| RAMCO GERSHENSON PROPERTIES TRUST Item 1A Risk Factors Many factors that affect our business involve risk and uncertainty |
| The factors described below are some of the risks that could materially harm our business, financial condition, and results of operations |
| Business Risks Adverse market conditions and tenant bankruptcies could adversely affect our revenues |
| The economic performance and value of our real estate assets are subject to all the risks associated with owning and operating real estate, including risks related to adverse changes in national, regional and local economic and market conditions |
| Our current properties are located in 13 states in the midwestern, southeastern and mid-Atlantic regions of the United States |
| The economic condition of each of our markets may be dependent on one or more industries |
| An economic downturn in one of these industries may result in a business downturn for existing tenants, and as a result, these tenants may fail to make rental payments, decline to extend leases upon expiration, delay lease commencements or declare bankruptcy |
| In addition, we may have difficulty finding new tenants during economic downturns |
| Any tenant bankruptcies, leasing delays or failure to make rental payments when due could result in the termination of the tenant’s lease, causing material losses to us and adversely impacting our operating results |
| If our properties do not generate sufficient income to meet our operating expenses, including future debt service, our income and results of operations would be adversely affected |
| 5 _________________________________________________________________ [60]Table of Contents The retail industry has experienced some financial difficulties during the past few years and certain local, regional and national retailers have filed for protection under bankruptcy laws |
| Any bankruptcy filings by or relating to one of our tenants or a lease guarantor would bar all efforts by us to collect pre-bankruptcy debts from that tenant, the lease guarantor or their property, unless we receive an order permitting us to do so from the bankruptcy court |
| A tenant or lease guarantor bankruptcy could delay our efforts to collect past due balances under the relevant leases and could ultimately preclude full 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 holders of unsecured claims |
| It is possible that we may recover substantially less than the full value of any unsecured claims we hold, if at all, which may adversely affect our operating results and financial condition |
| If any of our anchor tenants becomes insolvent, suffers a downturn in business, or decides not to renew its lease or vacates a property and prevents us from re-letting that property by continuing to pay rent for the balance of the term, it may adversely impact our business |
| In addition, a lease termination by an anchor tenant or a failure of an anchor tenant to occupy the premises could result in lease terminations or reductions in rent by some of our non-anchor tenants in the same shopping center pursuant to the terms of their leases |
| In that event, we may be unable to re-let the vacated space |
| Similarly, the leases of some anchor tenants may permit them to transfer their leases to other retailers |
| The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease, which would reduce the income generated by that retail center |
| In addition, a transfer of a lease to a new anchor tenant could also give other tenants the right to make reduced rental payments or to terminate their leases with us |
| Concentration of our credit risk could reduce our operating results |
| Several of our tenants represent a significant portion of our leasing revenues |
| As of December 31, 2005, we received 3dtta8prca of our annualized base rent from each of Wal-Mart Stores, Inc |
| and TJX Operating Companies and 3dtta1prca of our annualized base rent from Publix Super Markets, Inc |
| The concentration in our leasing revenue from a small number of tenants creates the risk that, should these tenants experience financial difficulties, our operating results could be adversely affected |
| REIT distribution requirements limit our available cash |
| As a REIT, we are subject to annual distribution requirements, which limit the amount of cash we retain for other business purposes, including amounts to fund our growth |
| We generally must distribute annually at least 90prca of our net REIT taxable income, excluding any net capital gain, in order for our distributed earnings not to be subject to corporate income tax |
| We intend to make distributions to our shareholders to comply with the requirements of the Code |
| However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the 90prca distribution requirement of the Code |
| Our inability to successfully identify or complete suitable acquisitions and new developments would adversely affect our results of operations |
| We may not be successful in identifying suitable real estate properties that meet our acquisition criteria and are compatible with our growth strategy or in consummating acquisitions or investments on satisfactory terms |
| We may not be successful in identifying suitable areas for new development, negotiating for the acquisition of the land, obtaining required permits and authorizations, or completing developments in accordance with our budgets and on a timely basis or leasing any newly-developed space |
| If we fail to identify or complete suitable acquisitions or developments on a timely basis and within our budget, our financial condition and results of 6 _________________________________________________________________ [61]Table of Contents operations could be adversely affected and our growth could slow, which in turn could adversely impact our share price |
| Our redevelopment projects may not yield anticipated returns, which would adversely affect our operating results |
| A key component of our business strategy is exploring redevelopment opportunities at existing properties within our portfolio and in connection with property acquisitions |
| To the extent that we engage in these redevelopment activities, they will be subject to the risks normally associated with these projects, including, among others, cost overruns and timing delays as a result of the lack of availability of materials and labor, weather conditions and other factors outside of our control |
| Any substantial unanticipated delays or expenses could adversely affect the investment returns from these redevelopment projects and adversely impact our operating results |
| We face competition for the acquisition and development of real estate properties, which may impede our ability to grow our operations or may increase the cost of these activities |
| We compete with many other entities for the acquisition of retail shopping centers and land that is appropriate for new developments, including other REITs, institutional pension funds and other owner-operators of shopping centers |
| These competitors may increase the price we pay to acquire properties or may succeed in acquiring those properties themselves |
| In addition, the sellers of properties we wish to acquire may find our competitors to be more attractive buyers because they may have greater resources, may be willing to pay more, or may have a more compatible operating philosophy |
| In particular, larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital |
| In addition, the number of entities and the amount of funds competing for suitable properties may increase |
| This would increase demand for these properties and therefore increase the prices paid for them |
| If we pay higher prices for properties or are unable to acquire suitable properties at reasonable prices, our ability to grow may be adversely affected |
| Competition may affect our ability to renew leases or re-let space on favorable terms and may require us to make unplanned capital improvements |
| We face competition from similar retail centers within the trade areas in which our centers operate to renew leases or re-let space as leases expire |
| Some of these competing properties may be newer and better located or have a better tenant mix than our properties, which would increase competition for customer traffic and creditworthy tenants |
| We may not be able to renew leases or obtain replacement tenants as leases expire, and the terms of renewals or new leases, including the cost of required renovations or concessions to tenants, may be less favorable to us than current lease terms |
| Increased competition for tenants may also require us to make capital improvements to properties which we would not have otherwise planned to make |
| In addition, we face competition from alternate forms of retailing, including home shopping networks, mail order catalogues and on-line based shopping services, which may limit the number of retail tenants that desire to seek space in shopping center properties generally |
| If we are unable to re-let substantial amounts of vacant space promptly, if the rental rates upon a renewal or new lease are significantly lower than expected, or if reserves for costs of re-letting prove inadequate, then our earnings and cash flow will decrease |
| We may be restricted from re-letting space based on existing exclusivity lease provisions with some of our tenants |
| In a number of cases, our leases contain provisions giving the tenant the exclusive right to sell clearly identified types of merchandise or provide specific types of services within the particular retail center or limit the ability of other tenants to sell that merchandise or provide those services |
| When re-letting space after a vacancy, these provisions may limit the number and types of prospective tenants suitable for the vacant space |
| If we are unable to re-let space on satisfactory terms, our operating results would be adversely impacted |
| 7 _________________________________________________________________ [62]Table of Contents We hold investments in joint ventures in which we do not control all decisions, and we may have conflicts of interest with our joint venture partners |
| As of December 31, 2005, 16 of our shopping centers are partially owned by non-affiliated partners through joint venture arrangements, none of which we have a controlling interest in |
| We do not control all decisions in our joint ventures and may be required to take actions that are in the interest of the joint venture partners but not our best interests |
| Accordingly, we may not be able to favorably resolve any issues which arise, or we may have to provide financial or other inducements to our joint venture partners to obtain such resolution |
| Various restrictive provisions and rights govern sales or transfers of interests in our joint ventures |
| These may work to our disadvantage because, among other things, we may be required to make decisions as to the purchase or sale of interests in our joint ventures at a time that is disadvantageous to us |
| Bankruptcy of our joint venture partners could adversely affect us |
| We could be adversely affected by the bankruptcy of one of our joint venture partners |
| The profitability of shopping centers held in a joint venture could also be adversely affected by the bankruptcy of one of the joint venture partners if, because of certain provisions of the bankruptcy laws, we were unable to make important decisions in a timely fashion or became subject to additional liabilities |
| Rising operating expenses could adversely affect our operating results |
| Our properties are subject to increases in real estate and other tax rates, utility costs, insurance costs, repairs and maintenance and administrative expenses |
| Our current properties and any properties we acquire in the future may be subject to rising operating expenses, some or all of which may be out of our control |
| In addition, while most of our leases require that tenants pay all or a portion of the applicable real estate taxes, insurance and operating and maintenance costs, renewals of leases or future leases may not be negotiated on these terms, in which event we will have to pay those costs |
| If we are unable to lease properties on a basis requiring the tenants to pay all or some of these costs, or if tenants fail to pay such costs, it could adversely affect our operating results |
| The illiquidity of our real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties, which could adversely impact our financial condition |
| Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to changing economic, financial and investment conditions is limited |
| The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control |
| We cannot predict whether we will be able to sell any property for the price and other terms we seek, or whether any price or other terms offered by a prospective purchaser would be acceptable to us |
| We also cannot predict the length of time needed to find a willing purchaser and to complete the sale of a property |
| We may be required to expend funds to correct defects or to make improvements before a property can be sold, and we cannot assure you that we will have funds available to correct those defects or to make those improvements |
| These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could significantly adversely affect our financial condition and operating results |
| If we suffer losses that are not covered by insurance or that are in excess of our insurance coverage limits, we could lose invested capital and anticipated profits |
| Catastrophic losses, such as losses resulting from wars, acts of terrorism, earthquakes, floods, hurricanes, tornadoes or other natural disasters, pollution or environmental matters, generally are either uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments |
| Although we currently maintain “all risk” replacement cost insurance for our buildings, rents and personal property, commercial general liability insurance and pollution and environmental liability 8 _________________________________________________________________ [63]Table of Contents insurance, our insurance coverage may be inadequate if any of the events described above occurred to, or caused the destruction of, one or more of our properties |
| Under that scenario, we could lose both our invested capital and anticipated profits from that property |
| Capitalization Risks We have substantial debt obligations, including variable rate debt, which may impede our operating performance and put us at a competitive disadvantage |
| Required repayments of debt and related interest can adversely affect our operating performance |
| As of December 31, 2005, we had dlra724dtta8 million of outstanding indebtedness, of which dlra253dtta1 million bears interest at a variable rate, and we have the ability to borrow an additional dlra12 million under our existing Credit Facility and to increase the availability under our unsecured revolving credit facility by up to dlra100 million under terms of the Credit Facility |
| Increases in interest rates on our existing indebtedness would increase our interest expense, which could adversely affect our cash flow and our ability to pay dividends |
| For example, if market rates of interest on our variable rate debt outstanding as of December 31, 2005 increased by 1dtta00prca, the increase in interest expense on our existing variable rate debt would decrease future earnings and cash flows by approximately dlra2dtta3 million annually |
| The amount of our debt may adversely affect our business and operating results by: • requiring us to use a substantial portion of our funds from operations to pay interest, which reduces the amount available for dividends and working capital; • placing us at a competitive disadvantage compared to our competitors that have less debt; • making us more vulnerable to economic and industry downturns and reducing our flexibility to respond to changing business and economic conditions; • limiting our ability to borrow more money for operations, capital or to finance acquisitions in the future; and • limiting our ability to refinance or pay-off debt obligations when they become due |
| Subject to compliance with the financial covenants in our borrowing agreements, our management and board of trustees have discretion to increase the amount of our outstanding debt at any time |
| We could become more highly leveraged, resulting in an increase in debt service costs that could adversely affect our cash flow and the amount available for distribution to our shareholders |
| If we increase our debt, we may also increase the risk of default on our debt |
| Because we must annually distribute a substantial portion of our income to maintain our REIT status, we will continue to need additional debt and/or equity capital to grow |
| In general, we must annually distribute at least 90prca of our taxable net income to our shareholders to maintain our REIT status |
| As a result, those earnings will not be available to fund acquisition, development or redevelopment activities |
| We have historically funded acquisition, development and redevelopment activities by: • retaining cash flow that we are not required to distribute to maintain our REIT status; • borrowing from financial institutions; • selling assets that we do not believe present the potential for significant future growth or that are no longer compatible with our business plan; • selling common shares and preferred shares; and • entering into joint venture transactions with third parties |
| 9 _________________________________________________________________ [64]Table of Contents We expect to continue to fund our acquisition, development and redevelopment activities in this way |
| Our failure to obtain funds from these sources could limit our ability to grow, which could have a material adverse effect on the value of our securities |
| Our financial covenants may restrict our operating or acquisition activities, which may adversely impact our financial condition and operating results |
| The financial covenants contained in our mortgages and debt agreements reduce our flexibility in conducting our operations and create a risk of default on our debt if we cannot continue to satisfy them |
| The mortgages on our properties contain customary negative covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage |
| In addition, if we breach covenants in our debt agreements, the lender can declare a default and require us to repay the debt immediately and, if the debt is secured, can ultimately take possession of the property securing the loan |
| In particular, our outstanding credit facilities contain customary restrictions, requirements and other limitations on our ability to incur indebtedness, including limitations on total liabilities to assets and minimum fixed charge coverage and tangible net worth ratios |
| Our ability to borrow under our credit facilities is subject to compliance with these financial and other covenants |
| We rely in part on borrowings under our credit facilities to finance acquisition, development and redevelopment activities and for working capital |
| If we are unable to borrow under our credit facilities or to refinance existing indebtedness, our financial condition and results of operations would likely be adversely impacted |
| Mortgage debt obligations expose us to increased risk of loss of property, which could adversely affect our financial condition |
| Incurring mortgage debt increases our risk of loss because defaults on indebtedness secured by properties may result in foreclosure actions by lenders and ultimately our loss of the related property |
| We have entered into mortgage loans which are secured by multiple properties and contain cross-collateralization and cross-default provisions |
| Cross-collateralization provisions allow a lender to foreclose on multiple properties in the event that we default under the loan |
| Cross-default provisions allow a lender to foreclose on the related property in the event a default is declared under another loan |
| For federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage |
| If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any cash proceeds |
| Tax Risks Our failure to qualify as a REIT would result in higher taxes and reduced cash available for our shareholders |
| We believe that we currently operate in a manner so as to qualify as a REIT for federal income tax purposes |
| Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, investment, organizational, distribution, shareholder ownership and other requirements on a continuing basis |
| Our ability to satisfy the asset tests depends upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals |
| Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to manage successfully the composition of our income and assets on an ongoing basis |
| Moreover, the proper classification of an instrument as debt or equity for federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements |
| Accordingly, there can be no assurance that the IRS will not contend that our interests in subsidiaries or other issuers constitute a violation of the REIT requirements |
| Moreover, future economic, market, legal, tax or other considerations may cause us to fail to qualify as a REIT 10 _________________________________________________________________ [65]Table of Contents If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to shareholders would not be deductible by us in computing our taxable income |
| Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn could have an adverse impact on the value of, and trading prices for, our common shares |
| Unless entitled to relief under certain Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT We have been and are currently under IRS examinations for prior years |
| The ultimate resolution of any tax liabilities arising pursuant to the IRS examinations may have a material adverse effect on our financial position, results of operations and cash flows |
| See Footnote 20 to the Notes to Consolidated Financial Statements in Item 8 |
| Even if we qualify as a REIT, we may be subject to various federal income and excise taxes, as well as state and local taxes |
| Even if we qualify as a REIT, we may be subject to federal income and excise taxes in various situations, such as if we fail to distribute all of our income |
| We also will be required to pay a 100prca tax on non-arm’s length transactions between us and a TRS (described below) and on any net income from sales of property that the IRS successfully asserts was property held for sale to customers in the ordinary course |
| Additionally, we may be subject to state or local taxation in various state or local jurisdictions, including those in which we transact business |
| The state and local tax laws may not conform to the federal income tax treatment |
| Any taxes imposed on us would reduce our operating cash flow and net income |
| Legislative or other actions affecting REITs could have a negative effect on us |
| The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS, and the United States Treasury Department |
| Changes to tax laws, which may have retroactive application, could adversely affect our shareholders or us |
| We cannot predict how changes in tax laws might affect our shareholders or us |
| Environmental Matters Under various Federal, state and local laws, ordinances and regulations relating to the protection of the environment (“Environmental Laws”), a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances disposed, stored, released, generated, manufactured or discharged from, on, at, onto, under or in such property |
| Environmental Laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence or release of such hazardous or toxic substance |
| The presence of such substances, or the failure to properly remediate such substances when present, released or discharged, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral |
| The cost of any required remediation and the liability of the owner or operator therefore as to any property is generally not limited under such Environmental Laws and could exceed the value of the property and/or the aggregate assets of the owner or operator |
| Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the cost of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such persons |
| In addition to any action required by Federal, state or local authorities, the presence or release of hazardous or toxic substances on or from any property could result in private plaintiffs bringing claims for personal injury or other causes of action |
| In connection with ownership (direct or indirect), operation, management and development of real properties, we may be potentially liable for remediation, releases or injury |
| In addition, Environmental Laws impose on owners or operators the requirement of ongoing compliance with rules and regulations regarding business-related activities that may affect the environment |
| Such activities include, for example, the ownership or use of transformers or underground tanks, the treatment or discharge of waste waters or other materials, the removal or abatement of asbestos-containing materials (“ACMs”) or lead-containing paint 11 _________________________________________________________________ [66]Table of Contents during renovations or otherwise, or notification to various parties concerning the potential presence of regulated matters, including ACMs |
| Failure to comply with such requirements could result in difficulty in the lease or sale of any affected property and/or the imposition of monetary penalties, fines or other sanctions in addition to the costs required to attain compliance |
| Several of our properties have or may contain ACMs or underground storage tanks (“USTs”); however, we are not aware of any potential environmental liability which could reasonably be expected to have a material impact on our financial position or results of operations |
| No assurance can be given that future laws, ordinances or regulations will not impose any material environmental requirement or liability, or that a material adverse environmental condition does not otherwise exist |