AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL ___, 2003
REGISTRATION NO. 333-_________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMREIT
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENT)
8 GREENWAY PLAZA, SUITE 824
HOUSTON, TEXAS 77046
(713) 850-1400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
H. KERR TAYLOR
CHIEF EXECUTIVE OFFICER
AMREIT
8 GREENWAY PLAZA, SUITE 824
HOUSTON, TEXAS 77046
(713) 850-1400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
BRYAN L. GOOLSBY
KENNETH L. BETTS
LOCKE LIDDELL & SAPP LLP
2200 ROSS AVENUE, SUITE 2200
DALLAS, TEXAS 75201-6776
(214) 740-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If this form is filed to register additional Securities for offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_| ___________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
|_| ____________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
|_| _____________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
------------------
CALCULATION OF REGISTRATION FEE
================================================ ================= ========================= ======================= ==============
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) FEE
------------------------------------------------ ----------------- ------------------------- ----------------------- --------------
------------------------------------------------ ----------------- ------------------------- ----------------------- --------------
Class C Common Shares of Beneficial Interest, 4,400,000 $10.00 $44,000,000 $4,048
$.01 par value
================================================ ================= ========================= ======================= ==============
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(o), promulgated under the Securities Act of 1933, as
amended.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED APRIL ___, 2003
AMREIT
UP TO 4,400,000 CLASS C COMMON SHARES OFFERED TO THE PUBLIC
AmREIT is a fully integrated real estate company that operates as a
real estate investment trust (REIT) under the federal income tax laws. AmREIT
acquires, owns and manages a diversified portfolio of single-tenant
freestanding and multi-tenant commercial frontage properties leased to
national, regional and local tenants with a focus on general retail, banking and
financial institutions, restaurant and medical sectors. As of the date of this
prospectus, AmREIT owned directly, or through joint ventures, interests in 46
properties located in 18 states that are leased to a total of 24 different
tenants and that contain an aggregate of approximately 380 thousand square
feet of gross leaseable area. The proceeds from the sale of the class C common
shares being offered by us pursuant to this prospectus will be invested in
these types of real estate properties. We are offering and selling to the
public up to 4,000,000 class C common shares of beneficial interest for $10.00
per share and up to 400,000 shares to be issued pursuant to our dividend
reinvestment plan at a purchase price of $10.00 per share.
This prospectus gives you detailed information about the class C
common shares. You are encouraged to read this document carefully. IN
PARTICULAR, YOU SHOULD READ THE "RISK FACTORS" SECTION BEGINNING ON PAGE ___
FOR A DESCRIPTION OF VARIOUS RISKS YOU SHOULD CONSIDER IN EVALUATING AN
INVESTMENT IN THE SHARES, INCLUDING THE FOLLOWING:
o the lack of a public trading market for the class C common shares,
o the speculative nature of an investment in the class C common shares,
o the shareholders can not evaluate property acquisitions ahead of time,
o the potential dilution of your interest should we issue additional shares,
o the ability for AmREIT to increase its current debt levels,
o the subordination of distributions on the shares to payments of our debt.
o the ability of AmREIT to maintain its REIT status, and
o the fact that AmREIT depends on few major tenants.
The Offering:
o The shares will be offered on a best efforts basis to investors at $10.00
per share.
o We will pay selling commissions to broker-dealers of 7% and a dealer
manager fee of 2.5% out of the offering proceeds raised.
o We will invest approximately 88% of the offering proceeds raised in real
estate properties or to pay down existing debt, and the balance will be
used to pay fees and expenses.
o This offering will terminate on or before [______________, ____].
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE ATTORNEY GENERAL
OF THE STATE OF NEW YORK NOR ANY OTHER STATE SECURITIES REGULATOR HAS APPROVED
OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL
OR COMPLETE. IT IS A CRIMINAL OFFENSE IF SOMEONE TELLS YOU OTHERWISE. THE USE
OF PROJECTIONS OR FORECASTS, OTHER THAN THOSE PRESENTED HEREIN, OR
SPECIFICALLY AUTHORIZED BY THE COMPANY, IS PROHIBITED. NO ONE IS PERMITTED
TO MAKE ANY ORAL OR WRITTEN PREDICTIONS ABOUT THE CASH BENEFITS OR TAX
CONSEQUENCES YOU WILL RECEIVE FROM YOUR INVESTMENT.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN OR INCORPORATED BY REFERENCE INTO
THIS PROSPECTUS IN CONNECTION WITH THE OFFERING OF THE CLASS C COMMON SHARES
MADE HEREBY AND, IF GIVEN OR MADE, THAT INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY
SECURITIES IN ANY JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER.
April ______, 2003
TABLE OF CONTENTS
PAGE
Questions and Answers About This Offering...................................................... 2
Summary of the Offering........................................................................ 8
Risk Factors................................................................................... 12
Risks Associated with an Investment in AmREIT............................................. 12
Risks Associated with an Investment in Real Estate........................................ 16
Risks Associated with Federal Income Taxation of AmREIT................................... 21
Suitability Standards.......................................................................... 23
Business and Properties........................................................................ 28
Management..................................................................................... 34
Executive Compensation.................................................................... 37
Security Ownership of Certain Beneficial Owners and Management............................ 38
Certain Relationships and Related Transactions............................................ 38
Legal Proceedings......................................................................... 39
Estimated Use of Proceeds...................................................................... 40
Prior Performance.............................................................................. 42
Selected Financial Data........................................................................ 52
Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 54
Investment Objectives and Criteria............................................................. 60
AmREIT's Declaration of Trust and Bylaws....................................................... 69
Certain Anti-Takeover Provisions of AmREIT's Declaration of Trust and Bylaws and Texas Law..... 72
Description of AmREIT's Capital Shares......................................................... 76
Federal Income Tax Consequences................................................................ 88
General................................................................................... 88
REIT Qualification........................................................................ 89
Taxation as a REIT........................................................................ 94
Failure to Qualify as a REIT.............................................................. 96
Taxation of Taxable U.S. Shareholders..................................................... 96
Backup Withholding........................................................................ 98
Taxation of Tax-Exempt Entities........................................................... 98
Taxation of Foreign Investors............................................................. 99
State and Local Taxes..................................................................... 100
Certain ERISA Considerations................................................................... 101
General Fiduciary Rules................................................................... 101
Plan Assets............................................................................... 101
Plan Asset Regulations - Publicly Offered Securities Exemption............................ 102
Prohibited Transactions................................................................... 102
Governmental Plans........................................................................ 103
Special Considerations for Insurance Companies............................................ 103
Plan of Distribution........................................................................... 104
Supplemental Sales Material.................................................................... 107
Legal Opinions................................................................................. 108
Additional Information......................................................................... 108
Glossary....................................................................................... 109
i
QUESTIONS AND ANSWERS ABOUT THE OFFERING
BELOW WE HAVE PROVIDED SOME OF THE MORE FREQUENTLY ASKED QUESTIONS AND
ANSWERS RELATING TO AN OFFERING OF THIS TYPE. PLEASE SEE "PROSPECTUS
SUMMARY OF THE OFFERING" AND THE REMAINDER OF THIS PROSPECTUS FOR MORE DETAILED
INFORMATION ABOUT THIS OFFERING. THESE QUESTIONS AND ANSWERS DO NOT, AND ARE
NOT INTENDED TO, ADDRESS ALL THE QUESTIONS THAT MAY BE IMPORTANT TO YOU.
PROSPECTIVE INVESTORS SHOULD CAREFULLY READ THE "SUMMARY OF THE OFFERING"
SECTION AND THE REMAINDER OF THIS PROSPECTUS FOR MORE INFORMATION REGARDING
THE OFFERING.
Q. WHAT IS A REIT?
A. In general, a REIT is a company that:
o combines the capital of many investors to acquire or provide
financing for real estate properties;
o pays dividends to investors of at least 90% of its taxable income;
o avoids the "double taxation" treatment of income that may
result from investments in a corporation because a REIT is not
generally subject to federal corporate income taxes on its net
income, provided certain income and distribution requirements are
satisfied; and
o allows individual investors to invest in a large-scale diversified
real estate portfolio through the purchase of interests, typically
shares, in the REIT.
Q. WHAT IS AMREIT?
A. AmREIT is a fully integrated real estate company dedicated to the
ownership, development and acquisition of commercial real estate
specializing in general retail, financial services and banking, medical
and restaurant sectors. In addition, AmREIT is a sponsor of real estate
investment opportunities, available through the financial planning
community. AmREIT, a Texas real estate investment trust, became the
successor to AmREIT, Inc., a Maryland corporation (the "Predecessor
Corporation"), on December 22, 2002, through the merger of the Predecessor
Corporation into AmREIT. AmREIT has outstanding approximately 2.8 million
class A common shares listed on the American Stock Exchange (AMEX:AMY)
and approximately 2.5 million class B common shares that are not listed
on an exchange, which may be converted into class A common shares, on a
one-for-one basis at any time, at the holder's option.
Q. HOW MANY REAL ESTATE PROPERTIES DO YOU CURRENTLY OWN?
A. As of the date of this prospectus, AmREIT owns, directly or through joint
venture, 46 real estate properties. These properties are located in 18
different states and include both single tenant free standing properties
as well as multi-tenant shopping centers. Some of our tenants include
Washington Mutual, Eckerd's, Radio Shack, IHOP, TGI Friday's, Sketchers,
Texas Children's Pediatric Association, and Memorial Herman Hospital.
Q. WHAT STEPS DO YOU TAKE TO MAKE SURE YOU PURCHASE ENVIRONMENTALLY COMPLIANT
PROPERTY?
A. We obtain a Phase I environmental assessment of each property purchased.
In addition, we generally obtain a representation from the seller that, to
its knowledge, the property is not contaminated with hazardous materials.
2
Q. WHAT ARE THE TERMS OF THE CLASS C COMMON SHARES?
A. The AmREIT class C common shares will have the following terms:
o dividends, which are preferred to the class A common shares and rank
equally to the class B common shares, in an amount per share equal to
7% of the issue price ($10.00 per share) per annum, payable monthly
in advance of any dividends payable on the AmREIT class A common
shares;
o can be converted into AmREIT class A common shares with a 10% premium
on original capital(i.e., $1,000 of class C common shares will
convert to $1,100 of class A common shares), after a seven year "lock
out" period; and
o can be called by AmREIT after three years for either one class A
common share or for cash at a price of $11.00 (representing a 10%
premium over the issue price), at the holder's option.
The 10% premium that shareholders will receive upon conversion will,
together with the dividends paid through the conversion date, provide a
total return of approximately 8.5% per annum as of the end of the
seven-year lock out period. Although the class C common shares will not be
listed on an exchange, they will be freely transferable by the holders
and will be convertible into the class A common shares after the seven-
year lock out period.
Q. IF I BUY SHARES, WILL I RECEIVE DIVIDENDS AND HOW OFTEN?
A. We have been making and intend to continue to make dividend distributions
to our shareholders. As a holder of class C common shares, you will
receive annual dividends in the amount of $0.70 per share, paid to
shareholders of record on a monthly basis.
The amount of each dividend distribution to be paid to holders of
class C common shares is determined by our board of trust managers and
typically depends on the amount of distributable funds, current and
projected cash requirements, tax considerations and other factors.
However, in order to remain qualified as a REIT, we must make
distributions of at least 90% of our REIT taxable income.
Q. HOW DO YOU CALCULATE THE PAYMENT OF DIVIDENDS TO SHAREHOLDERS?
A. We calculate our monthly dividends on a daily basis from the date the
class C common shares are issued through the end of the fiscal month in
which they were issued so your dividend benefits will begin to accrue
immediately upon becoming a shareholder. Thereafter, dividends are
determined on a monthly basis.
Q. WILL THE DIVIDENDS I RECEIVE BE TAXABLE AS ORDINARY INCOME?
A. Yes and No. Generally, dividends that you receive will be taxed as
ordinary income to the extent they are from current or accumulated
earnings and profits. We expect that some portion of your dividends will
not be subject to tax in the year in which they are received because
depreciation and other non-cash expenses reduce the amount of taxable
3
income but do not reduce cash available for distribution. The portion of
your distribution which is not subject to tax immediately is considered a
return of capital for tax purposes and will reduce the tax basis of your
investment. This, in effect, defers a portion of your tax until your
investment is sold or AmREIT is liquidated, at which time you will be taxed
at capital gains rates. However, because each investor's tax considerations
are different, we strongly recommend that you consult with your tax
advisor. You should also review the section of the prospectus entitled
"Federal Income Tax Consequences."
Q. WHAT WILL YOU DO WITH THE MONEY RAISED IN THIS OFFERING?
A. We will use the proceeds of this offering to acquire properties similar to
those currently owned by AmREIT or to pay down existing debt, which will
allow additional liquidity to acquire additional properties as
opportunities are available. We intend to invest a minimum of 88% of
the proceeds from this offering to acquire real estate properties or to
pay down debt, and the remaining proceeds will be used to pay fees and
expenses of this offering and acquisition-related expenses. The payment
of these fees and expenses will not reduce your invested capital. Your
initial invested capital amount will remain $10.00 per share, and your
dividend yield will be based on your $10.00 per share investment.
Until we invest the proceeds of this offering in real estate or pay down
existing debt, we may invest in short-term, highly liquid or other
authorized investments such as money market funds or commercial paper. Such
short-term investments will not earn as high of a return as we expect to
earn on our real estate investments, and we cannot guarantee how long it
will take to fully invest the proceeds in real estate.
Q. WILL THE CLASS C COMMON SHARES BE LISTED ON A STOCK EXCHANGE?
A. No. We have no plans to list the class C common shares on a stock
exchange. The AmREIT class A common shares into which the class C common
shares will be convertible, are currently listed on the American Stock
Exchange.
Q. DOES AMREIT USE ANY SPECIFIC CRITERIA WHEN SELECTING A POTENTIAL PROPERTY
FOR ACQUISITION?
A. Yes. AmREIT and its predecessors have developed over their 18-year
operating history a proprietary "AmREIT Decision Logic" system of analysis
for projects that it reviews. There are 25 specific factors that are
contained within this decision logic, including demographic studies,
traffic flow review, environmental review, site planning and financial
analysis. AmREIT will apply this model to each property it proposes to
acquire. AmREIT focuses on buying, developing, and joint venturing
commercial net lease properties located out in front of large traffic
generators. The projects may be either single or multi tenant credit tenant
properties leased primarily to credit quality parent companies.
Q. WHAT KIND OF OFFERING IS THIS?
A. We are offering the public up to 4,000,000 class C common shares on a
"best efforts" basis. In addition, we are offering up to 400,000 class
C common shares to investors who want to participate in our reinvestment
plan.
Q. WHAT IS A "BEST EFFORTS" OFFERING?
A. When common shares are offered to the public on a "best efforts" basis,
the brokers participating in the offering are only required to use their
best efforts to sell the shares and have no firm commitment or obligation
to purchase any of the shares.
4
Q. HOW LONG WILL THIS OFFERING LAST?
A. The offering will not last beyond [_______________), unless we decide
to extend the offering until not later than (________________), in any
state that allows us to extend the offering.
Q. WHO CAN BUY CLASS C COMMON SHARES?
A. If you receive a copy of this prospectus, you may buy class C common
shares provided that you have either (1) a net worth of at least $45,000
(excluding home, furnishings, and automobiles)and an annual gross income of
at least $45,000, or (2) a net worth of at least $150,000 (excluding home,
furnishings, and automobiles). For this purpose, net worth does not include
your home, home furnishings and personal automobiles. These minimum levels
may be higher in certain states, so you should carefully read the more
detailed information set forth under the caption "Suitability Standards" in
this prospectus.
Q. IS THERE ANY MINIMUM INVESTMENT REQUIRED?
A. Yes. You must invest at least $5,000 in a non-qualified account,
or $3,000 in a qualified account. These minimum investment levels may be
higher in certain states, so you should carefully read the more detailed
description of the minimum investment requirements appearing later in the
"Suitability Standards" section of this prospectus.
Q. HOW DO I SUBSCRIBE FOR SHARES?
A. If you choose to purchase shares in this offering, you will need to fill
out a Subscription Agreement, like the one contained in this prospectus as
Exhibit [__], for a specific number of shares and pay for the shares at
the time you subscribe.
Q. IF I BUY SHARES IN THIS OFFERING, HOW MAY I LATER SELL THEM?
A. At the time you purchase the shares, they will not be listed for trading
on any national securities exchange or over-the-counter market. In fact,
we expect that there will not be any public market for the shares when you
purchase them, and we cannot be sure if one will ever develop. As a
result, you may find it difficult to find a buyer for your shares and
realize a return on your investment. You may sell your shares to any buyer
unless such sale would cause the buyer to own more than 9.0% of the
outstanding shares. See "Description of AmREIT's Capital Shares-Ownership
Limits and Restriction on Transfer."
The class C common shares are convertible into class A common shares at any
time after the seventh anniversary of the acquisition of the shares. Upon
conversion, you will be able to sell the class A common shares on the open
market. The class A common shares are listed on the AMEX.
Q. WILL I BE NOTIFIED OF HOW MY INVESTMENT IS DOING?
A. Yes. You will receive periodic updates on the performance of your
investment with us, including:
o Twelve monthly dividend statements;
o A mid-year update report;
o An annual report;
o SEC filed 10-KSBs and 10-QSBs;
o An annual IRS Form 1099;
o Supplements to the prospectus, as necessary; and
o Regular acquisition reports detailing our latest property
acquisitions.
5
Q. WHAT ASSURANCES DO THE CLASS C INVESTORS HAVE THAT THEY WILL RECEIVE THEIR
DIVIDENDS?
A. As dividends must be declared by our board of trust managers based on
then existing economic and regulatory conditions, there can be no
assurances that dividends will be paid, however, class C dividends will be
declared prior to, or concurrently with, any distributions to class A
shareholders, concurrently with the dividends declared on class B shares.
Pursuant to the Internal Revenue Code, 90% of the taxable income of a REIT
must be paid out to its shareholders in the form of dividends.
Q. DOES AMREIT USE LEVERAGE?
A. Yes. AmREIT believes the conservative use of debt is very advantageous to
maximizing the monthly income to its shareholders. AmREIT limits the level
of recourse debt to less than 55% of its assets.
Q. WHAT ARE THE TERMS OF YOUR TYPICAL LEASES?
A. We seek to secure leases with creditworthy tenants prior to or at the time
of the acquisition of a property. Our single tenant leases are generally
economically "triple-net" leases, which means that the tenant is
responsible for the cost of repairs, maintenance, property taxes,
utilities, insurance and other operating costs. Our mutli-tenant leases
are generally "net leases", but generally require AmREIT to be responsible
for certain capital improvements as well as the operating and common area
costs for the tenants, which are reimbursable by the tenants on a monthly
and annual basis.
Q. MAY I REINVEST MY DIVIDENDS IN ADDITIONAL CLASS C COMMON SHARES?
A. Yes. Holders of class C common shares will have the option of participating
in our dividend reinvestment plan by checking the appropriate box on the
Subscription Agreement or by filling out an enrollment form we will
provide to you at your request. The purchase price for shares purchased
under the dividend reinvestment plan is currently $10.00 per share.
Q. WHAT HAPPENS TO THE VALUE OF MY INVESTMENT IF THE VALUE OF AMREIT CLASS A
COMMON SHARES DECLINES?
A. The value of the class C shares will not be affected by fluctuations in
the value of the class A common shares. The conversion of class C shares
into class A common shares is based upon the amount of capital invested.
Class C investors will receive $1.10 of class A common shares for each
$1.00 of invested capital regardless of the market price of the class A
common shares. The calculation on the conversion date can be expressed as
(capital invested x 1.10) / (stock price of class A). For example, after
the seven year lock out period expires, if class A common shares are
trading at $6.50 then class C investors will receive 169.23 class A common
shares for each $1,000 invested. If, after the seven year lock out period
expires, class A shares are trading at $11.00 per share then class C
investors will receive 100.00 class A common shares for each $1,000
invested.
6
Q. WHAT KIND OF TAX INFORMATION WILL I RECEIVE?
A A Form 1099 will be placed in the mail by January 31st of each year.
Q. WHO CAN HELP ANSWER MY QUESTIONS?
A. If you have more questions about the offering or if you would like
additional copies of this prospectus, you should contact your registered
representative or contact:
Investor Services Department
AmREIT
8 Greenway Plaza, Suite 824
Houston, Texas 77046
800-888-4400
FOR CHANGE OF ADDRESS AND LOST CHECKS: EXTENSION 110
FOR OTHER QUESTIONS REGARDING YOUR INVESTMENT: EXTENSION 124
7
SUMMARY OF THE OFFERING
This prospectus summary highlights selected information contained
elsewhere in this prospectus. It is not complete and does not contain all of
the information that is important to your decision whether to invest in AmREIT.
To understand this offering fully, you should read the entire prospectus
carefully, including the "Risk Factors" section and the financial statements.
AMREIT
AmREIT is a fully integrated real estate company that operates as a
real estate investment trust under the federal income tax laws. AmREIT, a Texas
real estate investment trust, became the successor to AmREIT, Inc., a Maryland
corporation (the "Predecessor Corporation"), on December 22, 2002, through the
merger of the Predecessor Corporation into AmREIT. As of the date of this
prospectus, AmREIT owned directly, or through joint ventures, interests in 46
properties. These properties are leased to a total of 24 different tenants and
are located in 18 states and contain an aggregate of approximately 380 thousand
square feet of gross leaseable area. AmREIT's principal executive offices are
located at 8 Greenway Plaza, Suite 824, Houston, Texas, 77046, and its
telephone number is (713) 850-1400.
SUMMARY RISK FACTORS
Following are the most significant risks relating to an investment in
the class C shares:
o There is no public trading market for the class C shares. Tender
offers and certain other changes of control may be discouraged due to
the limitations on share ownership required to maintain our status as
a REIT and provisions of Texas law. If you are able to sell your
shares at all, you may have to sell them for substantially less than
the price you paid for them in the offering.
o The acquisition of the class C shares is a speculative investment, as
AmREIT's ability to make distributions on its shares depends on
AmREIT's future business operations.
o Although AmREIT has an existing portfolio of 46 operating properties,
shareholders will not be able to evaluate future properties prior to
making an investment in AmREIT.
o There is no limitation on AmREIT's ability to issue additional common
shares and such issuance could potentially dilute your interest in
AmREIT.
o Although AmREIT has paid regular distributions since its
organization, distribution payments are subordinate to payments on
debt, so any future distributions to shareholders will be subject
to this restriction. We may increase our leverage without
shareholder approval, but not to more than 55% of gross asset
value as determined by our board of trust managers.
o AmREIT has elected to be taxed as a REIT, assuming that it meets
certain financial and structural criteria. If AmREIT does not meet
this criteria, or cannot maintain its REIT status, it may not qualify
as a REIT under the Internal Revenue Code.
o AmREIT depends on few major tenants.
o We established the offering price on an arbitrary basis.
8
o Real estate investments are relatively illiquid and subject to
general operating risks relating to economic conditions, changes in
zoning or tax laws and the availability of financing.
o AmREIT's property leases may not be renewed and the cost of any
improvements constructed on certain properties by AmREIT may not be
recoverable.
o Single tenant leases account for 87% of AmREIT's total revenue and
the failure of such a tenant could impact the viability of such a
lease. Also, the bankruptcy of a tenant could adversely affect
AmREIT's operations and the inability of a tenant to make lease and
mortgage payments could have an adverse effect on AmREIT.
o Net leases accounted for 100% of AmREIT's total rental income during
the year ended December 31, 2002. These leases frequently provide the
tenant greater flexibility in using the leased property and provide
for early termination under specified circumstances. In the event of
a termination, AmREIT may not be able to lease the property for the
same rent amount and may not be able to sell it without incurring a
loss. Consequently, these leases may not result in fair market lease
rates over time.
o Our involvement in joint ventures involve risks which may not
otherwise be present, such as the failure of a partner to perform,
the existence of conflicting business goals with a partner, or the
possibility that it may not be able to agree with a partner as to a
particular issue.
o Our properties may not be profitable, perform, appreciate in value or
result in dividends.
o AmREIT may provide purchaser financing which would delay receipt of
the proceeds from a property sale. AmREIT may provide this financing
where lenders are not willing to make loans secured by commercial
real estate or may find it desirable where a purchaser is willing to
pay a higher price for the property than it would without this
financing. As a consequence, AmREIT will be subject to risks inherent
in the business of lending.
o We may on occasion lease an investment property back to the seller. A
default or any premature termination of the leaseback agreement could
have an adverse effect on AmREIT's financial position. In the event
of a default, AmREIT may not be able to find new tenants without
incurring a loss.
o Our operating results will depend upon the availability of suitable
investment opportunities, which in turn depends on the type of
investment involved, the condition of the money market, the nature
and geographical location of the property, competition and other
factors, none of which can be predicted with certainty.
PROPERTIES TO BE ACQUIRED
We are authorized to purchase all types of commercial properties,
including, without limitation, office buildings, shopping centers, business and
industrial parks, manufacturing facilities, warehouses and distribution
facilities and other similar real estate properties. Although no properties
have been specifically identified, we are currently reviewing and analyzing
opportunities whereby we will purchase properties which are newly constructed,
under construction or have been constructed and have operating histories. All
9
properties may be acquired, developed and operated by us either alone or
jointly with another party. We anticipate that most of our properties will be
leased to credit worthy tenants on a "net lease" basis. In other words, the
tenant will pay as additional rent substantially all costs associated with the
repair and maintenance of the building, real estate taxes, insurance and other
similar costs associated with a building. Whenever possible, we intend to
execute leases for our properties at or prior to the closing of the acquisition
of such properties.
POSSIBLE LEVERAGE OF PROPERTIES
Our bylaws provide that we will not incur recourse indebtedness if,
after giving effect to the incurrence thereof, aggregate recourse indebtedness,
secured and unsecured, would exceed fifty-five percent (55%) of our Net Asset
Value on a consolidated basis. For this purpose, the term "Net Asset Value"
means the value of our total assets (less intangibles) based on market
capitalization rates and current year rental income, as determined by our
Board, before deducting depreciation or other non-cash reserves, less total
liabilities, as calculated at the end of each quarter on a basis consistently
applied.
ESTIMATED USE OF PROCEEDS OF OFFERING
We anticipate that we will invest approximately 88% of the proceeds of this
offering in real estate or to pay down existing debt. We will use the remainder
of offering proceeds to pay selling commissions and fees and expenses relating
to the selection and acquisition of properties and the costs of the offering.
INVESTMENT OBJECTIVES
Our investment objectives are:
o to create dependable, monthly dividends to our investors;
o to preserve and protect your capital contribution; and
o to realize growth in the value of our properties and our publicly
traded class A common shares.
We may only change these investment objectives upon approval of a
majority of all classes of shareholders.
PRIOR OFFERING SUMMARY
AmREIT's affiliates have previously sponsored three publicly offered and 11
privately placed real estate limited partnerships, all of which were on an
unspecified property or "blind pool" basis. As of December 31, 2002, AmREIT and
its affiliates have raised approximately $70 million from approximately 3,000
investors. The "Prior Performance Summary" on page ____ of this prospectus
contains a discussion of the AmREIT programs sponsored to date.
10
COMPENSATION TO AMREIT AND AFFILIATES
AmREIT's affiliates will receive compensation and fees for services
relating to this offering and the investment and management of our assets. The
most significant items of compensation are included in the following table:
Estimated Dollar Amount
Type of Compensation Form of Compensation for Maximum Offering ($40,000,000)
Dealer Manager Fee 2.5% of gross offering proceeds $1,000,000
Offering Expenses 1.5% of gross offering proceeds $ 600,000
Nonetheless, AmREIT or its affiliates may not receive compensation in
excess of the maximum amount permitted under the Statement of Policy Regarding
Real Estate Programs of the North American Securities Administrators Association
(NASAA Guidelines).
ERISA CONSIDERATIONS
The section of this prospectus entitled "Certain ERISA Considerations"
describes the effect the purchase of shares will have on individual retirement
accounts (IRAs) and retirement plans subject to the Employee Retirement Income
Security Act of 1974, as amended (ERISA), and/or the Internal Revenue Code.
ERISA is a federal law that regulates the operation of certain tax-advantaged
retirement plans. Any retirement plan trustee or individual considering
purchasing shares for a retirement plan or an IRA should read this section of
the prospectus very carefully.
DESCRIPTION OF CLASS C COMMON SHARES
General
Your investment will be recorded on our books only. We will not issue
stock certificates. If you wish to transfer your shares, you are required to
send us an executed transfer form. We will provide you the required form upon
request.
Shareholder Voting Rights and Limitations
Holders of class C common shares will have voting rights. In any
matter on which the class C common shares vote, you are entitled to one
vote for each share you own.
Restriction on Share Ownership
Our declaration of trust contains restrictions on ownership of the
shares that prevents one person from owning more than 9.0% of the outstanding
shares. These restrictions are designed to enable us to comply with share
accumulation restrictions imposed on REITs by the Internal Revenue Code. (See
"Description of AmREIT's Capital Shares-Restriction on Ownership of Shares.")
For a more complete description of the shares, including restrictions
on the ownership of shares, please see the "Description of AmREIT's Capital
Shares" section of this prospectus on page ____.
DIVIDEND REINVESTMENT PLAN
You may participate in our dividend reinvestment plan pursuant to
which you may have the dividends you receive on your class C common shares
reinvested in additional class C shares. If you participate, you will be taxed
on your share of our taxable income even though you will not receive the cash
from your dividends. As a result, you may have a tax liability without
receiving cash dividends to pay such liability. We may terminate the dividend
reinvestment plan at our discretion at any time upon 10 days' prior notice to
you. See "Description of AmREIT's Capital Shares--Dividend Reinvestment Plan."
GLOSSARY
We have defined certain terms which have initial capital letters in
the "Glossary" on page ______ of this prospectus.
11
RISK FACTORS
Before you decide to invest in AmREIT, you should be aware that your
purchase of class C common shares involves a number of risks. In addition to
the other information included in this prospectus, you should specifically
consider the following risks before purchasing shares. The following
information summarizes all material risks related to the acquisition of the
class C common shares.
RISKS ASSOCIATED WITH AN INVESTMENT IN AMREIT
THERE IS NO PUBLIC TRADING MARKET FOR THE CLASS C COMMON SHARES.
There is no current public market for the class C common shares and,
therefore, it will be difficult for you to sell your shares promptly. In
addition, the price received for any shares sold is likely to be less than
the proportionate value of the real estate we own. Therefore, you should
purchase the shares only as a long-term investment.
THE ACQUISITION OF THE CLASS C COMMON SHARES IS A SPECULATIVE INVESTMENT.
The class C common shares are speculative investments because AmREIT's
ability to make distributions on its class C common shares depends on AmREIT's
future business operations. While management believes AmREIT's ability to
achieve future operating results sufficient to be able to make these
distributions and payments is good, AmREIT may not be able to do so. AmREIT's
future operating budgets are based on assumptions about the general economy and
AmREIT's business operations. In general, budgets project inflation, interest
rates and revenues, all of which depend substantially on factors beyond
AmREIT's control. Interest rates and levels of economic activity have been
particularly volatile in recent years, and any significant increase in interest
rates or downturn in the level of economic activity, particularly in the real
estate industry, would materially impair AmREIT's ability to achieve budgeted
levels of operating income.
YOU CAN NOT EVALUATE PROPERTIES THAT WE HAVE NOT YET ACQUIRED OR IDENTIFIED
FOR ACQUISITION.
We have established certain criteria for evaluating potential
properties and tenants in which we may invest. We have not set fixed
minimum standards relating to creditworthiness of tenants and therefore the
Board of Trust Managers and management of the Company has flexibility in
assessing potential properties and tenants. As of December 31, 2002, we own
46 properties leased to 24 different tenants in 18 different states.
YOUR INTEREST IN AMREIT MAY BE DILUTED IF WE ISSUE ADDITIONAL SHARES.
Existing shareholders and potential investors in this offering do not
have preemptive rights to any shares issued by AmREIT in the future. Therefore,
existing shareholders and investors purchasing shares in this offering may
experience dilution of their equity investment in the event that we:
o sell shares in this offering or sell additional shares in the future;
o sell securities that are convertible into shares;
o issue shares in a private offering of securities to institutional
investors; or
o issue common shares upon the exercise of the options granted to our
independent trust managers.
12
DISTRIBUTION PAYMENTS ARE SUBORDINATE TO PAYMENTS ON DEBT.
AmREIT has paid regular distributions since its organization.
Distributions to shareholders of AmREIT will be subordinate to the payment of
AmREIT's current debts and obligations. If AmREIT has insufficient funds to
pay its debts and obligations, future distributions to shareholders
will be suspended pending the payment of such debts and obligations.
AMREIT MAY INCREASE ITS LEVERAGE WITHOUT SHAREHOLDER APPROVAL.
Our bylaws provide that we will not incur recourse indebtedness if,
after giving effect to the incurrence thereof, aggregate recourse indebtedness,
secured and unsecured, would exceed fifty-five percent (55%) of our Net Asset
Value on a consolidated basis. This additional debt could adversely affect
AmREIT's ability to make shareholder distributions and would result in an
increased risk of default on its obligations. AmREIT intends to borrow future
funds through secured and/or unsecured credit facilities to finance property
investments. These borrowings may require lump sum payments of principal and
interest at maturity. Because of the significant cash requirements necessary to
make those large payments, AmREIT's ability to make these payments may depend
upon its ability to sell or refinance properties for amounts sufficient to
repay such loans. In addition, increased debt service may adversely affect cash
flow and share value.
At December 31, 2002, AmREIT had outstanding debt totaling $33.6
million of which $11.8 million was unsecured. This debt represented
approximately 45% of AmREIT's total assets.
AMREIT DEPENDS ON A FEW MAJOR TENANTS.
IHOP Corp., FootStar, Inc. accounted for 32% and 13%, respectively,
of AmREIT's total revenues for the year ended December 31, 2002. The loss of
either of these tenants could have a material adverse effect on our business
and operations. See "Prior Performance" on page ___.
WE ESTABLISHED THE OFFERING PRICE ON AN ARBITRARY BASIS.
Our board of trust managers has arbitrarily determined the selling
price of the class C common shares and such price bears no relationship to
any established criteria for valuing issued or outstanding shares.
AMREIT'S PLAN TO GROW THROUGH THE ACQUISITION AND DEVELOPMENT OF NEW PROPERTIES
COULD BE ADVERSELY AFFECTED BY TRENDS IN THE REAL ESTATE AND FINANCING
BUSINESSES, MAY NOT GENERATE INCOME OR MAY GENERATE INSUFFICIENT INCOME FROM
OPERATIONS.
AmREIT's growth strategy is substantially based on the acquisition and
development of additional properties. We cannot assure you that AmREIT will be
able to do so successfully because AmREIT may have difficulty finding new
properties, negotiating with new or existing tenants or securing acceptable
financing. In addition, investing in additional properties is subject to many
risks. If AmREIT does not generate enough income from future operations to pay
distributions to shareholders, AmREIT may, as it has in the past, make
distributions to its shareholders in amounts exceeding its net income.
13
IF AMREIT CANNOT MEET ITS REIT DISTRIBUTION REQUIREMENTS, IT MAY HAVE TO BORROW
FUNDS OR LIQUIDATE ASSETS TO MAINTAIN ITS REIT STATUS.
REITs generally must distribute 90% of their taxable income annually.
In the event that AmREIT does not have sufficient available cash to make these
distributions, this requirement may limit AmREIT's ability to acquire
additional properties. Also, for the purposes of determining taxable income,
AmREIT may be required to include interest payments, rent and other items it
has not yet received and exclude payments attributable to expenses that are
deductible in a different taxable year. As a result, AmREIT could have taxable
income in excess of cash available for distribution. If this occurred, AmREIT
would have to borrow funds or liquidate some of its assets in order to make
sufficient distributions and maintain its status as a REIT.
LIMITATIONS ON SHARE OWNERSHIP REQUIRED TO MAINTAIN AMREIT'S REIT STATUS MAY
DETER ATTRACTIVE TENDER OFFERS FOR AMREIT COMMON SHARES.
For the purposes of protecting its REIT status, AmREIT's declaration
of trust limit the ownership by any single shareholder of any class of AmREIT
common shares to 9.0% of the issued and outstanding common shares, unless the
AmREIT board determines otherwise. These restrictions may discourage a change
in control of AmREIT, deter any attractive tender offers for AmREIT common
shares or limit the opportunity for you or other shareholders to receive a
premium for your AmREIT common shares.
AMREIT'S CHARTER CONTAINS ANTI-TAKEOVER PROVISIONS
AmREIT's charter contains provisions which may make it more difficult
to remove current management or delay or discourage an unsolicited takeover,
which could have the effect of inhibiting a non-negotiated merger or other
business combination involving AmREIT. These provisions include:
o The prohibition on any person owning, directly or indirectly, more than
9.0% of the outstanding common shares; and
o The provisions authorizing the issuance of preferred shares on terms that
board members determine make it more difficult for an aggressor to obtain
a controlling number of shares.
For AmREIT to continue to qualify as a REIT under the Code, not more
than 50 percent of its outstanding shares may be owned by five or fewer
individuals during the last half of each year and outstanding shares must
generally be owned by 100 or more persons during at least 335 days of a taxable
year of 12 months. AmREIT's charter restricts the accumulation or transfer of
common shares if any accumulation or transfer could result in any person
beneficially owning in excess of 9.0% of the then outstanding common shares.
PROVISIONS OF OUR CHARTER, BYLAWS AND TEXAS LAW COULD RESTRICT CHANGE IN
CONTROL.
AmREIT's declaration of trust and bylaws contain provisions that may
inhibit or impede acquisition or attempted acquisition of control of AmREIT by
means of a tender offer, a proxy contest or otherwise. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate bids and to encourage persons seeking to acquire control of AmREIT
to negotiate first with the trust managers. AmREIT believes that these
provisions increase the likelihood that proposals initially will be on more
attractive terms than would be the case in their absence and increase the
likelihood of negotiations, which might outweigh the potential disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals might result in improvement of terms. See "Certain Anti-Takeover
Provisions of AmREIT's Declaration of Trust and Bylaws and Texas Law."
14
PROPERTY ACQUISITIONS MAY FAIL TO PERFORM IN ACCORDANCE WITH EXPECTATIONS AND
ESTIMATES OF THE COSTS OF IMPROVEMENTS TO BRING AN ACQUIRED PROPERTY UP TO
STANDARD MAY PROVE INACCURATE.
AmREIT anticipates that its new developments and acquisitions will be
financed under lines of credit or other interim forms of secured or unsecured
financing. Permanent financing for those newly developed or acquired projects
may not be available or may be available only on disadvantageous terms. In
addition, AmREIT's distribution requirements limit its ability to rely upon
income from operations or cash flow from operations to finance new developments
or acquisitions. As a result, if permanent financing is not available on
acceptable terms, further development activities or acquisitions might be
curtailed. In the case of an unsuccessful development or acquisition, AmREIT's
loss could exceed its project investment.
WE WILL BE SUBJECT TO CONFLICTS OF INTEREST.
We will be subject to conflicts of interest arising out of our
relationship with our affiliated investment funds, including certain material
conflicts discussed below.
We will experience competition for properties. In evaluating
property acquisitions, certain properties may be appropriate for AmREIT as
well as its affiliated investment funds. You will not have the opportunity
to evaluate the manner in which these conflicts of interest are resolved
before making your investment. Generally, we will evaluate each property,
considering the investment objectives, credit worthy nature of the tenant,
expected holding period of the property, available capital and geographic
and tenant concentration issues when determining the allocation of properties
among the Company and its affiliated funds.
There will be competing demands on our management and trust
managers. Our management team and trust managers are not only responsible
for the Company, but also for our affiliated investment funds, which include
entities that may invest in the same types of assets in which we may invest.
For this reason, the management team and trust managers will share their
management time and services among those companies and us, will not devote
all of their attention to us and could take actions that are more favorable
to the other entities than to us.
We may invest along side our affiliated investment funds. We may
invest in joint ventures, partnerships or limited liability companies for
the purpose of owning or developing retail real estate projects. Therefore,
the interest, investment objectives and timing of disposition may be different
than that of our shareholders, and there are no assurances that your investment
objectives will take priority.
15
RISKS ASSOCIATED WITH AN INVESTMENT IN REAL ESTATE
REAL ESTATE INVESTMENTS ARE RELATIVELY ILLIQUID.
Real estate investments are relatively illiquid. Illiquidity limits
the owner's ability to vary its portfolio promptly in response to changes in
economic or other conditions. In addition, federal income tax provisions
applicable to REITs may limit AmREIT's ability to sell properties at a time
which would be in the best interest of its shareholders.
PROPERTIES ARE SUBJECT TO GENERAL REAL ESTATE OPERATING RISKS.
If you become a shareholder of AmREIT your investment will be subject
to the risks of investing in real property. In general, a downturn in the
national or local economy, changes in zoning or tax laws or the availability of
financing could adversely affect occupancy or rental rates. In addition,
increases in operating costs due to inflation and other factors may not be
offset by increased rents. If operating expenses increase, the local rental
market for properties similar to AmREIT's may limit the extent to which rents
may be increased to meet increased expenses without decreasing occupancy rates.
If any of the above occur, AmREIT's ability to make distributions to
shareholders could be adversely affected.
AMREIT MAY CONSTRUCT IMPROVEMENTS, THE COST OF WHICH MAY NOT BE RECOVERABLE.
AmREIT may on occasion acquire properties and construct improvements
or acquire properties under contract for development. Investment in properties
to be developed or constructed is more risky than investment in fully developed
and constructed properties with operating histories. In connection with the
acquisition of these properties, AmREIT may advance, on an unsecured basis, a
portion of the purchase price, either in the form of cash, a conditional letter
of credit and/or promissory note. AmREIT will be dependent upon the seller or
lessee of the property under construction to fulfill its obligations, including
the return of advances and the completion of construction. This party's ability
to carry out its obligations may be affected by financial and other conditions
which are beyond the control of AmREIT.
If AmREIT acquires construction properties, the general contractors
and the subcontractors may not be able to control the construction costs or
build in conformity with plans, specifications and timetables. The failure of a
contractor to perform may necessitate legal action by AmREIT to rescind its
construction contract, to compel performance or to rescind its purchase
contract. These legal actions may result in increased costs to AmREIT.
Performance may also be affected or delayed by conditions beyond the
contractor's control, such as building restrictions, clearances and
environmental impact studies imposed or caused by governmental bodies, labor
strikes, adverse weather, unavailability of materials or skilled labor and by
financial insolvency of the general contractor or any subcontractors prior to
completion of construction. These factors can result in increased project costs
project and corresponding depletion of AmREIT's working capital and reserves,
and in loss of permanent mortgage loan commitments relied upon as a primary
source for repayment of construction costs.
AmREIT may make periodic progress payments to the general contractors
of properties prior to construction completion. By making these payments,
AmREIT may incur substantial additional risks, including the possibility that
the developer or contractor receiving these payments may not fully perform the
construction obligations in accordance with the terms of his agreement with
AmREIT and that AmREIT may be unable to enforce the contract or to recover the
progress payments.
16
AMREIT LEASES TO SINGLE TENANTS WHO CAN FAIL.
Single tenant leases accounted for 87% of AmREIT's total revenue for
the year ended December 31, 2001. In single tenant leases, the continued
viability of the lease will depend directly on the continued financial
viability of one tenant. If the tenant fails and the lease is terminated,
AmREIT would incur a reduction in cash flow from the property and the value of
the property would be decreased. Also, where two or more properties have the
same tenant, or related tenants, the continued viability of each property would
depend directly on the financial viability of a single tenant. To help mitigate
these risks, AmREIT will continue to consider the creditworthiness and
financial strength of the tenants of its properties at the time they are
acquired.
NET LEASES MAY NOT RESULT IN FAIR MARKET LEASE RATES OVER TIME.
Net leases accounted for 87% of AmREIT's total rental income for the
year ended December 31, 2002. Net leases frequently provide the tenant greater
discretion in using the leased property than ordinary property leases, such as
the right to freely sublease the property, to make alterations in the leased
premises and to early termination of the lease under specified circumstances.
Further, net leases are typically for longer lease terms and, thus, there is an
increased risk that any rental increase clauses in future years will fail to
result in fair market rental rates during those years. The original leases on
AmREIT's existing properties are for original terms ranging from 10 to 20
years.
In the event a lease is terminated, AmREIT may not be able to lease
the property for the previous rent and may not be able to sell the property
without incurring a loss. AmREIT could also experience delays in enforcing its
rights against defaulting tenants. If a tenant does not pay rent, AmREIT may
not only lose the net cash flow from the property but may also need to use cash
flow generated by other properties to meet mortgage payments on the defaulted
property.
AMREIT MAY INVEST IN JOINT VENTURES, WHICH ADDS ANOTHER LAYER OF RISK TO ITS
BUSINESS.
Investments in joint ventures may involve risks which may not
otherwise be present where investments are made directly by AmREIT in real
property such as:
o the potential ability in AmREIT's joint venture partner to perform;
o the joint venture partner may have economic or business interests or
goals which are inconsistent with or adverse to those of AmREIT;
o the joint venture partner may take actions contrary to the requests
or instructions of AmREIT or contrary to AmREIT's objectives or
policies; and
o the joint venturers may not be able to agree on matters relating to
the property they jointly own. Although each joint owner will have a
right of first refusal to purchase the other owner's interest, in the
event a sale is desired, the joint owner may not have sufficient
resources to exercise such right of first refusal.
AmREIT also may participate with other investors, including, possibly
investment programs or other entities affiliated with management, in
investments as tenants-in-common or in some other joint venture arrangement.
The risks of such joint ownership may be similar to those mentioned above for
joint ventures and, in the case of a tenancy-in-common, each co-tenant normally
has the right, if an unresolvable dispute arises, to seek partition of the
property, which partition might decrease the value of each portion of the
divided property.
17
AMREIT'S PROPERTIES MAY NOT BE PROFITABLE, MAY NOT RESULT IN DISTRIBUTIONS
AND/OR MAY DEPRECIATE.
While AmREIT will attempt to buy leased, income-producing properties
at a price at or below the appraised value of such properties, properties
acquired by AmREIT:
o may not operate at a profit,
o may not perform to investor's expectations,
o may not appreciate in value,
o may depreciate in value,
o may not ever be sold at a profit,
o may result in the loss of a portion of your investment and
o may not result in dividends. The marketability and value of any
properties will depend upon many factors beyond AmREIT's control. A
ready market for AmREIT's properties may not exist or develop.
AMREIT MAY PROVIDE FINANCING TO PURCHASERS OF REIT PROPERTIES.
AmREIT may provide purchaser financing which would delay receipt of
the proceeds from the property sale, AmREIT may provide this financing where
lenders are not willing to make loans secured by commercial real estate or may
find it desirable where a purchaser is willing to pay a higher price for the
property than it would without this financing.
AmREIT will be subject to risks inherent in the business of lending,
such as the risk of default of the borrower or bankruptcy of the borrower. Upon
a default by a borrower, AmREIT may not be able to sell the property securing a
mortgage loan at a price that would enable it to recover the balance of a
defaulted mortgage loan. In addition, the mortgage loans could be subject to
regulation by federal, state and local authorities which could interfere with
AmREIT's administration of the mortgage loans and any collections upon a
borrower's default. AmREIT will also be subject to interest rate risk that is
associated with the business of making mortgage loans. Since AmREIT's primary
source of financing its mortgage loans is expected to be through variable rate
loans, any increase in interest rates will also increase AmREIT's borrowing
costs. In addition, any interest rate increases after a loan's origination
could also adversely affect the value of the loans when securitized.
AMREIT MAY ENGAGE IN SALE-LEASEBACK TRANSACTIONS.
AmREIT, on occasion, may lease an investment property back to the
seller. When the seller/lessee leases space to tenants, the seller/lessee may
be unable to meet its rental obligations to AmREIT if the tenants are unable to
meet their lease payments to the seller/lessee. A default by the seller/lessee
or other premature termination of the leaseback agreement could have an adverse
effect on AmREIT's financial position. In the event of a default or
termination, AmREIT may not be able to find new tenants without incurring a
loss.
Also, a seller may attempt to include in the acquisition price all or
some portion of the lease payments. If the seller is successful, AmREIT may pay
a premium upon acquisition where a leaseback is involved.
18
AMREIT MUST COMPETE FOR ACCEPTABLE INVESTMENTS.
AmREIT's operating results will depend upon the availability of
suitable investment opportunities, which in turn depends on the type of
investment involved, the condition of the money market, the nature and
geographical location of the property, competition and other factors, none of
which can be predicted with certainty. AmREIT will continue to compete for
acceptable investments with other financial institutions, including insurance
companies, pension funds and other institutions, real estate investment trusts
and limited partnerships which have investment objectives similar to those of
AmREIT. Many of these competitors may have greater resources than AmREIT.
AMREIT MAY BE UNABLE TO RENEW LEASES OR RELET SPACES.
AmREIT's property leases might not be renewed, the space might not be
relet or the terms of renewal or reletting may be less favorable than current
lease terms. AmREIT's cash flow and ability to make expected distributions to
its shareholders may be adversely affected if: (1) it is unable to promptly
relet or renew the leases, (2) the rental rate upon renewal or reletting is
significantly lower than expected or (3) its reserves proved inadequate.
AMREIT'S PROPERTIES FACE COMPETING PROPERTIES.
All of AmREIT's properties are located in areas that include competing
properties. The number of competitive properties could have a material adverse
effect on both AmREIT's ability to lease space and the rents charged. AmREIT
may be competing with other property owners that have greater resources. There
is no dominant competitor in any of AmREIT's markets.
BANKRUPTCY OF A TENANT COULD ADVERSELY AFFECT AMREIT'S OPERATIONS.
The bankruptcy of a tenant could adversely affect AmREIT in the
following ways:
o reduction or loss of lease payments related to the termination of the
tenant's leases;
o reduction of revenue resulting from the restructuring the original
tenant's leases;
o interruptions in the receipt of lease revenues from the tenant;
o increase in the costs associated with the maintenance and financing
of vacant properties;
o increase in costs associated with litigation and the protection of
the properties;
o increase in costs associated with improving and reletting the
properties;
o reduction in the value of AmREIT's shares; and
o decrease in distributions to shareholders.
19
THE INABILITY OF A TENANT TO MAKE LEASE AND MORTGAGE PAYMENTS COULD HAVE AN
ADVERSE EFFECT ON AMREIT.
AmREIT's business depends on the tenants' ability to pay their
obligations to AmREIT with respect to AmREIT's real estate leases.The
ability of the tenants to pay their obligations to AmREIT in a timely
manner will depend on a number of factors, including the successful
operation of their businesses. Various factors, many of which are
beyond the control of any business, may adversely affect the economic
viability of AmREIT's tenants, including but not limited to:
o national, regional and local economic conditions (which may be
adversely affected by industry slowdowns, employer relocations,
prevailing employment conditions and other factors), which may reduce
consumer demand for the products offered by AmREIT's customers;
o local real estate conditions;
o changes or weaknesses in specific industry segments;
o perceptions by prospective customers of the safety, convenience,
services and attractiveness of AmREIT's customers;
o changes in demographics, consumer tastes and traffic patterns;
o the ability to obtain and retain capable management;
o changes in laws, building codes, similar ordinances and other legal
requirements, including laws increasing the potential liability for
environmental conditions existing on properties;
o increases in operating expenses; and
o increases in minimum wages, taxes (including income, service, real
estate and other taxes) or mandatory employee benefits.
AMREIT HAS PROPERTIES SPECIFICALLY SUITED TO FEW TENANTS.
AmREIT may acquire properties specifically suited to particular tenant
needs, including retail or commercial facilities. The value of these properties
would be adversely affected by the specific tenant's failure to renew or honor
its lease. These properties would typically require extensive renovations to
adapt them for new uses by new tenants. Also, AmREIT may experience difficulty
selling special purpose properties to persons other than the tenant.
WE DO NOT HAVE CONTROL OVER MARKET AND BUSINESS CONDITIONS.
Changes in general or local economic or market conditions, such as
increased costs of operations, cost of development, increased costs of
insurance, increased costs of shortage in labor, competitive factors, quality
of management, turnover in management, changing consumer habits, changing
demographics, changing traffic patterns, environmental changes, regulatory
changes and other factors beyond our control may reduce the value of properties
that we currently own or those that we acquire in the future, the ability of
tenants to pay rent on a timely basis, and therefore, the amount of dividends
that we are able to pay to shareholders.
20
JOINT VENTURE PARTNERS MAY HAVE DIFFERENT INTERESTS THAN WE HAVE.
Investments in joint ventures involve the risk that our co-venturer
may have economic or business interests or goals which, at a particular time,
are inconsistent with our interest or goals. Among other things, actions by
a co-venturer might subject property owned by the joint venture to liabilities
in excess of those contemplated by the terms of the joint venture agreement or
to other adverse consequences. As a result, joint ownership of investments
may adversely affect our returns on the investments and, therefore, cash
available for distributions to our stockholders may be reduced.
WE WILL HAVE NO ECONOMIC INTEREST IN GROUND LEASED PROPERTIES.
We may acquire and currently own properties whereby we own the
leasehold interest, but do not own or control the underlying land. Thus,
with respect to ground leased properties, the Company will have no economic
interest in the land at the expiration of the lease, and therefore may lose
the right to the leasehold interest at the end of the ground lease.
RISKS ASSOCIATED WITH FEDERAL INCOME TAXATION OF AMREIT
AMREIT'S FAILURE TO QUALIFY AS A REIT FOR TAX PURPOSES WOULD RESULT IN
AMREIT'S TAXATION AS A CORPORATION AND THE REDUCTION OF FUNDS AVAILABLE FOR
SHAREHOLDER DISTRIBUTION.
Although AmREIT's management believes that it is organized and is
operating so as to qualify as a REIT, AmREIT may not be able to continue to
remain so qualified. In addition REIT qualification tax laws may change. AmREIT
is not aware, however, of any currently pending tax legislation that would
adversely affect its ability to continue to qualify as a REIT.
For any taxable year that AmREIT fails to qualify as a REIT, it will
be subject to federal income tax on its taxable income at corporate rates. In
addition, unless entitled to relief under certain statutory provisions, AmREIT
also will be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification is lost. This treatment would
reduce the net earnings available for investment or distribution to
shareholders because of the additional tax liability to AmREIT for the year or
years involved. In addition, distributions no longer would qualify for the
dividends paid deduction nor would there be any requirement that such
distributions be made. To the extent that distributions to shareholders would
have been made in anticipation of AmREIT qualifying as a REIT, AmREIT might be
required to borrow funds or to liquidate certain of its investments to pay the
applicable tax.
AMREIT MAY BE LIABLE FOR PROHIBITED TRANSACTION TAX AND/OR PENALTIES.
A violation of the REIT provisions, even where it does not cause
failure to qualify as a REIT, may result in the imposition on AmREIT of
substantial taxes, such as the 100% tax that applies to net income from a
prohibited transaction if AmREIT is determined to be a dealer in real property.
Because the question of whether that type of violation occurs may depend on the
facts and circumstances underlying a given transaction, these violations could
inadvertently occur. To reduce the possibility of an inadvertent violation, the
trust managers intend to rely on the advice of legal counsel in situations
where they perceive REIT provisions to be inconclusive or ambiguous.
21
CHANGES IN THE TAX LAW MAY ADVERSELY AFFECT AMREIT'S REIT STATUS.
The discussions of the federal income tax considerations are based on
current tax laws. Changes in the tax laws, such as the proposed legislation
under review by congress which may or may not have an impact on the taxability
of corporate dividends, could result in tax treatment that differs materially
and adversely from that described in this proxy statement.
INVESTMENT IN AMREIT MAY NOT BE SUITABLE UNDER ERISA AND IRA REQUIREMENTS.
Fiduciaries of a pension, profit sharing or other employee benefit
plan subject to ERISA should consider whether the investment in AmREIT
securities satisfies the ERISA diversification requirements of ERISA, whether
the investment is prudent, whether the investment would be an improper
delegation of responsibility for plan assets and whether such fiduciaries have
authority to acquire such securities under the appropriate governing instrument
and Title I of ERISA. Also, fiduciaries of an individual retirement account
should consider that an IRA may only make investments that are authorized by
the appropriate governing instrument.
22
SUITABILITY STANDARDS
An investment in AmREIT's class C common shares involves significant
risks. Although it is convertible into AmREIT class A common shares, subject to
certain restrictions discussed herein, it may be difficult to resell the class
C shares because no public market for the shares currently exists nor is one
ever expected to develop. Investors who are able to sell their class C shares
at all will likely be able to sell such shares only at a discount.
If the investor in AmREIT class C shares is an individual, including
an individual beneficiary of a purchasing IRA, or if the investor is a
fiduciary, such as a trustee of a trust or corporate pension or profit sharing
plan, or other tax-exempt organization, or a custodian under a Uniform Gifts to
Minors Act, that individual or fiduciary, as the case may be, must represent
that he meets specific investment requirements. The requirements are set out in
the Subscription Agreement attached as Exhibit __ to this prospectus, and
include the following:
o that the individual, or, in the case of a fiduciary, that the
fiduciary account or the donor who directly or indirectly supplies
the funds to purchase the shares, has a minimum annual gross income
of $45,000 and a net worth excluding home, furnishings and
automobiles of not less than $45,000; or
o that the individual, or, in the case of a fiduciary, that the
fiduciary account or the donor who directly or indirectly supplies
the funds to purchase the shares, has a net worth excluding home,
furnishings and automobiles of not less than $150,000.
Transferees will also be required to comply with applicable standards,
except for transfers to family members and transfers made by gift, inheritance
or divorce. In the case of purchases of shares by fiduciary accounts in
California, the suitability standards must be met by the beneficiary of the
account or, in those instances where the fiduciary directly or indirectly
supplies the funds for the purchase of shares, by such fiduciary.
The minimum purchase is 500 shares ($5,000) for non-qualified accounts
and 300 shares ($3,000) for qualified accounts, except in certain states as
described below. You may not transfer less than the minimum required purchase
or, except in very limited circumstances, transfer, fractionalize or subdivide
the shares so as to retain less than such minimum number thereof. For purposes
of satisfying the minimum investment requirement for retirement plans, unless
otherwise prohibited by state law, a husband and wife may jointly contribute
funds from their separate IRAs, provided that they contribute in increments of
at least $3,000. You should note, however, that an investment in AmREIT will
not, in itself, create a retirement plan as defined in Section 401(a) of the
Internal Revenue Code or an IRA as defined in Section 408(a) of the Internal
Revenue Code for any investor and that, in order to create a retirement plan or
an IRA, an investor must comply with all applicable provisions of the Internal
Revenue Code.
23
We have listed the suitability standards in the following table for
those states that have any requirements different from those set by AmREIT:
------------------------------- ---------------------------- ---------------------------- ----------------------------
INCOME/NET WORTH MINIMUM
STATE REQUIREMENTS PURCHASE OTHER LIMITATIONS
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Arizona (1) Current annual gross 500 shares ($ 5,000) N/A
income of $60,000 and net
worth of $60,000, or (2)
net worth of $225,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
California (1) Current annual gross 500 shares ($ 5,000) The following legend must
income of $60,000, or (2) be placed on each
net worth of $225,000 certificate: "It is
unlawful to consummate a
sale or transfer of this
security, or any
interest therein, or to
receive any consideration
therefore, without the
prior written consent of
the Commissioner of
Corporations of the State
of the State of
of California, except as
permitted in the
Commissioner's rules."
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Florida (1) Current annual gross 500 shares ($ 5,000) Shares of subsequent
income of $45,000 and net reinvestment plan must be
worth of $45,000, or (2) registered or exempt from
net worth of $150,000 registration in Florida,
and such shares must be
purchased from a Florida
broker.
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Iowa (1) Current annual gross 500 shares ($ 5,000) Husband and wife may not
income of $45,000 and net jointly contribute from
worth of $45,000, or (2) separate IRAs to satisfy
net worth of $200,000 minimum purchase.
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Maine (1) Current annual gross 500 shares ($ 5,000) Husband and wife may not
income of $50,000 and net jointly contribute from
worth of $50,000, or (2) separate IRAs to satisfy
net worth of $200,000 minimum purchase.
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Massachusetts (1) Current annual gross 500 shares ($ 5,000) N/A
income of $60,000 and net
worth of $60,000, or (2)
net worth of $225,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Michigan (1) Current annual gross 500 shares ($ 5,000) Investor may not invest
income of $45,000 and net more than 10% of net worth.
worth of $45,000, or (2)
net worth of $150,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
24
------------------------------- ---------------------------- ---------------------------- ----------------------------
INCOME/NET WORTH MINIMUM
STATE REQUIREMENTS PURCHASE OTHER LIMITATIONS
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Minnesota (1) Current annual gross 500 shares ($ 5,000); N/A
income of $45,000 and net 250 shares ($ 2,500) for
worth of $45,000, or (2) IRAs and qualified
net worth of $150,000 retirement plans
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Mississippi (1) Current annual gross 500 shares ($ 5,000) N/A
income of $60,000 and net
worth of $60,000, or (2)
net worth of $225,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Missouri (1) Current annual gross 500 shares ($ 5,000) Husband and wife may not
income of $60,000 and net jointly contribute from
worth of $60,000, or (2) separate IRAs to satisfy
net worth of $225,000 minimum purchase.
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Nebraska (1) Current annual gross 500 shares ($ 5,000) Investments in additional
income of $60,000 and net except for IRAs and shares pursuant to
worth of $60,000, or (2) qualified retirement plans reinvestment plan must be
net worth of $225,000 at least $50 per year and
made through a Nebraska
broker.
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
New Hampshire (1) Current annual gross 500 shares ($ 5,000) N/A
income of $50,000 and net
worth of $125,000, or (2)
net worth of $250,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
New York (1) Current annual gross 500 shares ($ 5,000) No proceeds from New York
income of $50,000 and net except for IRAs investors released from
worth of $50,000, or (2) escrow until $2,500,000
net worth of $150,000 raised in offering.
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
North Carolina (1) Current annual gross 500 shares ($ 5,000) N/A
income of $45,000 and net except for IRAs
worth of $45,000, or (2)
net worth of $150,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Ohio (1) Current annual gross 500 shares ($ 5,000) Investor may not invest
income of $45,000 and net except for IRAs more than 10% of net worth.
worth of $45,000, or (2)
net worth of $150,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Oklahoma (1) Current annual gross 500 shares ($ 5,000) Husband and wife may not
income of $45,000 and net jointly contribute from
worth of $45,000, or (2) separate IRAs to satisfy
net worth of $150,000 minimum purchase.
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Oregon (1) Current annual gross 500 shares ($ 5,000) N/A
income of $60,000 and net
worth of $60,000, or (2)
net worth of $225,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
25
------------------------------- ---------------------------- ---------------------------- ----------------------------
INCOME/NET WORTH MINIMUM
STATE REQUIREMENTS PURCHASE OTHER LIMITATIONS
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Pennsylvania (1) Current annual gross 500 shares ($ 5,000) Investor must have a net
income of $45,000 and net worth of at least ten
worth of $45,000, or (2) times amount of
net worth of $150,000 investment. Subscription
proceeds from Pennsylvania
proceeds
investors held in escrow
until $2,500,000 raised
from all investors. If
proceeds held in escrow
more than 120 days, funds
returned to investors
unless they choose to
$2,500,000
reinvest.
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
South Carolina (1) Net worth of $150,000, 250 shares ($2,500) except N/A
or (2) State and federal IRAs and qualified
income subject to maximum retirement plans
rate of income tax
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
South Dakota (1) Current annual gross 100 shares ($1,000) N/A
income of $60,000 and net
worth of $60,000, or (2)
net worth of $225,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Tennessee (1) Current annual gross 100 shares ($1,000) N/A
income of $60,000 and net
worth of $60,000, or (2)
net worth of $225,000
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Texas (1) Current annual gross 100 shares ($1,000) Investments through
income of $45,000 and net reinvestment plan must be
worth of $45,000, or (2) made through Texas
net worth of $150,000 registered broker.
------------------------------- ---------------------------- ---------------------------- ----------------------------
------------------------------- ---------------------------- ---------------------------- ----------------------------
Wisconsin (1) Current annual gross 100 shares ($1,000) Husband and wife may not
income of $45,000 and net jointly contribute from
worth of $45,000, or (2) separate IRAs to satisfy
net worth of $150,000 minimum purchase.
------------------------------- ---------------------------- ---------------------------- ----------------------------
Net worth in all cases excludes home, furnishings and automobiles.
By executing the Subscription Agreement and Subscription Agreement
Signature Page (collectively, the "Subscription Agreement"), which is attached
as Exhibit __ to this prospectus, you represent that you meet the foregoing
applicable suitability standards for the state in which you reside. We will not
accept subscriptions from any person or entity that does not represent that it
meets such standards. We have the unconditional right to accept or reject any
subscription in whole or in part.
26
AmREIT and each person selling class C common shares on our behalf are
required to:
o make reasonable efforts to assure that each person purchasing class C
common shares is suitable in light of such person's age, educational
level, knowledge of investments, financial means and other pertinent
factors; and
o maintain records for at least six years of the information used to
determine that an investment in class C common shares is suitable and
appropriate for each investor.
The agreements with the selling broker-dealers require such
broker-dealers to (1) make inquiries diligently as required by law of all
prospective investors in order to ascertain whether a purchase of class C
shares is suitable for the investor, and (2) transmit promptly to AmREIT all
fully completed and duly executed Subscription Agreements.
27
BUSINESS AND PROPERTIES
GENERAL
AmREIT is a fully integrated real estate company dedicated to the
ownership, development and acquisition of commercial real estate specializing
in general retail, financial services and banking, medical and restaurant
sectors, and is a sponsor of high quality real estate investment
opportunities to the financial planning community. AmREIT, a Texas real estate
investment trust, became the successor to AmREIT, Inc., a Maryland corporation
(the "Predecessor Corporation"), on December 22, 2002, through the merger of
the Predecessor Corporation into AmREIT. The merger was structured to preserve
unchanged the existing business, purpose, tax status, management,
capitalization and assets, liabilities and net worth (other than due to the
costs of the transaction) of the Predecessor Corporation, and the economic
interests and voting rights of the shareholders of the Predecessor Corporation
(who became the shareholders of AmREIT as a result of the Merger). The Board of
Trust Managers and the executive officers of AmREIT are identical to, and have
the same terms of office as, the Board of Trust Managers and executive officers
of the Predecessor Corporation. The term "AmREIT" includes, as the context
requires, the Predecessor Corporation and the other subsidiaries of "AmREIT."
AmREIT has outstanding approximately 2.8 million class A common shares, listed
on the American Stock Exchange (AMEX:AMY), and approximately 2.5 million class
B common shares, that are not listed on an exchange, which may be converted
into class A common shares on a one-for-one basis at any time at the holder's
option.
On July 23, 2002, the Predecessor Corporation successfully completed a
merger with three of its affiliated partnerships, AAA Net Realty Fund IX, Ltd,
AAA Net Realty Fund X, Ltd, and AAA Net Realty Fund XI, Ltd ("Funds IX, X and
XI") and listed its class A common stock on the American Stock Exchange. The
limited partners in Funds IX, X and XI received class B common stock of the
Predecessor Corporation, which was not listed, had a preferred 8% distribution
and was convertible one for one into the Class A common stock at the holder's
option. Each share of the Predecessor Corporation's class A common stock and
class B common stock was converted into one class A common share and class B
common share, respectively, in the Merger.
AmREIT and its predecessors have a proven track record over the past
18 years, completing over 200 transactions, including acquisitions, joint
ventures, ground-up developments, sale/leaseback transactions and numerous
dispositions. AmREIT and its management team have been active in the real
estate markets for eighteen years and understand the dynamics of real
estate transactions in these markets.
The Predecessor Corporation was formed in 1993 to continue and expand
the business of its predecessor company, American Asset Advisers Trust, which
was founded in 1985. We actively acquire, develop and manage high-quality
commercial properties leased to credit-worthy tenants under net-leases. Through
a wholly owned subsidiary, we also provide advisory services to 14 real estate
limited partnerships. As of December 31, 2002, AmREIT and its affiliated
investment funds owned approximately 63 properties ( 46 properties owned
directly by AmREIT and 17 properties owned through affiliated investment
funds). AmREIT currently has approximately 2,500 shareholders, and 500 partners
in the limited partnerships.
AmREIT is a synergistic combination of two complementary lines of business.
For 18 years AmREIT (and its predecessors) has been an entrepreneurial real
estate company and a sponsor of high quality real estate investment products.
AmREIT's first line of business consists of the ownership of a quality portfolio
of single tenant free standing credit tenant leased projects ("CTL") and
multi-tenant frontage commercial projects ("FCP") located contiguous to major
thoroughfares and traffic generators ("real estate" line of business).
28
Supporting this line of business is a wholly-owned subsidiary of AmREIT which is
a full service real estate operating company that provides a full range of real
estate services including development, construction management, property
management, brokerage, and leasing. AmREIT's real estate customer list includes
some of the finest companies in the U.S.: Goodyear Tire, Washington Mutual,
IHOP, McDonalds, Hermann Hospital, Radio Shack, Sprint, Coldwell Banker, Jack in
the Box, Guaranty Federal, Bennigan's, Chili's, Texas Children's Hospital,
Eckerd's and Discount Tire. AmREIT's second line of business consists of the
sponsorship of high quality real estate investment products ("sponsorship" line
of business) and is built upon an established track record and an outstanding
group of selected financial planning and broker/dealer firms operating under
licenses granted by the National Association of Securities Dealers, Inc.
("NASD").
AmREIT's real estate line of business includes a portfolio of
freestanding CTL properties and FCP projects, primarily located at major
intersections, lighted corners, primary interstates and roadways, and out in
front of significant traffic generators such as a regional mall, super center or
power center. This portfolio provides a stable base of rental income because the
lease is normally guaranteed by creditworthy companies such as Radio Shack,
Washington Mutual and IHOP which means that the monthly rent payments are
supported by the financial strength and stability of the parent company, not
just the individual location. AmREIT is financially conservative and keeps its
debt to asset ratio below 55%. It is our experience that CTL and FCP properties
are among the most liquid type of commercial real estate because there is a deep
and financially viable group of investors who desire this type of property and
can afford to buy them. AmREIT has extensive experience in buying and selling
these types of projects. This means AmREIT can frequently generate a substantial
profit through the sale of the project which, in turn, can be reinvested in
building AmREIT's lines of business or investing in new portfolio projects. In
the sponsorship line of business, AmREIT sponsors investment funds that take
advantage of this core competency. Capital is raised through the AmREIT's select
group of financial planning and broker/dealer firms on an ongoing basis. These
investment funds are the foundation of AmREIT's second line of business. As
AmREIT invests this capital into its various real estate projects, it creates
fees and "carried interest" for AmREIT and its shareholders. This line of
business provides the proverbial "win-win" situation for the investors of these
funds and for AmREIT. For the investors, they invest along side a stable, strong
company that serves as the investment sponsor. The "win" for AmREIT is that it
is able to leverage its relationships and core competency to generate fees and
profits after certain investor performance hurdles to its investors have been
met. AmREIT has raised capital consistently by sponsoring investment
partnerships through the financial planning broker-dealer community since 1985.
During this time period, AmREIT and its affiliates have raised approximately $70
million in equity to build, develop, or buy its real estate projects.
29
AmREIT's principal executive offices are located at 8 Greenway Plaza,
Suite 824, Houston, Texas 77046, and its telephone number is (713) 850-1400.
PROPERTIES
Description. AmREIT currently owns 46 properties consisting of single
structure, single and multi-tenant retail properties. Each of AmREIT's
properties is initially leased under a full-credit, long-term net lease, under
which the tenant is responsible for the operating costs of the property,
including taxes, insurance and maintenance costs. These 46 properties are leased
to a total of 24 different tenants and are located in 18 states. AmREIT's
properties contain an aggregate of approximately 380,000 square feet of gross
leaseable area. Information concerning the properties owned solely by AmREIT as
of December 31, 2002, is presented in the following tables:
30
AMREIT WHOLLY-OWNED PROPERTY INFORMATION
PROPERTY (LOCATION) DATE PURCHASE PERCENT LEASEABLE CURRENT LEASE
------------------- ---- -------- ------- --------- ------- -----
ANNUAL EXPIRATION
------ ----------
ACQUIRED PRICE OWNED(1) AREA RENT DATE
Radio Shack
(Dallas, TX) ........... 06/15/94 $1,062,000 100.00% 5,200 $108,900 11/30/06
Wherehouse Entertainment
(Independence, MO) ..... 11/14/94 1,550,000 100.00% 14,047 187,655 04/30/04
OneCare
(Houston, TX) .......... 07/01/95 1,680,000 100.00% 14,000 215,640 09/30/05
Wherehouse Entertainment
(Wichita, KS) .......... 09/12/95 1,700,000 100.00% 15,158 206,833 12/31/04
FootStar, Inc.
(Tucson, AZ) ........... 09/11/96 3,351,000 100.00% 19,550 419,026 09/30/16
Washington Mutual
(The Woodlands, TX) .... 09/23/96 500,000 100.00% 3,685 59,461 09/30/11
Washington Mutual
(Houston, TX) .......... 12/11/96 828,000 100.00% 3,685 97,861 12/31/11
FootStar, Inc.
(Baton Rouge, LA) ...... 06/09/97 2,806,000 100.00% 20,575 300,539 05/15/12
Hollywood Video
(Lafayette, LA) ........ 10/31/97 1,124,000 100.00% 7,488 134,709 09/24/12
Hollywood Video
(Ridgeland, MS) ........ 12/30/97 1,208,000 100.00% 7,488 138,453 12/22/12
OfficeMax
(Lake Jackson, TX) ..... 02/20/98 2,240,000 100.00% 23,500 230,300 04/01/13
OfficeMax
(Dover, DE) ............ 04/14/98 2,548,000 100.00% 23,500 264,679 04/30/13
Woodlands Plaza
(The Woodlands, TX)..... 06/03/98 3,542,000 100.00% 16,922 (1) (1)
Sugar Land Plaza
(Sugar Land, TX) ....... 07/01/98 3,635,000 100.00% 16,922 330,875 07/01/13
Don Pablos
(Peachtree City, GA) ... 12/18/98 738,000 100.00% Land Lease 75,000 12/17/08
IHOP, Corp.
(Sugarland, TX) ........ 9/30/99 1,608,000 100.00% 4,020 165,180 9/30/24
IHOP, Corp.
(St. Peters, MO) ....... 11/14/01 1,565,000 100.00% 4,020 189,223 11/15/01
IHOP, Corp.
(Topeka, KS) ............ 9/30/99 1,335,000 100.00% 4,020 137,340 9/30/24
Foodmaker
(Dallas, TX) ............ 6/23/02 (2) 715,100 100.00% 2,238 68,998 7/11/09
Baptist Memorial Health
(Memphis, TN)............ 6/23/02 (2) 2,079,200 100.00% 15,000 204,375 8/31/07
Payless Shoes
(Austin, TX)............. 6/23/02 (2) 698,300 100.00% 4,000 82,000 1/30/08
Golden Corral
(Houston, TX)............ 6/23/02 (2) 1,811,800 100.00% 12,000 182,994 11/30/07
Golden Corral
(Houston, TX)............ 6/23/02 (2) 1,843,400 100.00% 12,000 181,688 3/14/08
TGI Friday's
(Houston, TX)............ 6/23/02 (2) 2,036,900 100.00% 8,500 180,500 1/30/08
Goodyear Tire
(Houston, TX)............ 6/23/02 (2) 535,900 100.00% 5,209 51,756 3/31/09
Guitar Center
(Minneapolis, MN)........ 6/23/02 (2) 2,541,700 100.00% 15,000 246,750 8/31/09
AFC, Inc. (Popeye's
Chicken) (Atlanta, GA)... 6/23/02 (2) 1,113,900 100.00% 2,583 105,563 7/19/14
Memorial Herman Hospital
(Houston, TX)............ 6/23/02 (2) 1,816,800 100.00% 15,000 171,360 1/31/09
Blockbuster Video
(Oklahoma City, OK)...... 6/23/02 (2) 973,800 100.00% 15,000 92,610 8/31/05
Pier One
(Longmont, CO)........... 6/23/02 (2) 1,423,600 100.00% 8,014 135,560 2/29/08
----------- ------- ----------
TOTAL ..................... $51,403,200 322,344 $5,123,128
(1) Due to the bankruptcy of Just For Feet, this property is being remodeled
to accommodate multiple tenants with approximately 20% of the property
currently leased.
(2) These properties were acquired as part of the merger of the affiliated
partnerships (AAA Net Realty Funds IX, X and XI) on July 23, 2002. The
purchase price reflects the pro-rata portion of the negotiated price
allocated to the properties that AmREIT paid the partnerships, in
common shares.
In addition to the above wholly owned properties, AmREIT is the sole
shareholder of the corporate general partner and an 80% limited partner in
AAA CTL Notes, Ltd., a partnership created to purchase, hold, and manage a
portfolio of 17 IHOP leasehold estate and fee simple properties located
throughout the United States. Through its sponsorship of real estate
investment programs to the independent financial planning community, AmREIT
is also the sole shareholder of the corporate general partner and a 10.5% and
3.9% limited partner, respectively, in AmREIT Opportunity Fund and AmREIT
Income & Growth Fund at December 31, 2002.
31
Renovation and Improvements. AmREIT manages each of its properties and
is constantly evaluating the need for renovation and capital improvements.
Currently, The Woodlands Plaza is undergoing renovation and redevelopment. The
property was originally designed and built as a Just For Feet. Beginning in
2002, AmREIT began a redevelopment of this property that involved converting
this property to a multi-tenant shopping center. The budget called for
approximately $1 million in total renovation costs, including hard and soft
costs. Through December 31, 2002, approximately $500 thousand had been spent on
the renovation. Other than The Woodlands Plaza, there are no significant
renovations or improvements scheduled or anticipated for any project.
Leases. A majority of our properties are under lease to a regional or
national tenant. When entered into, each lease was long-term. Most leases are
net leases, requiring the tenant to pay all or substantially all expenses
related to operation of the property. The following table sets forth rental
information concerning AmREIT's tenants for the year ended December 31,
2002 2001
International House of Pancakes $ 1,784 $ 510
Footstar, Inc. 735 713
OfficeMax, Inc 509 518
Wherehouse Entertainment 381 378
Hollywood Entertainment Corp. 273 273
Sugar Land Imaging Affiliates Ltd. 264 217
Mattress Giant, Inc 168 106
Washington Mutual 158 158
Radio Shack 109 109
Golden Corral 167 0
Texas Children's Pediatrics 137 0
Don Pablos 78 79
One Care Health Industries, Inc. 57 204
Comp USA 123 0
Baptist Memorial Hospital 102 0
TGI Friday's 83 0
Dr. Pucillo 87 0
Pier 1 62 0
America's Favorite Chicken Co. 55 21
Blockbuster 42 0
Waldenbooks 38 0
Jack in the Box 34 0
Goodyear 25 0
Skewers 18 0
Hope Rehabilitation 5 0
---------------- ----------------
Total $5,494 $3,286
================ ================
The following table summarizes the minimum future rentals, exclusive
of any renewals, under AmREIT's operating and direct financing leases in
existence at December 31, 2002.
2002.................. $ 6,187,594
2003.................. 6,714,025
2004.................. 6,478,355
2005.................. 6,465,798
2006.................. 6,359,957
2007-2024............. $ 64,152,589
------------
Total $ 96,358,318
============
32
Significant Tenants. IHOP Corp. and Footstar, Inc. each individually
accounted for 32% and 13%, respectively, of rental income for the
year ended December 31, 2002. These tenants represented
approximately 33%, 14% and 10%, respectively, of rental income for the nine-
months ended September 30, 2002.
International House of Pancakes was founded in July 1958 and operates over
1,100 restaurants in three countries and forty-five states. IHOP is a family
restaurant, serving breakfast, lunch and dinner. IHOP is a New York Stock
Exchange, publicly-held company with a current market capitalization over
$460 million, based on reports filed with the SEC. For the twelve months
ended December 31, 2002, system-wide sales were up 9.9% to $1.5 billion,
same store sales increased 0.7% over 2001 and reported net income of $40.8
million which is a 1.4% increase over 2001. For more information on IHOP,
please see the SEC web site at www.sec.gov.
Footstar, Inc. was founded in October 1996 and operates three distinct
business lines: Just For Feet, Footaction and Meldisco. The Just For Feet
Superstores division operate 95 locations, primarily in the southern portion
of the United States and is headquartered in Birmingham, AL. Footaction is
headquartered in Irving, Texas and operates 459 primarily mall based stores
in 41 states, Puerto Rico, and the U.S. Virgin Islands. The Company's
Meldisco division is a leader in the discount footwear segment, operating
5,532 leased footwear departments, located in various discount stores,
superstores and malls, including Wal-Mart. Footstar had consolidated store
sales of $1,146 million for the six months ended June 29, 2002, compared to
$1,166 million for the previous year. Footstar reported total assets of
$893 million and total liabilities of $610 million for the six months ended
June 29, 2002, compared to total assets of $955 million and total liabilities
of $614 million for the previous year, based on reports filed with the SEC.
Footstar has not reported financial statements or results of operations
beyond June 29, 2002. For more information on Footstar, please see the
SEC web site at www.sec.gov.
COMPETITION
AmREIT's properties are located in 18 different states, with
approximately 50% of its properties located in the Texas metropolitan areas.
All of AmREIT's properties are located in areas that include competing
properties. The number of competitive properties in a particular area could
have a material adverse effect on both AmREIT's ability to lease space at any
of its properties or at any newly developed or acquired properties and the
rents charged. AmREIT may be competing with owners, including, but not limited
to, other REITs, insurance companies and pension funds that have greater
resources than AmREIT. There is no dominant competitor in any of AmREIT's
markets.
EMPLOYEES
AmREIT currently has 18 full-time employees and retains the services of
three managerial consultants on an as-needed basis.
33
MANAGEMENT
The trust managers and executive officers of AmREIT are as follows:
NAME AGE POSITION HELD TRUST MANAGER
OR OFFICER SINCE
H. Kerr Taylor............... 52 Chairman of the Board, 1993
Chief Executive Officer and President
Robert S. Cartwright, Jr..... 51 Trust Manager 1993
G. Steven Dawson............ 45 Trust Manager 2000
Bryan L. Goolsby............. 52 Trust Manager 2000
Philip Taggart............... 73 Trust Manager 2000
Charles C. Braun............. 31 Executive Vice President, 1999
Chief Financial Officer and
Secretary
H. Kerr Taylor - Mr. Taylor is the chairman of the board of trust
managers, chief executive officer and president of AmREIT and was, prior to
the Merger, the chairman of the board of trust managers, chief executive
officer and president of the Predecessor Corporation from August 1993. Mr.
Taylor was president, director and sole shareholder of American Asset
Advisers Realty Corp. from 1989 to June 1998. Additionally, Mr. Taylor
serves as the general partner for seven private partnerships managed by
AmREIT. Mr. Taylor has a bachelor's degree from Trinity University, a
Masters of Business Degree from Southern Methodist University and a Doctor
of Jurisprudence from South Texas College of Law. Mr. Taylor has over
twenty years experience and has participated in over 300 real estate
transactions. Mr. Taylor has served on a board and governing bodies of a
bank, numerous private and public corporations and charitable institutions,
and is currently on the board of Millennium Relief and Development. Mr.
Taylor is a member of the National Board of Realtors, the Texas Association
of Realtors, the Texas Bar Association, the International Counsel of
Shopping Centers, the Financial Planners Association, the National
Association of Real Estate Investment Trusts and the Urban Land Institute.
Robert S. Cartwright, Jr. - Mr. Cartwright has been a trust manager or
director of AmREIT or the Predecessor Corporation since 1993. Mr.
Cartwright is a Professor of Computer Science at Rice University. Mr.
Cartwright earned a bachelor's degree magna cum laude in Applied
Mathematics from Harvard College in 1971 and a doctoral degree in Computer
Science from Stanford University in 1977. Mr. Cartwright has been a member
of the Rice faculty since 1980 and twice served as department Chair. Mr.
Cartwright has compiled an extensive record of professional service. He is
a Fellow of the Association for Computing Machinery (ACM) and chair of the
ACM Pre-College Education Committee. He is also a member of the board of
trust managers of the Computing Research Association, an umbrella
organization representing academic and industrial computing researchers.
Mr. Cartwright has served as a charter member of the editorial boards of
two professional journals and has chaired several major ACM conferences.
From 1991-1996, he was a member of the ACM Turing Award Committee, which
selects the annual recipient of the most prestigious international prize
for computer science research.
G.Steven Dawson - Mr. Dawson has been a trust manager or director of AmREIT
or the Predecessor Corporation since 2000. Since 1990, Mr. Dawson has
served as senior vice president and chief financial officer of Camden
Property Trust (NYSE:CPT), a public real estate company which specializes
in the acquisition, development, and management of over 159 apartment
communities throughout the United States, with major concentrations in
Dallas, Houston, Las Vegas, Denver, Southern California and the
Tampa/Orlando areas. Prior to 1990, Mr. Dawson served in various related
capacities with companies involved in commercial real estate including
land and office building development as well as the construction and
management of industrial facilities located on airports throughout the
country. Mr. Dawson currently serves on the boards of U.S. Restaurant
Properties, Inc. (NYSE:USV) and His Grace Foundation.
34
Bryan L. Goolsby - Mr. Goolsby has been a trust manager or director of
AmREIT or the Predecessor Corporation since 2000. Mr. Goolsby is the
Managing Partner of Locke Liddell & Sapp LLP, and has practiced in the area
of corporate and securities since 1977. Mr. Goolsby is a member of the
Board of Governors of the National Association of Real Estate Investment
Trusts and is a member of the National Multi-Family Housing Association and
the Pension Real Estate Association. Mr. Goolsby is currently an associate
board member at the Edwin L. Cox School of Business at Southern Methodist
University and is a member of the board of the Junior Achievement of
Dallas. Mr. Goolsby has a bachelor's degree from Texas Tech University and
a Doctor of Jurisprudence from the University of Texas.
Philip Taggart - Mr. Taggart has been a trust manager or director of
AmREIT or the Predecessor Corporation since 2000. Mr. Taggart has
specialized in investor relations activities since 1964 and is the
president and chief executive officer of Taggart Financial Group, Inc. He
is the co-author of the book Taking Your Company Public, and has provided
communications services for 58 initial public offerings, more than 200
other new issues, 210 mergers and acquisitions, 3,500 analyst meetings and
annual and quarterly reports for over 25 years. Mr. Taggart serves on the
boards of International Expert Systems, Inc. and Salon Group International
and served on the board of the Foundation of Texas State Technical College
for 10 years. A distinguished alumnus of the University of Tulsa, he also
has been a university instructor in investor relations at the University of
Houston.
Charles C. Braun - Mr. Braun serves as Executive Vice President of
Finance, Treasurer and Secretary. Mr. Braun oversees the financial
accounting and reporting and is responsible for AmREIT's capital formation,
debt placement and joint venture initiatives. Mr. Braun joined the
Predecessor Corporation in 1999 and has over six years of accounting and
real estate experience, including five years with Ernst & Young, LLP. At
Ernst & Young, LLP, Mr. Braun served as a manager in the real estate
advisory services group and has provided extensive consulting and audit
services to a number of Real Estate Investment Trusts and private real
estate companies. These services included financial statement audits,
portfolio acquisition and disposition, real estate portfolio management,
merger integration and process improvement, financial analysis and due
diligence. Mr. Braun received a B.B.A degree in accounting and finance from
Hardin Simmons University and subsequently earned the CPA designation and
his Series 63, 7, 24 and 27 securities licenses.
AmREIT's other officers and senior management include:
JIM O'NEILL CPA. Mr. O'Neill serves as Corporate Controller and
oversees the daily accounting activities of AmREIT and its affiliated
partnerships, debt placement, and project financials. Mr. O'Neill's
responsibilities also include coordinating financial activities with
auditors, banks, lenders, transfer agents, and attorneys to assure timely
and accurately financial reporting. Mr. O'Neill is a graduate of Texas A &
M University, where he received his BBA in Accounting and subsequently
earned the distinction of CPA certification. Prior to joining AmREIT, Inc.,
Mr. O'Neill served in a controller capacity at Continental Emsco in
Houston, Texas, Wedge Energy Group in Houston, Texas, and Markborough
Development Company located in Denver, Colorado.
WADE GREENE. Mr. Greene serves as Senior Vice President and oversees
the business development and growth of the company's third party brokerage.
Mr. Greene has 20 years of experience in the real estate investment
banking/services industry and has successfully developed and implemented
investment strategies and capital market transactions. He has managed over
a billion dollars of real estate investment, lease and development
transactions. Mr. Greene received a B.S. in Economics from the University
of South Alabama and is a licensed Real Estate Broker, a Certified
Commercial Investment Member and holds a NASD Series 7 license.
35
TODD MCDONALD. Mr. McDonald serves as Vice President and oversees the
analysis, marketing, and sales process related to properties currently
being marketed by the Company. Mr. McDonald received his B.S. in Business
Economics from Wofford College. Mr. McDonald has real estate experience in
which he reviewed property level financial statements, produced project
proformas, and provided analysis on acquisition and disposition prospects.
JASON LAX. Mr. Lax serves as Vice President and oversees all
development and construction projects. Mr. Lax has nationwide experience in
the commercial construction industry obtained from previous employment with
ExxonMobil Corporation and Trammell Crow Company. During his career, he has
managed over a hundred projects valued over $150 million from grassroots
development projects to minor remodeling projects and has been involved in
all phases of development from conceptual site plan preparation to project
turnover after completion of construction. Mr. Lax received a B.S. in
Mechanical Engineering from Texas Tech University and has received his
Engineer In Training certification from the Texas Board of Professional
Engineers. He is also a Texas licensed Real Estate Salesperson.
PRESTON CUNNINGHAM, JD. Mr. Cunningham serves as our Acquisitions
Manager for existing retail properties and land suitable for infill
development. Mr. Cunningham received a B.B.A. degree in Financial Planning
and Services from Baylor University and Doctor of Jurisprudence from South
Texas College of Law. Mr. Cunningham has significant real estate experience
with The Howard Smith Company, Albritton Properties and Community Bank and
Trust. Mr. Cunningham is a member of the American Bar Association.
JEFF NOBLIN, MBA, SERIES 7, 63, 65 AND 31. Mr. Noblin serves as
Regional Sales Manager. He is responsible for raising capital through the
NASD marketplace into our company-sponsored programs. Mr. Noblin received
his B.B.A. degree in Marketing, with a minor in Sociology, from Mississippi
State University. He received his MBA in Finance from Texas A&M University.
Prior to joining AmREIT, Mr. Noblin served in a managerial capacity at
Dillards Company and Environmental Designs and Construction, Inc. He also
served as a Financial Planner at Morgan Stanley Dean Witter.
KIRBY DIXON, SERIES 7, 24, 65 SECURITIES LICENSES-INSURANCE GROUP I
AND IV. Mr. Dixon serves as Regional Sales Manager. Mr. Dixon's
responsibilities include building, developing and maintaining our
relationship with Broker-Dealer representatives with the purpose of raising
capital to fund our investment programs. Mr. Dixon attended The University
of Houston and has twelve years of experience in the financial services
industry with Bank of America Securities and Raymond James Financial
Services serving as a branch manager and financial representative to over
three hundred individual and small business clients in the Greater Houston
area.
DAVID M. THAILING MBA, SERIES 63, 65. As the East Coast Regional Sales
Manager, Mr. Thailing is responsible for raising capital for AmREIT
sponsored investment programs through the NASD marketplace. Mr. Thailing
received his B.B.A. degree in management from Southern Methodist University
and earned a Masters of Business from the Jones Graduate School at Rice
University. Prior to joining AmREIT, Mr. Thailing gained financial
consulting experience as an associate with Andersen's Corporate Finance and
Restructuring practice. He also has five years of experience as a financial
advisor and public speaker with PaineWebber.
36
NEIZE FERREIRA. Mrs. Ferreira serves as Marketing Manager. She
oversees and coordinates the production of marketing materials and
information throughout the marketplace and is responsible for both internal
and external communications regionally and nationally for the company. Mrs.
Ferreira attended the New Orleans Baptist Theological Seminary and has over
15 years of marketing and public relations experience. Having worked with
Principal Financial Services and Harris Research Inc. she brings her
expertise in marketing strategy and research to the table. She also has
extensive practical hands-on experience as an owner of a small business.
EXECUTIVE COMPENSATION
The below table represents the compensation paid to Mr. Taylor,
Chairman of the Board, Chief Executive Officer and President and Chad C. Braun,
Executive Vice President, Chief Financial Officer and Secretary. The table sets
forth all compensation, cash and restricted stock, received during the fiscal
years 2002, 2001 and 2000.
Annual Compensation Long-Term Compensation
Awards
Securities
Other Annual Underlying All Other
Name and Principal Position Year Salary Cash Bonus Compensation Options Compensation
--------------------------- ---- ------ ---------- ------------ ------- ------------
H. Kerr Taylor 2002 $175,000 $122,500 $52,914(1) --- (4)
Chief Executive Officer and 2001 $175,000 $ 61,250 $28,878(1) --- ---
President 2000 $102,500 --- --- --- ---
Chad C. Braun 2002 $115,000 $49,750 $21,488(2) --- $99,996(3),(4)
Executive Vice President and 2001 $ 85,000 $17,500 $ 8,251(2) --- ---
Chief Financial Officer 2000 $ 82,500 $7,125 --- --- ---
---------
(1) Mr. Taylor was granted 8,333 and 3,122 common shares as part of his
bonus for 2002 and 2001, respectively. The restrictions on these
shares lapse equally over a four year period beginning on February 15,
2003 and equally over a three year period beginning February 15, 2002.
(2) Mr. Braun was granted 3,384 and 892 common shares as part of his bonus
for 2002 and 2001, respectively. The restrictions on these shares
lapse equally over a four year period beginning on February 15, 2003
and equally over a three year period beginning on February 15, 2002.
(3) Mr. Braun was granted 14,388 common shares as a bonus related to the
completion of the merger of three affiliated investment funds with the
Company, completed in 2002. The restrictions on these shares lapse
equally over a four year period beginning on February 15, 2003.
(4) Mr. Taylor and Mr. Braun were assigned 45% and 5%, respectively, in
the income and cash flow of the general partner of AAA CTL Notes,
Ltd., which is comprised of a portfolio of seventeen IHOP properties.
Mr. Taylor's interest is 100% vested immediately. Mr. Braun's interest
vests 100% on February 15, 2008. The value of the assigned interest
can not be determined or estimated at this time.
37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 2002, the
beneficial ownership interest of the executive officers and trust managers of
AmREIT:
NAME AMOUNT AND NATURE OF PERCENT OF CLASS(1)
BENEFICIAL OWNERSHIP
H. Kerr Taylor - Chairman, President & CEO 580,096 21.43%
Robert S. Cartwright - Trust Manager 8,166 *
G. Steven Dawson - Trust Manager 6,000 *
Bryan L. Goolsby - Trust Manager 6,000 *
Philip Taggart - Trust Manager 6,800 *
Chad C. Braun - Secretary, CFO and Executive VP 18,664 *
------
All trust managers and executive officers as a group 625,726 23.12%
All other employees combined 12,381 *
------
All trust managers, executive officers, and employees as a group 638,107 23.58%
-----------------
* Less than 1%.
As of December 31, 2002, no other person was known by AmREIT to be the
beneficial owner of more than 5% of the shares of AmREIT.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 23, 2002, the Company completed a merger with three of its
affiliated partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X,
Ltd. and AAA Net Realty Fund XI, Ltd. AmREIT accounted for this merger as a
purchase, whereby the assets of the partnerships have been recorded at fair
market value. AmREIT increased itsw real estate assets by approximately $24.3
million and issued approximately 2.6 million Class B common shares to the
limited partners in the affiliated partnerships as a result of the merger.
Approximately $760 thousand in 8 year, 5.47% interest only, subordinated notes
were issued to limited partners of the affiliated partnerships who dissented to
the merger. The acquired properties are unencumbered, single tenant, free
standing properties on lease to national and regional tenants, where the lease
is the direct obligation of the parent company. A deferred merger expense
stemmed from stock issued to H. Kerr Taylor, President and Chief Executive
Officer, based on a deferred consideration that was approved by the shareholders
in 1998.
On June 5, 1998, our shareholders voted to approve an agreement and
plan of merger (the "Merger Agreement") with American Asset Advisers Realty
Corporation (the "Former Adviser"), whereby Mr. Taylor, the sole shareholder of
the Former Adviser, agreed to exchange 100% of the outstanding common stock of
the Former Adviser for up to 900,000 of our common shares. As a result of the
merger, we became a fully integrated, self-administered real estate investment
trust. Effective June 5, 1998, we issued Mr. Taylor 213,260 shares of common
stock and he deferred the right to receive the remaining 686,740 common shares
until certain goals were achieved following the merger. See "Proposal Two --
Amendment of the Merger Agreement." As a result of the merger of AAA Realty Fund
IX, AAA Net Realty Fund X and AAA Net Realty Fund XI into the Company, completed
on July 23, 2003, the Company issued to Mr. Taylor an additional 302,281 class A
common shares on September 19, 2002. Since July 23, 2002, Mr. Taylor has not
earned any of the remaining 384,459 class A common shares payable to him
pursuant to the terms of the Merger Agreement. The Merger Agreement currently
requires those goals to be met by June 2004, however, the Company has requested
the shareholders vote on a proposal to extend termination date of the Merger
Agreement to June 2006.
38
AmREIT provides property acquisition, leasing, administrative
and management services for ten affiliated real estate limited partnerships that
are under common management (the "Partnerships"). Mr. Taylor owns between 45%
and 100% of the stock of the companies that serve as the general partner of the
Partnerships. Service fees of $245 thousand and $335 thousand were paid by the
Partnerships to AmREIT for 2002 and 2001 respectively.
On May 20, 1999, AmREIT entered into a partnership agreement with
various individual investors to form AmREIT Opportunity Fund, Ltd. The
partnership was formed to develop, own, manage, hold for investment and/or
resell property and to make and/or invest in loans for the development or
construction of property. AmREIT invested $250,000 as a limited partner and
$1,000 as the sole general partner. Subject to certain restrictions in the
limited partnership agreement which require limited partner approval (such as
liquidating the partnership, withdrawing as general partner or assigning its
general partner interest), the general partner manages and operates the daily
activities of the partnership. The general partner can however be removed, with
or without cause, by a majority vote of the outstanding limited partner units.
On January 26, 2001, AmREIT entered into a partnership agreement with
various individual investors to form AmREIT Income & Growth Fund, Ltd. The
partnership was formed to develop, own, manage, hold for investment and/or
resell property and to make and/or invest in loans for the development or
construction of property. AmREIT invested $200,000 as a limited partner and
$1,000 as the sole general partner. Subject to certain restrictions in the
limited partnership agreement which require limited partner approval (such as
liquidating the partnership, withdrawing as general partner or assigning its
general partner interest), the general partner manages and operates the daily
activities of the partnership. The general partner can however, be removed, with
or without cause, by a majority vote of the outstanding limited partner units.
As a sponsor of real estate investment opportunities to the NASD
financial planning broker dealer community, the Company maintains a 1% general
partner interest in the investment funds that it sponsors. The funds are
typically structured such that the limited partners receive 99% of the
available cash flow until 100% of their original investment capital has been
returned and a preferred return has been met. Once this has happened, then the
general partner begins sharing in the available cash flow at various promoted
levels. The Company also assigns a portion of this general partner interest
in those investment funds to its employees as long term, contingent
compensation. In so doing, the Company believes that it will align the
interest of management with that of the shareholders, while at the same
time allowing for a competitive compensation structure in order to attract
and retain key management positions without increasing the overhead burden.
Locke Liddell & Sapp, LLP acts as the Company's operational attorneys.
Bryan Goolsby is the managing director of Locke Liddell & Sapp, LLP and is a
member of the Company's board of trust managers.
LEGAL PROCEEDINGS
Neither AmREIT nor any of its properties is subject to any material
claim or legal proceeding, nor to management's best knowledge, is any such
claim or legal proceeding threatened which could have a material adverse effect
on AmREIT or its properties.
39
ESTIMATED USE OF PROCEEDS
The following tables set forth information about how we intend to use
the proceeds raised in this offering assuming that we sell 2,000,000 shares and
4,000,000 shares, respectively, pursuant to this offering. Many of the figures
set forth below represent management's best estimate since they cannot be
precisely calculated at this time. Although there can be no assurances, we
expect that at least 88% of the money you invest will be used to buy real estate
or pay down existing debt, while the remaining up to 12% will be used for
working capital and to pay expenses and fees, including the payment of fees to
AmREIT Securities, a wholly-owned subsidiary of AmREIT and our Dealer Manager.
2,000,000 Shares 4,000,000 Shares
Amount(1) Percent Amount(2) Percent
Gross Offering Proceeds $20,000,000 100.0% $40,000,000 100.0%
Less Public Offering Expenses:
Selling Commissions and Dealer Manager Fee(s) (3) 2,100,000 10.5% 4,200,000 10.5%
Organization and Offering Expenses(4) 300,000 1.5% 600,000 1.5%
__________ _____ ___________ _____
$2,400,000 12.0% $ 4,800,000 12.0%
Amount Available for Investment(5) $17,600,000 88.0% 35,200,000 88.0%
=========== ===== ========== =====
(6) (6)
-----------------
1. Assumes that an aggregate of $20,000,000 will be raised in this
offering for purposes of illustrating the percentage of estimated
organization and offering expenses at two different sales levels. See
Note 4 below.
2. Assumes the maximum offering is sold which includes 4,000,000 shares
offered to the public at $10.00 per share.
3. Includes selling commissions equal to 7% of aggregate gross offering
proceeds, which commissions may be reduced under certain
circumstances, a 1% due diligence reimbursement and a dealer manager
fee equal to 2.5% of aggregate gross offering proceeds, both of which
are payable to the Dealer Manager, an affiliate of ours. The Dealer
Manager, in its sole discretion, may reallow selling commissions of
up to 7% of gross offering proceeds to other broker-dealers
participating in this offering attributable to the amount of shares
sold by them. In addition, the Dealer Manager may reallow a portion
of its dealer manager fee to Participating Dealers in the aggregate
amount of up to 1% of gross offering proceeds to be paid to such
Participating Dealers as marketing fees, or to reimburse
representatives of such Participating Dealers the costs and expenses
of attending our educational conferences and seminars.
4. Organization and offering expenses consist of reimbursement of actual
legal, accounting, printing and other accountable offering expenses,
other than selling commissions and the dealer manager fee, including
amounts to reimburse us for all marketing related costs and expenses,
including, but not limited to, salaries and direct expenses of our
employees while engaged in registering and marketing the shares and
other marketing and organization costs, technology costs and expenses
attributable to the offering, costs and expenses of conducting our
educational conferences and seminars, payment or reimbursement of
bona fide due diligence expenses, and costs and expenses we incur for
attending retail seminars conducted by broker-dealers. We will be
responsible for the payment of organization and offering expenses,
other than selling commissions and the dealer manager fee, to the
extent they exceed 1.5% of aggregate gross offering proceeds from
this offering. Notwithstanding the above, we do not expect
organization and offering expenses, including selling commissions,
the dealer manager fee and all other underwriting compensation,
to exceed 12% of gross offering proceeds.
40
5. Until required in connection with the acquisition and development of
properties, substantially all of the net proceeds of this offering
and, thereafter, the working capital reserves, may be invested in
short-term, highly-liquid investments including government
obligations, bank certificates of deposit, short-term debt obligations
and investor-bearing accounts or other authorized investments as
determined by our board of trust managers.
6. Includes amounts anticipated to be invested in properties net of fees
and expenses. We estimate that at least 88% of the proceeds received
from the sale of shares will be used to acquire properties or pay
down existing debt.
41
PRIOR PERFORMANCE
The following information summarizes the historical experience of real
estate programs previously sponsored by AmREIT's affiliates. INVESTORS IN THE
OFFERING SHOULD NOT ASSUME THAT THEY WILL EXPERIENCE RETURNS, IF ANY,
COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN THESE PRIOR INVESTMENTS.
Affiliates of AmREIT have sponsored a total of eleven non-public
programs and four public programs since 1985. As of December 31, 2002,
approximately $70 million had been raised from over 3,000 investors through all
programs. The properties acquired in the prior programs are located throughout
the United States.
In November 1999, Just For Feet, Inc., a significant tenant in
AmREIT's portfolio, declared bankruptcy. This resulted in four stores leased
by AmREIT to Just For Feet closing. Footstar, Inc., a New York Stock Exchange
company with a market capitalization of over $200 million, assumed two of the
leases for stores that AmREIT owned, one which is located in Baton Rouge,
Louisiana, and the other is located in Tucson, Arizona. These stores will
continue to be operated under the terms and conditions of the original Just
For Feet lease. The third store, located in Sugarland, Texas, has been 100%
re-leased as AmREIT's leasing team secured long term, guaranteed leases with
Mattress Giant and River Oaks Imaging and Diagnostics. AmREIT's construction
management team re-designed the building to accommodate these two tenants.
The fourth property, located in The Woodlands, Texas, has been re-designed
into a multi-tenant store front and has been substantially re-leased, with all
remaining space under a letter of intent.
The following table sets forth a summary information on all programs
previously sponsored by AmREIT's affiliates. A more detail description of these
programs is contained in the prior performance tables continued elsewhere in
this prospectus.
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
TYPE OF METHOD OF
NAME OF FUND REAL ESTATE ACTIVITY TYPE OF PROGRAM FINANCING
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
Taylor Income Investors III, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
Taylor Income Investors IV, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
Taylor Income Investors V, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
Taylor Income Investors VI, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
AAA Net Realty Fund VII, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
AAA Net Realty Fund VIII, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
AAA Net Realty Fund Goodyear, Ltd. Investment in Commercial Real Estate Non-Public All-Cash
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
AAA Net Realty Fund IX, Ltd. Investment in Commercial Real Estate Public All-Cash
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
AAA Net Realty Fund X, Ltd. Investment in Commercial Real Estate Public All-Cash
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
AAA Net Realty Fund XI, Ltd. Investment in Commercial Real Estate Public All-Cash
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
AmREIT, Inc. Investment in Commercial Real Estate Public Up to 50%
financing
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
AAA Net Developers, Ltd. Acquisition, development and construction of Non-Public Up to 80%
commercial real estate financing
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
AmREIT Opportunity Fund, Ltd. Acquisition, development and construction of Non-Public Up to 80%
commercial real estate financing
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
AmREIT Income & Growth Fund, Ltd. Acquisition, development and construction of Non Public Up to 75%
commercial real estate financing
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
AmREIT Monthly Income & Growth Fund, Ltd. Acquisition, development and construction of Non Public Targeted at
commercial real estate. 50% financing
-------------------------------------------- ----------------------------------------------- ----------------- ---------------
42
PUBLICLY OFFERED UNSPECIFIED REAL ESTATE PROGRAMS
AAA NET REALTY FUND IX, LTD. terminated its offering in May 1992 and
received aggregate gross proceeds of $ 5,390,500, representing subscriptions
from 326 limited partners. Fund IX wholly owns four properties and owns one
property in joint venture with an affiliate of the general partner:
o Foodmaker (Jack-in-the-Box) in Dallas, Texas;
o Baptist Memorial Health System in Memphis, Tennessee;
o Payless Shoe/Walden Books in Austin, Texas;
o Golden Corral in Houston, Texas; and
o 4.08% interest in Golden Corral in Houston, Texas
The prospectus of Fund IX provided that the properties would be held
for a period of eight to twelve years, but that the general partner, in their
sole discretion, could increase or decrease this timeframe. On July 23, 2002,
the limited partners in Fund IX and the shareholders of AmREIT approved a
plan of merger whereby the limited partners of Fund IX would become class B
common stock shareholders in AmREIT. The class B common shares were valued
by an independent third party firm at $9.25 per share, receive an 8%
cumulative and preferred dividend quarterly and are convertible into AmREIT
class A common shares at any time, at the holders option, one for one. Per
$1,000 of original invested capital, the limited partners received a total of
approximately $1,868 through quarterly distributions and class B common shares.
As of April 15, 2003, the class A common shares are trading at $6.68 per share.
AAA NET REALTY FUND X, LTD. terminated its offering in August 1994 and
received aggregate gross proceeds of $11,453,600, representing subscriptions
from 727 limited partners. Fund X wholly owns five properties and owns three
properties in joint venture with certain affiliates of the general partner:
o 95.92% interest in Golden Corral in Houston, Texas;
o TGI Friday's in Houston, Texas;
o Goodyear Tire in Houston, Texas;
o Comp USA in Minneapolis, Minnesota;
o AFC, Inc. (Popeye's Favorite Chicken) in Atlanta, Georgia;
o 45.16% interest in Wherehouse Entertainment in Independence, Missouri;
o Memorial Herman Hospital System (suburban doctors clinic) in Sugarland,
Texas; and
o 18.25% interest in Footstar, Inc. in Tucson, Arizona
The prospectus of Fund X provided that the properties would be held
for a period of eight to twelve years, but that the general partner, in their
sole discretion, could increase or decrease this timeframe. On July 23, 2002,
the limited partners in Fund X and the shareholders of AmREIT approved a
plan of merger whereby the limited partners of Fund X would become class B
common shareholders in AmREIT. The class B common shares were valued
by an independent third party firm at $9.25 per share, receive an 8%
cumulative and preferred dividend quarterly and are convertible into AmREIT
class A common shares at any time, at the holders option, one for one. Per
$1,000 of original invested capital, the limited partners received a total of
approximately $1,638 through quarterly distributions and class B common stock.
As of April 15, 2003, the class A common shares are trading at $6.68 per share.
43
AAA NET REALTY FUND XI, LTD. terminated its offering in January 1996
and received aggregate gross proceeds of $7,061,200, representing subscriptions
from 269 limited partners. Fund XI wholly owns two properties and owns five
properties in joint venture with certain affiliates of the general partner:
o 49% interest in Wherehouse Entertainment in Wichita, Kansas;
o Blockbuster Video in Oklahoma City, Oklahoma;
o 29.85% interest in Footstar, Inc. in Tucson, Arizona;
o 49% interest in Washington Mutual in The Woodlands, Texas;
o Pier One in Longmont, Colorado; and
o 25.42% interest in Hollywood Video in Lafayette, Louisiana
The prospectus of Fund XI provided that the properties would be held
for a period of eight to twelve years, but that the general partner, in their
sole discretion, could increase or decrease this timeframe. On July 23, 2002,
the limited partners in Fund XI and the shareholders of AmREIT approved a
plan of merger whereby the limited partners of Fund XI would become class B
common shareholders in AmREIT. The class B common shares were valued
by an independent third party firm at $9.25 per share, receive an 8%
cumulative and preferred dividend quarterly and are convertible into AmREIT
class A common shares at any time, at the holders option, one for one. Per
$1,000 of original invested capital, the limited partners received a total of
approximately $1,473 through quarterly distributions and class B common shares.
As of April 15, 2003, the class A common shares are trading at $6.68 per share.
PRIVATELY OFFERED UNSPECIFIED REAL ESTATE PROGRAMS
TAYLOR INCOME INVESTORS III, LTD. terminated its offering in December
1985 and received aggregate gross proceeds of $945,000, representing
subscriptions from 43 limited partners. Fund III owns a 44% interest in a
Bennigan's restaurant located in Houston, Texas. The property was purchased all
cash in December 1986. Additionally, in 2000, the partnership sold a Guaranty
Federal (acquired as a Bank of America) branch location in Houston, Texas that
was purchased in February 1986. The private placement memorandum provided that
the properties purchased by Fund III would typically be held for a period of 12
to 15 years, but that the general partner, in their sole discretion, could
increase or decrease this timeframe. The general partner is currently in the
process of evaluating the local real estate market and the Bennigan's lease to
determine the best course of liquidation. The exact timing of the disposition
will depend on the market conditions anticipated lease terms upon renewal.
TAYLOR INCOME INVESTORS IV, LTD. terminated its offering in June 1986
and received aggregate gross proceeds of $615,000, representing subscriptions
from 31 limited partners. Fund IV owns a 56% interest in a Bennigan's
restaurant located in Houston, Texas. Additionally, Fund IV owns a promissory
note secured by an Atlas Transmission located in Houston, Texas and matures in
October 2006. Fund IV purchased the Atlas Transmission in October 1986 and
subsequently sold the property in November 1997, however, Fund IV had to
provide owner financing. The private placement memorandum provided that the
properties purchased by Fund IV would typically be held for a period of 12 to
15 year, but that the general partner, in their sole discretion, could increase
or decrease this timeframe. The general partner is currently in the process of
evaluating the local real estate market and the Bennigan's lease to determine
the best course of liquidation. The exact timing of the disposition will depend
on the market conditions anticipated lease terms upon renewal.
44
TAYLOR INCOME INVESTORS V, LTD. terminated its offering in December
1986 and received aggregate gross proceeds of $480,000, representing
subscriptions from 21 limited partners. Fund V owns a 6.02% interest in a La
Petite Academy in Houston, Texas. Additionally, Fund IV owns a promissory note
secured by an Atlas Transmission located in Houston, Texas and matures in
October 2006. Fund IV purchased the Atlas Transmission in October 1986 and
subsequently sold the property in November 1997, however, Fund IV had to
provide owner financing. During 2001, the partnership sold a Pizza Inn and a
Whataburger in Clute, Texas that was purchased in March 1988. 100% of the net
sales proceeds from the sale of Pizza Inn and Whataburger were sent to the
limited partners as a capital distribution. The private placement memorandum
provided that the properties purchased by Fund V would typically be held for a
period of 12 to 15 year, but that the general partner, in their sole
discretion, could increase or decrease this timeframe. The general partner is
currently in the process of evaluating the local real estate market to
determine the best course of liquidation. The exact timing of the disposition
will depend on the market conditions and lease terms and negotiations
available.
TAYLOR INCOME INVESTORS VI, LTD. terminated its offering in June 1987
and received aggregate gross proceeds of $300,000, representing subscriptions
from 13 limited partners. Fund VI owns a 2.73% interest in a La Petite Academy
in Houston, Texas. Additionally, during 2001 the partnership sold a Pizza Inn
and a Whataburger in Clute, Texas that were purchased in March 1988. 100% of
the net sales proceeds from the sale of Pizza Inn and Whataburger were sent to
the limited partners as a capital distribution. The private placement
memorandum provided that the properties purchased by Fund VI would typically be
held for a period of 12 to 15 year, but that the general partner, in their sole
discretion, could increase or decrease this timeframe. The general partner is
currently in the process of evaluating the local real estate market to
determine the best course of liquidation. The exact timing of the disposition
will depend on the market conditions and lease terms and negotiations
available.
AAA NET REALTY INVESTORS FUND VII, LTD. terminated its offering in
March 1988 and received aggregate gross proceeds of $1,125,100, representing
subscriptions from 40 limited partners. Fund VII owns the following five
properties in joint venture with affiliates of the General Partner:
o 91.25% interest in La Petite Academy in Houston, Texas;
o 54.88% interest in Whataburger in Dallas, Texas;
o 27.27% interest in Superior Sound Systems in Houston, Texas;
o 27.27% interest in AFC, Inc. (Church's Fried Chicken) in Houston, Texas;
and
o 27.27% interest in Eller Media (Billboard) in Houston, Texas
The private placement memorandum provided that the properties purchased by Fund
VII would typically be held for a period of 12 to 15 year, but that the general
partner, in their sole discretion, could increase or decrease this timeframe.
The general partner is currently in the process of evaluating the local real
estate market to determine the best course of liquidation. The exact timing of
the disposition will depend on the market conditions and lease terms and
negotiations available.
45
AAA NET REALTY INVESTORS FUND VIII, LTD. terminated its offering in
March 1989 and received aggregate gross proceeds of $1,860,000, representing
subscriptions from 55 limited partners. Fund VIII owns a 100% interest in two
properties and five properties in joint venture with affiliates of the General
Partner:
o Discount Tire Center in Ft. Worth, Texas;
o La Petite Academy in Houston, Texas;
o 45.12% interest in Whataburger in Dallas, Texas;
o 72.72% interest in Superior Sound Systems in Houston, Texas;
o 72.72% interest in AFC, Inc. (Church's Fried Chicken) in Houston, Texas;
o 72.72% interest in Eller Media (Billboard) in Houston, Texas; and
o 25.27% interest in Goodyear Tire in Dallas, Texas
The private placement memorandum provided that the properties purchased by Fund
VIII would typically be held for a period of 12 to 15 year, but that the
general partner, in their sole discretion, could increase or decrease this
timeframe. The general partner is currently in the process of evaluating the
local real estate market to determine the best course of liquidation. The exact
timing of the disposition will depend on the market conditions and lease terms
and negotiations available.
AAA NET REALTY FUND GOODYEAR, LTD. terminated its offering in July
1991 and received aggregate gross proceeds of $1,335,000, representing
subscriptions from 37 limited partners. Fund Goodyear owns a Goodyear Tire in
Dallas, Texas and a 74.72% interest in another Goodyear Tire in Dallas, Texas
through a joint venture with an affiliated fund of the general partner. The
private placement memorandum provided that the properties purchased by Fund
Goodyear would typically be held for a period of 12 to 15 year, but that the
general partner, in their sole discretion, could increase or decrease this
timeframe. The general partner is currently in the process of evaluating the
local real estate market to determine the best course of liquidation. The exact
timing of the disposition will depend on the market conditions and lease terms
and negotiations available.
AAA NET DEVELOPERS, LTD. terminated its offering in January 1997 and
received aggregate gross proceeds of $1,862,100, representing subscriptions
from 30 limited partners. Net Developers owns an interest in the following
three properties:
o 50% interest in Parkwood Square Shopping Center, a multi-tenant retail
center located in Huntsville, Texas;
o 15% interest in Vista Ridge Shopping Center, a multi-tenant retail center
located in Lewisville, Texas; and
o 50% interest in Hollywood Video located in Montgomery, Alabama
Parkwood Square Shopping Center is a 14,271 square foot multi tenant
center located in Huntsville, Texas. Tenants include H&R Block, GNC, Friedman
Jewelers, Cingular Wireless, Pizza Hut, IHOP and A1 Liquer. At March 31, 2003,
the property was encumbered with a $1.473 million first lien by GMAC that
matures in June 2010. Net Developers has approximately $166,000 equity
remaining in this project, receives a 15% preferred return on its equity and
then 50% of the cash flow and profit upon disposition above the preferred
return. The project is currently being marketed for sale.
46
Vista Ridge Shopping Center is a 36,271 square foot multi tenant
center located in Lewisville, Texas. Tenants include Caldwell Watson, Planet
Tan, American Laser Vision, Frazier Ancillary Services and The Trakz Group,
Inc. At March 31, 2003, the property was encumbered with a $4.243 million
mortgage note secured by the property that matures in March 2010. Net
Developers has no remaining equity in this project and maintains an 8.3%
carried interest in the cash flows and profit upon disposition. The project is
currently being marketed for sale.
Hollywood Video is a single tenant property located in Montgomery,
Alabama. At March 31, 2003, the property was encumbered with a $946 thousand
mortgage note secured by the property that matures in April 2009. Net
Developers has no remaining equity in this project and maintains a 50% carried
interest in the cash flows and profit upon disposition. The project is
currently being marketed for sale.
Other projects that Net Developers made an investment in and have
already been liquidated include:
o Copper Plaza, a multi-tenant shopping center located in Houston, Texas;
o Just For Feet located in Lewisville, Texas;
o Hollywood Video located in Covington, Louisiana;
o Hollywood Video located in Saraland, Alabama;
o IHOP located in Gainesville, Georgia;
o IHOP located in Falls Church, Virginia; and
o IHOP located in Keyport, New Jersey
Net Developers was the first in a series of actively managed funds. Per the
private placement memorandum, it was a three-year fund that entered into
liquidation in August 1999. The remaining properties are currently listed for
sale, and upon disposition, net sales proceeds will be allocated to the general
partner and the limited partners in accordance with the limited partnership
agreement.
AMREIT OPPORTUNITY FUND, LTD. terminated its offering in January
2001 and received aggregate gross proceeds of $2,353,750, representing
subscriptions from 71 limited partners. AOF owns an interest in the
following five properties:
o 50% interest in McLendon Plaza, a multi-tenant shopping center located in
Houston, Texas;
o 50% interest in ARC Round Rock, a multi-tenant shopping center located in
Round Rock, Texas;
o 10% interest in River Park Shopping Center, a multi- tenant, multi-pad
shopping center located in Sugarland, Texas;
o 45% interest in Temple TX 363, Ltd, a multi-pad project located in Temple,
Texas;
o 29% interest in CDP #33, three IHOP properties located in Haggarstown,
Maryland; Orem, Utah and Houston, Texas
47
McLendon Plaza is a 16,000 square foot multi-tenant center located in
Houston, Texas. Tenants include Sprint PCS, Sketchers and Subway. The property
is under construction, with approximately 80% of the construction complete. The
property is subject to a construction loan in the amount of $286,550 as of
October 31, 2002. Upon completion of construction and leasing, the general
partner expects to pay off the construction loan with a permanent loan and list
the property for sale.
ARC Round Rock is a 9,600 square foot multi-tenant center located in
Round Rock, Texas. Tenants include The Sleep Shop, Noodles Etc., and ABC
Liquer. The property is newly constructed and as of October 31, 2002 is
encumbered with a construction loan in the amount of $1,606,294. AOF is
currently negotiating a permanent loan, which will be used to pay off the
construction loan, and is in the process of marketing the property for sale.
River Park Shopping Center is a 40 acre foot multi-tenant, multi-pad
shopping center located in Sugarland, Texas. The property is anchored by HEB
and includes significant shadow space and free standing pad sites. The property
is currently under construction. AOF has a 10% interest in the project. As the
project is completed, the intent is to fully lease the space and market the
entire project for sale.
Temple TX 363, Ltd. is a multi-pad project located in Temple, Texas.
This project included four individual, freestanding pad sites. Three of the pad
sites have been developed and sold, which included a McDonalds restaurant, an
IHOP restaurant and a Chili's restaurant. The fourth pad site is currently
being marketed and will either be developed and sold or sold directly to a
user/operator.
CDP # 33 is three IHOP properties located in Haggarstown, Maryland;
Orem, Utah; and Houston, Texas. The properties are encumbered with three
separate mortgage notes totaling $2,293,540 that are secured by the property
and mature in January 2012. AOF is currently marketing these three properties
for sale.
Other projects that AOF made an investment in and have already been
liquidated include:
o IHOP located in Norfolk, Virginia;
o IHOP located in Houston, Texas;
o Cooper Plaza, a multi-tenant shopping center located in Houston, Texas;
o CPD # 31, two IHOP properties located in Memphis, Tennessee and
Cookeville, Tennessee;
o IHOP and pad site located in Kenosha, Wisconsin; and
o Temple TX 363, a multi-pad project consisting of McDonalds, IHOP and
Chili's located in Temple, Texas
48
AOF is the second in a series of actively managed funds. Per the private
placement memorandum, AOF entered into liquidation in August 2002. The
remaining properties are still in the development stage or are currently listed
for sale, and upon disposition, net sales proceeds will be allocated to the
general partner and the limited partners in accordance with the limited
partnership agreement.
AMREIT INCOME & GROWTH FUND terminated its offering in November 2002
and received aggregate gross proceeds of $10,000,000, representing
subscriptions from 185 limited partners. AIG owns an interest in the following
six properties:
o IHOP located in Irondequoit, New York;
o 50% interest in McLendon Plaza, a multi-tenant shopping center located in
Houston, Texas;
o 20% interest in a portfolio of 17 IHOP properties, AAA CTL, located in
twelve different states;
o TGI Friday's located in Crystal Lake, Illinois;
o 45% interest in Temple TX 363, Ltd, a multi-pad project located in Temple,
Texas;
o 38% interest in CDP #33, three IHOP properties located in Haggarstown,
Maryland; Orem, Utah and Houston, Texas
IHOP - Irondequoit is an IHOP property located in Irondequoit, New
York. The property was purchased for cash in November 2002. AIG will hold this
property for investment purposes and collect rental income. During the
operating stage of the partnership, the general partner will evaluate the
credit of the tenant and the local real estate market, and when appropriate,
market the property for sale.
McLendon Plaza is a 16,000 square foot multi-tenant center located in
Houston, Texas. Tenants include Sprint PCS, Sketchers and Subway. The property
is under construction, with approximately 80% of the construction complete. The
property is subject to a construction loan in the amount of $286,550 as of
October 31, 2002. Upon completion of construction and leasing, the general
partner expects to pay off the construction loan with a permanent loan and list
the property for sale.
AAA CTL is a portfolio of 17 IHOP properties located in 12 different
states. AIG will hold its interest in the AAA for investment purposes, and
collect rental income. During the operating stage of the partnership, the
general partner will evaluate the credit of the tenant and the local real
estate market, and when appropriate, market the property for sale.
TGI Friday's is a full service restaurant located in Crystal Lake,
Illinois. The property was purchased for cash in November 2002. AIG will hold
this property for investment purposes and collect rental income. During the
operating stage of the partnership, the general partner will evaluate the
credit of the tenant and the local real estate market, and when appropriate,
market the property for sale.
Temple TX 363, Ltd. is a multi-pad project located in Temple, Texas.
This project included four individual, freestanding pad sites. Three of the pad
sites have been developed and sold, which included a McDonalds restaurant, an
IHOP restaurant and a Chili's restaurant. The fourth pad site is currently
being marketed and will either be developed and sold or sold directly to a
user/operator.
49
CDP # 33 is three IHOP properties located in Haggarstown, Maryland;
Orem, Utah; and Houston, Texas. The properties are encumbered with three
separate mortgage notes totaling $2,293,540 that are secured by the property
and mature in January 2012. AOF is currently marketing these three properties
for sale.
Other projects that AIG made an investment in and have already been
liquidated include:
o CDP #27, IHOP located in Memphis, Tennessee and Tupelo, Mississippi;
o CDP # 31, two IHOP properties located in Scottsdale, Arizona and
Cookeville, Tennessee;
o IHOP and pad site located in Kenosha, Wisconsin; and
o Temple TX 363, a multi-pad project consisting of McDonalds, IHOP and
Chili's located in Temple, Texas
AIG is the third in a series of actively managed funds. Per the private
placement memorandum, AIG is a seven year, actively managed fund that we enter
into a final liquidation during 2008. During the operating state of the
partnership, the general partner will negotiate the acquisition, development
and disposition of properties, focusing on generating dependable, increasing,
monthly income with appreciation on original capital during a seven year
actively managed time period.
50
PRICE RANGE OF CLASS A COMMON SHARES
As of April 15, 2003, there were approximately 863 record holders
of 2,772,340 of the Company's class a common shares net of 65,379 shares held in
treasury. AmREIT's class a common shares are listed on the AMEX and trade under
the symbol "AMY." The following table sets forth for the calendar periods
indicated the high and low sale prices per class A common share as reported on
the AMEX and the dividends paid per share for the corresponding period since the
commencement of trading on July 23, 2002.
Calendar Period High Low Dividends
2002
Third Quarter (from July 23, 2002)(1)........................ $7.50 $6.20 $.095
Fourth Quarter............................................... $6.55 $6.15 $.100
2003
First Quarter ............................................... $6.80 $6.05 $.109
Second Quarter (through April 15, 2003)...................... $6.80 $6.55 $.111
(1) The Company listed its class A common shares on the AMEX on
July 23, 2002. Prior to July 23, 2002, the Company's shares
were not listed on a public exchange, and therefore, there
is no public trading or pricing information available.
The payment of any future dividends by AmREIT is dependent upon
applicable legal and contractual restrictions, including the provisions of the
class C common shares, as well as its earnings and financial needs.
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth the selected historical financial data
for AmREIT. The selected historical operating, balance sheet and cash flow data
of AmREIT for each of the four years are derived from the audited financial
statements of AmREIT as reported in its Annual Reports on form 10-KSB. Prior to
1998, AmREIT (formerly American Asset Advisors Trust) was an externally advised
REIT. As an externally advised REIT, the results of operations and balance
sheet presentation are materially different and not comparable to AmREIT as an
internally advised REIT.
On July 23, 2002, AmREIT completed a merger with three of its affiliated
partnerships, AAA Net Realty Funds IX, X and XI. The December 31, 2001 balance
sheet and income statement do not reflect the effect of this merger. Through
this merger, AmREIT acquired approximately $24.3 million in net lease real
estate assets in exchange for issuing approximately 2.6 million class B common
shares. Additionally, AmREIT expensed approximately $1.9 million, based on the
payment of 302,281 class A common shares, as deferred merger costs paid to Mr.
Kerr Taylor in conjunction with the sale of his advisory company to AmREIT in
1998.
51
AmREIT
Selected Historical
Combined Financial and Other Data
December 31, December 31, December 31,
2002 2001 2000
Balance sheet data (at end of period)
Total Property .... $47,979,848 $ 30,716,025 $ 31,622,098
Accumulated depreciation (2,136,376) (2,066,067) (1,601,758)
Cash and cash equivalents .. 2,506,868 227,117 935,867
Total assets 73,975,753 38,828,393 36,522,276
Notes payable 33,586,085 16,971,549 15,472,183
Total liabilities 34,958,534 18,399,279 16,063,221
Minority interest 810,971 5,075,333 5,130,337
Shareholders' equity . 38,206,248 15,353,781 15,328,718
Fully diluted class A common shares issued (3).... 5,236,547 2,384,117 2,384,117
Treasury shares . 65,379 29,768 11,373
Other data
Cash flows provided by (used in):
Operating . 3,729,090 1,625,417 676,430
Investing (15,268,195) (2,332,891) (25,720)
Financing . 13,818,856 (1,276) (833,589)
Net increase (decrease) in cash and cash
equivalents .. 2,279,751 (708,750) (182,879)
Funds from operations (1) . 6,000 978,565 222,767
Adjusted funds from operations (2) . 1,910,370 978,565 222,767
Book value per share . 7.30 6.44 6.43
December 31, December 31,
1999 1998
Balance sheet data (at end of period)
Total Property .... $ 31,136,268 $ 30,967,134
Accumulated depreciation (1,148,503) (696,384)
Cash and cash equivalents .. 1,118,746 48,520
Total assets 37,018,186 33,137,546
Notes payable 15,480,378 10,580,110
Total liabilities 16,048,366 10,796,439
Minority interest 5,180,546 5,218,999
Shareholders' equity . 15,789,274 17,122,108
Fully diluted class A common shares issued (3).... 2,384,117 2,384,117
Treasury shares . 11,373 11,373
Other data
Cash flows provided by (used in):
Operating . 469,700 1,510,069
Investing (2,439,262) (7,687,454)
Financing . 3,039,788 4,824,165
Net increase (decrease) in cash and cash
equivalents .. 1,070,226 (1,353,220)
Funds from operations (1) . 410,105 (1,455,898)
Adjusted funds from operations (2) . 410,105 (1,455,898)
Book value per share . 6.62 7.18
(1) AmREIT has adopted the National Association of Real Estate Investment
Tursts (NAREIT) definition of FFO. FFO is calculated as net income
(computed in accordance with generally accepted accounting principles)
excluding gains or losses from sales of depreciable operating property,
depreciation and amortization of real estate assets, and excluding
results defined as "extraordinary items" under generally accepted
accounting principles. FFO shold not be considered an alternative to cash
flows from operating, investing and financing activities in accordance
with generall accepted accounting principles and is not necessarily
indicative of cash available to meet cash needs. AmREIT's computation of
FFO may difer from the methodology for calculating FFO utilized by other
equity REITs and, therefore, may not be comparable to such other REITS.
FFO is not defined by generally accepted accounting principles and should
not be considered an alternative to net income as an indication of
AmREIT's performance, or of cash flows as a measure of liquidity. Please
see the reconciliation of Net Income to FFO on page 58.
(2) Based on the adherence to the NAREIT definition of FFO, we have not added
back the $1.90 million charge to earnings in the third quarter of 2002
resulting from shares issued to Mr. Taylor as deferred merger cost
stemming from the sale of his advisory company to AmREIT in June 1998.
Adding this $1.90 million charge back to earnings would result in
Adjusted FFO of $1.90 million.
(3) Fully diluted class A common shares at December 31, 2002 include the
class B common shares, which are convertible, at the option of the holder
for no additional consideration, into the class A common shares on a
one-for-one basis.
52
AmREIT
Selected Historical
Combined Financial and Other Data
December 31, December 31, December 31,
2002 2001 2000
Operating Data
Revenues:
Rental income and earned income from DFL ... $ 5,494,211 $ 3,285,774 $ 3,125,294
Interest income .. 4,206 10,555 31,630
Service fee, other income, and gain and loss on sale
of property 2,691,260 2,650,113 793,268
Total revenues . 8,189,677 5,946,442 3,950,192
Expenses:
General operating, administrative, legal and
professional . 4,134,134 2,956,061 1,688,799
Reimbursements and fees to realted party - - -
Interest . 1,774,973 1,063,574 1,339,622
Depreciation and amortization . 666,307 464,308 453,906
Merger related acquisition costs . - - -
Bad debts - - -
Merger costs .. - - -
Deferred merger costs.... 1,904,370 - -
Potential acquisition costs .. - - 153,236
Total expense . 8,479,784 4,483,943 3,635,563
Income (loss) before federal income taxes and minority
interest in net income of consolidated joint ventures .. (290,107) 1,462,499 314,629
Federal income tax expense .. 60,656 144,420 -
Minority interest in net income of consolidated joint
ventures .. (308,010) (527,571) (527,121)
Net income (loss) .. $ (658,773) $ 790,508 $ (212,492)
Basic earnings (loss) per share ..... $ (0.62) $ 0.34 $ (0.09)
Diluted earnings (loss) per share . $ (0.62) $ 0.34 $ (0.09)
Distributions per share - class A . $ 0.34 $ 0.26 $ 0.10
Weighted average number of Series A common shares
outstanding . 2,469,725 2,354,572 2,373,060
Weighted average number of common shares plus dilutive
potential common shares . 2,469,725 2,354,572 2,373,060
December 31, December 31,
1999 1998
Operating Data
Revenues:
Rental income and earned income from DFL ... $ 3,649,818 $ 2,741,757
Interest income .. 199,448 98,692
Service fee, other income, and gain and loss on sale
of property 754,059 187,577
Total revenues . 4,603,325 3,028,026
Expenses:
General operating, administrative, legal and
professional . 1,290,433 562,110
Reimbursements and fees to realted party - 40,607
Interest . 1,134,919 402,707
Depreciation and amortization . 494,797 417,868
Merger related acquisition costs . 262,495 -
Bad debts 189,490 -
Merger costs .. - 2,427,658
Deferred merger costs.... - -
Potential acquisition costs .. 743,001 464,303
Total expense . 4,115,135 4,315,253
Income (loss) before federal income taxes and minority
interest in net income of consolidated joint ventures .. 488,190 (1,287,227)
Federal income tax expense .. - -
Minority interest in net income of consolidated joint
ventures .. (526,052) (518,559)
Net income (loss) .. $ (37,862) $ (1,805,786)
Basic earnings (loss) per share ..... $ (0.02) $ (0.81)
Diluted earnings (loss) per share . $ (0.02) $ (0.81)
Distributions per share - class A . $ 0.55 $ 0.71
Weighted average number of Series A common shares
outstanding . 2,372,744 2,226,403
Weighted average number of common shares plus dilutive
potential common shares . 2,372,744 2,226,403
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain information presented in this prospectus constitutes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although the
Company believes that the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, the Company's actual results
could differ materially from those set forth in the forward-looking statements.
Certain factors that might cause such a difference include the following:
changes in general economic conditions, changes in real estate market
conditions, continued availability of proceeds from the Company's debt or equity
capital, the ability of the Company to locate suitable tenants for its
properties and the ability of tenants to make payments under their respective
leases.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
Form 10-KSB for the fiscal year ended December 31, 2002, and the of selected
financial data appearing elsewhere in this prospectus. Historical results and
trends which might appear should not be taken as indicative of future
operations. The results of operations and financial condition of the Company, as
reflected in the accompanying statements and related footnotes, are subject to
management's evaluation and interpretation of business conditions, retailer
performance, changing capital market conditions and other factors, which could
affect the ongoing viability of the Company's tenants. Management believes the
most critical accounting policies in this regard are the accounting for lease
revenues (including the straight-line rent), the regular evaluation of whether
the value of a real estate asset has been impaired and the allowance for
doubtful accounts. Each of these issues requires management to make judgments
that are subjective in nature. Management relies on its experience, collects
historical data and current market data, and analyzes these assumptions in order
to arrive at what it believes to be reasonable estimates.
AmREIT, a Texas real estate investment trust, is listed on the American
Stock Exchange (AMY) and is a pre-eminent sponsor of high quality real estate
investment opportunities to the financial planning community. The Company
researches, identifies and participates in real estate opportunities and works
hand in hand with the broker-dealer community to sponsor real estate investment
products and services.
For 18 years we have established a track record of investing in
commercial real estate leased primarily to corporate tenants in the retail,
financial services and banking, medical and restaurant sectors. AmREIT's real
estate team focuses on development, management, brokerage and ownership of
freestanding credit tenant leased ("CTL") and frontage shopping centers ("FSC")
that are located contiguous to major thoroughfares and traffic generators.
AmREIT's real estate customer list includes national and regional tenants such
as: Walgreen's, Goodyear Tire, Washington Mutual, IHOP, McDonald's, Herman
Hospital, Radio Shack, Sprint, Coldwell Banker, Guaranty Federal, Bennigan's,
Chili's, Texas Children's Hospital, Discount Tire, etc.
54
Liquidity and Capital Resources
Cash flow from operations has been the principal source of capital to
fund the Company's ongoing operations. The Company's issuance of common stock
and the use of the Company's credit facility have been the principal sources of
capital to fund its growth.
Net cash provided by operating activities increased from $1.64 million
in 2001 to $3.73 million in 2002. The increase in cash provided by operating
activities was due primarily to the following components: (1) an increase in
deferred merger costs of $1.9 million in 2002, compared to $0 in 2001. The
deferred merger costs represent a charge to earnings taken for class A common
shares issued to H. Kerr Taylor as deferred consideration as a result of the
sale of his advisory company to AmREIT in June 1998. The merger of the
Affiliated Partnerships triggered a payment under the deferred consideration
agreement, and 302,281 class A common shares of AmREIT were issued and the
charge taken to earnings, which is the primary cause of the $659 thousand loss
in 2002, (2) a decrease in accounts receivable from during 2002 of $1.53 million
compared to an increase in accounts receivable during 2001 of $388 thousand, and
(3) an increase in deferred compensation of $0 in 2001 to $48 thousand in 2002.
The increase in deferred compensation was due to restricted shares issued to
employees and the board of trust managers as compensation in 2002. The above
changes are offset by the operating loss of $659 thousand in 2002 compared to an
operating profit of $790 thousand in 2001. The primary cause for the loss in
2002 is the $1.9 million charge to earnings for the deferred acquisition costs.
Net cash used in investing activities increased by $12.94 million to
$15.27 million in 2002 when compared to 2001. The increase was primarily due to
an increase in property acquisitions of $15.51 million to $18.95 million in
2002. This increase is related to the purchase of seventeen IHOP properties
purchased during 2002 through a majority owned subsidiary. Eighty-three percent
of the $17.96 million aggregate purchase price was financed with 83%
non-recourse debt. This increase in net cash was partially offset by the
proceeds from the sale of the Office Max property located in Lake Jackson,
Texas, which increased $1.17 million from $2.52 million in 2001 to $3.69 million
in 2002.
Net cash provided by financing activities increased $13.84 million in
2002 to $13.82 million in 2002 when compared to 2001. The increase was primarily
due to: (1) proceeds from notes payable, which totaled $19.25 million in 2002
compared to $8.04 million in 2001, the proceeds of which were primarily used to
fund the acquisition of the seventeen IHOP properties purchased during 2002, (2)
a decrease in payments of notes payables from $6.54 million in 2001 to $3.40
million in 2002, and (3) an increase in dividends paid from $605 thousand in
2001 to $1.73 million in 2002. The increase in dividends paid is a result of a
28% increase in the dividends per share paid to holders of class A shares, the
issuance of additional class A common shares, and the dividends paid on the
issuance of class B shares in July 2002 pursuant to the merger described below.
In order to continue to expand and develop its portfolio of properties
and other investments, the Company intends to finance future acquisitions and
growth through the most advantageous sources of capital available at the time.
Such capital sources may include proceeds from public or private offerings of
the Company's debt or equity securities, secured or unsecured borrowings from
banks or other lenders, acquisitions of the Company's affiliated entities or
other unrelated companies, or the disposition of assets, as well as
undistributed funds from operations.
55
On July 23, 2002, the Company completed a merger with the Affiliated
Partnerships, which increased the Company's real estate assets by approximately
$24.3 million. Pursuant to the merger, the Company issued approximately 2.6
million Class B common shares to the limited partners in the Affiliated
Partnerships. Approximately $760 thousand in 8 year, interest only, subordinated
notes were issued to limited partners of the Affiliated Partnerships who
dissented against the merger. The acquired properties are unencumbered, single
tenant, free standing properties on lease to national and regional tenants,
where the lease is the direct obligation of the parent company. A deferred
merger expense stemmed from stock issued to H. Kerr Taylor, President and Chief
Executive Officer, based on deferred consideration that was approved by the
stockholders in 1998 as a result of the sale of his advisory company to AmREIT.
Mr. Taylor was issued 302,281 Class A common shares, which resulted in a charge
to earnings in the third quarter 2002.
The Company's leases typically provide that the tenant bear
responsibility for substantially all property costs and expenses associated with
ongoing maintenance and operation, including utilities, property taxes and
insurance. In addition, the Company's leases generally provide that the tenant
be responsible for roof and structural repairs. Some of the tenants' leases
require the Company to be responsible for roof and structural repairs. In these
instances, the Company normally requires warranties and/or guarantees from the
related vendors, suppliers and/or contractors, to mitigate the potential costs
of repairs during the primary terms of the leases. Because many of the
properties which are subject to leases that place these responsibilities on the
Company are recently constructed, management anticipates that capital demands to
meet obligations with respect to these properties will be minimal for the
foreseeable future and can be met with funds from operations and working
capital. The Company may be required to use bank borrowing or other sources of
capital in the event of unforeseen significant capital expenditures.
In November 1998, the Company entered into an unsecured credit facility
(the "Credit Facility"), which is being used to provide funds for the
acquisition of properties and working capital, and repaid all amounts
outstanding under the Company's prior credit facility. Under the Credit
Facility, which had an original term of one year, and has been extended through
April 2003, the Company may borrow up to $20 million subject to the value of
unencumbered assets. The Company is working on a modification of the Credit
Facility, and the lender has agreed to extend the term by a period of fifteen
months under comparable terms and conditions. The Credit Facility contains
covenants which, among other restrictions, require the Company to maintain a
minimum net worth, a maximum leverage ratio, and specified interest coverage and
fixed charge coverage ratios. At December 31, 2002, the Lender waived these
financial covenant. The Credit Facility bears interest at an annual rate of
LIBOR plus a spread of 2.00%, which resulted in an effective interest rate of
3.4375% at December 31, 2002. As of December 31, 2002, $11.76 million was
outstanding under the Credit Facility. The Company has approximately $8.24
million availability under its line of credit, subject to use of proceeds
approval by the lender.
56
As of December 31, 2002, the Company owned 46 properties directly
and, since its inception, had invested $70.83 million, exclusive of any minority
interests, including certain acquisition expenses related to the Company's
investment in these properties. These expenditures resulted in a corresponding
decrease in the Company's liquidity.
Until properties are acquired by the Company, the Company's funds are
held in short-term, highly liquid investments which the Company believes to have
appropriate safety of principal. This investment strategy has allowed, and
continues to allow, high liquidity to facilitate the Company's use of these
funds to acquire properties at such time as properties suitable for acquisition
are located. At December 31, 2002, the Company's cash and cash equivalents
totaled $2.51 million.
The Company paid aggregate cash dividends to the holders of its class A
and class B common shares, as applicable, during 2002 and 2001, distributing a
total of $1.73 million and $605 thousand, respectively, for each such fiscal
year.
Inflation has had very little effect on income from operations.
Management expects that increases in store sales volumes due to inflation as
well as increases in the Consumer Price Index, may contribute to capital
appreciation of the Company properties. These factors, however, also may have an
adverse impact on the operating margins of the tenants of the properties.
Funds From Operations
Funds from operations (FFO) decreased $973 thousand to $6 thousand in
2002 from $979 thousand in 2001. The decrease in FFO is primarily due to the
$1.90 million charge to earnings in the third quarter 2002 resulting from
302,281 class A common shares issued to Mr. Taylor, resulting from the merger of
the Affiliated Partnerships. The Company has adopted the National Association of
Real Estate Investment Trusts (NAREIT) definition of FFO. FFO is calculated as
net income (computed in accordance with generally accepted accounting
principles) excluding gains or losses from sales of depreciable operating
property, depreciation and amortization of real estate assets, and excluding
results defined as "extraordinary items" under generally accepted accounting
principles ("GAAP"). FFO should not be considered an alternative to cash flows
from operating, investing and financing activities in accordance with generally
accepted accounting principles and is not necessarily indicative of cash
available to meet cash needs. The Company's computation of FFO may differ from
the methodology for calculating FFO utilized by other equity REIT's and,
therefore, may not be comparable to such other REIT's. FFO is not defined by
GAAP and should not be considered an alternative to net income as an indication
of the Company's performance.
57
Below is the reconciliation of net income, which the Company believes is
the most comparable GAAP financial measure, to FFO in thousands:
2002 2001
----------------- -------------------
Net (loss) income $ (659) $ 791
Plus depreciation of real estate assets 617 442
Less loss (gain) on sale of real estate assets 48 (254)
----------------- -------------------
Total Funds From Operations * $ 6 $ 979
Cash dividends paid $ 1,730 $ 605
Dividends in excess of (less than) FFO * $ 1,724 $(374)
* Based on the adherence to the NAREIT definition of FFO, we have not added
back the $1.90 million charge to earnings in the third quarter 2002 resulting
from shares issued to Mr.Taylor. Adding this $1.90 million charge to earnings
back to earnings would result in $1.90 million adjusted funds from operations,
and dividends paid less than adjusted FFO of $170 thousand.
Cash flows from operating activities, investing activities, and financing
activities are presented below in thousands:
2002 2001
---------------------- ---------------------
Operating activities $ 3,729 $ 1,642
Investing activities (15,268) (2,333)
Financing activities 13,819 (18)
Results of Operations
Years Ended December 31, 2002 and 2001:
As of December 31, 2002 and 2001, the Company owned and leased 46 and 19
properties, respectively. During the years ended December 31, 2002 and 2001, the
Company had revenues of: (1) $5.49 million and $3.29 million, respectively, in
rental income from operating leases and earned income from direct financing
leases, (2) $2.04 million and $2.03 million, respectively, in service fee and
other income, (3) $280 thousand and $342 thousand, respectively, in management
fee income, (4) $417 thousand and $20 thousand, respectively, in income from
non-consolidated affiliates and (5) $(48) thousand and $254 thousand,
respectively, in (loss) gain on sale of property.
The increase in gross revenue is primarily attributed to the merger of
the Affiliated Partnerships in July 2002 and the acquisition of the 17 IHOP
properties during 2002, which generated increases in both rental income from
operating leases and earned income from direct financing leases.
The Company sold an OfficeMax in Lake Jackson, Texas during 2002.
The Company recorded a loss on the sale of this property primarily due to the
write-off of accrued rental income.
58
The decrease in management fee income is primarily due to the merger of
the Affiliated Partnerships in July 2002, which resulted in a decrease in
management fees that had historically been paid from the Affiliated
Partnerships. The increase in income from non-consolidated affiliates is
primarily due to Company's interest in AmREIT Opportunity Fund and AmREIT Income
& Growth Fund. The Company is the general partner of AmREIT Opportunity Fund and
AmREIT Income & Growth Fund, and receives a profit interest in these funds as
certain investment objectives and returns are met for the third party limited
partners.
Service fees and other income increased based on:(1) additional asset
management and advisory fee income and commissions generated by an increase in
capital raised through the Company's direct participation investment funds and
(2) income earned in our non-consolidated affiliates, which are a result of the
Company's general partner interest's in its direct participation investment
funds.
General and administrative costs were $2.80 million in 2002 compared to
$1.95 million in 2001. The increased general and administrative costs are
primarily related to: (1) property costs incurred due to a vacancy and required
maintenance at Copper Plaza, and (2) increase in the number of employees during
2002 as we built the management and facilitation teams, resulting in an increase
in personnel and benefit costs.
Legal and professional fees increased from $1.00 million in 2001 to
$1.33 million in 2002. The primary increase was an increase in commission
expense to third party broker dealers as a result of an increase in capital
raised through the Company's direct participation investment funds and an
increase in transfer agent costs due to the issuance of 2.6 million class B
common shares as a result of the merger of the Affiliated Partnerships.
Interest expense was $1.77 million in 2002 compared to $1.06 million in
2001. The increase in interest expense is due to the acquisition of seventeen
IHOP properties, which were purchased utilizing approximately $14.76 million in
non-recourse debt with an average interest rate of 7.85%. Included in interest
expense is $131 thousand and $8 thousand, respectively for 2002 and 2001, for
amortized loan acquisition costs.
59
INVESTMENT OBJECTIVES AND CRITERIA
AMREIT'S INVESTMENT POLICIES
AmREIT's investment policies have been adopted by its board of trust
managers and set forth the policies and restrictions pursuant to which AmREIT
conducts its affairs. The board of trust managers may change any investment
policy without the approval of shareholders. Set forth below is a summary of
AmREIT's investment policies.
Investments in Properties. AmREIT will:
o invest only in interests in (including mortgage loan interests
secured by) income-producing, undeveloped, development stage and
improved real estate properties using borrowed capital only where
prudent as determined by the board;
o not invest more than 10% of its total assets in unimproved real
property or mortgage loans on unimproved real property;
o not engage in the purchase and sale of investments, other than real
property interests which satisfy AmREIT's investment objectives or
for the purpose of investing on a short-term basis reserves and funds
available for the purchase of properties; and
o pay consideration for a property which is based on its fair market
value as determined by a majority of the trust managers. In cases
where the majority of the independent trust managers determine, and
in all acquisitions from interested persons, such fair market value
shall be determined by an independent expert selected by the
independent trust managers.
Policy Restrictions. AmREIT will not:
o invest more than ten percent (10%) of its total assets in second
mortgages, excluding wrap-around type second mortgage loans;
o make or invest in mortgage loans, including construction loans, on
any one property if the aggregate amount of all mortgage loans
outstanding on the property, including AmREIT's loan(s), would exceed
an amount equal to eighty-five percent (85%) of the appraised value
of the property as determined by appraisal unless substantial
justification exists because of the presence of other underwriting
criteria. For purposes of this subsection, the "aggregate amount of
all mortgage loans outstanding on the property" shall include all
interest (excluding contingent participation in income and/or
appreciation in value of the mortgaged property), the current payment
of which may be deferred pursuant to the terms of such loans, to the
extent that deferred interest on each loan exceeds five percent (5%)
per annum of the principal balance of the loan;
o make or invest in any mortgage loans that are subordinate to any
mortgage or equity interest of an Advisor, trust manager or any
affiliate of AmREIT;
o invest in any mortgage loans that are subordinate to any liens or
other indebtedness on a property if the effect of such mortgage loans
would be to cause the aggregate value of all such subordinated
indebtedness to exceed twenty-five percent (25%) of AmREIT's tangible
assets;
60
o invest in equity securities of other issuers unless a majority of the
trust managers, including a majority of the independent trust
managers, not otherwise interested in the transaction approve the
transaction as being fair, competitive and commercially reasonable;
o invest in the equity securities of any non-governmental issue,
including other real estate investment trusts or limited partnerships
for a period in excess of eighteen (18) months, unless approved by a
majority of the trust managers, including a majority of the
independent trust managers;
o engage in underwriting or the agency distribution of securities
issued by others;
o invest in commodities or commodity futures contracts, other than
solely for hedging purposes;
o engage in short sales of securities or trading, as distinguished from
investment activities;
o invest in real estate contracts of sale, otherwise known as land sale
contracts, unless such contracts are in recordable form and
appropriately recorded in the chain of title;
o issue equity securities which are redeemable at the election of the
holder of such securities;
o issue debt securities unless the historical debt service coverage (in
the most recently completed fiscal year) as adjusted for known
changes is sufficient to properly service that higher level of debt;
o issue warrants, options or similar evidences of a right to buy its
securities, unless issued to all of its security holders ratably,
o issued as part of a financing arrangement; or
o issue shares on a deferred payment basis or other similar
arrangement.
Restrictions on Leverage. AmREIT may not borrow funds in order to
distribute the proceeds to the shareholders and thereby offset
under-performance by the properties, unless it is required to do so for REIT
qualification purposes.
The trust managers must review AmREIT's borrowings at least quarterly
for reasonableness in relation to its net assets. AmREIT may not incur
indebtedness if, after giving effect to the incurrence thereof, aggregate
indebtedness, secured and unsecured, would exceed fifty-five percent (55%) of
its net assets on a consolidated basis. For this purpose, the term "net assets"
means the value of our total assets (less intangibles) based on market
capitalization rates and current year rental income, as determined by our
board, before deducting depreciation or other non-cash reserves, less total
liabilities, as calculated at the end of each quarter on a basis consistently
applied.
61
Transactions with Affiliates. AmREIT is self-managed and does not
have an external advisor. AmREIT's dealings with and its officers, trust
managers, sponsors and any advisor are subject to the following restrictions:
Sales To Interested Persons. An advisor, officer or trust manager may
not acquire assets from AmREIT except as approved by a majority of trust
managers (including a majority of independent trust managers), not otherwise
interested in such transaction, as being fair and reasonable to AmREIT.
Acquisitions From Interested Persons. Any transaction with a trust
manager, officer or affiliate that involves the acquisition of a property from
an interested person must be approved by a majority of the independent trust
managers as being fair and reasonable to AmREIT and at a price not greater than
the cost of the property to such seller, or if at a greater price only if
substantial justification exists and such excess is reasonable and not in excess
of the properties' current appraised value.
Leases to Interested Persons. AmREIT may lease assets to an advisor,
or a trust manager only if such transaction is approved by a majority of trust
managers (including a majority of independent directors), not otherwise
interested in such transaction, as being fair and reasonable to AmREIT.
Loans From Interested Persons. AmREIT may not borrow money from an
advisor or a trust manager unless a majority of the trust managers, including a
majority of the independent directors, not otherwise interested in such
transaction approve the transaction as being fair, competitive, and commercially
reasonable and no less favorable to AmREIT than loans between unaffiliated
parties under the same circumstances.
Loans To Interested Persons. AmREIT may not make or invest in loans to
a sponsor, advisor or trust manager, which includes any affiliate thereof,
except for mortgage loans for the construction of improvements on properties to
be acquired by AmREIT that are under lease or binding contract to be leased to
qualifying tenants and those loans insured or guaranteed by a government or
government agency or unless an appraisal is obtained on the underlying property.
An appraisal of the underlying property shall be obtained in connection with any
loan to an advisor, trust manager or their affiliate.
Other Transactions With Interested Persons. All other transactions
between AmREIT and the sponsor, advisor, or a trust manager shall require
approval by a majority of the trust managers (including a majority of the
independent trust managers) not otherwise interested in such transactions as
being fair and reasonable to AmREIT and on terms and conditions not less
favorable to AmREIT than those available from unaffiliated third parties.
Joint Venture Investments. AmREIT may enter into joint ventures with
unaffiliated third parties. AmREIT may also invest jointly with another
publicly-registered entity sponsored by a sponsor, advisor or trust manager that
has investment objectives and management compensation provisions substantially
identical to those of AmREIT, provided that the following conditions must be
satisfied:
o the joint venture must have approval of a majority of the trust
managers, including a majority of the independent trust managers;
o the joint venture must have investment objectives comparable to
AmREIT;
o the investment by each party to the joint venture must be on
substantially the same terms and conditions; provided, however,
AmREIT shall own more than fifty percent (50%) of any joint venture
between it and its sponsor or affiliate;
o in making any such joint venture investment, AmREIT may not pay more
than once, directly or indirectly, for the same services and may not
act indirectly through any such joint venture if AmREIT would be
prohibited from doing so directly because of restrictions contained
in the bylaws; and
o in the event of a proposed sale of the property initiated by the
other joint venture partner, AmREIT must have a right of first
refusal to purchase the other party's interest.
62
Real Estate Commissions on Resale of Property. If an advisor, officer
or director provides a substantial amount of the services in the effort to sell
an AmREIT property, that such person may receive up to one-half of the
brokerage commission paid but in no event to exceed an amount equal to 3% of
the contract price for the property. In addition, the amount paid when added to
the sums paid to unaffiliated parties in such a capacity shall not exceed the
lesser of the Competitive Real Estate Commission or an amount equal to 6% of
the contract price for the property. The Competitive Real Estate Commission is
the real estate or brokerage commission paid for the purchase or sale of a
property which is reasonable, customary and competitive in light of the size,
type and location of such property. The "contract price" is the amount actually
paid or allocated to the purchase, development, or construction or improvement
of a property exclusive of the acquisition fees and acquisition expenses.
Acquisition Fees and Acquisition Expenses. AmREIT may not pay
acquisition fees and acquisition expenses which are unreasonable. The total
amount of such fees may not exceed 6% of the contract price of the property, or
in the case of a mortgage loan, 6% of the funds advanced. Notwithstanding the
foregoing, a majority of the trust managers, including a majority of the
independent trust managers, not otherwise interested in the transaction may
approve fees in excess of these limits if they determine the transaction to be
commercially competitive, fair and reasonable to AmREIT.
AMREIT'S OPERATING STRATEGY
AmREIT's policies with respect to the following activities have been
determined by the board within the restrictions of AmREIT's stated investment
policies and, in general, may be amended or revised, from time to time, subject
to the stated objectives and policies, by the board without a vote of the
shareholders.
Real Estate Strategy. Over the years, AmREIT has emphasized the
development, ownership and sale of commercial frontage properties that are
located on prime tracts of land, which will maximize the total return to its
shareholders, consisting of both dividends paid and appreciation in value of
the shares. These properties are often adjacent to major regional malls and
other high traffic generators and are either single tenant projects leased to
national and/or regional companies or strip centers leased to national,
regional and local tenants. These properties are usually smaller in size (2,500
to 50,000 sq. ft.) and have a large, stable and deep pool of investors as
buyers for this type of real estate. In particular, tax concerned investors
("1031 investors"), wealthy family estates and professional investors find
these types of properties valuable. Therefore, the marketability of this type
of property is usually appealing. For these reasons, management believes that
AmREIT's niche of frontage commercial credit is among the most liquid type of
real estate. AmREIT intends to continue to focus on acquiring commercial
frontage properties, believing that this sector is capable of providing
appealing returns at more attractive risk levels than other sectors of the
retail/commercial real estate market. In pursuing its growth strategy, AmREIT
intends to utilize research-driven investment analysis, disciplined buy/sell
decisions and up-to-date operating systems. AmREIT's business has, however,
expanded beyond being solely dependent on the income produced by its real
63
estate portfolio to include the real estate operating and capital raising
operations of its wholly-owned taxable REIT subsidiaries. See "Business and
Properties - Real Estate Operations and Capital Raising Activities" on page
___. Today, AmREIT's lines of business are expanding, its core portfolio is
improved and more diversified, and AmREIT has the best team of people in its
history. AmREIT's real estate strategy will focus on major markets, with the
goal of achieving a significant presence in major retail corridor markets of
targeted cities. These new operations provide AmREIT with additional funds to
pay distributions to its shareholders and increased asset value through its
ownership of the equity securities of these subsidiaries.
Management believes that AmREIT's focus on upgrading its property
portfolio and its continued emphasis on commercial frontage properties which are
often adjacent to major regional malls or other high traffic generators, coupled
with increasing the size of the portfolio through the acquisition of the
properties through the merger with certain of its affiliated partnerships and of
the financing opportunities provided by these new properties, should allow
AmREIT to increase revenue distributable to shareholders in the short-term. The
revenue growth strategy is enhanced by the possibility of increased long-term
value arising from the operating success of AmREIT's subsidiaries. Management
believes that AmREIT's structure allows it to be an entrepreneurial real estate
company, with income producing assets to provide attractive returns to
shareholders plus revenue producing subsidiaries which can both support AmREIT's
distributions and produce cash flow for continued growth.
Investment Strategy. AmREIT will continue to invest in existing,
newly-developed, development stage or undeveloped retail properties subject to
leases under which the tenant is responsible for all operating costs (i.e., the
tenant pays non-capital costs associated with operating the leased premises),
frequently referred to as a net lease. AmREIT will continue to seek to lease to
single tenant and multiple tenant properties. AmREIT intends to continue to
concentrate its investments in the Southwest, but may invest in properties
anywhere in the continental United States.
In determining whether a property is a suitable for investment,
management considers the following factors, among others:
o the safety of the investment;
o the location, condition, use and design of the property and its
suitability for a long-term net lease or a lease that otherwise
limits the amount of expenses to be incurred by AmREIT;
o the cash flow expected to be generated by the property;
o the terms of the proposed lease (including, specifically, provisions
relating to rent increases or percentage rent and provisions relating
to passing on operating expenses to tenants);
o the creditworthiness of the lessee (based on the lessee's most recent
audited financial statement or other similar evidence establishing
net worth) and the cash flow expected to be generated by the
property;
o the prospects for long-term appreciation of the property;
o the prospects for long-range liquidity of the investment; and
o the stability and potential growth of the community.
64
AmREIT invests in properties which are either under current lease or
are to be leased upon completion of development to a national or regional
corporation. However, in circumstances deemed appropriate, leases may be with a
sole proprietor or franchisee operating the businesses on the property. AmREIT
has no minimum financial requirements for its tenants, which will vary
depending on individual circumstances of the property and the lease. With
respect to the credit of a prospective tenant, AmREIT will evaluate the party's
creditworthiness in terms of its most recent audited financial statements, its
general credit history, any trends exhibited by its credit rating, appropriate
references, if available, the type of business in which it engages, the size
and scope of its business, the length of its operating history, the background
and experience of its management and similar types of factors.
Management also considers a property's prospects for long-term
appreciation and the prospects for long-range liquidity of the investment.
Other considerations of AmREIT affecting appreciation of the properties and
liquidity of the investment include: inclusion of lease clauses providing for
increased rents based on a tenant's increased revenues, lease clauses providing
for periodic inflation adjustments to the base rent, minimizing deferred
maintenance by prompt attention to repair and replacement needs at the
properties and by including common area maintenance clauses in the leases.
AmREIT's procedures with respect to environmental due diligence are to
require, prior to the purchase of a property, that all conditions imposed by a
lender loaning funds toward the acquisition of the property, if applicable,
have been satisfied and that all conditions imposed by the title insurer which
exclude coverage due to environmental conditions are either removed, waived or
found acceptable by a majority of AmREIT's trust managers. Where neither lender
nor title insurer conditions raise issues regarding environmental due diligence,
AmREIT may nevertheless require certain protective representations from the
seller of a property, including a satisfactory phase one environmental study of
the property site.
AmREIT competes for both investment opportunities and the operation of
its properties with other real estate investors (both domestic and foreign),
including other real estate investment trusts and limited partnerships which
have investment objectives similar to those of AmREIT and which are likely to
have resources greater than those of AmREIT. Management continually monitors
the real estate market in order to identify potential desirable property
acquisitions and advantageous disposition opportunities for its properties.
AmREIT plans to explore possible acquisitions of properties in whole
or partial exchange for its equity securities. AmREIT has authority to issue
additional shares or other securities in exchange for property and other valid
consideration, and to repurchase or otherwise reacquire its shares or any other
securities and may engage in such activities in the future. AmREIT has
authorized preferred shares, but has not issued such senior securities.
Line of Business Strategy. AmREIT has two primary areas of business
beyond its portfolio: a real estate operating company and its affiliates ("ARIC)
and its capital formation subsidiaries (investment sponsorship business). ARIC
is contributing strongly to AmREIT's profitability through brokerage and
development fee income. AmREIT's commercial brokerage activity allows it to buy
and sell properties, thereby creating potential fee income for shareholders.
This line of business carries little overhead burden and has proven profitable
from the beginning. During the past year, AmREIT was successful in selling a
number of projects to investors across the United States. AmREIT's facility
development division provides comprehensive development and construction
services from site selection and design through building completion for
credit-worthy tenants across the nation. These tenants include retail, banking,
medical and other diversified types of business. Not only does this area of
expertise allow AmREIT to generate third party fee income, but also respond to
its own portfolio needs when the situation calls for it. AmREIT's second line of
business, its sponsorship activity, continues to grow and gain traction. By
sponsoring investment funds through the NASD financial broker dealers, AmREIT is
able to: 1) better match its capital with its real estate pipeline, 2) generate
fee income from the real estate activities and asset management fees that
benefit the AmREIT shareholders, and 3) participate, as the general partner of
these investment funds, in the "back end" or "carried interest" in these funds.
65
As a sponsor of real estate investment opportunities to the NASD
financial planning broker dealer community, the Company maintains a 1% general
partner interest in the investment funds that it sponsors. The funds are
typically structured such that the limited partners receive 99% of the
available cash flow until 100% of their original invested capital has been
returned and a preferred return has been met. Once this has happened, then the
general partner begins sharing in the available cash flow at various promoted
levels. The Company also assigns a portion of this general partner interest in
these investment funds to management as long term, contingent compensation.
In so doing, the Company believes that it will align the interest of management
with that of the shareholders, while at the same time allowing for a
competitive compensation structure in order to attract and retain key
management positions without increasing the overhead burden.
Management of Properties. AmREIT internally manages each of its
properties. Such management includes providing leasing services in connection
with identifying and qualifying prospective tenants, assisting in the
negotiation of the leases, providing statements as to the income and expense
applicable to each property, receiving and depositing monthly lease payments,
periodic verification of tenant payment of real estate taxes and insurance
coverage, and periodic inspection of properties and tenants' sales records
where applicable. AmREIT pays no property management fees or advisory fees. The
tenants will be responsible, at their expense, for day-to-day oversight and
maintenance of the properties.
AmREIT acquires marketable title to each of its properties, subject
only to such liens and encumbrances as are acceptable to management. Evidence
of title includes a policy of title insurance, an opinion of counsel or such
other evidence as is customary in the locality in which the property is
situated.
Development of Properties. AmREIT intends to continue to increase its
own development of properties. Under AmREIT's investment policies not more than
10% of AmREIT's total assets may be invested in unimproved real property and
AmREIT does not intend to exceed such percentage. Depending upon the
circumstances, improvements will be developed and/or constructed either through
joint ventures with third party development companies from whom AmREIT purchases
the properties, by the tenants to whom such properties are leased, or by
development companies other than the sellers of the properties. AmREIT finances
the construction or completion of improvements on particular properties through
borrowing under its current credit facilities, which it intends to increase
should the merger be consummated.
To the extent AmREIT acquires property on which improvements are to be
constructed or completed, AmREIT is subject to risk in connection with the
builder's ability to control construction costs or to build in conformity with
plans, specifications and timetables and to make the property available to the
lessee within the time projected. Performance may be affected or delayed by
conditions beyond the builder's control such as building restrictions,
clearances and environmental impact studies imposed or caused by governmental
bodies, labor strikes, adverse weather, unavailability of materials or of
skilled labor, and by the financial insolvency of the builder or any
subcontractors prior to completion of construction. Such factors can result in
increased costs of a project, corresponding depletion of AmREIT's offering
proceeds, working capital reserves and/or cash from operations and could
possibly result in the loss of permanent mortgage loan commitments relied upon
as a primary source for repayment of construction loans.
66
AmREIT may use one or more of the following techniques to reduce the
risk of any non-performance by the builder and to assure compliance with
approved plans and specifications:
o a labor and material bond, a completion bond or a performance bond,
or more than one of the foregoing, may be required;
o if in management's opinion, the financial position of the builder so
requires, a personal guaranty or pledge of other assets may be
accepted in lieu of, or required in addition to, a bond;
o in some cases, the builder of the property will be required to
leaseback the property from AmREIT until construction is completed
with lease payments designed to return to AmREIT a portion of its
funds paid to the builder during construction and to require the
builder to bear the risk of construction;
o where possible, AmREIT will purchase property subject to the
construction loan and management will endeavor not to have AmREIT be
liable on such loan; and
o depending on the financial condition of the builder, the contract may
provide that portions of the purchase price payments to the former
owners will be withheld until a notice of completion of construction
is obtained.
Property Sale and Disposition Strategy. AmREIT intends to sell some
properties over time. The determination of whether a particular property should
be sold or otherwise disposed of will be made after consideration of performance
of the property and market conditions and will depend, in part, on the economic
benefits of continued ownership. In deciding whether to sell properties,
management will consider factors such as potential capital appreciation, cash
flow and federal income tax consequences. Affiliates of AmREIT or of one or more
of its trust managers may be selected to perform various substantial real estate
brokerage functions in connection with the sale of properties by AmREIT. AmREIT
will not sell or lease any property to its trust managers or their affiliates.
Management will periodically review the assets comprising AmREIT's
portfolio. AmREIT has no current intention to dispose of any of its properties
or other properties acquired in the merger with its affiliated partnerships,
unless the sale of properties is necessary or appropriate because of liquidity
problems. AmREIT reserves the right to dispose of any of the properties or any
property that may be acquired in the future if the trust managers, based in part
upon management's periodic reviews, determines that the disposition of such
property is in the best interests of AmREIT.
Any net proceeds from the sale of any property may, at the election of
the AmREIT trust managers, based upon their then current evaluation of the real
estate market conditions, either be distributed to the shareholders or be
reinvested in other properties. A reinvestment in other properties would be
feasible only if it could be accomplished so that the status of AmREIT as a REIT
would not be adversely affected. Any properties in which net proceeds from a
sale are reinvested will be subject to the same acquisition guidelines as
properties initially acquired by AmREIT. See "Business and Properties."
67
In connection with the sale of a property owned by AmREIT, purchase
money obligations secured by mortgages may be taken as partial payment. The
terms of payment to AmREIT will be affected by custom in the area in which the
property being sold is located and the then prevailing economic conditions. To
the extent AmREIT receives notes and property other than cash on sales, such
proceeds will not be included in net proceeds of sale until and to the extent
the notes or other property are actually collected, sold, refinanced or
otherwise liquidated. Therefore, dividends to shareholders of the proceeds of a
sale may be delayed until the notes or other property are collected at
maturity, sold, refinanced or otherwise converted to cash. AmREIT may receive
payments (cash and other property) in the year of sale in an amount less than
the full sales price and subsequent payments may be spread over several years.
The entire balance of the principal may be a balloon payment due at maturity.
For federal income tax purposes, unless AmREIT elects otherwise it will report
the gain on such sale ratably as principal payments are received under the
installment method of accounting.
Borrowing Policies. AmREIT may elect to borrow funds in order to take
advantage of particular acquisition opportunities, cover the cost of improving a
property, cover costs not met by insurance or cover operating costs. The amount
of borrowings will be determined from time to time based on a number of factors,
including the use of the proceeds, the lender's restrictions, the likelihood
that the loan can be readily serviced from rents at the property where the
proceeds are applied and similar considerations. AmREIT will not borrow funds in
order to use the proceeds from the borrowing to pay dividends to AmREIT's
shareholders, unless such borrowings are necessary for REIT qualification
purposes.
AmREIT may not borrow from a trust manager, officer or any affiliate
thereof, unless a majority of trust managers, including a majority of
independent trust managers, not otherwise interested in such transaction approve
the transaction as being fair, competitive, and commercially reasonable and no
less favorable to AmREIT than loans between unaffiliated parties under the same
circumstances.
Conflict of Interest and Affiliate Transaction Policy. Mr. Taylor is
prohibited from engaging in competitive real estate activities, including any
real estate acquisitions, development or management activities in connection
therewith, during his employment with AmREIT, except as may be approved by the
independent trust managers.
AmREIT will not enter into any transactions, including, without
limitation, loans, acquisitions or sales of property, joint ventures and
partnerships, in which AmREIT or a subsidiary is a party and in which any
officer, trust manager, principal security holder or affiliate has any direct or
indirect pecuniary interest, unless such transaction is approved by a majority
of the independent trust managers after full disclosure of such interests. In
determining whether to approve the transaction, the independent trust managers
will condition such approval on the transaction being fair and reasonable to
AmREIT and, to the extent deemed relevant by such independent trust managers, on
terms no less favorable to AmREIT than prevailing market terms and conditions
for comparable transactions. Independent trust managers will be considered to be
disinterested for this purpose provided they have no direct or indirect
pecuniary interest in the transaction.
Summary of AmREIT's Growth Strategy. AmREIT has focused on
strengthening its management, its board of trust managers and thereby, its
intellectual capital base over the past two years. Simultaneously, a stronger
emphasis on long term growth and value creation has been embraced. This has
translated into a lower payout ratio of funds from operations, which has
allowed AmREIT to reinvest in its strategic lines of business at a more
aggressive rate, while maintaining its REIT status. Along with this long-term
growth and value creation focus, AmREIT's management also recognizes the need
to provide short-term results for its shareholders. This balances the desire to
create long-term value and the short-term need to provide an acceptable and
steady current returns to its investors. This approach also recognizes the
reality of the variable nature of AmREIT's net income as profits from its lines
of business fluctuate as compared to a large REIT that looks to its portfolio
income for its distributable cash flow. Although it is a reality that AmREIT's
net income is not as predictable as a large portfolio REIT, AmREIT is able to
potentially generate very attractive long term yields because its smaller
equity base creates more upside for shareholders as its lines of business
create profits.
Today, AmREIT is a nimble, efficient and effective entrepreneurial
real estate company which has the ability to generate attractive non-portfolio
yields through its lines of business including investment sponsorship, merchant
development, brokerage, construction and property management.
68
AMREIT'S DECLARATION OF TRUST AND BYLAWS
The following summarizes the material terms of AmREIT's current
declaration of trust and bylaws, but does not set forth all the provisions of
AmREIT's declaration of trust or bylaws. For additional information about
AmREIT's declaration of trust and bylaws, you should read these documents,
which are included as exhibits to this registration statement, in their
entirety.
AUTHORIZED STOCK
The charter provides that AmREIT is authorized to issue 103,010,000
equity shares consisting of 60,010,000 class A common shares, $0.01 par value
per share, 3,000,000 class B common shares, $0.01 par value per share,
40,000,000 undesignated common shares, $0.01 par value per share, and
10,001,000 preferred shares, par value $0.01 per share. The undesignated common
shares and the preferred shares may be issued from time to time, in one or more
series, each of which series shall have such voting powers, designations,
preferences and rights, and the qualifications, limitations or restrictions
relating thereto, as shall be authorized by the board of trust managers. See
"Description of AmREIT's Capital Shares" beginning on page [___].
TRUST MANAGERS
The bylaws provide that the number of trust managers shall consist of
not less than three nor more than nine members, the exact number of which shall
be fixed by the board from time to time. The bylaws provide that, except as
otherwise provided by law or the charter, a quorum of the board for the
transaction of business shall consist of a majority of the entire board. The
act of a majority of the trust managers present at any meeting at which there
is a quorum shall be the act of the board. The charter and the bylaws do not
provide for a classified board or for cumulative voting in the election of
trust managers to the board. The bylaws provide that vacancies and any
newly-created trust manager portions resulting from an increase in the
authorized number of trust managers may be filled by a majority of the trust
managers then in office, though less than a quorum.
SHAREHOLDER MEETINGS AND SPECIAL VOTING REQUIREMENTS
The annual meetings of shareholders are held on such date as shall be
fixed by the board. The bylaws specify such date to be not fewer than 30 days
nor more than 61 days after distribution of AmREIT's annual report to
shareholders. Special meetings of shareholders may be called only upon the
request of a majority of the trust managers, a majority of the independent trust
managers, the president, or upon the written request of shareholders entitled to
cast at least 10 % of all of the votes entitled to be cast at such meeting. In
general, the presence in person or by proxy of shareholders entitled to cast a
majority of votes shall constitute a quorum at any shareholders' meeting. The
charter and the bylaws may in general be amended by a majority vote of the
shareholders. However, an amendment of any provision of the charter or bylaws
which requires a greater than majority vote must itself be approved by a vote of
the shareholders holding shares representing at least 66 2/3 % of the votes
entitled to be cast thereon.
Other matters on which the shareholders are entitled to vote include:
o the election and removal of trust managers;
o a voluntary change in AmREIT's status as a REIT; and/or
o the dissolution of AmREIT.
69
AMENDMENT OF THE CHARTER AND BYLAWS
A majority of the trust managers may in their discretion, from time to
time, amend, without a shareholder vote, the bylaws. The shareholders may amend
the bylaws by a majority vote.
TRANSACTIONS WITH INTERESTED OFFICERS OR TRUST MANAGERS
The bylaws provide that contracts or transactions between AmREIT and a
trust manager or officer of AmREIT or a corporation or entity in which such
officer or trust manager is also an officer or trust manager or has a financial
interest, are not void or voidable solely for such reason or solely because the
officer or trust manager is present at or participates in any meeting of the
board which authorizes the transaction or contract, or solely because such
officer's or trust manager's vote is counted for such purpose, if the bylaw
restrictions regarding such transactions are satisfied (see discussion under
stated investment policies above) and:
o the material facts as to his relationship or interest are
disclosed or are known to the board or a committee and the board
or a committee in good faith authorizes such contract or
transaction;
o the material facts as to his relationship or interest are
disclosed or are known to the shareholders entitled to vote
thereon and the shareholders in good faith specifically approve
such contract or transact; or
o the contract or transaction is fair to AmREIT at the time it is
authorized, approved or ratified by the board, a committee or
the shareholders.
In addition, the bylaws provide that any transactions with interested
trust managers or officers or their affiliates shall be made on commercially
reasonable terms substantially equivalent to terms available from third parties
in an arm's-length transaction in the competitive marketplace.
LIMITATIONS ON HOLDINGS AND TRANSFER
For AmREIT to continue to qualify as a REIT under the Code, not more
than fifty percent (50%) of its outstanding shares may be owned by five or fewer
individuals during the last half of each year and outstanding shares must be
owned by 100 or more persons during at least 335 days of a taxable year of 12
months or during a proportionate part of a shorter taxable year except with
respect to the first taxable year for which an election to be treated as a REIT
is made. The charter restricts the accumulation or transfer of common shares if
any accumulation or transfer could result in any person beneficially owning, in
accordance with the Code, in excess of 9.0% of the then outstanding common
shares, or could result in AmREIT being disqualified as a REIT under the Code.
Such restrictions authorize the board to refuse to give effect to such transfer
on AmREIT's books as to common shares accumulated in excess of the 9.0%
ownership limit. Although the intent of these restrictions is to preclude
transfers which would violate the ownership limit or protect the AmREIT's status
as a REIT under the Code, there can be no assurance that such restrictions will
achieve their intent. See "Description of AmREIT's Capital Shares -- Ownership
Limits and Restrictions on Transfer."
A transferee who acquires shares in a restricted transfer is required
to indemnify, defend, and hold AmREIT and its other shareholders harmless from
and against all damages, losses, costs, and expenses, including, without
limitation, reasonable attorneys' fees, incurred or suffered by AmREIT or such
shareholders by virtue of AmREIT's loss of its qualification as a REIT if such
loss is a result of the transferee's acquisition. See "Federal Income Tax
Consequences" beginning on page [___].
70
LIABILITY FOR MONETARY DAMAGES
The declaration of trust provides that no trust manager will be
personally liable to AmREIT or its shareholders for monetary damages for breach
of fiduciary duty as a trust manager, other than liability for breach of the
duty of loyalty to AmREIT or its shareholders, acts or omissions not in good
faith, intentional misconduct, a knowing violation of law, certain unlawful
dividends, share repurchases or redemptions or any transaction from which the
trust manager derived an improper personal benefit. Any repeal or modification
of such provision by the shareholders of AmREIT will not adversely affect any
right or protection of a trust manager existing at the time of such repeal or
modification with respect to acts or omissions occurring prior to such repeal
or modification.
INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The declaration of trust provides for the indemnification of present
and former trust managers and officers of AmREIT and persons serving as trust
managers, officers, employees or agents of another corporation or entity at the
request of AmREIT to the fullest extent permitted by Texas law. Indemnified
parties are specifically indemnified in the charter and the bylaws for
expenses, including attorneys' fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by an indemnified party (1) in
connection with a threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) by reason of the
fact that he is or was a trust manager or officer of AmREIT or is or was
serving as a trust manager, director, officer, employee or agent of another
corporation or entity at the request of AmREIT, or (2) in connection with the
defense or settlement of a threatened, pending or completed action or suit by
or in the right of AmREIT, provided that such indemnification is permitted only
with judicial approval if the indemnified party is adjudged to be liable to
AmREIT. Such indemnified party must have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
subject entity and, with respect to any criminal action or proceeding, must
have had no reasonable cause to believe his conduct was unlawful. Any
indemnification under the indemnification provisions must be authorized based
on a determination that the indemnification is proper if the applicable
standard of conduct has been met by the indemnified party, provided that no
such authorization is required, and indemnification is mandatory, where a trust
manager or officer of AmREIT is successful in the defense of such action, suit
or proceeding or any claim or matter therein. Otherwise, such determination
will be made by a majority vote of a quorum of the board consisting of trust
managers not a party to the suit, action or proceeding, by a written opinion of
independent legal counsel or by the shareholders. In the event that a
determination is made that a trust manager or officer is not entitled to
indemnification under the indemnification provisions, the indemnification
provisions provide that the indemnified party may seek a judicial determination
of his right to indemnification. The indemnification provisions further provide
that the indemnified party is entitled to indemnification for all expenses
(including attorneys' fees) incurred in any proceeding seeking to collect from
AmREIT an indemnity claim under the indemnification provisions if such
indemnified party is successful. Other than proceedings to enforce rights to
indemnification, AmREIT is not obligated to indemnify any person in connection
with a proceeding initiated by such person, unless authorized by the board.
AmREIT will pay expenses incurred by a trust manager or officer of
AmREIT, or a former trust manager or officer, in advance of the final
disposition of an action, suit or proceeding, if he undertakes to repay amounts
advanced if it is ultimately determined that he is not entitled to be
indemnified by AmREIT.
The indemnification provisions and provisions for advancing expenses
in the charter will be expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to the bylaws. The
71
indemnification provisions and provisions for advancing expenses in the bylaws
and the charter will be expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to any agreement, vote of
the shareholders or disinterested trust managers or pursuant to judicial
direction. AmREIT will be authorized to purchase insurance on behalf of an
indemnified party for liabilities incurred, whether or not AmREIT would have
the power or obligation to indemnify him pursuant to the charter, the bylaws or
Texas law.
In addition, AmREIT will enter into indemnification agreements with
its trust managers and certain of its executive officers pursuant to which such
persons are indemnified for costs and expenses actually and reasonably incurred
by such persons in connection with a threatened, pending or completed claim
arising out of service as a trust manager, officer, employee, trustee and/or
agent of AmREIT or another entity at the request of AmREIT.
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE
DECLARATION OF TRUST, BYLAWS AND TEXAS LAW
AmREIT's declaration of trust and bylaws contain certain provisions
that may inhibit or impede acquisition or attempted acquisition of control of
AmREIT by means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of AmREIT to negotiate first with the trust managers. AmREIT
believes that these provisions increase the likelihood that proposals initially
will be on more attractive terms than would be the case in their absence and
increase the likelihood of negotiations, which might outweigh the potential
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals might result in improvement of terms. The
description set forth below is only a summary of the terms of the declaration
of trust and bylaws. See "Description of AmREIT's Capital Shares -- Ownership
Limits and Restrictions on Transfer."
NUMBER OF TRUST MANAGERS; REMOVAL; FILLING VACANCIES
Subject to any rights of holders of preferred shares to elect
additional trust managers under specified circumstances ("Preferred Holders'
Rights"), the declaration of trust provides that the number of trust managers
will be fixed by, or in the manner provided in, the bylaws, but must not be
more than nine nor less than three. See "Preferred Shares" below. In addition,
the bylaws provide that, subject to any Preferred Holders' Rights, the number
of trust managers will be fixed by the trust managers, but must not be more
than nine nor less than three. In addition, the bylaws provide that, subject to
any Preferred Holders' Rights, and unless the trust managers otherwise
determine, any vacancies (other than vacancies created by an increase in the
total number of trust managers) will be filled by the affirmative vote of a
majority of the remaining trust managers, although less than a quorum, and any
vacancies created by an increase in the total number of trust managers may be
filled by a majority of the entire trust managers. Accordingly, the trust
managers could temporarily prevent any shareholder from enlarging the trust
managers and then filling the new trust manager position with such
shareholder's own nominees.
The declaration of trust and the bylaws provide that, subject to any
Preferred Holders' Rights, trust managers may be removed only for cause upon
the affirmative vote of holders of at least 80% of the entire voting power of
all the then-outstanding shares entitled to vote generally in the election of
trust managers, voting together as a single class.
72
RELEVANT FACTORS TO BE CONSIDERED BY THE BOARD OF TRUST MANAGERS
The declaration of trust provides that, in determining what is in the
best interest of AmREIT in evaluating a "business combination," "change in
control" or other transaction, a trust manager of AmREIT shall consider all of
the relevant factors. These factors may include (i) the immediate and long-term
effects of the transaction on AmREIT shareholders, including shareholders, if
any, who do not participate in the transaction; (ii) the social and economic
effects of the transaction on AmREIT's employees, suppliers, creditors and
customers and others dealing with AmREIT and on the communities in which AmREIT
operates and is located; (iii) whether the transaction is acceptable, based on
the historical and current operating results and financial condition of AmREIT;
(iv) whether a more favorable price would be obtained for AmREIT's stock or
other securities in the future; (v) the reputation and business practices of
the other party or parties to the proposed transaction, including its or their
management and affiliates, as they would affect employees of AmREIT; (vi) the
future value of AmREIT's securities; (vii) any legal or regulatory issues
raised by the transaction; and (viii) the business and financial condition and
earnings prospects of the other party or parties to the proposed transaction
including, without limitation, debt service and other existing financial
obligations, financial obligations to be incurred in connection with the
transaction, and other foreseeable financial obligations of such other party or
parties. Pursuant to this provision, the trust managers may consider subjective
factors affecting a proposal, including certain nonfinancial matters, and, on
the basis of these considerations, may oppose a business combination or other
transaction which, evaluated only in terms of its financial merits, might be
attractive to some, or a majority, of AmREIT's shareholders.
ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS
The bylaws provide for an advance notice procedure for shareholders to
make nominations of candidates for trust manager or bring other business before
an annual meeting of shareholders of AmREIT (the "Shareholder Notice
Procedure").
Pursuant to the Shareholder Notice Procedure (i) only persons who are
nominated by, or at the direction of, the trust managers, or by a shareholder
who has given timely written notice containing specified information to the
Secretary of AmREIT prior to the meeting at which trust managers are to be
elected, will be eligible for election as trust managers of AmREIT and (ii) at
an annual meeting, only such business may be conducted as has been brought
before the meeting by, or at the direction of, the Chairman or the trust
managers or by a shareholder who has given timely written notice to the
Secretary of AmREIT of such shareholder's intention to bring such business
before such meeting. In general, for notice of shareholder nominations or
proposed business to be conducted at an annual meeting to be timely, such
notice must be received by AmREIT not less than 70 days nor more than 90 days
prior to the first anniversary of the previous year's annual meeting.
The purpose of requiring shareholders to give AmREIT advance notice of
nominations and other business is to afford the trust managers a meaningful
opportunity to consider the qualifications of the proposed nominees or the
advisability of the other proposed business and, to the extent deemed necessary
or desirable by the trust managers, to inform shareholders and make
recommendations about such nominees or business, as well as to ensure an
orderly procedure for conducting meetings of shareholders.
Although the bylaws do not give the trust managers power to block
shareholder nominations for the election of trust managers or proposal for
action, the Shareholder Notice Procedure may have the effect of discouraging a
shareholder from proposing nominees or business, precluding a contest for the
election of trust managers or the consideration of shareholder proposals if
procedural requirements are not met, and deterring third parties from
soliciting proxies for a non-management proposal or slate of trust managers,
without regard to the merits of such proposal or slate.
73
PREFERRED SHARES
The declaration of trust authorizes the trust managers to establish
one or more series of preferred shares and to determine, with respect to any
series of preferred shares, the preferences, rights and other terms of such
series. AmREIT believes that the ability of the trust managers to issue one or
more series of preferred shares will provide AmREIT with increased flexibility
in structuring possible future financings and acquisitions, and in meeting
other needs. The authorized preferred shares are available for issuance without
further action by AmREIT's shareholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which AmREIT's securities may be listed or traded at the time of issuance or
proposed issuance. Although the trust managers have no present intention to do
so, they could, in the future, issue a series of preferred shares which, due to
its terms, could impede a merger, tender offer or other transaction that some,
or a majority, of AmREIT's shareholders might believe to be in their best
interests or in which shareholders might receive a premium over then-prevailing
market prices for their common shares.
AMENDMENT OF DECLARATION OF TRUST
The declaration of trust provides that it may be amended only by the
affirmative vote of the holders of not less than two-thirds of the votes
entitled to be cast, except that the provisions of the declaration of trust
relating to "business combinations" or "control shares" (as described below
under "-- Business Combinations" and "-- Control Share Acquisitions") may be
amended only with the affirmative vote of 80% of the votes entitled to be cast,
voting together as a single class.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The declaration of trust authorizes the trust managers, subject to any
rights of holders of any series of preferred shares, to create and issue rights
entitling the holders thereof to purchase from AmREIT common shares or other
securities or property. The times at which and terms upon which such rights are
to be issued are within the discretion of the trust managers. This provision is
intended to confirm the authority of the trust managers to issue share purchase
rights which could have terms that would impede a merger, tender offer or other
takeover attempt, or other rights to purchase securities of AmREIT or any other
entity.
BUSINESS COMBINATIONS
The declaration of trust establishes special requirements with respect
to "business combinations" (including a merger, consolidation, share exchange,
or, in certain circumstances, an asset transfer or issuance of reclassification
of equity securities) between AmREIT and any person who beneficially owns,
directly or indirectly, 10% or more of the voting power of AmREIT's shares (an
"Interested Shareholder"), subject to certain exemptions. In general, the
declaration of trust provides that an Interested Shareholder or any affiliate
thereof may not engage in a "business combination" with AmREIT for a period of
five years following the date he becomes an Interested Shareholder. Thereafter,
pursuant to the declaration of trust, such transactions must be (i) approved by
the trust managers of AmREIT and (ii) approved by the affirmative vote of at
least 80% of the votes entitled to be cast by holders of voting shares other
than voting shares held by the Interested Shareholder with whom the business
combination is to be effected, unless, among other things, the holders of
Equity Shares receive a minimum price (as defined in the declaration of trust)
for their shares and the consideration is received in cash or in the same form
as previously paid by the Interested Shareholder for his shares. These
provisions of the declaration of trust do not apply, however, to business
combinations that are approved or exempted by the trust managers of AmREIT
prior to the time that the Interested Shareholder becomes an Interested
Shareholder.
74
CONTROL SHARE ACQUISITIONS
The declaration of trust provides that "control shares" of AmREIT
acquired in a control share acquisition have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast by the
holders of Equity Shares, excluding shares as to which the acquiror, officers
of AmREIT and employees of AmREIT who are also trust managers have the right to
vote or direct the vote. "Control shares" are Equity Shares which, if
aggregated with all other Equity Shares previously acquired which the person is
entitled to vote, would entitle the acquiror to vote (i) 20% or more but less
than one-third; (ii) one-third or more but less than a majority; or (iii) a
majority of the outstanding voting shares of AmREIT. Control shares do not
include Equity Shares that the acquiring person is entitled to vote on the
basis of prior shareholder approval. A "control share acquisition" is defined
as the acquisition of control shares, subject to certain exemptions enumerated
in the declaration of trust.
The declaration of trust provides that a person who has made or
proposed to make a control share acquisition and who has obtained a definitive
financing agreement with a responsible financial institution providing for any
amount of financing not to be provided by the acquiring person may compel the
trust managers of AmREIT to call a special meeting of shareholders to be held
within 50 days of demand to consider the voting rights of the Equity Shares. If
no request for a meeting is made, the declaration of trust permits AmREIT
itself to present the question at any shareholders' meeting.
Pursuant to the declaration of trust, if voting rights are not
approved at a shareholders' meeting or if the acquiring person does not deliver
an acquiring person statement as required by the declaration of trust, then,
subject to certain conditions and limitations set forth in the declaration of
trust, AmREIT will have the right to redeem any or all of the control shares,
except those for which voting rights have previously been approved, for fair
value determined, without regard to the absence of voting rights of the control
shares, as of the date of the last control share acquisition or of any meeting
of shareholders at which the voting rights of such shares are considered and
not approved. Under the declaration of trust, if voting rights for control
shares are approved at a shareholders' meeting and, as a result, the acquiror
would be entitled to vote a majority of the Equity Shares entitled to vote, all
other shareholders will have the rights of dissenting shareholders under the
Texas Real Estate Investment Trust Act (the "TRA"). The declaration of trust
provides that the fair value of the Equity Shares for purposes of such
appraisal rights may not be less than the highest price per share paid by the
acquiror in the control share acquisition, and that certain limitations and
restrictions of the TRA otherwise applicable to the exercise of dissenters'
rights do not apply.
These provisions of the declaration of trust do not apply to Equity
Shares acquired in a merger, consolidation or share exchange if AmREIT is a
party to the transaction, or if the acquisition is approved or excepted by the
declaration of trust or bylaws of AmREIT prior to a control share acquisition.
OWNERSHIP LIMIT
The limitation on ownership of shares of common shares set forth in
AmREIT's declaration of trust, as well as the provisions of the TRA, could have
the effect of discouraging offers to acquire AmREIT and of increasing the
difficulty of consummating any such offer. See "Description of AmREIT's Capital
Shares -- Ownership Limits and Restrictions on Transfer."
75
DESCRIPTION OF AMREIT'S CAPITAL SHARES
GENERAL
AmREIT's authorized equity structure consists of 103,010,000 common
shares, $0.01 par value per share, and 10,001,000 shares of preferred stock,
par value $0.01 per share. As of December 31, 2002, AmREIT had outstanding
approximately 2.8 million class A common shares, 2.6 million class B common
shares and no preferred shares. AmREIT is authorized to issue 103,010,000 common
shares consisting of 60,010,000 class A common shares, 3,000,000 class B common
shares and 40,000,000 undesignated common shares
CLASS A COMMON SHARES
Subject to such preferential rights as may be granted by the board of
trust managers in connection with the future issuance of preferred shares and
the preferential rights of the holders of the class B and class C common
shares, holders of class A common shares are exclusively entitled to one vote
for each class A common shares on all matters to be voted on by shareholders
and are entitled to receive ratably such dividends as may be declared on the
class A common shares by the board of trust managers in its discretion from
legally available funds. In the event of the liquidation, dissolution or
winding up of AmREIT, holders of class A common shares are entitled to share
ratably with holders of class B common shares and class C common shares that
portion of aggregate assets available for distribution as the number of
outstanding class A common shares held by such holder bears to the total number
of (w) class A common shares then outstanding, (x) the class B common shares
then outstanding, (y) the class C common shares then outstanding and (z) any
other series of common shares then outstanding that rank on a parity with the
class A common shares as to the distribution of assets upon liquidation.
Holders of class A common shares have no subscription, redemption, conversion
or preemptive rights. Matters submitted for shareholder approval generally
require a majority vote of the shares present and voting thereon.
The transfer agent and registrar for the class A common shares is
Wells Fargo Shareowner Services, 161 North Concord Exchange, South St. Paul, MN
55075.
CLASS B COMMON SHARES
Dividends. Subject to the preferential rights of any series of our
preferred shares (of which there is currently none issued), holders of class B
common shares will be entitled to receive, when and as declared by the AmREIT
board of trust managers, out of funds legally available for the payment of
dividends, cumulative cash dividends in an amount per class B common share
equal to $0.74 per annum. Dividends with respect to the class B common shares
will be cumulative from the date of original issuance and will be payable
quarterly in arrears on March 31, June 30, September 30 and December 31 (each,
a Dividend Payment Date), beginning with a partial dividend on September 30,
2002, with respect to the period from the date of original issuance to the
initial Dividend Payment Date. Any dividend payable on the class B common
shares for any partial dividend period after the initial dividend period will
be computed on the basis of a 360-day year consisting of twelve 30-day months.
Dividends payable on the class B common shares for each full dividend period
will be computed by dividing the annual dividend rate by four. Dividends will
be payable to holders of record as they appear in the share records of AmREIT
at the close of business on the applicable record date, which will be the first
day of the calendar month in which the applicable Dividend Payment Date falls
or such other date designated by the AmREIT board for the payment of dividends
that is no more than thirty (30) nor less than ten (10) days prior to the
Dividend Payment Date (each, a Dividend Record Date).
76
No dividends on class B common shares will be declared by the AmREIT
board or paid or set apart for payment at such time as, and to the extent that,
the terms and provisions of any AmREIT agreement, including any agreement
relating to its indebtedness, or any provisions of its charter relating to any
series of preferred stock, prohibit such declaration, payment or setting apart
for payment or provide that such declaration, payment or setting apart for
payment would constitute a breach thereof or a default thereunder, or if such
declaration or payment will be restricted or prohibited by law. Notwithstanding
the foregoing, dividends on the class B common shares will accrue whether or
not AmREIT has earnings, whether or not there are funds legally available for
the payment of such dividends and whether or not such dividends are declared.
Holders of the class B common shares will not be entitled to any dividends in
excess of full cumulative dividends as described above.
If any class B common shares are outstanding, no full dividends will
be declared or paid or set apart for payment on the class A common shares for
any period unless full cumulative dividends have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for such payment on the class B common shares for all past dividend
periods and the then current dividend period. No interest, or sum of money in
lieu of interest, will be payable in respect of any dividend payment or
payments on class B common shares which may be in arrears. Any dividend payment
made on class B common shares will first be credited against the earliest
accrued but unpaid dividend due with respect to class B common shares which
remains payable.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of AmREIT, subject to the prior rights of any series of preferred
stock, the holders of class B common shares will share pro rata with the
holders of the class A common shares, class C common shares and any other
series of common shares then outstanding that rank on a parity with the class B
common shares as to the distribution of assets on liquidation, the assets of
AmREIT remaining following the payment of all liquidating distributions payable
to holders of capital shares of AmREIT with liquidation rights senior to those
of the common shares.
Redemption. The class B common shares will not be redeemable prior to
July 16, 2005, except under certain limited circumstances to preserve the
AmREIT's status as a REIT. On and after July 16, 2005, AmREIT, at its option
(to the extent AmREIT has funds legally available therefore) upon not less than
30 nor more than 60 days' written notice, may redeem class B common shares, in
whole or in part, at any time or from time to time, for, at the option of the
holder thereof, either in cash at the redemption price per share of $10.18,
plus all accrued and unpaid dividends, if any, thereon (whether or not earned
or declared) to the date fixed for redemption, or for one class A common share.
Notwithstanding the foregoing, unless full cumulative dividends on all
class B common shares have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period, no class B
common shares will be redeemed unless all outstanding class B common shares are
simultaneously redeemed. The foregoing, however, will not prevent the purchase
or acquisition of the class B common shares pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding class B common
shares. Unless full cumulative dividends on all outstanding class B common
shares have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period, AmREIT will not purchase
or otherwise acquire directly or indirectly through a subsidiary or otherwise,
any class B common shares.
If fewer than all of the outstanding class B common shares are to be
redeemed, the number of shares to be redeemed will be determined by AmREIT and
those shares may be redeemed pro rata from the holders of record of those
shares in proportion to the number of those shares held by the holders (as
nearly as may be practicable without creating fractional class B common shares)
or any other equitable method determined by AmREIT.
77
Notice of redemption will be given by publication in a newspaper of
general circulation in the City of New York, such publication to be made once a
week for two successive weeks commencing not less than 30 nor more than 60
days' prior to the redemption date. A similar notice will be mailed by AmREIT,
postage prepaid, not less than 30 nor more than 60 days' prior to the
redemption date, addressed to the respective holders of record of class B
common shares to be redeemed at their respective addresses as they appear on
the stock transfer records of AmREIT. No failure to give notice or any defect
therein or in the mailing thereof will affect the validity of the proceeding
for the redemption of any class B common shares except as to the holder to whom
notice was defective or not given. Each notice will state: (1) the redemption
date; (2) the redemption price; (3) the number of class B common shares to be
redeemed; (4) the place or places where the class B common shares are to be
surrendered for payment of the redemption price; (5) that dividends on the
shares to be redeemed will cease to accrue on the redemption date; and (6) that
any conversion rights will terminate at the close of business on the third
business day immediately preceding the redemption date. If fewer than all the
class B common shares held by any holder are to be redeemed, the notice mailed
to that holder will also specify the number of class B common shares to be
redeemed from that holder. If notice of redemption of any class B common shares
has been properly given and if funds necessary for redemption have been
irrevocably set aside by AmREIT in trust for the benefit of the holders of any
of the class B common shares so called for redemption, then from and after the
redemption date dividends will cease to accrue on those class B common shares,
those shares will no longer be deemed to be outstanding and all rights of the
holders of those shares will terminate except for the right to receive the
applicable redemption price and other amounts payable in respect of such
shares.
The holders of class B common shares at the close of business on a
Dividend Record Date will be entitled to receive the dividend payable with
respect to class B common shares on the corresponding Dividend Payment Date
notwithstanding the redemption thereof between that Dividend Record Date and
the corresponding Dividend Payment Date or AmREIT's default in the payment of
the dividend due. Except as provided above, AmREIT will make no payment or
allowance for unpaid dividends, whether or not in arrears, on class B common
shares called for redemption.
Voting Rights. Holders of the class B common shares will not have any
voting rights, except as set forth below or as otherwise from time to time
required by law. In any matter in which the class B common shares may vote,
including any action by written consent, each class B common share will be
entitled to one vote. The holders of each class B common share may separately
designate a proxy for the vote to which that class B common share is entitled.
AmREIT shall not issue any preferred shares or other class of common
shares with dividend preferences senior to the dividends payable on the class B
common shares without the approval of a majority of the class B common shares
then outstanding.
Whenever dividends on any class B common shares have been in arrears
for six or more consecutive quarterly periods, the holders of those class B
common shares will be entitled to vote for the election of two additional trust
managers of AmREIT at a special meeting called by the holders of record of at
least 10% of the class B common shares (unless the request is received less
than 90 days before the date fixed for the next annual or special meeting of
the stockholders), or at the next annual meeting of shareholders, and at each
subsequent annual meeting until all dividends accumulated on the class B common
shares for the past dividend periods and the then current dividend period have
been fully paid or declared and a sum sufficient for the payment thereof set
aside for payment. In this event, the entire AmREIT board of trust managers
will be increased by two trust managers. Each of these two trust managers will
be elected to serve until the earlier of (1) the election and qualification of
that trust manager's successor or (2) payment of the dividend arrearage for the
class B common shares.
78
In addition, AmREIT may not sell all or substantially all of its
assets, dissolve, or amend its declaration of trust in any manner that
materially and adversely affects the voting powers, rights or preferences of
the holders of class B common shares without the approval of a majority of the
class B common shares then outstanding; provided, however, the issuance of any
security with dividend or liquidation preferences that are pari passu or junior
to the dividend or liquidation preferences of the class B common shareholders
shall not be considered to materially or adversely affect the voting powers,
rights or preferences of the class B common shareholders.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which a vote would otherwise be required is
effected, all outstanding class B common shares have been redeemed or called
for redemption upon proper notice and sufficient funds have been deposited in
trust to effect such redemption.
Conversion. Subject to the exceptions described under the caption
"Restrictions on Transfer" below, holders of the class B common shares will
have the right, at any time and from time to time, to convert all or any of the
class B common shares into class A common shares on a one for one basis,
subject to adjustment upon the occurrence of the events described below (the
Conversion Price).
Class B common shares will be deemed to have been converted
immediately prior to the close of business on the date the shares are
surrendered for conversion and notice of election to convert the same is
received by AmREIT. Upon conversion, no adjustment or prepayment will be made
for dividends, but if any holder surrenders class B common shares for
conversion after the close of business on a Dividend Record Date and prior to
the opening of business on the related Dividend Payment Date, then,
notwithstanding the conversion, the dividend payable on that Dividend Payment
Date will be paid on that Dividend Payment Date to the registered holder of
those shares on that Dividend Record Date. Class B common shares surrendered
for conversion during the period from the close of business on a Dividend
Record Date to the Dividend Payment Date must also pay the amount of the
dividend which is payable. No fractional class A common shares will be issued
upon conversion and, if the conversion results in a fractional interest, an
amount will be paid in cash equal to the value of the fractional interest based
on the market price of the common shares on the last trading day prior to the
date of conversion.
The number of class A common shares or other assets issuable upon
conversion and the Conversion Price are subject to adjustment upon the
occurrence of the following events:
(1) the issuance of class A common shares as a dividend or
distribution on class A common shares;
(2) the subdivision, combination or reclassification of the
outstanding class A common shares;
(3) the issuance to all holders of class A common shares of rights
or warrants to subscribe for or purchase class A common shares
(or securities convertible into class A common shares) at a
price per share less than the then current market price per
share;
(4) the distribution to all holders of class A common shares of
evidences of indebtedness or assets (including securities, but
excluding Ordinary Cash Distributions, as defined below, and
those dividends, distributions, rights or warrants referred to
above); and
(5) the distribution to all holders of class A common shares of
rights or warrants to subscribe for securities (other than those
referred to in clause (3) above).
79
In the event of a distribution of evidence of indebtedness or other
assets (as described in clause (4)) or a dividend to all holders of class A
common shares of rights to subscribe for additional AmREIT's capital stock
(other than those referred to in clause (3) above), AmREIT may, instead of
making an adjustment of the Conversion Price, make proper provision so that
each holder who converts shares will be entitled to receive upon conversion, in
addition to class A common shares, an appropriate number of those rights,
warrants, evidences of indebtedness or other assets. No adjustment will be made
for "Ordinary Cash Distributions," which are distributions to holders of class
A common shares in an amount not exceeding AmREIT's accumulated funds from
operations since its formation, after deducting dividends or other
distributions (1) paid in respect of all classes of capital shares of AmREIT or
(2) accrued in respect of the class B common shares, and any preferred shares.
In addition, no adjustment of the Conversion Price will be made until
cumulative adjustments amount to one percent or more of the Conversion Price as
last adjusted. Any adjustments not so required to be made will be carried
forward and taken into account in subsequent adjustments.
Whenever the number of class A common shares or other assets issuable
upon conversion and the Conversion Price are adjusted as herein provided,
AmREIT (1) will promptly make available at the office of the transfer agent a
statement describing in reasonable detail such adjustment, and (2) will cause
to be mailed by first class mail, postage prepaid, as soon as practicable, to
each holder of record of class B common shares, a notice stating that
adjustments have been made and stating the adjusted conversion price.
In the event of any capital reorganization or reclassification of the
capital shares of AmREIT, or consolidation or merger of AmREIT with another
corporation, or the sale, transfer or lease of all or substantially all of its
assets to another corporation, is effected in a way that holders of class A
common shares will be entitled to receive stock, securities or other assets
with respect to or in exchange for class A common shares, then, as a condition
of that reorganization, reclassification, consolidation, merger, sale, transfer
or lease, the holder of each class B common share will have the right
immediately to convert that share into the kind and amount of stock, securities
or other assets which the holders of those shares would have owned or been
entitled to receive immediately after the transaction if those holders had
converted such shares immediately before the effective date of the transaction,
subject to further adjustment upon the occurrence of the events described
above.
Restrictions on Transfer. The class B common shares are generally
transferable, subject to restrictions to enable AmREIT to maintain its REIT
status. See "--Ownership Limits and Restrictions on Transfer."
CLASS C COMMON SHARES
Dividends. Subject to the preferential rights of any series of our
preferred shares (of which there is currently none issued), holders of class C
common shares will be entitled to receive, when and as declared by the AmREIT
board of trust managers, out of funds legally available for the payment of
dividends, cumulative cash dividends in an amount per class C common share
equal to $0.70 per annum. Dividends with respect to the class C common shares
will be cumulative from the date of original issuance and will be payable
monthly in arrears (each, a Dividend Payment Date), beginning with a partial
dividend payable at the end of the fiscal month during which the class C common
shares were acquired, with respect to the period from the date of original
issuance to the initial Dividend Payment Date. Any dividend payable on the
class C common shares for any partial dividend period after the initial
dividend period will be computed on the basis of a 360-day year consisting of
twelve 30-day months. Dividends payable on the class C common shares for each
full dividend period will be computed by dividing the annual dividend rate by
twelve. Dividends will be payable to holders of record as they appear in the
share records of AmREIT at the close of business on the applicable record date,
which will be the first day of the calendar month in which the applicable
Dividend Payment Date falls or such other date designated by the AmREIT board
for the payment of dividends that is no more than thirty (30) nor less than ten
(10) days prior to the Dividend Payment Date (each, a Dividend Record Date).
80
No dividends on class C common shares will be declared by the AmREIT
board or paid or set apart for payment at such time as, and to the extent that,
the terms and provisions of any AmREIT agreement, including any agreement
relating to its indebtedness, or any provisions of its charter relating to any
series of preferred stock, prohibit such declaration, payment or setting apart
for payment or provide that such declaration, payment or setting apart for
payment would constitute a breach thereof or a default thereunder, or if such
declaration or payment will be restricted or prohibited by law.
Liquidation Rights. In the event of any liquidation, dissolution or
winding up of AmREIT, subject to the prior rights of any series of preferred
stock, the holders of class C common shares will share pro rata with the
holders of the class A common shares, class B common shares and any other
series of common shares then outstanding that rank on a parity with the class C
common shares as to the distribution of assets on liquidation, the assets of
AmREIT remaining following the payment of all liquidating distributions payable
to holders of capital shares of AmREIT with liquidation rights senior to those
of the common shares.
Redemption. The class C common shares will not be redeemable prior to
_____________, except under certain limited circumstances to preserve the
AmREIT's status as a REIT. On and after ___________, AmREIT, at its option (to
the extent AmREIT has funds legally available therefore) upon not less than 30
nor more than 60 days' written notice, may redeem class C common shares, in
whole or in part, at any time or from time to time, for, at the option of the
holder thereof, either in cash at the redemption price per share of $11.00,
plus all accrued and unpaid dividends, if any, thereon (whether or not earned
or declared) to the date fixed for redemption, or for one class A common share.
Notwithstanding the foregoing, unless full cumulative dividends on all
class C common shares have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period, no class C
common shares will be redeemed unless all outstanding class C common shares are
simultaneously redeemed. The foregoing, however, will not prevent the purchase
or acquisition of the class C common shares pursuant to a purchase or exchange
offer made on the same terms to holders of all outstanding class C common
shares. Unless full cumulative dividends on all outstanding class C common
shares have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for all past
dividend periods and the then current dividend period, AmREIT will not purchase
or otherwise acquire directly or indirectly through a subsidiary or otherwise,
any class C common shares.
If fewer than all of the outstanding class C common shares are to be
redeemed, the number of shares to be redeemed will be determined by AmREIT and
those shares may be redeemed pro rata from the holders of record of those
shares in proportion to the number of those shares held by the holders (as
nearly as may be practicable without creating fractional class C common shares)
or any other equitable method determined by AmREIT.
Notice of redemption will be given by publication in a newspaper of
general circulation in the City of New York, such publication to be made once a
week for two successive weeks commencing not less than 30 nor more than 60
days' prior to the redemption date. A similar notice will be mailed by AmREIT,
postage prepaid, not less than 30 nor more than 60 days' prior to the
redemption date, addressed to the respective holders of record of class C
common shares to be redeemed at their respective addresses as they appear on
the stock transfer records of AmREIT. No failure to give notice or any defect
therein or in the mailing thereof will affect the validity of the proceeding
for the redemption of any class C common shares except as to the holder to whom
notice was defective or not given. Each notice will state: (1) the redemption
81
date; (2) the redemption price; (3) the number of class C common shares to be
redeemed; (4) the place or places where the class C common shares are to be
surrendered for payment of the redemption price; (5) that dividends on the
shares to be redeemed will cease to accrue on the redemption date; and (6) that
any conversion rights will terminate at the close of business on the third
business day immediately preceding the redemption date. If fewer than all the
class C common shares held by any holder are to be redeemed, the notice mailed
to that holder will also specify the number of class C common shares to be
redeemed from that holder. If notice of redemption of any class C common shares
has been properly given and if funds necessary for redemption have been
irrevocably set aside by AmREIT in trust for the benefit of the holders of any
of the class C common shares so called for redemption, then from and after the
redemption date dividends will cease to accrue on those class C common shares,
those shares will no longer be deemed to be outstanding and all rights of the
holders of those shares will terminate except for the right to receive the
applicable redemption price and other amounts payable in respect of such
shares.
The holders of class C common shares at the close of business on a
Dividend Record Date will be entitled to receive the dividend payable with
respect to class C common shares on the corresponding Dividend Payment Date
notwithstanding the redemption thereof between that Dividend Record Date and
the corresponding Dividend Payment Date or AmREIT's default in the payment of
the dividend due. Except as provided above, AmREIT will make no payment or
allowance for unpaid dividends, whether or not in arrears, on class C common
shares called for redemption.
Voting Rights. Holders of the class C common shares will have the
right to vote on all matters presented to shareholders as a single class with
all other holders of common shares. In any matter in which the class C common
shares may vote, including any action by written consent, each class C common
share will be entitled to one vote.
AmREIT shall not issue any preferred shares or other class of common
shares with dividend preferences senior to the dividends payable on the class C
common shares without the approval of a majority of the class C common shares
then outstanding.
Whenever dividends on any class C common shares have been in arrears
for six or more consecutive quarterly periods, the holders of those class C
common shares will be entitled to vote for the election of two additional trust
managers of AmREIT at a special meeting called by the holders of record of at
least 10% of the class C common shares (unless the request is received less
than 90 days before the date fixed for the next annual or special meeting of
the stockholders), or at the next annual meeting of shareholders, and at each
subsequent annual meeting until all dividends accumulated on the class C common
shares for the past dividend periods and the then current dividend period have
been fully paid or declared and a sum sufficient for the payment thereof set
aside for payment. In this event, the entire AmREIT board of trust managers
will be increased by two trust managers. Each of these two trust managers will
be elected to serve until the earlier of (1) the election and qualification of
that trust manager's successor or (2) payment of the dividend arrearage for the
class C common shares.
In addition, AmREIT may not sell all or substantially all of its
assets, dissolve, or amend its declaration of trust in any manner that
materially and adversely affects the voting powers, rights or preferences of
the holders of class C common shares without the approval of a majority of the
class C common shares then outstanding; provided, however, the issuance of any
security with dividend or liquidation preferences that are pari passu or junior
to the dividend or liquidation preferences of the class C common shareholders
shall not be considered to materially or adversely affect the voting powers,
rights or preferences of the class C common shareholders.
82
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which a vote would otherwise be required is
effected, all outstanding class C common shares have been redeemed or called
for redemption upon proper notice and sufficient funds have been deposited in
trust to effect such redemption.
Conversion. Subject to the exceptions described under the caption
"Restrictions on Transfer" below, holders of the class C common shares will
have the right, from time to time after _________, to convert all or any of the
class C common shares into class A common shares at a conversion price equal to
the purchase price of the class C common shares, plus a 10% premium. As a
result, each $1,000 of class C common shares owned by an investor will be able
to be converted into $1,100 of class A common shares, with the exact number of
class A common shares to be acquired upon conversion being determined by
dividing the $1,100 by the market price of the class A common shares on the
date notice of conversion is delivered. Upon conversion, no gain or loss will
be then recognized by the class C shareholder.
Class C common shares will be deemed to have been converted
immediately prior to the close of business on the date the shares are
surrendered for conversion and notice of election to convert the same is
received by AmREIT. Upon conversion, no adjustment or prepayment will be made
for dividends, but if any holder surrenders class C common shares for
conversion after the close of business on a Dividend Record Date and prior to
the opening of business on the related Dividend Payment Date, then,
notwithstanding the conversion, the dividend payable on that Dividend Payment
Date will be paid on that Dividend Payment Date to the registered holder of
those shares on that Dividend Record Date. Class C common shares surrendered
for conversion during the period from the close of business on a Dividend
Record Date to the Dividend Payment Date must also pay the amount of the
dividend which is payable. No fractional class A common shares will be issued
upon conversion and, if the conversion results in a fractional interest, an
amount will be paid in cash equal to the value of the fractional interest based
on the market price of the common shares on the last trading day prior to the
date of conversion.
In the event of any capital reorganization or reclassification of the
capital shares of AmREIT, or consolidation or merger of AmREIT with another
corporation, or the sale, transfer or lease of all or substantially all of its
assets to another corporation, is effected in a way that holders of class A
common shares will be entitled to receive stock, securities or other assets
with respect to or in exchange for class A common shares, then, as a condition
of that reorganization, reclassification, consolidation, merger, sale, transfer
or lease, the holder of each class C common share will have the right
immediately to convert that share into the kind and amount of stock, securities
or other assets which the holders of those shares would have owned or been
entitled to receive immediately after the transaction if those holders had
converted such shares immediately before the effective date of the transaction,
subject to further adjustment upon the occurrence of the events described
above.
Restrictions on Transfer. The class C common shares are generally
transferable, subject to restrictions necessary to enable AmREIT to maintain
its REIT status. See "--Ownership Limits and Restrictions on Transfer."
PREFERRED SHARES
The declaration of trust of AmREIT authorizes the trust managers of
AmREIT to issue up to 10,000,000 preferred shares of beneficial interest, par
value $.01 per share, to establish one or more series of such preferred shares
and to determine, with respect to any series of preferred shares, the terms,
rights, restrictions and qualifications of such series. Although the trust
managers have no present intention to do so, they could, in the future, issue a
series of preferred shares which, due to its terms, could impede a merger,
tender offer or other transaction that some, or a majority, of AmREIT's
shareholders might believe to be in their best interests or in which
shareholders might receive a premium over then prevailing market prices for
their common shares.
83
OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFER
For AmREIT to qualify as a REIT under the Internal Revenue Code, (i)
not more than 50% in value of outstanding equity securities of all classes may
be owned, directly or indirectly, by five or fewer individuals (as defined in
the Internal Revenue Code to include certain entities) during the last half of
a taxable year; (ii) the outstanding equity securities of all classes must be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year of 12 months or during a proportionate part of a shorter taxable year; and
(iii) certain percentages of AmREIT's gross income must come from certain
activities.
To ensure that five or fewer individuals do not own more than 50% in
value of the outstanding equity securities of all classes, AmREIT's declaration
of trust provides generally that no holder may own, or be deemed to own by
virtue of certain attribution provisions of the Internal Revenue Code, more
than 9.0% of the issued and outstanding common shares or more than 9.9% of the
issued and outstanding shares of any series of preferred shares, except that H.
Kerr Taylor, the chairman of the board of trust managers and chief executive
officer of AmREIT, and certain related persons together may own, or be deemed
to own, by virtue of certain attribution provisions of the Internal Revenue
Code, up to 9.8% of the issued and outstanding common shares. The board of
trust managers, upon receipt of a ruling from the IRS, an opinion of counsel,
or other evidence satisfactory to the board of trust managers, in its sole
discretion, is permitted to waive or change, in whole or in part, the
application of the ownership limit with respect to any person that is not an
individual (as that term is used in Section 542(a)(2) of the Internal Revenue
Code). In connection with any waiver or change, the board of trust managers has
the authority to require such representations and undertakings from such person
or affiliates and to impose such other conditions as the board of trust
managers deems necessary, advisable or prudent, in its sole discretion, to
determine the effect, if any, of a proposed transaction or ownership of
outstanding equity securities of all classes on AmREIT's status as a REIT. The
board of trust managers also has the authority to reduce the ownership limit on
H. Kerr Taylor, with the written consent of Mr. Taylor or his
successor-in-interest or designee, after any transfer permitted by the
declaration of trust.
In addition, the board of trust managers will have the right, from
time to time, to increase the ownership limit on common shares, except that it
will not be permissible for the board of trust managers (i) to increase the
ownership limit or create additional limitations if, after giving effect
thereto, AmREIT would be "closely held" within the meaning of Section 856(h) of
the Internal Revenue Code, (ii) to increase either the ownership limit on
common shares or the ownership limit on preferred shares to a percentage that
is greater than 9.9%, or (iii) to increase the ownership limit on H. Kerr
Taylor. Prior to any modification of the Ownership limit with respect to any
person, the board of trust managers will have the right to require such
opinions of counsel, affidavits, undertakings or agreements as it may deem
necessary, advisable or prudent, in its sole discretion, in order to determine
or ensure AmREIT's status as a REIT.
Under the declaration of trust, the ownership limit will not be
automatically removed even if the REIT provisions of the Internal Revenue Code
are changed so as to no longer contain any ownership concentration limitation
or if the ownership concentration limit is increased. In addition to preserving
AmREIT's status as a REIT for federal income tax purposes, the ownership limit
may prevent any person or small group of persons from acquiring control of
AmREIT.
84
The declaration of trust of AmREIT also provides that if any issuance,
transfer or acquisition of equity securities (i) would result in a holder
exceeding the ownership limit, (ii) would cause AmREIT to be beneficially owned
by less than 100 persons, (iii) would result in AmREIT being "closely held"
within the meaning of Section 856(h) of the Internal Revenue Code, or (iv)
would otherwise result in the failure of AmREIT to qualify as a REIT for
federal income tax purposes, then that issuance, transfer or acquisition will
be null and void to the intended transferee or holder, and the intended
transferee or holder will acquire no rights to the shares. Pursuant to the
declaration of trust, equity securities owned, transferred or proposed to be
transferred in excess of the ownership limit or which would otherwise
jeopardize AmREIT's status as a REIT under the Internal Revenue Code
automatically will be deemed to have been transferred to a trustee appointed by
AmREIT, unaffiliated with AmREIT and the intended transferee or holder, to
serve as trustee of a charitable trust for the exclusive benefit of one or more
nonprofit organizations designated by AmREIT so that the shares proposed to be
transferred in excess of the ownership limit held in the charitable trust would
not violate ownership restrictions set forth in the declaration of trust. The
transfer to the trustee will be deemed to be effective as of the close of
business on the business day prior to the purported transfer or other event
that results in the transfer to the charitable trust. Shares proposed to be
transferred in excess of the ownership limit held by the trustee shall be
issued and outstanding equity securities of AmREIT. The intended transferee or
holder will have no rights in the shares proposed to be transferred in excess
of the ownership limit, will not benefit economically from these shares, will
have no rights to dividends or other distributions associated with the shares
and shall not possess any rights to vote or other rights attributable to the
shares. The trustee will have all voting rights and rights to dividends or
other distributions to which such shares proposed to be transferred in excess
of the ownership limit are entitled with respect to such shares held in the
charitable trust, which rights shall be exercised for the exclusive benefit of
the charitable beneficiary. Any dividend or other distribution paid prior to
the discovery by AmREIT that the shares have been deemed transferred to the
trustee shall be paid with respect to the shares to the trustee upon demand and
any dividend or other distribution authorized but unpaid shall be paid when due
to the trustee. Any dividends or distributions so paid over to the trustee
shall be held in trust for the benefit of the charitable beneficiary for
distribution at such times as may be determined by the trustee. The prohibited
owner of these shares will have no voting rights with respect to the shares
held in the charitable trust and, subject to Texas law, effective as of the
date that the shares have been deemed transferred to the trustee, the trustee
shall have the authority (i) to rescind as void any vote cast, to the extent
the shares are entitled to vote, by a prohibited owner prior to the discovery
by AmREIT that the shares have been deemed transferred to the trustee and (ii)
to recast such vote, to the extent the shares are entitled to vote, in
accordance with the desires of the trustee acting for the benefit of the
charitable beneficiary. Within twenty (20) days of receiving notice from AmREIT
that shares proposed to be transferred in excess of the ownership limit have
been deemed transferred to the charitable trust, the trustee of the charitable
trust shall sell the shares held in the charitable trust to a person,
designated by the trustee, whose ownership of the shares will not violate the
ownership limit or otherwise jeopardize AmREIT's status as a REIT under the
Internal Revenue Code. Upon the sale, the interest of the charitable
beneficiary in the shares sold shall terminate and the trustee shall distribute
the net proceeds of the sale to the prohibited owner and to the charitable
beneficiary as follows: (i) the prohibited owner shall receive the lesser of
(1) the price paid by the prohibited owner for the shares or, if the prohibited
owner did not give value for the shares in connection with the event that
resulted in the transfer of such shares to the charitable trust (e.g., in the
case of a gift, devise or other such transaction), the market price at the time
of such gift, devise or other transaction which resulted in the transfer of the
shares and (2) the price per share (net of costs of sales) received by the
trustee from the sale or other disposition of the shares held in the charitable
trust; and (ii) any net sales proceeds in excess of the amount payable to the
prohibited owner shall be immediately paid to the charitable beneficiary. If,
prior to the discovery by AmREIT that the shares have been deemed transferred
to the trustee, the shares are sold by a prohibited owner, then (i) the shares
85
shall be deemed to have been sold on behalf of the charitable trust and (ii) to
the extent that the prohibited owner received an amount for such shares that
exceeds the amount that such prohibited owner would have been entitled to
receive if such shares had been sold by the trustee such excess shall be paid
to the trustee upon demand. The shares will be subject to repurchase by AmREIT
at its election and shall be deemed to have been offered for sale to AmREIT or
its designee, at a price per share equal to the lesser of (i) the price per
share in the transaction that resulted in such deemed transfer to the
charitable trust (or, in the case of a devise or gift or event other than a
transfer or acquisition which results in the deemed transfer of the shares, the
market price at the time of such devise or gift or event other than a transfer
or acquisition which results in the deemed transfer of the shares) and (ii) the
market price of the shares on the date AmREIT, or its designee, accepts such
offer. AmREIT and its assignees will have the right to accept the offer until
the trustee has otherwise sold the shares held in the charitable trust. Upon
such a sale to AmREIT or its designees, the interest of the charitable
beneficiary in the shares sold shall terminate and the trustee shall distribute
all net sales proceeds of the sale to the prohibited owner.
If the trust managers or any duly authorized committee thereof shall
at any time determine in good faith that a transfer or other event has taken or
is otherwise proposed to take place that results or will result in a violation
of the ownership limit or otherwise jeopardizes AmREIT's status as a REIT under
the Internal Revenue Code, the trust managers or a committee thereof shall take
such action as it deems advisable to refuse to give effect to or to prevent
such transfer or other event, including, without limitation, causing AmREIT to
redeem equity securities, refusing to give effect to such transfer on the books
of AmREIT or instituting proceedings to enjoin such transfer or other event;
provided, however that any transfer or attempted transfer or other event in
violation of the declaration of trust shall automatically result in the
transfer to the charitable trust described above, and, where applicable, such
transfer (or other event) shall be void ab initio as provided above
irrespective of any action (or non-action) by the board of trust managers or a
committee thereof.
Under the declaration of trust, AmREIT will have the authority, at any
time, to waive the requirement that the shares be deemed outstanding in
accordance with the provisions of the declaration of trust if the fact that the
shares are deemed to be outstanding would, in the opinion of nationally
recognized tax counsel, jeopardize the status of AmREIT as a REIT for federal
income tax purposes.
All certificates issued by AmREIT representing equity securities will
bear a legend referring to the restrictions described above.
The declaration of trust of AmREIT also will provide that all persons
who own, directly or by virtue of the attribution provisions of the Internal
Revenue Code, more than 5.0% of the outstanding equity securities (or such
lower percentage as may be set by the board of trust managers), must give
written notice to AmREIT containing information specified in the declaration of
trust no later than January 30 of each year. In addition, each shareholder will
be required, upon demand, to disclose to AmREIT in writing such information
with respect to the direct, indirect and constructive ownership of shares as
the trust managers deem necessary to comply with the provisions of the Internal
Revenue Code, as applicable to a REIT, or to comply with the requirements of a
governmental authority or agency.
The ownership limitations described above may have the effect of
inhibiting or impeding acquisitions of control of AmREIT-Texas by a third
party. See "Certain Provisions of the Declaration of Trust, Bylaws and Texas
Law," below.
86
DIVIDEND REINVESTMENT PLAN
AmREIT's board of trust managers has authorized a dividend
reinvestment plan that allows you to have the dividends otherwise distributable
to you as a class C common shareholder invested in additional class C common
shares.
You may purchase class C common shares under our dividend reinvestment
plan for $10 per share until all of the shares registered as part of this
offering have been sold. After that time, we may fund the dividend reinvestment
plan through purchasing shares on the open market, if a market then exists, or
issuing additional shares. In any case, the price per share will be equal to the
then-prevailing market price, which shall equal the price on the securities
exchange or over-the-counter market on which such shares are listed at the date
of purchase if such shares are then listed. A copy of our Dividend Reinvestment
Plan as currently in effect is included as Exhibit __ to this prospectus. You
may elect to participate in the dividend reinvestment plan by completing the
Subscription Agreement, the enrollment form or by other written notice to the
plan administrator. Participation in the plan will begin with the next
distribution made after receipt of your written notice. We may terminate the
dividend reinvestment plan for any reason at any time upon 10 days' prior
written notice to participants. Your participation in the plan will also be
terminated to the extent that a reinvestment of your dividends in class C
common shares would cause the percentage ownership limitation contained in our
declaration of trust to be exceeded. In addition, you may terminate your
participation in the dividend reinvestment plan at any time by providing us
with written notice.
If you elect to participate in the dividend reinvestment plan and are
subject to federal income taxation, you will incur a tax liability for
dividends allocated to you even though you have elected not to receive the
dividends in cash but rather to have the dividends withheld and reinvested
pursuant to the dividend reinvestment plan. Specifically, you will be treated
as if you have received the dividend from us in cash and then applied such
dividend to the purchase of additional shares. You will be taxed on the amount
of such dividend as ordinary income to the extent such dividend is from current
or accumulated earnings and profits, unless we have designated all or a portion
of the dividend as a capital gain dividend.
87
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following summary of material federal income tax consequences that
may be relevant to a holder of our securities is based on current law, is for
general information only and is not intended as tax advice. The following
discussion, which is not exhaustive of all possible tax consequences, does not
include a detailed discussion of any state, local or foreign tax consequences.
Nor does it discuss all of the aspects of federal income taxation that may be
relevant to a prospective holder of our securities in light of his or her
particular circumstances or to certain types of holders (including insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the
United States and persons holding securities as part of a conversion
transaction, a hedging transaction or as a position in a straddle for tax
purposes) who are subject to special treatment under the federal income tax
laws. Unless otherwise indicated the terms "we," "us," and "our" when used
herein refer to AmREIT.
The statements in this discussion are based on current provisions of
the Internal Revenue Code of 1986, as amended (the "Code") existing, temporary
and currently proposed Treasury Regulations under the Code, the legislative
history of the Code, existing administrative rulings and practices of the IRS
and judicial decisions. No assurance can be given that legislative, judicial or
administrative changes will not affect the accuracy of any statements in this
discussion with respect to transactions entered into or contemplated prior to
the effective date of such changes. Any such change could apply retroactively
to transactions preceding the date of the change. We do not plan to request any
rulings from the IRS concerning our tax treatment and the statements in this
discussion are not binding on the IRS or any court. Thus, we can provide no
assurance that these statements will not be challenged by the IRS or that such
challenge will not be sustained by a court.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX
PLANNING. EACH PROSPECTIVE PURCHASER OF SECURITIES IS ADVISED TO CONSULT WITH
HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR
HER OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES IN AN ENTITY
ELECTING TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN
AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, DISPOSITION AND
ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
We have elected to be treated as a REIT under Sections 856 through 860
of the Code for federal income tax purposes commencing with our taxable year
ended December 31, 1994. We believe that we have been organized and have
operated in a manner that qualifies for taxation as a REIT under the Code. We
also believe that we will continue to operate in a manner that will preserve
our status as a REIT. We cannot however, assure you that such requirements will
be met in the future.
Locke Liddell & Sapp LLP, our legal counsel, is of the opinion that we
qualified as a REIT under the Code for our taxable year ended December 31,
2002, we have been organized and our manner of operation has been in conformity
with the requirements for qualification and taxation as a REIT as of the date
of this prospectus and that our proposed manner of operation and diversity of
equity ownership should enable us to continue to satisfy the requirements for
qualification as a REIT in the future if we operate in accordance with the
methods of operations described herein including our representations concerning
our intended method of operation. However, no opinion can be given that we will
actually satisfy all REIT requirements in the future since this depends on
future events. You should be aware that opinions of counsel are not binding on
the IRS or on the courts, and, if the IRS were to challenge these conclusions,
no assurance can be given that these conclusions would be sustained in court.
88
The opinion of Locke Liddell & Sapp LLP is based on various assumptions as well
as on certain representations made by us as to factual matters, including a
factual representation letter provided by us. The rules governing REITs are
highly technical and require ongoing compliance with a variety of tests that
depend, among other things, on future operating results, asset diversification,
distribution levels and diversity of stock ownership. Locke Liddell & Sapp LLP
will not monitor our compliance with these requirements. While we expect to
satisfy these tests, and will use our best efforts to do so, no assurance can
be given that we will qualify as a REIT for any particular year, or that the
applicable law will not change and adversely affect us and our shareholders.
See "-- Failure to Qualify as a REIT." The following is a summary of the
material federal income tax considerations affecting us as a REIT and our
shareholders. This summary is qualified in its entirety by the applicable Code
provisions, relevant rules and regulations promulgated under the Code, and
administrative and judicial interpretations of the Code and these rules and
regulations.
REIT QUALIFICATION
We must be organized as an entity that would, if we do not maintain
our REIT status, be taxable as a regular corporation. We cannot be a financial
institution or an insurance company. We must be managed by one or more trust
managers. Our taxable year must be the calendar year. Our beneficial ownership
must be evidenced by transferable shares. Our capital shares must be held by at
least 100 persons during at least 335 days of a taxable year of 12 months or
during a proportionate part of a taxable year of less than 12 months. Not more
than 50% of the value of the shares of our capital shares may be held, directly
or indirectly, applying the applicable constructive ownership rules of the
Code, by five or fewer individuals at any time during the last half of each of
our taxable years. We must also meet certain other tests, described below,
regarding the nature of our income and assets and the amount of our
distributions.
Our outstanding shares of common stock are owned by a sufficient
number of investors and in appropriate proportions to permit us to satisfy
these share ownership requirements. To protect against violations of these
share ownership requirements, our Declaration of Trust provides that no person
(other than the existing holder) is permitted to own, applying constructive
ownership tests set forth in the Code, more than 9.0% of our outstanding common
shares, unless the trust managers are provided evidence satisfactory to them in
their sole discretion that our qualification as a REIT will not be jeopardized.
In addition, our Declaration of Trust contains restrictions on transfers of
capital shares, as well as provisions that automatically transfer capital
shares to a charitable trust for the benefit of a charitable beneficiary to the
extent that another investor's ownership of such capital shares otherwise might
jeopardize our REIT status. These restrictions, however may not ensure that we
will, in all cases, be able to satisfy the share ownership requirements. If we
fail to satisfy these share ownership requirements, except as provided in the
next sentence, our status as a REIT will terminate. However, if we comply with
the rules contained in applicable Treasury Regulations that require us to
ascertain the actual ownership of our shares and we do not know, or would not
have known through the exercise of reasonable diligence, that we failed to meet
the 50% requirement described above, we will be treated as having met this
requirement. See the Section below entitled "-- Failure to Qualify as a REIT."
To monitor our compliance with the share ownership requirements, we
are required to and we do maintain records disclosing the actual ownership of
our common shares. To do so, we will demand written statements each year from
the record holders of certain percentages of shares in which the record holders
are to disclose the actual owners of the shares (i.e., the persons required to
include in gross income the REIT dividends). A list of those persons failing or
refusing to comply with this demand will be maintained as part of our records.
Shareholders who fail or refuse to comply with the demand must submit a
statement with their tax returns disclosing the actual ownership of the shares
and certain other information.
89
We currently satisfy, and expect to continue to satisfy, each of these
requirements discussed above. We also currently satisfy, and expect to continue
to satisfy, the requirements that are separately described below concerning the
nature and amounts of our income and assets and the levels of required annual
distributions.
Sources of Gross Income. In order to qualify as a REIT for a
particular year, we also must meet two tests governing the sources of our
income - a 75% gross income test and a 95% gross income test. These tests are
designed to ensure that a REIT derives its income principally from passive real
estate investments. The Code allows a REIT to own and operate a number of its
properties through wholly-owned subsidiaries which are "qualified REIT
subsidiaries." The Code provides that a qualified REIT subsidiary is not
treated as a separate corporation, and all of its assets, liabilities and items
of income, deduction and credit are treated as assets, liabilities and items of
income, deduction and credit of the REIT.
In the case of a REIT which is a partner in a partnership or any other
entity such as a limited liability company that is treated as a partnership for
federal income tax purposes, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership. Also,
the REIT will be deemed to be entitled to its proportionate share of the income
of the partnership. The character of the assets and gross income of the
partnership retains the same character in the hands of the REIT for purposes of
Section 856 of the Code, including satisfying the gross income tests and the
asset tests. Thus, our proportionate share of the assets and items of income of
any partnership in which we own an interest are treated as our assets and items
of income for purposes of applying the requirements described in this
discussion, including the income and asset tests described below.
75% Gross Income Test. At least 75% of a REITs gross income for each
taxable year must be derived from specified classes of income that principally
are real estate related. The permitted categories of principal importance to us
are:
o rents from real property;
o interest on loans secured by real property;
o gains from the sale of real property or loans secured by real
property (excluding gain from the sale of property held primarily for
sale to customers in the ordinary course of our business, referred to
below as "dealer property");
o income from the operation and gain from the sale of property acquired
in connection with the foreclosure of a mortgage securing that
property ("foreclosure property");
o distributions on, or gain from the sale of, shares of other
qualifying REITs;
o abatements and refunds of real property taxes;
o amounts received as consideration for entering into agreements to
make loans secured by real property or to purchase or lease real
property; and
o "qualified temporary investment income" (described below).
90
In evaluating our compliance with the 75% gross income test, as well
as the 95% gross income test described below, gross income does not include
gross income from "prohibited transactions." In general, a prohibited
transaction is one involving a sale of dealer property, not including
foreclosure property and not including certain dealer property we have held for
at least four years.
We expect that substantially all of our operating gross income will be
considered rent from real property and interest income. Rent from real property
is qualifying income for purposes of the gross income tests only if certain
conditions are satisfied. Rent from real property includes charges for services
customarily rendered to tenants, and rent attributable to personal property
leased together with the real property so long as the personal property rent is
not more than 15% of the total rent received or accrued under the lease for the
taxable year. We do not expect to earn material amounts in these categories.
Rent from real property generally does not include rent based on the
income or profits derived from the property. However, rent based on a
percentage of gross receipts or sales is permitted as rent from real property
and we will have leases where rent is based on a percentage of gross receipts
or sales. We generally do not intend to lease property and receive rentals
based on the tenant's income or profit. Also excluded from "rents from real
property" is rent received from a person or corporation in which we (or any of
our 10% or greater owners) directly or indirectly through the constructive
ownership rules contained in Section 318 and Section 856(d)(5) of the Code, own
a 10% or greater interest in either vote or value.
A third exclusion from qualifying rent income covers amounts received
with respect to real property if we furnish services to the tenants or manage
or operate the property, other than through an "independent contractor" from
whom we do not derive any income or through a "taxable REIT subsidiary." A
taxable REIT subsidiary is a corporation in which a REIT owns stock, directly
or indirectly, and with respect to which the corporation and the REIT have made
a joint election to treat the corporation as a taxable REIT subsidiary. The
obligation to operate through an independent contractor or a taxable REIT
subsidiary generally does not apply, however, if the services we provide are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not considered rendered primarily for the convenience of
the tenant (applying standards that govern in evaluating whether rent from real
property would be unrelated business taxable income when received by a
tax-exempt owner of the property). Further, if the value of the non-customary
service income with respect to a property, valued at no less than 150% of our
direct cost of performing such services, is 1% or less of the total income
derived from the property, then the provision of such non-customary services
shall not prohibit the rental income (except the non-customary service income)
from qualifying as "rents from real property."
We believe that the only material services generally to be provided to
tenants will be those usually or customarily rendered in connection with the
rental of space for occupancy only. We do not intend to provide services that
might be considered rendered primarily for the convenience of the tenants, such
as hotel, health care or extensive recreational or social services.
Consequently, we believe that substantially all of our rental income will be
qualifying income under the gross income tests, and that our provision of
services will not cause the rental income to fail to be included under that
test.
Upon the ultimate sale of our properties, any gains realized also are
expected to constitute qualifying income, as gain from the sale of real
property (not involving a prohibited transaction).
91
95% Gross Income Test. In addition to earning 75% of our gross income
from the sources listed above, 95% of our gross income for each taxable year
must come either from those sources, or from dividends, interest or gains from
the sale or other disposition of stock or other securities that do not
constitute dealer property. This test permits a REIT to earn a significant
portion of its income from traditional "passive" investment sources that are
not necessarily real estate related. The term "interest" (under both the 75%
and 95% tests) does not include amounts that are based on the income or profits
of any person, unless the computation is based only on a fixed percentage of
receipts or sales.
Failing the 75% or 95% Tests; Reasonable Cause. As a result of the 75%
and 95% tests, REITs generally are not permitted to earn more than 5% of their
gross income from active sources, including brokerage commissions or other fees
for services rendered. We may receive certain types of that income. This type
of income will not qualify for the 75% test or 95% test but is not expected to
be significant and that income, together with other nonqualifying income, is
expected to be at all times less than 5% of our annual gross income. While we
do not anticipate that we will earn substantial amounts of nonqualifying
income, if nonqualifying income exceeds 5% of our gross income, we could lose
our status as a REIT. We may establish taxable REIT subsidiaries to hold assets
generating non-qualifying income. The gross income generated by these
subsidiaries would not be included in our gross income. However, dividends we
receive from these subsidiaries would be included in our gross income and
qualify for the 95% income test.
If we fail to meet either the 75% or 95% income tests during a taxable
year, we may still qualify as a REIT for that year if (1) we report the amount
and nature of each item of our gross income in a schedule attached to our
federal income tax return for that year, (2) the inclusion of any incorrect
information in such schedule is not due to fraud with intent to evade tax, and
(3) the failure to meet the tests is due to reasonable cause and not to willful
neglect. It is not possible, however, to state whether in all circumstances we
would be entitled to the benefit of this relief provision. For example, if we
fail to satisfy the gross income tests because nonqualifying income that we
intentionally accrue or receive causes us to exceed the limits on nonqualifying
income, the IRS could conclude that our failure to satisfy the tests was not
due to reasonable cause. If these relief provisions do not apply to a
particular set of circumstances, we will not qualify as a REIT. As discussed
below, even if these relief provisions apply, and we retain our status as a
REIT, a tax would be imposed with respect to our non-qualifying income. We
would be subject to a 100% tax based on the greater of the amount by which we
fail either the 75% or 95% income tests (substituting 90% for 95% for purposes
of calculating the amount by which the 95% income test is failed) for that year
multiplied by a fraction intended to reflect our profitability. See "--
Taxation as a REIT" below.
Prohibited Transaction Income. Any gain that we realize on the sale of
any property held as inventory or other property held primarily for sale to
customers in the ordinary course of business (including our share of any such
gain realized by any subsidiary partnerships but excluding foreclosure
property), will be treated as income from a prohibited transaction that is
subject to a 100% penalty tax. This prohibited transaction income may also
adversely affect our ability to satisfy the income tests for qualification as a
REIT. Under existing law, whether property is held as inventory or primarily
for sale to customers in the ordinary course of a trade or business depends on
all the facts and circumstances surrounding the particular transaction. We
intend to hold our and our subsidiary partnerships intend to hold their
properties for investment with a view to long-term appreciation, to engage in
the business of acquiring, developing and owning properties, and to make
occasional sales of the properties as are consistent with their investment
objectives. The IRS may contend, however, that one or more of these sales is
subject to the 100% penalty tax.
92
Character of Assets Owned. At the close of each calendar quarter of
our taxable year, we also must meet three tests concerning the nature of our
investments. First, at least 75% of the value of our total assets generally
must consist of real estate assets, cash, cash items (including receivables)
and government securities. For this purpose, "real estate assets" include
interests in real property, interests in loans secured by mortgages on real
property or by certain interests in real property, shares in other REITs and
certain options, but excluding mineral, oil or gas royalty interests. The
temporary investment of new capital in stock or debt instruments also qualifies
under this 75% asset test, but only for the one-year period beginning on the
date we receive the new capital. Second, although the balance of our assets
generally may be invested without restriction, other than certain debt
securities, we will not be permitted to own (1) securities of any one
non-governmental issuer that represent more than 5% of the value of our total
assets, (2) securities possessing more than 10% of the voting power of the
outstanding securities of any single issuer or (3) securities having a value of
more than 10% of the total value of the outstanding securities of any one
issuer. A REIT, however, may own 100% of the stock of a qualified REIT
subsidiary, in which case the assets, liabilities and items of income,
deduction and credit of the subsidiary are treated as those of the REIT. A REIT
may also own more than 10% of the voting power or value of a taxable REIT
subsidiary. Third, not more than 20% of the value of a REIT's total assets may
be represented by securities of one or more taxable REIT subsidiaries. In
evaluating a REIT's assets, if the REIT invests in a partnership, it is deemed
to own its proportionate share of the assets of the partnership.
After initially meeting the asset tests at the close of any quarter,
we will not lose our status as a REIT for failure to satisfy the asset tests at
the end of a later quarter solely by reason of changes in asset values. If we
fail to satisfy the asset tests because we acquire securities or other property
during a quarter, we can cure this failure by disposing of sufficient
nonqualifying assets within 30 days after the close of that quarter. We intend
to take such action within the 30 days after the close of any quarter as may be
required to cure any noncompliance. If we fail to cure noncompliance with the
asset tests within this time period, we would cease to qualify as a REIT.
Annual Distributions to Shareholders. To maintain our REIT status, we
generally must distribute as a dividend to our shareholders in each taxable
year at least 90% of our net ordinary income. Capital gain is not required to
be distributed. More precisely, we must distribute an amount equal to (1) 90%
of the sum of (a) our "REIT Taxable Income" before deduction of dividends paid
and excluding any net capital gain and (b) 90% of the excess of net income from
foreclosure property over the tax on such income, minus (2) certain limited
categories of "excess noncash income," including, income attributable to
certain payments for the use of property or services described under Section
467 of the Code, cancellation of indebtedness and original issue discount
income. REIT Taxable Income is defined to be the taxable income of the REIT,
computed as if it were an ordinary corporation, with certain modifications. For
example, the deduction for dividends paid is allowed, but neither net income
from foreclosure property, nor net income from prohibited transactions, is
included. In addition, the REIT may carry over, but not carry back, a net
operating loss for 20 years following the year in which it was incurred.
A REIT may satisfy the 90% distribution test with dividends paid
during the taxable year and with certain dividends paid after the end of the
taxable year. Dividends paid in January that were declared during the last
calendar quarter of the prior year and were payable to shareholders of record
on a date during the last calendar quarter of that prior year are treated as
paid on December 31 of the prior year. Other dividends declared before the due
date of our tax return for the taxable year, including extensions, also will be
treated as paid in the prior year if they are paid (1) within 12 months of the
end of that taxable year and (2) no later than our next regular distribution
payment. Dividends that are paid after the close of a taxable year that do not
qualify under the rule governing payments made in January (described above)
will be taxable to the shareholders in the year paid, even though we may take
them into account for a prior year. A nondeductible excise tax equal to 4% will
be imposed for each calendar year to the extent that dividends declared and
distributed or deemed distributed on or before December 31 are less than the
sum of (a) 85% of our "ordinary income" plus (b) 95% of our capital gain net
income plus (c) any undistributed income from prior periods.
93
To be entitled to a dividends paid deduction, the amount distributed
by a REIT must not be preferential. For example, every shareholder of the class
of shares to which a distribution is made must be treated the same as every
other shareholder of that class, and no class of shares may be treated
otherwise than in accordance with its dividend rights as a class.
We will be taxed at regular corporate rates to the extent that we
retain any portion of our taxable income. For example, if we distribute only
the required 90% of our taxable income, we would be taxed on the retained 10%.
Under certain circumstances we may not have sufficient cash or other liquid
assets to meet the distribution requirement. This could arise because of
competing demands for our funds, or due to timing differences between tax
reporting and cash receipts and disbursements (i.e., income may have to be
reported before cash is received, or expenses may have to be paid before a
deduction is allowed). Although we do not anticipate any difficulty in meeting
this requirement, no assurance can be given that necessary funds will be
available. In the event these circumstances do occur, then in order to meet the
90% distribution requirement, we may arrange for short-term, or possibly
long-term, borrowings to permit the payment of required dividends.
If we fail to meet the 90% distribution requirement because of an
adjustment to our taxable income by the IRS, we may be able to cure the failure
retroactively by paying a "deficiency dividend," as well as applicable interest
and penalties, within a specified period.
TAXATION AS A REIT
As a REIT, we generally will not be subject to corporate income tax to
the extent we currently distribute our REIT taxable income to our shareholders.
This treatment effectively eliminates the "double taxation" imposed on
investments in most corporations. Double taxation refers to taxation that
occurs once at the corporate level when income is earned and once again at the
shareholder level when such income is distributed. We generally will be taxed
only on the portion of our taxable income that we retain, which will include
any undistributed net capital gain, because we will be entitled to a deduction
for dividends paid to shareholders during the taxable year. A dividends paid
deduction is not available for dividends that are considered preferential
within any given class of shares or as between classes except to the extent
that class is entitled to a preference. We do not anticipate that we will pay
any of those preferential dividends.
Even as a REIT, we will be subject to tax in certain circumstances as
follows:
o We would be subject to tax on any income or gain from
foreclosure property at the highest corporate rate (currently
35%). Foreclosure property is generally defined as property
acquired through foreclosure or after a default on a loan
secured by the property or a lease of the property.
o A confiscatory tax of 100% applies to any net income from
prohibited transactions which are, in general, certain sales or
other dispositions of property held primarily for sale to
customers in the ordinary course of business other than
foreclosure property.
94
o If we fail to meet either the 75% or 95% source of income tests
described above, but still qualify for REIT status under the
reasonable cause exception to those tests, a 100% tax would be
imposed equal to the amount obtained by multiplying (a) the
greater of the amount, if any, by which it failed either the 75%
income test or the 95% (substituting for purposes of calculating
the amount by which the 95% gross income test is failed, 90% for
95%) income test, times (b) a fraction intended to reflect our
profitability.
o We will be subject to the alternative minimum tax on items of
tax preference, excluding items specifically allocable to our
shareholders.
o If we should fail to distribute with respect to each calendar
year at least the sum of (a) 85% of our REIT ordinary income for
that year, (b) 95% of our REIT capital gain net income for that
year, and (c) any undistributed taxable income from prior years,
we would be subject to a 4% excise tax on the excess of the
required distribution over the amounts actually distributed.
o Under temporary regulations, we also may be taxed at the highest
regular corporate tax rate on any built-in gain attributable to
assets that we acquire in certain tax-free corporate
transactions, to the extent the gain is recognized during the
first ten years after we acquire those assets. Built-in gain is
the excess of (a) the fair market value of the asset over (b)
our adjusted basis in the asset, in each case determined as of
the beginning of the ten-year recognition period. The results
described in this paragraph with respect to the recognition of
built-in gain assume that we will make an election pursuant to
the temporary regulations; and
o We will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains.
As a result of recent legislation, a tax is imposed on a REIT equal to
100% of redetermined rents, redetermined deductions and excess interest.
Redetermined rents are generally rents from real property which would otherwise
be reduced on distribution, apportionment or allocation to clearly reflect
income as a result of services furnished or rendered by a taxable REIT
subsidiary to tenants of the REIT. There are a number of exceptions with regard
to redetermined rents, which are summarized below.
o Redetermined rents do not include amounts received directly or
indirectly by a REIT for services customarily furnished or
rendered in connection with the rental of real property or
services furnished through an independent contractor from whom
the REIT does not derive or receive any income or through a
taxable REIT subsidiary.
o Redetermined rents do not include de minimis payments received
by the REIT with respect to non-customary services rendered to
the tenants of a property owned by the REIT that do not exceed
1% of all amounts received by the REIT with respect to the
property.
o The redetermined rent provisions do not apply with respect to
any services rendered by a taxable REIT subsidiary to the
tenants of the REIT, as long as the taxable REIT subsidiary
renders a significant amount of similar services to persons
other than the REIT and to tenants who are unrelated to the REIT
or the taxable REIT subsidiary or the REIT tenants, and the
charge for these services is substantially comparable to the
charge for similar services rendered to such unrelated persons.
95
o The redetermined rent provisions do not apply to any services
rendered by a taxable REIT subsidiary to a tenant of a REIT if
the rents paid by tenants leasing at least 25% of the net
leaseable space in the REIT's property who are not receiving
such services are substantially comparable to the rents paid by
tenants leasing comparable space who are receiving the services
and the charge for the services is separately stated.
o The redetermined rent provisions do not apply to any services
rendered by a taxable REIT subsidiary to tenants of a REIT if
the gross income of the taxable REIT subsidiary from these
services is at least 150% of the taxable REIT subsidiary's
direct cost of rendering the service.
o The Secretary of the Treasury has the power to waive the tax
that would otherwise be imposed on redetermined rents if the
REIT establishes to the satisfaction of the Secretary that rents
charged to tenants were established on an arm's length basis
even though a taxable REIT subsidiary provided services to the
tenants.
Redetermined deductions are deductions, other than redetermined rents,
of a taxable REIT subsidiary if the amount of these deductions would be
decreased on distribution, apportionment or allocation to clearly reflect
income between the taxable REIT subsidiary and the REIT. Excess interest means
any deductions for interest payments made by a taxable REIT subsidiary to the
REIT to the extent that the interest payments exceed a commercially reasonable
rate of interest.
FAILURE TO QUALIFY AS A REIT
For any taxable year in which we fail to qualify as a REIT and certain
relief provisions do not apply, we would be taxed at regular corporate rates,
including alternative minimum tax rates on all of our taxable income.
Distributions to our shareholders would not be deductible in computing that
taxable income, and distributions would no longer be required to be made. Any
corporate level taxes generally would reduce the amount of cash available for
distribution to our shareholders and, because the shareholders would continue
to be taxed on the distributions they receive, the net after tax yield to the
shareholders from their investment likely would be reduced substantially. As a
result, failure to qualify as a REIT during any taxable year could have a
material adverse effect on an investment in our shares of common stock. If we
lose our REIT status, unless certain relief provisions apply, we would not be
eligible to elect REIT status again until the fifth taxable year which begins
after the taxable year during which our election was terminated. It is not
possible to state whether in all circumstances we would be entitled to this
statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
Except as discussed below, distributions generally will be taxable to
taxable U.S. shareholders as ordinary income to the extent of our current or
accumulated earnings and profits. We may generate cash in excess of our net
earnings. If we distribute cash to shareholders in excess of our current and
accumulated earnings and profits (other than as a capital gain dividend), the
excess cash will be deemed to be a return of capital to each shareholder to the
extent of the adjusted tax basis of the shareholder's shares. Distributions in
excess of the adjusted tax basis will be treated as gain from the sale or
exchange of the shares. A shareholder who has received a distribution in excess
of our current and accumulated earnings and profits may, upon the sale of the
shares, realize a higher taxable gain or a smaller loss because the basis of
the shares as reduced will be used for purposes of computing the amount of the
gain or loss. Distributions we make, whether characterized as ordinary income
or as capital gains, are not eligible for the dividends received deduction for
corporations.
96
Dividends we declare in October, November, or December of any year and
payable to a shareholder of record on a specified date in any of these months
shall be treated as both paid by us and received by the shareholder on December
31 of that year, provided we actually pay the dividend on or before January 31
of the following calendar year. Shareholders may not include in their own
income tax returns any of our net operating losses or capital losses.
Distributions that we properly designate as capital gain dividends
will be taxable to taxable U.S. shareholders as gains from the sale or
disposition of a capital asset to the extent that they do not exceed our actual
net capital gain for the taxable year. Depending on the period of time the tax
characteristics of the assets which produced these gains, and on certain
designations, if any, which we may make, these gains may be taxable to
non-corporate U.S. shareholders at a 20% or 25% rate. U.S. shareholders that
are corporations may, however, be required to treat up to 20% of certain
capital gain dividends as ordinary income.
We may elect to retain, rather than distribute as a capital gain
dividend, our net long-term capital gains. If we make this election, we would
pay tax on our retained net long-term capital gains. In addition, to the extent
we designate, a U.S. shareholder generally would:
o include its proportionate share of our undistributed long-term
capital gains in computing its long-term capital gains in its
return for its taxable year in which the last day of our taxable
year falls;
o be deemed to have paid the capital gains tax imposed on us on
the designated amounts included in the U.S. shareholder's
long-term capital gains;
o receive a credit or refund for the amount of tax deemed paid by
it; and
o increase the adjusted basis of its shares of common stock by the
difference between the amount of includable gains and the tax
deemed to have been paid by it; and, in the case of a U.S.
shareholder that is a corporation, appropriately adjust its
earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be prescribed by the
IRS.
Distributions we make and gain arising from the sale or exchange by a
U.S. shareholder of our shares will not be treated as income from a passive
activity, within the meaning of Section 469 of the Code, since income from a
passive activity generally does not include dividends and gain attributable to
the disposition of property that produces dividends. As a result, U.S.
shareholders subject to the passive activity rules will generally be unable to
apply any "passive losses" against this income or gain. Distributions we make,
to the extent they do not constitute a return of capital, generally will be
treated as investment income for purposes of computing the investment interest
limitation. Gain arising from the sale or other disposition of our shares,
however, will be treated as investment income if a shareholder so elects, in
which case the capital gain is taxed at ordinary income rates.
Generally, gain or loss realized by a shareholder upon the sale of
shares will be reportable as capital gain or loss. In general, capital gains
recognized by individuals and other non-corporate shareholders upon the sale or
disposition of shares of common stock will be subject to a maximum federal
income tax rate of 20% if the shares of common stock are held for more than 12
months, and will be taxed at ordinary income rates of up to 38.6% if the shares
of common stock are held for 12 months or less. Gains recognized by
shareholders that are corporations are subject to federal income tax at a
maximum rate of 35%, whether or not classified as long-term capital gains.
Capital losses recognized by a shareholder upon the disposition of shares of
97
common stock held for more than one year at the time of disposition will be
considered long-term capital losses, and are generally available only to offset
capital gain income of the shareholder but not ordinary income (except in the
case of individuals, who may offset up to $3,000 of ordinary income each year).
In addition, if a shareholder receives a long-term capital gain dividend from
us and has held the shares for six months or less, any loss incurred on the
sale or exchange of the shares is treated as a long-term capital loss to the
extent of the corresponding long-term capital gain dividend received.
In any year in which we fail to qualify as a REIT, the shareholders
generally will continue to be treated in the same fashion described above,
except that none of our dividends will be eligible for treatment as capital
gains dividends, corporate shareholders will qualify for the dividends received
deduction and the shareholders will not be required to report any share of our
tax preference items.
BACKUP WITHHOLDING
We will report to our shareholders and the IRS the amount of dividends
paid during each calendar year and the amount of tax withheld, if any. If a
shareholder is subject to backup withholding, we will be required to deduct and
withhold from any dividends payable to that shareholder a tax equal to the rate
as provided under Section 3406(a)(1) of the Code. These rules may apply (1)
when a shareholder fails to supply a correct taxpayer identification number,
(2) when the IRS notifies us that the shareholder is subject to the rules or
has furnished an incorrect taxpayer identification number, or (3) in the case
of corporations or others within certain exempt categories, when they fail to
demonstrate that fact when required. A shareholder that does not provide a
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount withheld as backup withholding may be credited against
the shareholder's federal income tax liability. We also may be required to
withhold a portion of capital gain distributions made to shareholders who fail
to certify their non-foreign status.
The United States Treasury issued its final regulations regarding the
withholding and information reporting rules discussed above. In general, the
final regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and clarify
reliance standards. The final regulations were generally made effective for
payments made on or after January 1, 2001, subject to certain transition rules.
Prospective investors should consult their own tax advisors concerning these
final regulations and the potential effect on their ownership of shares of
common stock.
TAXATION OF TAX-EXEMPT ENTITIES
In general, a tax-exempt entity that is a shareholder will not be
subject to tax on distributions or gain realized on the sale of shares. A
tax-exempt entity may be subject to unrelated business taxable income, however,
to the extent that it has financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Code. In determining the
number of shareholders a REIT has for purposes of the "50% test" described
above under "-- REIT Qualification," generally, any shares held by tax-exempt
employees' pension and profit sharing trusts which qualify under Section 401(a)
of the Code and are exempt from tax under Section 501(a) of the Code
("qualified trusts") will be treated as held directly by its beneficiaries in
proportion to their interests in the trust and will not be treated as held by
the trust.
A qualified trust owning more than 10% of a REIT may be required to
treat a percentage of dividends from the REIT as unrelated business taxable
income ("UBTI"). The percentage is determined by dividing the REIT's gross
income (less direct expenses related thereto) derived from an unrelated trade
98
or business for the year (determined as if the REIT were a qualified trust) by
the gross income (less direct expenses related thereto) of the REIT for the
year in which the dividends are paid. However, if this percentage is less than
5%, dividends are not treated as UBTI. These UBTI rules apply only if the REIT
qualifies as a REIT because of the "look-thru" rule with respect to the 50%
test discussed above and if the trust is "predominantly held" by qualified
trusts. A REIT is predominantly held by qualified trusts if at least one
pension trust owns more than 25% of the value of the REIT or a group of pension
trusts each owning more than 10% of the value of the REIT collectively own more
than 50% of the value of the REIT. We do not currently meet either of these
requirements.
For social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts and qualified group legal services
plans exempt from federal income taxation under Sections 501(c)(7), (c)(9),
(c)(17) and (c)(20) of the Code, respectively, income from an investment in our
capital stock will constitute UBTI unless the organization is able to deduct an
amount properly set aside or placed in reserve for certain purposes so as to
offset the UBTI generated by the investment in our capital stock. These
prospective investors should consult their own tax advisors concerning the "set
aside" and reserve requirements.
TAXATION OF FOREIGN INVESTORS
The rules governing federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders are complex and no attempt will be made herein to provide more
than a summary of such rules. Prospective non-U.S. shareholders should consult
with their own tax advisors to determine the impact of federal, state and local
income tax laws with regard to an investment in shares of common stock,
including any reporting requirements, as well as the tax treatment of such an
investment under the laws of their home country.
Dividends that are not attributable to gain from any sales or
exchanges we make of United States real property interests and which we do not
designate as capital gain dividends will be treated as dividends of ordinary
income to the extent that they are made out of our current or accumulated
earnings and profits. Those dividends ordinarily will be subject to a
withholding tax equal to 30% of the gross amount of the dividend unless an
applicable tax treaty reduces or eliminates that tax. However, if income from
the investment in the shares of common stock is treated as effectively
connected with the non-U.S. shareholder's conduct of a United States trade or
business, the non-U.S. shareholder generally will be subject to a tax at
graduated rates, in the same manner as U.S. shareholders are taxed with respect
to those dividends, and may also be subject to the 30% branch profits tax in
the case of a shareholder that is a foreign corporation. For withholding tax
purposes, we are currently required to treat all distributions as if made out
of our current and accumulated earnings and profits and thus we intend to
withhold at the rate of 30%, or a reduced treaty rate if applicable, on the
amount of any distribution (other than distributions designated as capital gain
dividends) made to a non-U.S. shareholder unless (1) the non-U.S. shareholder
files an IRS Form W-8BEN claiming that a lower treaty rate applies or (2) the
non-U.S. shareholder files an IRS Form W-8ECI claiming that the dividend is
effectively connected income.
Under the final regulations, which were generally effective for
distributions on or after January 1, 2001, we are not required to withhold at
the 30% rate on distributions we reasonably estimate to be in excess of our
current and accumulated earnings and profits. Dividends in excess of our
current and accumulated earnings and profits are not taxable to a shareholder
to the extent that they do not exceed the adjusted basis of the shareholder's
shares, but rather will reduce the adjusted basis of those shares. To the
extent that those dividends exceed the adjusted basis of a non-U.S.
shareholder's shares, they will give rise to tax liability if the non-U.S.
shareholder would otherwise be subject to tax on any gain from the sale or
disposition of his shares, as described below. If it cannot be determined at
the time a dividend is paid whether or not a dividend will be in excess of
current and accumulated earnings and profits, the dividend will be subject to
such withholding. We do not make quarterly estimates of that portion of
dividends that are in excess of earnings and profits, and, as a result, all
dividends will be subject to such withholding. However, the non-U.S.
shareholder may seek a refund of those amounts from the IRS.
99
For any year in which we qualify as a REIT, distributions that are
attributable to gain from our sales or exchanges of United States real property
interests will be taxed to a non-U.S. shareholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980, commonly known as
"FIRPTA." Under FIRPTA, those dividends are taxed to a non-U.S. shareholder as
if the gain were effectively connected with a United States business. Non-U.S.
shareholders would thus be taxed at the normal capital gain rates applicable to
U.S. shareholders subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals. Also,
dividends subject to FIRPTA may be subject to a 30% branch profits tax in the
hands of a corporate non-U.S. shareholder not entitled to treaty exemption. We
are required by the Code and applicable Treasury Regulations to withhold 35% of
any dividend that could be designated as a capital gain dividend in connection
with the sale of a United States real property interest. This amount is
creditable against the non-U.S. shareholder's FIRPTA tax liability.
Gain recognized by a non-U.S. shareholder upon a sale of shares
generally will not be taxed under FIRPTA if we are a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the shares was held directly or
indirectly by foreign persons. It is currently anticipated that we will be a
"domestically controlled REIT," and therefore the sale of shares will not be
subject to taxation under FIRPTA. Because the shares of common stock will be
publicly traded, however, no assurance can be given that we will remain a
"domestically controlled REIT." However, gain not subject to FIRPTA will be
taxable to a non-U.S. shareholder if (1) investment in the shares of common
stock is effectively connected with the non-U.S. shareholder's United States
trade or business, in which case the non-U.S. shareholder will be subject to
the same treatment as U.S. shareholders with respect to that gain, and may also
be subject to the 30% branch profits tax in the case of a corporate non-U.S.
shareholder, or (2) the non-U.S. shareholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year in which case the nonresident alien individual will be subject to a 30%
withholding tax on the individual's capital gains. If we were not a
domestically controlled REIT, whether or not a non-U.S. shareholder's sale of
shares would be subject to tax under FIRPTA would depend on whether or not the
shares of common stock were regularly traded on an established securities
market (such as the NYSE) and on the size of selling non-U.S. shareholder's
interest in our capital shares. If the gain on the sale of shares were to be
subject to taxation under FIRPTA, the non-U.S. shareholder will be subject to
the same treatment as U.S. shareholders with respect to that gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals and the possible application of the 30%
branch profits tax in the case of foreign corporations) and the purchaser of
our shares of common stock may be required to withhold 10% of the gross
purchase price.
STATE AND LOCAL TAXES
We, and our shareholders, may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in our capital shares.
100
CERTAIN ERISA CONSIDERATIONS
Each prospective investor that is (i) an ERISA Plan, (ii) a plan
within the meaning of Section 4975(e)(1) of the Code (including an IRA and a
Keogh Plan) or (iii) a person investing assets of any ERISA Plan or plan whose
assets are deemed to include plan assets should consider the matters described
below in determining whether to invest in our capital shares. Such ERISA Plans,
plans and persons are referred to herein as "Plans."
GENERAL FIDUCIARY RULES
Investments by ERISA Plans and persons whose assets are deemed to
include plan assets are subject to ERISA's general fiduciary requirements,
including the requirements of investment prudence and diversification,
requirements respecting the delegation of investment authority and the
requirement that an ERISA Plan's investment be made in accordance with the
documents governing the Plan. Plan fiduciaries must give appropriate
consideration to, among other things, the role that an investment in our
capital shares has in the Plan's investment portfolio, taking into account the
Plan's purposes, the risk of loss and the potential return in respect of such
investment, the composition of the Plan's portfolio, the liquidity and current
return of the total portfolio relative to the anticipated cash flow needs of
the Plan, and the projected return of the portfolio relative to the Plan's
funding objectives. Keogh Plan and IRA investors should also consider whether
an investment in our capital shares is appropriate for their Keogh Plans or
IRAs.
PLAN ASSETS
Regulations issued by the U.S. Department of Labor (the "Plan Asset
Regulations") describe what constitutes the assets of a Plan for purposes of
various provisions of ERISA and Section 4975 of the Code when a Plan makes an
equity investment in an entity such as an investment in our capital shares. The
U.S. Department of Labor has generally stated that an investment by a plan in
securities (within the meaning of section 3(20) of ERISA) of a corporation or
partnership will not, solely by reason of such investment, be considered to be
an investment in the underlying assets of such corporation or partnership so as
to make such assets of the entity "plan assets" and thereby make a subsequent
transaction between the party in interest and the corporation or partnership a
prohibited transaction under Section 406 of ERISA. The Plan Asset Regulations
provide that the assets of entities in which retirement plans make equity
investments will be treated as "plan assets" unless such investments are (1) in
publicly offered securities, (2) in securities offered by an investment company
registered under the Investment Company Act of 1940, or (3) within one of the
other specific exemptions set forth in the Plan Asset Regulations. Since we are
not a registered investment company, the exemption contained in the Plan Asset
Regulations which may apply to an investment in our capital shares is that
it may be an investment in "publicly offered securities," defined generally as
interests which are freely transferable, widely-held and registered with the
Securities and Exchange Commission or an investment in which equity
participation by "benefit plan investors" is not significant. The Plan Asset
Regulations provide that equity participation in an entity by benefit plan
investors is "significant" if at any time 25% or more of the value of any class
of equity interest is held by benefit plan investors. The term "benefit plan
investors" is broadly defined for this purpose to include any employee pension
or welfare benefit plan, whether or not subject to ERISA, any plan described in
Section 4975(e)(1) of the Code and any entity whose underlying assets include
plan assets by reason of plan investment in the entity. We may have equity
participation in this offering by "benefit plan investors" that is significant,
as defined above. Therefore, we may not qualify for the exemption for
investments in which equity participation by benefit plan investors is not
significant.
101
PLAN ASSET REGULATIONS - PUBLICLY OFFERED SECURITIES EXEMPTION
As noted above, if a retirement plan acquires "publicly offered
securities," the assets of the issuer of the securities are not deemed to be
plan assets under the Plan Asset Regulations. The definition of publicly
offered securities requires that such securities must be "widely-held," "freely
transferable" and must satisfy certain registration requirements under federal
securities laws. Although we should satisfy the registration requirements under
this definition, the determinations of whether a security is "widely-held" and
"freely transferable" are inherently factual matters. Under the Plan Asset
Regulations, a class of securities will be "widely-held" if it is held by 100
or more persons. We anticipate that this requirement will be met; however, even
if the shares are deemed to be widely-held, the "freely transferable"
requirement must also be satisfied in order to qualify for this exemption. We
intend to satisfy the freely transferable requirement set forth in the Plan
Asset Regulations with respect to our shares. Because of the factual nature of
such a determination, however, and the lack of further guidance as to the
meaning of the term "freely transferable," there can be no assurance that we
will, in fact, qualify for this exemption.
PROHIBITED TRANSACTIONS
ERISA generally prohibits a fiduciary from causing an ERISA Plan to
engage in a broad range of transactions involving the assets of the ERISA Plan
and persons having a specified relationship to the Plan ("parties in interest")
unless a statutory or administrative exemption applies. Similar prohibitions
are contained in Section 4975 of the Code and generally apply with respect to
ERISA Plans, Keogh Plans, IRAs, and other Plans. An excise tax may be imposed
pursuant to Section 4975 of the Code on persons having a specified relationship
with a Plan ("disqualified persons") in respect of prohibited transactions
involving the assets of the Plan. Generally speaking, parties in interest for
purposes of ERISA would be disqualified persons under Section 4975 of the Code.
If our assets are treated for purposes of ERISA and Section 4975 of
the Code as the assets of the Plans that invest in our capital shares due to
the fact that we fail to satisfy the publicly offered securities exception,
certain transactions that we might enter into in the ordinary course of our
business might constitute "prohibited transactions" under ERISA and the Code,
thereby potentially subjecting fiduciaries of the Plans to personal liability
and civil penalties and potentially resulting in the imposition of an excise
tax under Section 4975 of the Code on the disqualified person that is party to
the transaction with us unless a statutory or administrative exemption exist
and the plan satisfies all conditions for such exemptive relief.
There are five class exemptions issued by the Department of Labor that
could apply in the event of a prohibited transaction. These Department of Labor
Prohibited Transaction Class Exemptions apply to:
o plan asset transactions determined by independent qualified
professional asset managers (PTE 84-14),
o certain transactions involving bank collective investment funds
(PTE 91-38),
o certain transactions involving insurance company pooled separate
accounts (PTE 90-1),
o certain transactions involving insurance company general
accounts (PTE 95-60), and
o plan asset transactions determined by in-house asset manager
(PTE 96-23).
However, there is no assurance that these exemptions or any other
exemption will apply, even if all of the conditions specified are satisfied.
102
GOVERNMENTAL PLANS
Although federal, state and local governmental pension plans are not
subject to ERISA, applicable provisions of federal and state law may restrict
the type of investments such a plan may make or otherwise have an impact on
such a plan's ability to invest in our capital shares. Accordingly, state and
local governmental pension plans considering an investment in our capital
shares should consult with their counsel regarding their proposed investment in
our capital shares.
SPECIAL CONSIDERATIONS FOR INSURANCE COMPANIES
An insurance company considering an investment should consider whether
it's general account may be deemed to include assets of the plans investing in
the general account, for example, through the purchase of an annuity contract.
In John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 510
U.S. 86 (1993), the United States Supreme Court held that assets held in an
insurance company's general account may be deemed to be plan assets under
certain circumstances. In that event, the insurance company might be treated as
a party in interest under such plans. However, PTE 95-60 (described above) may
exempt some or all of the transactions that could occur as the result of the
acquisition of our capital shares by an insurance company general account.
Therefore, insurance company investors should analyze whether John Hancock and
PTE 95-60 or any other exemption may have an impact on their decision to
purchase our capital shares.
In addition, the Small Business Job Protection Act of 1996 added a new
Section 401(c) of ERISA relating to the status of the assets of insurance
company general accounts under ERISA and Section 4975 of the Code. Pursuant to
Section 401(c), the Department of Labor issued final regulations effective
January 5, 2000 (the "General Account Regulations") with respect to insurance
policies issued on or before December 31, 1998 that are supported by an
insurer's general account. As a result of these regulations, assets of an
insurance company general account will not be treated as "plan assets" for
purposes of the fiduciary responsibility provisions of ERISA and Section 4975
of the Code to the extent such assets relate to contracts issued to employee
benefit plans on or before December 31, 1998 and the insurer satisfies various
conditions. The plan asset status of insurance company separate accounts is
unaffected by new Section 401(c) of ERISA, and separate account assets continue
to be treated as the plan assets of any such plan invested in a separate
account.
THE FOREGOING DISCUSSION OF ERISA AND INTERNAL REVENUE CODE ISSUES
SHOULD NOT BE CONSTRUED AS LEGAL ADVICE. FIDUCIARIES OF PLANS SHOULD CONSULT
THEIR OWN COUNSEL WITH RESPECT TO ISSUES ARISING UNDER ERISA AND THE INTERNAL
REVENUE CODE AND MAKE THEIR OWN INDEPENDENT DECISION REGARDING AN INVESTMENT IN
OUR CAPITAL SHARES.
103
PLAN OF DISTRIBUTION
GENERAL
We are offering a maximum of 4,000,000 shares to the public through
Participating Dealers, as defined below. The shares are being offered at a
price of $10.00 per share on a "best efforts" basis, which means generally that
the Participating Dealers will be required to use only their best
efforts to sell the shares and they have no firm commitment or obligation to
purchase any of the shares. We are also offering 400,000 shares for sale
pursuant to our dividend reinvestment plan at a price of $10.00 per share. We
reserve the right in the future to reallocate additional shares to our dividend
reinvestment plan out of our public offering shares. Therefore, a total of
4,400,000 shares are being registered in this offering.
The offering of shares will terminate on or before
____________________. However, we reserve the right to terminate this offering
at any time prior to such termination date.
UNDERWRITING COMPENSATION AND TERMS
Except as provided below, the Participating Dealers will
receive selling commissions of 7.0% of the gross offering proceeds. The Dealer
Manager will receive 2.5% of the gross offering proceeds in the form of a
dealer manager fee as compensation for acting as the Dealer Manager and for
expenses incurred in connection with marketing our shares. We will not pay
referral or similar fees to any accountants, attorneys or other persons in
connection with the distribution of the shares. Shareholders who elect to
participate in the dividend reinvestment plan will be charged selling
commissions and dealer manager fees on shares purchased pursuant to the
dividend reinvestment plan on the same basis as shareholders purchasing shares
other than pursuant to the dividend reinvestment plan.
The Dealer Manager will select other broker-dealers who are members of
the NASD (Participating Dealers) to sell our shares. In the event of the sale
of shares by such Participating Dealers, the Dealer Manager may reallow its
commissions in the amount of up to 7.0% of the gross offering proceeds to such
Participating Dealers. In addition, the Dealer Manager may reallow a portion of
its dealer manager fee to Participating Dealers in the aggregate amount of up
to 1.5% of gross offering proceeds to be paid to such Participating Dealers as
marketing fees, or to reimburse representatives of such Participating Dealers
the costs and expenses of attending our educational conferences and seminars.
In addition, unless otherwise agreed with the Dealer Manager,
Participating Dealers will be reimbursed for bona fide due diligence expenses,
not to exceed 1.0% of gross offering proceeds in the aggregate.
Investors may agree with their broker-dealer to reduce the amount of
selling commissions payable with respect to the sale of their shares down to
zero (1) in the event that the investor has engaged the services of a
registered investment advisor or other financial advisor with whom the investor
has agreed to pay compensation for investment advisory services or other
financial or investment advice, or (2) in the event that the investor is
investing in a bank trust account with respect to which the investor has
delegated the decision-making authority for investments made in the account to
a bank trust department. The net proceeds to AmREIT will not be affected by
reducing the commissions payable in connection with such transactions.
Neither the Dealer Manager nor its affiliates will compensate any
person engaged as an investment advisor by a potential investor as an
inducement for such investment advisor to advise favorably for an investment in
AmREIT. In addition, subscribers for shares may agree with their Participating
104
Dealers and the Dealer Manager to have selling commissions due with respect to
the purchase of their shares paid over a six-year period pursuant to a deferred
commission arrangement. Stockholders electing the deferred commission option
will be required to pay a total of $9.40 per share purchased upon subscription,
rather than $10.00 per share, with respect to which $0.10 per share will be
payable as commissions due upon subscription. For the period of six years
following subscription, $0.10 per share will be deducted on an annual basis
from dividends or other cash distributions otherwise payable to the
shareholders and used by AmREIT to pay deferred commission obligations. The net
proceeds to AmREIT will not be affected by the election of the deferred
commission option. Under this arrangement, a stockholder electing the deferred
commission option will pay a 1% commission upon subscription, rather than a 7%
commission, and an amount equal to a 1% commission per year thereafter for the
next six years, or longer if required to satisfy outstanding deferred
commission obligations, will be deducted from dividends or other cash
distributions otherwise payable to such shareholder and used by AmREIT to
satisfy commission obligations.
Shareholders electing the deferred commission option who are subject
to federal income taxation will incur tax liability for dividends or other cash
distributions otherwise payable to them with respect to their shares even
though such dividends or other cash distributions will be withheld from such
shareholders and will instead be paid to third parties to satisfy commission
obligations.
Investors who wish to elect the deferred commission option should make
the election on their Subscription Agreement. Election of the deferred
commission option shall authorize AmREIT to withhold dividends or other cash
distributions otherwise payable to such shareholder for the purpose of paying
commissions due under the deferred commission option; provided, however, that in
no event may AmREIT withhold in excess of $0.60 per share in the aggregate under
the deferred commission option. Such dividends or cash distributions otherwise
payable to shareholders may be pledged by AmREIT, the Dealer Manager or their
affiliates to secure one or more loans, the proceeds of which would be used to
satisfy sales commission obligations.
In the event that, at any time prior to the satisfaction of our
remaining deferred commission obligations, we begin a liquidation of our
properties, the remaining commissions due under the deferred commission option
may be accelerated by AmREIT. In such event, we shall provide notice of any
such acceleration to shareholders who have elected the deferred commission
option. In the event of a liquidation of our properties, the amount of
remaining commissions due shall be deducted and paid by AmREIT out of dividends
or net sale proceeds otherwise payable to shareholders who are subject to any
such acceleration of their deferred commission obligations. In no event may
AmREIT withhold in excess of $0.60 per share in the aggregate for the payment
of deferred commissions.
SUBSCRIPTION PROCEDURES
You should pay for your shares by check payable to "AmREIT."
Subscriptions will be effective only upon our acceptance, and we reserve the
right to reject any subscription in whole or in part. We may not accept a
subscription for shares until at least five business days after the date you
receive this prospectus. You will receive a confirmation of your purchase. We
will initially deposit the subscription proceeds in an interest-bearing account
with Wells Fargo Bank. Subscribers may not withdraw funds from the account. We
will withdraw funds from the account periodically for the acquisition of real
estate properties, the payment of fees and expenses or other investments
approved by our board of trust managers. We generally admit shareholders to
AmREIT on a daily basis.
105
Except for purchases pursuant to our dividend reinvestment plan or
reinvestment plans of other public real estate programs, all accepted
subscriptions will be for whole shares and for not less than 500 shares
($5,000) for non-qualified accounts, or 300 shares ($3,000) for qualified
accounts. See "Suitability Standards." Except in Maine, Minnesota, Nebraska and
Washington, investors who have satisfied the minimum purchase requirement and
have purchased units or shares in AmREIT programs or units or shares in other
public real estate programs may purchase less than the minimum number of shares
discussed above, provided that such investors purchase a minimum of 2.5 shares
($25). After investors have satisfied the minimum purchase requirement, minimum
additional purchases must be in increments of at least 2.5 shares ($25), except
for purchases made pursuant to our dividend reinvestment plan or reinvestment
plans of other public real estate programs.
The proceeds of this offering will be used only for the purposes set
forth in the "Estimated Use of Proceeds" section. Subscriptions will be
accepted or rejected within 30 days of receipt by AmREIT and, if rejected, all
funds shall be returned to the rejected subscribers within 10 business days.
The Dealer Manager and each Participating Dealer who sells shares on behalf of
AmREIT have the responsibility to make every reasonable effort to determine
that the purchase of shares is appropriate for the investor and that the
requisite suitability standards are met. See "Suitability Standards." In making
this determination, the Participating Dealer will rely on relevant information
provided by the investor, including information as to the investor's age,
investment objectives, investment experience, income, net worth, financial
situation, other investments, and other pertinent information. Each investor
should be aware that the Participating Dealer will be responsible for
determining suitability.
The Dealer Manager or each Participating Dealer shall maintain records
of the information used to determine that an investment in shares is suitable
and appropriate for an investor. These records are required to be maintained
for a period of at least six years.
106
SUPPLEMENTAL SALES MATERIAL
In addition to this prospectus, we may utilize certain sales material in
connection with the offering of the shares, although only when accompanied by
or preceded by the delivery of this prospectus. In certain jurisdictions, some
or all of such sales material may not be available. This material may include
information relating to this offering, our past performance, property brochures
and articles and publications concerning real estate. In addition, the sales
material may contain certain quotes from various publications without obtaining
the consent of the author or the publication for use of the quoted material in
the sales material.
The offering of shares is made only by means of this prospectus. Although
the information contained in such sales material will not conflict with any of
the information contained in this prospectus, such material does not purport to
be complete, and should not be considered a part of this prospectus or the
registration statement of which this prospectus is a part, or as incorporated
by reference in this prospectus or said registration statement or as forming
the basis of the offering of the shares.
EXPERTS
The consolidated financial statements and related consolidated
financial statement schedule of AmREIT as of and for the year ended December 31,
2002 have been audited by KPMG LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority in accounting and auditing.
The consolidated financial statements and related consolidated financial
statement schedule of AmREIT as of and for the year ended December 31, 2001 have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
On December 12, 2002, the Company dismissed Deloitte & Touche LLP
as its independent public accountants, effective immediately. The change was
made by the Audit Committee of the Board of Trust Managers of the Company.
Management sought and received proposals from three other independent public
accounting firms. These proposals were submitted from three other independent
public accounting firms. These proposals were submitted to the Company's
Audit Committee, which selected KPMG LLP as the Company's new auditors.
Deloitte & Touche's reports on the Company's consolidated financial
statements for the latest two fiscal years ended December 31, 2001 and December
31, 2000 did not contain an adverse opinion or disclaimer of opinion and were
not qualified as to uncertainty, audit scope or accounting principles. During
the Company's fiscal years ended December 31, 2001 and December 31, 2000 and
subsequent interim periods preceding the dismissal, there were no disagreements
with Deloitte & Touche on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Deloitte & Touche, would
have caused it to make reference to the subject matter of the disagreement in
connection with its reports. During the two most recent fiscal years and the
subsequent interim period through December 12, 2002, there were no reportable
events (as described in Regulation S-K Item 304 (a)(1)(v)).
On December 12, 2002, the Company engaged KPMG LLP to audit the Company's
financial statements for the year ending December 31, 2002. During the
Company's two most recent fiscal years ended December 31, 2001 and December
31, 2000, and the subsequent interim period through December 12, 2002, the
Company did not consult with KPMG LLP regarding any of the matters or events
set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K
107
LEGAL OPINIONS
The legality of the shares being offered hereby has been passed upon
by Locke Liddell & Sapp LLP. The statements under the caption "Federal Income
Tax Consequences" as they relate to federal income tax matters have been
reviewed by Locke Liddell, and Locke Liddell has opined as to certain income tax
matters relating to an investment in the company. Locke Liddell has represented
affiliates of AmREIT in other matters and may continue to do so in the future.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission
(Commission), Washington, D.C., a registration statement on Form S-11 under the
Securities Act of 1933, as amended, with respect to the shares offered pursuant
to this prospectus. This prospectus does not contain all the information set
forth in the registration statement and the exhibits related thereto filed with
the Commission, reference to which is hereby made. Copies of the registration
statement and exhibits related thereto, as well as periodic reports and
information filed by AmREIT may be obtained upon payment of the fees prescribed
by the Commission, or may be examined at the offices of the Commission without
charge, at the public reference facility in Washington, D.C. at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the
Commission maintains a Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
108
GLOSSARY
The following are definitions of certain terms used in this prospectus
and not otherwise defined herein or in the partnership agreement:
"DEALER MANAGER" means AmREIT Securities, Inc.
"NASAA GUIDELINES" means the Statement of Policy Regarding Real Estate
Programs of the North American Securities Administrators Association, Inc.
adopted on October 9 and 12, 1988, effective January 1, 1989, as amended.
"UBTI" means unrelated business taxable income, as that term is
defined in Sections 511 through 514 of the Internal Revenue Code.
109
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
AND FINANCIAL STATEMENT SCHEDULE
FOR THE YEAR ENDED DECEMBER 31, 2002
AMREIT AND SUBSIDIARIES
F-1
AMREIT AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
FINANCIAL STATEMENTS:
Independent Auditors' Report F-3
Independent Auditors' Report F-4
Consolidated Balance Sheet, December 31, 2002 F-5
Consolidated Statements of Operations for the Years Ended
December 31, 2002 and 2001 F-6
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 2002 and 2001 F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002 and 2001 F-8
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2002 and 2001 F-9 to F-22
FINANCIAL STATEMENT SCHEDULE:
Schedule III Consolidated Real Estate Owned and Accumulated
Depreciation for the Year Ended December 31, 2002 F-23
All other financial statement schedules are omitted as the required information
is either inapplicable or is included in the financial statements or related
notes.
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Trust Managers
AmREIT:
We have audited the accompanying consolidated balance sheet of AmREIT and
subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year ended December 31, 2002. In connection with our audit of the
consolidated financial statements, we have also audited the related financial
statement schedule. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AmREIT and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
KPMG LLP
Houston, Texas
March 31, 2003
F-3
INDEPENDENT AUDITORS' REPORT
To the Board of Trust Managers
AmREIT
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of AmREIT (formerly AmREIT, Inc.) and
subsidiaries (the "Company") for the year ended December 31, 2001. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, AmREIT and subsidiaries results of operations and cash
flows for the year ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Houston, Texas
March 15, 2002
F-4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMREIT AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2002
2002
ASSETS
Property:
Land $18,945,607
Buildings 28,652,858
Furniture, fixtures and equipment 381,383
__________
47,979,848
Accumulated depreciation (2,136,376)
__________
Total property, net 45,843,472
Net investment in direct financing leases 23,405,324
Cash and cash equivalents 2,506,868
Accounts receivable 173,659
Accounts receivable - related party 68,934
Escrow deposits 120,466
Prepaid expenses, net 438,696
Other assets:
Preacquisition costs 1,765
Loan acquisition cost, net of $85,579 in accumulated amortization 249,572
Accrued rental income 360,062
Intangible lease cost 257,600
Investment in non-consolidated affiliates 549,335
__________
Total other assets 1,418,334
__________
TOTAL ASSETS $73,975,753
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $33,586,085
Accounts payable 1,126,219
Accounts payable - related party 206,123
Security deposit 33,930
Prepaid rent 6,177
___________
TOTAL LIABILITIES 34,958,534
___________
Minority interest 810,971
Shareholders' equity:
Preferred stock, $.01 par value, 10,001,000 shares authorized, none issued -
Class A Common stock, $.01 par value, 100,010,000 shares authorized,
2,772,340 shares issued and outstanding 27,723
Class B Common stock, $.01 par value, 3,000,000 shares authorized,
2,464,207 shares issued and outstanding 24,642
Capital in excess of par value 47,183,271
Accumulated distributions in excess of earnings (8,426,846)
Deferred compensation (205,353)
Cost of treasury stock, 65,379 shares (397,189)
___________
TOTAL SHAREHOLDERS' EQUITY 38,206,248
___________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $73,975,753
===========
See Notes to Consolidated Financial Statements.
F-5
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2002 2001
Revenues:
Rental income from operating leases $ 3,687,094 $ 2,648,237
Earned income from direct financing leases 1,807,117 637,537
Service fees and other income 2,041,999 2,033,008
Management fees 279,910 342,349
Income from non-consolidated affiliates 416,904 20,743
(Loss) gain on sale of property (47,553) 254,013
Interest income 4,206 10,555
_________ _________
Total revenues 8,189,677 5,946,442
_________ _________
Expenses:
General operating and administrative 2,801,946 1,953,285
Legal and professional 1,332,188 1,002,776
Interest 1,774,973 1,063,574
Depreciation 666,307 464,308
Deferred merger costs 1,904,370 -
_________ _________
Total expenses 8,479,784 4,483,943
_________ _________
(Loss) income before federal income taxes and minority
interest in net income of consolidated joint ventures (290,107) 1,462,499
Federal income tax expense for taxable REIT subsidiary 60,656 144,420
Minority interest in net income of consolidated joint ventures (308,010) (527,571)
__________ _________
Net (loss) income (658,773) 790,508
Distributions paid to Class B shareholders (865,293) -
__________ _________
Net (loss) income available to Class A shareholders $(1,524,066) $ 790,508
========== =========
Net (loss) income per common share, basic and diluted (0.62) 0.34
========== =========
Common shares used to compute net (loss) and income
per share, basic and diluted 2,469,725 2,354,572
========== =========
See Notes to Consolidated Financial Statements.
F-6
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2002 and 2001
Capital in
Common Shares excess of
Number Amount par value
Balance at December 31, 2000 2,384,117 $ 23,841 $ 21,655,867
Net income - - -
Repurchase of common shares, Class A (24,723 shares) - - -
Distributions - - -
_________ ______ __________
Balance at December 31, 2001 2,384,117 23,841 21,655,867
_________ ______ __________
Net loss - - -
Issuance of common shares Class A 388,200 3,882 2,057,755
Issuance of common shares Class B, net of 124,750 that
converted to Class A 2,464,207 24,642 23,469,649
Issuance of restricted shares Class A - - -
Repurchase of common shares Class A (46,069 shares) - - -
Distributions - - -
_________ ______ __________
Balance at December 31, 2002 5,236,524 $52,365 $47,183,271
========= ====== ==========
Accumulated
distributions Deferred Cost of
in excess of Compensation treasury
earnings Obligation shares Total
Balance at December 31, 2000 $ (6,223,523) $ - $ (127,467) $ 15,328,718
Net income 790,508 - - 790,508
Repurchase of common shares Class A (24,723 shares) - - (160,703) (160,703)
Distributions (604,742) - - (604,742)
_________ _________ ________ __________
Balance at December 31, 2001 (6,037,757) - (288,170) 15,353,781
_________ _________ ________ __________
Net loss (658,773) - - (658,773)
Issuance of common shares, Class A - - - 2,061,637
Issuance of common shares, Class B, net of 124,750 that
converted to Class A - - - 23,494,291
Issuance of restricted shares Class A - (205,353) 185,119 (20,234)
Repurchase of common shares Class A (46,069 shares) - - (294,138) (294,138)
Distributions (1,730,316) - - (1,730,316)
_________ _______ _______ __________
Balance at December 31, 2002 $(8,426,846) $ (205,353) $(397,189) $38,206,248
========= ======== ======= ==========
See Notes to Consolidated Financial Statements.
F-7
AMREIT AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years ended December 31,
2002 2001
Cash flows from operating activities:
Net (loss) income $ (658,773) $ 790,508
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Loss (gain) on sale of property 47,553 (254,013)
Depreciation and amortization 723,607 481,265
Increase in minority interest in net income of consolidated
joint ventures 308,010 527,571
Deferred merger costs 1,904,370 -
Decrease (increase) in accounts receivable 1,155,875 (89,921)
Decrease (increase) in accounts receivable - related party 378,494 (298,521)
Increase in prepaid expenses, net (170,028) (128,324)
(Decrease) increase in accounts payable (365,018) 821,168
Increase in accounts payable- related party 181,123 15,524
Cash receipts from direct financing leases
less than income recognized 282,805 (38,581)
Decrease (increase) in accrued rental income 32,095 (102,757)
Increase in prepaid rent 6,177 -
Increase in other assets (49,114) (81,545)
Increase in deferred compensation (48,086) -
_________ _________
Net cash provided by operating activities 3,729,090 1,642,374
_________ _________
Cash flows from investing activities:
Improvements to real estate (623,124) (432,276)
Acquisitions of real estate (18,951,523) (3,445,279)
Additions to furniture, fixtures and equipment (25,131) (37,061)
Distributions from (investment in) joint ventures 431,604 (729,958)
Proceeds from sale of property 3,692,544 2,520,259
Decrease (increase) in preacquisition costs 207,435 (208,576)
__________ _________
Net cash used in investing activities (15,268,195) (2,332,891)
__________ _________
Cash flows from financing activities:
Proceeds from notes payable 19,253,403 8,038,500
Payments of notes payable (3,399,277) (6,539,134)
Loan acquisition costs (38,035) (169,579)
Issuance of treasury stock 185,119 -
Purchase of treasury stock (294,138) (160,703)
Issuance of common stock (517,857) -
Retirement of common stock (106,500) -
Common dividends paid (1,730,316) (604,742)
Contributions from minority interests 809,971 -
Distributions to minority interests (343,514) (582,575)
__________ ___________
Net cash provided by (used in) financing activities 13,818,856 (18,233)
__________ ___________
Net increase (decrease) in cash and cash equivalents 2,279,751 (708,750)
Cash and cash equivalents at January 1 227,117 935,867
__________ ___________
Cash and cash equivalents at December 31 $ 2,506,868 $ 227,117
========== ===========
Supplemental schedule of noncash investing and financing activities
On July 23, 2002, the Company merged with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd. and
AAA Net Realty Fund XI, Ltd. In conjunction with the merger, the Company
acquired $23,890,319 worth of property and issued 2,589,179 shares of Class
B common stock.
Supplemental schedule of cash flow information: Cash paid during the year
for:
Interest 1,691,927 1,063,574
Income taxes 133,841 -
See Notes to Consolidated Financial Statements.
F-8
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AmREIT, ("AmREIT" or the "Company") formally AmREIT, Inc., which was
incorporated in the state of Maryland in August 1993, is a real estate
investment trust ("REIT") based in Houston, Texas and is listed on the
American Stock Exchange (AMY). AmREIT was organized in the state of Texas on
December 22, 2002 and is a pre-eminent sponsor of real estate direct
participation programs to the financial planning community. For more than 17
years, the Company has established a track record of investing in commercial
real estate leased to parent companies in the retail, financial services and
banking, medical and restaurant sectors. AmREIT's real estate team focuses on
development, management, brokerage and ownership of freestanding credit tenant
leased ("CTL") and frontage shopping centers ("FSC") that are located
contiguous to major thoroughfares and traffic generators. AmREIT's customer
list includes national and regional tenants such as: Walgreens, Goodyear Tire,
Washington Mutual, IHOP, McDonald's, Herman Hospital, Radio Shack, Coldwell
Banker, Guaranty Federal, Bennigan's, Chili's, Texas Children's Pediatric
Associates, Discount Tire, etc.
AmREIT owns a real estate portfolio that consists of over 46 properties located
in 18 states. Its properties include single-tenant; free standing credit tenant
leased projects and multi-tenant frontage projects. The single tenant projects
are located from coast to coast and are primarily leased to corporate tenants
where the lease is the direct obligation of the parent companies. In so doing,
the dependability of the lease payments are based on the strength and viability
of the entire company, not just that location. The multi-tenant projects are
situated primarily throughout Texas. Supporting the real estate portfolio is an
operating company subsidiary of AmREIT that provides a complete range of
services including development, construction management, property management,
brokerage and leasing.
Through AmREIT's direct participation programs, it creates new investment
entities that buy and develop commercial real estate with proceeds raised from
third-party investors. AmREIT has extensive experience and long-term
relationships in the commercial real estate market - the basis of its ability
to sponsor real estate investment opportunities while creating fee income and
carried interests for AmREIT and its shareholders.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and
AAA Net Realty Fund XI, Ltd. With the merger of the affiliated partnerships,
AmREIT increased its real estate assets by approximately $24.3 million and
issued approximately 2.6 million Class B common shares to the limited
partners in the affiliated partnerships. Approximately $760 thousand in 8 year,
interest only, subordinated notes were issued to limited partners of the
affiliated partnerships who dissented against the merger. The acquired
properties are unencumbered, single tenant, free standing properties on lease
to national and regional tenants, where the lease is the direct obligation of
the parent company. This merger transaction triggered a payment under the
deferred consideration agreement between AmREIT and H. Kerr Taylor, President
and Chief Executive Officer. The deferred consideration agreement was approved
by the shareholders in 1998 as part of the sale of Mr. Taylor's advisory
company to AmREIT. In the agreement, Mr. Taylor would receive additional class
A common shares, in exchange for the sale of his advisory company, as AmREIT
F-9
issued additional capital. Mr. Taylor was issued approximately 302 thousand
Class A common shares, which resulted in a deferred merger expense of $1.9
million in the third quarter 2002. Under the deferred consideration agreement,
approximately 384 thousand shares remain to be issued to Mr. Taylor in the
event the Company issues additional shares prior to June 4, 2004, the
expiration date of the agreement.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of AmREIT, and its
wholly or majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
BASIS OF ACCOUNTING
The financial records of the Company are maintained on the accrual basis of
accounting whereby revenues are recognized when earned and expenses are
recorded when incurred.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist of demand deposits at commercial banks and money market
funds.
PROPERTY
Property is leased to others, primarily on a net lease basis, whereby the
operating expenses related to the properties, including property taxes,
insurance and common area maintenance are the responsibility of the tenant. The
leases are accounted for under the operating method or the direct financing
method in accordance with generally accepted accounting principles. Under the
operating lease method, the properties are recorded at cost. Rental income is
recognized ratably over the life of the lease and depreciation is charged based
upon the estimated useful life of the property. Under the direct financing
lease method, properties are recorded at their net investment. Unearned income
is deferred and amortized to income over the life of the lease so as to produce
a constant periodic rate of return.
Expenditures related to the development of real estate are carried at cost plus
capitalized carrying charges, acquisition costs and development costs. Carrying
charges, primarily interest and loan acquisition costs, and direct and indirect
development costs related to buildings under construction are capitalized as
part of construction in progress. The Company capitalizes acquisition costs
once the acquisition of the property becomes probable. Prior to that time, the
Company expenses these costs as acquisition expense.
Management reviews its properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets, including
accrued rental income, may not be recoverable through operations. Management
determines whether an impairment in value occurred by comparing the estimated
future cash flows (undiscounted and without interest charges), including the
residual value of the property, with the carrying cost of the individual
property. If impairment is indicated, a loss will be recorded for the amount by
which the carrying value of the asset exceeds its fair value.
F-10
DEPRECIATION
Buildings are depreciated using the straight-line method over an estimated
useful life of 39 years. Leasehold estate properties, where the Company owns
the building and improvements but not the related ground, therefore there is no
residual value beyond the lease, are depreciated over the life of the lease.
INVESTMENT IN NON-CONSOLIDATED AFFILIATES
AmREIT invested $250 thousand as a limited partner and $1,000 as a general
partner in AmREIT Opportunity Fund, Ltd. ("AOF"), which is accounted for using
the equity method. The limited partners have the right to remove and replace
the general partner by a vote of the limited partners owning two-thirds of the
outstanding units. AmREIT currently owns a 10.5% limited partner interest in
AOF. AOF was formed to develop, own, manage, and hold for investment and, or
resell property and to make or invest in loans for the development or
construction of property. Liquidation of AOF commenced in July of 2002. Based
on the general partner's analysis of owned real estate as of December 31, 2002,
none of the assets owned or in liquidation by AOF are impaired.
AmREIT invested $200 thousand as a limited partner and $1,000 as a general
partner in AmREIT Income & Growth Fund, Ltd. ("AIG") that is accounted for
using the equity method. The limited partners have the right to remove and
replace the general partner by a vote of the limited partners owning a majority
of the outstanding units. AmREIT currently owns an approximately 3.9% limited
partner interest in AIG. AIG was formed to develop, own, manage, and hold for
investment and, or resell property and to make or invest in loans for the
development or construction of property.
AmREIT invested $70 thousand as a limited partner in AmREIT CDP #27, LP that is
accounted for using the equity method. AmREIT CDP #27, LP was formed to acquire
commercial real property and to develop, operate, lease, manage, and or sell
real property. AmREIT CDP #27, LP purchased two IHOP properties in 2001 located
in Memphis, Tennessee and Tupelo, Mississippi. The Memphis, Tennessee property
was sold for a profit in the first quarter of 2002.
ARIC invested $122 thousand as a limited partner in AmREIT CDP SPE #33, Ltd.
that is accounted for using the equity method. AmREIT CDP SPE #33, Ltd. was
formed to acquire commercial real property and to develop, operate, lease,
manage, and or sell real property. In December 2001, AmREIT CDP #33, Ltd.
purchased three IHOP leasehold estate properties located in Houston, Texas,
Orem, Utah, and Hagerstown, Maryland.
AmREIT invested $330 thousand as a member in AmREIT CDP #31, LLC ("CDP 31")
that is accounted for using the equity method. CDP 31 was formed to acquire
commercial real property and to develop, operate, lease, manage, and or sell
real property. CDP 31 purchased two IHOP properties in 2001 located in
Cookeville, Tennessee and Scottsdale, Arizona. Both properties were sold during
the first quarter 2002, and CDP 31 does not own any real property as of
December 31, 2002.
OTHER ASSETS
Other assets include loan acquisition costs, net of accumulated amortization,
of $250 thousand. Loan acquisitions costs are incurred in obtaining property
financing and are amortized to interest expense on the effective interest
method over the term of the debt agreements. Accumulated amortization related
to loan acquisition costs as of December 31, 2002 totaled $86 thousand.
F-11
DEFERRED COMPENSATION
Deferred compensation includes stock grants to employees as a form of long term
compensation. The stock grants vest over a period of time not to exceed four
years. This allows the Company to align the interest of its employees with the
interest of our shareholders. As the stock grants vest, the Company will
amortize the vested portion to compensation expense. The expense will be
calculated by taking the number of shares vested multiplied by the market price
per share as determined on the vesting dates.
Effective January 1, 2003, AmREIT will adopt SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123".
STOCK ISSUANCE COSTS
Issuance costs incurred in the raising of capital through the sale of common
stock are treated as a reduction of shareholders' equity.
REVENUE RECOGNITION
Properties are primarily leased on a net lease basis. Revenue is recognized on
a straight-line basis over the terms of the individual leases. Service fees are
recognized when earned.
FEDERAL INCOME TAXES
AmREIT is qualified as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, and is, therefore, not subject to Federal income
taxes to the extent of dividends paid, provided it meets all conditions
specified by the Internal Revenue Code for retaining its REIT status, including
the requirement that at least 90% of its real estate investment trust taxable
income is distributed by March 15 of the following year.
AmREIT Realty Investment Corporation ("ARIC"), a wholly owned subsidiary of
AmREIT, is treated as a taxable REIT subsidiary for Federal income tax
purposes. As such, ARIC and its consolidated subsidiaries have recorded a
Federal income tax expense at December 31, 2002 of $61 thousand, which
represents the Federal income tax obligations on the consolidated taxable REIT
subsidiary's taxable net income. Additionally, in 2002, a deferred tax
liability of $28 thousand was established to record the taxes on certain
real estate assets of ARIC.
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income to class A
common shareholders by the weighted average number of class A common shares
outstanding. Diluted earnings per share has been computed by dividing net
income (as adjusted) by the weighted average number of common shares
outstanding plus the weighted average number of dilutive potential common
shares.
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
For the Years Ended December 31,
BASIC AND DILUTED EARNINGS PER SHARE 2002 2001
Weighted average common shares outstanding (in thousands) 2,470 2,355
Basic and diluted (loss)/earnings per share * $(0.62) $0.34
------- -----
EARNINGS FOR BASIC AND DILUTED COMPUTATION
(Loss) earnings to Class A common shareholders (in thousands) * $(1,524) $791
====== ====
* For 2002, the loss of $1.524 million includes the charge taken against
earnings during the third quarter of $1.9 million, which was the market value
of the Class A common shares issued to H. Kerr Taylor, President & CEO, related
to the sale of his advisory company to AmREIT in 1998. The charge was for the
deferred merger cost due from this sale that was triggered by the issuance of
additional common stock as part of the merger with AmREIT's affiliated
partnerships during the third quarter of 2002.
F-12
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's consolidated financial instruments consist primarily of cash,
cash equivalents, accounts receivable and accounts and notes payable. The
carrying value of cash, cash equivalents, accounts receivable and accounts
payable are representative of their respective fair values due to the
short-term maturity of these instruments. The Company's total debt obligations
are $33.6 million, of which $13.42 million has variable rate terms and
therefore, the fair value is representative of its carry value. Approximately
$20.18 million has fixed rate terms, of which approximately $15.5 million was
entered into during 2002. Based on the dates that the debt obligations were
entered into and the pricing on current debt obligations, the Company believes
that the fair value of its fixed rate debt obligations is materially
representative of its carry value.
NEW ACCOUNTING STANDARDS
On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the
Financial Accounting Standards Board ("FASB"). SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Goodwill and certain intangible assets will remain on the
balance sheet and not be amortized. On an annual basis, and when there is
reason to suspect that their values have been diminished or impaired, these
assets must be tested for impairment, and write-downs may be necessary. The
Company implemented SFAS No. 141 on July 1, 2001. The adoption of this
Statement had no effect on the Company's consolidated financial position or
results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets " was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company implemented SFAS No. 142 on January 1,
2002. The adoption of SFAS No. 142 did not have a material impact on our
consolidated financial position, results of operations, or cash flows.
F-13
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which is effective for fiscal years beginning after June 15,
2002. SFAS No. 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of SFAS No. 143 did not have a material
impact on our consolidated financial position, results of operations, or cash
flows.
On January 1, 2002, the company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses accounting
and reporting for the impairment or disposal of a segment of a business. More
specifically, this statement broadens the presentation of discontinued
operations to include a component of an entity whose operations and cash flows
can be clearly distinguished, opertionally and for financial reporting
purposes, from the rest of the entity. The adoption of SFAS No. 144 did not
have a material impact on our consolidated financial position, results of
operations, or cash flows.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The initial
recognition and measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002 and are not expected to
have a material effect on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002, however, these disclosure
modifications are not applicable to the Company and adoption of SFAS 148 is not
anticipated to have a material impact on our consolidated financial position,
results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements. The
Interpretation requires certain disclosures in financial statements issued
after January 31, 2003 if it is reasonably possible that the Company will
consolidate or disclose information about variable interest entities when the
Interpretation becomes effective.
Reclassification
Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform to the presentation used in the 2002 consolidated
financial statements.
F-14
2. OPERATING LEASES
A summary of minimum future rentals to be received, exclusive of any renewals,
under noncancellable operating leases in existence at December 31, 2002 is as
follows:
2003 4,342,650
2004 4,260,343
2005 4,015,934
2006 3,994,020
2007 3,754,100
2008-2027 15,285,089
----------
$35,652,136
3. NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in its direct financing leases at December 31,
2002 included:
Minimum lease payments receivable $ 61,306,182
Unguaranteed residual value 3,858,403
Less: Unearned income (41,759,261)
------------
$ 23,405,324
A summary of minimum future rentals, exclusive of any renewals, under the
noncancellable direct financing leases follows:
2003 2,444,944
2004 2,453,682
2005 2,462,421
2006 2,471,778
2007 2,605,857
2008 - 2027 48,867,500
-----------
Total $61,306,182
===========
4. INVESTMENT IN NON-CONSOLIDATED AFFILIATES
AmREIT owns interests in 5 limited liability companies or limited
partnerships, which are accounted for under the equity method since
AmREIT exercises significant influence. Our interests in these joint ventures
and limited partnerships range from 2% to 40%, which are primarily single and
multi-tenant net lease retail real estate assets. Combined condensed financial
information of these ventures (at 100%) is summarized as follows:
F-15
Combined Balance Sheet December 31, 2002
Assets
Property, net $ 8,698,634
Cash 4,172,585
Other assets 2,456,268
-------------
TOTAL ASSETS $15,327,487
===========
Liabilities and partners' capital
Notes payable $ 3,859,810
Other liabilities 493,454
Partners capital 10,974,223
------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $15,327,487
===========
Combined Statement of Operations
2002 2001
Total Revenue $ 2,624,850 $ 582,001
Expense
Interest 358,672 83,110
Depreciation and amortization 189,066 71,640
Other 188,834 188,598
-------------- ---------
TOTAL EXPENSE 736,572 343,348
-------------- ---------
NET INCOME $ 1,888,278 $ 238,653
============= ============
5. NOTES PAYABLE
In November 1998, the Company entered into an unsecured credit facility (the
"Credit Facility"), which is being used to provide funds for the acquisition of
properties and working capital, and repaid all amounts outstanding under the
Company's prior credit facility. Under the Credit Facility, which had an
original term of one year, and has been extended through April 2003, the
Company may borrow up to $20 million subject to the value of unencumbered
assets. The Company is negotiating with the Lender for an extension of the
Credit Facility, which would extend the maturity of the Credit Facility beyond
December 31, 2003. The Credit Facility contains covenants, which among other
restrictions, require the Company to maintain a minimum net worth and a maximum
leverage ratio. As of December 31, 2002, the Lender had waived these financial
covenants. The Credit Facility bears interest at an annual rate of LIBOR plus a
spread of 2.0% (3.4375% as of December 31, 2002). On December 31, 2002, $11.76
million was outstanding under the Credit Facility. Thus the Company has
approximately $8.24 million available under its line of credit subject to use
of proceeds by the lender.
In March 1999, the Company entered into a ten-year mortgage note, amortized
over 30 years, for $1 million with $968 thousand being outstanding at December
31, 2002. The interest rate is fixed at 8.375% with payments of principal and
interest due monthly. The note matures April 1, 2009 and as of December 31,
2002 the Company is in compliance with all terms of the agreement. The note is
collateralized by a first lien mortgage on property with an aggregate carrying
value of $1.179 million, net of $107 thousand of accumulated depreciation.
F-16
In February 2001, the Company entered into a ten-year mortgage note, amortized
over 20 years, for $1.35 million with $1.3 million being outstanding at
December 31, 2002. The interest rate is fixed at 8.25% with payments of
principal and interest due monthly. The note matures February 28, 2011 and as
of December 31, 2002 the Company is in compliance with all terms of the
agreement. The note is collateralized by a first lien mortgage on property,
which is accounted for as a direct financing lease with a net investment in
direct financing lease of $1 million and land of $741 thousand.
In October 2001, the Company entered into a ten-year mortgage note amortized
over 30 years, for $2.4 million with $2.378 million being outstanding at
December 31, 2002. The interest rate is fixed at 7.60% with payments of
principal and interest due monthly. The note matures November 1, 2011 and as of
December 31, 2002 the Company is in compliance with all terms of the agreement.
The note is collateralized by a first lien mortgage on property with an
aggregate carrying value of $3.967 million, net of $330 thousand of accumulated
depreciation.
In October 2001, the Company entered into a note payable for $1.658 million
with $1.658 million being outstanding at December 31, 2002. The interest rate
is equal to the thirty day LIBOR rate plus 280 basis points, but in no event
lower than 6.75%, which equated to 6.75% at December 31, 2002. The note matures
November 1, 2004 and as of December 31, 2002 the Company is in compliance with
all terms of the agreement. The note is collateralized by a first lien mortgage
on property, which is accounted for as a direct financing lease with a net
investment in direct financing lease of $1.33 million and land of $564
thousand.
Beginning in April 2002, AAA CTL Notes, Ltd., a majority owned subsidiary of
AmREIT, began entering into non-recourse ten-year mortgages, amortized over 20
years, related to the purchase of seventeen IHOP properties. The following
table summarizes the terms of loan agreements and the property collateralizing
the non-recourse notes. As of December 31, 2002 the Company is in compliance
with all terms of the agreement. The non-recourse notes have
cross-collateralization and default provisions with each other.
F-17
Loan amount at Net investment in
Location Original loan December 31, Fixed direct financing
amount 2002 interest Date loan lease
(in thousands) (in thousands) rate matures (in thousands)
Shawnee, KS $ 751 $ 741 7.82% May 1, 2012 $ 889
El Paso, TX 760 751 7.82% May 1, 2012 897
Beaverton, OR 887 876 7.82% May 1, 2012 1,046
Rochester, NY 951 939 7.82% May 1, 2012 1,136
Baton Rouge, LA 1,250 1,235 7.82% May 1, 2012 1,460
Charlottesville, VA 630 622 7.82% May 1, 2012 749
Albuquerque, NM 767 747 7.82% May 1, 2012 887
Springfield, MO 1,030 1,019 7.82% June 1, 2012 1,208
Salem, OR 621 614 7.82% June 1, 2012 732
Roanoke, VA 712 706 7.89% July 1, 2012 845
Alexandria, LA 716 711 7.89% Aug. 1, 2012 855
Centerville, UT 1,242 1,233 7.89% Aug. 1, 2012 1,078
Memphis, TN 1,342 1,333 7.89% Aug. 1, 2012 1,088
La Verne, CA 745 741 7.89% Sept. 1, 2012 998
El Paso, TX 894 890 7.89% Sept. 1, 2012 1,156
Memphis, TN 777 773 7.89% Sept. 1, 2012 1,062
Parker, CO 835 831 7.89% Sept. 1, 2012 1,112
----------------- ----------------- --------------------
Total $14,910 $14,762 $17,198
================= ================= ====================
In July of 2002, the Company issued thirteen, 8 year subordinated, 5.47%
interest-only notes totaling $760 thousand, maturing July 2010. The notes,
which are callable by the Company at par plus accrued interest, were issued to
partners who dissented against the Company's merger with three affiliated
public partnerships.
Aggregate annual maturity of the notes payable for each of the following five
years ending December 31 are as follows:
(in thousands)
2003 $ 12,172
2004 447
2005 483
2006 522
2007 565
Thereafter 19,397
------------
$ 33,586
F-18
6. MAJOR TENANTS
The following schedule summarizes rental income by lessee for 2002 and 2001 (in
thousands):
2002 2001
International House of Pancakes $ 1,784 $ 510
Footstar, Inc. 735 713
OfficeMax, Inc. 509 518
Wherehouse Entertainment 381 378
Hollywood Entertainment Corp. 273 273
Sugar Land Imaging Affiliates Ltd. 264 217
Mattress Giant, Inc. 168 106
Washington Mutual 158 158
Radio Shack 109 109
Golden Corral (4) 167 0
Texas Children's Pediatrics (2) 137 0
Don Pablos 78 79
One Care Health Industries, Inc. (1) 57 204
Comp USA (4) 123 0
Baptist Memorial Hospital (4) 102 0
TGI Friday's (4) 83 0
Dr. Pucillo (4) 87 0
Pier 1 62 0
America's Favorite Chicken Co. (3) (4) 55 21
Blockbuster (4) 42 0
Waldenbooks (4) 38 0
Jack in the Box (4) 34 0
Goodyear (4) 25 0
Skewers 18 0
Hope Rehab 5 0
------- -------
Total $ 5,494 $ 3,286
======= =======
(1) One Care Health Industries, Inc. was a tenant at Copperfield Medical
Plaza. In April of 2002, AmREIT negotiated a lease buy out agreement
with One Care for approximately $190 thousand. As a result, AmREIT
immediately released approximately 75% of the available space to Texas
Children's Pediatrics and the Company has negotiated a lease for
balance of the space.
(2) Texas Children's Pediatrics entered into a long-term lease with
AmREIT, beginning in May 2002, at Copperfield Medical Plaza. The lease
was entered into as a result of the negotiated lease buy out by AmREIT
and One Care Health Industries, Inc.
(3) The America's Favorite Chicken Co. restaurant located in Atlanta
was sold by AmREIT during the first quarter 2001.
(4) Properties were purchased from three affiliated partnerships in
July 2002.
7. FEDERAL INCOME TAXES
The differences between net income for financial reporting purposes and taxable
income before distribution deductions relate primarily to temporary
differences, merger costs and potential acquisition costs which are expensed
for financial reporting purposes.
For income tax purposes, distributions paid to shareholders consist of ordinary
income, capital gains and return of capital as follows (in thousands):
2002 2001
-------- --------
Ordinary income $ - $ 6
Return of capital 1,730 143
Capital gain - 456
-------- --------
$ 1,730 $ 605
======== ========
F-19
8. RELATED PARTY TRANSACTIONS
See Note 4 regarding investments in non-consolidated affiliates.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and
AAA Net Realty Fund XI, Ltd. AmREIT accounted for this merger as a purchase,
whereby the assets of the partnerships have been recorded at fair market value.
AmREIT increased its real estate assets by approximately $24.3 million and
issued approximately 2.6 million shares of Class B common stock to the limited
partners in the affiliated partnerships as a result of the merger.
Approximately $760 thousand in 8 year, 5.47% interest only, subordinated notes
were issued to limited partners of the affiliated partnerships who dissented to
the merger. The acquired properties are unencumbered, single tenant, free
standing properties on lease to national and regional tenants, where the lease
is the direct obligation of the parent company. A deferred merger expense
stemmed from stock issued to H. Kerr Taylor, President and Chief Executive
Officer, based on a deferred consideration that was approved by the
stockholders in 1998. Mr. Taylor was issued 302 thousand shares of Class A
common stock, which resulted in a $1.9 million charge to earnings in the third
quarter 2002. As the Company raises additional equity, Mr. Taylor is eligible
to receive up to an additional 384 thousand shares of Class A common stock
pursuant to the deferred consideration agreement approved by the stockholders
in 1998 related to the sale of Mr. Taylor's advisory company to AmREIT.
The Company provides property acquisition, leasing, administrative and
management services for ten affiliated real estate limited partnerships that
are under common management (the "Partnerships"). The president and director of
the Company owns between 45% and 100% of the stock of the companies that serve
as the general partner of the Partnerships. Service fees of $245 thousand and
$335 thousand were paid by the Partnerships to the Company for 2002 and 2001
respectively.
As a sponsor of real estate investment opportunities to the NASD financial
planning broker dealer community, the Company maintains a 1% general partner
interest in the investment funds that it sponsors. The funds are typically
structured such that the limited partners receive 99% of the available cash
flow until 100% of their original invested capital has been returned and a
preferred return has been met. Once this has happened, then the general partner
begins sharing in the available cash flow at various promoted levels. The
Company also assigns a portion of this general partner interest in these
investment funds to its employees as long term, contingent compensation. In so
doing, the Company believes that it will align the interest of management with
that of the shareholders, while at the same time allowing for a competitive
compensation structure in order to attract and retain key management positions
without increasing the overhead burden.
On March 20, 2002, the Company formed AAA CTL Notes, Ltd. ("AAA"), a majority
owned subsidiary which is consolidated in the financial statements of AmREIT,
through which the Company purchased fifteen IHOP leasehold estate properties
and two IHOP fee simple properties.
Locke Liddell and Sapp, LLP acts as the Company's corporate attorneys. Bryan
Goolsby is the managing director of Locke Liddell and Sapp LLP and is a member
of the Company's board of trust managers. During 2002 and 2001, the Company
paid Locke Liddell and Sapp LLP approximately $777 thousand and $133 thousand,
respectively, for legal services rendered.
F-20
9. PROPERTY ACQUISITIONS AND DISPOSITIONS
During the third quarter, the Company purchased seventeen IHOP restaurant
properties. Fifteen of the properties are leasehold estate properties, whereby
the Company owns the physical improvements, but does not own the underlying
land. Two of the properties were purchased in fee simple. The total purchase
price was $17.25 million. The properties were purchased utilizing $2.34 million
cash and $14.91 million non-recourse, 10-year debt with an average
interest rate of 7.85%. Each lease agreement extends for a period of 18-25
years, however, the tenant has the ability to extend the primary term of the
lease for two to three additional terms of five years each. Additionally, each
lease is subject to a corresponding ground lease with the same term of 18-25
years and two to three additional terms of five years each. The Company
recorded $1.18 million in rental income during 2002 from properties acquired
in this transaction.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and
AAA Net Realty Fund XI, Ltd., which was accounted for as an acquisition. With
the merger of the affiliated partnerships, AmREIT increased its real estate
assets by approximately $24.3 million and issued approximately 2.6 million
shares of Class B common stock to the limited partners in the affiliated
partnerships. The class B common shares are not listed on an exchange and
there is currently no available trading market for the class B common shares.
The class B common shares do not have voting rights, receive a fixed 8%
cumulative and preferred dividend, and are convertible into the class A common
shares on a one-for-one basis at any time, at the holder's option.
Approximately $760 thousand in 8 year, interest only, subordinated notes were
issued to limited partners of the affiliated partnerships who dissented against
the merger. The acquired properties are unencumbered, single tenant, free
standing properties on lease to national and regional tenants, where the lease
is the direct obligation of the parent company.
The following selected unaudited pro forma consolidated statement of operations
for AmREIT and subsidiaries gives effect to the merger with its three
affiliated partnerships, which assumes that the merger occurred on January 1,
2002 and January 1, 2001, respectively. Additionally, we have presented a
summary of assets acquired and liabilities assumed as of the date of the
merger, July 23, 2002.
Pro Forma Consolidated Statement of Operations
For the Twelve Months Ended December 31,
(Unaudited)
2002 2001
Revenues
Rental income and earned income $ 6,399,475 $ 5,012,747
Other income 2,542,974 2,459,287
----------- -----------
Total Revenues 8,942,449 7,472,034
----------- -----------
Total Expense 8,806,471 6,811,762
----------- -----------
Proforma Income Before Minority Interest in Net Income of
Consolidated Joint Ventures 135,978 660,272
Federal Income Tax Expense from Non-Qualified Subsidiary (20,524) (144,420)
------------ ------------
Minority Interest in Net Income of Consolidated Joint Ventures (46,419) -
Pro Forma Net Income $ 69,035 $ 515,852
Distributions to Class B Shareholders (1,822,262) (1,915,992)
____________ ____________
Net (Loss) available to Class A Shareholders (1,753,227) (1,400,140)
Pro Forma Basic and Diluted (Loss)Per Share $ (0.65) $ (0.52)
============ ============
Pro Forma Weighted Average Common Shares Outstanding 2,691,580 2,706,961
F-21
Summary of Assets Acquired and Liabilities Assumed
As of July 23, 2002,
(Unaudited)
Assets
Buildings $ 16,330,088
Land 7,560,231
Accounts receivable 1,105,612
Prepaid expenses 15,757
-------------
TOTAL ASSETS $ 25,011,688
=============
Liabilities $ 132,630
Shareholders' equity
Class B common stock $ 24,879,058
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 25,011,688
=============
10. COMMITMENT
The Company has a one-year lease agreement for its office facilities through
December 31, 2003. Rental expense for the years ended December 31, 2002 and
2001 was $77 thousand and $71 thousand, respectively.
F-22
AmREIT and subsidiaries
SCHEDULE III - Consolidated Real Estate Owned and Accumulated Depreciation For
the year ended December 31, 2002
Cost at
Property Encum- Improve- Close of Year
Description brances Building Land ments Building
Properties Invested in
Under Operating Leases
Radio Shack Retail Store, Texas $ - $ 788,330 $ 337,856 $ - $ 788,330
Blockbuster Music Store, Missouri $ - $ 1,247,461 $ 534,483 $ - $ 1,247,461
OneCare Health Industries, Inc., Texas $ - $ 1,436,615 $ 534,086 $ - $ 1,436,615
Blockbuster Music Store, Kansas $ - $ 1,382,846 $ 592,648 $ - $ 1,382,846
Just For Feet Store, Arizona $ - $ - $ 1,214,046 $ - $ -
Bank United, Woodlands, Texas $ - $ - $ 562,846 $ - $ -
Bank United, Houston, Texas $ - $ - $ 851,973 $ - $ -
Just For Feet Store, Louisiana $ - $ 2,254,537 $ 966,230 $ - $ 2,254,537
Hollywood Video Store, Louisiana $ - $ 784,123 $ 443,544 $ - $ 784,123
Hollywood Video Store, Mississippi $ - $ 835,854 $ 450,000 $ - $ 835,854
OfficeMax, Delaware $ - $ 1,978,313 $ 870,480 $ - $ 1,978,313
Lake Woodlands Plaza $ - $ 2,832,540 $ 1,369,065 $ - $ 2,832,540
Sugar Land Plaza $ - $ 2,902,157 $ 1,280,043 $ - $ 2,902,157
Don Pablo's, Georgia $ - $ - $ 773,800 $ - $ -
IHOP, Topeka $ - $ - $ 450,984 $ - $ -
IHOP, Sugarland $ - $ - $ 740,882 $ - $ -
IHOP, St. Peters $ - $ - $ 564,096 $ - $ -
Jack in the Box $ - $ 504,230 $ 216,099 $ - $ 504,230
Baptist Memorial Health $ - $ 1,456,017 $ 624,006 $ - $ 1,456,017
Payless Shoe Source $ - $ 498,098 $ 212,907 $ - $ 498,098
Golden Corral $ - $ 1,097,215 $ 725,552 $ - $ 1,097,215
Golden Corral $ - $ 1,297,851 $ 556,221 $ - $ 1,297,851
TGI Friday's $ - $ 1,453,769 $ 623,043 $ - $ 1,453,769
Goodyear Tire $ - $ 376,172 $ 161,217 $ - $ 376,172
Guitar Center $ - $ 1,782,470 $ 763,917 $ - $ 1,782,470
Popeye's $ - $ 778,771 $ 333,758 $ - $ 778,771
Dr. Pucillo $ - $ 1,276,836 $ 547,214 $ - $ 1,276,836
Blockbuster Video $ - $ 688,091 $ 294,896 $ - $ 688,091
Pier One Imports $ - $ 1,000,562 $ 422,722 $ - $ 1,000,562
IHOP, Memphis $ - $ - $ 469,502 $ - $ -
IHOP, Centerville $ - $ - $ 457,492 $ - $ -
________________________________________________________________________________
Total $ - $ 28,652,858 $ 18,945,608 $ - $ 28,652,858
===============================================================================================================================
Properties Invested in Under
Direct Financing Lease
Just For Feet Store, Arizona $ - $ 2,848,151 $ - $ - $ 2,848,151
IHOP, Topeka $ - $ 993,774 $ - $ - $ 993,774
IHOP, Sugarland $ - $ 999,517 $ - $ - $ 999,517
IHOP, St. Peters $ - $ 1,331,121 $ - $ - $ 1,331,121
IHOP, Albuquerque $ - $ 886,692 $ - $ - $ 886,692
IHOP, Baton Rouge $ - $ 1,460,170 $ - $ - $ 1,460,170
IHOP, Beaverton $ - $ 1,045,672 $ - $ - $ 1,045,672
IHOP, Charlottesville $ - $ 748,859 $ - $ - $ 748,859
IHOP, El Paso #1934 $ - $ 896,644 $ - $ - $ 896,644
IHOP, Roanoke $ - $ 845,051 $ - $ - $ 845,051
IHOP, Rochester $ - $ 1,135,950 $ - $ - $ 1,135,950
IHOP, Salem $ - $ 731,642 $ - $ - $ 731,642
IHOP, Shawnee $ - $ 889,229 $ - $ - $ 889,229
IHOP, Springfield $ - $ 1,207,602 $ - $ - $ 1,207,602
IHOP, Alexandria $ - $ 854,837 $ - $ - $ 854,837
IHOP, Centerville $ - $ 1,077,649 $ - $ - $ 1,077,649
IHOP, Memphis #4462 $ - $ 1,088,114 $ - $ - $ 1,088,114
IHOP, La Verne $ - $ 997,980 $ - $ - $ 997,980
IHOP, El Paso #1938 $ - $ 1,156,194 $ - $ - $ 1,156,194
IHOP, Memphis #4482 $ - $ 1,098,749 $ - $ - $ 1,098,749
IHOP, Parker $ - $ 1,111,727 $ - $ - $ 1,111,727
________________________________________________________________________________
Total $ - $ 23,405,324 $ - $ - $ 23,405,324
===============================================================================================================================
F-23
Life on Which
Depreciation
Cost at in Latest Income
Close of Year Accumulated Date of Date Statement
Land Depreciation Construction Acquired is Computed
Properties Invested in
Under Operating Leases
Radio Shack Retail Store, Texas $ 337,856 $ 172,606 N/A 06-15-94 39 Years
Blockbuster Music Store, Missouri $ 534,483 $ 138,644 N/A 11-14-94 39 Years
OneCare Health Industries, Inc., Texas $ 534,086 $ 236,890 N/A 09-26-95 39 Years
Blockbuster Music Store, Kansas $ 592,648 $ 128,969 N/A 09-12-95 39 Years
Just For Feet Store, Arizona $ 1,214,046 N/A N/A 09-11-96 N/A
Bank United, Woodlands, Texas $ 562,846 N/A N/A 09-23-96 N/A
Bank United, Houston, Texas $ 851,973 N/A N/A 12-11-96 N/A
Just For Feet Store, Louisiana $ 966,230 $ 165,360 N/A 06-09-97 39 Years
Hollywood Video Store, Louisiana $ 443,544 $ 75,635 N/A 10-31-97 39 Years
Hollywood Video Store, Mississippi $ 450,000 $ 107,161 N/A 12-30-97 39 Years
OfficeMax, Delaware $ 870,480 $ 232,494 N/A 4-14-98 39 Years
Lake Woodlands Plaza $ 1,369,065 $ 288,585 N/A 6-3-98 39 Years
Sugar Land Plaza $ 1,280,043 $ 330,195 N/A 7-1-98 39 Years
Don Pablo's, Georgia $ 773,800 N/A N/A 12-18-98 N/A
IHOP, Topeka $ 450,984 N/A N/A 9-30-99 N/A
IHOP, Sugarland $ 740,882 N/A N/A 9-22-99 N/A
IHOP, St. Peters $ 564,096 N/A N/A 11-30-01 N/A
Jack in the Box $ 216,099 $ 6,003 N/A 7-23-02 39 Years
Baptist Memorial Health $ 624,006 $ 17,453 N/A 7-23-02 39 Years
Payless Shoe Source $ 212,907 $ 5,866 N/A 7-23-02 39 Years
Golden Corral $ 725,552 $ 13,109 N/A 7-23-02 39 Years
Golden Corral $ 556,221 $ 15,474 N/A 7-23-02 39 Years
TGI Friday's $ 623,043 $ 17,098 N/A 7-23-02 39 Years
Goodyear Tire $ 161,217 $ 4,498 N/A 7-23-02 39 Years
Guitar Center $ 763,917 $ 21,336 N/A 7-23-02 39 Years
Popeye's $ 333,758 $ 9,351 N/A 7-23-02 39 Years
Dr. Pucillo $ 547,214 $ 15,251 N/A 7-23-02 39 Years
Blockbuster Video $ 294,896 $ 8,174 N/A 7-23-02 39 Years
Pier One Imports $ 422,722 $ 12,000 N/A 7-23-02 39 Years
IHOP, Memphis $ 469,502 N/A N/A 7-26-02 N/A
IHOP, Centerville $ 457,492 N/A N/A 7-25-02 N/A
____________________________________________________________________
Total $ 18,945,608 $ 2,022,152
========================================================================
Properties Invested in Under
Direct Financing Lease
Just For Feet Store, Arizona $ - (1) N/A 09-11-96 N/A
IHOP, Topeka $ - (1) N/A 9-30-99 N/A
IHOP, Sugarland $ - (1) N/A 9-22-99 N/A
IHOP, St. Peters $ - (1) N/A 11-30-01 N/A
IHOP, Albuquerque $ - (1) N/A 4-23-02 N/A
IHOP, Baton Rouge $ - (1) N/A 4-23-02 N/A
IHOP, Beaverton $ - (1) N/A 4-16-02 N/A
IHOP, Charlottesville $ - (1) N/A 4-23-02 N/A
IHOP, El Paso #1934 $ - (1) N/A 4-16-02 N/A
IHOP, Roanoke $ - (1) N/A 6-21-02 N/A
IHOP, Rochester $ - (1) N/A 4-16-02 N/A
IHOP, Salem $ - (1) N/A 5-17-02 N/A
IHOP, Shawnee $ - (1) N/A 4-16-02 N/A
IHOP, Springfield $ - (1) N/A 5-17-02 N/A
IHOP, Alexandria $ - (1) N/A 7-18-02 N/A
IHOP, Centerville $ - (1) N/A 7-25-02 N/A
IHOP, Memphis #4462 $ - (1) N/A 7-26-02 N/A
IHOP, La Verne $ - (1) N/A 8-23-02 N/A
IHOP, El Paso #1938 $ - (1) N/A 8-23-02 N/A
IHOP, Memphis #4482 $ - (1) N/A 8-23-02 N/A
IHOP, Parker $ - (1) N/A 8-23-02 N/A
____________________________________________________________________
Total $ - (1)
=================================================================================================================
(1) The portion of the lease relating to the building of this property has been
recorded as a direct financing lease for financial reporting purposes.
Consequently, depreciation is not applicable.
F-24
(2) Transactions in real estate and accumulated depreciation during 2002, 2001
and 2000 for operating lease properties are summarized as follows:
Accumulated
Cost Depreciation
Balance at December 31, 1999 29,861,678 1,123,790
Acquisitions / additions 33,430 -
Depreciation expense - 435,259
__________ _________
Balance at December 31, 2000 29,895,108 1,559,049
Acquisitions / additions 1,351,201 -
Disposals (797,237) -
Depreciation expense - 439,652
__________ _________
Balance at December 31, 2001 $ 30,449,072 $ 1,998,701
Acquisitions / additions $ 20,024,562 $ -
Disposals $ (2,875,168) $ (238,591)
Depreciation expense $ - $ 262,042
__________ _________
Balance at December 31, 2002 $ 47,598,466 $ 2,022,152
(3) The aggregate cost of all properties for Federal Income Tax purposes is
$71,261,389 at December 31, 2002.
F-25
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration Fee......................................... $
NASD Filing Fee *............................................ $
Legal fees and expenses *.................................... $
Accounting fees and expenses *............................... $
Printing, engraving and mailing expenses *................... $
Blue Sky Fees and Expenses *................................. $
Miscellaneous (including solicitation costs)*................ $
TOTAL* $
-
*Estimated
ITEM 32. SALES TO SPECIAL PARTIES
Not Applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 34. INDEMNIFICATION OF TRUST MANAGERS AND OFFICERS
AmREIT's Declaration of Trust provides that the liability of each
trust manager for monetary damages shall be eliminated to the fullest extent
permitted by applicable law. In general, under current Texas law, a trust
manager is liable to the trust only for liabilities arising from such trust
manager's own willful misfeasance or willful malfeasance or gross negligence.
The Declaration of Trust also provides that no amendment thereto may limit or
eliminate this limitation of liability with respect to event occurring prior to
the effective date of such amendment.
AmREIT's Declaration of Trust provides that the trust manages and
officers shall be indemnified to the maximum extent permitted by Texas law.
Under current Texas law, the trust will indemnify a person who was, is, or is
threatened to be made a named defendant or respondent in a proceeding because
the person is or was a trust manager or officer if it is determined that the
person (i) conducted himself in good faith; (ii) reasonably believed: (a) in
the case of conduct in his official capacity as a trust manager or officer of
the real estate investment trust, that his conduct was in the real estate
investment trust's best interests; and (b) in all other cases, that his conduct
was at least not opposed to the real estate investment trust's best interests;
and (iii) in the case of any criminal proceeding, had no reasonable cause to
believe that his conduct was unlawful. Except to the extent provided in the
following sentence, a trust manager or officer may not be indemnified (i) in
respect of a proceeding in which the person is found liable on the basis that
personal benefit was improperly received by him, whether or not the benefit
resulted from an action taken in the person's official capacity; or (ii) in
which the person is found liable to the real estate investment trust.
Notwithstanding the foregoing, a person may be indemnified against judgments,
penalties (including excise and similar taxes), fines, settlements, and
reasonable expenses actually incurred by the person in connection with the
proceeding; provided that if the person is found liable to the real estate
investment trust or is found liable on the basis that personal benefit was
improperly received by the person, the indemnification (i) is limited to
II-1
reasonable expenses actually incurred by the person in connection with the
proceeding, and (ii) shall not be made in respect of any proceeding in which
the person shall have been found liable for willful or intentional misconduct
in the performance of his duty to the real estate investment trust. In
addition, the Company's Declaration of Trust and Bylaws require it to payor
reimburse, in advance of the final disposition of a proceeding, reasonable
expenses incurred by a present or former director or officer made a party to a
proceeding by reason of his status as a trust manager or officer, provided that
the Company shall have received (i) a written affirmation by the trust manager
or officer of his good faith belief that he has met the standard of conduct
necessary for indemnification by the Company as authorized by the Bylaws and
(ii) a written undertaking by or on his behalf to repay the amount paid or
reimbursed by the Company if it shall ultimately be determined that the
standard of conduct was not met. The Company's Declaration of Trust and Bylaws
also permit the Company to provide indemnification, payment or reimbursement of
expenses to any employee or agent of the Company in such capacity. Any
indemnification, payment or reimbursement of the expenses permitted by the
Declaration of Trust and Bylaws shall be furnished in accordance with the
procedures provided for indemnification and payment or reimbursement of
expenses under Texas Real Estate Investment Trust Act for trust managers.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS.
AmREIT Financial Statements for the Year Ended December 31, 2002
Independent Auditor's Report
Consolidated Balance Sheet, December 31, 2002
Consolidated Statements of Operations for the Years Ended
December 31, 2002 and 2001
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002 and 2001
Notes to Consolidated Financial Statements for the Years
Ended December 31, 2002 and 2001
(B) EXHIBITS (SEE EXHIBIT INDEX).
EXHIBIT NO. EXHIBIT
1.1* Form of Dealer Manager Distribution Agreement
3.1 Amended and Restated Declaration of Trust (incorporated by reference to
Exhibit 3.1 to AmREIT's Form 10-KSB for the fiscal year ended
December 31, 2002)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to AmREIT's Form 10-KSB
for the fiscal year ended December 31, 2002)
3.3* Form of Statement of Designation for class C common shares
4.1* Form of Subscription Agreement and Subscription Agreement Signature Page
(included as Exhibit A to the Prospectus)
5.1* Opinion of Locke Liddell & Sapp LLP regarding legality of the securities
8.1* Opinion of Locke Liddell & Sapp LLP regarding tax matters
23.1* Consent of Locke Liddell & Sapp LLP (included in Exhibits 5.1 and 8.1)
23.2 Consent of KPMG LLP
23.3 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (included on signature page)
----------------
* To be filed by amendment.
II-2
ITEM 37. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained
in periodic reports filed with or furnished to the Commission by the Registrant
pursuant to Section 13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual report pursuant
to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trust managers, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trust officer, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trust officer, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Houston, State of Texas, on the 17th day of
April, 2003.
AMREIT
(Registrant)
By: /s/ H. Kerr Taylor
------------------------------------------
Name: H. Kerr Taylor
Title: President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
trust managers of AmREIT hereby severally constitute H. Kerr Taylor and Chad C.
Braun and each of them singly, our true and lawful attorneys with full power to
them, and each of them singly, to sign for us and in our names in the
capacities indicated below the Registration Statement filed herewith and any
and all amendments to said Registration Statement, and generally to do all such
things in our names and in our capacities as officers and trust managers to
enable AmREIT to comply with the provisions of the Securities Act of 1933, and
all requirements of the Securities and Exchange Commission, hereby ratifying
and confirming our signatures as they may be signed by our said attorneys, or
any of them, to said Registration Statement and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
President, Chief Executive Officer April 21, 2003
/s/ H. Kerr Taylor and Chairman of the Board
---------------------------------------------- (Principal Executive Officer)
H. Kerr Taylor
Executive Vice President
/s/ Chad C. Braun and Chief Financial Officer April 21, 2003
---------------------------------------------- (Principal Financial Officer)
Chad C. Braun
/s/ Robert S. Cartwright Trust Manager April 21, 2003
----------------------------------------------
Robert S. Cartwright
/s/ G. Steven Dawson Trust Manager April 21, 2003
----------------------------------------------
G. Steven Dawson
/s/ Bryan L. Goolsby Trust Manager April 21, 2003
----------------------------------------------
Bryan L. Goolsby
/s/ Philip W. Taggart Trust Manager April 21, 2003
----------------------------------------------
Philip W. Taggart
II-4
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
1.1* Form of Dealer Manager Distribution Agreement
3.1 Amended and Restated Declaration of Trust (incorporated by
reference to Exhibit 3.1 to AmREIT's Form 10-KSB for the
fiscal year ended December 31, 2002)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 to AmREIT's
Form 10-KSB for the fiscal year ended December 31, 2002)
3.3* Form of Statement of Designation for class C common shares
4.1* Form of Subscription Agreement and Subscription Agreement
Signature Page (included as Exhibit A to the Prospectus)
5.1* Opinion of Locke Liddell & Sapp LLP regarding legality of the
securities
8.1* Opinion of Locke Liddell & Sapp LLP regarding tax matters
23.1* Consent of Locke Liddell & Sapp LLP (included in Exhibits 5.1
and 8.1)
23.2 Consent of KPMG LLP
23.3 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (included on signature page)
* To be filed by amendment.
II-5
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Trust Managers
AmREIT:
We consent to the use of our report included herein on the consolidated
financial statements and consolidated financial statement schedule as of
and for the year ended December 31, 2002 and to the reference to our firm
under the heading "Experts" in the prospectus.
KPMG LLP
/s/
_______________________________
Houston, Texas
April 17, 2003
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
To the Board of Trust Managers
AmREIT:
We consent to the use in this Registration Statement of AmREIT on Form S-11
of our report dated March 15, 2002, appearing in the Prospectus, which is part
of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
/s/
_________________________________
Houston, Texas
April 17, 2003