| SPIRIT FINANCE CORP Item 1A Risk Factors In addition to factors discussed elsewhere in this report, the following are important factors which could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company |
| Factors Related to Our Business We rely on key personnel with long-standing business relationships, the loss of whom could materially impair our ability to operate successfully |
| Our future success depends, to a significant extent, on the continued services of Morton H Fleischer, our Chairman of the Board, and Christopher H Volk, our President and Chief Executive Officer |
| In particular, the extent and nature of the relationships that these individuals have developed with financial institutions and existing and prospective customers is critically important to the success of our business |
| Although we have employment agreements with Mr |
| Fleischer and Mr |
| Volk, these agreements cannot guarantee that Mr |
| Fleischer and Mr |
| Volk will remain employed by us |
| The loss of services of one or more members of our corporate management team could harm our business and our prospects |
| Our investments are currently concentrated in a relatively small number of customers and we may be unable to adequately continue to diversify our real estate portfolio, which may result in increased risk due to industry, borrower or tenant concentration |
| Because we make relatively large investments in each property or group of properties operated by a single tenant, our assets may be concentrated with a limited number of customers and we may not have sufficient capital to continue to diversify our portfolio of real estate |
| As of December 31, 2005, our investment portfolio totaled dlra1dtta5 billion, 9 _________________________________________________________________ representing 684 properties operated by 106 customers in various industries |
| If we do not continue to diversify our real estate portfolio, our performance will be closely tied to the performance of each of our customers and the industry in which it operates |
| This increases the chance that a default by any single customer will significantly and adversely affect our results of operations and the amounts available to pay distributions |
| If we are unable to continue to diversify our portfolio, we will also be affected by changing conditions in the industries in which our customers operate |
| Our exposure to this risk is further increased because, as of December 31, 2005, approximately 30prca of our total real estate investments were concentrated in the restaurant industry and 13prca in the movie theater industry |
| Some of the factors that affect the restaurant industry include the demand for convenience, the levels of household incomes and the costs of restaurant labor |
| Some of the factors that affect the movie theater industry include the quality, quantity and availability of motion pictures, the number and quality of competing theater locations and the popularity and affordability of other forms of entertainment such as home videos, cable television services, concerts or professional sporting events |
| Changes in these factors could adversely affect the financial performance of our tenants and their ability to make payments to us |
| Without industry diversification, or diversification across different parts of an industry, the chance that a downturn in a particular industry or part of an industry will adversely affect us increases significantly |
| In addition, if we are unable to continue to diversify our portfolio, our properties may be concentrated geographically |
| As of December 31, 2005, approximately 17prca of our properties were located in Texas, approximately 8prca were located in Arizona and approximately 7prca were located in Florida |
| The inability to geographically diversify our portfolio increases the chance that a decline or adverse economic or other event in one region or in a particular real estate market will adversely affect the results of our operations |
| Our use of debt to finance acquisitions could restrict our operations, inhibit our ability to grow our business and our revenues, and adversely affect our cash flow |
| Some of our property acquisitions were made, and may be made in the future, by borrowing a portion of the purchase price of our properties and securing the loan with a mortgage on the property |
| In addition, we obtain debt financing by placing secured mortgage loans on properties that we initially acquire for cash |
| As of December 31, 2005, substantially all of our properties were subject to debt or pledged as collateral under one of our secured debt facilities |
| We may acquire properties for the purpose of securitization or use similar structured finance alternatives |
| If we are unable to make our debt payments as required, a lender could foreclose on the property or properties securing its debt |
| This could cause us to lose part or all of our investment, which in turn could cause the value of our shares and distributions to our stockholders to be reduced |
| We have a target overall leverage ratio of 65prca, but there is no limitation on the amount we can borrow on a single property or the aggregate amount of our borrowings and we can change this policy at any time without stockholder approval |
| We may not be able to obtain debt financing at favorable rates |
| In addition, if interest rates increase, any variable rate borrowings we have would result in our expenses increasing |
| Some of our borrowings require the payment of the principal amount in a balloon payment at maturity |
| We may not have sufficient funds available to make all of our balloon payments at maturity, which would require us to refinance that debt at maturity |
| If we have to re-finance our debt as it matures in a rising interest rate environment, our expenses will increase |
| An increase in our expenses would reduce the funds we have available to pay distributions |
| To the extent the agreements governing our borrowings contain financial and other covenants that we are required to comply with, our operating flexibility may be limited |
| Borrowings under our secured debt facilities are subject to various covenants, including a maximum leverage ratio, minimum liquidity amount, minimum tangible net worth, and other financial ratio calculations |
| These covenants, as well as any additional covenants we may be subject to in the future on additional borrowings, could cause us to have to forego investment opportunities, or may cause us to have to finance investments in a less 10 _________________________________________________________________ efficient manner than if we were not subject to the covenants |
| In addition, the agreements governing some of our borrowings have cross default provisions, such that a default on one of our borrowings would lead to a default on some of our other borrowings |
| Failure to hedge effectively against interest rate changes may adversely affect our results of operations |
| We attempt to mitigate our exposure to interest rate volatility by using interest rate hedging arrangements that involve risk; however, these arrangements may not be effective in reducing our exposure to interest rate changes |
| In addition, the counterparties to our hedging arrangements may not honor their obligations |
| Failure to hedge effectively against changes in interest rates relating to the interest expense of our future borrowings may have a material adverse effect on our operating results and financial condition |
| We compete for customers and the acquisition or refinancing of properties which could reduce the yields we are able to negotiate on our investments |
| We compete for the acquisition or financing of properties with financial institutions, real estate funds and investment companies, pension funds, private individuals and other REITs |
| We also face competition from institutions that provide or arrange for other types of commercial financing through private or public offerings of equity or debt or traditional bank financings |
| Many of our competitors have greater name recognition, resources and access to capital than we have |
| In particular, larger REITs may enjoy significant competitive advantages that result from a lower cost of capital and enhanced operating efficiencies |
| Because the real estate financing market is highly competitive, competitors are quick to adopt new financing products |
| To the extent we offer unique financing terms in the future, our competitors could also begin offering similar terms, which would decrease our ability to develop a competitive advantage |
| We continue to experience increased competitive conditions caused by larger amounts of investor capital seeking quality income-producing investments, which has caused us to lose bids or turn down various transactions where competition has reduced yields to the point that we concluded the transaction did not provide us a sufficient return |
| We may have to increase our purchase price of properties, reduce the rent we require a tenant to pay or reduce the interest rates on loans we make in order to secure customers or remain competitive |
| If this happens, our returns to stockholders may be adversely affected |
| We may not have adequate access to funding to successfully execute our growth strategy |
| Our business strategy principally depends on our ability to grow the size of our real estate portfolio |
| Our business plan requires significant funds for property acquisition, loan origination, working capital, minimum REIT distributions and other needs |
| This strategy depends, in part, on our ability to access the debt and equity capital markets to finance our cash requirements |
| We will need to access long-term debt financing facilities or other permanent debt strategies and also raise additional equity capital in order to successfully execute our business plan |
| We will need access to significant additional funding to adequately diversify our portfolio and continue to execute our business strategy |
| An inability to effectively access these markets would have an adverse effect on our ability to make new investments and could adversely affect our ability to pay distributions |
| The loss of a tenant or the failure of a tenant to pay rent, or our inability to re-lease a property, will reduce our revenues, which could lead to losses on our investments and reduced returns to our stockholders |
| Generally, each of our properties is operated and occupied by a single tenant; therefore, the success of our investments is materially dependent on the financial stability of each tenant |
| Leasing activity represented approximately 93prca of our total revenues for the fiscal year ended December 31, 2005 |
| The success of our tenants is dependent on each of their individual businesses and their industries, which could be adversely affected by economic conditions in general, changes in consumer trends and preferences and other factors over which neither they nor we have control |
| We acquire properties from single tenants that operate multiple locations, which means we own numerous properties operated by the same tenant |
| To the extent we finance numerous properties operated by one company, the general failure of that single tenant or a loss or significant decline in its business would have an adverse affect on us |
| 11 _________________________________________________________________ A default of a tenant on its lease payments to us that would cause us to lose the revenue from the property would have an adverse effect on our operating results and financial condition and/or could cause us to reduce the amount of distributions we pay to stockholders |
| In the event of a default, we may incur substantial costs in protecting our investment and re-leasing our property |
| In addition, if a lease is terminated or not renewed, we may not be able to re-lease the property on favorable terms or sell the property without incurring a loss |
| Loss of a tenant may further reduce our revenues because the net leases we may enter into or acquire may be for properties that are specially suited to the particular business of our tenants |
| With these types of properties, if the current lease is terminated or not renewed, we may be required to renovate the property at substantial costs, decrease the rent we charge or provide other concessions in order to lease the property to another tenant |
| In addition, in the event we are required to sell the property, we may have difficulty selling it to a party other than the tenant due to the special purpose for which the property may have been designed |
| This potential illiquidity may limit our ability to quickly modify our portfolio in response to changes in economic or other conditions |
| These and other limitations may negatively affect our cash flow from operations or the proceeds from disposition of any such properties and adversely affect returns to our stockholders |
| The loss of a borrower or the failure of a borrower to make loan payments on a timely basis will reduce our revenues, which could lead to losses on our investments and reduced returns to our stockholders |
| Currently, our total mortgage loan portfolio represents three different borrowers; therefore, the success of our mortgage loan investments is materially dependent on the financial stability of each of these borrowers |
| The success of our borrowers is dependent on each of their individual businesses and their industries, which could be affected by economic conditions in general, changes in consumer trends and preferences and other factors over which neither they nor we have control |
| A default of a borrower on its loan payments to us that would prevent us from earning interest or receiving a return of the principal of our loan would have an adverse effect on our operating results and financial condition and could cause us to reduce the amount of dividends we pay to our stockholders |
| In the event of a default, we may also experience delays in enforcing our rights as lender and may incur substantial costs in collecting the amounts owed to us and in liquidating any real estate collateral |
| Foreclosure and other similar proceedings used to enforce payment of real estate loans are generally subject to principles of equity, which are designed to relieve the indebted party from the legal effect of that partyapstas default |
| Foreclosure and other similar laws may limit our right to obtain a deficiency judgment against the defaulting party after a foreclosure or sale |
| The application of any of these principles may lead to a loss or delay in the payment on loans we hold, which in turn could reduce the amounts we have available to pay distributions |
| Further, in the event we have to foreclose on a property, the amount we receive from the foreclosure sale of the property may be inadequate to fully pay the amounts owed to us by the borrower and our costs incurred to foreclose, repossess and sell the property which could adversely impact our results of operations |
| The risk of default on our real estate investment portfolio may be higher because, as of December 31, 2005, most of our properties were operated by non-investment grade companies |
| As of December 31, 2005, most of our properties were operated by customers that do not have an investment grade rating from at least one of the nationally recognized rating agencies |
| Investment grade means companies which have unsecured corporate debt ratings equal to or greater than BBB- by Standard & Poorapstas (a division of The McGraw Hill Companies, Inc |
| (a subsidiary of Moodyapstas Corporation) and NAIC-2 by the National Association of Insurance Commissioners |
| Customers who are highly leveraged or do not have recognized credit ratings may be more likely to default or file for bankruptcy |
| 12 _________________________________________________________________ Any bankruptcy filings by or relating to one of our customers could prevent us from collecting pre-bankruptcy debts from that customer or their property, unless we receive an order permitting us to do so from the bankruptcy court |
| A customer bankruptcy could delay our efforts to collect past due balances under the subject leases or loans, and could ultimately prevent full collection of these sums |
| If a lease were rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages |
| Any unsecured claim we hold against a bankrupt entity 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 |
| Additionally, we may not be able to terminate the subject lease and seek new tenants |
| We may recover substantially less than the full value of any unsecured claims, if anything, which would harm our financial condition |
| We invest in real estate in industries in which we have limited investment and underwriting experience, which could adversely affect our results of operations |
| Our current strategy is to acquire real estate assets across a variety of industries in a variety of geographic locations |
| We have limited experience investing in real estate operated by some of the industries we are targeting |
| Accordingly, we will be required to develop expertise, relationships and market knowledge across a broad range of industries and will be subject to the market conditions affecting each industry operating our properties, including such factors as the economic climate, business layoffs, industry slowdowns, changing demographics, and supply and demand issues |
| This multi-industry approach could require more management time, support staff and expense than a company whose focus is dedicated to a greater extent on a single property type |
| If we are not able to efficiently and effectively manage a diverse multi-industry portfolio of real estate properties and loans, our results of operations and returns to our stockholders will be adversely impacted |
| Insurance on our real estate collateral may not adequately cover all losses which could reduce stockholder returns if a material uninsured loss occurs |
| Our customers are required to maintain insurance coverage for the properties they operate |
| There are various types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war that may be uninsurable or not economically insurable |
| Should an uninsured loss occur, we could lose our capital investment and/or anticipated profits and cash flow from one or more properties |
| Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, also might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed |
| In that case, the insurance proceeds received might not be adequate to restore our economic position with respect to the affected real property |
| If this happens, it could reduce the amounts we have available to pay dividends to our stockholders |
| The costs of compliance with or liabilities under environmental laws may harm our operating results |
| The properties we acquire may be subject to known and unknown environmental liabilities |
| This risk is further increased because as of December 31, 2005, approximately 6prca of our total assets were invested in interstate travel plazas or convenience stores/car washes that sell petroleum products |
| An owner of real property can face liability for environmental contamination created by the presence or discharge of hazardous substances on the property |
| We may face liability regardless of: • our knowledge of the contamination; • the timing of the contamination; • the cause of the contamination; or • the party responsible for the contamination of the property |
| There may be environmental problems associated with our properties of which we are unaware |
| We generally obtain or update Phase I environmental surveys on the properties we finance or acquire |
| The environmental surveys may not reveal all environmental conditions affecting a property; therefore, there could be undiscovered environmental liabilities on the properties we own |
| Some of our properties 13 _________________________________________________________________ use, or may have used in the past, underground tanks for the storage of petroleum-based products or waste products that could create a potential for release of hazardous substances |
| If environmental contamination exists on our properties, we could be subject to strict, joint and/or several liability for the contamination by virtue of our ownership interest |
| The presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs |
| In addition, although our leases generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenantapstas activities on the property, we could be subject to strict liability by virtue of our ownership interest, and we cannot be sure that our tenants will, or will be able to, satisfy their indemnification obligations under our lease, if any |
| The discovery of environmental liabilities attached to our properties could adversely affect a customerapstas ability to make payments to us or otherwise affect our results of operations and financial condition and our ability to pay distributions to stockholders |
| Our environmental liability may include property damage, personal injury, investigation remediation and clean-up costs |
| These costs could be substantial |
| Generally, properties we own at which petroleum products are sold are covered by different types of environmental insurance products, which can vary extensively from property to property in the scope, amount and terms of coverage |
| Although these properties generally are covered by environmental insurance for a period of time, that insurance may be insufficient to address a particular environmental situation that arises, and may be subsequently unavailable, at a reasonable cost or at all, in the future |
| If the existing environmental insurance coverage were inadequate relative to the exposure, we could become subject to material losses for environmental liabilities |
| Our ability to receive the benefits of any environmental insurance policy will depend on the financial ability of the insurance companies that have issued the policies and the positions they take with respect to those policies |
| If we become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations would be materially and adversely affected |
| Most of the environmental risks discussed above refer to properties that we own or may acquire in the future; however, each of the risks identified also applies to the owners (and potentially, the lessees) of the properties that secure each of our mortgage loans and any mortgage loans we may acquire or make in the future |
| Therefore, the existence of environmental conditions could diminish the value of each of the mortgage loans and the abilities of the borrowers to repay the mortgage loans, as well as adversely affect our results of operations and financial condition and our ability to pay distributions to stockholders |
| Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediation of the problem |
| When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time |
| Some molds may produce airborne toxins or irritants |
| Concern about indoor exposure to mold has been increasing along with awareness that exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions |
| As a result, the presence of significant mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected properties |
| In addition, the presence of significant mold could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise |
| If we ever become subject to significant mold-related liabilities, our business, financial condition, liquidity, results of operations and ability to pay dividends could be materially and adversely affected |
| 14 _________________________________________________________________ Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unintended expenditures that adversely impact our ability to pay dividends |
| All of our properties are required to comply with the ADA The ADA has separate compliance requirements for "e public accommodations "e and "e commercial facilities, "e but generally requires that the buildings be made accessible to people with disabilities |
| Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the US government or an award of damages to private litigants, or both |
| While our tenants are obligated by law to comply with the ADA provisions, and typically under our leases and financing agreements are obligated to cover costs associated with compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs could be adversely affected and we could be required to expend our own funds to comply with the provisions of the ADA, which could adversely affect our results of operations and financial condition and our ability to pay dividends to our stockholders |
| In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties |
| We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have an adverse effect on our ability to pay distributions |
| Additionally, failure to comply with any of these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants |
| While we intend to only acquire properties that we believe are currently in substantial compliance with all regulatory requirements, these requirements could be changed or new requirements could be imposed which would require significant unanticipated expenditures by us and could have an adverse affect on our cash flow and distributions paid |
| Construction loans are riskier than loans on developed properties because the underlying property may not generate income and could encounter problems associated with construction |
| From time to time, we make loans to finance the development of new properties |
| These loans are generally made to fund the construction of one or more buildings on real property |
| These loans are riskier than loans secured by income producing properties because of increased risks during construction, and the fact that the property does not generate income until construction is completed, which reduces the funds the borrower has available to make payments on the loan |
| We may also be required to expend funds to complete construction of the property if the borrower defaults and does not complete construction |
| We may make loans that are not secured by any assets, which could lead to losses if borrowers default on those loans |
| In connection with a real estate financing, we may make general business loans that are not secured by real estate or any other assets |
| In these cases, we will not have a security interest in a specific asset, but will rely instead on a promise to pay from the borrower |
| If the borrower does not keep its promise to pay and defaults, we will not have the benefit of a lien on any specific asset on which to foreclose to collect the loan |
| If we do not have any collateral to repossess through foreclosure and sell, we may lose our entire investment on that loan |
| We may not be able to effectively manage a rapidly growing portfolio which could lead to losses |
| The successful implementation of our growth strategy depends, in part, on our ability to effectively manage rapid growth in our portfolio |
| Our ability to effectively manage rapid growth in our portfolio depends on our ability to successfully attract and retain additional qualified personnel |
| An inability to attract the necessary qualified personnel to properly manage and grow our portfolio could have an adverse affect on our business |
| 15 _________________________________________________________________ Risks Related to Our Organization and Structure Our organizational documents and Maryland law contain provisions that may inhibit potential acquisition bids that may be in our stockholders &apos best interests |
| Our organizational documents contain provisions that may have an anti-takeover effect and inhibit a change in our board of directors |
| These provisions include the following: • There are ownership limits and restrictions on transferability in our charter |
| In order to qualify as a REIT, not more than 50prca of the value of our outstanding shares of stock (in some cases, after taking into account options to acquire shares of stock) may be owned, beneficially or constructively, by five or fewer individuals and our shares of stock 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 assist us in satisfying these tests, subject to some exceptions, our charter generally prohibits any stockholder from beneficially or constructively owning more than 9dtta8prca, in value or voting power, whichever is more restrictive, of our outstanding shares of stock or owning more than 9dtta8prca, in value or number, whichever is more restrictive, of our outstanding shares of common stock and also prohibits any transfer which would result in a violation of these ownership limits |
| This restriction may: • discourage a tender offer or other transactions or a change in the composition of our board of directors or control that might involve a premium price for our shares of stock or otherwise be in the best interests of our stockholders; or • compel the transfer of shares of stock held by a stockholder who had acquired more than 9dtta8prca of our shares of stock to a charitable trust and, as a result, forfeit the benefits of owning the shares over 9dtta8prca |
| • Our charter permits our board of directors to issue preferred stock with terms that may discourage a third party from acquiring us |
| Our charter permits our board of directors to authorize the issuance of up to 125cmam000cmam000 shares of preferred stock, having preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or conditions of redemption as determined by our board |
| Thus, our board could authorize the issuance of preferred stock with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our common stock might receive a premium for their shares over the then-prevailing market price of our common stock |
| • Our charter and bylaws contain other possible anti-takeover provisions |
| Our charter and bylaws contain other provisions that may have the effect of delaying, deferring or preventing a change in control of us or the removal of existing directors and, as a result, could prevent our stockholders from being paid a premium for their common stock over the then-prevailing market price |
| These provisions include advance notice requirements for stockholder proposals |
| Although we do not have a "e poison pill "e or similar rights at this time, we have reserved the right to adopt those measures in the future as we deem necessary for stockholder protection |
| In addition, Maryland law provides protection for Maryland corporations against unsolicited takeovers by providing, among other things, that the duties of the directors in unsolicited takeover situations do not require them to: • accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation; • authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholders &apos rights plan; 16 _________________________________________________________________ • take any action under the Maryland Business Combination Act or the Maryland Control Share Acquisition Act; or • respond because of the effect the response or lack of a response may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition |
| Under Maryland law, the act of the directors of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director |
| Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law |
| Our rights and the rights of our stockholders to take action against our directors and officers are limited |
| Maryland law provides that a director or officer has no liability in that capacity if the director performs the directorapstas duties in good faith, in a manner the director reasonably believes to be in the best interests of our stockholders and with the care that an ordinarily prudent person in a like position would use under similar circumstances |
| Our charter, in the case of directors and officers, requires us to indemnify our directors and officers for actions taken by them in those capacities to the fullest extent permitted by Maryland law |
| Our executive officers have agreements that provide them with benefits in the event their employment is terminated following a change of control of our company which could discourage a takeover that could be in the best interests of our stockholders |
| We have entered into employment agreements with the senior members of our management team that provide them with severance benefits if their employment ends under specified circumstances following a change in control of our company |
| In addition, in the event of a change in control, we would provide to other officers certain termination benefits |
| These benefits could increase the cost to a potential acquirer of our company and thereby prevent or discourage a change of control of our company that might involve a premium price for shares of our common stock or could otherwise be viewed as in our stockholders &apos best interest |
| Factors Related to Our REIT Status Failure to qualify as a REIT would adversely affect our operations and ability to make distributions |
| If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at regular corporate rates |
| In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year we lost our REIT status |
| Failing to obtain, or losing our REIT status, would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability, and we would no longer be required to make distributions |
| We might be required to borrow funds or liquidate some investments in order to pay the applicable tax |
| Qualification as a REIT is subject to the satisfaction of tax requirements and various factual matters and circumstances which are not entirely within our control and which will be evaluated in light of our future operations |
| New legislation, regulations, administrative interpretations or court decisions could change the tax laws with respect to qualification as a REIT or the federal income tax consequences of being a REIT In addition, future tax laws related to other types of entities could reduce our tax-advantaged status relative to those entities, which could cause a reduction in the market price of our shares |
| Further, our future operations may, contrary to expectation, prohibit us from satisfying one or more conditions to qualifying as a REIT Complying with REIT requirements may cause us to forego otherwise attractive opportunities |
| In order to qualify as a REIT for US federal income tax purposes, we must continually satisfy tests concerning our sources of income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock |
| We may also be required to make distributions to our 17 _________________________________________________________________ stockholders at disadvantageous times or when we do not have funds readily available for distribution |
| Thus, compliance with REIT requirements may hinder our ability to operate solely with the goal of maximizing profits |
| In addition, the REIT provisions of the Internal Revenue Code impose a 100prca tax on income from "e prohibited transactions "e |
| Prohibited transactions generally include sales of assets that constitute inventory or other property primarily held for sale to customers in the ordinary course of a business, other than foreclosure property |
| This 100prca tax could impact our desire to sell properties at otherwise opportune times if we believe those sales could result in us being treated as engaging in a prohibited transaction |
| Complying with REIT requirements may force us to borrow funds or sell properties on disadvantageous terms in order to make distributions to our stockholders and those distributions may represent a return of capital to investors |
| As a REIT, we must distribute 90prca of our REIT taxable income to our stockholders each year |
| REIT taxable income is determined without regard to the deduction for dividends paid and by excluding net capital gains |
| We are also required to pay tax at regular corporate rates to the extent that we distribute less than 100prca of our taxable income (including net capital gains) each year |
| In addition, we are required to pay a 4prca nondeductible excise tax on the amount, if any, by which specified distributions we pay, or are deemed to pay, with respect to any calendar year are less than the sum of 85prca of our ordinary income for that calendar year, 95prca of our capital gain net income for the calendar year and any amount of our income that was not distributed in prior years |
| From time to time, we may generate taxable income greater than our cash flow available for distribution to our stockholders |
| If we do not have other funds available in these situations, we may be unable to distribute 90prca of our taxable income as required by the REIT rules or an amount sufficient to avoid federal income tax and the nondeductible excise tax |
| Thus, we could be required to borrow funds, sell a portion of our properties at disadvantageous times or prices or find another alternative source of funds |
| These distributions could also represent a return of capital to investors |
| These alternatives could increase our costs or reduce our equity and reduce amounts we have available to invest |
| The IRS may treat sale-leaseback transactions as loans, which could jeopardize our REIT status |
| The Internal Revenue Service may take the position that specific sale-leaseback transactions we treat as true leases are not true leases for federal income tax purposes but are, instead, financing arrangements or loans |
| If a sale-leaseback transaction were so re-characterized, we might fail to satisfy the REIT asset tests, the income tests or distribution requirements and consequently lose our REIT status effective with the year of re-characterization |
| The primary risk relates to our loss of previously incurred depreciation expenses, which could affect the calculation of our REIT taxable income, which could cause us to fail the REIT distribution test that requires a REIT to distribute at least 90prca of our REIT taxable income |
| Forward-Looking Statements Some of the statements in this report constitute forward-looking statements |
| Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts |
| In some cases, forward-looking statements can be identified by terms such as "e anticipate, "e "e believe, "e "e could, "e "e estimate, "e "e expect, "e "e intend, "e "e may, "e "e plan, "e "e potential, "e "e should, "e "e will "e and "e would "e or the negative of these terms or other similar terminology |
| The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us |
| These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control |
| If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking 18 _________________________________________________________________ statements |
| The following are some of the factors that could cause actual results to vary from our forward-looking statements: • changes in our industry, interest rates or general economic conditions; • general volatility of the capital markets and the market price of our common stock; • changes in our business strategy or development plans; • availability and terms of additional capital; • failure to maintain our status as a REIT; • availability of suitable properties to acquire at favorable prices and our ability to rent those properties at favorable rates; • defaults by tenants on our leases; • our ability to renew leases with tenants at the expiration of their lease term or otherwise re-lease those properties to suitable new tenants; • availability of qualified personnel and our ability to retain our key management personnel; • changes in, or the failure or inability to comply with, government regulation; • the extent and nature of our competition; and • other factors referenced in this report, including those set forth under the captions "e —Risk Factors "e above and "e Managementapstas Discussion and Analysis of Financial Condition and Results of Operations "e |
| We expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations with regard to the statements or any change in events, conditions or circumstances on which any such statement is based |