| BNP RESIDENTIAL PROPERTIES INC ITEM 1A RISK FACTORS An investment in our securities involves various risks, including those described below |
| You should consider carefully these risk factors together with all of the other information included in this Annual Report before deciding to purchase or sell our securities |
| Some of the information in this discussion of risk factors may contain forward-looking statements |
| Please review our Caution Regarding Forward-Looking Statements at the beginning of this Annual Report |
| When considering such forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Annual Report |
| The risk factors noted in this section and other factors noted throughout this Annual Report, including certain risks and uncertainties, could cause our actual results to differ materially from those contained in any forward-looking statement |
| 7 Geographic concentration of our properties makes our business vulnerable to economic downturns in North Carolina, South Carolina or Virginia |
| All of our properties are located in North Carolina, South Carolina and Virginia |
| Adverse economic developments in these states could adversely impact the operations of our properties and therefore our profitability |
| The concentration of properties in a limited number of markets may expose us to risks of adverse economic developments that are greater than the risks of owning properties in many markets |
| Our revenues and the value of our properties may be affected by a number of factors, including the local economic climate (which may be adversely impacted by business layoffs, downsizing or industry slow downs), changing demographics and other factors |
| Our apartment communities are subject to multiple operating risks |
| Our apartment communities are subject to operating risks common to apartment communities in general |
| Such risks include: o competition from other apartment communities; o alternative housing, including home ownership, especially during times of low mortgage interest rates; o new construction of comparable properties or adverse economic conditions in the areas in which our apartment communities are located, either of which might adversely affect apartment occupancy or rental rates; o increases in operating costs (including insurance and real estate taxes), which may not necessarily be offset by increased rents; and o the inability or unwillingness of residents to pay rent increases |
| The local rental market may limit the extent to which we may increase rents in response to operating expense increases without decreasing occupancy rates |
| Any of the above events could adversely affect our ability to make distributions |
| A decline in revenues from, or a sale of, our restaurant properties could adversely affect our financial condition and results of operations |
| We own 40 restaurant properties that we lease on a triple-net basis to Boddie-Noell Enterprises, Inc |
| The master lease for our restaurant properties requires Boddie-Noell Enterprises to pay us annual rent equal to the greater of a specified minimum rent or 9dtta875prca of food sales |
| If Boddie-Noell Enterprises renews the master lease, after December 2007, it has the right to terminate the lease on up to five restaurants per year by offering to purchase them under specified terms |
| The original lease was for 47 restaurant properties |
| Since 1999, we have sold seven restaurant properties deemed non-economic to Boddie-Noell Enterprises under an agreement that allowed the lessee to close up to seven restaurants and buy them back for no less than net carrying value |
| The minimum rent on the 40 restaurants is dlra3dtta8 million per year |
| As a result of favorable sales, our restaurant rental income peaked in 1992 at dlra5dtta3 million, which was substantially above the then-current minimum rent |
| In 2003, Hardeeapstas, the concept at the majority of our restaurant properties, 8 introduced the "e Thick-Burger "e product line and began seeing significant sales increases; and same-store sales at our restaurant properties increased by 2dtta4prca |
| Even with the recent same-store sales increases, from 1996 through 2005 the revenues of our restaurant properties were below the level requiring payments in excess of the minimum rent |
| Given the current state of flux in the fast-food industry, we are uncomfortable making a prediction or relying on the forecasts of others as to future sales trends for our restaurant properties |
| For this reason, we have based our plans and expectations on continuing to receive the minimum rent in 2006 |
| In order to protect our stockholders from declining restaurant revenues from 1992 through 2002, we began to acquire apartment communities in 1993 |
| We believe that we can more effectively enhance the value of our common stock by acquiring and operating apartment communities |
| Accordingly, we focused our business primarily on the ownership and operation of apartment communities |
| As a consequence of this refocused strategy, we may elect to sell our restaurant properties and reinvest the proceeds in additional apartment communities |
| No sale of the restaurants is pending, nor are we actively marketing the restaurants |
| We will only divest the restaurants if we believe doing so will enhance stockholder value |
| If we do dispose of the restaurant properties, it is possible that we may incur a loss on the disposition of the properties |
| It is also possible that we may invest such sale proceeds in properties that yield significantly less than the dlra3dtta8 million we currently receive from Boddie-Noell Enterprises |
| Further, in the event we were to find a buyer, Boddie-Noell Enterprises has the right to purchase the restaurants from us on the same terms as that offer |
| This right may make it more difficult to find a suitable buyer or could adversely affect the price we might realize on any such sale |
| For the year ended December 31, 2005, the restaurant properties accounted for 5dtta3prca of our total revenues |
| All of the restaurant property revenue comes from Boddie-Noell Enterprises |
| The inability of Boddie-Noell Enterprises to pay us rent would adversely affect funds from operations and funds available for distribution |
| Boddie-Noell Enterprises, Inc, our restaurant operator, may not renew the restaurant lease at the expiration of its initial term |
| We lease our 40 restaurant properties to Boddie-Noell Enterprises, Inc |
| under a master lease that provides for annual rent equal to the greater of a specified minimum rent, currently dlra3dtta8 million per year, or 9dtta875prca of food sales |
| The initial term of this lease expires on December 31, 2007 |
| Boddie-Noell Enterprises, at its sole option, has the right to renew the master lease for up to three five-year periods |
| Under the lease, Boddie-Noell Enterprises is required to give us notice of its intention to terminate at least 180 days prior to the expiration of the initial term; otherwise, the lease will automatically renew |
| There is no assurance that Boddie-Noell Enterprises will renew the master lease |
| In the event Boddie-Noell Enterprises elects to terminate the lease, we would cease to receive rental payments from Boddie-Noell Enterprises and would be forced to seek alternative tenants for the properties, find alternate uses for the properties, or sell the properties |
| In the event Boddie-Noell Enterprises does not renew the lease, there is no assurance that we will be able to fully replace the dlra3dtta8 million in revenue that we currently receive from Boddie-Noell Enterprises |
| 9 We have substantial debt obligations, which may reduce our operating performance and adversely affect our ability to pay distributions |
| At December 31, 2005, on a consolidated basis, we had dlra436dtta7 million in long-term debt, of which dlra388dtta6 million is related to properties owned in fee by BNP Residential Properties and dlra48dtta1 million is related to properties in which we have a partial ownership interest |
| Payments of principal and interest on borrowings may leave us with insufficient cash resources to operate the apartment communities or to pay the distributions we must pay to maintain our qualification as a REIT Further, a high debt level creates an increased risk that we may default on our obligations |
| If we default, the banks that lent us funds could foreclose on the properties securing their loans |
| Because we have a substantial amount of debt that bears interest at variable rates, increases in interest rates would reduce our net income |
| At December 31, 2005, we had dlra53dtta7 million in long-term debt at variable interest rates |
| In addition, we may incur additional debt in the future that also bears interest at variable rates |
| Variable-rate debt creates higher debt service requirements if market interest rates increase |
| Such an increase would adversely affect our cash flow and the amounts available to pay dividends |
| If our debt cannot be paid, refinanced or extended at maturity, in addition to our failure to repay our debt, we may not be able to make distributions to stockholders at expected levels or at all |
| We may obtain financing with "e due-on-encumbrance "e or "e due-on-sale "e clauses in which future refinancing or property sales could cause the maturity dates of the mortgages to accelerate and the financing to become due immediately |
| Thus, we could be required to sell properties on an all-cash basis, or the purchaser might be required to obtain new financing in connection with a sale |
| Alternatively or additionally, we may obtain mortgages that have balloon payments |
| Such mortgages involve greater risks than mortgages with principal amounts amortized over the term of the loan since our ability to repay the outstanding principal amount at maturity may depend on obtaining adequate refinancing or selling the property |
| The efficacy of either option would depend on economic conditions in general and the value of the underlying properties in particular |
| We cannot guarantee that we could refinance or repay any such mortgages at maturity |
| Further, a significant decline in the value of the underlying property could result in a loss of the property through foreclosure |
| We may be liable for environmental contamination for which we do not have insurance and which might have a material adverse effect on our financial condition and results of operations |
| Various federal, state and local laws subject property owners or operators to liability for the costs of removal or remediation of certain hazardous substances released on a property |
| Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of the hazardous substances |
| The presence of, or the failure to remediate properly, hazardous substances may adversely affect occupancy of any contaminated apartment communities, the ability of Boddie-Noell Enterprises to operate restaurants and our ability to sell or borrow against contaminated properties |
| In addition to the costs associated with investigation and remediation actions brought by governmental agencies, the presence of hazardous wastes on a property could result in personal injury or similar claims by private plaintiffs |
| Various laws also impose, on persons who arrange for the disposal or treatment of hazardous or toxic substances, liability for the cost of removal or remediation of hazardous substances at the disposal or treatment facility |
| These laws often impose liability whether or not the person arranging for the disposal ever owned or operated the disposal facility |
| Boddie-Noell Enterprises has agreed to pay for the costs of complying with applicable environmental laws, ordinances and regulations on the restaurant properties |
| However, the obligation to 10 pay for such costs with respect to our other properties, or Boddie-Noell Enterprises &apos inability to pay for such costs on the restaurant properties, may adversely affect our operating costs and the value of our properties |
| Phase I environmental site assessments have been obtained on all of our owned apartment communities |
| The purpose of Phase I environmental site assessments is to identify potential sources of contamination for which an owner may be responsible and to assess the status of environmental regulatory compliance |
| All of the restaurant properties were subjected to transaction screens in December 1995 |
| A transaction screen involves a review of a property for the purpose of recommending whether we should perform a Phase I environmental site assessment |
| A transaction screen is significantly less thorough in scope than a Phase I environmental site assessment |
| Neither the transaction screens nor the environmental site assessments revealed any environmental condition, liability or compliance concern that we believe would have a material adverse affect on our business, assets or results of operations |
| Nor are we aware of any such condition, liability or concern by any other means |
| However, it is possible that the transaction screens and the environmental site assessments relating to any one of the properties did not reveal all environmental conditions, liabilities, or compliance concerns |
| It is also possible that there are material environmental conditions, liabilities or compliance concerns that arose at a property after the related review was completed |
| Unexpected costs associated with compliance with the Americans with Disabilities Act and other laws would impair our operating performance |
| Under the Americans with Disabilities Act of 1990 (the "e ADA "e ), all public accommodations and commercial facilities must meet certain federal requirements related to access and use by disabled persons |
| Compliance with the ADA requirements could require removal of access barriers |
| Additional federal, state and local laws exist that are related to access by disabled persons |
| These laws also may require modifications to our properties or restrict renovations of our properties |
| For example, the Fair Housing Amendments Act of 1988 (the "e FHAA "e ) requires apartment communities first occupied after March 13, 1991 to be designed and constructed so as to be accessible to the handicapped |
| Non-compliance with the ADA, FHAA and similar laws could result in the imposition of fines or an award of damages to private litigants |
| Boddie-Noell Enterprises is financially responsible for upgrading the restaurant properties should such properties not be in compliance with the ADA However, in the event Boddie-Noell Enterprises fails to upgrade properly the restaurants and there is a determination that the restaurant properties are not in compliance with the ADA, we could still face the imposition of fines or an award of damages to private litigants |
| If we were required to make unanticipated expenditures to comply with the ADA or other laws, our cash flow and the amounts available for distributions to you may be adversely affected |
| The Federal Fair Housing Act and state fair housing laws prohibit discrimination on the basis of certain protected classes |
| We have a policy against these kinds of discriminatory behaviors and train our employees to avoid discrimination and the appearance of discrimination |
| We cannot assure you that an employee will not violate our policy against discrimination and violate the fair housing laws |
| Because most of our directors have personal interests that could create a conflict with the interests of our stockholders, we may make decisions that are not in your best interest |
| Of our six directors, four have personal interests that could create a conflict between what is in the best interest of our security holders and what is in the best interest of each such director |
| Payne and Wilkerson are executive officers of the company; o Messrs |
| Chrysson and Gilley own significant stakes in the operating partnership |
| 11 Such conflicts of interests could influence board members to take action that is not in the best interest of our security holders |
| If we do not qualify as a REIT, we will be subject to tax as a regular corporation and face substantial tax liability |
| Beginning with our taxable year ended December 31, 1987, we have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code |
| We believe that beginning with that taxable year we have been organized and have operated in a manner that enables us to qualify for taxation as a REIT, and we intend to continue to operate in such a manner |
| We can provide no assurance, however, that we have operated or will operate in a manner so as to qualify or remain qualified as a REIT We have not requested, and do not plan to request, a ruling from the Internal Revenue Service that we qualify as a REIT If we fail to qualify as a REIT, we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates |
| We also could be subject to the federal alternative minimum tax |
| Unless we are entitled to relief under specific statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified |
| Therefore, if we lose our REIT status, the funds available for distribution to you would be reduced substantially for each of the years involved |
| At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended |
| Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a shareholder |
| Complying with REIT requirements may cause us to forego otherwise attractive opportunities |
| As a REIT, we are subject to annual distribution requirements, including a requirement that we currently distribute at least 90prca of our "e REIT taxable income "e to our common shareholders |
| These requirements limit the amount of cash we have available for other business purposes, including amounts to fund our growth |
| We expect that our cash flow will exceed our REIT taxable income, due to the allowance for depreciation and other non-cash charges in computing REIT taxable income |
| We anticipate that we generally will have sufficient cash or liquid assets to enable us to satisfy the distribution requirement |
| It is possible, however, that we may not have sufficient cash or other liquid assets to meet the 90prca distribution requirement or to distribute such greater amount as may be necessary to avoid income and excise taxation |
| In such event, we may find it necessary to borrow funds to pay the required distribution or, if possible, pay taxable stock dividends in order to meet the distribution requirement or avoid such income or excise taxation |
| Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow |
| Even if we qualify as a REIT, we and our subsidiaries will be subject to certain federal, state and local taxes on our income and property that could reduce operating cash flow |
| Our charter does not permit ownership in excess of 9dtta8prca of our capital stock, and attempts to acquire our capital stock in excess of the 9dtta8prca limit are void without prior approval from our board of directors |
| Our charter limits ownership of our capital stock by any single stockholder to 9dtta8prca of the outstanding shares |
| The charter also prohibits anyone from buying shares if the purchase would cause us to lose our REIT status |
| This could happen if a share transaction results in fewer than 100 persons owning 12 all of our shares or five or fewer persons, applying certain broad attribution rules of the Internal Revenue Code, owning 50prca or more of our shares |
| If you or anyone else acquires shares in excess of the ownership limit or in violation of the ownership requirements of the Internal Revenue Code for REITs, we: o will consider the transfer to be null and void; o will not reflect the transaction on our books; o may institute legal action to enjoin the transaction; o will not pay dividends or other distributions with respect to those shares; o will not recognize any voting rights for those shares; o will consider the shares held in trust for the benefit of the company; and o will either direct the affected person to sell the shares and turn over any profit to us, or we will redeem the shares |
| If we redeem the shares, it will be at a price equal to the lesser of: (a) the price paid by the transferee of the shares or (b) the average of the last reported sales prices on the American Stock Exchange on the 10 trading days immediately preceding the date fixed for redemption by our board of directors |
| An individual who acquires shares that violate the above rules bears the risk that (1) he may lose control over the power to dispose of the shares, (2) he may not recognize profit from the sale of such shares if the market price of the shares increases and (3) he may be required to recognize a loss from the sale of such shares if the market price decreases |
| Because provisions contained in Maryland law and our governing documents discourage hostile takeover attempts, investors may be prevented from receiving a "e control premium "e for their shares |
| Provisions contained in our charter and bylaws, as well as Maryland general corporation law and the partnership agreement of the operating partnership, discourage hostile takeovers, which may prevent stockholders from receiving a "e control premium "e for their shares |
| These provisions include the following: o Ownership Limit |
| The 9dtta8prca ownership limit discussed above may have the effect of precluding acquisition of control of us by a third party without the consent of our board of directors |
| A provision in the operating partnership agreement prohibits us from engaging in certain transactions that could result in a change of control without the approval of the holders of a majority of the outstanding units, including units that we own |
| While we expect that we will always hold a majority of the outstanding units, we cannot guarantee that this will be the case |
| If we ever own less than a majority of the outstanding units, this voting requirement might limit the possibility for an acquisition or change in control of the company, even if such acquisition or change in control would be in your (the stockholders &apos ) best interests |
| As of December 31, 2005, we owned 80prca of the operating partnership common units |
| The operating partnership agreement contains provisions relating to limited partners &apos redemption rights in the event of certain changes of control of the company |
| These provisions require an acquiror to maintain the 13 operating partnership structure and to maintain a limited partnerapstas right to continue to hold units with future redemption rights |
| Such provision could have the effect of discouraging a third party from making an acquisition proposal, even if such proposal were in our stockholders &apos best interests |
| The plan involves the issuance of preferred share purchase rights to all stockholders |
| The rights entitle stockholders to purchase capital stock at a discount if a person or group purchases or makes a tender offer for 15prca or more of our common stock |
| Our board of directors may redeem the rights at $ |
| 01 per right until the acquisition of 15prca or more of our common stock by a person or group |
| The purpose of the poison pill is to ensure that any potential purchaser of the company must negotiate with our board before an acquisition |
| The poison pill may discourage offers for the company, even those in the best interest of the stockholders |
| In 1999, the State of Maryland enacted legislation that enhances the power of Maryland corporations to protect themselves from unsolicited takeovers |
| Among other things, the legislation permits our board, without stockholder approval, to amend our charter to: o stagger our board of directors into three classes; o provide that only remaining directors may fill a vacancy on the board; o provide that only the board can fix the size of the board; and o require that special stockholder meetings may only be called by holders of a majority of the voting shares entitled to be cast at the meeting |
| If we lose any of our executive officers, our operating performance could suffer |
| We are dependent on the efforts of our executive officers, particularly Philip S Payne, D Scott Wilkerson, Pamela B Bruno and Eric S Rohm |
| While we believe that we could find replacements for these key personnel, if necessary, the loss of their services could have an adverse effect on our operations |
| Bruno have entered into employment contracts with us |