| EQUITY LIFESTYLE PROPERTIES INC Item 1A Risk Factors |
| Several factors may adversely affect the economic performance and value of our Properties |
| These factors include: - - changes in the national, regional and local economic climate; - - local conditions such as an oversupply of lifestyle-oriented properties or a reduction in demand for lifestyle-oriented properties in the area, the attractiveness of our Properties to customers, competition from manufactured home communities and other lifestyle-oriented properties and alternative forms of housing (such as apartment buildings and site-built single family homes); - - our ability to collect rent from customers and pay maintenance, insurance and other operating costs (including real estate taxes), which could increase over time; - - the failure of our assets to generate income sufficient to pay our expenses, service our debt and maintain our Properties, which may adversely affect our ability to make expected distributions to our stockholders; - - our inability to meet mortgage payments on any Property that is mortgaged, in which case the lender could foreclose on the mortgage and take the Property; - - interest rate levels and the availability of financing, which may adversely affect our financial condition; and - - changes in laws and governmental regulations (including rent control laws and regulations governing usage, zoning and taxes), which may adversely affect our financial condition |
| New Acquisitions May Fail to Perform as Expected and Competition for Acquisitions May Result in Increased Prices for Properties |
| Newly acquired properties may fail to perform as expected |
| We may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position |
| Difficulties in integrating acquisitions may prove costly or time-consuming and could divert management attention |
| Additionally, we expect that other real estate investors with significant capital will compete with us for attractive investment opportunities |
| These competitors include publicly traded REITs, private REITs and other types of investors |
| Such competition increases prices for properties |
| We expect to acquire properties with cash from secured or unsecured financings, proceeds from offerings of equity or debt, undistributed funds from operations and sales of investments |
| We may not be in a position or have the opportunity in the future to make suitable property acquisitions on favorable terms |
| Real estate investments generally cannot be sold quickly |
| We may not be able to vary our portfolio promptly in response to economic or other conditions, forcing us to accept lower than market value |
| This inability to respond promptly to changes in the performance of our investments could adversely affect our financial condition and ability to service debt and make distributions to our stockholders |
| Some Potential Losses Are Not Covered by Insurance |
| We carry comprehensive liability, fire, extended coverage and rental loss insurance on all of our Properties |
| We believe the policy specifications and insured limits of these policies are adequate and appropriate |
| There are, however, certain types of losses, such as lease and other contract claims, that generally are not insured |
| Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a Property, as well as the anticipated future revenue from the Property |
| In such an event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the Property |
| Our business is subject to risks normally associated with debt financing |
| The total principal amount of our outstanding indebtedness was approximately dlra1dtta6 billion as of December 31, 2005 |
| Our substantial indebtedness and the cash flow associated with serving our indebtedness could have important consequences, including the risks that: 8 - - our cash flow could be insufficient to pay distributions at expected levels and meet required payments of principal and interest; - - we will be required to use a substantial portion of our cash flow from operations to pay our indebtedness, thereby reducing the availability of our cash flow to fund the implementation of our business strategy, acquisitions, capital expenditures and other general corporate purposes; - - our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; - - we may not be able to refinance existing indebtedness (which in virtually all cases requires substantial principal payments at maturity) and, if we can, the terms of such refinancing might not be as favorable as the terms of existing indebtedness; - - 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; and - - if prevailing interest rates or other factors at the time of refinancing (such as the possible reluctance of lenders to make commercial real estate loans) result in higher interest rates, increased interest expense would adversely affect cash flow and our ability to service debt and make distributions to stockholders |
| If a Property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the mortgagee could foreclose on the Property, resulting in loss of income and asset value |
| The mortgages on our Properties contain customary negative covenants which, among other things, limit our ability, without the prior consent of the lender, to further mortgage the Property and to discontinue insurance coverage |
| In addition, our credit facilities contain certain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including total debt to assets ratios, debt service coverage ratios and minimum ratios of unencumbered assets to unsecured debt |
| Foreclosure on mortgaged Properties or an inability to refinance existing indebtedness would likely have a negative impact on our financial condition and results of operations |
| Our debt to market capitalization ratio (total debt as a percentage of total debt plus the market value of the outstanding common stock and Units held by parties other than the Company) is approximately 56prca as of December 31, 2005 |
| The degree of leverage could have important consequences to stockholders, including an adverse effect on our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes, and makes us more vulnerable to a downturn in business or the economy generally |
| WE DEPEND ON OUR SUBSIDIARIES &apos DIVIDENDS AND DISTRIBUTIONS Substantially all of our assets are indirectly held through the Operating Partnership |
| As a result, we have no source of operating cash flow other than from distributions from the Operating Partnership |
| Our ability to pay dividends to holders of common stock depends on the Operating Partnershipapstas ability first to satisfy its obligations to its creditors and make distributions payable to third party holders of its preferred Units and then to make distributions to MHC Trust and common Unit holders |
| Similarly, MHC Trust must satisfy its obligations to its creditors and preferred shareholders before making common stock distributions to us |
| STOCKHOLDERS &apos ABILITY TO EFFECT CHANGES OF CONTROL OF THE COMPANY IS LIMITED Provisions of Our Charter and Bylaws Could Inhibit Changes of Control |
| Certain provisions of our charter and bylaws may delay or prevent a change of control of the Company or other transactions that could provide our stockholders with a premium over the then-prevailing market price of their common stock or which might otherwise be in the best interest of our stockholders |
| These include the Ownership Limit described below |
| Also, any future series of preferred stock may have certain voting provisions that could delay or prevent a change of control or other transaction that might involve a premium price or otherwise be good for our stockholders |
| Maryland Law Imposes Certain Limitations on Changes of Control |
| Certain provisions of Maryland law prohibit "e business combinations "e (including certain issuances of equity securities) with any person who beneficially owns ten percent or more of the voting power of outstanding common stock, or with an affiliate of the Company who, at any time within the two-year period prior to the date in question, was the owner of ten percent or more of the voting power of the outstanding voting stock (an "e Interested Stockholder "e ), or with an affiliate of an Interested Stockholder |
| These prohibitions last for five years after the most recent date on which the Interested Stockholder became an Interested Stockholder |
| After the five-year period, a business combination with an Interested Stockholder must be approved by two super-majority stockholder votes unless, among other 9 conditions, our common stockholders receive a minimum price for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares of common stock |
| The Board of Directors has exempted from these provisions under the Maryland law any business combination with Samuel Zell, who is the Chairman of the Board of the Company, certain holders of Units who received them at the time of our initial public offering, the General Motors Hourly Rate Employees Pension Trust and the General Motors Salaried Employees Pension Trust, and our officers who acquired common stock at the time we were formed and each and every affiliate of theirs |
| To remain qualified as a REIT for US federal income tax purposes, not more than 50prca in value of our outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the federal income tax laws applicable to REITs) at any time during the last half of any taxable year |
| To facilitate maintenance of our REIT qualification, our charter, subject to certain exceptions, prohibits Beneficial Ownership (as defined in our charter) by any single stockholder of more than 5prca (in value or number of shares, whichever is more restrictive) of our outstanding capital stock |
| We refer to this as the "e Ownership Limit "e |
| Within certain limits, our charter permits the Board of Directors to increase the Ownership Limit with respect to any class or series of stock |
| The Board of Directors, upon receipt of a ruling from the IRS, opinion of counsel, or other evidence satisfactory to the Board of Directors and upon fifteen days prior written notice of a proposed transfer which, if consummated, would result in the transferee owning shares in excess of the Ownership Limit, and upon such other conditions as the Board of Directors may direct, may exempt a stockholder from the Ownership Limit |
| Absent any such exemption, capital stock acquired or held in violation of the Ownership Limit will be transferred by operation of law to us as trustee for the benefit of the person to whom such capital stock is ultimately transferred, and the stockholderapstas rights to distributions and to vote would terminate |
| Such stockholder would be entitled to receive, from the proceeds of any subsequent sale of the capital stock transferred to us as trustee, the lesser of (i) the price paid for the capital stock or, if the owner did not pay for the capital stock (for example, in the case of a gift, devise of other such transaction), the market price of the capital stock on the date of the event causing the capital stock to be transferred to us as trustee or (ii) the amount realized from such sale |
| A transfer of capital stock may be void if it causes a person to violate the Ownership Limit |
| The Ownership Limit could delay or prevent a change in control of the Company and, therefore, could adversely affect our stockholders &apos ability to realize a premium over the then-prevailing market price for their common stock |
| CONFLICTS OF INTEREST COULD INFLUENCE THE COMPANY &apos S DECISIONS Certain Stockholders Could Exercise Influence in a Manner Inconsistent With the Stockholders &apos Best Interests |
| As of December 31, 2005, Mr |
| Zell and certain affiliated holders beneficially owned approximately 14dtta2prca of our outstanding common stock (in each case including common stock issuable upon the exercise of stock options and the exchange of Units) |
| Accordingly, Mr |
| Zell has significant influence on our management and operation |
| Such influence could be exercised in a manner that is inconsistent with the interests of other stockholders |
| Zell and His Affiliates Continue to be Involved in Other Investment Activities |
| Zell and his affiliates have a broad and varied range of investment interests, including interests in other real estate investment companies involved in other forms of housing, including multifamily housing |
| Zell and his affiliates may acquire interests in other companies |
| Zell may not be able to control whether any such company competes with the Company |
| Consequently, Mr |
| Zellapstas continued involvement in other investment activities could result in competition to the Company as well as management decisions which might not reflect the interests of our stockholders |
| RISK OF EMINENT DOMAIN AND TENANT LITIGATION We own Properties in certain areas of the country where real estate values have increased faster than rental rates in our Properties either because of locally imposed rent control or long term leases |
| In such areas, we have learned that certain local government entities have investigated the possibility of seeking to take our Properties by eminent domain at values below the value of the underlying land |
| While no such eminent domain proceeding has been commenced, and we would exercise all of our rights in connection with any such proceeding, successful condemnation proceedings by municipalities could adversely affect our financial condition |
| Moreover, certain of our Properties located in California are subject to rent control ordinances, some of which not only severely restrict ongoing rent increases but also prohibit us from increasing rents upon turnover |
| Such regulation allows customers to sell their homes for a premium representing the value of the future discounted rent-controlled rents |
| As part of our effort to realize the value of our Properties subject to rent control, we have initiated lawsuits against several municipalities in California |
| In response to our efforts, tenant groups have filed lawsuits against us seeking not only to limit rent increases, but to be awarded large damage awards |
| If we are unsuccessful in our efforts to challenge rent control ordinances, it is likely that we will not be able to charge rents that reflect the intrinsic value of the affected Properties |
| Finally, tenant groups in non-rent controlled markets have also attempted to use litigation as a means of protecting themselves from rent increases reflecting the rental value of the affected Properties |
| An unfavorable outcome in the tenant group lawsuits could have an adverse impact on our financial condition |
| 10 ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND CAN BE COSTLY Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean up hazardous or toxic substances or petroleum product releases at such property |
| The owner or operator may have to pay a governmental entity or third parties for property damage and for investigation and clean-up costs incurred by such parties in connection with the contamination |
| Such laws typically impose clean-up responsibility and liability without regard to whether the owner or operator knew of or caused the presence of the contaminants |
| Even if more than one person may have been responsible for the contamination, each person covered by the environmental laws may be held responsible for all of the clean-up costs incurred |
| In addition, third parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site |
| Environmental laws also govern the presence, maintenance and removal of asbestos |
| Such laws require that owners or operators of property containing asbestos properly manage and maintain the asbestos, that they notify and train those who may come into contact with asbestos and that they undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building |
| Such laws may impose fines and penalties on real property owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers |
| WE HAVE A SIGNIFICANT CONCENTRATION OF PROPERTIES IN FLORIDA AND CALIFORNIA, AND NATURAL DISASTERS OR OTHER CATASTROPHIC EVENTS IN THESE OR OTHER STATES COULD ADVERSELY AFFECT THE VALUE OF OUR PROPERTIES AND OUR CASH FLOW As of December 31, 2005, we owned or had an ownership interest in 285 Properties located in 28 states and British Columbia, including 84 Properties located in Florida and 47 Properties located in California |
| The occurrence of a natural disaster or other catastrophic event in any of these areas may cause a sudden decrease in the value of our Properties |
| While we have obtained insurance policies providing certain coverage against damage from fire, flood, property damage, earthquake, wind storm and business interruption, these insurance policies contain coverage limits, limits on covered property and various deductible amounts that the Company must pay before insurance proceeds are available |
| Such insurance may therefore be insufficient to restore our economic position with respect to damage or destruction to our Properties caused by such occurrences |
| Moreover, each of these coverages must be renewed every year and there is the possibility that all or some of the coverages may not be available at a reasonable cost |
| In addition, in the event of such natural disaster or other catastrophic event, the process of obtaining reimbursement for covered losses, including the lag between expenditures incurred by us and reimbursements received from the insurance providers, could adversely affect our economic performance |
| MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR COMMON STOCK One of the factors that investors consider important in deciding whether to buy or sell shares of a REIT is the distribution rates with respect to such shares (as a percentage of the price of such shares) relative to market interest rates |
| If market interest rates go up, prospective purchasers of REIT shares may expect a higher 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 |
| Thus, higher market interest rates could cause the market price of our publicly traded securities to go down |
| WE ARE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL To qualify as a REIT, we must distribute to our stockholders each year at least 90prca of our REIT taxable income (determined without regard to the deduction for dividends paid and excluding any net capital gain) |
| In addition, we intend to distribute all or substantially all of our net income so that we will generally not be subject to US federal income tax on our earnings |
| Because of these distribution requirements, it is not likely that we will be able to fund all future capital needs, including for acquisitions, from income from operations |
| We therefore will have to rely on third-party sources of debt and equity capital financing, which may or may not be available on favorable terms or at all |
| Our access to third-party sources of capital depends on a number of things, including conditions in the capital markets generally and the marketapstas perception of our growth potential and our current and potential future earnings |
| Moreover, additional equity offerings may result in substantial dilution of stockholders &apos interests, and additional debt financing may substantially increase our leverage |
| OUR QUALIFICATION AS A REIT IS DEPENDENT ON COMPLIANCE WITH US FEDERAL INCOME TAX REQUIREMENTS We believe we have been organized and operated in a manner so as to qualify for taxation as a REIT, and we intend to continue to operate so as to qualify as a REIT for US federal income tax purposes |
| Qualification as a REIT for US federal income tax purposes, however, is governed by highly technical and complex provisions of the Code for which there are only limited judicial or administrative interpretations |
| Our qualification as a REIT requires analysis of various facts and circumstances that may not be entirely within our control, and we cannot provide any assurance that the Internal Revenue 11 Service (the "e IRS "e ) will agree with our analysis |
| These matters can affect our qualification as a REIT In addition, legislation, new regulations, administrative interpretations or court decisions might significantly change the tax laws with respect to the requirements for qualification as a REIT or the US federal income tax consequences of qualification as a REIT If, with respect to any taxable year, we fail to maintain our qualification as a REIT (and specified relief provisions under the Code were not applicable to such disqualification), we could not deduct distributions to stockholders in computing our net taxable income and we would be subject to US federal income tax on our net taxable income at regular corporate rates |
| Any US federal income tax payable could include applicable alternative minimum tax |
| If we had to pay US federal income tax, the amount of money available to distribute to stockholders and pay indebtedness would be reduced for the year or years involved, and we would no longer be required to distribute money to stockholders |
| In addition, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost, unless we were entitled to relief under the relevant statutory provisions |
| Although we currently intend to operate in a manner designed to allow us to qualify as a REIT, future economic, market, legal, tax or other considerations may cause us to revoke the REIT election |