| COLONIAL PROPERTIES TRUST Item 1A Risk Factors Set forth below are the risks that we believe are material to investors who purchase or own our common, preferred or debt securities |
| You should consider carefully the following risks, together with the other information contained in and incorporated by reference in this Annual Report on Form 10-K, and the descriptions included in our consolidated financial statements and accompanying notes |
| Risks Associated with Real Estate We face numerous risks associated with the real estate industry that could adversely affect our results of operations through decreased revenues or increased costs |
| As a real estate company, we are subject to various changes in real estate conditions, any negative trends of which may adversely affect our results of operations through decreased revenues or increased costs |
| These conditions include: • worsening of national and regional economic conditions, as well as the local economic conditions in our principal market areas; • the existence and quality of the competition, such as the attractiveness of our property as compared to our competitors’ properties based on considerations such as convenience of location, rental rates, amenities and safety record; • increased operating costs, including increased real property taxes, maintenance, insurance and utilities costs; • weather conditions that may increase or decrease energy costs and other weather-related expenses; • oversupply of multifamily, office or retail space or a reduction in demand for real estate in the markets in which our properties are located; 21 _________________________________________________________________ • a favorable interest rate environment that may result in a significant number of potential tenants of our multifamily properties deciding to purchase homes instead of renting; and • changing trends in the demand by consumers for merchandise offered by retailers conducting business at our retail properties |
| Moreover, other factors may affect our results of operations adversely, including changes in government regulations and other laws, rules and regulations governing real estate, zoning or taxes, changes in interest rate levels, the availability of financing and potential liability under environmental and other laws and other unforeseen events, most of which are discussed elsewhere in the following risk factors |
| Any or all of these factors could materially adversely affect our results of operations through decreased revenues or increased costs |
| Real estate investments are illiquid, and therefore we may not be able to sell our properties in response to economic changes which could adversely affect our results of operations or financial condition |
| Real estate investments generally are relatively illiquid and as a result cannot be sold quickly or on favorable terms in response to changes in the economy or other conditions when it may be prudent to do so |
| This inability to respond quickly to changes in the performance of our properties could adversely affect our results of operations if we cannot sell an unprofitable property |
| Our financial condition could also be adversely affected if we were, for example, unable to sell one or more of our properties in order to meet our debt obligations upon maturity |
| In addition, the tax laws applicable to REITs require that we hold our properties for investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales or properties that otherwise would be in our best interest |
| Therefore, we may be unable to vary our portfolio promptly in response to market conditions, which may adversely affect our financial position |
| We are subject to significant regulation that inhibits our activities, which could adversely affect our results of operations through increased costs or inability to pursue business opportunities |
| Local zoning and use laws, environmental statutes and other governmental requirements may restrict our development, expansion, rehabilitation and reconstruction activities |
| These regulations may prevent or delay us from taking advantage of economic opportunities |
| If we fail to comply with these requirements, governmental authorities may impose fines on us or private litigants may be awarded damages against us |
| In addition, we cannot predict what requirements may be enacted in the future and there can be no assurance that such enactment will not increase our costs of regulatory compliance or prohibit us from pursuing business opportunities that could be profitable to us |
| Risks Associated with Our Operations Our properties may not generate sufficient income to pay our expenses if we are unable to lease our new properties or renew leases or re-lease space at our existing properties as leases expire, which may adversely affect our operating results |
| We derive the majority of our income from tenants who lease space from us at our properties |
| A number of factors may adversely affect our ability to attract tenants at favorable rental rates and generate sufficient income, including: • local conditions such as an oversupply of, or reduction in demand for, multifamily, office or retail properties; • the attractiveness of our properties to residents, shoppers and tenants; • decreases in market rental rates; and • our ability to collect rent from our tenants |
| If we cannot generate sufficient income to pay our expenses, maintain our properties and service our debt as a result of any of these factors, our operating results may be adversely affected |
| The tenants at our office properties generally enter into leases with an initial term ranging from three to ten years, tenants at our retail properties generally enter into leases with an initial term ranging from one to ten 22 _________________________________________________________________ years and tenants at our multifamily properties generally enter into leases with an initial term ranging from six months to one year |
| As leases expire at our existing properties, tenants may elect not to renew them |
| Even if the tenants do renew or we can re-lease the space, the terms of renewal or re-leasing, including the cost of required renovations, may be less favorable than current lease terms |
| In addition, for new properties, we may be unable to attract enough tenants and the occupancy rates and rents may not be sufficient to make the property profitable |
| If we are unable to renew the leases or re-lease the space at our existing properties promptly or lease the space at our new properties, or if the rental rates upon renewal or re-leasing at existing properties are significantly lower than expected rates, our operating results will be negatively affected |
| We may not be able to control our operating costs or our expenses may remain constant, even if our revenues decrease, causing our results of operations to be adversely affected |
| Factors that may adversely affect our ability to control operating costs include: • the need to pay for insurance and other operating costs, including real estate taxes, which could increase over time; • the need periodically to repair, renovate and re-lease space; • the cost of compliance with governmental regulation, including zoning and tax laws; • the potential for liability under applicable laws; • interest rate levels; and • the availability of financing |
| If our operating costs increase as a result of any of the foregoing factors, our results of operations may be adversely affected |
| The expense of owning and operating a property is not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from the property |
| As a result, if revenues drop, we may not be able to reduce our expenses accordingly |
| Costs associated with real estate investments, such as real estate taxes, loan payments and maintenance generally will not be reduced even if a property is not fully occupied or other circumstances cause our revenues to decrease |
| An economic downturn or natural disaster in an area in which our properties are concentrated could adversely affect our results of operations or financial condition |
| Substantially all of our properties are located in the Sunbelt region of the United States |
| In particular, we derived an aggregate of approximately 69dtta9prca of our net operating income in 2005 from top quartile cities located in the Sunbelt region |
| If the Sunbelt region of the United States, and in particular the areas of or near Birmingham, Charlotte, Orlando, Atlanta, Dallas or Fort Worth experiences a slowdown in the economy or a natural disaster, our results of operations and financial condition may be negatively affected as a result of decreased revenues, increased costs or damage or loss of assets |
| Tenant bankruptcies and downturns in tenants’ businesses may adversely affect our operating results by decreasing our revenues |
| As a result, our tenants may delay lease commencement, cease or defer making rental payments or declare bankruptcy |
| A bankruptcy filing by or relating to one of our tenants would bar all efforts by us to collect pre-bankruptcy debts from that tenant, or their property, unless we receive an order permitting us to do so from the bankruptcy court |
| A tenant bankruptcy could delay our efforts to collect past due balances under the relevant leases, and could ultimately preclude collection of these sums |
| If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must be paid to us in full |
| However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages |
| Any unsecured claim we hold may be paid only to the extent that funds are available and only in the same percentage as is paid to all other 23 _________________________________________________________________ holders of unsecured claims, and there are restrictions under bankruptcy laws that limit the amount of the claim we can make if a lease is rejected |
| As a result, it is likely that we will recover substantially less than the full value of any unsecured claims we hold from a bankrupt tenant |
| Any bankruptcy or financial difficulties of our tenants may negatively affect our operating results by decreasing our revenues |
| Risks associated with the property management, leasing and brokerage businesses could adversely affect our results of operations by decreasing our revenues |
| In addition to the risks we face as a result of our ownership of real estate, we face risks relating to the property management, leasing and brokerage businesses of CPSI, including risks that: • management contracts or service agreements with third-party owners will be lost to competitors; • contracts will not be renewed upon expiration or will not be renewed on terms consistent with current terms; and • leasing and brokerage activity generally may decline |
| Each of these developments could adversely affect our results of operations by decreasing our revenues |
| We could incur significant costs related to environmental issues which could adversely affect our results of operations through increased compliance costs or our financial condition if we become subject to a significant liability |
| Under federal, state and local laws and regulations relating to the protection of the environment, a current or previous owner or operator of real property, and parties that generate or transport hazardous substances that are disposed of on real property, may be liable for the costs of investigating and remediating hazardous substances on or under or released from the property and for damages to natural resources |
| The federal Comprehensive Environmental Response, Compensation & Liability Act, and similar state laws, generally impose liability on a joint and several basis, regardless of whether the owner, operator or other responsible party knew of or was at fault for the release or presence of hazardous substances |
| In connection with the ownership or operation of our properties, we could be liable in the future for costs associated with investigation and remediation of hazardous substances released at such properties |
| The costs of any required remediation and related liability as to any property could be substantial under these laws and could exceed the value of the property and/or our aggregate assets |
| The presence of hazardous substances, or the failure to properly remediate those substances may result in our being liable for damages suffered by a third party and may adversely affect our ability to sell or rent a property or to borrow funds using the property as collateral |
| In addition, environmental laws may impose restrictions on the manner in which we use our properties or operate our business, and these restrictions may require expenditures for compliance |
| The restrictions themselves may change from time to time, and these changes may result in additional expenditures in order to achieve compliance |
| We cannot assure you that a material environmental claim or compliance obligation will not arise in the future |
| The costs of defending against any claims of liability, of remediating a contaminated property, or of complying with future environmental requirements could be substantial and affect our operating results |
| In addition, if a judgment is obtained against us or we otherwise become subject to a significant environmental liability, our financial condition may be adversely affected |
| On December 29, 1998, we acquired Bel Air Mall in Mobile, Alabama |
| During the course of our environmental due diligence, we identified several different areas of the property in which contamination is present |
| One of those areas involves drycleaner solvent; the others involve petroleum contamination |
| The Alabama Department of Environmental Management (ADEM) is overseeing the investigation and cleanup of the drycleaner contamination |
| Under the terms of the purchase and sale agreement, the former owner of the property purchased a dlra10 million environmental insurance policy (including paying the dlra275cmam000 up front deductible) and established an escrow account totaling dlra1cmam000cmam000 to cover any costs associated with investigation and remediation of the contaminated areas not covered by the insurance policy |
| Under the agreement the seller is currently performing all required remediation of the drycleaner contamination until a “no further action” status is obtained from ADEM In addition, an out parcel at the Bel Air Mall, previously occupied by an Amoco Gas station, currently has ongoing remediation activity on the now vacant site |
| Although 24 _________________________________________________________________ we sold the Bel Air Mall to the GPT Joint Venture, in which we retained a 10prca interest (see Item 1 — “Business — Joint Ventures — Equity Method of Investments — GPT Transaction”), we remain exposed to the related environmental liability (in addition to our exposure as a current 10prca owner) as a previous owner |
| Uninsured or underinsured losses could adversely affect our financial condition |
| As of December 31, 2005, we are self insured up to dlra1dtta1 million, dlra1dtta8 million and dlra1dtta8 million for general liability, workers’ compensation and property insurance, respectively |
| We are also self insured for health insurance and responsible for claims up to dlra125cmam000 per claim and up to dlra1dtta0 million per person |
| If the actual costs incurred to cover such uninsured claims are significantly greater than our budgeted costs, our financial condition will be adversely affected |
| We carry comprehensive liability, fire, extended coverage and rental loss insurance on all of our properties |
| There are, however, certain types of losses, such as lease and other contract claims, acts of war or terrorism, act of God, and in some cases, flooding that generally are not insured because such coverage is not available or it is not available at commercially reasonable rates |
| Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in the damaged property, as well as the anticipated future revenue from the property |
| The costs associated with property and casualty renewals may be higher than anticipated |
| We cannot predict at this time if in the future we will be able to obtain full coverage at a reasonable cost |
| Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it impractical or undesirable to use insurance proceeds to replace a property after it has been damaged or destroyed |
| In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged |
| Competition for acquisitions could reduce the number of acquisition opportunities available to us and result in increased prices for properties, which could adversely affect our return on properties we purchase |
| We compete with other major real estate investors with significant capital for attractive investment opportunities in multifamily, office or retail properties |
| These competitors include publicly traded REITs, private REITs, investment banking firms, private institutional investment funds and national, regional and local real estate investors |
| The current market for acquisitions continues to be extremely competitive |
| This competition could increase the demand for multifamily, office or retail properties, and therefore reduce the number of suitable acquisition opportunities available to us and increase the prices paid for such acquisition properties |
| As a result, our expected return from investment in these properties will deteriorate |
| We may be unable to successfully integrate and effectively manage the properties we acquire, which could adversely affect our results of operations |
| So long as we are able to obtain capital on commercially reasonable terms, we intend to continue to selectively acquire multifamily, office and retail properties that meet our criteria for investment opportunities, are consistent with our business strategies and we believe will be profitable or will enhance the value of our portfolio |
| The success of these acquisitions will depend, in part, on our ability to efficiently integrate the acquired properties into our organization, and apply our business, operating, administrative, financial and accounting strategies and controls to these acquired properties |
| As a result of the rapid growth of our portfolio, we cannot assure you that we will be able to adapt our management, administrative, accounting and operational systems or hire and retain sufficient operational staff to integrate these properties into our portfolio and manage any future acquisitions of additional properties without operating disruptions or unanticipated costs |
| As we develop or acquire additional properties, we will be subject to risks associated with managing new properties, including tenant retention and mortgage default |
| In addition, acquisitions or developments may cause disruptions in our operations and divert management’s attention away from day-to-day operations, which could impair our relationships with our current tenants and employees |
| In addition, our profitability may suffer because of acquisition-related costs or amortization costs for acquired goodwill and other intangible assets |
| If we are unable to successfully integrate the acquired properties into our operations, our results of operations may be adversely affected |
| 25 _________________________________________________________________ We may not be able to achieve the anticipated financial and operating results from our acquisitions, which would adversely affect our operating results |
| We will continue to acquire multifamily, office or retail properties only if they meet our criteria and we believe that that they will enhance our future financial performance and the value of our portfolio |
| Our belief, however, is based on and is subject to risks, uncertainties and other factors, many of which are forward-looking and are uncertain in nature or are beyond our control |
| In addition, some of these properties may have unknown characteristics or deficiencies or may not complement our portfolio of existing properties |
| As a result, some properties may be worth less or may generate less revenue than, or simply not perform as well as, we believed at the time of the acquisition, thereby negatively affecting our operating results |
| We may be unable to develop new properties or redevelop existing properties successfully, which could adversely affect our results of operations due to unexpected costs, delays and other contingencies |
| To complement our acquisition strategy, we will continue to develop new properties or expand or redevelop existing properties as opportunities arise |
| However, there are significant risks associated with our development activities in addition to those generally associated with the ownership and operation of developed properties |
| These risks include the following: • significant expenditure of money and time on projects that may be delayed or never be completed, • higher than projected construction costs, • lack of availability of debt or equity financing on acceptable terms, • failure to meet anticipated occupancy or rent levels, • failure to obtain zoning, occupancy or other governmental approvals, • changes in applicable zoning and land use laws may require us to abandon projects prior to their completion, resulting in the loss of development costs incurred up to the time of abandonment, and • late completion because of construction delays, delays in the receipt of zoning, occupancy and other approvals or other factors outside of our control |
| In addition, if a project is delayed, certain tenants may have the right to terminate their leases |
| Any one or more of these risks may cause us to incur unexpected costs in connection with our development strategy, which would negatively affect our results of operations |
| Our joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on our joint venture partners’ financial condition, any disputes that may arise between us and our joint venture partners and our exposure to potential losses from the actions of our joint venture partners |
| Our investments in joint ventures involve risks not customarily associated with our wholly owned properties, including the following: • we share decision-making authority with some of our joint venture partners regarding major decisions affecting the ownership or operation of the joint venture and the joint venture properties, such as the sale of the properties or the making of additional capital contributions for the benefit of the properties, which may prevent us from taking actions that are opposed by those joint venture partners; • prior consent of our joint venture partners is required for a sale or transfer to a third party of our interests in the joint venture, which restricts our ability to dispose of our interest in the joint venture; • our joint venture partners might become bankrupt or fail to fund their share of required capital contributions, which may delay construction or development of a joint venture property or increase our financial commitment to the joint venture; • our joint venture partners may have business interests or goals with respect to the joint venture properties that conflict with our business interests and goals, which could increase the likelihood of disputes regarding the ownership, management or disposition of such properties; 26 _________________________________________________________________ • disputes may develop with our joint venture partners over decisions affecting the joint venture properties or the joint venture, which may result in litigation or arbitration that would increase our expenses and distract our officers and/or trustees from focusing their time and effort on our business, and possibly disrupt the day-to-day operations of the property such as by delaying the implementation of important decisions until the conflict or dispute is resolved; and • we may suffer losses as a result of the actions of our joint venture partners with respect to our joint venture investments |
| Risks Associated with Our Indebtedness and Financing We have substantial indebtedness and our cash flow may not be sufficient to make required payments on our indebtedness or repay our indebtedness as it matures |
| We rely on debt financing for our business |
| As of December 31, 2005, the amount of our total debt was approximately dlra2dtta9 billion, consisting of dlra2dtta5 billion of consolidated debt and dlra0dtta4 billion of our pro rata share of joint venture debt |
| Due to our high level of debt, we may be required to dedicate a substantial portion of our funds from operations to servicing our debt, and our cash flow may be insufficient to meet required payments of principal and interest |
| If a property were mortgaged to secure payment of indebtedness and we were unable to meet mortgage payments, the mortgagee could foreclose upon that property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies |
| In addition, if principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow will not be sufficient in all years to repay all maturing debt |
| Most of our indebtedness does not require significant principal payments prior to maturity |
| However, we will need to raise additional equity capital, obtain secured or unsecured debt financing, issue private or public debt, or sell some of our assets to either refinance or repay our indebtedness as it matures |
| We cannot assure you that these sources of financing or refinancing will be available to us at reasonable terms or at all |
| Our inability to obtain financing or refinancing to repay our maturing indebtedness, and our inability to refinance existing indebtedness on reasonable terms, may require us to make higher interest and principal payments, issue additional equity securities, or sell some of our assets on disadvantageous terms, all or any of which may result in foreclosure of properties, partial or complete loss on our investment and otherwise adversely affect our financial conditions and results of operation |
| Our degree of leverage could limit our ability to obtain additional financing which would negatively impact our results of operation and financial condition |
| As of December 31, 2005, our consolidated borrowings and pro rata share of unconsolidated borrowings totaled approximately dlra2dtta9 billion, which represented approximately 50dtta97prca of our total market capitalization |
| Total market capitalization represents the sum of the outstanding indebtedness (including our share of joint venture indebtedness), the total liquidation preference of all our preferred shares and the total market value of our common shares and units of partnership interest of our operating partnership, based on the closing price of our common shares as of December 31, 2005 |
| Our organizational documents do not contain any limitation on the incurrence of debt |
| Our leverage and any future increases in our leverage could adversely affect our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes which would negatively impact our results of operation and financial condition |
| Due to the amount of our variable rate debt, rising interest rates would adversely affect our results of operation |
| As of December 31, 2005, we had approximately dlra424dtta4 million of variable rate debt outstanding, consisting of dlra266dtta8 million of our consolidated debt and dlra157dtta6 million of our pro rata share of variable rate unconsolidated joint venture debt |
| While we have sought to refinance our variable rate debt with fixed rate debt or cap our exposure to interest rate fluctuations by using interest rate swap agreements where appropriate, failure to hedge effectively against interest rate changes may adversely affect our results of operations |
| In 27 _________________________________________________________________ addition, as opportunities arise, we may borrow additional money with variable interest rates in the future |
| As a result, a significant increase in interest rates would adversely affect our results of operations |
| We have entered into debt agreements with covenants that restrict our operating activities, which could adversely affect our results of operations, and violation of these restrictive covenants could adversely affect our financial condition through debt defaults or acceleration |
| Our credit facility contains numerous customary restrictions, requirements and other limitations on our ability to incur debt, including restrictions related to: • secured debt to total asset value ratio; • interest coverage ratio; • fixed charge coverage ratio; • debt to total asset value ratio; • unencumbered interest coverage ratio; • unencumbered leverage ratio; and • adjusted total asset value |
| In addition, the indenture under which our senior unsecured debt is issued contains financial and operating covenants including coverage ratios |
| Our indenture also limits our ability to: • incur secured and unsecured indebtedness; • sell all or substantially all or our assets; and • engage in mergers, consolidations and acquisitions |
| These restrictions will continue to hinder our operational flexibility through limitations on our ability to incur additional indebtedness, pursue certain business initiatives or make other changes to our business |
| These limitations could adversely affect our results of operations |
| In addition, violations of these covenants could cause the declaration of defaults and any related acceleration of indebtedness, which would result in adverse consequences to our financial condition |
| Our inability to obtain sufficient third party financing could adversely affect our results of operations and financial condition because we depend on third party financing for our development, expansion or acquisition activities |
| To qualify as a REIT, we must distribute to our shareholders each year at least 90prca of our REIT taxable income, excluding any net capital gain |
| Because of these distribution requirements, it is not likely that we will be able to fund all future capital needs from income from operations |
| As a result, as we continue to develop or acquire new properties or expand existing properties, we will continue to rely on third-party sources of capital, including lines of credit, secured or unsecured debt (both construction financing and permanent debt), and equity issuances |
| These sources, however, may not be available on favorable terms or at all |
| Our access to third-party sources of capital depends on a number of factors, including the market’s perception of our growth potential and our current and potential future earnings |
| Moreover, additional equity offerings may result in substantial dilution of our shareholders’ interests, and additional debt financing may substantially increase our leverage |
| There can be no assurance that we will be able to obtain the financing necessary to fund new development or project expansions or our acquisition activities on terms favorable to us or at all |
| If we are unable to obtain sufficient level of third party financing to fund our growth, our results of operations and financial condition may be adversely affected |
| Our senior notes do not have an established trading market, therefore, holders of our notes may not be able to sell their notes |
| Each series of our senior notes is a new issue of securities with no established trading market |
| We do not intend to apply for listing of any series of notes on any national securities exchange |
| The underwriters in an 28 _________________________________________________________________ offering of senior notes may advise us that they intend to make a market in the notes, but they are not obligated to do so and may discontinue market making at any time without notice |
| We can give no assurance as to the liquidity of or any trading market for any series of our notes |
| Risks Associated with Our Organization Some of our trustees and officers have conflicts of interest and could exercise influence in a manner inconsistent with the interests of our shareholders |
| Thomas Lowder, our Chairman of the Board, Chief Executive Officer and President, and James Lowder and Harold Ripps, each of whom is our trustee, could seek to exert influence over our decisions as to sales or re-financings of particular properties we own |
| Any such exercise of influence could produce decisions that are not in the best interest of all of the holders of interests in us |
| The Lowder family and their affiliates hold interests in a company that has performed insurance brokerage services with respect to our properties |
| This company may perform similar services for us in the future |
| As a result, the Lowder family may realize benefits from transactions between this company and us that are not realized by other holders of interests in us |
| In addition, Thomas and James Lowder, as our trustees, may be in a position to influence us to do business with companies in which the Lowder family has a financial interest |
| Our policies may not be successful in eliminating the influence of conflicts |
| Moreover, transactions with companies controlled by the Lowder family, if any, may not be on terms as favorable to us as we could obtain in an arms-length transaction with a third party |
| Restrictions on the acquisition and change in control of the Company may have adverse effects on the value of our common shares |
| Various provisions of our Declaration of Trust restrict the possibility for acquisition or change in control of us, even if the acquisition or change in control were in the shareholders’ interest |
| As a result, the value of our common shares may be less than they would otherwise be in the absence of such restrictions |
| Our Declaration of Trust contains ownership limits and restrictions on transferability |
| Our Declaration of Trust contains certain restrictions on the number of common shares and preferred shares that individual shareholders may own intended to ensure that we maintain our qualification as a REIT In order for us to qualify as a REIT, no more than 50prca of the value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year and the shares 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 |
| To help avoid violating these requirements, our Declaration of Trust contains provisions restricting the ownership and transfer of shares in certain circumstances |
| These ownership limitations provide that no person may beneficially own, or be deemed to own by virtue of the attribution provisions of the Code, more than: • 9dtta8prca, in either number of shares or value (whichever is more restrictive), of any class of outstanding shares of Colonial; • 5prca in number or value (whichever is more restrictive), of the outstanding common shares and any outstanding excess shares of Colonial; and • in the case of certain excluded holders related to the Lowder family: 29prca by one individual; 34prca by two individuals; 39prca by three individuals; or 44prca by four individuals |
| These ownership limitations may be waived by our Board of Trustees if it receives representations and undertakings of certain facts for the protection of our REIT status, and if requested, an IRS ruling or opinion of counsel |
| Our Declaration of Trust permits our Board of Trustees to issue preferred shares with terms that may discourage a third party from acquiring us |
| Our Declaration of Trust permits the Board of Trustees to issue up to 20cmam000cmam000 preferred shares, having those preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or conditions of redemption as determined by the Board of 29 _________________________________________________________________ Trustees |
| Thus, the Board of Trustees could authorize the issuance of preferred shares with terms and conditions that could have the effect of discouraging a takeover or other transaction in which some or a majority of shares might receive a premium for their shares over the then-prevailing market price of shares |
| Our Declaration of Trust and Bylaws contain other possible anti-takeover provisions |
| Our Declaration of Trust and Bylaws contain other provisions that may have the effect of delaying, deferring or preventing an acquisition or change in control of the Company, and, as a result could prevent our shareholders from being paid a premium for their common shares over the then-prevailing market prices |
| These provisions include: • a prohibition on shareholder action by written consent; • the ability to remove trustees only at a meeting of shareholders called for that purpose, by the affirmative vote of the holders of not less than two-thirds of the shares then outstanding and entitled to vote in the election of trustees; • the limitation that a special meetings of shareholders can be called only by the president or chairman of the board or upon the written request of shareholders holding outstanding shares representing at least 25prca of all votes entitled to be cast at the special meeting; • the advance written notice requirement for shareholders to nominate a trustee before a meeting of shareholders; and • the requirement that the amendment of certain provisions of the Declaration of Trust relating to the removal of trustees, the termination of the Company and any provision that would have the effect of amending these provisions, require the affirmative vote of the holders of two-thirds of the shares then outstanding |
| Our board of directors has adopted a shareholder rights plan that could discourage a third party from making a proposal to acquire us |
| In 1998, our Board of Trustees adopted a shareholder rights plan, which may discourge a third party from making a proposal to acquire us |
| Under the plan, preferred purchase rights, which are attached to our common shares, generally will be triggered upon the acquisition of 20prca or more of our outstanding common shares, unless the rights are redeemed or exchanged |
| If triggered, these rights would entitle our shareholders other than the acquirer to purchase 1/10cmam000th of a Colonial Series 1998 preferred share at a price of dlra92dtta00, subject to adjustment |
| We may change our business policies in the future, which could adversely affect our financial condition or results of operations |
| Our major policies, including our policies with respect to development, acquisitions, financing, growth, operations, debt capitalization and distributions, are determined by our Board of Trustees |
| Although it has no present intention to do so, our Board of Trustees may amend or revise these and other policies from time to time |
| A change in these policies could adversely affect our financial condition or results of operations, including our ability to service debt |
| Risks Related to Our Shares Market interest rates and low trading volume may have an adverse effect on the market value of our common shares |
| The market price of shares of a REIT may be affected by the distribution rate on those shares, as a percentage of the price of the shares, relative to market interest rates |
| If market interest rates increase, prospective purchasers of our shares may expect a higher annual distribution rate |
| Higher interest rates would not, however, result in more funds for us to distribute and, in fact, would likely increase our borrowing costs and potentially decrease funds available for distribution |
| This could cause the market price of our common shares to go down |
| In addition, although our common shares are listed on the New York Stock Exchange, the daily trading volume of our shares may be lower than the trading volume for other industries |
| As a result, our 30 _________________________________________________________________ investors who desire to liquidate substantial holdings may find that they are unable to dispose of their shares in the market without causing a substantial decline in the market value of the shares |
| A large number of shares available for future sale could adversely affect the market price of our common shares |
| The sales of a substantial number of common shares, or the perception that such sales could occur, could adversely affect prevailing market prices for shares |
| In addition to the possibility that we may sell our shares in a public offering at any time, or pursuant to share option and share purchase plans, we may currently issue up to 10cmam872cmam568 common shares upon redemption of currently outstanding units |
| No prediction can be made about the effect that future sales of common shares will have on the market price of our common shares |
| Changes in market conditions or a failure to meet the market’s expectations with regard to our earnings and cash distributions could adversely affect the market price of our common shares |
| We believe that the market value of a REIT’s equity securities is based primarily upon the market’s perception of the REIT’s growth potential and its current and potential future cash distributions, and is secondarily based upon the real estate market value of the underlying assets |
| For that reason, our shares may trade at prices that are higher or lower than the net asset value per share |
| To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes, these retained funds, while increasing the value of our underlying assets, may not correspondingly increase the market price of our common shares |
| In addition, we are subject to the risk that our cash flow will be insufficient to meet the required payments on our preferred shares and the Operating Partnership’s preferred units |
| Our failure to meet the market’s expectations with regard to future earnings and cash distributions would likely adversely affect the market price of our shares |
| The stock markets, including The New York Stock Exchange (NYSE), on which we list our common shares, have experienced significant price and volume fluctuations |
| As a result, the market price of our common shares could be similarly volatile, and investors in our common shares may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects |
| Among the market conditions that may affect the market price of our publicly traded securities are the following: • our financial condition and operating performance and the performance of other similar companies; • actual or anticipated differences in our quarterly operating results; • changes in our revenues or earnings estimates or recommendations by securities analysts; • publication of research reports about us or our industry by securities analysts; • additions and departures of key personnel; • strategic decisions by us or our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy; • the reputation of REITs generally and the reputation of REITs with portfolios similar to ours; • the attractiveness of the securities of REITs in comparison to securities issued by other entities (including securities issued by other real estate companies); • an increase in market interest rates, which may lead prospective investors to demand a higher distribution rate in relation to the price paid for our shares; • the passage of legislation or other regulatory developments that adversely affect us or our industry; • speculation in the press or investment community; • actions by institutional shareholders or hedge funds; • changes in accounting principles; • terrorist acts; and 31 _________________________________________________________________ • general market conditions, including factors unrelated to our performance |
| In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price |
| This type of litigation could result in substantial costs and divert our management’s attention and resources |
| Risks Associated with Income Tax Laws Our failure to qualify as a REIT would decrease the funds available for distribution to our shareholders and adversely affect the market price of our common shares |
| We believe that we have qualified for taxation as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 1993 |
| We intend to continue to meet the requirements for taxation as a REIT, but we cannot assure shareholders that we will qualify as a REIT We have not requested and do not plan to request a ruling from the IRS that we qualify as a REIT, and the statements in this Form 10-K are not binding on the IRS or any court |
| As a REIT, we generally will not be subject to federal income tax on our income that we distribute currently to our shareholders |
| Many of the REIT requirements are highly technical and complex |
| The determination that we are a REIT requires an analysis of various factual matters and circumstances that may not be totally within our control |
| For example, to qualify as a REIT, at least 95prca of our gross income must come from sources that are itemized in the REIT tax laws |
| We generally are prohibited from owning more than 10prca of the voting securities or more than 10prca of the value of the outstanding securities of any one issuer, subject to certain exceptions, including an exception with respect to certain debt instruments and corporations electing to be “taxable REIT subsidiaries |
| ” We are also required to distribute to shareholders at least 90prca of our REIT taxable income (excluding capital gains) |
| The fact that we hold most of our assets through the Operating Partnership further complicates the application of the REIT requirements |
| Even a technical or inadvertent mistake could jeopardize our REIT status |
| Furthermore, Congress or the Internal Revenue Service might make changes to the tax laws and regulations, or the courts might issue new rulings that make it more difficult, or impossible, for us to remain qualified as a REIT If we fail to qualify as a REIT for federal income tax purposes, and are unable to avail ourselves of certain savings provisions set forth in the Internal Revenue Code, we would be subject to federal income tax at regular corporate rates |
| As a taxable corporation, we would not be allowed to take a deduction for distributions to shareholders in computing our taxable income or pass through long term capital gains to individual shareholders at favorable rates |
| We also could be subject to the federal alternative minimum tax and possibly increased state and local taxes |
| We would not be able to elect to be taxed as a REIT for four years following the year we first failed to qualify unless the IRS were to grant us relief under certain statutory provisions |
| If we failed to qualify as a REIT, we would have to pay significant income taxes, which would reduce our net earnings available for investment or distribution to our shareholders |
| This likely would have a significant adverse effect on our earnings and the value of our common shares |
| In addition, we would no longer be required to pay any distributions to shareholders |
| If we fail to qualify as a REIT for federal income tax purposes and are able to avail ourselves of one or more of the statutory savings provisions in order to maintain our REIT status, we would nevertheless be required to pay penalty taxes of dlra50cmam000 or more for each such failure |
| Even if we qualify as a REIT, we will be required to pay some taxes |
| Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state and local taxes on our income and property |
| For example, we will be subject to income tax to the extent we distribute less than 100prca of our REIT taxable income (including capital gains) |
| Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100prca tax |
| In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business |
| The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale |
| However, we will not be treated as a dealer in real property with respect to a property that we sell for the purposes of the 100prca tax if (i) we have held the property for at least four years for the production of rental income prior to the sale, (ii) capitalized expenditures on the property in the four years preceding the sale are less than 30prca of the net selling price of the property, and (iii) we either (a) have seven or fewer sales of property (excluding certain property obtained through foreclosure) for the year 32 _________________________________________________________________ of sale or (b) the aggregate tax basis of property sold during the year of sale is 10prca or less of the aggregate tax basis of all of our assets as of the beginning of the taxable year and substantially all of the marketing and development expenditures with respect to the property sold are made through an independent contractor from whom we derive no income |
| The sale of more than one property to one buyer as part of one transaction constitutes one sale for purposes of this “safe harbor |
| ” We intend to hold our properties, and CRLP intends to hold its properties, for investment with a view to long-term appreciation, to engage in the business of acquiring, developing, owning and operating properties, and to make occasional sales of properties as are consistent with our investment objectives |
| However, not all of our sales will satisfy the “safe harbor” requirements described above |
| Furthermore, there are certain interpretive issues related to the application of the “safe harbor” that are not free from doubt under the federal income tax law |
| While we acquire and hold our properties with an investment objective and do not believe they constitute dealer property, we cannot provide any assurance that the IRS might not contend that one or more of these sales are subject to the 100prca penalty tax or that the IRS would not challenge our interpretation of, or any reliance on, the “safe harbor” provisions |
| In addition, any net taxable income earned directly by our taxable REIT subsidiaries, or through entities that are disregarded for federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax |
| We have elected to treat Colonial Properties Services, Inc |
| as a taxable REIT subsidiary, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future |
| In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation |
| For example, a taxable REIT subsidiary is limited in its ability to deduct interest payments made to an affiliated REIT In addition, the REIT has to pay a 100prca penalty tax on some payments that it receives or on some deductions taken by the taxable REIT subsidiaries if the economic arrangements between the REIT, the REIT’s tenants, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties |
| Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income because not all states and localities treat REITs the same as they are treated for federal income tax purposes |
| To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our shareholders |