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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
Current Report
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
November 15, 2001
Federal Realty Investment Trust
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(Exact name of registrant as specified in its charter)
Maryland 1-07533 52-0782497
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(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) (Identification No.)
1626 East Jefferson Street, Rockville, Maryland 20852-4041
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 998-8100
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FEDERAL REALTY INVESTMENT TRUST
ITEM 5. OTHER EVENTS.
As used in this Current Report, references to "we", "our", the "Trust" and
"Federal Realty" and similar references are to Federal Realty Investment Trust,
a Maryland real estate investment trust and its consolidated subsidiaries.
Federal Realty Investment Trust is an equity real estate investment trust
specializing in the ownership, management, development and re-development of
high quality retail and mixed-use properties. Federal Realty owns or has an
interest in 56 community and neighborhood shopping centers comprising over
12 million square feet, primarily located in densely populated and affluent
communities throughout the Northeast and Mid-Atlantic United States. In
addition, Federal Realty owns 66 retail and urban mixed-use properties
comprising over 2 million square feet located in strategic metropolitan markets
across the United States and one apartment complex. Federal Realty has paid
quarterly dividends to its shareholders continuously since its founding in 1962,
and has increased its dividend rate for 34 consecutive years.
Our traditional focus has been on community and neighborhood shopping centers
that are anchored by supermarkets, drug stores or high volume, value oriented
retailers that provide consumer necessities. Late in 1994, recognizing a trend
of consumer shopping preferences and retailer expansion to main streets, we
expanded our investment strategy to include "street retail" or "mixed-use"
properties. Our mixed-use properties are typically centered around a retail
component but may also include office, residential and hotel components, in
established main street shopping areas. In addition, since 1997, we have
obtained control of various land parcels and have devoted substantial resources
for the purpose of developing mixed-use projects in urban areas that center
around the retail component. We believe that these mixed-use developments will
be an important source of our growth in the future.
We continually evaluate our properties for renovation, retenanting and
expansion opportunities. Similarly, we regularly review our portfolio and from
time to time consider selling properties or exchanging them for other real
estate assets. Proceeds from the sale of such properties may be used to acquire
other properties, including funding for development projects and for other
capital needs.
We have benefited, and expect to continue to benefit, from the following
characteristics of our operations:
. Long term operating history. Our revenues have increased consistently
since we were founded through many real estate and economic cycles. As a
result, we have been able to increase our common dividend each and every
year for the past 34 years.
. Strong demand for our assets. During the twelve months ended September
30, 2001, we signed leases for 1,457,000 square feet of retail space. On a
same space basis, we re-leased 837,000 square feet of retail space at an
average increase in rent per square foot of 15%.
. Excellent demographics. Our properties tend to be located in densely
populated, affluent markets where limited land availability and zoning
restrictions limit the development of new competitive products.
. Contractual rents. During the twelve months ended September 30, 2001, 98%
of our retail rental income was contractual minimum rent plus expense
recoveries and was not derived from percentage rents.
. Diverse tenant base. In 2000, our retail rental income was derived from
approximately 2,100 tenants, with no single tenant or corporate entity
accounting for more than 2.5% of revenue.
. Favorable lease structure. Our typical shopping center lease includes
provisions for recapture of a majority of property operating expenses
and real estate taxes. For the year ended December 31, 2000, we recovered
81% of property operating expenses and 80% of real estate taxes.
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We continue to seek well-located shopping centers and retail buildings to
acquire, renovate, retenant and remerchandise, thereby enhancing their revenue
potential. In addition, we may engage in further development activities if
economic conditions appear to support expansion of any of our current projects.
Although we do not have any policy setting specific criteria for or otherwise
restricting our ability to make investments in properties or development sites,
we generally look for properties and sites in densely populated, affluent areas
where the barriers to entry or further development are high. We evaluate each
investment on its individual merits, looking for investments where we believe we
will be able to increase the cash flow from the property over time. Although we
usually purchase a 100% fee interest in our acquisitions, on occasion, we have
entered into long-term leases, classified as capital leases under the provisions
of SFAS 13, "Accounting for Leases," as a means of acquiring control of
properties. A capital lease transfers the benefits and risks of ownership of the
property to us and we record the lease as an acquisition of the property with a
corresponding incurrence of a liability. In addition, we have purchased certain
properties in partnership with others. Certain of the partnerships, known as
"downreit partnerships," are a means of allowing property owners to make a tax
deferred contribution of their property in exchange for partnership units, which
receive the same distributions as our common shares and may be convertible into
our common shares.
Since a significant portion of cash provided by operating activities is
distributed to common and preferred shareholders, capital outlays for
acquisitions, developments and redevelopments typically require debt or equity
funding. During our 39 years of existence, we have financed our operations and
other capital needs in a variety of ways during a variety of economic
conditions, including through the issuance of senior securities and
subordinated debt and by borrowing money on our credit facilities. Since
January 1, 1998, we financed our capital needs primarily with debt. Debt
issuances since January 1, 1998, were as follows:
. In March 1998, we issued $80 million of Medium-Term Notes to the public;
$39.5 million bear interest at 6.74% and are due March 2004, and $40.5
million bear interest at 6.99% and are due March 2006.
. In December 1998, we obtained a $125 million four-year term loan from
five institutional lenders. The loan, which bears interest at LIBOR plus
95 basis points, requires fees and has the same covenants as our revolving
credit facility. During 2001, we entered into interest rate swaps, which
fixed the interest rate at 6.22%, which includes the spread.
. In November 1999, we issued $175 million of 8.75% Notes to the public.
The notes pay interest semi-annually on June 1 and December 1 and are
due December 1, 2009.
. In February 2000, we obtained a $24.5 million construction loan for our
development project in Bethesda, Maryland. The loan bears interest at
LIBOR plus 1.2%-1.5% depending upon occupancy, matures August 2002 and
has two one-year extension options.
. In June 2000, we modified certain covenants and extended our $300
million syndicated credit facility and our $125 million term loan for an
additional year to December 19, 2003.
. In October 2000, we obtained a $152 million mortgage loan, which is
secured by five shopping centers. The mortgage bears interest at 7.95%
and matures November 1, 2015.
. In April 2001, we obtained a $33 million mortgage loan secured by Brick
Plaza, a shopping center in Brick, New Jersey. The mortgage bears interest
at 7.415% and matures November 1, 2015.
. In April 2001, we closed on a $295 million construction loan on our Santana
Row project in San Jose, California. The loan currently bears interest at
LIBOR plus 212.5 basis points, matures April 2004 with two one-year
extension options, which are subject to attaining certain operating
targets. The interest rate on the loan will decrease over time if we
achieve specified leasing, occupancy and net operating income targets. The
loan requires fees and has various covenants including the maintenance of a
minimum shareholders' equity and a maximum ratio of debt to gross asset
value. The initial funding of the loan took place in August 2001 when our
equity and pre-leasing requirements were met. As of October 31, 2001, $43
million was borrowed under the loan.
. During 2001 we refinanced the mortgages on Federal Plaza and Tysons
Station. We repaid the $26.5 million mortgage on Federal Plaza, a shopping
center in Rockville, Maryland, with proceeds from the new $36.5 million
mortgage which bears interest at 6.75% and matures in June 2011. We repaid
the $3.9 million mortgage on Tysons Station, a shopping center in Falls
Church, Virginia, with proceeds from the new $7.0 million mortgage which
bears interest at 7.4% and matures in September 2011.
. In connection with the purchase of Friendship Center in September 2001, we
placed a $17.0 million mortgage on the property. The loan bears interest at
LIBOR plus 135 basis points and matures September 2003 with three one-year
extension options.
We are in compliance with the financial covenants imposed upon us by our
lenders.
In addition, since January 1, 1998, we have issued 640,057 common shares of
beneficial interest under our Dividend Reinvestment Plan, realizing proceeds of
$13.8 million.
In the future, we intend to satisfy our needs for cash through private and
public offerings of our equity and debt securities, by entering into joint
ventures and by borrowing on our revolving credit facility. We may also seek to
extend, expand or renew our revolving credit facility, or obtain new credit
facilities or lines of credit. In addition, if necessary we
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may seek to obtain mortgages on our properties. Our board of trustees has not
adopted a policy limiting the amount or number of mortgages that may be placed
on a particular property, although our mortgage financing instruments typically
do limit additional indebtedness on properties covered by existing mortgages.
Our properties are located in numerous states, including Arizona,
California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan,
New York, New Jersey, North Carolina, Oregon, Pennsylvania, Texas and Virginia
and the District of Columbia. While we anticipate that future property
acquisitions will be located in the United States, our activities will not
necessarily be limited to those states in which we currently own properties.
Although no single property accounts for over 10% of our revenues, we have not
adopted a policy which limits the amount or percentage of our assets we may
invest in a property.
We operate on an asset management model, where small focused teams are
responsible for a portfolio of assets. We have divided our portfolio of
properties into three operating regions: the Northeast, Mid-Atlantic and West.
Each region is operated under the direction of a chief operating officer, with
dedicated leasing, property management and financial staff and operates largely
autonomously with respect to day-to-day operating decisions.
While our emphasis will continue to be on equity real estate investments, we
may, in our discretion, invest in mortgages of retail properties and other
similar interests. We do not intend to be a lender to a significant extent by
making mortgages or deeds of trust. Similarly, although we do not intend to do
so to a significant degree, we may invest in securities of other entities
engaged in real estate activities or securities of other issuers. We do not,
however, intend to make investments that would cause us to register as an
investment company under the Investment Company Act of 1940, nor will we
underwrite securities of other issuers. We have in the past and may in the
future repurchase or otherwise reacquire our own securities if we determine it
would be beneficial to us to do so. In December 1999 our board of trustees
authorized a share repurchase program for calendar year 2000. A total of
1,325,900 shares were repurchased at a cost of $25.2 million under this plan.
All of the investment, acquisition and capital raising strategies described
in this section may be changed by our board of trustees, without a vote of our
shareholders.
We are organized as a Maryland real estate investment trust. Our executive
offices are located at 1626 East Jefferson Street, Rockville, Maryland 20852
and our telephone number is (301) 998-8100.
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RISK FACTORS
The following risks should be carefully considered by prospective investors
in our common and preferred shares.
RISKS RELATING TO OWNING, OPERATING AND DEVELOPING RETAIL AND MIXED-USE REAL
ESTATE
WE MAY BE UNABLE TO RENEW LEASES OR RELET SPACE AS LEASES EXPIRE WHICH MAY
RESULT IN REDUCED CASH FLOW AND MAY ADVERSELY AFFECT OUR ABILITY TO MAKE
DISTRIBUTIONS TO SHAREHOLDERS. If our tenants decide not to renew their leases
upon their expiration, we may not be able to relet the space promptly. Even if
the tenants do renew or we can relet the space, the terms of renewal or
reletting, including the cost of required renovations may be less favorable
than current lease terms. From January 1, 2001 through December 31, 2005,
leases, excluding leases with options to renew, will expire on a total of 2.5
million rentable square feet or 17% of the rentable square feet at our current
properties. If we are unable to promptly renew the leases or relet this space,
or if the rental rates upon such renewal or reletting are significantly lower
than expected rates, then our cash flow and ability to make distributions to
shareholders may suffer.
REVENUE FROM OUR PROPERTIES DEPENDS IN PART ON THE SUCCESS OF OUR TENANTS'
RETAIL REVENUE, MAKING US VULNERABLE TO GENERAL ECONOMIC DOWNTURNS AND OTHER
CONDITIONS AFFECTING THE RETAIL INDUSTRY. Our leases provide for base rent plus
contractual base rent increases. A number of our leases also include a
percentage rent clause for additional rent above the base amount based upon a
specified percentage of the revenues our tenants generate. In 2000, 177 of our
2,115 tenants paid percentage rent totalling an aggregate of $6.4 million, or
2.4% of our rental income for the year.
Under our percentage rent leases, our revenue from tenants may increase as
revenues of our tenants increase. Generally, retailers face declining revenues
during downturns in the economy. In addition, traditional retailers are facing
competition from Internet sales. To the extent that the Internet is successful
in attracting customers away from our tenants, our tenants' revenues could be
adversely affected. As a result, the portion of our revenue which we derive from
percentage rent leases could decline upon a general economic downturn and
competition from Internet sales.
THE GROUND-UP DEVELOPMENT OF REAL ESTATE PROPERTIES, AS OPPOSED TO
RENOVATION AND REDEVELOPMENT OF EXISTING PROPERTIES, IS A NEW LINE OF BUSINESS
FOR US AND PRESENTS US WITH SUBSTANTIAL RISKS WE HAVE NOT FACED BEFORE. We have
devoted substantial resources, including money and manpower, to our development
business. At September 30, 2001, we had invested $271 million in development of
two projects, Pentagon Row in Arlington, Virginia and Phase 1 of Santana Row in
San Jose, California. We estimate that we will spend $291 million to complete
these two projects. We are competing with other companies that may have more
development experience than we have and that may have more resources than we
have. The business of developing properties has many risks, as noted in the
paragraph below. As we continue to devote substantial time and money to this
line of business, if it is not successful, it may adversely affect our financial
condition and results of operations.
WE FACE A VARIETY OF RISKS RELATING TO OUR DEVELOPMENT, CONSTRUCTION AND
RENOVATION ACTIVITIES, ANY OF WHICH MAY NEGATIVELY IMPACT OUR RESULTS OF
OPERATIONS. We intend to develop, construct and renovate properties,
particularly in urban areas undergoing revitalization initiatives. Risks
associated with development, construction and renovation activities include the
risks that:
. we may abandon a development opportunity after expending significant
resources if we determine that the development opportunity is not
feasible or if we are unable to obtain all necessary zoning and other
required governmental permits and authorizations;
. development, construction and renovation costs of a project may exceed
original estimates;
. we may be unable to attract credit-worthy tenants that attract visitors
to our properties;
. occupancy rates and rents at a newly completed property may not be
sufficient to make the property profitable;
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. construction and/or permanent financing may not be available on
favorable terms or may not be available at all; and
. projects may not be completed on schedule as a result of several
factors, many of which are beyond our control like weather, labor
conditions and material shortages, resulting in increased debt service
expense and construction costs and decreases in revenue.
Properties we develop or acquire for development may generate little or no
cash flow from the date of acquisition through the date of completion of
development and may experience operating deficits after the date of completion.
In addition, new development and renovation activities, regardless of whether
or not they are ultimately successful, may require a substantial portion of
management's time and attention.
OUR SANTANA ROW DEVELOPMENT PROJECT IS THE LARGEST, MOST EXPENSIVE PROJECT
WE HAVE UNDERTAKEN AND IF IT IS NOT SUCCESSFUL, IT COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We are
developing a project in San Jose, California, known as "Santana Row" on 42
acres of land we acquired in 1997. Phase 1 of Santana Row consists of a 1,500
foot "main street" framed by nine buildings which are scheduled to contain
538,000 square feet of retail space, 501 residential housing units and a 214-
room hotel, as well as the development's own central utility plant. Phase 1 is
anticipated to cost $475 million. If Phase 1 of Santana Row, which upon
completion will comprise approximately 20% of our total real estate at cost,
should be unsuccessful, for each one percent decrease in its yield, our net
operating income would be adversely affected by $4.8 million.
On April 17, 2001 we obtained a $295 million construction loan for Phase 1 of
Santana Row. As of September 30, 2001, $23.0 million had been borrowed under the
loan and we had invested $202 million in Santana Row. We intend to finance any
amounts needed in excess of the construction loan to complete Phase 1 through
borrowings from our revolving credit facility.
The recent downturn in the economy has severely impaired the San Jose
economy, producing decreased market rents and higher vacancies in the
residential sector than we projected at commencement of Phase 1. We have not
finalized the cost and scope of future phases of Santana Row, and will not do so
until the success of Phase 1 and future demand for rental space, both
residential and retail, can be determined.
COMPETITION FOR ACQUISITIONS RESULTS IN INCREASED PRICES FOR, AND LOWER
RETURNS ON, PROPERTIES. We expect other major real estate investors will compete
with us for attractive investment and development opportunities. These
competitors include other publicly traded REITs, private REITs, investment
banking firms, private institutional investment funds, individual investors,
opportunity funds and local, regional and national developers. This competition
increases prices for properties which will result in lower returns on our
investments. Many of our competitors are larger than we are and have greater
financial resources than we do.
ACQUIRED PROPERTIES MAY FAIL TO PERFORM AS EXPECTED, ADVERSELY AFFECTING OUR
FINANCIAL CONDITION. We may acquire retail properties to the extent that they
can be acquired on advantageous terms, meet our investment criteria and we are
able to obtain capital on commercially reasonable terms. Newly acquired
properties may fail to perform as we expect. We may underestimate the costs
necessary to bring an acquired property up to standards established for its
intended market position. These failures could adversely affect our financial
condition and results of operations.
OUR EXPENSES REMAIN RELATIVELY CONSTANT EVEN IF OUR REVENUE DROPS. The
expenses of owning and operating a property, including mortgage payments, real
estate taxes, insurance and maintenance costs, are not
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necessarily reduced when market factors and competition may require us to
reduce rents we charge on a property to attract or retain tenants. Furthermore,
if our operating expenses increase, the local rental market may limit the
extent to which we can raise rents without decreasing occupancy rates. If we
cannot increase rents or control our costs, our financial condition and results
of operations may be adversely affected.
RISKS RELATING TO OUR SUBSTANTIAL LEVEL OF INDEBTEDNESS
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
OUR ABILITY TO MAKE DISTRIBUTIONS TO SHAREHOLDERS. Like many owners of real
estate, we rely on borrowings and debt issuances to assist us in acquiring,
holding and developing properties. As of September 30, 2001, we had $1.1 billion
of debt outstanding, including $165 million drawn on our $300 million revolving
credit facility but excluding capital leases. We also may incur additional debt
in connection with future property acquisitions or development, construction or
redevelopment activities. Consequently, our business will be affected by risks
normally associated with debt financing. If we cannot refinance, extend or pay
principal payments due at maturity with proceeds of other capital transactions,
including new equity capital, our cash flow will not be sufficient in all years
to repay all maturing debt. If prevailing interest rates or other factors at the
time of refinancing, including the possible reluctance of lenders to make
commercial loans, result in higher interest rates, increased interest expense
would adversely affect our cash flow and our ability to make distributions to
shareholders.
The following table shows the interest rate and maturity for our debt
outstanding at September 30, 2001. All dollar references are in thousands.
Description Principal Interest Rate Maturity Date
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5 1/4% Convertible subordinated
debentures......................... $ 289 5.25% 2002
8% Senior notes..................... 25,000 8.00% 2002
Note issued in connection with
land purchase...................... 3,400 LIBOR + 1.25% 2002
5 1/4% Convertible subordinated
debentures......................... 75,000 5.25% 2003
Term note with banks(1)............. 125,000 LIBOR + .95% 2003
Revolving credit facilities......... 165,000 LIBOR + .80% 2003
Mortgage loan....................... 17,000 LIBOR + 1.35% 2003
Construction loan................... 22,361 LIBOR + 1.35% 2004
6.74% Medium Term Notes............. 39,500 6.74% 2004
6.625% Notes........................ 40,000 6.63% 2005
6.99% Medium Term Notes............. 40,500 6.99% 2006
Construction loan................... 23,047 LIBOR + 2.125% 2006
6.82% Medium Term Notes, due 2027,
redeemable by holder 2007.......... 40,000 6.82% 2007
7.48% Debentures due 2027,
redeemable by holder 2008.......... 50,000 7.48% 2008
Mortgage loans...................... 9,900 6.5% 2008
8.75% Notes......................... 175,000 8.75% 2009
Mortgage loans...................... 43,379 6.75% - 7.4% 2011
Amortizing debt..................... 2,796 7.5% - 10% 2008 - 2013
Mortgage loans...................... 185,000 7.415% - 7.95% 2015
Muncipal bonds...................... 9,400 Variable 2016
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$1,091,572
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(1) During 2001, we entered into interest rate swaps that fixed the interest
rate at 6.22%, which includes the spread.
OUR OBLIGATION TO COMPLY WITH FINANCIAL COVENANTS IN OUR REVOLVING CREDIT
FACILITY AND TERM LOANS COULD RESTRICT OUR RANGE OF OPERATING ACTIVITIES. Our
outstanding indebtedness contains financial covenants that could restrict our
ability to incur indebtedness, including requiring us to:
. limit the amount of our debt as a percentage of our gross asset value to
under .6 to 1 (we maintained a ratio of .53 to 1 as of September 30, 2001);
. limit the amount of secured debt as a percentage of our gross asset
value to under .35 to 1 (we maintained a ratio of .17 to 1 as of
September 30, 2001);
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. limit the amount of our debt so that interest coverage will exceed 1.75
to 1 on a rolling four quarter basis (we maintained a ratio of 2.14 to 1
as of September 30, 2001);
. limit the amount of secured debt so that unencumbered asset value to
unsecured debt will equal or exceed 1.67 to 1 (we maintained a ratio of
1.98 to 1 as of September 30, 2001); and
. limit the total cost of development projects under construction to 30%
or less of gross asset value (the budgeted total cost of our projects
under construction represented 24% of gross asset value as of
September 30, 2001).
WE HAVE NO LIMITATION ON DEBT INCURRENCE IN OUR ORGANIZATIONAL DOCUMENTS
WHICH COULD RESULT IN US INCURRING MORE DEBT THAN WE CAN SERVICE. Our
organizational documents do not contain any limitation on the amount of
indebtedness we may incur. Accordingly, we could become highly leveraged,
resulting in an increase in debt service that could increase our risk of default
on our indebtedness, which would adversely affect our cash flow and our ability
to make distributions to shareholders.
WE DEPEND ON EXTERNAL SOURCES OF CAPITAL FOR FUTURE GROWTH. As with other
REITs, but unlike corporations generally, our ability to reduce our debt and
finance our growth largely must be funded by external sources of capital
because we generally will have to distribute to our shareholders 90% of our net
taxable income in order to qualify as a REIT, including taxable income where we
do not receive corresponding cash. For taxable years prior to January 1, 2001,
we were required to distribute 95% of our net taxable income to qualify as a
REIT. Our access to external capital will depend upon a number of factors,
including general market conditions, the market's perception of our growth
potential, our current and potential future earnings, cash distributions and the
market price of our common shares.
RISKS RELATING TO THE REAL ESTATE INDUSTRY
BECAUSE REAL ESTATE INVESTMENTS ARE ILLIQUID, WE MAY NOT BE ABLE TO SELL
PROPERTIES WHEN APPROPRIATE, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION. Real estate investments generally cannot be sold quickly. As a
result, we may not be able to diversify our portfolio promptly in response to
economic or other conditions. Our inability to respond rapidly to changes in
the performance of our investments could adversely affect our financial
condition and results of operations.
OUR PERFORMANCE AND SHARE VALUE WILL BE AFFECTED BY RISKS ASSOCIATED WITH
THE REAL ESTATE INDUSTRY. Factors that may adversely affect the economic
performance and value of our properties include:
. changes in the national, regional and local economic climate;
. local conditions such as an oversupply of, or a reduction in demand for,
main street retail, residential, office or shopping center properties;
. the attractiveness of our properties to shoppers, residents and tenants;
and
. competition from other main street retail and mixed-use properties as
well as community shopping centers, regional shopping malls and the
Internet.
IF WE CO-INVEST IN PROPERTIES WITH THIRD PARTIES, WE MAY NOT CONTROL THE
MANAGEMENT OF THOSE PROPERTIES. We may co-invest in properties with third
parties through partnerships, joint ventures or other vehicles. In some of
these co-investments, we may acquire non-controlling interests in, or shared
management responsibility for, the affairs of the property and, therefore, may
not be able to control decisions relating to the property. Even in co-
investments where we do control ordinary management of the property, we may not
be able to sell or finance the property without the consent of our co-investor.
Where we acquire non-controlling interests, our co-investors may be in a
position to take action contrary to our instructions or requests and contrary
to our policies or objectives. If we share management responsibilities, we and
our co-investor may reach an impasse on major decisions, such as a sale,
because neither we nor our co-investor would have full control over the
management of the investment property.
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Currently we have co-investors in 8 shopping centers, one development
project and 13 mixed-use buildings centered on their retail component. We have
the managing general partnership interest in all these co-investments, but we
must obtain the consent of the co-investor or meet defined criteria to sell 21
of these properties or to finance 12 of these properties.
CO-INVESTMENTS MAY CREATE INCREASED BANKRUPTCY, LIABILITY AND OTHER RISKS.
Co-investments in partnerships, joint ventures or other vehicles may involve
risks not present were a third party not involved, including the possibility
that:
. our co-investors might fail to fund their share of required capital
contributions;
. our co-investors might at any time have economic or other business
interests or goals which are inconsistent with our business interests or
goals; and
. we may be liable for the actions of our co-investors.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE. We carry comprehensive
liability, fire, extended coverage and rental loss insurance on our properties.
There are, however, some types of losses, such as lease and other contract
claims or losses caused by acts of war, that may not be insured. Should an
uninsured loss or a loss in excess of insured limits occur, we could lose all or
a portion of the capital we have invested in a property, as well as the
anticipated future revenue from the property. In that event, we may nevertheless
remain obligated for any mortgage debt or other financial obligations related to
the property. In addition, there can be no assurance as to future costs and the
scope of coverage that may be available under our insurance policies.
We carry earthquake insurance on all of our properties in California. Our
earthquake policies contain coverage limitations. We also carry environmental
insurance on most of our properties, which policies also contain coverage
limitations. We cannot assure shareholders that material losses in excess of
insurance proceeds will not occur in the future.
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND CAN BE COSTLY. Federal, state and
local laws and regulations relating to the protection of the environment may
require a current or previous owner or operator of real estate to investigate
and clean up hazardous or toxic substances or petroleum product releases at
such property. If unidentified environmental problems arise, we may have to
make substantial payments which could adversely affect our cash flow.
Environmental laws also govern the presence, maintenance and removal of
asbestos. These laws may impose fines and penalties on building owners or
operators who fail to comply with these requirements and may allow third
parties to seek recovery from owners or operators for personal injury
associated with exposure to asbestos fibers.
RISKS RELATING TO OWNING OUR COMMON SHARES
AN INCREASE IN THE NUMBER OF OUR COMMON SHARES THAT ARE OR BECOME AVAILABLE
FOR FUTURE SALE COULD ADVERSELY AFFECT THE PRICE FOR OUR COMMON SHARES. Sales of
a substantial number of our common shares, or the perception that sales could
occur, could adversely affect prevailing market prices for our common shares. In
addition, holders of limited partnership interests in some of our subsidiary
partnerships have the right to receive common shares for those limited
partnership interests and upon registration or an exemption from registration
will be able to sell their shares freely after they are received, unless the
person is our affiliate. Further, a substantial number of our common shares have
been and will be issued or reserved for issuance from time to time under our
employee benefit plans, including shares paid to officers and some employees as
bonuses pursuant to our incentive compensation plans and our common shares
reserved for options, and these common shares would be available for sale in the
public markets from time to time pursuant to exemptions from registration or
upon registration. Moreover, the issuance of additional common shares by us in
the future would be available for sale in the public markets. We can make no
prediction about the effect that future sales of our common shares would have on
the market price of our common shares.
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OUR EARNINGS AND CASH DISTRIBUTIONS WILL AFFECT THE MARKET PRICE OF OUR
COMMON SHARES. We believe that the market value of a REIT's equity securities
is based upon the market's perception of the REIT's growth potential, its
current and potential future cash distributions, whether from operations, sales,
acquisitions, development or refinancings, and upon the value of the underlying
assets. Our common shares may trade at prices that are higher or lower than our
net asset value per share. To the extent we retain operating cash flow for
investment purposes, working capital reserves or other purposes rather than
distributing such cash flow to shareholders, these retained funds, while
increasing the value of our underlying assets, may not correspondingly increase
the market price of our common shares. Our failure to meet the market's
expectation with regard to future earnings and cash distributions would likely
adversely affect the market price of our common shares.
MARKET INTEREST RATES MAY AFFECT THE PRICE OF OUR COMMON SHARES. One of the
factors that investors consider important in deciding whether to buy or sell
shares of a REIT is the distribution rate on such shares, considered as a
percentage of the price of such shares, relative to market interest rates. If
market interest rates increase, prospective purchasers of REIT shares may
expect a higher distribution rate. Thus, higher market interest rates could
cause the market price of our shares to go down.
IF OUR KEY PERSONNEL LEAVE, OUR BUSINESS MAY BE ADVERSELY AFFECTED. We
depend on the efforts of our executive officers, particularly Steven J.
Guttman, Donald C. Wood and Ron D. Kaplan. If any of them resigned, our
operations could be adversely affected. We have an employment agreement with
Steven J. Guttman and severance agreements with all other executive officers.
RISKS RELATING TO PROVISIONS IN OUR GOVERNING DOCUMENTS AND MARYLAND LAW,
INCLUDING LIMITING CHANGES IN CONTROL
OUR BOARD OF TRUSTEES MAY MAKE CHANGES IN OUR OPERATING POLICIES WITHOUT
SHAREHOLDER APPROVAL. Our investment, financing and borrowing policies and our
policies with respect to all other activities, such as growth, debt,
capitalization and operations, will be determined by our board of trustees. Our
board of trustees may amend or revise these policies at any time and from time
to time at its discretion without a vote of our shareholders. A change in these
policies could adversely affect our financial condition, results of operations
and the market price of our securities.
PROVISIONS OF OUR DECLARATION OF TRUST AND BYLAWS AND MARYLAND LAW, AND OUR
SHAREHOLDER RIGHTS PLAN, COULD INHIBIT CHANGES IN CONTROL. Provisions of our
declaration of trust and bylaws and Maryland law contain provisions that may
delay or prevent a change in control or other transaction that could provide
our shareholders with a premium over the then-prevailing market price of their
shares or which might otherwise be in their best interests. These provisions
include:
. Board authority to issue preferred shares without shareholder approval.
Our board of trustees can issue preferred shares having a preference as
to dividends or distributions upon liquidation over our common shares
without shareholder approval. The issuance of preferred shares could
adversely affect the voting power of the holders of our common shares
and could be used to discourage, delay or prevent a change in control.
. Staggered board of trustees and fixed size of board of trustees, within
a range. Our board of trustees currently consists of six trustees and is
divided into three classes with each class being elected for three-year
terms. The board can change the size of the board anywhere between three
and 15 trustees by a two-thirds vote of the board. These provisions may
make it more difficult for a third party to gain control of our board
because at least two annual meetings of shareholders, instead of one,
would generally be required to effect a change in a majority of our
board of trustees.
. Call of special meetings. A special meeting of our shareholders may be
called only by the president, by two-thirds of the trustees or by
shareholders possessing not less than 25% of all the votes entitled to
be cast at such meeting, which limits the ability of shareholders to
call special meetings.
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. Authorize additional shares of beneficial interest and classify and
reclassify shares of beneficial interest. Our board of trustees, without
a shareholder vote, can classify or reclassify unissued shares of
beneficial interest, including the reclassification of common shares
into preferred shares and vice versa.
. Two-thirds shareholder vote required to approve some amendments to the
declaration of trust. A two-thirds vote of the outstanding common shares
is required for approval of amendments to the foregoing provisions which
are contained in our declaration of trust. These supermajority vote
requirements may make it difficult for our shareholders to amend our
declaration of trust.
. Advance notice requirements for proposals to be presented at shareholder
meetings. We have an advance notice bylaw provision that requires
shareholders intending to present nominations for trustees or other
business for consideration at an annual meeting of shareholders to
notify us not later than the close of business on the 120th day prior to
the first anniversary of the date of the proxy statement for the
preceding year's annual meeting. For a special meeting of shareholders,
shareholders must notify us a reasonable amount of time before we print
and mail the proxy materials for the special meeting. This provision
limits the ability of shareholders to make nominations for trustees or
introduce other proposals that are not timely received for consideration
at a meeting.
. Maryland law limitations on changes in control. Provisions of Maryland
corporate law applicable to Maryland REITs prohibit some "business
combinations," including some issuances of equity securities, between a
Maryland REIT and any person who owns 10% or more of the voting power of
the REIT's capital shares, or an "interested shareholder," unless the
transaction is approved by 80% of the REIT's outstanding voting shares.
In addition, an interested shareholder may not engage in a business
combination for five years following the date he became an interested
shareholder. As a result, a change in control or other transaction that
may provide our shareholders with a premium or which might otherwise be
in their best interests may be prevented or delayed.
. Shareholder rights plan. We adopted a shareholder rights plan which
provides, among other things, that when specified events occur, our
shareholders will be entitled to purchase from us a number of common
shares equal in value to two times the purchase price, initially equal
to $65.00 per share, subject to adjustment upon the occurrence of
specified events. Therefore, for example, if our common shares had a
current market value of $21.66 and the purchase price was $65.00, a
shareholder would be entitled to purchase six common shares for $65.00.
The share purchase rights are triggered by the earlier to occur of (1)
the date of a public announcement that a person or group acting in
concert has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of our outstanding common shares without the
prior consent of our board of trustees or (2) ten days after the
commencement of or announcement of an intention to make a tender offer
or exchange offer, the consummation of which would result in the
acquiring person becoming the beneficial owner of 15% or more of our
outstanding common shares. The share purchase rights would cause
substantial dilution to a person or group that attempts to acquire us on
terms not approved by our board of trustees.
IF WE ELECT TO BE GOVERNED BY IT IN THE FUTURE, THE MARYLAND CONTROL SHARE
ACQUISITION LAW COULD DELAY OR PREVENT A CHANGE IN CONTROL. Under Maryland law,
unless a REIT elects not to be subject to the provision, "control shares"
acquired in a "control share acquisition" have no voting rights except to the
extent approved by shareholders by a vote of two-thirds of the votes entitled
to be cast on the matter, excluding shares owned by the acquiror and by
officers or trustees who are employees of the REIT. "Control shares" are voting
shares which would entitle the acquiror to exercise voting power in electing
trustees within specified ranges of voting power. A "control share acquisition"
means the acquisition of control shares, with some exceptions.
Our bylaws state that the Maryland control share acquisition law shall not
apply to any acquisition by any person of our common shares. This bylaw
provision may be repealed, in whole or in part, at any time, whether before or
after an acquisition of control shares and, upon such repeal, may, to the
extent provided by any successor bylaw, apply to any prior or subsequent
control share acquisition.
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FEDERAL INCOME TAX RISKS RELATING TO OPERATING AS A REAL ESTATE INVESTMENT
TRUST
WE INTEND TO QUALIFY AS A REIT, BUT WE CANNOT GUARANTEE THAT WE WILL
QUALIFY. We believe that we have qualified for taxation as a REIT for federal
income tax purposes commencing with our taxable year ended December 31, 1962.
If we qualify as a REIT, we generally will not be subject to federal income tax
on our income that we distribute to our shareholders. We plan to continue to
meet the requirements for taxation as a REIT, but there can be no assurance
that we will do so. Many of the REIT requirements are highly technical and
complex. The determination that we are a REIT requires an analysis of various
factual matters and circumstances that may not be totally within our control.
For example, to qualify as a REIT, at least 95% of our gross income must come
from sources that are itemized in the REIT tax laws. We generally are
prohibited from owning more than 10% of the voting securities or more than 10%
of the value of the outstanding securities of any one issuer, subject to
certain exceptions, including an exception with respect to corporations
electing to be "taxable REIT subsidiaries," and we are also required to
distribute to shareholders at least 90% of our REIT taxable income, excluding
capital gains. Furthermore, Congress and the Internal Revenue Service might
make changes to the tax laws and regulations, and the courts might issue new
rulings that make it more difficult, or impossible, for us to remain qualified
as a REIT. We do not believe, however, that any pending or proposed tax law
changes would jeopardize our REIT status.
If we failed to qualify as a REIT, we would be subject to federal income tax
at regular corporate rates. Also, unless the Internal Revenue Service granted
us relief under certain statutory provisions, we would remain disqualified as a
REIT for the four years following the year we first failed to qualify. If we
failed to qualify as a REIT, we would have to pay significant income taxes and
would therefore have less money available for investments or for distributions
to shareholders. This would likely have a significant adverse affect on the
value of our common shares.
WE PAY SOME TAXES. Even if we qualify as a REIT, we are required to pay some
federal, state and local taxes on our income and property. In addition, any net
taxable income earned directly by the taxable REIT subsidiaries is subject to
federal, state and local corporate tax. A taxable REIT subsidiary is a fully
taxable corporation and is limited in its ability to deduct interest payments
made to us. In addition, we will be subject to a 100% penalty tax on some
payments that we receive if the economic arrangements between us, our tenants,
and the taxable REIT subsidiary are not arm's length.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a description of federal income tax consequences for a
holder of Federal Realty's common shares. The following discussion is not
exhaustive of all possible tax consequences and does not provide a detailed
discussion of any state, local or foreign tax consequences. Nor does it discuss
all of the aspects of federal income taxation that may be relevant to a
prospective shareholder in light of his or her particular circumstances or to
shareholders (including insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) who are subject to special
treatment under the federal income tax laws.
The information in this section is based on the Internal Revenue Code,
current, temporary and proposed regulations, the legislative history of the
Internal Revenue Code, current administrative interpretations and practices of
the IRS and court decisions. The reference to IRS interpretations and practices
includes IRS practices and policies as endorsed in private letter rulings,
which are not binding on the IRS except with respect to the taxpayer that
receives the ruling. In each case, these sources are relied upon as they exist
on the date of this prospectus. We cannot assure you that future legislation,
regulations, administrative interpretations and court decisions will not
significantly change current law or adversely affect existing interpretations
of existing law. Any change of this kind could apply retroactively to
transactions preceding the date of the change. Therefore, we cannot assure you
that the statements made in the following discussion, which do not bind the IRS
or the courts, will not be challenged by the IRS or will be sustained by a
court if so challenged.
EACH PROSPECTIVE SHAREHOLDER IS ADVISED TO CONSULT WITH ITS OWN TAX ADVISOR
REGARDING THE SPECIFIC FEDERAL INCOME TAX CONSEQUENCES TO IT IN LIGHT OF ITS
SPECIFIC OR UNIQUE CIRCUMSTANCES OF THE ACQUISITION, OWNERSHIP AND SALE OF
SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REIT, AND ANY STATE, LOCAL AND
FOREIGN TAX CONSEQUENCES AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF FEDERAL REALTY
GENERAL. Federal Realty has elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code. Federal Realty believes that it is
organized and has operated in a manner so as to qualify for taxation as a REIT
under the Internal Revenue Code, and Federal Realty intends to continue to
operate in such a manner. Qualification and taxation as a REIT depends upon
Federal Realty's ability to meet on a continuing basis, through actual annual
operating results, the various requirements under the Internal Revenue Code and
described in this prospectus with regard to, among other things, the source of
its gross income, the composition of its assets, distribution levels and
diversity of stock ownership. While Federal Realty intends to operate so that
it qualifies as a REIT, given the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations and the possibility of
future changes in circumstances of Federal Realty, no assurance can be given
that Federal Realty will continue to satisfy such tests.
Federal Realty has received an opinion from Hogan & Hartson L.L.P. to the
effect that Federal Realty has been organized and has operated in conformity
with the requirements for qualification and taxation as a REIT under the
Internal Revenue Code for each of its taxable years commencing with the taxable
year ended December 31, 1995 and that Federal Realty's organization and
proposed method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Internal
Revenue Code. Hogan & Hartson L.L.P.'s opinion is based on certain assumptions,
as well as certain representations provided by Federal Realty. The
representations generally involve factual matters relating to the assets,
operations and activities of Federal Realty. Hogan & Hartson L.L.P. will not
review Federal Realty's compliance with the REIT qualification requirements on
a continuing basis. The opinion rendered by Hogan & Hartson L.L.P. is based on
the Internal Revenue Code, current, temporary and proposed Treasury
regulations, current administrative interpretations and practices of the
Internal Revenue Service, including its practices and policies as endorsed in
private letter rulings, which are not binding on the Internal Revenue Service,
and existing court decisions. Future legislation, Treasury regulations,
administrative interpretations and court decisions could
13
change current law or adversely affect existing interpretations of current law.
Any such change could apply retroactively. Accordingly, no assurance can be
provided that the opinion of Hogan & Hartson L.L.P. (which does not bind the
Internal Revenue Service or the courts) will not be challenged by the Internal
Revenue Service or would be sustained by a court if so challenged.
In any year in which Federal Realty qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income taxes on that portion
of its REIT taxable income or capital gain that it currently distributes to
shareholders. This treatment substantially eliminates the "double taxation," at
both the corporate and shareholder levels, that generally results from the use
of corporate investment vehicles. However, Federal Realty will be subject to
federal income tax as follows.
. Federal Realty will be taxed at regular corporate rates on any "REIT
taxable income." REIT taxable income is the taxable income of the REIT
subject to specified adjustments, including a deduction for dividends
paid by the REIT.
. Under some circumstances, Federal Realty may be subject to the
"alternative minimum tax" on its items of tax preference.
. If Federal Realty has net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in
the ordinary course of business or other non-qualifying income from
foreclosure property, it will be subject to tax at the highest corporate
rate on this income.
. Federal Realty's net income from "prohibited transactions" will be
subject to a 100% tax. In general, prohibited transactions are sales or
other dispositions of property held primarily for sale to customers in
the ordinary course of business other than foreclosure property.
. If Federal Realty fails to satisfy either the 75% gross income test or
the 95% gross income test discussed below, but nonetheless maintains its
qualification as a REIT because other requirements are met, it will be
subject to a tax equal to the gross income attributable to the greater
of either (1) the amount by which 75% of its gross income exceeds the
amount qualifying under the 75% test for the taxable year or (2) the
amount by which 90% of its gross income exceeds the amount of its income
qualifying for the 95% test, multiplied in either case by a fraction
intended to reflect Federal Realty's profitability.
. Federal Realty will be subject to a 4% excise tax on the excess of the
required distribution over the sum of amounts actually distributed and
amounts retained for which federal income tax was paid, if Federal
Realty fails to distribute during each calendar year at least the sum
of:
- 85% of its REIT ordinary income for the year;
- 95% of its REIT capital gain net income for the year; and
- any undistributed taxable income from prior taxable years.
. Federal Realty will be subject to a 100% tax on amounts received through
arrangements between Federal Realty, its tenants and a taxable REIT
subsidiary that are not arm's length.
In addition, if Federal Realty acquires any assets from a taxable "C"
corporation in a carry-over basis transaction, it could be liable for specified
tax liabilities inherited from the "C" corporation. If Federal Realty
recognizes gain on the disposition of such assets during the ten year period
beginning on the date on which such assets were acquired by it, then to the
extent of such assets' "Built-In Gain" (i.e., the excess of (a) the fair market
value of such asset at the time of the acquisition by Federal Realty over (b)
the adjusted basis in such asset, determined at the time of such acquisition),
such gain will be subject to tax at the highest regular corporate rate
applicable. The results described herein with respect to the recognition of
Built-In Gain assume that Federal Realty made or will make an election pursuant
to Notice 88-19 or Treasury Regulations that were promulgated in 2000. Federal
Realty acquired assets from a "C" corporation in a carry-over basis transaction
in 1995 and made the required election with respect to any Built-In Gain.
Federal Realty also acquired assets from a "C" corporation in a carry-over basis
transaction in 2001 and intends to make the required election with respect to
any Built-In Gain.
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REQUIREMENTS FOR QUALIFICATION AS A REIT. The Internal Revenue Code defines
a REIT as a corporation, trust or association
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares
or by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation, but for Sections 856
through 859 of the Internal Revenue Code;
(4) that is neither a financial institution nor an insurance company
subject to specified provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) of which not more than 50% in value of the outstanding stock is owned,
directly or indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include specified entities) during the last
half of each taxable year;
(7) that makes an election to be taxable as a REIT for the current taxable
year, or has made such an election for a previous taxable year which
has not been revoked or terminated; and
(8) that meets certain other tests, described below, regarding the nature
of its income and assets.
Conditions (1) through (4), inclusive, must be met during the entire taxable
year. Condition (5) must be met during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than 12
months other than the first taxable year for which an election is made.
Condition (6) must be met during the last half of each taxable year other than
the first taxable year for which an election to become a REIT is made. For
purposes of determining stock ownership under condition (6), a supplemental
unemployment compensation benefits plan, a private foundation or a portion of a
trust permanently set aside or used exclusively for charitable purposes
generally is considered an individual. However, a trust that is a qualified
trust under Internal Revenue Code Section 401(a) generally is not considered an
individual, and beneficiaries of a qualified trust are treated as holding
shares of a REIT in proportion to their actuarial interests in the trust for
purposes of condition (6).
Federal Realty believes that it has issued sufficient shares of beneficial
interest with sufficient diversity of ownership to allow it to satisfy
conditions (5) and (6) above. In addition, Federal Realty's Declaration of
Trust contains restrictions regarding the transfer of its common shares that
are intended to assist Federal Realty in continuing to satisfy the share
ownership requirements described in (5) and (6) above. These restrictions,
however, may not ensure that Federal Realty will be able to satisfy these share
ownership requirements. If Federal Realty fails to satisfy these share
ownership requirements, it will fail to qualify as a REIT. For Federal Realty's
taxable years commencing after December 31, 1997, if Federal Realty complies
with regulatory rules pursuant to which it is required to send annual letters
to holders of securities requesting information regarding the actual ownership
of securities, but does not know, and exercising reasonable diligence would not
have known, whether it failed to meet the requirement that it not be closely
held, Federal Realty will be treated as having met the requirement.
In addition, the corporation, trust or association must satisfy all relevant
filing and other administrative requirements established by the IRS that must
be met to elect and maintain REIT status, use a calendar year for federal
income tax purposes, and comply with the recordkeeping requirements of the
Internal Revenue Code and the regulations promulgated thereunder.
To qualify as a REIT, Federal Realty cannot have at the end of any taxable
year any undistributed earnings and profits that are attributable to a non-REIT
taxable year. Federal Realty has elected to be taxed as a REIT beginning with
its first taxable year. Therefore, Federal Realty has not had any undistributed
non-REIT earnings and profits of its own. In 1995 and 2001, Federal Realty
acquired the assets of a "C" corporation through a reorganization under Section
368 of the Code. Federal Realty does not believe that it acquired any
undistributed non-REIT earnings and profits in connection with these
acquisitions. However, the Internal Revenue Service could determine otherwise.
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TAXABLE REIT SUBSIDIARIES. A taxable REIT subsidiary of Federal Realty is a
corporation other than a REIT in which Federal Realty directly or indirectly
holds stock and that has made a joint election with Federal Realty 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 Federal Realty 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 Federal Realty may be
limited in its ability to deduct interest paid to Federal Realty.
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 Federal Realty will not be subject
to federal corporate income taxation, although it may be subject to state and
local taxation in some states.
INCOME TESTS. In order to maintain qualification as a REIT, there are two
gross income requirements that must be satisfied annually. First, at least 75%
of the REIT's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property including
"rents from real property," gains on the disposition of real estate, dividends
paid by another REIT and interest on obligations secured by mortgages on real
property or on interests in real property or from certain types of temporary
investments. Second, at least 95% of the REIT's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
the same items which qualify under the 75% income test, and from dividends,
interest, some payments under hedging instruments and gain from the sale or
disposition of stock, securities or some hedging instruments.
Rents received by Federal Realty will qualify as rents from real property in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. These conditions relate to the identity of the
tenant, the computation of the rent payable and the nature of the property
leased. 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, rents received from a "related party tenant" will not qualify as
rents from real property in satisfying the gross income tests unless
(1) the tenant is a taxable REIT subsidiary,
(2) at least 90% of the property is leased to unrelated tenants and
(3) the rent paid by the taxable REIT subsidiary is substantially
comparable to the rent paid by the unrelated tenants for comparable
space.
A tenant is a related party tenant if the REIT, or an actual or constructive
owner of 10% or more of the REIT, actually or constructively owns 10% or more
of the tenant. Third, if rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to the personal
property will not qualify as rents from real property.
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Generally, for rents to qualify as rents from real property for the purposes
of the gross income tests, Federal Realty 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
Federal Realty 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
Federal Realty's direct cost of providing the service. If the impermissible
tenant service income exceeds 1% of Federal Realty's total 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 Federal Realty's 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.
Federal Realty may receive fees in consideration of the performance of
property management services with respect to certain properties not owned
entirely by Federal Realty. A portion of such fees, corresponding to that
portion of a property owned by a third party, will not qualify under the 75% or
95% gross income test. Federal Realty also may receive certain other 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 Federal Realty's stock in
any taxable REIT subsidiaries will not qualify under the 75% gross income test.
Federal Realty believes, however, that the aggregate amount of such fees and
other non-qualifying income in any taxable year will not cause Federal Realty to
exceed the limits on non-qualifying income under the 75% and 95% gross income
tests.
Federal Realty owns stock interests in taxable REIT subsidiaries. Each of
these taxable REIT subsidiaries is taxable as a regular "C corporation." Federal
Realty's share of any dividends received from these taxable REIT subsidiaries
should qualify for purposes of the 95% gross income test but not for purposes of
the 75% gross income test. Federal Realty does not anticipate that it will
receive sufficient dividends from these taxable REIT subsidiaries to cause it to
exceed the limit on non-qualifying income under the 75% gross income test.
If Federal Realty fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
that year if it is entitled to relief under the Internal Revenue Code. These
relief provisions generally will be available if Federal Realty's failure to
meet the tests is due to reasonable cause and not due to willful neglect,
Federal Realty attaches a schedule of the sources of its income to its federal
income tax return and any incorrect information on the schedule is not due to
fraud with the intent to evade tax. It is not possible, however, to state
whether in all circumstances Federal Realty would be entitled to the benefit of
these relief provisions. For example, if Federal Realty fails to satisfy the
gross income tests because non-qualifying income that Federal Realty
intentionally incurs exceeds the limits on non-qualifying income, the Internal
Revenue Service could conclude that the failure to satisfy the tests was not
due to a reasonable cause. If Federal Realty fails to satisfy the 75% or 95%
gross income test and these relief provisions do not apply, Federal Realty will
fail to qualify as a REIT. Even if these relief provisions were to apply,
Federal Realty would be subject to a penalty tax based upon the amount of non-
qualifying income.
ASSET TESTS. At the close of each quarter of its taxable year, Federal
Realty must satisfy six tests relating to the nature of its assets.
(1) At least 75% of the value of Federal Realty's total assets must be
represented by real estate assets, cash, cash items and government
securities. Federal Realty's real estate assets include, for this
purpose, 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 less than one year purchased with the proceeds of
an offering of shares or long-term debt of Federal Realty.
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(2) Not more than 25% of Federal Realty's total assets may be represented
by securities, other than those in the 75% asset class.
(3) Except for investments in REITs, qualified REIT subsidiaries and
taxable REIT subsidiaries, the value of any one issuer's securities
owned by Federal Realty may not exceed 5% of the value of Federal
Realty's total assets.
(4) Except for investments in REITs, qualified REIT subsidiaries and
taxable REIT subsidiaries, Federal Realty may not own more than 10% of
any one issuer's outstanding voting securities.
(5) Except for investments in REITs, qualified REIT subsidiaries and
taxable REIT subsidiaries, Federal Realty may not own more than 10% of
the total value of the outstanding securities of any one issuer.
(6) Not more than 20% of the value of Federal Realty's total assets may be
represented by the securities of one or more taxable REIT subsidiaries.
Federal Realty currently owns stock interests in taxable REIT subsidiaries.
So long as these subsidiaries qualify as taxable REIT subsidiaries, Federal
Realty will not be subject to the 5% asset test, 10% voting securities
limitation or 10% value limitation with respect to these subsidiaries. Federal
Realty may acquire securities in other taxable REIT subsidiaries in the future.
Federal Realty believes that the aggregate value of its taxable REIT
subsidiaries will not exceed 20% of the aggregate value of its gross assets.
With respect to each issuer in which Federal Realty currently owns an
interest that does not qualify as a REIT, a qualified REIT subsidiary or a
taxable REIT subsidiary, Federal Realty believes that its pro rata share of the
value of the securities, including unsecured debt, of any such issuer does not
exceed 5% of the total value of Federal Realty's assets and that it complies
with the 10% voting securities limitation and 10% value limitation, taking into
account the "straight debt" exceptions with respect to certain issuers. With
respect to its compliance with each of these asset tests, however, Federal
Realty cannot assure you that the Internal Revenue Service might not disagree
with Federal Realty's determinations.
Securities for purposes of the asset tests may include debt securities.
However, debt of an issuer will not count as a security for purposes of the 10%
value test if the debt securities meet the straight debt safe harbor and (1)
the issuer is an individual, (2) the only securities of the issuer that the
REIT holds are straight debt or (3) if the issuer is a partnership, the REIT
holds at least a 20% profits interest in the partnership.
After initially meeting the asset tests at the close of any quarter, Federal
Realty will not lose its status as a REIT if it fails to satisfy the 25%, 20%
or 5% asset tests or the 10% value limitation at the end of a later quarter
solely by reason of changes in the relative values of its assets. If the
failure to satisfy the 25%, 20% or 5% asset tests or the 10% value limitation
results from an acquisition of securities or other property during a quarter,
the failure can be cured by disposition of sufficient non-qualifying assets
within 30 days after the close of that quarter. Federal Realty intends to
maintain adequate records of the value of its assets to ensure compliance with
the asset tests and to take any available actions within 30 days after the
close of any quarter as may be required to cure any noncompliance with the 25%
20%, or 5% asset tests or 10% value limitation. If Federal Realty were to fail
to cure noncompliance with the asset tests within this time period, Federal
Realty would cease to qualify as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS. Federal Realty, in order to qualify for
taxation as a REIT, is required to make dividend distributions (other than
capital gain dividends) to its shareholders each year in an amount at least
equal to
(1) the sum of
(a) 90% of Federal Realty's REIT taxable income (computed without
regard to the dividends paid deduction and Federal Realty's net
capital gain) and
18
(b) 90% of the net income (after tax), if any, from foreclosure
property,
minus
(2) the sum of certain items of non-cash income.
Distributions must generally be made during the taxable year to which they
relate. Dividends may be paid in the following year in two circumstances.
First, dividends may be declared in the following year if the dividends are
declared before Federal Realty timely files its tax return for the year and if
made before the first regular dividend payment made after such declaration.
Second, if Federal Realty declares a dividend in October, November, or December
of any year with a record date in one of these months and pays the dividend on
or before January 31 of the following year, Federal Realty will be treated as
having paid the dividend on December 31 of the year in which the dividend was
declared. To the extent that Federal Realty does not distribute all of its net
capital gain or distributes at least 90%, but less than 100%, of its REIT
taxable income, as adjusted, it will be subject to tax on the undistributed
amount at regular capital gains or ordinary corporate tax rates, as the case
may be.
A REIT may elect to retain rather than distribute all or a portion of its
net capital gains and pay the tax on the gains. In that case, a REIT may elect
to have its shareholders include their proportionate share of the undistributed
net capital gains in income as long-term capital gains and receive a credit for
their share of the tax paid by the REIT. For purposes of the 4% excise tax
described above, any retained amounts would be treated as having been
distributed.
Federal Realty believes that it has made, and intends to continue to make,
timely distributions sufficient to satisfy the annual distribution
requirements. It is possible, however, that Federal Realty, from time to time,
may not have sufficient cash or other liquid assets to meet the distribution
requirements. In that event, Federal Realty may arrange for short-term, or
possibly long-term, borrowing to permit the payments of required dividends.
Under some circumstances, Federal Realty may be able to rectify a failure to
meet the distribution requirement for a year by paying deficiency dividends to
shareholders in a later year, which may be included in Federal Realty's
deduction for dividends paid for the earlier year. Thus, Federal Realty may be
able to avoid being taxed on amounts distributed as deficiency dividends.
However, Federal Realty will be required to pay interest based upon the amount
of any deduction taken for deficiency dividends.
RECORD-KEEPING REQUIREMENTS. Federal Realty is required to comply with
applicable record-keeping requirements. Failure to comply could result in
monetary fines.
FAILURE TO QUALIFY. If Federal Realty fails to qualify for taxation as a
REIT in any taxable year and the relief provisions do not apply, Federal Realty
will be subject to tax, including any applicable alternative minimum tax, on
its taxable income at regular corporate rates. Distributions to shareholders in
any year in which Federal Realty fails to qualify will not be required and, if
made, will not be deductible by Federal Realty. Unless entitled to relief under
specific statutory provisions, Federal Realty also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all
circumstances Federal Realty would be entitled to such statutory relief.
TAX ASPECTS OF FEDERAL REALTY'S INVESTMENTS IN PARTNERSHIPS
GENERAL. Federal Realty holds direct or indirect interests in a number of
partnerships and limited liability companies (each individually, a
"partnership" and, collectively, the "partnerships"). Federal Realty believes
that each of the partnerships, other than wholly owned limited liability
companies, which are disregarded for tax purposes, qualifies as a partnership,
as opposed to an association taxable as a corporation, for federal income tax
purposes. If any of the partnerships were to be treated as an association, it
would be taxable as a corporation and therefore subject to an entity-level tax
on its income. In such a situation, the character of Federal Realty's assets
and items of gross income would change, which could preclude Federal Realty
from satisfying the asset tests and possibly the income tests and, in turn,
could prevent Federal Realty from qualifying as a REIT.
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OWNERSHIP OF PARTNERSHIP INTERESTS BY A REIT. A REIT that is a partner in a
partnership will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to earn its proportionate share of the
partnership's income. In addition, the assets and gross income of the
partnership retain the same character in the hands of the REIT for purposes of
the gross income and asset tests applicable to REITs. Thus, Federal Realty's
proportionate share of the assets and items of income of the partnerships,
including the partnership's share of assets and items of income of any
subsidiaries that are partnerships or limited liability companies, are treated
as assets and items of income of Federal Realty for purposes of applying the
asset and income tests. Federal Realty has control over substantially all of
the partnerships and limited liability companies in which it holds interests
and intends to operate them in a manner that is consistent with the
requirements for qualification of Federal Realty as a REIT.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Pursuant to 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 such
that the contributing partner is charged with, or benefits from, respectively,
the unrealized gain or unrealized loss associated with the property at the time
of the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value and the
adjusted tax basis of contributed property at the time of contribution (a
"Book-Tax Difference"). Such allocations are solely for federal income tax
purposes and do not affect the book capital accounts or other economic or legal
arrangements among the partners. These allocations will tend to eliminate the
Book-Tax Difference over the life of the partnerships. However, the special
allocation rules of Section 704(c) as applied by Federal Realty do not always
entirely rectify 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 Partnerships will cause Federal Realty
to be allocated lower depreciation and other deductions, and possibly greater
amounts of taxable income in the event of a sale of contributed assets in
excess of the economic or book income allocated to it as a result of such sale.
This may cause Federal Realty to recognize taxable income in excess of cash
proceeds, which might adversely affect Federal Realty's ability to comply with
the REIT distribution requirements.
SALE OF THE PROPERTIES
Federal Realty's share of any gain realized by the sale of any dealer
property generally will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. Under existing law, whether property is
dealer property is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. Federal Realty and
its partnership subsidiaries have held and intend to continue to hold the
properties for investment with a view to long-term appreciation, to engage in
the business of acquiring, developing, owning and operating the properties and
to make such occasional sales of the properties as are consistent with Federal
Realty's investment objectives. Based upon such investment objectives, Federal
Realty believes that, in general, the properties should not be considered
dealer property and that the amount of income from prohibited transactions, if
any, will not be material.
TAXATION OF TAXABLE DOMESTIC HOLDERS OF COMMON SHARES
As used in the remainder of this discussion, the term "U.S. shareholder"
means a beneficial owner of a common share of Federal Realty that is, for
United States federal income tax purposes:
. a citizen or resident, as defined in Section 7701(b) of the Internal
Revenue Code, of the United States;
. a corporation or partnership, or other entity treated as a corporation
or partnership for federal income tax purposes, created or organized in or
under the laws of the United States or any state or the District of
Columbia, unless in the case of a partnership, Treasury Regulations are
adopted that provide otherwise;
. an estate the income of which is subject to United States federal income
taxation regardless of its source; or
. a trust (i) if it is subject to the primary supervision of a court within
the United States and one or more United States persons have the authority
to control all substantial decisions of the trust or (ii) that has a valid
election under applicable Treasury Regulations to be treated as a United
States person.
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Generally, in the case of a partnership that holds common shares of Federal
Realty, any partner that would be a U.S. shareholder if it held the common
shares directly is also a U.S. shareholder. A "non-U.S. shareholder" is a
holder, including any partner in a partnership that holds common shares, that
is not a U.S. shareholder.
DISTRIBUTIONS. As long as Federal Realty qualifies as a REIT, distributions
made to Federal Realty's taxable U.S. shareholders out of current or
accumulated earnings and profits, and not designated as capital gain dividends,
will be taken into account by them as ordinary income. Corporate shareholders
will not be eligible for the dividends received deduction with respect to these
distributions.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a U.S. shareholder to the extent that the distributions do
not exceed the adjusted basis of the U.S. shareholder's common shares. Rather,
such distributions will reduce the adjusted basis of such common shares. To the
extent that such distributions exceed the adjusted basis of a U.S.
shareholder's common shares, they will be taxable as capital gains, assuming
the common shares are a capital asset in the hands of the U.S. shareholder. If
Federal Realty declares a dividend in October, November or December of any year
with a record date in one of these months and pays the dividend on or before
January 31 of the following year, Federal Realty will be treated as having paid
the dividend, and the shareholder will be treated as having received the
dividend, on December 31 of the year in which the dividend was declared.
Federal Realty may elect to designate distributions of its net capital gain
as "capital gain dividends." Capital gain dividends are taxed to U.S.
shareholders 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
shareholder has held its shares. If Federal Realty designates any portion of a
dividend as a capital gain dividend, a U.S. shareholder will receive an
Internal Revenue Service Form 1099-DIV indicating the amount that will be
taxable to the shareholder as capital gain. Corporate shareholders, however,
may be required to treat up to 20% of capital gain dividends as ordinary
income.
Federal Realty may elect to require shareholders to include Federal Realty's
undistributed net capital gains in their income. If Federal Realty makes such
an election, U.S. shareholders
(1) will include in their income as long-term capital gains their
proportionate share of such undistributed capital gains and
(2) will be deemed to have paid their proportionate share of the tax paid
by Federal Realty on such undistributed capital gains and thereby
receive a credit or refund for such amount.
A U.S. shareholder will increase the basis in its common shares by the
difference between the amount of capital gain included in its income and the
amount of tax it is deemed to have paid. The earnings and profits of Federal
Realty will be adjusted appropriately.
Federal Realty will classify portions of any designated capital gain
dividend as either:
. a 20% gain distribution, which would be taxable to non-corporate U.S.
shareholders at a maximum rate of 20%; or
. an "unrecaptured Section 1250 gain" distribution, which would be taxable
to non-corporate U.S. shareholders at a maximum rate of 25%.
Federal Realty must determine the maximum amounts that it may designate as
20% and 25% capital gain dividends by performing the computation required by
the Internal Revenue Code as if the REIT were an individual whose ordinary
income were subject to a marginal tax rate of at least 28%. Designations made
by Federal Realty only will be effective to the extent that they comply with
Revenue Ruling 89-81, which requires that distributions made to different
classes of shares not be composed disproportionately of a particular type of
dividends.
Distributions made by Federal Realty and gain arising from the sale or
exchange by a U.S. shareholder of common shares will not be treated as passive
activity income, and as a result, U.S. shareholders generally will not be able
to apply any "passive losses" against this income or gain. In addition, taxable
distributions from Federal Realty generally will be treated as investment
income for purposes of the investment interest
21
limitations. A U.S. shareholder may elect to treat capital gain dividends and
capital gains from the disposition of common shares as investment income for
purposes of the investment interest limitation, in which case the applicable
capital gains will be taxed at ordinary income rates. Federal Realty will
notify shareholders regarding the portions of distributions for each year that
constitute ordinary income, return of capital and capital gain. U.S.
shareholders may not include in their individual income tax returns any net
operating losses or capital losses of Federal Realty. Federal Realty's
operating or capital losses would be carried over by Federal Realty for
potential offset against future income, subject to applicable limitations.
SALES OF SHARES. Upon any taxable sale or other disposition of common
shares, a U.S. shareholder will recognize gain or loss for federal income tax
purposes on the disposition in an amount equal to the difference between:
(1) the amount of cash and the fair market value of any property received
on such disposition; and
(2) the holder's adjusted basis in the common shares for tax purposes.
Gain or loss will be capital gain or loss if the shares have been held by
the U.S. shareholder as a capital asset. The applicable tax rate will depend on
the shareholder's holding period in the asset (generally, if an asset has been
held for more than one year, it will produce long-term capital gain) and the
shareholder's tax bracket. The Internal Revenue Service has the authority to
prescribe, but has not yet prescribed, regulations that would apply a capital
gain tax rate of 25%, which is generally higher than the long-term capital gain
tax rates for non-corporate shareholders, to a portion of capital gain realized
by a non-corporate shareholder on the sale of REIT shares that would correspond
to the REIT's "unrecaptured Section 1250 gain." Shareholders are advised to
consult with their own tax advisors with respect to their capital gain tax
liability.
In general, any loss recognized by a U.S. shareholder upon the sale or other
disposition of shares that have been held for six months or less, after
applying certain holding period rules, will be treated as a long-term capital
loss, but only to the extent of distributions received by the U.S. shareholder
from Federal Realty that are required to be treated by such U.S. shareholder as
long-term capital gains.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Provided that a tax-exempt shareholder has not held its common shares as
"debt financed property" within the meaning of the Internal Revenue Code, the
dividend income from Federal Realty will not be unrelated business taxable
income, referred to as UBTI, to a tax-exempt shareholder. Similarly, income
from the sale of common shares will not constitute UBTI unless the tax-exempt
shareholder has held its share as debt financed property within the meaning of
the Internal Revenue Code or has used the common shares in a trade or business.
However, for tax-exempt shareholders that are social clubs, voluntary
employee benefit associations, supplemental unemployment benefit trusts and
qualified group legal services plans exempt from federal income taxation under
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code,
respectively, income from an investment in Federal Realty will constitute UBTI
unless the organization properly sets aside or reserves such amounts for
purposes specified in the Internal Revenue Code. These tax-exempt shareholders
should consult their own tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension-held REIT" are treated as UBTI 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 the REIT. Tax-exempt pension funds that are described in Section
401(a) of the Internal Revenue Code are referred to below as "pension trusts."
A REIT is a pension-held REIT if it meets the following two tests:
(1) it would not have qualified as a REIT but for the provisions of Section
856(h)(3) of the Internal Revenue Code, which provide that stock owned
by pension trusts will be treated, for purposes of
22
determining whether the REIT is closely held, as owned by the
beneficiaries of the trust rather than by the trust itself; and
(2) either
(a) at least one pension trust holds more than 25% of the value of
the interests in the REIT, or
(b) a group of pension trusts each individually holding more than 10%
of the value of the REIT's shares, collectively owns more than
50% of the value of the REIT's shares.
The percentage of any REIT dividend treated as UBTI is equal to the ratio
of the UBTI earned by the REIT, treating the REIT as if it were a pension
trust and therefore subject to tax on UBTI, to the total gross income of the
REIT. An exception applies where the percentage is less than 5% for any year.
The provisions requiring pension trusts to treat a portion of REIT
distributions as UBTI will not apply if the REIT is able to satisfy the "not
closely held requirement" without relying upon the "look-through" exception
with respect to pension trusts. Based on both its current share ownership and
the limitations on transfer and ownership of shares contained in its
Declaration of Trust, Federal Realty does not expect to be classified as a
pension-held REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
DISTRIBUTIONS BY FEDERAL REALTY. Distributions by Federal Realty to a non-
U.S. shareholder that are neither attributable to gain from sales or exchanges
by Federal Realty of "U.S. real property interests" nor designated by Federal
Realty as capital gains dividends will be treated as dividends of ordinary
income to the extent that they are made out of Federal Realty's current or
accumulated earnings and profits. These distributions ordinarily will be
subject to U.S. federal income tax on a gross basis at a rate of 30%, or a
lower rate as permitted under an applicable income tax treaty, unless the
dividends are treated as effectively connected with the conduct by the non-
U.S. shareholder of a U.S. trade or business. Under some treaties, however,
lower tax and withholding rates generally applicable to dividends do not apply
to dividends from REITs. Dividends that are effectively connected with a trade
or business will be subject to tax on a net basis, that is, after allowance
for deductions, at graduated rates, in the same manner as U.S. shareholders
are taxed with respect to these dividends and are generally not subject to
withholding. Applicable certification and disclosure requirements must be
satisfied to be exempt from withholding under the effectively connected income
exemption. Any dividends received by a corporate non-U.S. shareholder that is
engaged in a U.S. trade or business also may be subject to an additional
branch profits tax at a 30% rate, or lower applicable treaty rate. Federal
Realty 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. shareholder unless:
(1) a lower treaty rate applies and the non-U.S. shareholder files an
Internal Revenue Service Form W-8BEN evidencing eligibility for that
reduced rate with Federal Realty; or
(2) the non-U.S. shareholder files an Internal Revenue Service Form W-8ECI
with Federal Realty claiming that the distribution is effectively
connected income.
Distributions in excess of Federal Realty's current or accumulated earnings
and profits that do not exceed the adjusted basis of the non-U.S. shareholder
in its common shares will reduce the non-U.S. shareholder's adjusted basis in
its Federal Realty's common shares and will not be subject to U.S. federal
income tax. Distributions in excess of current and accumulated earnings and
profits of Federal Realty that do exceed the adjusted basis of the non-U.S.
shareholder in its common shares will be treated as gain from the sale of its
common shares, the tax treatment of which is described below. See "Taxation of
Non-U.S. Shareholders--Sale of Common Shares."
Federal Realty 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. shareholder is not liable for tax on the
receipt of that distribution. However, a non-U.S. shareholder may seek a
refund of these amounts
23
from the Internal Revenue Service if the non-U.S. shareholder's U.S. tax
liability with respect to the distribution is less than the amount withheld.
Distributions to a non-U.S. shareholder that are designated by Federal
Realty at the time of the distribution as capital gain dividends, other than
those arising from the disposition of a U.S. real property interest, generally
should not be subject to U.S. federal income taxation unless:
. the investment in the common shares is effectively connected with the
non-U.S. shareholder's trade or business, in which case the non-U.S.
shareholder will be subject to the same treatment as U.S. shareholders
with respect to any gain, except that a shareholder that is a foreign
corporation also may be subject to the 30% branch profits tax, as
discussed above, or
. the non-U.S. shareholder is a nonresident alien individual who is
present in the U.S. for 183 days or more during the taxable year and has
a "tax home" in the U.S., in which case the nonresident alien individual
will be subject to a 30% tax on the individual's capital gains.
Federal Realty will be required to withhold and remit to the Internal
Revenue Service 35% of any distributions to foreign shareholders that are
designated as capital gain dividends, or, if greater, 35% of a distribution
that could have been designated as a capital gain dividend. Distributions can
be designated as capital gains to the extent of Federal Realty's net capital
gain for the taxable year of the distribution. The amount withheld is
creditable against the non-U.S. shareholder's United States federal income tax
liability.
Although the law is not clear on the matter, it appears that amounts
designated by Federal Realty as undistributed capital gains in respect of the
common shares held by U.S. shareholders generally should be treated with
respect to non-U.S. shareholders in the same manner as actual distributions by
Federal Realty of capital gain dividends. Under that approach, the non-U.S.
shareholders would be able to offset as a credit against their United States
federal income tax liability resulting therefrom their proportionate share of
the tax paid by Federal Realty on the undistributed capital gains, and to
receive from the Internal Revenue Service a refund to the extent their
proportionate share of this tax paid by Federal Realty were to exceed their
actual United States federal income tax liability.
Under the Foreign Investment in Real Property Tax Act, which is referred to
as "FIRPTA," distributions to a non-U.S. shareholder that are attributable to
gain from sales or exchanges by Federal Realty of U.S. real property interests,
whether or not designated as a capital gain dividend, will cause the non-U.S.
shareholder to be treated as recognizing gain that is income effectively
connected with a U.S. trade or business. Non-U.S. shareholders will be taxed on
this gain at the same rates applicable to U.S. shareholders, 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. shareholder that is a corporation.
SALE OF COMMON SHARES. Gain recognized by a non-U.S. shareholder upon the
sale or exchange of Federal Realty common shares generally would not be subject
to United States taxation unless:
. the investment in Federal Realty common shares is effectively connected
with the non-U.S. shareholder's U.S. trade or business, in which case
the non-U.S. shareholder will be subject to the same treatment as
domestic shareholders with respect to any gain;
. the non-U.S. shareholder 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 net capital gains for the taxable year; or
. Federal Realty common shares constitute a U.S. real property interest
within the meaning of FIRPTA, as described below.
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Federal Realty's common shares will not constitute a United States real
property interest if Federal Realty is a domestically controlled REIT. Federal
Realty will be a domestically controlled REIT if, 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. shareholders.
Federal Realty believes that, currently, it is a domestically controlled
REIT and, therefore, that the sale of Federal Realty's common shares would not
be subject to taxation under FIRPTA. Because Federal Realty's common shares are
publicly traded, however, Federal Realty cannot guarantee that it is or will
continue to be a domestically controlled REIT.
Even if Federal Realty does not qualify as a domestically controlled REIT at
the time a non-U.S. shareholder sells its Federal Realty common shares, gain
arising from the sale still would not be subject to FIRPTA tax if:
. the class or series of shares sold is considered regularly traded under
applicable Treasury regulations on an established securities market,
such as the NYSE; and
. the selling non-U.S. shareholder owned, actually or constructively, 5%
or less in value of the outstanding class or series of shares being sold
throughout the five-year period ending on the date of the sale or
exchange.
If gain on the sale or exchange of Federal Realty common shares were subject
to taxation under FIRPTA, the non-U.S. shareholder would be subject to regular
U.S. income tax with respect to any gain in the same manner as a taxable U.S.
shareholder, subject to any applicable alternative minimum tax and special
alternative minimum tax in the case of nonresident alien individuals.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
U.S. SHAREHOLDERS
In general, information reporting requirements will apply to payments of
distributions on common shares and payments of the proceeds of the sale of
common shares to some shareholders, unless an exception applies. Further, the
payer will be required to withhold backup withholding tax if:
. the payee fails to furnish a taxpayer identification number, or TIN, to
the payer or to establish an exemption from backup withholding;
. the Internal Revenue Service notifies the payer that the TIN furnished
by the payee is incorrect;
. there has been a notified payee under reporting with respect to
interest, dividends or original issue discount described in Section
3406(c) of the Internal Revenue Code; or
. there has been a failure of the payee to certify under the penalty of
perjury that the payee is not subject to backup withholding under the
Internal Revenue Code.
Effective for dividend payments made after August 6, 2001, the backup
withholding rate decreased from 31% to 30.5% for payments made in 2001 and is
scheduled to be further reduced through 2006 as federal ordinary income tax
rates decrease. Some shareholders, including corporations, will be exempt from
backup withholding. Any amounts withheld under the backup withholding rules from
a payment to a shareholder will be allowed as a credit against the shareholder's
United States federal income tax and may entitle the shareholder to a refund,
provided that the required information is furnished to the Internal Revenue
Service.
NON-U.S. SHAREHOLDERS
Generally, information reporting will apply to payments of distributions on
common shares, and backup withholding at a rate of 31% may apply, unless the
payee certifies that it is not a U.S. person or otherwise establishes an
exemption.
25
The payment of the proceeds from the disposition of common shares to or
through the U.S. office of a U.S. or foreign broker will be subject to
information reporting and, possibly, backup withholding unless the non-U.S.
shareholder certifies as to its non-U.S. status or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
shareholder is a U.S. person or that the conditions of any other exemption are
not, in fact, satisfied. The proceeds of the disposition by a non-U.S.
shareholder of common shares to or through a foreign office of a broker
generally will not be subject to information reporting or backup withholding.
However, if the broker is a U.S. person, a controlled foreign corporation for
U.S. tax purposes, or a foreign person 50% or more of whose gross income from
all sources for specified periods is from activities that are effectively
connected with a U.S. trade or business, information reporting generally will
apply unless the broker has documentary evidence as to the non-U.S.
shareholder's foreign status and has no actual knowledge to the contrary.
Applicable Treasury regulations provide presumptions regarding the status of
shareholders when payments to the shareholders cannot be reliably associated
with appropriate documentation provided to the payer. Under these Treasury
regulations, some shareholders are required to have provided new certifications
with respect to payments made after December 31, 2000. Because the application
of these Treasury regulations varies depending on the shareholder's particular
circumstances, you are advised to consult your tax advisor regarding the
information reporting requirements applicable to you.
OTHER TAX CONSIDERATIONS
A portion of the cash to be used by Federal Realty to fund distributions
comes from the taxable REIT subsidiaries through payment of dividends on the
stock of such corporations held by Federal Realty. The taxable REIT subsidiaries
are regular "C corporations" and thus pay federal, state and local income taxes
on their net income at normal corporate rates. Furthermore, a taxable REIT
subsidiary may be limited in its ability to deduct interest payments made to
Federal Realty. Any federal, state or local income taxes that Federal Realty's
taxable REIT subsidiaries are required to pay will reduce the amounts paid as
dividends to Federal Realty and, thus, will reduce the cash available for
distribution by Federal Realty to its shareholders.
Federal Realty and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of
Federal Realty and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the common shares of Federal Realty.
ITEM 7. Exhibits
Exhibit 23.1 Consent of Arthur Andersen LLP
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FEDERAL REALTY INVESTMENT TRUST
Date: November 14, 2001 By: /s/ NANCY J. HERMAN
------------------------------
Nancy J. Herman
Senior Vice President--General
Counsel and Secretary
EXHIBIT INDEX
Exhibit 23.1 Consent of Arthur Andersen LLP