424B3 1 a05-12447_7424b3.htm 424B3

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-122743

 

PROSPECTUS

 

 

INLAND AMERICAN REAL ESTATE TRUST, INC.

540,000,000

200,000

shares of common stock — maximum offering

shares of common stock — minimum offering

 

We are a newly organized Maryland corporation sponsored by our affiliate Inland Real Estate Investment Corporation, or IREIC, formed to acquire primarily retail properties and multi-family, office and industrial buildings, located in the United States and Canada, either directly or by acquiring REITs or other “real estate operating companies.”  We are offering 500,000,000 shares of our common stock at a price of $10.00 per share on a “best efforts” basis through our affiliate, Inland Securities Corporation.  “Best efforts” means that Inland Securities is not obligated to purchase any specific number or dollar amount of shares.  We also are offering up to 40,000,000 shares of our common stock at a price of $9.50 per share to stockholders who elect to participate in our distribution reinvestment plan.  In each case, the offering price was arbitrarily determined by our board of directors.  We intend to be taxed as a real estate investment trust, or REIT, beginning with the tax year ending December 31, 2005.  We expect that all shares of our common stock will be issued in book entry form only.

 

Investing in our common stock involves a high degree of risk.  You should purchase our common stock only if you can afford a complete loss of your investment.  See “Risk Factors” beginning on page 17.  Material risks of an investment in our common stock include:

 

    our investment policies and strategies are very broad and permit us to invest in any type of commercial real estate

 

    our business manager could recommend investments in an attempt to increase its fees because the fees paid to it are based upon a percentage of our invested assets and, in certain cases, the purchase price for these assets

 

    we have no prior operating history

 

    the number and value of real estate assets we can initially acquire will depend on the proceeds raised in this offering

 

    employees of our business manager, property managers and two of our directors are also employed by IREIC or its affiliates and will face competing demands for their time and service and may have conflicts in allocating their time to our business                                        

 

    we may borrow up to 300.0% of our net assets, and principal and interest payments will reduce the funds available for distribution

 

    we will pay significant fees to our business manager, property managers and other affiliates of IREIC

 

    there is no market for our shares and we do not expect to list our shares in the near future

 

    this is a “blind pool” offering because we have not yet acquired any properties

 

    we do not have any employees and will rely entirely on our business manager and property managers to manage our business and assets

 

    our articles limit a person from owning more than 9.8% of our common stock without prior approval of our board

 

    we may fail to qualify as a REIT

 

Inland Securities, our dealer manager, is a member of the National Association of Securities Dealers, Inc.  The dealer manager must sell at least 200,000 shares, if any are sold, and will use its best efforts to sell the remaining 539,800,000 shares.  This offering will end no later than August 31, 2006, unless we elect to extend it to a date no later than August 31, 2007, in any jurisdiction that allows us to extend.  The minimum purchase requirement generally is 300 shares at a price of $10.00 per share ($3,000) for individuals and 100 shares at a price of $10.00 per share ($1,000) for tax-exempt entities.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.  The use of forecasts in this offering is prohibited.  Any representation to the contrary and any predictions, written or oral, as to the amount or certainty of any present or the future cash benefit or tax consequence which may flow from an investment in our common stock is not permitted.

 

No one is authorized to make any statements about this offering different from those that appear in this prospectus.  We will accept subscriptions only from people who meet the suitability standards described in this prospectus.  The description of our Company contained in this prospectus was accurate as of August 31, 2005.  We will amend or supplement this prospectus if there is a material change in our affairs.

 

Prior to the time we sell at least 200,000 of shares of our common stock, your subscription payments will be placed in an account held by LaSalle Bank, N.A. as escrow agent.  If we are not able to sell at least 200,000 shares by August 31, 2006, we will terminate this offering and your funds in the escrow account, including any interest earned on your funds, will be returned to you within ten (10) business days. 

 

 

 

Per Share

 

Minimum Offering

 

Maximum Offering

 

Public offering price, primary shares

 

$

10.00

 

$

2,000,000

 

$

5,000,000,000

 

Public offering price, distribution reinvestment plan

 

$

9.50

 

 

 

$

380,000,000

 

Commissions(1)

 

$

1.05

 

$

210,000

 

$

525,000,000

 

Proceeds, before expenses(2), to us

 

$

8.95

 

$

1,790,000

 

$

4,855,000,000

 

 


(1) Commissions are paid only for primary shares offered on a “best efforts” basis and are composed of a 7.5% selling commission, a 2.5% marketing contribution and a 0.5% due diligence expense allowance.

 

(2) Organization and offering expenses, excluding commissions, may not exceed 4.5% of the gross offering proceeds.  These expenses include registration and filing fees, legal and accounting fees, printing and mailing expenses, bank fees and other administrative expenses.  Total organization and offering expenses, including commissions, may not exceed 15.0% of the gross offering proceeds.

 

The date of this prospectus is August 31, 2005.

 



 

FOR RESIDENTS OF MICHIGAN ONLY

 

A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE OFFICE OF FINANCIAL AND INSURANCE SERVICES, SECURITIES SECTION, MICHIGAN DEPARTMENT OF LABOR AND ECONOMIC GROWTH.  THE DEPARTMENT HAS NOT UNDERTAKEN TO PASS UPON THE VALUE OF THESE SECURITIES NOR TO MAKE ANY RECOMMENDATIONS AS TO THEIR PURCHASE.

 

THE USE OF THIS PROSPECTUS IS CONDITIONED UPON ITS CONTAINING ALL MATERIAL FACTS AND THAT ALL STATEMENTS CONTAINED HEREIN ARE TRUE AND CAN BE SUBSTANTIATED.  THE DEPARTMENT HAS NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.

 

NO BROKER-DEALER, SALESMAN, AGENT OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING HEREBY MADE OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR EFFECTIVE LITERATURE.

 

THIS IS A BEST EFFORTS OFFERING, AND WE RESERVE THE RIGHT TO ACCEPT OR REJECT ANY SUBSCRIPTION AND WILL PROMPTLY NOTIFY THE SUBSCRIBER OF ACCEPTANCE OR REJECTION.  THERE IS NO ASSURANCE AS TO HOW MANY SHARES WE WILL SELL.

 

WE HAVE NOT YET ENGAGED IN BUSINESS.  THE SECURITIES HEREBY OFFERED INVOLVE A HIGH DEGREE OF RISK.  THE OFFERING PRICE HAS BEEN ARBITRARILY SELECTED BY US.  NO MARKET EXISTS FOR THESE SECURITIES, AND UNLESS A MARKET IS ESTABLISHED, YOU MIGHT NOT BE ABLE TO SELL THEM.

 

THERE IS NO ASSURANCE THAT OUR OPERATIONS WILL BE PROFITABLE OR THAT LOSSES WILL NOT OCCUR.

 

IT IS NOT OUR POLICY TO REDEEM OUR STOCK (EXCEPT AS PROVIDED IN THIS OFFERING).

 

ANY REPRESENTATIONS CONTRARY TO ANY OF THE FOREGOING SHOULD BE REPORTED FORTHWITH TO THE LANSING OFFICE OF THE DEPARTMENT AT 611 WEST OTTAWA, P.O. BOX 30701, LANSING, MICHIGAN 48909-8201, OR BY TELEPHONE AT (877) 999-6442.

 

FOR RESIDENTS OF NEW YORK ONLY

 

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.  ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.  SUBJECT TO THE CONDITIONS SPECIFIED IN THIS PROSPECTUS, THE COMPANY WILL PLACE INVESTOR SUBSCRIPTIONS IN ESCROW UNTIL THE TIME THE COMPANY SELLS AT LEAST 200,000 SHARES OF ITS COMMON STOCK.

 

FOR RESIDENTS OF PENNSYLVANIA ONLY

 

BECAUSE THE MINIMUM CLOSING AMOUNT IS LESS THAN $250,000,000, YOU ARE CAUTIONED TO CAREFULLY EVALUATE THE COMPANY’S ABILITY TO FULLY

 



 

ACCOMPLISH ITS STATED OBJECTIVES AND TO INQUIRE AS TO THE CURRENT DOLLAR VOLUME OF COMPANY SUBSCRIPTIONS.

 

WE WILL PLACE ALL PENNSYLVANIA INVESTOR SUBSCRIPTIONS IN ESCROW UNTIL THE COMPANY HAS RECEIVED TOTAL SUBSCRIPTIONS OF AT LEAST $250,000,000, OR FOR AN ESCROW PERIOD OF 120 DAYS, WHICHEVER IS SHORTER.

 

IF THE COMPANY HAS NOT RECEIVED TOTAL SUBSCRIPTIONS OF AT LEAST $250,000,000 BY THE END OF THE ESCROW PERIOD, THE COMPANY MUST:

 

A.  RETURN THE PENNSYLVANIA INVESTORS’ FUNDS WITHIN 15 CALENDAR DAYS OF THE END OF THE ESCROW PERIOD; OR

 

B.  NOTIFY THE PENNSYLVANIA INVESTORS IN WRITING BY CERTIFIED MAIL OR ANY OTHER MEANS WHEREBY RECEIPT OF DELIVERY IS OBTAINED WITHIN 10 CALENDAR DAYS AFTER THE END OF THE ESCROW PERIOD, THAT THE PENNSYLVANIA INVESTORS HAVE A RIGHT TO HAVE THEIR INVESTMENT RETURNED TO THEM.  IF AN INVESTOR REQUESTS THE RETURN OF SUCH FUNDS WITHIN 10 CALENDAR DAYS AFTER RECEIPT OF NOTIFICATION, THE COMPANY MUST RETURN SUCH FUNDS WITHIN 15 CALENDAR DAYS AFTER RECEIPT OF THE INVESTOR’S REQUEST.

 

NO INTEREST IS PAYABLE TO AN INVESTOR WHO REQUESTS A RETURN OF FUNDS AT THE END OF THE INITIAL 120-DAY ESCROW PERIOD.  ANY PENNSYLVANIA INVESTOR WHO REQUESTS A RETURN OF FUNDS AT THE END OF ANY SUBSEQUENT 120-DAY ESCROW PERIOD WILL BE ENTITLED TO RECEIVE INTEREST EARNED, IF ANY, FOR THE TIME THAT THE INVESTOR’S FUNDS REMAIN IN ESCROW COMMENCING WITH THE FIRST DAY AFTER THE INITIAL 120-DAY ESCROW PERIOD.

 

WHO MAY INVEST

 

In order to purchase shares of our common stock, you must:

 

                                          satisfy the minimum suitability standards for investors; and

 

                                          offer to purchase the minimum required number of shares at a price of $10.00 per share.

 

SUITABILITY STANDARDS

 

Because an investment in our common stock is risky and is a long-term investment, it is suitable for you only if you have adequate financial means, you have no immediate need for liquidity in your investment and you can bear the complete loss of your investment.

 

We have established financial suitability standards for investors interested in purchasing shares of our common stock.  In addition, residents of some states must meet higher suitability standards.  These standards require you to meet the applicable criteria below.  In determining your net worth, do not include your home, home furnishings or automobile.

 

Investors with investment discretion over the assets of an employee benefit plan covered by ERISA should carefully review the information in the section entitled “ERISA Considerations.”

 

ii



 

MINIMUM SUITABILITY STANDARDS FOR INVESTORS

 

                                          Minimum net worth of at least $150,000; or

 

                                          Minimum annual gross income of at least $45,000 and a minimum net worth of at least $45,000.

 

Standards for South Carolina Residents:

 

                                          Minimum net worth of at least $150,000; or

 

                                          Minimum annual gross income of at least $65,000 and a minimum net worth of at least $65,000.

 

Standards for Maine Residents:

 

                                          Minimum net worth of at least $200,000; or

 

                                          Minimum annual gross income of at least $50,000 and a minimum net worth of at least $50,000.

 

Standards for Alaska, Arizona, California, Iowa, Kansas, Michigan, Missouri, North Carolina, Oregon or Tennessee Residents:

 

                                          Minimum net worth of at least $225,000; or

 

                                          Minimum annual gross income of at least $60,000 and a minimum net worth of at least $60,000.

 

Standards for Massachusetts or Ohio Residents:

 

                                          Minimum net worth of at least $250,000; or

 

                                          Minimum annual gross income of at least $70,000 and a minimum net worth of at least $70,000.

 

Standards for New Hampshire Residents:

 

                                          Minimum net worth of at least $250,000; or

 

                                          Minimum net gross income of at least $50,000 and a minimum net worth of at least $125,000.

 

Standards for California, Kansas, Massachusetts, Missouri, Nebraska, Ohio or Pennsylvania Residents:

 

                                          In addition to meeting the applicable minimum suitability standards set forth above, your investment may not exceed ten percent (10.0%) of your liquid net worth, which may be defined as the remaining balance of cash and other assets easily converted to cash after subtracting the investor’s total liabilities from total assets.

 

In the case of sales to fiduciary accounts (such as an IRA, Keogh Plan or pension or profit-sharing plan), these minimum suitability standards must be satisfied by the beneficiary, the fiduciary

 

iii



 

account, or by the donor or grantor who directly or indirectly supplies the funds to purchase our common stock if the donor or the grantor is the fiduciary.  In the case of gifts to minors, the minimum suitability standards must be met by the custodian of the account or by the donor.

 

MINIMUM PURCHASE

 

Subject to the restrictions imposed by state law, we will sell shares of our common stock only to investors who initially purchase a minimum of three hundred (300) shares of common stock at a price of $10.00 per share for a total purchase price of $3,000, or tax-exempt entities which purchase a minimum of one hundred (100) shares of common stock at a price of $10.00 per share for a total purchase price of $1,000.  A tax-exempt entity is generally any investor that is exempt from federal income taxation, including:

 

                                          a pension, profit-sharing, retirement, IRA or other employee benefit plan that satisfies the requirements for qualification under Section 401(a), 414(d) or 414(e) of the Internal Revenue Code;

 

                                          a pension, profit-sharing, retirement, IRA or other employee benefit plan that meets the requirements of Section 457 of the Internal Revenue Code;

 

                                          trusts that are otherwise exempt under Section 501(a) of the Internal Revenue Code;

 

                                          a voluntary employees’ beneficiary association under Section 501(c)(9) of the Internal Revenue Code; or

 

                                          an IRA that meets the requirements of Section 408 of the Internal Revenue Code.

 

The term “plan” includes plans subject to Title I of ERISA, other employee benefit plans and IRAs subject to the prohibited transaction provisions of Section 4975 of the Internal Revenue Code, governmental or church plans that are exempt from ERISA and Section 4975 of the Internal Revenue Code, but that may be subject to state law requirements, or other employee benefit plans.

 

Subject to any restrictions imposed by state law, subsequent additional investments by investors will require a minimum investment of ten (10) shares of common stock at a price of $10.00 per share for a total purchase price of $100.  This minimum investment amount for future purchases will not apply to purchases of shares through our distribution reinvestment plan.

 

DISTRIBUTION IN CANADA

 

Shares of our common stock also may be offered and sold in Canada in reliance on and in accordance with exemptions from the prospectus requirements of Canadian provincial and territorial securities laws or pursuant to discretionary exemption orders obtained in advance from applicable provincial or territorial regulatory authorities.

 

iv



 

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

1

Inland American Real Estate Trust, Inc.

1

Risk Factors

1

Our Sponsor, Business Manager, Dealer Manager, Property Managers and The Inland Group, Inc.

2

Description of Real Estate Investments

4

We May Borrow Money

4

Estimated Use of Proceeds of Offering

4

Conflicts of Interest

4

Compensation To Be Paid To Our Affiliates

6

Investment Objectives

9

Distribution Policy

9

ERISA Considerations

9

Shares Sold Before the Offering

9

Stockholder Voting Rights and Limitations

9

Restriction on Share Ownership

10

Terms of the Offering

10

Appropriateness of Investment

10

Distribution Reinvestment Plan

10

Estimated Use of Proceeds

12

 

 

QUESTIONS AND ANSWERS ABOUT THE OFFERING

13

 

 

RISK FACTORS

17

 

 

Risks Related to the Offering

17

We have no prior operating history and the prior performance of programs sponsored by IREIC may not be an accurate barometer of our future results

17

There is no public market for our shares, the offering price was arbitrarily established and you may not be able to sell your shares at a price that equals or exceeds the offering price

17

This is a “blind pool” offering and you will not have the opportunity to evaluate our investments before we make them

17

This is a “best efforts” offering and if we are unable to raise substantially more than the minimum offering, the number and type of investments will be limited

18

Our share repurchase program may be amended, suspended or terminated by our board of directors at any time without stockholder approval, reducing the potential liquidity of your investment

18

Risks Related to Our Business

18

We compete with numerous other parties or entities for real estate assets and tenants

18

Delays in locating suitable investments could adversely affect the return on your investment

19

Your interest in us will be diluted if we issue additional shares

19

Your investment will be directly affected by general economic and regulatory factors that impact real estate investments

20

 

v



 

We may invest directly in, or acquire REITs or other real estate operating companies that invest in, mortgage-related assets and, therefore, may be subject to the risks associated with mortgage-related securities

20

Borrowings may reduce the funds available for distribution and increase the risk of loss since defaults may cause us to lose the properties securing the loans

21

We will compete with real estate investment programs sponsored by IREIC for the time and services of personnel

21

There are conflicts of interest between us and affiliates of our sponsor that may affect our acquisition of properties and financial performance

21

If we are unable to borrow at favorable rates, we may not be able to acquire new properties, REITs or other real estate operating companies, which could reduce our income and the amount of distributions that we can make to you

22

Lenders may restrict certain aspects of our operations, which could, among other things, limit our ability to make distributions to you

22

If we do not have sufficient working capital, we will have to obtain financing from other sources

22

We may invest in collateralized mortgage-backed securities, which may increase our exposure to credit and interest rate risk

22

To hedge against interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective and may reduce the overall returns on your investment

23

The total amount we may borrow is limited by our articles of incorporation

24

We may lend money to affiliates of, or entities sponsored by, IREIC

24

There are inherent risks with real estate investments

24

We will depend on tenants for the majority of our revenue, and lease terminations or the exercise of any co-tenancy rights could have an adverse effect

24

We may incur additional costs in acquiring or re-leasing properties

25

We may be restricted from re-leasing space

25

We may be unable to sell assets if or when we decide to do so

25

We may be contractually obligated to purchase property even if we are unable to secure financing for the acquisition

25

The availability and timing of cash distributions is uncertain and there is no assurance that sufficient cash will be available to pay distributions

26

Although IREIC or its affiliates previously have agreed to forgo or defer advisor fees in an effort to maximize cash available for distribution by the other REITs sponsored by IREIC, our Business Manager is under no obligation, and may not agree, to forgo or defer its business management fee

26

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect the markets in which we operate, our operations and our profitability

26

An increase in real estate taxes may decrease our income from properties

27

Uninsured losses or premiums for insurance coverage may adversely affect your returns

27

Our operating results may be negatively affected by potential development and construction delays and the resulting increase in costs and risks

27

The costs of complying with environmental laws and other governmental laws and regulations may adversely affect us

27

 

vi



 

Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results

28

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem

28

Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act

29

The costs associated with complying with the Americans With Disabilities Act may reduce the amount of cash available to distribute to you

29

Sale leaseback transactions may be recharacterized in a manner unfavorable to us

30

We may have increased exposure to liabilities as a result of any participation by us in Section 1031 Exchange Transactions

30

Actions by a co-tenant might have the result of subjecting the property to liabilities in excess of those contemplated and may have the effect of reducing your returns

30

There is no assurance that we will be able to pay or maintain cash distributions or that distributions will increase over time

31

If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser

31

Maryland law and our organizational documents limit your right to bring claims against our officers and
directors

31

Our board of directors may, in the future, adopt certain measures under Maryland law without stockholder approval that may have the effect of making it less likely that you would receive a “control premium” for your shares

31

Our articles place limits on the amount of common stock that any person may own without the prior approval of our board of directors

32

Our articles permit our board of directors to issue preferred stock on terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us

33

Maryland law limits, in some cases, the ability of a third party to vote shares acquired in a “control share acquisition.”

33

Risks Related to Our Business Manager, Property Managers and their Affiliates

33

We do not have arm’s-length agreements with our Business Manager, Property Managers or any other affiliates of IREIC

33

Our Business Manager will receive fees based upon our invested assets and, in certain cases, the purchase price for these assets, and may recommend that we make investments in an attempt to increase its fees

34

We will pay significant fees to our Business Manager, Property Managers and other affiliates of our sponsor, IREIC, and cannot predict the amount of fees to be paid

34

IREIC may face a conflict of interest in allocating personnel and resources between its affiliates, our Business Manager and Property Managers

34

We may acquire real estate assets from affiliates of IREIC in transactions in which the price will not be the result of arm’s length negotiations

35

We may purchase real estate assets from persons who have prior business relationships with affiliates of IREIC. Our interests in these transactions may be different from the interests of affiliates in these transactions

35

We have the same legal counsel as our dealer manager and certain of its affiliates

35

Inland Securities Corporation, the dealer manager of this offering, is an affiliate of IREIC

35

 

vii



 

Federal Income Tax Risks

35

If we fail to qualify as a REIT, our operations and distributions to stockholders will be adversely affected

35

Distributions to tax-exempt investors may be classified as unrelated business tax income

36

Investors subject to ERISA must address special considerations when determining whether to acquire our common stock

36

If our assets are deemed to be ERISA plan assets, our Business Manager and we may be exposed to liability under Title I of ERISA and the Internal Revenue Code

36

There are special considerations that apply to pension or profit-sharing trusts or IRAs investing in our shares

37

The annual statement of value that we will send to stockholders subject to ERISA and to certain other plan stockholders is only an estimate and may not reflect the actual value of our shares

37

You may have tax liability on distributions that you elect to reinvest in our common stock

38

In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available to pay distributions to you

38

Equity participation in mortgage loans may result in taxable income and gains from these properties, which could adversely impact our REIT status

38

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

39

 

 

SELECTED FINANCIAL DATA

40

 

 

CAPITALIZATION

40

 

 

COMPENSATION TABLE

40

Nonsubordinated Payments

41

Subordinated Payments

48

 

 

ESTIMATED USE OF PROCEEDS

51

 

 

PRIOR PERFORMANCE OF IREIC AFFILIATES

52

Prior Investment Programs

52

Summary Information

53

Publicly Registered REITs

55

Private Partnerships

60

1031 Exchange Private Placement Offering Program

61

 

 

MANAGEMENT

79

Board of Directors

79

Inland Affiliated Companies

79

Our Directors and Executive Officers

82

Committees of Our Board of Directors

86

Compensation of Directors and Officers

86

Compensation of Executive Officers

87

Our Business Manager

88

Our Property Managers

88

The Business Management Agreement

90

Property Management Agreements

95

 

viii



 

Property Acquisition Agreement

96

Business Combinations

97

Inland Securities Corporation

98

 

 

CONFLICTS OF INTEREST

103

Our Business Manager and Property Managers will share employees with IREIC, its affiliates and other REITs sponsored by IREIC

103

We do not have arm’s-length agreements with our Business Manager, Property Managers or any other affiliates of
IREIC

103

Our Business Manager, Property Managers and other affiliates of IREIC receive commissions, fees and other compensation based upon our invested assets and, in certain cases, the purchase price paid to acquire these assets

103

We compete with other REITs sponsored by IREIC for shopping centers and single tenant net-leased properties

104

We may acquire real estate assets from affiliates of IREIC

104

We may purchase real estate assets from persons who have prior business relationships with affiliates of IREIC. Our interests in these transactions may be different from the interests of affiliates in these transactions

104

Our Business Manager may have conflicting fiduciary obligations if we acquire real estate assets from affiliates of
IREIC

105

Inland Securities, the dealer manager of this offering, is an affiliate of IREIC

105

 

 

PRINCIPAL STOCKHOLDERS

106

 

 

BUSINESS AND POLICIES

107

Investment Strategy

107

Acquisition Standards

108

Borrowing

109

Joint Ventures and Other Co-Ownership Arrangements

109

Change in Investment Objectives and Policies

109

Appropriateness of Investment

110

Investment Limitations

110

Appraisals

111

Return of Uninvested Proceeds

111

Exchange Listing and Liquidity Events

111

Construction and Development Activities

112

Competition

112

Insurance

112

Government Regulations

113

Other Policies

113

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

115

General

115

Liquidity and Capital Resources

116

Results of Operations

116

Inflation

116

Critical Accounting Policies

116

Distributions

119

Offering and Operational Fees and Expenses

119

Funds from Operations

119

Quantitative and Qualitative Disclosures about Market Risk

119

 

ix



 

DESCRIPTION OF SECURITIES

121

Authorized Stock

121

Common Stock

121

Distributions

122

Transfer Agent and Registrar

122

Book Entry System

122

Preferred Stock

123

Issuance of Additional Securities and Debt Instruments

123

Restrictions on Issuance of Securities

123

Restrictions on Ownership and Transfer

124

Certain Provisions of Maryland Corporate Law and Our Articles of Incorporation and Bylaws

126

Shares to be Outstanding or Issuable upon Exercise or Conversion of Other Securities

128

Securities Act Restrictions

128

Independent Director Stock Option Plan

128

Effect of Availability of Shares on Market Price of Shares

129

Registration Rights

129

 

 

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

130

 

 

SUMMARY OF OUR ORGANIZATIONAL DOCUMENTS

133

Articles of Incorporation and Bylaw Provisions

133

Stockholders’ Meetings and Voting Rights

133

Board of Directors

134

Rights of Objecting Stockholders

134

Inspection of Books and Records; Stockholder Lists

135

Amendment of the Organizational Documents

135

Dissolution or Termination of the Company

135

Advance Notice of Director Nominations and New Business

136

Restrictions on Certain Conversion Transactions and Roll-ups

137

Limitation on Total Operating Expenses

139

Transactions with Affiliates

139

Restrictions on Borrowing

140

Restrictions on Investments

140

 

 

FEDERAL INCOME TAX CONSIDERATIONS

143

Federal Income Taxation as a REIT

144

General

144

Tax Aspects of Investments in Partnerships

154

Federal Income Taxation of Stockholders

155

Other Tax Considerations

158

 

 

ERISA CONSIDERATIONS

160

Fiduciary Obligations—Prohibited Transactions

161

Plan Assets—Definition

161

Publicly Offered Securities Exemption

162

Real Estate Operating Company Exemption

162

Consequences of Holding Plan Assets

163

Prohibited Transactions

163

Prohibited Transactions—Consequences

164

Valuation

164

 

x



 

PLAN OF DISTRIBUTION

165

General

165

Escrow Conditions

165

Subscription Process

166

Representations and Warranties in the Subscription Agreementv

167

Determination of Your Suitability as an Investor

167

Compensation We Will Pay for the Sale of Our Shares

168

Volume Discounts

169

Indemnification

170

 

 

HOW TO SUBSCRIBE

172

 

 

SALES LITERATURE

174

 

 

DISTRIBUTION REINVESTMENT PLAN AND SHARE REPURCHASE PROGRAM

175

Distribution Reinvestment Plan

175

Share Repurchase Program

177

 

 

REPORTS TO STOCKHOLDERS

179

 

 

PRIVACY POLICY NOTICE

180

 

 

RELATIONSHIPS AND RELATED TRANSACTIONS

180

 

 

LEGAL MATTERS

186

 

 

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

186

 

 

WHERE YOU CAN FIND MORE INFORMATION

186

 

 

Index to Financial Statements

F-i

 

 

APPENDIX A – Prior Performance Tables

A-1

 

 

APPENDIX B – Distribution Reinvestment Plan

B-1

 

 

APPENDIX C-1 – Subscription Agreement

C-1-1

 

 

APPENDIX C-2 – Distribution Reinvestment Plan Enrollment Form

C-2-1

 

 

APPENDIX D – Transfer on Death Designation

D-1

 

 

APPENDIX E-1 – Letter of Direction

E-1-1

 

 

APPENDIX E-2 – Notice of Revocation

E-2-1

 

 

APPENDIX G – Privacy Policy Notice

G-1

 

xi



 

                                                PROSPECTUS SUMMARY

 

This summary highlights the material information contained elsewhere in this prospectus.  Because this is a summary, it does not contain all information that may be important to you.  You should read this entire prospectus and its appendices carefully before you decide to invest in shares of our common stock.

 

Inland American Real Estate Trust, Inc.

 

We are a newly-organized Maryland corporation.  We will elect to be taxed as a REIT for federal and state income tax purposes beginning with the tax year ending December 31, 2005.  In general, a REIT is an entity that:

 

                                          combines the capital of many investors to, among other things, acquire or invest in commercial real estate;

 

                                          allows individual investors to invest in a real estate portfolio under professional management through the purchase of interests, typically shares;

 

                                          must pay distributions to its stockholders equal to at least ninety percent (90.0%) of its “REIT taxable income;” and

 

                                          is not typically subject to federal corporate income taxes, thus eliminating the “double taxation” (both corporate and stockholder level taxes) generally applicable to a corporation.

 

For additional discussion regarding REITs and REIT qualification, see “Federal Income Tax Considerations” below.

 

Risk Factors

 

An investment in our shares involves significant risks.  If we are unable to effectively manage these risks, we may not meet our investment objectives and you may lose some or all of your investment.  See “Risk Factors” beginning on page 17 below.  The following is a summary of the material risks that we believe are most relevant to an investment in shares of our common stock.  These risks are generally listed in order of priority.

 

                                          Our investment policies and strategies are very broad and permit us to invest in any type of commercial real estate including developed or undeveloped properties, entities owning these assets or other real estate assets regardless of geographic location or property type.

 

                                          We may borrow up to 300.0% of our net assets, and principal and interest payments will reduce the funds available for distribution to our stockholders.

 

                                          Our Business Manager could recommend that we make investments in an attempt to increase its fees because the fees paid to it are based upon a percentage of our invested assets and, in certain cases, the purchase price for these assets.  Further, because we will pay our Business Manager a fee when we acquire a REIT or other real estate operating company but not a fee interest in real estate, our Business Manager may focus on, and recommend, acquiring REITs

 



 

and real estate operating companies even if fee interests in real estate assets generate better returns.

 

                                          We will pay significant fees to affiliates of our sponsor including our Business Manager and Property Managers.

 

                                          We have no prior operating history and there is no assurance that we will be able to successfully implement our strategies.

 

                                          There is no market for our shares and no assurance that one will develop.  We do not expect that our shares will be listed for trading on a national securities exchange or included for quotation on a national market system in the near future.  You will not, therefore, be able to easily resell any shares that you may purchase in this offering.  Any shares that you are able to resell may be sold at prices less than the amount you paid for them.

 

                                          This is a “blind pool” offering because we have not acquired, or entered into any agreements to acquire, any real estate assets.

 

                                          The number and value of properties, entities or other real estate assets we can initially acquire will depend on the proceeds raised in this offering.

 

                                          We do not have any employees and will rely entirely on our Business Manager and Property Managers to manage our business and assets.

 

                                          Employees of our Business Manager, Property Managers and two of our directors, Ms. Gujral and Mr. Parks, are also employed by IREIC or its affiliates and will face competing demands for their time and service and may have conflicts in allocating their time to our business.  Ms. Gujral and Mr. Parks also serve as our president and chairman of the board, respectively.

 

                                          Our articles limit a person from owning more than 9.8% of our common stock without the prior approval of our board of directors.

 

                                          We may fail to qualify as a REIT.

 

Our Sponsor, Business Manager, Dealer Manager, Property Managers and The Inland Group, Inc.

 

Our sponsor and affiliate, Inland Real Estate Investment Corporation, or IREIC, is a subsidiary of The Inland Group, Inc.  The Inland Group, together with its subsidiaries and affiliates, is a fully-integrated group of legally and financially separate companies that have been engaged in diverse facets of real estate such as property management, leasing, marketing, acquisition, disposition, development, redevelopment, renovation, construction, finance and other related services for over thirty-five years.  Various affiliates of IREIC will be involved in our operations.  Our Business Manager, Inland American Business Manager & Advisor, Inc., referred to herein as our Business Manager, is a wholly owned subsidiary of IREIC.  The dealer manager of this offering is Inland Securities Corporation, which also is a wholly owned subsidiary of IREIC.  Our four property managers, Inland American Retail Management LLC, Inland American Office Management LLC, Inland American Industrial Management LLC and Inland American Apartment Management LLC, which we refer to collectively herein as our Property Managers, are indirect wholly owned subsidiaries of corporations currently owned by the four individuals owning substantially all of the outstanding voting stock of The Inland Group.  Inland Real Estate Acquisitions, Inc., an indirect wholly owned subsidiary of The Inland Group, will provide acquisition

 

2



 

services to us from time to time.  Our office, as well as the executive offices of The Inland Group, our Business Manager, our Property Managers and Inland Real Estate Acquisitions, are located at 2901 Butterfield Road, Oak Brook, Illinois 60523.

 

Our board of directors is responsible for overseeing our business.  Our board, including a majority of our independent directors, must approve certain actions.  Those matters are set forth in our Third Articles of Amendment and Restatement referred to herein as the “articles” or the “articles of incorporation.”  We have seven members on our board of directors, four of whom are independent of IREIC and its affiliates.  These independent directors are responsible for reviewing the performance of our Business Manager and Property Managers.  All of our directors are elected annually by our stockholders.  Although we have executive officers, we do not have any paid employees.  We will reimburse our Business Manager and Property Managers for certain expenses, described herein.

 

The following chart depicts the services that affiliates of our sponsor will render to us and our organizational structure:

 

ORGANIZATIONAL CHART

 

 

 

Solid lines indicate 100% ownership.

 

Broken lines indicate service.

 


* The four indicated individuals own substantially all of the outstanding voting stock of The Inland Group, Inc.

 

3



 

Description of Real Estate Investments

 

We expect to use substantially all of the net proceeds from this offering to acquire commercial real estate located in the United States and Canada, including REITs or other real estate operating companies.  We will focus on properties or entities owning properties such as:

 

                                          shopping or retail centers;

 

                                          malls;

 

                                          multi-family apartment buildings; and

 

                                          office and industrial buildings.

 

Our investment policies and strategies do not require us to invest any specific amount or percentage of assets in any one type of investment.  Further, we do not expect to adopt any policies as to the amount or percentage of assets that will be invested in commercial real estate, entities owning commercial real estate or other real estate assets such as collateralized mortgage-backed securities.  Because we do not identify, and have not yet identified, any specific real estate assets to purchase, this is considered to be a “blind pool” offering.  See “Risk Factors – Risks Related to the Offering” for additional discussion regarding “blind pool” offerings.  After we commence this offering, we will supplement this prospectus to describe any material acquisitions.

 

We May Borrow Money

 

We expect to finance a portion of the purchase price of any asset including a REIT or other real estate operating company that we acquire with monies borrowed on an interim or permanent basis from banks, institutional investors and other lenders, including lenders affiliated with our sponsor.  We expect that any money we borrow will be the subject of a written loan agreement and secured by a mortgage or other interest in the real estate.  The interest we pay on our loans may be fixed or variable.  We also may establish a revolving line of credit for short-term cash management and bridge financing purposes.  Further, we may agree to limit the time during which we may prepay any loan in order to reduce the interest rate on the loan.  As a matter of policy, the aggregate borrowings secured by all of our assets will not exceed fifty-five percent (55.0%) of their combined fair market value.  For these purposes, the fair market value of each asset will be equal to the purchase price paid for the asset or the value reported in the most recent appraisal of the asset, whichever is later.  Our articles limit the aggregate amount we may borrow, whether secured or unsecured, to an amount not to exceed three hundred percent (300.0%) of our net assets unless the board determines that a higher level is appropriate.  The loan agreements with our lenders may impose additional restrictions on the amount we may borrow.  See “Risk Factors – Risks Related to Our Business” for additional discussion of our borrowings.

 

Estimated Use of Proceeds of Offering

 

We anticipate investing approximately 87.0% of the gross proceeds of this offering, assuming the maximum amount is sold, in real estate assets.  The remaining offering proceeds will be used to pay selling commissions, fees and the costs of this offering and to fund a working capital reserve.

 

Conflicts of Interest

 

Conflicts of interest exist between us and other entities including REITs sponsored by IREIC, including Inland Retail Real Estate Trust, Inc., Inland Western Retail Real Estate Trust, Inc., and Inland

 

4



 

Real Estate Corporation with respect to certain properties.  Inland Retail Real Estate Trust, Inc. purchases neighborhood and community shopping centers located generally east of the Mississippi River.  Inland Western Retail Real Estate Trust, Inc. purchases the same type of shopping centers located generally west of the Mississippi River.  Inland Real Estate Corporation is in the business of purchasing this type of shopping center located within 400 miles of Oak Brook, Illinois.  Each of these entities also may purchase single tenant net-leased properties located anywhere in the United States.  Although we too may purchase shopping centers and single tenant net-leased properties, our investment policies and strategies are much broader and do not limit our acquisitions to a specific type of real estate asset or geographic area.  In addition, we may purchase REITs or other real estate operating companies.

 

Other conflicts of interest include:

 

                                          the fact that our Business Manager and Property Managers will share employees with IREIC, its affiliates and other REITs sponsored by IREIC.  These individuals will face competing demands for their time and services and may have conflicts in allocating their time between our business and the business of these other entities.  IREIC also may face a conflict of interest in allocating personnel and resources between its affiliates and our Business Manager and Property Managers;

 

                                          the fact that we do not have arm’s length agreements with our Business Manager, Property Managers or any other affiliates of IREIC;

 

                                          the fact that our Business Manager, Property Managers and other affiliates of IREIC receive commissions, fees and other compensation based on our investments and, therefore, may benefit from us retaining our assets or leveraging our assets while our stockholders may be better served by sale or disposition of, or not leveraging, the assets.  Our Business Manager also could recommend investments in an attempt to increase its fees because the fees paid to it are based upon a percentage of our invested assets and, in certain cases, the purchase price for these assets, or recommend the purchase of one type of investment if the fees paid on that investment are greater than the fees paid on another type of investment;

 

                                          the fact that we compete with other REITs sponsored by IREIC for shopping centers and single tenant net-leased properties.  We, along with each of these REITs, rely to some degree on Inland Real Estate Acquisitions, or IREA, to identify and assist in acquiring real estate assets.  Under the property acquisition agreement we have entered into with IREA, we have been granted a right of first refusal to acquire all properties, REITs or other real estate operating companies that it identifies, acquires or obtains the right to acquire, subject to the prior rights granted by IREA to the other REITs sponsored by IREIC to acquire shopping centers and single tenant net-leased properties.  See “Management – Property Acquisition Agreement” for a more detailed discussion of the property acquisition agreement;

 

                                          the possibility that we may acquire real estate assets from companies that are owned, managed or advised by affiliates of IREIC or that compete with these affiliates for properties or that have a pre-existing relationship with these affiliates, any of which may result in a conflict of interest between our business and that of these affiliates; and

 

                                          the fact that Inland Securities, our dealer manager, is an affiliate of IREIC and is not, therefore, independent.

 

5



 

Compensation To Be Paid To Our Affiliates

 

We intend to pay fees to Inland Securities, our Business Manager, our Property Managers, The Inland Group and their affiliates.  We also will reimburse these entities for expenses incurred in performing services on our behalf.

 

Set forth below is a summary of the most significant fees and expenses we expect to pay these entities.  For purposes of illustrating offering stage fees and expenses, we have assumed that we sell the maximum of 500,000,000 shares in the “best efforts” portion of this offering at $10.00 per share.  We have not given effect to any special sales or volume discounts that could reduce selling commissions.  We will not pay commissions in connection with shares of common stock issued through our distribution reinvestment plan.

 

Type of Compensation

 

Offering Stage

 

 

 

Selling Commission

7.5% of the sale price for each share

 

 

 

Estimated maximum:  $375,000,000

 

 

Marketing Contribution

2.5% of the gross offering proceeds

 

 

 

Estimated maximum:  $125,000,000

 

 

Due Diligence Expense Allowance

0.5% of the gross offering proceeds

 

 

 

Estimated maximum:   $25,000,000

 

 

Reimbursable Expenses and Other
Expenses of Issuance

 

We will reimburse IREIC for costs and other expenses of issuance and distribution that it pays on our behalf in connection with this offering.  If we sell at least the minimum offering, our Business Manager has agreed to pay any organization and offering expenses that exceed fifteen percent (15.0%) of the gross offering proceeds. 

 

 

Operational Stage

 

 

 

Acquisition Expenses

We will reimburse our Business Manager and The Inland Real Estate Transactions Group, Inc., Inland Real Estate Acquisitions and each of their respective affiliates for expenses paid on our behalf in connection with acquiring real estate assets, regardless of whether we acquire the assets; provided that we may not reimburse expenses, when combined with any acquisition fees that may be paid, greater than six percent (6.0%) of the contract price of any real estate asset acquired or, in the case of a loan, six percent (6.0%) of the funds advanced.  The actual amount depends on each asset and cannot be determined at this time.

 

6



 

Acquisition Fee

We will pay our Business Manager or its designee a fee for services performed in connection with acquiring a controlling interest in a REIT or other real estate operating company.  Acquisition fees, however, will not be paid for acquisitions solely of a fee interest in property.  The amount of the acquisition fee will be equal to two and one-half percent (2.5%) of the aggregate purchase price paid to acquire the controlling interest.  The actual amount depends on the amount invested in each asset and cannot be determined at this time. 

 

 

Property Management Fee

For each property managed directly by any of our Property Managers, their affiliates or agents, we will pay the applicable Property Manager a monthly fee equal to a total of four and one-half percent (4.5%) of the gross income from each property.  The actual amount depends on the gross income generated and cannot be determined at the present time.

 

 

Oversight Fee

For each property managed directly by entities other than our Property Managers, their affiliates or agents, we will pay the applicable Property Manager, based on the type of property managed, a monthly oversight fee of up to one percent (1.0%) of the gross income from each such property.  In no event will our Property Managers receive both a property management fee and an oversight fee with respect to a particular property.  The actual amount depends on the gross income generated and cannot be determined at the present time.

 

 

Business Management Fee

After our stockholders have received a non-cumulative, non-compounded return of five percent (5.0%) per annum on their “invested capital,” we will pay our Business Manager an annual business management fee of up to one percent (1.0%) of our “average invested assets.”  Separate and distinct from any business management fee, we also will reimburse our Business Manager or its affiliates for all expenses paid or incurred on our behalf including the salaries and benefits of persons performing services for us except for the salaries and benefits of persons who also serve as one of our executive officers or as an executive officer of our Business Manager.  The actual amount depends on the amount of our assets and distributions paid to our stockholders and cannot be determined at the present time.

 

 

Incentive Fee

After our stockholders have first received a ten percent (10.0%) cumulative, non-compounded return on, plus return of, their “invested capital,” we will pay our Business Manager an incentive fee equal to fifteen percent (15.0%) of the net proceeds from the sale of real estate assets.  The actual amount depends on the amount of net proceeds from the sale of real estate assets and cannot be determined at the present time.

 

7



 

Interest Expense

We may borrow money from our Business Manager and its affiliates, including Inland Mortgage Corporation or other REITs sponsored by IREIC.  We will pay interest on these loans at prevailing market rates.  The actual amount of interest paid will depend on the amount borrowed and the interest rate prevailing at the time.  We cannot determine the amount at this time.

 

 

Service Fee Associated with Purchasing, Selling and Servicing Mortgages

 

We will pay Inland Mortgage Servicing Corporation 0.03% per year on the first billion dollars and 0.01% thereafter on all mortgages that are serviced by Inland Mortgage Servicing Corporation.  In addition, we will pay Inland Mortgage Brokerage Corporation 0.2% of the principal amount of each loan placed for us by Inland Mortgage Brokerage Corporation.  The actual amount depends on results of operations and cannot be determined at the present time.

 

 

Ancillary Services

Reimbursements

 

We will reimburse IREIC, our Business Manager and their respective affiliates for any expenses that they pay or incur in providing services to us.  The actual amount depends on the services provided and the method by which reimbursement rates are calculated.  Actual amounts cannot be determined at the present time.

 

 

Liquidation Stage

 

 

 

Property Disposition Fee

We may pay a property disposition fee to Inland Real Estate Sales, Inc. or Inland Partnership Property Sales Corp. in an amount equal to the lesser of:  (1) three percent (3.0%) of the contract sales price of the property; or (2) fifty percent (50.0%) of the customary commission which would be paid to a third party broker for the sale of a comparable property.  The amount paid, when added to the sums paid to unaffiliated parties, may not exceed either the customary commission or an amount equal to six percent (6.0%) of the contract sales price.  The actual amounts to be received depend upon the sale price of our properties and, therefore, cannot be determined at the present time.

 

8



 

Investment Objectives

 

Our investment objectives are:

 

                                          to invest in real estate assets that produce attractive current yield and long-term risk-adjusted returns to our stockholders; and

 

                                          to generate sustainable and predictable cash flow from our operations to distribute to our stockholders.

 

To achieve these objectives, we intend to selectively acquire and actively manage investments in commercial real estate.  To the extent we sell assets, we intend to reinvest the sale proceeds.  See the “Business and Policies” section of this prospectus for a more complete description of our business and objectives.

 

Distribution Policy

 

We intend to make regular cash distributions to our stockholders, typically on a monthly basis.  The actual amount and timing of distributions will be determined by our board of directors in its discretion and will depend typically on the amount of funds available for distribution after reserves and capital expenditures, current and projected cash requirements, and tax considerations.  See “Risk Factors – Risks Related to Our Business” for additional discussion regarding the amount and timing of distributions.  Although our distribution rate and payment frequency may vary from time to time, to remain qualified as a REIT, we must distribute at least ninety percent (90.0%) of our “REIT taxable income” each year.  See the “Description of Securities” and the “Federal Income Tax Considerations – Annual Distribution Requirements” herein for a more complete description of our distribution policy.

 

ERISA Considerations

 

The section of this prospectus entitled “ERISA Considerations” describes the effect that the purchase of shares will have on individual retirement accounts and retirement plans that are subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code.  ERISA is a federal law that regulates the operation of certain tax-advantaged retirement plans.  Any retirement plan trustee or individual considering purchasing shares for a retirement plan or an individual retirement account should read this section of the prospectus carefully.

 

Shares Sold Before the Offering

 

This is our initial public offering.  We previously issued 20,000 shares of our common stock for $10.00 per share, or an aggregate purchase price of $200,000, to IREIC, our sponsor, in connection with our formation.

 

Stockholder Voting Rights and Limitations

 

We will hold annual meetings of our stockholders to elect directors or conduct other business matters that may be presented at these meetings.  We also may call special meetings of stockholders from time to time.  The holders of our common stock are entitled to one vote per share on all matters voted on by stockholders, including electing our directors.

 

9



 

Restriction on Share Ownership

 

Our articles contain restrictions on the number of shares any one person or group may own.  Specifically, no person or group may own or control more than 9.8% of our outstanding shares.  These restrictions are designed to enable us to comply with ownership restrictions imposed on REITs by the Internal Revenue Code, and may have the effect of preventing a third party from engaging in a business combination or other transaction even if doing so would result in you receiving a “premium” for your shares.  See “Risk Factors – Risks Related to Our Business” for additional discussion regarding restrictions on share ownership.

 

Terms of the Offering

 

We are offering a minimum of 200,000 shares and a maximum of 500,000,000 shares at a price of $10.00 per share on a “best efforts” basis.  We also are offering up to 40,000,000 shares at a purchase price of $9.50 per share to stockholders who elect to participate in our distribution reinvestment plan.  We also may issue up to 75,000 shares pursuant to the exercise of options which may be granted under our independent director stock option plan.  A “best efforts” offering is one in which the securities dealers participating in the offering are under no obligation to purchase any of the securities being offered.  No specified number of securities are, therefore, guaranteed to be sold and no specified amount of money is guaranteed to be raised in this offering.  See “Risk Factors – Risks Related to the Offering” for additional discussion regarding a “best efforts” offering.

 

The offering price of our shares was arbitrarily determined by our board of directors in its sole discretion.  Our board of directors determined the offering price based upon the offering price of other REITs organized by our sponsor, the offering price of other REITs that do not have a public trading market and the recommendation of Inland Securities, our dealer manager.  See “Risk Factors – Risks Related to the Offering” for additional discussion regarding the offering price of our shares.

 

Appropriateness of Investment

 

An investment in our shares may be appropriate as part of your investment portfolio if:

 

                                          You seek regular distributions because we intend to make regular cash distributions to our stockholders, typically on a monthly basis.

 

                                          You seek a hedge against inflation because we intend to enter into leases with tenants that provide for scheduled rent escalations or participation in the growth of tenant sales.

 

                                          You seek to preserve your capital with appreciation because we intend to acquire a portfolio of diverse commercial real estate assets that offer appreciation potential.

 

We cannot guarantee that we will achieve any of these objectives.

 

Distribution Reinvestment Plan

 

We also are offering up to 40,000,000 shares to be sold to stockholders who participate in our distribution reinvestment plan.  You may participate in the plan by reinvesting distributions in additional shares of our common stock at a purchase price per share equal to $9.50.  Distributions may be fully reinvested because the distribution reinvestment plan permits fractional shares to be purchased and credited to participant accounts.  If you participate, you will be taxed on income attributable to the reinvested distributions.  Thus, you would have to rely solely on sources other than distributions from us

 

10



 

to pay taxes on the distributions.  As a result, you may have a tax liability without receiving cash distributions to pay the tax liability.  Our board may terminate or amend the plan, including increasing the per share purchase price, in its sole discretion at any time on ten (10) days notice to plan participants.  See “Risk Factors – Risks Related to Our Business” for additional discussion regarding our distribution reinvestment plan.

 

11



 

Estimated Use of Proceeds

 

The amounts listed in the table below represent our best good faith estimate of the use of offering proceeds.  The organization and offering expenses may not be greater than fifteen percent (15.0%) of the “Gross Offering Proceeds.”  The estimates may not accurately reflect the actual receipt or application of the offering proceeds.  Although we estimate total organization and offering expenses will be less than the total permitted in the case of the “maximum offering,” actual organization and offering expenses may total fifteen percent (15.0%) of the gross offering proceeds.  The first scenario assumes we sell the minimum of 200,000 shares in the “best efforts” portion of the offering at $10.00 per share.  The second scenario assumes we sell the maximum of 500,000,000 shares in the “best efforts” portion of the offering at $10.00 per share.  We have not given effect to any special sales or volume discounts which could reduce selling commissions under either scenario.  In addition, we will not pay commissions in connection with shares of common stock issued through our distribution reinvestment plan.

 

 

 

Minimum Offering

 

Maximum Offering

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

Gross Offering Proceeds

 

$

2,000,000

 

100.00

%

$

5,000,000,000

 

100.00

%

Less Expenses:

 

 

 

 

 

 

 

 

 

Selling Commissions

 

$

150,000

 

7.50

%

$

375,000,000

 

7.50

%

Marketing Contribution

 

$

50,000

 

2.50

%

$

125,000,000

 

2.50

%

Due Diligence Expense Allowance

 

$

10,000

 

0.50

%

$

25,000,000

 

0.50

%

Organization and Offering Expenses(1)

 

$

90,000

 

4.50

%

$

50,500,000

 

1.01

%

TOTAL EXPENSES:

 

$

300,000

 

15.00

%

$

575,500,000

 

11.51

%

Gross Amount Available

 

$

1,700,000

 

85.00

%

$

4,424,500,000

 

88.49

%

Less:

 

 

 

 

 

 

 

 

 

Working Capital Reserve

 

$

20,000

 

1.00

%

$

50,000,000

 

1.00

%

Estimated Acquisition Fees and Expenses(2)

 

$

10,000

 

0.50

%

$

25,000,000

 

0.50

%

NET CASH AVAILABLE FOR INVESTMENT:

 

$

1,670,000

 

83.50

%

$

4,349,500,000

 

86.99

%

 


(1)          Organization and offering expenses were estimated by us in reliance on the prior experience of IREIC, our sponsor, in sponsoring three other REIT programs.  Organization and offering expenses include amounts for Securities and Exchange Commission registration fees, NASD filing fees, printing and mailing expenses, blue sky fees and expenses, legal fees and expenses, accounting fees and expenses, advertising and sales literature, transfer agent fees, data processing fees, bank fees and other administrative expenses.

 

(2)          Acquisition fees and expenses are estimated for illustrative purposes only.  The actual amount of acquisition fees and expenses cannot be determined at the present time and will depend on numerous factors including the type of real estate asset acquired, the aggregate purchase price paid to acquire the real estate asset, the aggregate amount borrowed, if any, to acquire the real estate asset, the number of real estate assets acquired, and the type of consideration, cash or common stock, used to pay the fees and expenses.

 

As of August 31, 2005, IREIC was our only stockholder.  On October 20, 2004, we issued 20,000 shares of our common stock for $10.00 per share, or an aggregate purchase price of $200,000, to IREIC in connection with our formation.

 

12



 

QUESTIONS AND ANSWERS ABOUT THE OFFERING

 

Q:  What is Inland American Real Estate Trust, Inc.?

 

A:  Inland American Real Estate Trust, Inc., which we sometimes refer to as the Company, was formed on October 4, 2004 to acquire commercial real estate, primarily retail properties and multi-family, office and industrial buildings, located in the United States and Canada.  We may acquire these assets directly by purchasing the property also known as a “fee interest” or indirectly by purchasing interests, including controlling interests, in real estate investment trusts, or REITs, or other “real estate operating companies” that own these assets, such as real estate management companies and real estate development companies.  See “Management – Property Acquisition Agreement” for a more complete definition of “real estate operating company.”  We also may invest in other real estate assets such as collateralized mortgage-backed securities.  Investments in collateralized mortgage-backed securities, such as bonds issued by the Government National Mortgage Association, or GNMA, or real estate mortgage investment conduits also known as REMICs, may increase our exposure to credit and interest rate risk.  See “Risk Factors – Risks Related to Our Business” for a more detailed discussion of these risks.  In addition, we may make loans to affiliates of, or entities sponsored by, IREIC.  These loans may be secured by first or second mortgages on commercial real estate owned by the entity or a pledge of ownership interests in the entity owning commercial real estate.  In no event will the aggregate amount of all loans made to any of these affiliates or entities exceed an amount equal to eighty-five percent (85.0%) of the appraised value of the property or the entity securing the loan.  We will not have any employees but instead will be managed by our Business Manager, Inland American Business Manager & Advisor, Inc.  We intend to be taxed as a REIT for federal and state income tax purposes.

 

Q:  What kind of offering is this?

 

A:  We are offering a minimum of 200,000 shares and a maximum of 500,000,000 shares at a price of $10.00 per share on a “best efforts” basis.  We also are offering up to 40,000,000 shares at a purchase price of $9.50 per share to stockholders who elect to participate in our distribution reinvestment plan.

 

Q:  How does a “best efforts” offering work?

 

A:  A “best efforts” offering means that an underwriter, broker-dealer, including our dealer manager or any soliciting dealer, or other person may, but is not obligated to, purchase any specific number or dollar amount of shares provided that the purchases comply with NASD regulations.  Therefore, we cannot guarantee the sale of any minimum number of shares.  Prior to the time we sell at least 200,000 shares, subscription payments will be placed in an escrow account with our escrow agent, LaSalle Bank, N.A.  If we are not able to sell at least 200,000 shares by August 31, 2006, which is one year from the original effective date of this prospectus, we will terminate this offering and all funds in the escrow account, including any interest earned on the funds, will be returned to subscribers within ten (10) business days following the termination date.  Common stock purchased by any of our officers, directors or affiliates, or by our dealer manager or any soliciting dealer, will not count toward satisfying the minimum offering.  If you choose to purchase shares in this offering, you will need to fill out a subscription agreement, in the form attached to this prospectus as Appendix C-1 and pay for the shares at the time you subscribe.  If you purchase shares after the minimum offering amount is sold, the escrow agent will hold your funds, along with those of other similar subscribers, until we accept your subscription.  Generally, we accept or reject subscriptions within ten (10) days of receipt.

 

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Q:  How long will the offering last?

 

A:  This offering will not last beyond August 31, 2006 unless we decide to extend the offering until not later than August 31, 2007, in any jurisdiction that allows us to extend the offering.  All jurisdictions, except California, Florida, Maine, Ohio, Guam and Puerto Rico, allow us to extend the offering for an additional year either automatically or by paying a renewal fee.  We will notify investors of any extension via a supplement to this prospectus.

 

Q:  Who can buy shares?

 

A:  Anyone who receives this prospectus can buy shares provided that they satisfy the minimum suitability standards described elsewhere in this prospectus and offer to purchase the minimum required number of shares at a price of $10.00 per share.

 

Q:  Will I receive a stock certificate?

 

A:  No, unless expressly authorized by our board of directors.  In this offering, we anticipate that all common stock will be issued in book entry form only.  The use of book entry registration protects against loss, theft or destruction of stock certificates and reduces the offering costs.

 

Q:  Will fractional shares be issued?

 

A:  We will issue fractional shares only in connection with purchases of common stock made through our distribution reinvestment plan.  Otherwise, only whole shares of common stock will be sold in this offering.

 

Q:  Is there any minimum required investment?

 

A:  Yes.  Individuals must initially invest at least $3,000 and tax-exempt entities must initially invest at least $1,000.  The minimum amount of any subsequent investments will be $100.

 

Q:  After I subscribe for shares, can I change my mind and withdraw my money?

 

A:  Prior to the time we sell at least 200,000 shares or terminate the offering, you may rescind your subscription.  If you choose to rescind your subscription, all subscription payments held in escrow for your benefit will be returned to you by the escrow agent within ten (10) business days of being notified by us of your election to rescind.  You will not be able to rescind your subscription after we sell at least 200,000 shares.  Purchases of common stock by any of our officers, directors and affiliates, or by our managing dealer or any soliciting dealer, will not count toward satisfying the minimum offering.

 

Q:  If I buy shares in the offering, how can I sell them?

 

A:  We are not listing the shares for trading on any national securities exchange or quotation on a national market system and do not expect to do so in the near future.  A public market may never develop.  You may not be able to sell your shares when you desire or at a price equal to or greater than the offering price.

 

Our share repurchase program is designed to provide stockholders with limited, interim liquidity by enabling them to sell their shares back to us.  We may repurchase shares through the program, from time to time, at prices ranging from $9.25 per share for stockholders who have owned shares for at least one year to $10.00 per share for stockholders who have owned shares for at least four years.  Stockholders

 

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who have held their shares for at least one year may request that we repurchase any whole number of shares by submitting a written repurchase request to Ms. Roberta S. Matlin, Vice President of Administration, Inland American Real Estate Trust, Inc., 2901 Butterfield Road, Oak Brook, Illinois 60523.  We will effect all repurchases on the last business day of the calendar month or any other business day that may be established by our board of directors.

 

Our obligation to repurchase shares under the share repurchase program is conditioned upon our having sufficient funds available to complete the repurchase.  We will use offering proceeds from our public offerings, as well as proceeds from our distribution reinvestment plan and other operating funds, if any, as the board, in its sole discretion, may reserve for the purpose of funding the share repurchase program.  In addition, we will limit the number of shares repurchased during any consecutive twelve (12) month period to five percent (5.0%) of the number of outstanding shares of common stock at the beginning of that twelve (12) month period.  The share repurchase program will be terminated if our shares become listed for trading on a national securities exchange or included for quotation on a national market system or if our board determines that it is in our best interest to terminate the share repurchase program.  We may amend or modify any provision of the program at any time in our board’s discretion.

 

Q:  What will you do with the proceeds from this offering?

 

A:  Our use of proceeds will depend on the number of shares sold in the offering.  After paying the fees and expenses of the offering, we plan to use the remaining proceeds to acquire interests in commercial real estate, including acquiring REITs or other “real estate operating companies,” and other real estate assets such as collateralized mortgage-backed securities.  In addition, we may make loans to affiliates of, or entities sponsored by, IREIC.  These loans may be secured by first or second mortgages on commercial real estate owned by the entity or a pledge of ownership interests in the entity owning commercial real estate.  In no event will the aggregate amount of all loans made to any of these affiliates or entities exceed an amount equal to eighty-five percent (85.0%) of the appraised value of the property or the entity securing the loan.  Aside from these requirements, we do not have, and do not expect to adopt, any policies as to the amount or percentage of assets that will be used to make loans to affiliates of, or entities sponsored by, IREIC.  Our investment policies and strategies are very broad and do not require us to invest any specific amount or percentage of assets in any one type of investment.  Further, we do not expect to adopt any policies as to the amount or percentage of assets that will be invested in commercial real estate, entities owning commercial real estate or other real estate assets.  Prior to investing in commercial real estate, we will invest proceeds received from this offering in short-term, highly liquid investments.  These short-term investments typically yield less than investments in commercial real estate.  Assuming all 500,000,000 shares are sold at a price of $10.00 per share in the “best efforts” portion of the offering, we expect to have approximately $4,349,500,000 of net offering proceeds available for investment.  If the minimum of 200,000 shares is sold in the “best efforts” portion of the offering, we expect to have approximately $1,670,000 of net offering proceeds available for investment.

 

Q:  What is the experience of the officers and directors?

 

A:  Our management team has substantial experience in all aspects of acquiring, owning, managing and operating commercial real estate and other real estate assets across diverse property types, as well as a broad range of experience in financing real estate assets.

 

Q:  How will you select investments and make investment decisions?

 

A:  Our Business Manager will have the authority, subject to the direction and oversight of our board of directors, to make all of our investment decisions.

 

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Q:  If I buy shares, will I receive distributions and, if so, how often?

 

A:  We intend to make regular cash distributions to our stockholders, typically on a monthly basis.  The actual amount and timing of distributions will be determined by our board of directors in its discretion and typically will depend on the amount of distributable funds, which will depend on items such as current and projected cash requirements and tax considerations.  As a result, our distribution rate and payment frequency may vary from time to time.  However, in order to remain qualified as a REIT, we must make distributions equal to at least ninety percent (90.0%) of our “REIT taxable income” each year.  We anticipate that distributions will commence no later than forty-five (45) days after the sale of the minimum offering.  During the early stages of our operations, we may not have sufficient cash on-hand to pay distributions.  Therefore, we may need to borrow funds to make cash distributions to you.  If the aggregate amount of cash distributed in any given year exceeds the amount of our “REIT taxable income” generated during the year, the excess amount will be deemed a return of capital.

 

Q:  Are distributions I receive taxable?

 

A:  Yes, distributions that you receive will be considered ordinary income to the extent they come from current and accumulated earnings and profits.  However, because depreciation expense reduces taxable income but does not reduce cash available for distribution, we expect a portion of your distributions will be considered a return of capital for tax purposes.  These amounts will not be subject to tax immediately but will instead reduce the tax basis of your investment in effect deferring a portion of your tax until you sell your shares or we liquidate.  Because each investor’s tax implications are different, you should consult with your tax advisor.

 

Q:  When will I get my tax information?

 

A:  Your Form 1099 tax information will be mailed by January 31st of each year.

 

Q:  Do you have a reinvestment program through which I can reinvest my distributions in additional shares?

 

A:  Yes, our distribution reinvestment plan allows investors to reinvest distributions in additional shares at $9.50 per share.  The terms of this plan may, however, be amended or the plan terminated in the sole discretion of our board.

 

Q:  Who can help answer questions?

 

A:  If you have more questions about the offering or if you would like additional copies of this prospectus, you should contact your registered representative or our dealer manager:

 

Inland Securities Corporation
2901 Butterfield Road
Oak Brook, Illinois  60523
(630) 218-8000
Attention:  Ms. Roberta S. Matlin

 

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RISK FACTORS

 

An investment in our shares involves significant risks and is suitable only for those persons who understand the following material risks and who are able to bear the risk of losing their entire investment.  You should consider the following material risks in addition to other information set forth elsewhere in this prospectus before making your investment decision.

 

Risks Related to the Offering

 

We have no prior operating history and the prior performance of programs sponsored by IREIC may not be an accurate barometer of our future results.

 

We have no operating history.  You should not rely on the past performance of other real estate investment programs sponsored by IREIC to predict our future results.

 

There is no public market for our shares, the offering price was arbitrarily established and you may not be able to sell your shares at a price that equals or exceeds the offering price.

 

There is no public market for our shares and no assurance that one may develop.  We do not expect that our shares will be listed for trading on a national securities exchange or included for quotation on a national market system in the near future.  Our board will determine when, and if, to apply to have our shares of common stock listed for trading on a national securities exchange or included for quotation on a national market system, subject to satisfying existing listing requirements.  Our board does not anticipate evaluating a listing until at least 2010.  Further, our articles limit a person or group from owning more than 9.8% of our common stock without prior approval of our board.  These restrictions may inhibit your ability to sell your shares.  Our board of directors arbitrarily determined the offering price in its sole discretion based on:

 

                                          the offering price of other REITs organized by IREIC;

 

                                          the range of offering prices of other REITs that do not have a public trading market; and

 

                                          the recommendation of Inland Securities Corporation.

 

The offering price of our shares may be higher or lower than the price at which the shares would trade if they were listed on a national securities exchange or actively traded by dealers or marketmakers.  Further, there is no assurance that you will be able to sell any shares that you purchase in the offering at prices that equal or exceed the offering price, if at all.  You may lose money on any sale.  See “Plan of Distribution – General” for additional discussion regarding the offering price of our shares.

 

This is a “blind pool” offering and you will not have the opportunity to evaluate our investments before we make them.

 

Because we have not yet acquired or identified any real estate assets that we may acquire, we are not able to provide you with information that you may want to evaluate before deciding to invest in our shares.  Our investment policies and strategies are very broad and permit us to invest in any type of commercial real estate including developed and undeveloped properties, entities owning these assets or other real estate assets regardless of geographic location or property type.  Our board has absolute discretion in implementing these policies and strategies, subject to the restrictions on investment objectives and policies set forth in our articles of incorporation.  See “Business and Policies – Investment Strategy” for additional discussion regarding our investment policies and strategies.

 

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This is a “best efforts” offering and if we are unable to raise substantially more than the minimum offering, the number and type of investments will be limited.

 

If we are unable to raise substantially more than the minimum offering amount, we will make fewer investments resulting in a less diversified portfolio in terms of the number and type of investments owned and the geographic regions in which our investments are located.  A total of 500,000,000 shares are being offered on a “best efforts” basis, meaning the brokers participating in the offering are only required to use their best efforts to sell our shares and have no firm commitment or obligation to purchase any of the shares.  As a result, we cannot assure you that we will sell anything more than the minimum offering amount.  Thus, the potential that our profitability will be affected by the performance of any one of our investments will increase.  Additionally, we are generally not limited in the number or size of our investments or the percentage of net proceeds we may dedicate to a single investment. Your investment in our shares will be subject to greater risk to the extent that we lack a diversified portfolio of investments.  In addition, if we are unable to raise substantial funds, our fixed operating expenses, as a percentage of gross income, will be higher, and our financial condition, results of operations and ability to pay distributions to you could be adversely affected.  In the event we sell only the minimum offering, we may not have sufficient funds to acquire any properties.

 

Prior to the time we sell the minimum offering, all subscription payments will be placed into an escrow account.  If we are not able to sell the minimum offering by August 31, 2006, we will terminate the offering and all funds in the escrow account, including any interest earned on these funds, will be returned to subscribers within ten (10) business days.  If we sell more than the minimum offering, subscription payments will be released to us only after we accept a subscriber’s subscription agreement.  Thus, subscription payments will not be immediately available to us for investment, which could have an adverse effect on our financial condition, results of operations and ability to pay distributions to you.  See “Distribution Reinvestment Plan and Share Repurchase Program – Share Repurchase Program” for additional discussion regarding amendments to, or suspension or termination of, our share repurchase program.

 

Our share repurchase program may be amended, suspended or terminated by our board of directors at any time without stockholder approval, reducing the potential liquidity of your investment.

 

Our share repurchase program is designed to provide eligible stockholders with limited, interim liquidity by enabling them to sell their shares back to us.  Our board of directors, however, may amend, suspend or terminate the share repurchase program at any time in its sole discretion without stockholder approval.  Any amendments to, or suspension or termination of, the share repurchase program may restrict or eliminate your ability to have us repurchase your shares and otherwise prevent you from liquidating your investment.

 

Risks Related to Our Business

 

We compete with numerous other parties or entities for real estate assets and tenants.

 

We will compete with numerous other persons or entities seeking to buy real estate assets including REITs or other real estate operating companies or to attract tenants to properties already owned.  These persons or entities may have greater experience and financial strength.  There is no assurance that we will be able to acquire real estate assets or attract tenants on favorable terms, if at all.  For example, our competitors may be willing to offer space at rental rates below our rates, causing us to lose existing or potential tenants and pressuring us to reduce our rental rates to retain existing tenants or convince new tenants to lease space at our properties.  All of these factors could adversely affect our results of operations, financial condition and ability to pay distributions to you.

 

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Delays in locating suitable investments could adversely affect the return on your investment.

 

We could suffer from delays in locating suitable investments.  Delays may occur, for example, as a result of our relying on our Business Manager and its affiliates including Inland Real Estate Acquisitions at times when their employees are simultaneously seeking to locate suitable investments for other programs sponsored by IREIC.  Delays in selecting, acquiring and developing real estate assets could adversely affect your returns.  In addition, when we acquire a property prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and rent available space.  Therefore, cash flow attributable to those particular properties could be delayed.  If we are unable to invest our offering proceeds in income-producing real estate assets in a timely manner, our ability to pay distributions to you will be adversely affected.  As of the date of this prospectus, we have not identified specific real estate assets that we will purchase with the proceeds of this offering.  Because we are conducting this offering on a “best efforts” basis over several months, our ability to commit to purchase specific real estate assets will depend partially on the amount of net proceeds realized from this offering.  We also may experience delays as a result of selling shares or negotiating or obtaining the necessary purchase documentation to close an acquisition.  We will invest all proceeds we receive from this offering in short-term, highly-liquid investments until invested in real estate assets.  These short-term investments typically yield less than investments in commercial real estate.  We intend to use the principal amount of these investments, and any returns generated on these investments, to pay fees in connection with this offering and the expenses of our Business Manager, Property Managers and other affiliates of IREIC in connection with acquiring real estate assets for us.  Because cash generated by our short term investments may not be reinvested in additional short-term investments, our percentage return on short-term investments may, therefore, be less than the return an investor may otherwise realize by directly investing in similar types of short-term investments.

 

Your interest in us will be diluted if we issue additional shares.

 

Stockholders will not have preemptive rights to any shares issued by us in the future.  Our articles authorize us to issue 1.5 billion shares of capital stock, of which 1.46 billion shares will be designated as common stock and forty million (40,000,000) will be designated as preferred stock.  We may, in the sole discretion of our board:

 

                                          sell additional shares in this or future offerings;

 

                                          issue equity interests in a private offering of securities;

 

                                          issue shares of our capital stock on the exercise of options granted to our independent directors or employees of our Business Manager, Property Managers, Inland Real Estate Acquisitions or its or their affiliates;

 

                                          issue shares of our capital stock in exchange for real estate assets; or

 

                                          issue shares of our capital stock to our Business Manager or Property Managers in connection with any business combination between us and either of them.

 

In addition, we may issue shares to our Business Manager or its designee to pay certain acquisition fees.  See “Description of Securities – Issuance of Additional Securities and Debt Instruments” for additional discussion regarding the issuance of additional shares.

 

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Your investment will be directly affected by general economic and regulatory factors that impact real estate investments.

 

Because we will invest primarily in commercial real estate, our financial condition, results of operations and our ability to pay distributions to you will be directly affected by general economic and regulatory factors impacting real estate investments.  These factors are generally outside of our control.  Among the factors that could impact our real estate assets and the value of your investment are:

 

                                          local oversupply, increased competition or reduced demand for real estate assets of the type that we will own;

 

                                          financial market conditions;

 

                                          inability to collect rent from tenants;

 

                                          vacancies or inability to rent space on favorable terms;

 

                                          inflation and other increases in operating costs, including insurance premiums, utilities and real estate taxes;

 

                                          adverse changes in the laws and regulations applicable to us;

 

                                          the relative illiquidity of real estate investments;

 

                                          changing market demographics;

 

                                          an inability to acquire and finance properties on favorable terms;

 

                                          acts of God, such as earthquakes, floods or other uninsured losses; and

 

                                          changes or increases in interest rates and availability of permanent mortgage funds.

 

In addition, periods of economic slowdown or recession, or declining demand for real estate, or the public perception that any of these events may occur, could result in a general decline in rents or increased defaults under existing leases, which could adversely affect our financial condition, results of operations and ability to pay distributions to you.

 

We may invest directly in, or acquire REITs or other real estate operating companies that invest in, mortgage-related assets and, therefore, may be subject to the risks associated with mortgage-related securities.

 

We may invest directly in, or acquire REITs or other real estate operating companies that invest in, mortgage-related assets.  There are various risks associated with mortgage-related assets including:

 

                                          fluctuations in value due to changes in interest rates;

 

                                          interest rate caps on adjustable mortgage-backed securities;

 

                                          increases in levels of prepayments;

 

                                          fluctuations in the market value of mortgage-backed securities;

 

                                          increases in borrower defaults;

 

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                                          decreases in the value of property underlying mortgage-backed securities; and

 

                                          conflicts between the debt structure used to acquire a mortgage and the debt structure of the mortgages.

 

Borrowings may reduce the funds available for distribution and increase the risk of loss since defaults may cause us to lose the properties securing the loans.

 

We may, in some instances, acquire real estate assets by using either existing financing or borrowing new monies.  Our articles generally limit the total amount we may borrow to three hundred percent (300.0%) of our net assets.  See “Summary of Our Organizational Documents – Restrictions on Borrowing” for additional discussion regarding these restrictions.  In addition, we may obtain loans secured by some or all of our properties or other assets to fund additional acquisitions or operations including to satisfy the requirement that we distribute at least ninety percent (90.0%) of our annual “REIT taxable income” to our stockholders, or as is otherwise necessary or advisable to assure that we continue to qualify as a REIT for federal income tax purposes.  Payments required on any amounts we borrow will reduce the funds available for distribution to our stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with amounts we borrow.

 

Defaults on loans secured by a property we own may result in foreclosure actions initiated by lenders and our loss of the property or properties securing the loan that is in default.  For tax purposes, a foreclosure would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the property.  If the outstanding balance of the debt exceeds our tax basis in the property, we would recognize taxable income on the foreclosure but would not receive any cash proceeds.  We also may fully or partially guarantee any monies that subsidiaries borrow to purchase or operate real estate assets.  In these cases, we will be responsible to the lender for repaying the loans if the subsidiary is unable to do so.  If any mortgages contain cross collateralization or cross default provisions, more than one property may be affected by a default.  If any of our properties are foreclosed upon due to a default, our financial condition, results of operations and ability to pay distributions to you will be adversely affected.

 

We will compete with real estate investment programs sponsored by IREIC for the time and services of personnel.

 

IREIC has sponsored other REITs, private real estate equity programs, exchange programs and private placement mortgage and note programs, and may in the future sponsor other real estate investment programs.  These programs may compete with us for the time and attention of persons employed by our Business Manager, Inland Real Estate Acquisitions or our Property Managers and any of these other programs.  In addition, two of our directors, Ms. Gujral and Mr. Parks, who also serve as our president and chairman of the board, respectively, are employed by IREIC or its affiliates.  These persons may have conflicts in allocating their time and attention between us and these other programs or in acquiring properties or negotiating with tenants.  For example, a real estate asset or tenant may be directed to a competing program even though we may desire to acquire the property or to enter into, or retain, a lease with the tenant in question.  See “Conflicts of Interest” generally for additional discussion regarding competition with real estate investment programs sponsored by IREIC.

 

There are conflicts of interest between us and affiliates of our sponsor that may affect our acquisition of properties and financial performance.

 

Our operation and management may be influenced or affected by conflicts of interest arising out of our relationship with entities previously sponsored by IREIC.  These entities include Inland Retail Real Estate Trust, Inc., Inland Western Retail Real Estate Trust, Inc., Inland Real Estate Corporation and other entities formed or to be formed by The Inland Group, Inc.  The business plan of Inland Retail Real Estate

 

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Trust, Inc. focuses on purchasing shopping centers located generally east of the Mississippi River.  The business plan of Inland Western Retail Real Estate Trust, Inc. focuses on purchasing the same type of shopping centers located generally west of the Mississippi River.  The business plan of Inland Real Estate Corporation focuses on purchasing this type of shopping center within 400 miles of Oak Brook, Illinois.  Each of these entities also may purchase single tenant net-leased properties located anywhere in the United States.  We will compete with these entities to the extent we seek to acquire shopping centers and single tenant net-leased properties.  The resolution of conflicts in favor of other entities would result in our losing investment opportunities.  See “Conflicts of Interest” generally for additional discussion regarding conflicts that may affect our acquisition of properties and financial performance.

 

If we are unable to borrow at favorable rates, we may not be able to acquire new properties, REITs or other real estate operating companies, which could reduce our income and the amount of distributions that we can make to you.

 

If we are unable to borrow money at favorable rates, we may be unable to acquire additional real estate assets or refinance existing loans at maturity.  Further, we may enter into loan agreements or other credit arrangements that require us to pay interest on amounts we borrow at variable or “adjustable” rates.  Increases in interest rates would increase our interest costs.  If interest rates are higher when we refinance our loans, our expenses will increase and we may not be able to pass on this added cost in the form of increased rents, thereby reducing our cash flow and the amount available for distribution to you.  Further, during periods of rising interest rates, we may be forced to sell one or more of our properties in order to repay existing loans, which may not permit us to maximize the return on the particular properties being sold.

 

Lenders may restrict certain aspects of our operations, which could, among other things, limit our ability to make distributions to you.

 

The terms and conditions contained in any of our loan documents may require us to maintain cash reserves, limit the aggregate amount we may borrow on a secured and unsecured basis, require us to satisfy restrictive financial covenants, prevent us from entering into certain business transactions, such as a merger, sale of assets or other business combination, restrict our leasing operations or require us to obtain consent from the lender to complete transactions or make investments that are ordinarily approved only by our board of directors.  In addition, secured lenders may restrict our ability to discontinue insurance coverage on a mortgaged property even though we may believe that the insurance premiums paid to insure against certain losses, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, are greater than the potential risk of loss.  Any restrictions on us or our operations also could limit our ability to pay distributions to you.

 

If we do not have sufficient working capital, we will have to obtain financing from other sources.

 

If we do not have sufficient working capital, we will have to obtain financing from sources affiliated with our sponsor or from unaffiliated third parties to fund our cash requirements.  We cannot assure you that sufficient financing will be available or, if available, will be available on acceptable terms.  Additional borrowing for working capital purposes will increase our interest expense and could have an adverse effect on our financial condition, results of operations and ability to pay distributions to you.

 

We may invest in collateralized mortgage-backed securities, which may increase our exposure to credit and interest rate risk.

 

We may invest in collateralized mortgage-backed securities, which may increase our exposure to credit and interest rate risk.  We have not adopted, and do not expect to adopt, any formal policies or procedures designed to manage risks associated with our investments in collateralized mortgage-backed

 

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securities.  In this context, credit risk is the risk that borrowers will default on the mortgages underlying the collateralized mortgage-backed securities.  We intend to manage this risk by investing in collateralized mortgage-backed securities guaranteed by U.S. government agencies, such as the Government National Mortgage Association (GNMA), or U.S. government sponsored enterprises, such as the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation (FHLMC).  Interest rate risk occurs as prevailing market interest rates change relative to the current yield on the collateralized mortgage-backed securities.  For example, when interest rates fall, borrowers are more likely to prepay their existing mortgages to take advantage of the lower cost of financing.  As prepayments occur, principal is returned to the holders of the collateralized mortgage-backed securities sooner than expected, thereby lowering the effective yield on the investment.  On the other hand, when interest rates rise, borrowers are more likely to maintain their existing mortgages.  As a result, prepayments decrease, thereby extending the average maturity of the mortgages underlying the collateralized mortgage-backed securities.  We intend to manage interest rate risk by purchasing collateralized mortgage-backed securities offered in tranches, or with sinking fund features, that are designed to match our investment objectives.  If we are unable to manage these risks effectively, our results of operations, financial condition and ability to pay distributions to you will be adversely affected.  See “Business and Policies” for additional discussion regarding collateralized mortgage-backed securities.

 

To hedge against interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective and may reduce the overall returns on your investment.

 

We may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets and investments in collateralized mortgage-backed securities.  Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements.  Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from our currently anticipated hedging strategy.

 

 To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we will be exposed to credit risk, basis risk and legal enforceability risks; however, we have not adopted, and do not expect to adopt, any formal policies or procedures designed to manage risks associated with the use of derivative financial instruments.  In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract.  If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us.  We intend to manage credit risk by dealing only with major financial institutions that have high credit ratings.  Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective.  We intend to manage basis risk by matching, to a reasonable extent, the contract index to the index upon which the hedged asset or liability is based.  Finally, legal enforceability risks encompass general contractual risks including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract.  We intend to manage legal enforceability risks by ensuring, to the best of our ability, that we contract with reputable counterparties and that each counterparty complies with the terms and conditions of the derivative contract.  If we are unable to manage these risks effectively, our results of operations, financial condition and ability to pay distributions to you will be adversely affected.

 

The use of derivative financial instruments may reduce the overall returns on your investments.  We have limited experience with derivative financial instruments and may recognize losses in our use of derivative financial instruments.  Any loss will adversely affect our results of operations, financial condition and ability to pay distributions to you.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Quantitative and Qualitative Disclosures about Market Risk” for additional discussion regarding derivative financial instruments.

 

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The total amount we may borrow is limited by our articles of incorporation.

 

Our articles generally limit the total amount we may borrow to three hundred percent (300.0%) of our net assets.  This limit could adversely affect our business, including:

 

                                          limiting our ability to purchase real estate assets;

 

                                          causing us to lose our REIT status if we cannot borrow to fund the monies needed to satisfy the REIT distribution requirements;

 

                                          causing operational problems if there are cash flow shortfalls for working capital purposes; and

 

                                          causing the loss of a property if, for example, financing is necessary to cure a default on a mortgage.

 

See “Summary of Our Organizational Documents – Restrictions on Borrowing” for additional discussion regarding restrictions on borrowing.

 

We may lend money to affiliates of, or entities sponsored by, IREIC.

 

If we have excess working capital, we may, from time to time, lend money to affiliates of, or entities sponsored by, IREIC in accordance with our investment policies.  These loan arrangements will not be negotiated at arm’s length and may contain terms and conditions that are not in our best interest and would not otherwise be applicable if we entered into arm’s length arrangements with a third-party borrower.  Defaults on any of these loans could have an adverse effect on our financial condition, results of operations and ability to pay distributions to you.

 

There are inherent risks with real estate investments.

 

Investments in real estate assets are subject to varying degrees of risk.  For example, an investment in real estate cannot generally be quickly converted to cash, limiting our ability to promptly vary our portfolio in response to changing economic, financial and investment conditions.  Investments in real estate assets also are subject to adverse changes in general economic conditions which reduce the demand for rental space.  Other factors also affect the value of real estate assets, including:

 

                                          federal, state or local regulations and controls affecting rents, zoning, prices of goods, fuel and energy consumption, water and environmental restrictions;

 

                                          labor and material costs; and

 

                                          the attractiveness of a property to tenants.

 

Further, if our investments do not generate revenues sufficient to meet operating expenses, we may have to borrow amounts to cover fixed costs, and our cash available for distributions will be adversely affected.

 

We will depend on tenants for the majority of our revenue, and lease terminations or the exercise of any co-tenancy rights could have an adverse effect.

 

Defaults on lease payment obligations by our tenants would cause us to lose the revenue associated with that lease and require us to find an alternative source of revenue to pay our mortgage indebtedness and prevent a foreclosure action.  If a tenant defaults or declares bankruptcy, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our

 

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investment.  Termination of significant leases also would have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.

 

Further, we may enter into leases containing co-tenancy provisions.  Co-tenancy provisions may allow a tenant to exercise certain rights if, among other things, another tenant fails to open for business, delays its opening or ceases to operate after being open, or if a percentage of the property’s gross leasable space or a particular portion of the property is not leased or subsequently becomes vacant.  A tenant exercising co-tenancy rights may be able to abate minimum rent, reduce its share or the amount of its payments of common area operating expenses and property taxes or cancel its lease.  The exercise of any co-tenancy rights by tenants could have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.

 

We may incur additional costs in acquiring or re-leasing properties.

 

We may invest in properties designed or built primarily for a particular tenant or a specific type of use known as a “single-user facility.”  If the tenant fails to renew its lease or defaults on its lease obligations, we may not be able to readily market a single-user facility to a new tenant without making substantial capital improvements or incurring other significant re-leasing costs.  We also may incur significant litigation costs in enforcing our rights as a landlord against the defaulting tenant.  These consequences would adversely affect our revenues and reduce the cash available for distribution to our stockholders.

 

We may be restricted from re-leasing space.

 

In the case of leases with retail tenants, the majority of the leases will contain provisions giving the particular tenant the exclusive right to sell particular types of merchandise or provide specific types of services within the particular retail center.  These provisions may limit the number and types of prospective tenants interested in leasing space in a particular retail property.

 

We may be unable to sell assets if or when we decide to do so.

 

Our ability to sell real estate assets will be affected by many factors, such as general economic conditions, the availability of financing, interest rates and the supply and demand for the particular asset type.  These factors are beyond our control.  We cannot predict whether we will be able to sell any real estate asset on favorable terms and conditions, if at all, or the length of time needed to sell an asset.

 

We may be contractually obligated to purchase property even if we are unable to secure financing for the acquisition.

 

We expect to finance a portion of the purchase price for each property that we acquire.  However, to ensure that our offers are as competitive as possible, we do not expect to enter into contracts to purchase property that include financing contingencies.  Thus, we may be contractually obligated to purchase a property even if we are unable to secure financing for the acquisition.  In this event, we may choose to close on the property by using cash on hand, which would result in less cash available for our operations and distributions to stockholders.  Alternatively, we may choose not to close on the acquisition of the property and default on the purchase contract.  If we default on any purchase contract, we could lose our earnest money and become subject to liquidated or other contractual damages and remedies.  These consequences would adversely affect our revenues, diminish our portfolio and reduce the cash available for distribution to our stockholders.

 

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The availability and timing of cash distributions is uncertain and there is no assurance that sufficient cash will be available to pay distributions.

 

We intend to pay regular cash distributions to our stockholders, typically on a monthly basis.  The actual amount and timing of distributions will be determined by our board of directors in its discretion and typically will depend on the amount of funds available for distribution, which will depend on items such as current and projected cash requirements and tax considerations.  As a result, our distribution rate and payment frequency may vary from time to time.  During the early stages of our operations, we may not have sufficient cash available to pay distributions.  Therefore, we may need to borrow funds to make cash distributions in order to maintain our status as a REIT, which may adversely affect our results of operations and financial condition.  Further, if the aggregate amount of cash distributed in any given year exceeds the amount of our “REIT taxable income” generated during the year, the excess amount will be deemed a return of capital.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Distributions” for additional discussion regarding distributions.

 

Although IREIC or its affiliates previously have agreed to forgo or defer advisor fees in an effort to maximize cash available for distribution by the other REITs sponsored by IREIC, our Business Manager is under no obligation, and may not agree, to forgo or defer its business management fee.

 

From time to time, IREIC or its affiliates agreed to either forgo or defer a portion of the business management and advisory fee due them from the other REITs sponsored by IREIC to ensure that each REIT generated sufficient cash from operating, investing and financing activities to pay distributions while continuing to raise capital and acquire properties.  In each case, IREIC or its affiliates determined the amounts that would be forgone or deferred in their sole discretion and, in some cases, were paid the deferred amounts in later periods.  In the case of Inland Western, IREIC also advanced monies to Inland Western to pay distributions.  See “Prior Performance of IREIC Affiliates – Publicly Registered REITs” for a greater discussion of the amounts forgone, deferred or advanced.  As described herein, our Business Manager is entitled to receive a business management fee of up to one percent (1.0%) of our “average invested assets.”  There is no assurance that our Business Manager will agree to forgo, defer or advance monies to enable us to pay distributions while we are raising capital and acquiring real estate assets.

 

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, and other acts of violence or war may affect the markets in which we operate, our operations and our profitability.

 

Terrorist attacks may negatively affect our operations and your investment.  We may acquire real estate assets located in areas that are susceptible to attack.  These attacks may directly impact the value of our assets through damage, destruction, loss or increased security costs.  Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage to fund any losses we may incur.  Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims.  Further, certain losses resulting from these types of events are uninsurable or not insurable at reasonable costs.

 

More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the United States and worldwide financial markets and economy, all of which could adversely affect our tenants’ ability to pay rent on their leases or our ability to borrow money or issue capital stock at acceptable prices and have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.

 

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An increase in real estate taxes may decrease our income from properties.

 

From time to time the amount we pay for property taxes will increase as either property values increase or assessment rates are adjusted.  Increases in a property’s value or in the assessment rate will result in an increase in the real estate taxes due on that property.  If we are unable to pass the increase in taxes through to our tenants, our net operating income for the property will decrease, which could have a material adverse effect on our financial condition, results of operation and ability to pay distributions to you.

 

Uninsured losses or premiums for insurance coverage may adversely affect your returns.

 

We will attempt to adequately insure all of our properties against casualty losses.  There are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments.  Risks associated with potential acts of terrorism could sharply increase the premiums we pay for coverage against property and casualty claims.  Additionally, mortgage lenders sometimes require commercial property owners to purchase specific coverage against terrorism as a condition for providing mortgage loans.  These policies may not be available at a reasonable cost, if at all, which could inhibit our ability to finance or refinance our properties.  In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses.  If we incur any casualty losses not fully covered by insurance, the value of our assets will be reduced by the amount of the uninsured loss.  In addition, other than any reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property, and we cannot assure you that any of these sources of funding will be available to us in the future.  See “Business and Policies – Insurance” for additional discussion regarding uninsured losses.

 

Our operating results may be negatively affected by potential development and construction delays and the resulting increase in costs and risks.

 

Investing in properties under development will subject us to uncertainties such as the ability to achieve desired zoning for development, environmental concerns of governmental entities or community groups, ability to control construction costs or to build in conformity with plans, specifications and timetables.  Delays in completing construction also could give tenants the right to terminate preconstruction leases for space at a newly-developed project.  We may incur additional risks when we make periodic progress payments or advance other costs to third parties prior to completing construction.  These and other factors can increase the costs of a project or cause us to lose our investment. In addition, we will be subject to normal lease-up risks relating to newly constructed projects. Furthermore, we must rely upon projections of rental income and expenses and estimates of fair market value upon completing construction when agreeing upon a price to be paid for the property at the time we acquire the property.  If our projections are inaccurate, we may pay too much for a property, and our return on investment could suffer, thus impacting our ability to pay distributions to you.  See “Business and Policies – Construction and Development Activities” for additional discussion regarding potential development and construction delays.

 

The costs of complying with environmental laws and other governmental laws and regulations may adversely affect us.

 

All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety.  These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of

 

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these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigating or remediating contaminated properties, regardless of fault or whether the original disposal was legal.  In addition, the presence of these substances, or the failure to properly remediate these substances, may adversely affect our ability to sell or rent the property or to use the property as collateral for future borrowing.

 

Some of these laws and regulations have been amended to require compliance with new or more stringent standards as of future dates.  Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to spend material amounts of money.  Future laws, ordinances or regulations may impose material environmental liability.  Further, the existing condition of our properties may be affected by tenants, the existing condition of the land, operations in the vicinity of the properties, such as the presence of underground or above-ground storage tanks, or the activities of unrelated third parties. We also are required to comply with various local, state and federal fire, health, life-safety and similar regulations.  The cost of complying or failing to comply with all of the environmental laws and other governmental laws and regulations may have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.  See “Business and Policies – Government Regulations” for additional discussion regarding environmental laws and regulations.

 

Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.

 

Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the cost of removing or remediating hazardous or toxic substances on, under or in a property.  The costs of removing or remediating could be substantial.  These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous or toxic substances.  Environmental laws also may impose restrictions on the manner in which property may be used or businesses that may be operated.  These restrictions may require us to spend substantial amounts of money.  Environmental laws provide for sanctions in the event of noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties.  Certain environmental laws and common law principles could be used to impose liability for release of, and exposure to, hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to hazardous substances.  The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could materially adversely affect our financial condition, results of operations and ability to pay distributions to you.

 

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediating the problem.

 

The presence of mold at any of our properties could require us to undertake a costly program to remediate, contain or remove the mold.  Mold growth may occur when moisture accumulates in buildings or on building materials.  Some molds may produce airborne toxins or irritants.  Concern about indoor exposure to mold has been increasing because exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. The presence of mold could expose us to liability from our tenants, their employees and others if property damage or health concerns arise, all of which could have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.

 

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Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.

 

We are not registered as an investment company under the Investment Company Act of 1940.  If we fail to maintain an exemption or other exclusion from registration as an investment company, we could, among other things, be required either (a) to substantially change the manner in which we conduct our operations to avoid registering as an investment company or (b) to register as an investment company.  If we were registered as an investment company, we would have to comply with a variety of substantive requirements that would:

 

                                          place limits on our capital structure;

 

                                          impose restrictions on specified investments;

 

                                          prohibit transactions with affiliates; and

 

                                          require us to comply with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

 

To maintain the exemption, we must engage primarily in the business of buying or investing in real estate.  These investments must be made within a year after the offering ends.  If we are unable to invest a significant portion of the proceeds of this offering in real estate assets within one year of terminating the offering, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns.  Doing so would likely reduce the cash available for distribution to you.

 

To comply with the exemptions, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise want to retain.  In addition, we may have to acquire assets that generate additional income or loss that we might not otherwise have acquired or may have to forgo opportunities to acquire assets that we would otherwise want to acquire consistent with our strategy.

 

If we were required to register as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us.  In addition, our contracts would be unenforceable unless a court was to require enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

 

The costs associated with complying with the Americans With Disabilities Act may reduce the amount of cash available to distribute to you.

 

Investment in real estate assets may also be subject to the Americans With Disabilities Act of 1990, as amended.  Under this act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons.  The act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities.  The act’s requirements could require us to remove access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages.  We will attempt to acquire properties that comply with the act or place the burden on the seller or other third party, such as a tenant, to ensure compliance with the act.  We cannot assure you that we will be able to acquire properties or allocate responsibilities in this manner.  Any monies we use to comply with the act will reduce the amount of cash available to distribute to you.  See “Business and Policies – Government Regulations” for additional discussion regarding the Americans with Disabilities Act of 1990.

 

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Sale leaseback transactions may be recharacterized in a manner unfavorable to us.

 

We may from time to time enter into a sale leaseback transaction where we purchase a property and then lease the property to the seller.  The transaction may, however, be characterized as a financing instead of a sale in the case of the seller’s bankruptcy.  In this case, we would not be treated as the owner of the property but rather as a creditor with no interest in the property itself.  The seller may have the ability in a bankruptcy proceeding to restructure the financing by imposing new terms and conditions.  The transaction also may be recharacterized as a joint venture.  In this case, we would be treated as a joint venturer with liability, under some circumstances, for debts incurred by the seller relating to the property.  Thus, recharacterization of a sale leaseback transaction could have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.

 

We may have increased exposure to liabilities as a result of any participation by us in Section 1031 Exchange Transactions.

 

We may enter into transactions that qualify for like-kind exchange treatment under Section 1031 of the Internal Revenue Code (a “1031 Exchange Transaction”).  Real estate acquired through a 1031 Exchange Transaction is commonly structured as the acquisition of real estate owned in co-tenancy arrangements with persons (1031 Participants) in tax pass-through entities, including single member limited liability companies or similar entities.  Changes in tax laws may adversely affect 1031 Exchange Transactions.  Owning co-tenancy interests involves risks generally not otherwise present with an investment in real estate such as:

 

                                          the risk that a co-tenant may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals;

 

                                          the risk that a co-tenant may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; or

 

                                          the possibility that a co-tenant might become insolvent or bankrupt, which may be an event of default under mortgage loan financing documents or allow a bankruptcy court to reject the tenants in common agreement or management agreement entered into by the co-tenants owning interests in the property.

 

Actions by a co-tenant might have the result of subjecting the property to liabilities in excess of those contemplated and may have the effect of reducing your returns.

 

If our interests become adverse to those of the other co-tenants in a 1031 Exchange Transaction, we may not have the contractual right to purchase the co-tenancy interests from the other co-tenants.  Even if we are given the opportunity to purchase the co-tenancy interests, we cannot guarantee that we will have sufficient funds available to complete a purchase.

 

In addition, we may desire to sell our co-tenancy interests in a given property at a time when the other co-tenants do not desire to sell their interests.  Therefore, we may not be able to sell our interest in a property at the time we would like to sell.  In addition, it will likely be more difficult to find a willing buyer for our co-tenancy interests in a property than it would be to find a buyer for a property we owned outright.  Further, agreements that contain obligations to acquire unsold co-tenancy interests in properties may be viewed by institutional lenders as a contingent liability against our cash or other assets, limiting our ability to borrow funds in the future.  See “Business and Policies – Joint Ventures and Other Co-Ownership Arrangements” for additional discussion regarding co-tenancies.

 

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There is no assurance that we will be able to pay or maintain cash distributions or that distributions will increase over time.

 

There are many factors that can affect the availability and timing of cash distributions to stockholders such as our ability to buy, and earn positive yields on, real estate assets, the yields on securities of other entities in which we invest, our operating expense levels, as well as many other variables.  Actual cash available for distributions may vary substantially from estimates.  There is no assurance that we will be able to pay or maintain distributions or that the amount of distributions will increase over time.  See “Description of Securities – Distributions” for additional discussion regarding distributions.

 

If we sell properties by providing financing to purchasers, we will bear the risk of default by the purchaser.

 

We may, from time to time, sell a property by providing financing to the purchaser.  There are no limits or restrictions on our ability to accept purchase money obligations secured by a mortgage as payment for the purchase price.  The terms of payment to us will be affected by custom in the area where the property being sold is located and the then-prevailing economic conditions.  If we receive promissory notes or other property in lieu of cash from property sales, the distribution of the proceeds of sales to our stockholders, or reinvestment in other properties, will be delayed until the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed.  In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.  We will bear the risk of default by the purchaser and may incur significant litigation costs in enforcing our rights against the purchaser.  Defaults by any purchaser under any financing arrangement with us could, therefore, adversely affect our financial condition, results of operations and our ability to pay distributions to you.

 

Maryland law and our organizational documents limit your right to bring claims against our officers and directors.

 

Subject to the limitations set forth in our articles, a director will not have any liability for monetary damages under Maryland law so long as he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interest, and with the care that an ordinary prudent person in a like position would use under similar circumstances.  In addition, our articles, in the case of our directors, officers, employees and agents, and the business management agreement and the property management agreements, with our Business Manager and Property Managers, respectively, require us to indemnify these persons for actions taken by them in good faith and without negligence or misconduct.  Moreover, we may enter into separate indemnification agreements with each of our directors and some of our executive officers.  As a result, we and our stockholders may have more limited rights against these persons than might otherwise exist under common law.  In addition, we may be obligated to fund the defense costs incurred by these persons in some cases.  See “Limitation of Liability and Indemnification of Directors and Officers” for additional discussion regarding claims against our officers and directors.

 

Our board of directors may, in the future, adopt certain measures under Maryland law without stockholder approval that may have the effect of making it less likely that you would receive a “control premium” for your shares.

 

Corporations organized under Maryland law are permitted to protect themselves from unsolicited proposals or offers to acquire the company.  Although our articles currently provide that we are not subject to these provisions, our stockholders could approve an amendment to our articles eliminating this restriction.  If we do become subject to these provisions in the future, our board of directors would have the power under Maryland law to, among other things, amend our articles without stockholder approval to:

 

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                                          stagger our board of directors into three classes;

 

                                          require a two-thirds vote of stockholders to remove directors;

 

                                          empower only remaining directors to fill any vacancies on the board;

 

                                          provide that only the board can fix the size of the board;

 

                                          provide that all vacancies on the board, regardless of how the vacancy was created, may be filled only by the affirmative vote of a majority of the remaining directors in office; and

 

                                          require that special stockholders meetings be called only by holders of a majority of the voting shares entitled to be cast at the meeting.

 

These provisions may discourage an extraordinary transaction, such as a merger, tender offer or sale of all or substantially all of our assets, all of which might provide a premium price for your shares.

 

Further, under the Maryland Business Combination Act, we may not engage in any merger or other business combination with an “interested stockholder” or any affiliate of that interested stockholder for a period of five years after the most recent purchase of stock by the interested stockholder.  After the five-year period ends, any merger or other business combination with the interested stockholder must be recommended by our board of directors and approved by the affirmative vote of at least:

 

                                          eighty percent (80.0%) of all votes entitled to be cast by holders of outstanding shares of our voting stock; and

 

                                          two-thirds of all of the votes entitled to be cast by holders of outstanding shares of our voting stock other than those shares owned or held by the interested stockholder unless, among other things, our stockholders receive a minimum payment for their common stock equal to the highest price paid by the interested stockholder for its common stock.

 

Our articles exempt any business combination involving us and The Inland Group or any affiliate of The Inland Group, including our Business Manager and Property Managers, from the provisions of this law.  See “Description of Securities – Certain Provisions of Maryland Corporate Law and Our Articles of Incorporation and Bylaws” for additional discussion regarding business combinations under the Maryland Business Combination Act and our articles.

 

Our articles place limits on the amount of common stock that any person may own without the prior approval of our board of directors.

 

To qualify as a REIT, no more than fifty percent (50.0%) of our outstanding shares of our common stock may be beneficially owned, directly or indirectly, by five or fewer individuals at any time during the last half of each taxable year.  Our articles prohibit any persons or groups from owning more than 9.8% of our common stock without the prior approval of our board of directors.  These provisions may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets that might involve a premium price for holders of our common stock.  Further, any person or group attempting to purchase shares exceeding these limits could be compelled to sell the additional shares and, as a result, to forfeit the benefits of owning the additional shares.  See “Description of Securities – Restrictions on Ownership and Transfer” for additional discussion regarding restrictions on the ownership of common stock.

 

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Our articles permit our board of directors to issue preferred stock on terms that may subordinate the rights of the holders of our current common stock or discourage a third party from acquiring us.

 

Our board of directors is permitted, subject to certain restrictions set forth in our articles, to issue up to forty million (40,000,000) shares of preferred stock without stockholder approval.  Further, subject to certain restrictions set forth in our articles, our board may classify or reclassify any unissued preferred stock and establish the preferences, conversions or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, and terms of conditions of redemption of any preferred stock.  Thus, our board of directors could authorize us to issue shares of preferred stock with terms and conditions that could subordinate the rights of the holders of our common stock or have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction such as a merger, tender offer or sale of all or substantially all of our assets, that might provide a premium price for holders of our common stock.  See “Description of Securities – Authorized Stock” for additional discussion regarding the issuance of shares of preferred stock.

 

Maryland law limits, in some cases, the ability of a third party to vote shares acquired in a “control share acquisition.”

 

Under the Maryland Control Share Acquisition Act, persons or entities owning “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights with respect to those shares except to the extent approved by a vote of two-thirds of the corporation’s disinterested stockholders.  Shares of stock owned by the acquirer or by officers or directors who are employees of the corporation, are not considered disinterested for these purposes.  “Control shares” are shares of stock that, taken together with all other shares of stock the acquirer previously acquired, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:

 

                                          one-tenth or more but less than one-third of all voting power;

 

                                          one-third or more but less than a majority of all voting power; or

 

                                          a majority or more of all voting power.

 

Control shares do not include shares of stock the acquiring person is entitled to vote as a result of having previously obtained stockholder approval.  A “control share acquisition” means the acquisition of control shares, subject to certain exceptions.  The Control Share Acquisition Act does not apply to (1) shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (2) acquisitions approved or exempted by our articles or bylaws.  Our articles exempt transactions between us and The Inland Group and its affiliates, including our Business Manager and Property Managers, from the limits imposed by the Control Share Acquisition Act.  This statute could have the effect of discouraging offers from third parties to acquire us and increase the difficulty of successfully completing this type of offer by anyone other than The Inland Group and its affiliates.  See “Description of Securities – Certain Provisions of Maryland Corporate Law and Our Articles of Incorporation and Bylaws” for additional discussion regarding the Control Share Acquisition Act.

 

Risks Related to Our Business Manager, Property Managers and their Affiliates

 

We do not have arm’s-length agreements with our Business Manager, Property Managers or any other affiliates of IREIC.

 

None of the agreements and arrangements with our Business Manager, Property Managers and other affiliates of IREIC were negotiated at arm’s length.  These agreements may contain terms and conditions that are not in our best interest and would not otherwise be applicable if we entered into arm’s

 

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length agreements with third parties.  See “Management – The Business Management Agreement,” “– Property Management Agreements” and “– Property Acquisition Agreement” for additional discussion regarding these agreements.

 

Our Business Manager will receive fees based upon our invested assets and, in certain cases, the purchase price for these assets, and may recommend that we make investments in an attempt to increase its fees.

 

Our Business Manager receives fees based on the aggregate book value, including acquired intangibles, of our invested assets and on the purchase price paid to acquire interests in REITs or other real estate operating companies.  The book value of our assets includes amounts borrowed to acquire these assets.  Also, we will pay our Business Manager a fee each time we acquire a REIT or other real estate operating company.  Our Business Manager may, therefore: (1) borrow more money than prudent to increase the amount we can invest; (2) retain instead of sell assets; or (3) avoid reducing the carrying value of assets that may otherwise be viewed as impaired.  Further, because we will pay our Business Manager a fee when we acquire a controlling interest in a REIT or other real estate operating company but not a fee interest in real estate, our Business Manager may focus on, and recommend, acquiring REITs or other real estate operating companies even if fee interests in real estate assets generate better returns.  See “Management – The Business Management Agreement” for additional discussion regarding the fees paid to our Business Manager.

 

We will pay significant fees to our Business Manager, Property Managers and other affiliates of our sponsor, IREIC, and cannot predict the amount of fees to be paid.

 

We will pay significant fees to our Business Manager, Property Managers and other affiliates of IREIC for services provided to us.  Because these fees are generally based on the amount of our invested assets, the purchase price for these assets or the revenues generated by our properties, we cannot predict the amounts that we will ultimately pay to these entities.  In addition, because employees of our Business Manager are given broad discretion to determine when to consummate a particular real estate transaction, we rely on these persons to dictate the level of our business activity.  Fees paid to our Business Manager, Property Managers and other affiliates of IREIC will reduce funds available for distribution to our stockholders.  Because we cannot predict the amounts to be paid to these entities, we cannot predict how fees will impact funds available for distribution.  See “Management – The Business Management Agreement,” “– Property Management Agreements” and “– Property Acquisition Agreement” for additional discussion regarding the fees paid to our Business Manager, Property Managers and other affiliates of IREIC.

 

IREIC may face a conflict of interest in allocating personnel and resources between its affiliates, our Business Manager and Property Managers.

 

We will rely on persons employed by our Business Manager and Property Managers to manage our day-to-day operations.  Some of these individuals, including two of our directors, Ms. Gujral and Mr. Parks, who serve as our president and chairman of the board, respectively, also are employed by IREIC or its affiliates, and may provide services to one or more of the following investment programs previously sponsored by IREIC:  Inland Western Real Estate Trust, Inc.; Inland Retail Real Estate Trust, Inc.; Inland Real Estate Corporation; Inland Land Appreciation Fund, L.P.; Inland Land Appreciation Fund II, L.P.; InLand Capital Fund, L.P.; Inland’s Monthly Income Fund, L.P.; and Inland Monthly Income Fund II, L.P.  These individuals will face competing demands for their time and service and may have conflicts in allocating their time between our business and the business of IREIC and its affiliates.  During times of intense activity, these individuals may not be able to devote all of their time and resources to our business, which could have an adverse effect on our financial condition, results of operations and ability to pay distributions to you.

 

34



 

We may acquire real estate assets from affiliates of IREIC in transactions in which the price will not be the result of arm’s length negotiations.

 

We may, from time to time, acquire real estate assets from affiliates of IREIC.  Although the purchase price we pay will be equal to the price paid for the properties or other assets by the affiliate plus any costs incurred by the affiliate in acquiring or financing the property or asset, it is possible that we would have negotiated a better price if we had negotiated directly with the seller.

 

We may purchase real estate assets from persons who have prior business relationships with affiliates of IREIC.  Our interests in these transactions may be different from the interests of affiliates in these transactions.

 

We may purchase real estate assets from third parties who have existing or previous business relationships with entities affiliated with IREIC.  The officers, directors or employees of our Business Manager, Inland Real Estate Acquisitions or our Property Managers who also perform services for IREIC or these other affiliates may have a conflict in representing our interests in these transactions on the one hand and the interests of IREIC and its affiliates in preserving or furthering their respective relationships on the other hand.  We may, therefore, end up paying a higher price to acquire the asset or sell the asset for a lower price than we would if these other relationships did not exist.

 

We have the same legal counsel as our dealer manager and certain of its affiliates.

 

Shefsky & Froelich Ltd. serves as our general legal counsel as well as legal counsel to Inland Securities, our dealer manager.  Thus, you will not have the benefit of due diligence that might otherwise be performed by independent counsel.  Further, the interests of our dealer manager or its affiliates may become adverse to our interests.  Under applicable legal ethics rules, Shefsky & Froelich Ltd. may be precluded from representing us due to a conflict of interest between us and our dealer manager.  If any situation arises in which our interests are in conflict with those of our dealer manager or its affiliates, we would be required to retain additional counsel and may incur additional fees and expenses.  See “Legal Matters” for additional discussion regarding our legal counsel.

 

Inland Securities Corporation, the dealer manager of this offering, is an affiliate of IREIC.

 

Inland Securities Corporation, the dealer manager of this offering, is an affiliate of IREIC and is not, therefore, independent.  Thus, you will not have the benefit of an independent due diligence review and investigation of the type normally performed by unaffiliated, independent underwriters in securities offerings.  Further, none of the fees and expenses payable to Inland Securities have been negotiated at arm’s length.

 

Federal Income Tax Risks

 

If we fail to qualify as a REIT, our operations and distributions to stockholders will be adversely affected.

 

We intend to operate so as to qualify as a REIT under the Internal Revenue Code.  A REIT generally is not taxed at the corporate level on income it currently distributes to its stockholders.  Qualification as a REIT involves the application of highly technical and complex rules for which there are only limited judicial or administrative interpretations.  The determination of various factual matters and circumstances is not entirely within our control and may affect our ability to qualify, or continue to qualify, as a REIT.  In addition, new legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualifying as a REIT or the federal income tax consequences of qualification.

 

35



 

If we were to fail to qualify as a REIT in any taxable year:

 

                                          we would not be allowed to deduct distributions paid to stockholders when computing our taxable income;

 

                                          we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;

 

                                          we would be disqualified from being taxed as a REIT for the four taxable years following the year during which we failed to qualify, unless entitled to relief under certain statutory provisions;

 

                                          we would have less cash to pay distributions to stockholders; and

 

                                          we may be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations we may incur as a result of being disqualified.

 

See “Federal Income Tax Considerations – General – Failure to Qualify as a REIT” for additional discussion regarding the failure to qualify as a REIT.

 

Distributions to tax-exempt investors may be classified as unrelated business tax income.

 

The Internal Revenue Code may classify distributions paid to a tax-exempt investor as unrelated business tax income, or UBTI, if the investor borrows money to purchase our shares.  See “Federal Income Tax Considerations – Federal Income Taxation of Stockholders – Taxation of Tax-Exempt Stockholders” for additional discussion regarding distributions to tax-exempt investors.

 

Investors subject to ERISA must address special considerations when determining whether to acquire our common stock.

 

Fiduciaries of a pension, profit-sharing or other employee benefit plans subject to the Employee Retirement Income Security Act of 1974, as amended, or “ERISA,” should consider whether investing in our common stock:

 

                                          is subject to the “plan assets” rules under ERISA and the Internal Revenue Code;

 

                                          satisfies the fiduciary standards of care established under ERISA;

 

                                          is subject to the unrelated business taxation rules under Section 511 of the Internal Revenue Code; and

 

                                          constitutes a prohibited transaction under ERISA or the Internal Revenue Code.

 

We intend to satisfy the “real estate operating company” exception to the plan assets regulations promulgated pursuant to ERISA.  Consequently, our assets should not be treated as plan assets of an investing plan subject to ERISA.  We cannot assure you, however, that this exception will apply to our assets and, if not, our assets may be treated as plan assets of an investing plan subject to ERISA.  See “ERISA Considerations” generally for additional discussion regarding ERISA.

 

If our assets are deemed to be ERISA plan assets, our Business Manager and we may be exposed to liability under Title I of ERISA and the Internal Revenue Code.

 

 In some circumstances where an ERISA plan holds an interest in an entity, the assets of the entire entity are deemed to be ERISA plan assets unless an exception applies.  This is known as the

 

36



 

“look-through rule.”  Under those circumstances, the obligations and other responsibilities of plan sponsors, plan fiduciaries and plan administrators, and of parties in interest and disqualified persons, under Title I of ERISA and Section 4975 of the Internal Revenue Code, as applicable, may be applicable, and there may be liability under these and other provisions of ERISA and the Internal Revenue Code.  If our Business Manager or we are exposed to liability under ERISA or the Internal Revenue Code, our performance and results of operations could be adversely affected.  Prior to making an investment in us, you should consult with your legal and other advisors concerning the impact of ERISA and the Internal Revenue Code on your investment and our performance.  See “ERISA Considerations” generally for additional discussion regarding ERISA plan assets.

 

There are special considerations that apply to pension or profit-sharing trusts or IRAs investing in our shares.

 

If you are investing the assets of a pension, profit-sharing, 401(k), Keogh or other qualified retirement plan or the assets of an IRA in our shares, you should satisfy yourself that, among other things:

 

                                          your investment is consistent with your fiduciary obligations under ERISA and the Internal Revenue Code;

 

                                          your investment is made in accordance with the documents and instruments governing your plan or IRA, including your plan’s investment policy;

 

                                          your investment satisfies the prudence and diversification requirements of ERISA;

 

                                          your investment will not impair the liquidity of the plan or IRA;

 

                                          your investment will not produce unrelated business taxable income, or UBTI, for the plan or IRA;

 

                                          you will be able to value the assets of the plan annually in accordance with ERISA requirements; and

 

                                          your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Internal Revenue Code.

 

See “ERISA Considerations” for additional discussion regarding investing the assets of a pension, profit-sharing, 401(k), Keogh or other qualified retirement plan or the assets of an IRA in our shares.

 

The annual statement of value that we will send to stockholders subject to ERISA and to certain other plan stockholders is only an estimate and may not reflect the actual value of our shares.

 

The annual statement of value will report the value of each share of common stock as of the close of our fiscal year.  No independent appraisals will be obtained and the value will be based upon an estimated amount we determine would be received if our assets were sold as of the close of our fiscal year and if the proceeds, together with our other funds, were distributed pursuant to a liquidation.  The net asset value of each share of common stock will be deemed to be $10.00 during this offering and for the first three years following the termination of this offering.  Because this is only an estimate, we may subsequently revise any annual valuation that is provided.  We cannot assure that:

 

                                          a value included in the annual statement could actually be realized by us or by our stockholders upon liquidation;

 

                                          stockholders could realize that value if they attempted to sell their common stock; or

 

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                                          an annual statement of value would comply with any reporting and disclosure or annual valuation requirements under ERISA or other applicable law.

 

We will stop providing annual statements of value if our common stock becomes listed for trading on a national securities exchange or included for quotation on a national market system.  See “ERISA Considerations – Valuation” for additional discussion regarding the annual statement of value.

 

You may have tax liability on distributions that you elect to reinvest in our common stock.

 

If you participate in our distribution reinvestment plan, you will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in common stock.  As a result, unless you are a tax-exempt entity, you will have to use funds from other sources to pay your tax liability.  See “Federal Income Tax Considerations – Distribution Reinvestment Plan” for additional discussion regarding tax liability on distributions reinvested in our common stock.

 

In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available to pay distributions to you.

 

Even if we maintain our status as a REIT, we may become subject to federal income taxes and related state taxes.  For example, if we have net income from a “prohibited transaction,” we will incur taxes equal to the full amount of the income from the prohibited transaction.  We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs.  We also may decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on this income.  In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly.  However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of the tax liability.  We also may be subject to state and local taxes on our income or property, either directly or at the level of the other companies through which we indirectly own our assets.  Any federal or state taxes paid by us will reduce our cash available to pay distributions to you.  See “Federal Income Tax Considerations – General” for additional discussion regarding federal and state income taxes.

 

Equity participation in mortgage loans may result in taxable income and gains from these properties, which could adversely impact our REIT status.

 

If we participate under a mortgage loan in any appreciation of the properties securing the mortgage loan or its cash flow and the Internal Revenue Service characterizes this participation as “equity,” we might have to recognize income, gains and other items from the property.  This could affect our ability to maintain our status as a REIT.

 

Complying with REIT requirements may limit our ability to hedge effectively.

 

The REIT provisions of the Internal Revenue Code may limit our ability to hedge the risks inherent to our operations.  Under current law, any income that we generate from derivatives or other transactions intended to hedge our interest rate risk will generally constitute income that does not qualify for purposes of the seventy-five percent (75.0%) income requirement applicable to REITs, and also will be treated as nonqualifying income for purposes of the ninety-five percent (95.0%) income test also applicable to REITs unless specified requirements are met.  In addition, any income from foreign currency or other hedging transactions would generally constitute nonqualifying income for purposes of both the seventy-five percent (75.0%) and ninety-five percent (95.0%) income tests.  As a result of these rules, we may have to limit the use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.  See “Federal Income Tax Considerations – General – Derivatives and Hedging Transactions” for additional discussion regarding our ability to hedge effectively.

 

38



 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus includes forward-looking statements that reflect our expectations and projections about our future results, performance, prospects and opportunities.   We have attempted to identify these forward-looking statements by using words such as “may,” “will,” “expects,” “anticipates,” “believes,” “intends,” “should,” “estimates,” “could” or similar expressions.  These forward-looking statements are based on information currently available to us and are subject to a number of known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements.  These factors include, among other things, those discussed above under the heading “Risk Factors” above.  We do not undertake to publicly update or revise any forward-looking statements, whether as a result as new information, future events or otherwise, except as may be required to satisfy our obligations under federal securities law.

 

39



 

SELECTED FINANCIAL DATA

 

We are a newly-formed entity without any operating history.  See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our financial statements and related notes thereto appearing elsewhere in this prospectus.

 

CAPITALIZATION

 

The following table sets forth our historical capitalization as of June 30, 2005 and our pro forma capitalization as of that date as adjusted to give effect to the sale of the minimum offering of 200,000 shares of common stock and the application of the estimated net proceeds therefrom as described in “Estimated Use of Proceeds.”  We sold 20,000 shares to IREIC for an aggregate purchase price of $200,000 in connection with our formation.  The table does not include shares of common stock issuable upon the exercise of options that may be, but have not been, granted under our independent director stock option plan.  The information set forth in the following table should be read in conjunction with our historical financial statements included elsewhere in this prospectus and the discussion set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

 

 

 

June 30, 2005

 

 

 

Historical

 

Pro Forma

 

Debt:

 

 

 

 

 

Mortgage Notes Payable

 

$

 

$

 

Stockholders Equity:

 

 

 

 

 

Preferred stock, $0.001 par value, 40,000,000 shares authorized, none outstanding

 

 

 

Common stock, $0.001 par value, 1,460,000,000 shares authorized, 20,000 shares issued and outstanding historical; 220,000 shares issued and outstanding pro forma

 

20

 

220

 

Additional Paid-in Capital

 

199,980

 

1,899,780

 

Retained Earnings Deficit

 

(91,886

)

(91,886

)

TOTAL STOCKHOLDERS’ EQUITY:

 

$

108,114

 

$

1,808,114

 

TOTAL CAPITALIZATION:

 

$

108,114

 

$

1,808,114

 

 

COMPENSATION TABLE

 

The following table describes the compensation we contemplate paying to our Business Manager, Property Managers and their respective affiliates.  In those instances in which there are maximum amounts or ceilings on the compensation that may be received, excess amounts may not be recovered by reclassifying them under a different compensation or fee category.

 

We define “net income” as total revenues less expenses other than additions to or allowances for reserves for depreciation, amortization or bad debts or other similar non-cash reserves.  When we use the term “net income” for purposes of calculating some expenses and fees, it excludes the gain from the sale of our assets.  This definition of net income is prescribed by the Statement of Policy Regarding REITs adopted by the North American Securities Administrators Association, Inc., or NASAA, but is not in accordance with generally accepted accounting principles, or GAAP, in the United States because depreciation and other non-cash reserves are not deducted in determining net income under the NASAA REIT Statement.  Thus, our net income calculated in accordance with GAAP may be greater or less than our net income calculated under the NASAA REIT Statement.

 

40



 

Nonsubordinated Payments

 

The following aggregate amounts of compensation, allowances and fees we may pay to our Business Manager and its affiliates are not subordinated to the returns on invested capital paid to our stockholders.

 

Offering Stage

 

SELLING COMMISSIONS

 

Type of Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

Selling commissions payable to Inland Securities Corporation and soliciting dealers designated by Inland Securities. Neither Inland Securities, the soliciting dealers nor our officers, directors or affiliates will be permitted to purchase shares of our stock in order to meet the minimum thresholds.

 

We will pay Inland Securities a selling commission equal to seven and one-half percent (7.5%) (up to seven percent (7.0%) of which may be reallowed to participating dealers) of the sale price for each share, subject to reduction for special sales under the circumstances as described in the “Plan of Distribution – Compensation We Will Pay For the Sale of Our Shares.”

Inland Securities, or any of its directors, officers, employees or affiliates, may initially purchase shares net of sales commissions and the marketing contribution and due diligence expense allowance for $8.95 per share; however, the discount on any subsequent purchases of shares to these entities or individuals may not exceed five percent (5.0%).

Each soliciting dealer and their respective directors, officers, employees or affiliates may initially purchase shares net of selling commissions for $9.30 per share; however, the discount on any subsequent purchases of shares may not exceed five percent (5.0%).

 

The actual amount depends on the number of shares sold. We will not pay any selling commissions if the minimum offering is not sold. If we sell only the minimum amount of 200,000 shares, and there are no special sales, we will pay a total of $150,000 in selling commissions. If the maximum amount of 540,000,000 shares (500,000,000 shares offered at a price of $10.00 per share and 40,000,000 shares offered at a price of $9.50 per share through our distribution reinvestment plan) is sold, and there are no special sales, we will pay a total of $375,000,000 in selling commissions. We will not pay commissions in connection with shares of common stock issued through our distribution reinvestment plan.

 

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MARKETING AND DUE DILIGENCE

 

Type of Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

Marketing contribution and due diligence expense allowance paid to Inland Securities and the soliciting dealers.

 

We will pay a marketing contribution equal to two and one-half percent (2.5%) of the gross offering proceeds to Inland Securities, which may reallow up to one and one-half percent (1.5%) to soliciting dealers. We will pay an additional
one-half percent (0.5%) of the gross offering proceeds to Inland Securities, which may reallow all or a portion to the soliciting dealers for bona fide due diligence expenses. We will not pay the marketing contribution and due diligence expense allowance in connection with any special sales, except those receiving volume discounts and those described in “Plan of Distribution – Volume Discounts.”

 

The actual amount depends on the number of shares sold. Assuming in each case no special sales, we will pay $60,000 in the aggregate if we sell the minimum number of 200,000 shares, or $150,000,000 in the aggregate if we sell the maximum number of 540,000,000 shares (500,000,000 shares offered at a price of $10.00 per share and 40,000,000 shares offered at a price of $9.50 per share through our distribution reinvestment plan) for marketing and due diligence. We will not pay these fees in connection with shares of common stock issued through our distribution reinvestment plan.

 

EXPENSES OF ISSUANCES AND DISTRIBUTION

 

Type of Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

Other expenses of issuances and distribution.

 

We expect to pay the following expenses in connection with this offering:

 

All amounts other than the SEC registration fee and the NASD filing

 

 

SEC Filing Fees

NASD Filing Fee

Printing & Mailing Exp.

Blue Sky Fees/Exp.

Legal Fees/Exp.

Accounting Fees/Exp.

Advertising/Sales Lit.

Transfer Agent Fees

Data Processing Fees

Bank Fees and Other Admin.Exp.

 

$
$
$
$
$
$
$
$
$

$

633,226
75,500
20,000,000
1,000,000
2,500,000
2,500,000
16,500,000
3,500,000
1,000,000

2,791,274

 

fee are estimates. The actual amounts of these expenses cannot be determined at the present time. We estimate the total amount for expenses of issuances and distribution will be approximately $50,500,000.

 

 

We will reimburse IREIC for costs and other expenses of issuance and distribution that it pays on our behalf in connection with this

 

Expenses of approximately $1,480,967 have been advanced by IREIC in connection with this offering.

 

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offering. However, if we sell at least the minimum offering of 200,000 shares, our Business Manager has agreed to pay any organization and offering expenses, including selling commissions and the other fees payable to Inland Securities that exceed fifteen percent (15.0%) of the gross offering proceeds.

 

We may reimburse IREIC $90,000 if we sell the minimum offering or $225,000,000 if we sell the maximum. If we do not sell the minimum number of shares, IREIC will be responsible for all of these expenses.

 

Operational Stage

 

ACQUISITION EXPENSES

 

Type of Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

Acquisition expenses paid to our Business Manager and The Inland Real Estate Transactions Group, Inc., Inland Real Estate Acquisitions and each of their respective affiliates.

 

We will reimburse our Business Manager and The Inland Real Estate Transactions Group, Inc., Inland Real Estate Acquisitions and each of their respective affiliates for expenses paid on our behalf in connection with acquiring real estate assets, regardless of whether we acquire the real estate assets; provided that we may not reimburse expenses, when combined with any acquisition fees that may be paid, greater than six percent (6.0%) of the contract price of any real estate asset acquired or, in the case of a loan, six percent (6.0%) of the funds advanced. Reimbursable expenses include payments for things such as property appraisals, environmental surveys, property audit fees, legal fees, due diligence review and business travel, such as airfare, hotel, meal and phone charges.

 

The actual amount depends on each asset and cannot be determined at this time.

 

 

 

 

 

Acquisition fee paid to our Business Manager or its designee.

 

We will pay our Business Manager or its designee a fee for services performed in connection with acquiring a controlling interest in a REIT or other real estate operating company. Acquisition fees, however, will not be paid for acquisitions solely of a fee interest in property. The amount of the acquisition fee will be equal to two and one-half percent (2.5%) of the aggregate purchase price paid to

 

The actual amount depends on the amount invested in each asset and cannot be determined at this time.

 

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Type of Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

 

 

acquire the controlling interest. We will pay acquisition fees either in cash or by issuing shares of our common stock, valued per share at the greater of (i) the per share offering price of our common stock in our most recent public offering, (ii) if applicable, the per share price ascribed to shares of our common stock used in our most recent acquisition of a controlling interest in a REIT or other real estate operating company and (iii) $10.00 per share. Any shares issued will be subject to restrictions on transfer. If paying the acquisition fee in shares of our common stock would result in more than 9.8% of our outstanding shares being held by The Inland Group and its affiliates, including our Business Manager, our board may waive the ownership restrictions contained in our articles to permit the issuance of the additional shares. This fee terminates if we acquire our Business Manager. See “Risk Factors – Risks Related to Our Business Manager, Property Managers and their Affiliates” and “Management – Property Acquisition Agreement – Compensation” for additional discussion regarding this fee.

 

 

 

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The following table sets forth other fees and expenses that we will pay in operating our business.  Except to the extent that these fees and expenses are calculated pursuant to a formula or based on a percentage of an underlying amount, the billing rates we pay will not exceed ninety percent (90.0%) of the market rate for similar services.

 

OTHER OPERATIONAL EXPENSES

 

Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

Property management fee paid to our Property Managers.

 

We will pay the applicable Property Manager a monthly fee equal to a total of four and one-half percent (4.5%) of the gross income of each property managed directly by the Property Manager, its affiliates or agents. We will pay this fee for services in connection with renting, leasing, operating and managing each property. As is customary in the industry, we will reimburse the Property Manager, its affiliates and agents for property-level expenses that they pay or incur on our behalf such as salaries and benefit expenses for on-site employees and other miscellaneous expenses. See “Management – Property Management Agreements” for more information about the services provided or arranged by our Property Managers.

 

The actual amount depends on the gross income generated by properties managed by our Property Managers, their affiliates and agents and cannot be determined at the present time.

 

 

 

 

 

Oversight fee paid to our Property Managers.

 

We will pay the applicable Property Manager, based on the type of property managed, a monthly oversight fee of up to one percent (1.0%) of the gross income from each property managed directly by entities other than our Property Managers, their affiliates or agents. We will pay this fee for transition services to coordinate and align the systems and policies of the third party property manager with those of our Property Managers. In no event will any of our Property Managers receive a property management fee and an oversight fee with respect to a particular property. Further, in no event will the aggregate amount of the property management fee paid to entities other than our Property Managers, their affiliates or agents

 

The actual amount depends on the gross income generated by the properties overseen by our Property Managers, its affiliates and agents and cannot be determined at the present time.

 

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Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

 

 

plus the oversight fee paid to any Property Manager exceed a total of four and one-half percent (4.5%) of the gross income of the particular property. Oversight fees may not be paid for more than three years following the acquisition of the property, REIT or real estate operating company, as the case may be. This fee terminates if we acquire our Property Managers.

 

 

 

 

 

 

 

Interest expense paid to our Business Manager and its affiliates, including Inland Mortgage Corporation or other REITs sponsored by IREIC.

 

We may borrow money from our Business Manager and its affiliates, including Inland Mortgage Corporation or other REITs sponsored by IREIC. We will pay interest on these loans at prevailing market rates.

 

The actual amount of interest paid will depend on the amount borrowed and the interest rate prevailing at the time. We cannot determine the amount at this time.

 

 

 

 

 

We will pay Inland Mortgage Servicing Corporation and Inland Mortgage Brokerage Corporation for purchasing, selling and servicing mortgages.

 

We will pay Inland Mortgage Servicing Corporation 0.03% per year on the first billion dollars and 0.01% thereafter on all mortgages that are serviced by Inland Mortgage Servicing Corporation. In addition, we will pay Inland Mortgage Brokerage Corporation 0.2% of the principal amount of each loan placed for us by Inland Mortgage Brokerage Corporation. Any such fees must be approved by a majority of our directors and a majority of our independent directors as fair and reasonable to us.

 

The actual amount depends on results of operations and cannot be determined at the present time.

 

 

 

 

 

We will reimburse IREIC, our Business Manager and their respective affiliates for providing ancillary services.

 

We will reimburse IREIC, our Business Manager and their respective affiliates for any expenses that they pay or incur in providing services to us, including the costs of salaries and benefits of persons employed by these entities and performing services for us. See “Management – The Business Management Agreement – Ancillary Agreements” for a description of how we may reimburse these service providers.

 

The actual amount depends on the services provided and the method by which reimbursement rates are calculated. Actual amounts cannot be determined at the present time.

 

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Liquidation Stage

 

LIQUIDATION STAGE

 

Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

Property disposition fee to be paid to Inland Real Estate Sales, Inc. or Inland Partnership Property Sales Corp.

 

We may pay a property disposition fee to Inland Real Estate Sales or Inland Partnership Property Sales in an amount equal to the lesser of:

 

             three percent (3.0%) of the contract sales price of the property; or

 

             fifty percent (50.0%) of the customary commission which would be paid to a third party broker for the sale of a comparable property.

 

The amount paid, when added to the sums paid to unaffiliated parties, may not exceed either the customary commission or an amount equal to six percent (6.0%) of the contract sales price. We may pay these fees only if these entities provide substantial service in connection with selling a property. This fee terminates if we acquire our Business Manager.

 

The actual amounts to be received depend upon the sale price of our properties and, therefore, cannot be determined at the present time.

 

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Subordinated Payments

 

We may pay the following additional fees to our Business Manager after a minimum return on invested capital has been paid to our stockholders.

 

Operational Stage

 

ASSET MANAGEMENT FEE

 

Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

Business management fee paid to our Business Manager. 

 

After our stockholders have received a non-cumulative, non-compounded return of five percent (5.0%) per annum on their “invested capital,” we will pay our Business Manager an annual business management fee of up to one percent (1.0%) of our “average invested assets,” payable quarterly in an amount equal to one-quarter of one percent (0.25%) of our average invested assets as of the last day of the immediately preceding quarter.  For these purposes, “invested capital” means the original issue price paid for the shares of our common stock reduced by prior distributions from the sale or financing of our properties.  For these purposes, “average invested assets” means, for any period, the average of the aggregate book value of our assets, including lease intangibles, invested, directly or indirectly, in financial instruments, debt and equity securities and equity interests in and loans secured by real estate assets, including amounts invested in REITs and other real estate operating companies, before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of these values at the end of each month during the period.  We will pay this fee for services provided or arranged by our Business Manager, such as managing our
day-to-day business operations, arranging for the ancillary services provided by other affiliates and overseeing these services, administering our

 

The actual amount depends on the amount of our assets and distributions paid to our stockholders and cannot be determined at the present time.

 

48



 

Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

 

 

bookkeeping and accounting functions, consulting with our board, overseeing our real estate assets and providing other services as our board deems appropriate.  This fee terminates if we acquire our Business Manager.  Separate and distinct from any business management fee, we also will reimburse our Business Manager or any affiliate for all expenses that it, or any affiliate including IREIC, pays or incurs on our behalf including the salaries and benefits of persons employed by our Business Manager or its affiliates and performing services for us except for the salaries and benefits of persons who also serve as one of our executive officers or as an executive officer of our Business Manager.

 

For any year in which we qualify as a REIT, our Business Manager must reimburse us for the amounts, if any, by which our total operating expenses paid during the previous fiscal year exceed the greater of:

 

      two percent (2.0%) of our average invested assets for that fiscal year; or

 

      twenty-five percent (25.0%) of our net income for that fiscal year, subject to certain adjustments described herein.

 

For these purposes, items such as organization and offering expenses, property expenses, interest payments, taxes, non-cash charges, any incentive fees payable to our Business Manager and acquisition fees and expenses are excluded from the definition of total operating expenses. 

 

 

 

49



 

Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

Incentive fee paid to our Business Manager.

 

After our stockholders have first received a ten percent (10.0%) cumulative, non-compounded return on, plus return of, their “invested capital,” we will pay our Business Manager an incentive fee equal to fifteen percent (15.0%) of the net proceeds from the sale of real estate assets, including assets owned by a REIT or other real estate operating company that we acquire and operate as a subsidiary.  For these purposes, “invested capital” means the original issue price paid for the shares of our common stock reduced by prior distributions from the sale or financing of our properties.  This fee terminates if we acquire our Business Manager.

 

The actual amount depends on the amount of net proceeds from the sale of real estate assets and cannot be determined at the present time.

 

50



 

ESTIMATED USE OF PROCEEDS

 

The amounts listed in the table below represent our best good faith estimate of the use of offering proceeds.  The organization and offering expenses may not be greater than fifteen percent (15.0%) of the “Gross Offering Proceeds.”  The estimates may not accurately reflect the actual receipt or application of the offering proceeds.  Although we estimate total organization and offering expenses will be less than the total permitted in the case of the “maximum offering,” actual organization and offering expenses may total fifteen percent (15.0%) of the gross offering proceeds.  The first scenario assumes we sell the minimum of 200,000 shares in the “best efforts” portion of the offering at $10.00 per share.  The second scenario assumes we sell the maximum of 500,000,000 shares in the “best efforts” portion of the offering at $10.00 per share.  We have not given effect to any special sales or volume discounts which could reduce selling commissions under either scenario.  In addition, we will not pay commissions in connection with shares of common stock issued through our distribution reinvestment plan.

 

 

 

Minimum Offering

 

Maximum Offering

 

 

 

Amount

 

Percent

 

Amount

 

Percent

 

Gross Offering Proceeds

 

$

2,000,000

 

100.00

%

$

5,000,000,000

 

100.00

%

Less Expenses:

 

 

 

 

 

 

 

 

 

Selling Commissions

 

$

150,000

 

7.50

%

$

375,000,000

 

7.50

%

Marketing Contribution

 

$

50,000

 

2.50

%

$

125,000,000

 

2.50

%

Due Diligence Expense Allowance

 

$

10,000

 

0.50

%

$

25,000,000

 

0.50

%

Organization and Offering Expenses(1)

 

$

90,000

 

4.50

%

$

50,500,000

 

1.01

%

TOTAL EXPENSES: 

 

$

300,000

 

15.00

%

$

575,500,000

 

11.51

%

Gross Amount Available

 

$

1,700,000

 

85.00

%

$

4,424,500,000

 

88.49

%

Less:

 

 

 

 

 

 

 

 

 

Working Capital Reserve

 

$

20,000

 

1.00

%

$

50,000,000

 

1.00

%

Estimated Acquisition Fees and Expenses(2)

 

$

10,000

 

0.50

%

$

25,000,000

 

0.50

%

NET CASH AVAILABLE FOR INVESTMENT:

 

$

1,670,000

 

83.50

%

$

4,349,500,000

 

86.99

%

 


(1)                                  Organization and offering expenses were estimated by us in reliance on the prior experience of IREIC, our sponsor, in sponsoring three other REIT programs.  Organization and offering expenses include amounts for Securities and Exchange Commission registration fees, NASD filing fees, printing and mailing expenses, blue sky fees and expenses, legal fees and expenses, accounting fees and expenses, advertising and sales literature, transfer agent fees, data processing fees, bank fees and other administrative expenses.

(2)                                  Acquisition fees and expenses are estimated for illustrative purposes only.  The actual amount of acquisition fees and expenses cannot be determined at the present time and will depend on numerous factors including the type of real estate asset acquired, the aggregate purchase price paid to acquire the real estate asset, the aggregate amount borrowed, if any, to acquire the real estate asset, the number of real estate assets acquired, and the type of consideration, cash or common stock, used to pay the fees and expenses.

 

51



 

PRIOR PERFORMANCE OF IREIC AFFILIATES

 

Prior Investment Programs

 

During the ten year period ending June 30, 2005, IREIC and its affiliates have sponsored three other REITs and thirty-eight (38) real estate exchange private placements, which altogether have raised more than $6,800,000,000 from over 160,000 investors.  During that period, Inland Western Retail Real Estate Trust, Inc., Inland Real Estate Corporation and Inland Retail Real Estate Trust, Inc., the other REITs, have raised over $6,600,000,000 from over 167,000 investors.  Inland Western Retail Real Estate Trust, Inc., Inland Real Estate Corporation and Inland Retail Real Estate Trust, Inc. have investment objectives similar to ours in that they seek to invest in real estate that produces both current income and long-term capital appreciation for stockholders.  Each of these entities, however, invests solely in retail shopping centers (generally neighborhood and community centers) and single tenant net-leased properties located throughout the United States.  Although we too may purchase retail shopping centers and single tenant net-leased properties, our investment policies and strategies are much broader and do not limit our acquisitions to a specific type of real estate asset or geographic area.  The real estate exchange private placements offered by Inland Real Estate Exchange Corporation are designed to provide replacement properties for persons wishing to complete an IRS Section 1031 real estate exchange.  Thus, these private placement programs do not have investment objectives similar to ours.  However, these private placement programs have owned real estate assets similar to those that we may seek to acquire, including industrial buildings, shopping centers, office buildings and other retail buildings.  Unlike us, none of the prior programs sponsored by IREIC or its affiliates had investment policies or strategies of acquiring controlling interests in REITs or other real estate operating companies.  The three REITs that seek current income and capital appreciation represent approximately ninety-six percent (96.0%) of the aggregate amount raised by entities sponsored by IREIC, approximately ninety-nine percent (99.0%) of the aggregate number of investors, approximately ninety-four percent (94.0%) of properties purchased and approximately ninety-six percent (96.0%) of the aggregate cost of the properties purchased by the prior programs sponsored by IREIC and its affiliates.

 

We intend to pay fees to Inland Securities, our Business Manager, Property Managers, The Inland Group and their affiliates.  We also will reimburse these entities for expenses incurred in performing services on our behalf.  During the offering stage, we will pay selling commissions, marketing contributions and a due diligence expense allowance to Inland Securities, a portion of which may be reallowed to its soliciting dealers.  In addition, we will reimburse IREIC for costs and other expenses of the offering.  During the operational stage, we will reimburse our Business Manager and The Inland Real Estate Transactions Group, Inc., Inland Real Estate Acquisitions and each of their respective affiliates for acquisition expenses.  We also intend to pay our Business Manager an acquisition fee each time we acquire a controlling interest in a REIT or other real estate operating company, as well as a business management fee and an incentive fee after our stockholders have received a minimum return on their invested capital.  In addition, we intend to pay our Property Managers either a property management fee for any property managed by our Property Managers, their affiliates or agents or an oversight fee for any property managed by an entity other than our Property Managers, their affiliates or agents.  Further, we will pay interest on any money that we may borrow from our Business Manager and its affiliates; we will pay fees to Inland Mortgage Servicing Corporation and Inland Mortgage Brokerage Corporation for all mortgages serviced or loans placed, respectively; and we will reimburse IREIC, our Business Manager and their respective affiliates for any expenses that they pay or incur in providing services to us.  If we decide to sell a property, we may pay a property disposition fee to Inland Real Estate Sales, Inc. or Inland Partnership Property Sales Corp.  See “Compensation Table” for a more detailed discussion regarding the fees and expenses that we expect to pay to Inland Securities, our Business Manager, Property Managers, The Inland Group and their affiliates.

 

52



 

The other three REITs previously sponsored by IREIC have similarly compensated IREIC and each of their respective business managers, property managers and affiliates.  However, because none of these REITs have investment policies or strategies of acquiring controlling interests in REITs or other real estate operating companies, they did not contemplate paying an acquisition fee to their respective business managers or an oversight fee to their respective property managers.  For example, we will pay our Business Manager a fee in connection with acquiring a controlling interest in a REIT or other real estate operating company, while the other three entities did not pay their respective business managers fees for the acquisition of properties.  Furthermore, we intend to pay our Property Managers an oversight fee based on the gross income from each property managed by entities other than our Property Managers or their affiliates or agents; the other REITs did not pay their respective property managers oversight fees.

 

Similarly, the private placement programs sponsored by Inland Real Estate Exchange Corporation pay some of the same types of fees and expenses that we intend to pay, such as selling commissions, marketing expenses, due diligence fees, acquisition fees, and property management fees.  However, because the business conducted by, and the underlying investments objectives of, these private placement programs are substantially different than our business and investment objectives, other fees and expenses paid by the private placement programs are not directly comparable to ours.

 

The information in this section and in the Prior Performance Tables, included in this prospectus as Appendix A, shows relevant summary information concerning real estate programs sponsored by IREIC and its affiliates.  The purpose of these tables is to provide information on the prior performance of these programs so that you may evaluate the experience of the affiliated companies in sponsoring similar programs.  Because the investment objectives and policies of these prior real estate programs differ in some respects from our objectives and policies, you should not rely upon the prior performance tables to evaluate our potential performance.  The following discussion is intended to briefly summarize the objectives and performance of the prior programs and to disclose any material adverse business developments sustained by these programs.  Past performance is not necessarily indicative of future performance.

 

Summary Information

 

The table below provides summarized information concerning prior programs sponsored by IREIC or its affiliates for the ten year period ending June 30, 2005, and is qualified in its entirety by reference to the introductory discussion above and the detailed information appearing in the Prior Performance Tables in Appendix A of the prospectus.  WE ARE NOT, BY INCLUDING THESE TABLES, IMPLYING THAT WE WILL HAVE RESULTS COMPARABLE TO THOSE REFLECTED IN THE TABLES BECAUSE OUR YIELD, CASH AVAILABLE FOR DISTRIBUTION AND OTHER FACTORS MAY BE SUBSTANTIALLY DIFFERENT.  ACQUIRING OUR SHARES WILL NOT GIVE YOU ANY INTEREST IN ANY PRIOR PROGRAM.

 

53



 

 

 

Inland Western
Retail Real
Estate Trust,
Inc.

 

Inland Retail
Real Estate
Trust, Inc.

 

Inland Real
Estate
Corporation

 

Inland Real
Estate
Exchange
Private

 

 

 

REIT

 

REIT

 

REIT

 

Placement

 

 

 

Program as of

 

Program as of

 

Program as of

 

Offerings as of

 

 

 

June 30, 2005

 

June 30, 2005

 

June 30, 2005

 

June 30, 2005

 

 

 

 

 

 

 

 

 

 

 

Number of programs sponsored

 

1

 

1

 

1

 

38

 

Aggregate amount raised from investors

 

$

3,571,711,000

 

2,333,750,000

 

706,865,000

 

248,921,000

 

Approximate aggregate number of investors

 

99,900

 

59,000

 

8,100

 

636

 

Number of properties purchased

 

187

 

284

 

155

 

38

 

Aggregate cost of properties

 

$

5,397,221,000

 

4,129,160,000

 

1,443,000,000

 

490,275,000

 

Number of mortgages/notes

 

7

 

0

 

0

 

0

 

Principal amount of mortgages/notes

 

$

136,000,000

 

0

 

0

 

0

 

Percentage of properties (based on cost) that were:

 

 

 

 

 

 

 

 

 

Commercial—

 

 

 

 

 

 

 

 

 

Retail

 

76.00

%

90.00

%

87.00

%

37.00

%

Single-user retail net-lease

 

24.00

%

10.00

%

13.00

%

13.00

%

Nursing homes

 

0.00

%

0.00

%

0.00

%

0.00

%

Offices

 

0.00

%

0.00

%

0.00

%

35.00

%

Industrial

 

0.00

%

0.00

%

0.00

%

15.00

%

Health clubs

 

0.00

%

0.00

%

0.00

%

0.00

%

Mini-storage

 

0.00

%

0.00

%

0.00

%

0.00

%

Total commercial

 

100.00

%

100.00

%

100.00

%

100.00

%

Multi-family residential

 

0.00

%

0.00

%

0.00

%

0.00

%

Land

 

0.00

%

0.00

%

0.00

%

0.00

%

 

 

 

 

 

 

 

 

 

 

Percentage of properties (based on cost) that were:

 

 

 

 

 

 

 

 

 

Newly constructed (within a year of acquisition)

 

32.00

%

38.00

%

40.00

%

25.00

%

Existing construction

 

68.00

%

62.00

%

60.00

%

75.00

%

 

 

 

 

 

 

 

 

 

 

Number of properties sold in whole or in part

 

0

 

2

 

12

 

0

 

 

 

 

 

 

 

 

 

 

 

Number of properties exchanged

 

0

 

0

 

0

 

0

 

 

During the three years prior to June 30, 2005, Inland Western Retail Real Estate Trust, Inc. purchased one hundred eighty-seven (187) properties, Inland Real Estate Corporation purchased thirty-two (32) commercial properties and Inland Retail Real Estate Trust, Inc. purchased two hundred nineteen (219) commercial properties. Upon written request, you may obtain, without charge, a copy of Table VI filed with the Securities and Exchange Commission in Part II of our registration statement.  Table VI provides more information about these acquisitions.  In addition, upon written request, you may obtain, without charge, a copy of the most recent Form 10-K annual report filed with the Securities and Exchange Commission by any of these REITs within the last twenty-four (24) months.  We will provide exhibits to each such Form 10-K upon payment of a reasonable fee for copying and mailing expenses.

 

54



 

Publicly Registered REITs

 

Inland Real Estate Corporation was formed in May 1994.  Through a total of four public offerings, the last of which was completed in 1998, Inland Real Estate Corporation, which we refer to herein as IRC, sold a total of 51,642,397 shares of common stock. In addition, as of June 30, 2005, IRC had issued 14,664,341 shares of common stock through its distribution reinvestment program.  As of June 30, 2005, IRC repurchased 5,256,435 shares of common stock through its share repurchase program.  As a result, IRC has realized total gross offering proceeds of approximately $706,865,000 as of June 30, 2005.  On June 9, 2004, IRC listed its shares on the New York Stock Exchange and began trading under the ticker “IRC”.  On August 30, 2005, the closing price of the stock on the New York Stock Exchange was $15.31 per share.

 

IRC focuses on purchasing shopping centers that provide convenience goods, personal services, wearing apparel and hardware and appliances located within an approximate 400-mile radius of its headquarters in Oak Brook, Illinois.  IRC seeks to provide stockholders with regular cash distributions and a hedge against inflation through capital appreciation.  IRC also may acquire single-user retail properties throughout the United States.  As of June 30, 2005, the properties owned by IRC were generating sufficient cash flow to pay operating expenses and an annual cash distribution of $0.96 per share, a portion of which is paid monthly.

 

As of June 30, 2005, IRC owned one hundred forty-three (143) properties for a total investment of approximately $1,443,000,000.  These properties were purchased with proceeds received from the above described offerings of shares of its common stock and financings.  As of June 30, 2005, IRC had borrowed approximately $619,301,000 secured by its properties and had $140,000,000 outstanding through an unsecured line of credit.

 

On July 1, 2000, IRC became a self-administered REIT by acquiring, through merger, Inland Real Estate Advisory Services, Inc., its advisor, and Inland Commercial Property Management, Inc., its property manager, into two wholly owned subsidiaries. As a result of the merger, IREIC, the sole shareholder of the advisor, and The Inland Property Management Group, Inc., the sole shareholder of its property manager, received an aggregate of 6,181,818 shares of IRC’s common stock valued at $11.00 per share, or approximately nine percent (9.0%) of its common stock.

 

Inland Retail Real Estate Trust, Inc. was formed in February 1999.  Through a total of three public offerings, the last of which was completed in 2003, Inland Retail Real Estate Trust, Inc., which we refer to herein as IRRETI, sold a total of 213,699,534 shares of its common stock.  In addition, as of June 30, 2005, IRRETI had issued approximately 26,859,000 shares through its distribution reinvestment program, and has repurchased a total of approximately 5,679,000 shares through the share reinvestment program.  As a result, IRRETI has realized total net offering proceeds of approximately $2,333,705,000 as of June 30, 2005.  On December 29, 2004, IRRETI issued 19,700,060 shares as a result of a merger with its advisor and property managers, as described below.

 

IRRETI focuses on purchasing shopping centers located east of the Mississippi River in addition to single-user retail properties in locations throughout the United States.  IRRETI seeks to provide investors with regular cash distributions and a hedge against inflation through capital appreciation.  As of June 30, 2005, the properties owned by IRRETI were generating sufficient cash flow to pay operating expenses and an annual cash distribution of $0.83 per share, a portion of which is paid monthly.

 

As of June 30, 2005, IRRETI owned two hundred eighty-two (282) properties for a total investment of approximately $4,129,160,000.  These properties were purchased with proceeds received from the above described offerings of shares of its common stock and financings.  As of June 30, 2005, IRRETI borrowed approximately $2,292,863,000 on its properties.

 

55



 

On December 29, 2004, IRRETI became a self-administered REIT by acquiring, through merger, Inland Retail Real Estate Advisory Services, Inc., its business manager and advisor, and Inland Southern Management Corp., Inland Mid-Atlantic Management Corp., and Inland Southeast Property Management Corp., its property managers.  As a result of the merger, IRRETI issued to our sponsor, IREIC, the sole shareholder of the business manager and advisor, and the shareholders of the property managers, an aggregate of 19,700,060 shares of IRRETI’s common stock, valued at $10.00 per share for purposes of the merger agreement, or approximately 7.9% of its common stock.

 

Inland Western Retail Real Estate Trust, Inc. was formed in March 2003.  On September 15, 2003, Inland Western Retail Real Estate Trust, Inc., which we refer to herein as Inland Western, commenced its initial public offering of 250,000,000 shares of common stock at $10.00 per share. As of June 30, 2005, Inland Western had sold a total of 349,872,101 shares of its common stock. In addition, as of June 30, 2005, Inland Western had issued 7,748,882 shares through its distribution reinvestment program and has repurchased 411,708 shares through its share repurchase program.  As a result, Inland Western has realized total gross offering proceeds of approximately $3,567,903,000 as of June 30, 2005.

 

On December 28, 2004, Inland Western’s follow-on registration statement was declared effective by the Securities and Exchange Commission. This second offering is for an additional 250,000,000 shares of common stock at $10.00 per share and an additional 20,000,000 shares of common stock at $9.50 per share, issuable pursuant to Inland Western’s distribution reinvestment program.  Inland Western’s initial public offering of 250,000,000 shares commenced on September 17, 2003.  Inland Securities Corporation, an affiliate of Inland Western serves as the managing underwriter of the follow-on offering.  Inland Western began sales of this follow-on offering in January 2005.

 

Inland Western focuses on purchasing shopping centers located primarily west of the Mississippi River although it has been purchasing centers located east of the Mississippi River.  Inland Western also purchases single-user retail properties in locations throughout the United States.  Inland Western seeks to provide investors with regular cash distributions and a hedge against inflation through capital appreciation.  As of June 30, 2005, the properties owned by Inland Western were generating sufficient cash flow to pay operating expenses and an annualized cash distribution of $0.6375 per share, a portion of which is paid monthly.

 

As of June 30, 2005, Inland Western owned one hundred eighty-seven (187) properties for a total investment of approximately $5,397,221,000. These properties were purchased with proceeds received from the above described offering of shares of its common stock and financings.  As of June 30, 2005, Inland Western financed approximately $2,867,747,000 on its properties.

 

The following tables summarize distributions paid by IRC, IRRETI and Inland Western through June 30, 2005.  The rate at which each company raised capital, acquired properties and generated cash from all sources determined the amount of cash available for distribution.  As described in more detail below, IREIC or its affiliates agreed to either forgo or defer all or a portion of the business management and advisory fee due them, from time to time, to increase the amount of cash available to pay distributions while the REIT continued to raise capital and acquire properties.  In the case of Inland Western, IREIC also advanced monies to Inland Western to pay distributions.  Inland Western has since repaid these advances. Specifically, with respect to IRC, from 1995 through 2000, IREIC or its affiliates agreed to forgo $10,527,710 in advisor fees.  With respect to IRRETI, from 1999 through 2004, IREIC or its affiliates agreed to forgo $3,211,041 and defer $13,121,256 in advisor fees.  As of December 31, 2004, IRRETI had paid IREIC or its affiliates all deferred advisor fees.  With respect to Inland Western, since 2003, IREIC or its affiliates agreed to forgo $4,957,510 in advisor fees.  During this time, IREIC also advanced funds to Inland Western to pay distributions.  In 2003 and 2004, Inland Western received $1,202,519 and $4,689,290, respectively, for an aggregate amount of $5,891,809.  As of June 30, 2005, IREIC has forgiven $2,369,139 of this amount, which is included as “additional paid in capital” in Inland Western’s financial statements.  The remaining $3,522,670 was classified as “advances from sponsor” in

 

56



 

Inland Western’s financial statements.  As of July 7, 2005, Inland Western had repaid all funds previously advanced by IREIC.

 

In each case, if IREIC or its affiliates had not agreed to forgo or defer all or a portion of the advisor fee, or, in the case of Inland Western, advance monies to pay distributions, the aggregate amount of distributions made by each REIT may have been reduced or the REIT would have likely had to decrease the number of properties acquired or the pace at which it acquired properties.  Our Business Manager may agree to forgo or defer all or a portion of its business management fee during the periods that we are raising capital and acquiring real estate assets.  Our Business Manager is not, however, obligated to do so and thus we may pay less in distributions or have less cash available to acquire real estate assets.  See “Risk Factors – Risks Related to Our Business” for a discussion of risks associated with the availability and timing of our cash distributions.

 

57



 

Inland Real Estate Corporation - Offering Completed 1998

 

 

 

Total
Distribution

 

Ordinary
Income

 

Non Taxable
Distribution

 

Capital Gain
Distribution

 

Total Distributions
per Share

 

 

 

$

 

$*

 

$**

 

$***

 

$

 

1995

 

736,627

 

694,213

 

42,414

 

 

.76

 

1996

 

3,704,943

 

3,093,525

 

611,418

 

 

.81

 

1997

 

13,127,597

 

9,739,233

 

3,388,364

 

 

.86

 

1998

 

35,443,213

 

27,015,143

 

8,428,070

 

 

.88

 

1999

 

48,379,621

 

35,640,732

 

12,738,889

 

 

.89

 

2000

 

52,964,010

 

40,445,730

 

12,518,280

 

 

.89

 

2001

 

58,791,604

 

45,754,604

 

12,662,414

 

374,586

 

.93

 

2002

 

60,090,685

 

41,579,944

 

18,315,640

 

195,101

 

.94

 

2003

 

61,165,608

 

47,254,096

 

13,577,679

 

333,833

 

.94

 

2004

 

62,586,577

 

53,458,760

 

7,883,026

 

1,244,791

 

.94

 

2005

 

31,909,968

 

31,909,968

 

 

*

 

*

 

 

 

 

428,900,453

 

336,585,948

 

90,166,194

 

2,148,311

 

 

 

 


*     The breakout between ordinary income and return of capital is finalized on an annual basis after the calendar year end.

**   Represents a reduction in basis for federal income tax purposes resulting from cash distributions (other than in respect of property sale proceeds) in excess of current or accumulated earnings and profits.

*** Represents a capital gain distribution for federal income tax purposes.

 

Inland Retail Real Estate Trust, Inc. - Offering Completed 2003

 

 

 

Total
Distribution

 

Ordinary
Income

 

Non Taxable
Distribution

 

Capital Gain
Distribution

 

Total Distributions
per Share

 

 

 

$

 

$*

 

$**

 

$***

 

$

 

1999

 

1,396,861

 

318,484

 

1,078,377

 

 

.49

****

2000

 

6,615,454

 

3,612,577

 

3,002,877

 

 

.77

 

2001

 

17,491,342

 

10,538,534

 

6,952,808

 

 

.80

 

2002

 

58,061,491

 

36,387,136

 

21,674,355

 

 

.82

 

2003

 

160,350,811

 

97,571,099

 

62,779,712

 

 

.83

 

2004

 

190,630,575

 

110,922,403

 

79,708,172

 

 

.83

 

2005

 

104,347,512

 

104,347,512

 

 

*

 

 

 

 

 

538,894,046

 

363,697,745

 

175,196,301

 

 

 

 

 


*     The breakout between ordinary income and return of capital is finalized on an annual basis after the calendar year end.

**   Represents a reduction in basis for federal income tax purposes resulting from cash distributions (other than in respect of property sale proceeds) in excess of current or accumulated earnings and profits.

*** Represents a capital gain distribution for federal income tax purposes.

**** IRRETI began paying monthly distributions in May 1999.  This amount represents total distributions per share made during the period from May 1999 through December 1999.

 

Inland Western Retail Real Estate Trust, Inc.

 

 

 

Total
Distribution

 

Ordinary
Income

 

Non Taxable
Distribution

 

Capital Gain
Distribution

 

Total Distributions
per Share

 

 

 

$

 

$*

 

$**

 

$***

 

$

 

2003

 

1,285,329

 

 

1,285,329

 

 

.13

****

2004

 

54,544,863

 

30,020,730

 

24,524,133

 

 

.66

 

2005

 

89,977,000

 

89,977,000

 

 

*

 

 

 

 

 

145,807,192

 

119,997,730

 

25,809,462

 

 

 

 

 


*       The breakout between ordinary income and return of capital is finalized on an annual basis after the calendar year end.

**     Represents a reduction in basis for federal income tax purposes resulting from cash distributions (other than in respect of property sale proceeds) in excess of current or accumulated earnings and profits.

***   Represents a capital gain distribution for federal income tax purposes

**** Inland Western began paying monthly distributions in October 2003.  This amount represents total distributions per share made during the period from October 2003 through December 2003.

 

58



 

The following table summarizes the yield on initial principal investment that investors would have realized if they had reinvested their distributions at the discounted share price provided in the distribution reinvestment program of the three REITs previously sponsored by IREIC.  Yields are calculated from the commencement date of each REIT’s initial public offering and are based on the actual amount of distributions made since that date.  All calculations assume an initial principal investment of $10,000.00 and that distributions were reinvested through the distribution reinvestment program (DRP) offered by each REIT.  The dollar amount of each periodic distribution was calculated based on the cumulative number of shares owned at the time of the distribution and the actual distribution per share.  The resulting amount was divided by the actual DRP share price at the time of the distribution to determine the number of additional shares purchased through the DRP.  These additional shares were then added to the cumulative number of shares owned immediately prior to the distribution.  These calculations were repeated for each month of a given year.  The cumulative compounded yield on principal as of December 31 of each year was then calculated based on the cumulative number of shares owned at the beginning of December multiplied by the annualized distribution (actual distribution per share paid in December multiplied by twelve) and divided by the dollar amount of the initial principal investment.

 

Cumulative Compounded Yield on Initial Principal Investment

 

As of December 31,

 

IRC (1)

 

IRRETI (2)

 

Inland Western (3)

 

1994

 

0.00

%(4)

N/A

 

N/A

 

1995

 

8.45

%

N/A

 

N/A

 

1996

 

9.55

%

N/A

 

N/A

 

1997

 

11.00

%

N/A

 

N/A

 

1998

 

12.14

%

N/A

 

N/A

 

1999

 

13.36

%

7.79

%(5)

N/A

 

2000

 

14.99

%

9.00

%

N/A

 

2001

 

17.88

%

9.92

%

N/A

 

2002

 

18.35

%

11.07

%

N/A

 

2003

 

20.07

%

12.08

%

5.01

%(6)

2004

 

21.71

%

13.18

%

6.98

%

 


(1)

 

IRC sold shares for $10.00 per share from October 1994 through March 1998. During this time, the DRP purchase price was $9.05 per share. From April 1998 through December 1998, IRC sold shares for $11.00 per share. During that time and through May 2004, the DRP purchase price was $10.50 per share. In June 2004, IRC became publicly traded. Since then, the DRP share price has been calculated as the average of the opening and closing share prices for the five days immediately preceding the payment of the monthly distribution. This price is calculated on a monthly basis. As of December 31, 2004, the DRP purchase price was $15.27 per share.

(2)

 

IRRETI sold shares from February 1999 through May 2003 at a price of $10.00 per share. During that time and through December 31, 2004, the DRP purchase price has been $9.50 per share.

(3)

 

Inland Western commenced selling shares in September 2003 at a price of $10.00 per share. During that time and through December 31, 2004, the DRP purchase price has been $9.50 per share.

(4)

 

Although IRC began selling shares in October 1994, it did not acquire its first property until January 1995 and did not make distributions in 1994. During 1995, IRC paid three quarterly distributions and, in November 1995, began paying monthly distributions.

(5)

 

IRRETI began paying monthly distributions in June 1999. This represents the annualized cumulative compounded yield on principal for the period from June 1999 through December 1999.

(6)

 

Inland Western began paying monthly distributions in November 2003. This represents the annualized cumulative compounded yield on principal for the period from November 2003 through December 2003.

 

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As discussed above, from time to time, IREIC or its affiliates agreed to either forgo or defer all or a portion of the advisor fee in an effort to maximize cash available for distributions by each REIT.  In the case of Inland Western, IREIC also advanced amounts to Inland Western to fund distributions.  In each case, if IREIC or its affiliates had not agreed to forgo or defer all or a portion of the advisor fee, or, in the case of Inland Western, advance funds to fund distributions, the aggregate amount of distributions made by each REIT would have been reduced, dollar for dollar, by the amounts forgone, deferred or advanced.  Had this occurred, the corresponding reduction in the aggregate amount of distributions made by each REIT would have resulted in a cumulative compounded yield on initial principal investment lower than as set forth for each REIT in the table above.

 

Private Partnerships

 

Through June 30, 2005, affiliates of IREIC have sponsored five hundred fourteen (514) private placement limited partnerships which have raised more than $524,201,000 from approximately 17,000 investors and invested in properties for an aggregate price of more than $1 billion in cash and notes.  Of the five hundred twenty-two (522) properties purchased, ninety-three percent (93.0%) have been located in Illinois.  Approximately ninety percent (90.0%) of the funds were invested in apartment buildings, six percent (6.0%) in shopping centers, two percent (2.0%) in office buildings and two percent (2.0%) in other properties. Including sales to affiliates, four hundred seventy-five (475) partnerships have sold their original property investments.  Officers and employees of IREIC and its affiliates invested more than $17,000,000 in these limited partnerships.

 

From July 1, 1995 through June 30, 2005, investors in these private partnerships have received total distributions in excess of $291 million consisting of cash flow from partnership operations, interest earnings, sales and refinancing proceeds and cash received during the course of property exchanges.

 

Following a proposal by the former corporate general partner, which was an affiliate of The Inland Group, investors in three hundred one (301) private partnerships voted in 1990 to admit IREIC as the corporate general partner for those partnerships.  Beginning in December 1993 and continuing into the first quarter of 1994, investors in one hundred one (101) private limited partnerships for which IREIC is the general partner received letters informing them of the possible opportunity to sell the sixty-six (66) apartment properties owned by those partnerships to a to-be-formed REIT in which affiliates of IREIC would receive stock and cash and the limited partners would receive cash. The underwriters of this apartment REIT subsequently advised IREIC to sell to a third party its management and general partner interests in those remaining limited partnerships not selling their apartment properties to the apartment REIT. Those not selling their apartment properties constituted approximately thirty percent (30.0%) of the IREIC-sponsored limited partnerships owning apartment buildings. The prospective third-party buyers of IREIC’s interests in the remaining partnerships, however, would make no assurance to support those partnerships financially. As a result, in March 1994, IREIC informed investors of its decision not to form the apartment REIT.

 

Following this decision, two investors filed a complaint in April 1994 in the Circuit Court of Cook County, Illinois, Chancery Division, purportedly on behalf of a class of other unnamed investors, alleging that IREIC had breached its fiduciary responsibility to those investors whose partnerships would have sold apartment properties to the apartment REIT.  The complaint sought an accounting of information regarding the apartment REIT matter, an unspecified amount of damages and the removal of IREIC as general partner of the partnerships that would have participated in the sale of properties. In August 1994, the court granted IREIC’s motion to dismiss, finding that the plaintiffs lacked standing to bring the case individually. The plaintiffs were granted leave to file an amended complaint. Thereafter, in August 1994, six investors filed an amended complaint, purportedly on behalf of a class of other investors, and derivatively on behalf of six limited partnerships of which IREIC is the general partner. The derivative counts sought damages from IREIC for alleged breach of fiduciary duty and breach of

 

60



 

contract, and asserted a right to an accounting. IREIC filed a motion to dismiss in response to the amended complaint. The suit was dismissed in March 1995 with prejudice. The plaintiffs filed an appeal in April 1996. After the parties briefed the issue, arguments were heard by the appellate court in February 1997.  In September 1997, the appellate court affirmed the trial court decision in favor of IREIC.

 

IREIC is the general partner of twenty-seven (27) private limited partnerships and one public limited partnership that owned interests in fifteen buildings that are net leased to Kmart.  The fourteen Kmarts owned by the private limited partnerships were all cross-collateralized. Relating to the Kmart bankruptcy, the status of the fifteen buildings is as follows:

 

             Category 1 - The leases of nine of the Kmarts were current and had been accepted by Kmart under their Chapter 11 reorganization plan.

 

             Category 2 - Kmart assigned its designation rights in one lease to Kohl’s. The lease was amended and extended for Kohl’s by IREIC, the general partner on behalf of the owners and lender and Kohl’s began paying rent February 12, 2003.

 

             Category 3 - Under Kmart’s Chapter 11 reorganization plan and upon emergence from bankruptcy on April 22, 2003, Kmart rejected four property leases, one of which was subject to a ground lease to Kimco. Kmart ceased paying rent as of May 1, 2003.

 

IREIC, as general partner, agreed with the note holders who owned the loan to conduct a liquidation of the fourteen properties which comprise Categories 1, 2 and 3. The Category 2 property, which is leased by Kohl’s was sold on February 19, 2004.  As of June 30, 2005, all of the Category 1 and Category 3 Kmart properties have been sold and the note holders have been paid off in full.

 

             Category 4 - Under Kmart’s Chapter 11 reorganization, Kmart rejected the lease for the property owned by the public limited partnership and ceased paying rent as of June 29, 2002.  This Kmart was sold in May 2005.

 

1031 Exchange Private Placement Offering Program

 

In March of 2001, Inland Real Estate Exchange Corporation (IREX) was established as a subsidiary of Inland Real Estate Investment Corporation.  IREX was formed to provide replacement properties for people wishing to complete an IRS Section 1031 real estate exchange.  Through June 30, 2005, IREX has offered the sale of thirty-eight (38) properties with a total property value of $490,275,000.

 

Landings Of Sarasota DBT. Inland Southern Acquisitions, Inc., a Delaware corporation and an affiliate of IREX acquired The Landings, a multi-tenant shopping center located in Sarasota, Florida in December 1997 for $9,800,000.  In August 2001, Inland Southern Acquisitions, Inc. contributed one hundred percent (100.0%) of its interest in the property into Landings of Sarasota DBT, a Delaware business trust, refinanced the property with a loan of $8,000,000 from Parkway Bank & Trust Co., an Illinois banking corporation, and began offering all of its beneficial interests in the trust to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $12,000,000, which consisted of $8,000,000 in debt assumption and $4,000,000 in equity investment. $200,000 of the offering proceeds were allocated to a property reserve account.  The offering was completed in May 2002 when the maximum offering amount was raised.

 

Sentry Office Building, DBT, a Delaware business trust, purchased a newly constructed, single-tenant office building in Davenport, Iowa in December 2001 from Ryan Companies US Inc., a Minnesota corporation.  The trust financed its acquisition of the property with a $7,500,000 first mortgage loan from Parkway Bank & Trust Co., an Illinois banking corporation.  In January 2002, Sentry Office Building

 

61



 

Corporation, a Delaware corporation and the initial beneficiary of the trust, began offering all of its beneficial interests in the trust to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $11,000,000, which consisted of $7,500,000 in debt assumption and $3,500,000 in equity investment. $100,000 of the offering proceeds obtained from the new owners was allocated to a property reserve account.  The offering was completed in April 2002 when the maximum offering amount was raised.

 

Pets Bowie Delaware Business Trust purchased a single-tenant retail building leased to PETsMART in Bowie, Maryland in October 2001 from PETsMART, Inc. and Wells Fargo Bank Northwest, N.A.  The trust initially financed its acquisition of the property with a temporary loan of $2,625,305 from Parkway Bank & Trust Co., an Illinois banking corporation, and then replaced this loan with a permanent loan of $1,300,000 with the same lender.  In May 2002, Pets Bowie Delaware Business Trust began offering all of its beneficial interests to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $3,900,000, which consisted of $1,300,000 in debt assumption and $2,600,000 in equity investment. $90,000 of the offering proceeds obtained from the new owners was allocated to a property reserve account.  The offering was completed in July 2002 when the maximum offering amount was raised.

 

1031 Chattanooga DBT, a Delaware business trust, acquired a retail property currently leased to Eckerd in Chattanooga, Tennessee in May 2002.  The trust financed the property with a loan of $1,500,000 from Parkway Bank & Trust Co., an Illinois banking corporation.  In July 2002, 1031 Chattanooga, L.L.C., the initial beneficiary of 1031 Chattanooga DBT, began offering all of the beneficial interests of the trust to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $3,400,000, which consisted of $1,500,000 in debt assumption and $1,900,000 in equity investment.  The offering was completed in May 2003 when the maximum offering amount was raised.

 

Lansing Shopping Center, DBT a Delaware business trust, purchased a newly constructed, multi-tenant retail shopping center in Lansing, Illinois in June 2002 from LaSalle Bank, N.A., as trustee under trust agreement dated May 22, 2001 and known as Trust No. 127294.  The trust financed its acquisition of the property with a $5,900,000 first mortgage loan from Parkway Bank & Trust Co., an Illinois banking corporation.  In August 2002, Lansing Shopping Center, L.L.C., a Delaware limited liability company and the initial beneficiary of Lansing Shopping Center, DBT, began offering all of the beneficial interests of the trust to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $10,900,000, which consisted of $5,900,000 in debt assumption and $5,000,000 in equity investment. $80,000 of the offering proceeds was allocated to a property reserve account.  The offering was completed in September 2002 when the maximum offering amount was raised.

 

Inland 220 Celebration Place Delaware Business Trust purchased a single-tenant office building currently leased to Walt Disney World Co., a Florida corporation, in Celebration, Osceola County, Florida, in June 2002 from Walt Disney World Co. in a sale/leaseback transaction.  The trust financed its acquisition of the property with an $18,000,000 first mortgage loan from Bank of America, N.A., a national banking association.  In September 2002, Inland 220 Celebration Place, L.L.C., a Delaware limited liability company and the initial beneficiary of Inland 220 Celebration Place Delaware Business Trust, began offering all of the beneficial interests of the trust to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $33,800,000, which consisted of $18,000,000 in debt assumption and $15,800,000 in equity investment. $50,000 of the offering proceeds was allocated to a property reserve account. The offering was completed in September 2003 when the maximum offering amount was raised.

 

Taunton Circuit Delaware Business Trust acquired a retail property currently leased to Circuit City in Taunton, Massachusetts in July 2002.  The Trust financed the property with a first mortgage of

 

62



 

$2,800,000 from MB Financial Bank.  In September 2002, Inland Taunton Circuit, L.L.C., the initial beneficiary of Taunton Circuit Delaware Business Trust, offered all of its interest in the trust to a qualified person in need of a replacement property to complete a 1031 tax-deferred exchange.  The total price was $6,550,000, which consisted of $2,800,000 in debt assumption and $3,750,000 in equity investment.  The offering was completed in September 2002.

 

Broadway Commons Delaware Business Trust acquired a multi-tenant retail center located in Rochester, Minnesota, in July 2002.  The Trust financed the property with a first mortgage of $8,850,000 from Parkway Bank & Trust Co., an Illinois banking corporation.  In October 2002, Broadway Commons, L.L.C., the initial beneficiary of Broadway Commons Delaware Business Trust, began offering all of its beneficial interests in the trust to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $17,250,000, which consisted of $8,850,000 in debt assumption and $8,400,000 in equity investment.  $100,000 of the offering proceeds was allocated to a property reserve account.  The offering was completed in December 2003 when the maximum offering amount was raised.

 

Bell Plaza 1031, LLC. Rehab Associates XIII, Inc., an Illinois corporation and an affiliate of IREX acquired Bell Plaza, a multi-tenant shopping center in Oak Lawn, Illinois on August 28, 1998 for $1,675,000.  In October 2002, Rehab Associates XIII contributed one hundred percent (100.0%) of its interest in the property into Bell Plaza 1031, LLC, a Delaware single member limited liability company, and then offered all of its membership interests in Bell Plaza, LLC to North Forsyth Associates, a North Carolina general partnership, which was in need of a replacement property to complete a 1031 tax-deferred exchange.  The total price was $4,030,000, which consisted of $3,140,000 in debt assumption and $890,000 in equity investment. $25,000 of the offering proceeds was allocated to a property reserve account.  The offering was completed in November 2002.

 

Inland 210 Celebration Place Delaware Business Trust purchased a single-tenant office building currently leased to Walt Disney World Co., a Florida corporation, in Celebration, Osceola County, Florida, in June 2002 from Walt Disney World Co .in a sale/leaseback transaction.  The trust financed its acquisition of the property with a $5,700,000 first mortgage loan from Bear Stearns Commercial Mortgage, Inc.  In January 2003, Inland 210 Celebration Place Delaware Business Trust sold its fee simple interest in 210 Celebration Place to Old Bridge Park Celebration, LLC, a Delaware limited liability company, which was in need of a replacement property to complete a 1031 tax-deferred exchange.  The total price was $12,000,000, which consisted of $5,700,000 in debt assumption and $6,300,000 in equity investment.

 

CompUSA Retail Building. Lombard C-USA, L.L.C., a Delaware limited liability company, purchased a single-tenant retail building leased to CompUSA, Inc. in Lombard, Illinois in January 2003 from an unrelated third party.  The L.L.C. financed its acquisition of the property with a $4,000,000 loan from Bear Stearns Commercial Mortgage, Inc.  In April 2003, Lombard C-USA, L.L.C. began offering ninety-nine percent (99.0%) of the undivided tenant in common interests in the real estate and improvements thereon located at 2840 S. Highland Avenue, Lombard, DuPage County, Illinois for $3,910,500 in cash plus the assumption of the existing indebtedness to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $7,950,000, which consisted of $4,000,000 in debt assumption and $3,950,000 in equity investment. As required by the lender, Lombard C-USA, L.L.C. shall retain at least a one percent (1.0%) tenant in common interest, which is included in the $3,950,000 equity investment. $75,000 of the offering proceeds was allocated to a property reserve account.  The offering was completed in February 2004 when the maximum offering amount was raised.

 

Deere Distribution Facility in Janesville, Wisconsin.  Janesville 1031, L.L.C., a Delaware limited liability company, purchased a single-tenant, light industrial distribution center leased to Deere & Company, a Delaware corporation, in Janesville, Wisconsin in February 2003 from Ryan Janesville,

 

63



 

L.L.C., a Minnesota corporation and an affiliate of Ryan Companies US, Inc.  The L.L.C. financed its acquisition of the property with a $10,450,000 loan from Bear Stearns Commercial Mortgage, Inc. In May 2003, Janesville 1031, L.L.C. began offering ninety-nine percent (99.0%) of the undivided tenant in common interests in the real estate and improvements thereon located at 2900 Beloit Avenue, Janesville, Rock County, Wisconsin for $9,949,500 in cash plus the assumption of the existing indebtedness to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $20,500,000, which consisted of $10,450,000 in debt assumption and $10,050,000 in equity investment, one percent (1.0%) of which was required by the lender to be retained by Janesville 1031, L.L.C. $100,000 of the offering proceeds was allocated to a property reserve account.  The offering was completed in January 2004 when the maximum offering was raised.

 

Fleet Office Building.  Westminster Office 1031, L.L.C., a Delaware limited liability company, purchased a single-tenant office building leased entirely to Fleet National Bank, a national banking association, in Providence, Rhode Island in April 2003 from Fleet National Bank in a sale/leaseback transaction.  The L.L.C. financed its acquisition of the property with a $12,900,000 loan from Bear Stearns Commercial Mortgage, Inc.  In June 2003, Westminster Office 1031, L.L.C. began offering ninety-nine percent (99.0%) of the undivided tenant in common interests in the real estate and improvements thereon located at 111 Westminster Street, Providence, Providence County, Rhode Island for $9,900,000 in cash plus the assumption of the existing indebtedness to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $22,900,000, which consisted of $12,900,000 in debt assumption and $10,000,000 in equity investment, one percent (1.0%) of which was required by the lender to be retained by Westminster Office 1031, L.L.C. $150,000 of the offering proceeds was allocated to a property reserve account.  The offering was completed in January 2004 when the maximum offering was raised.

 

Deere Distribution Facility in Davenport, IowaDavenport 1031, L.L.C., a Delaware limited liability company, purchased a single-tenant, light industrial distribution center leased to Quad Cities Consolidation and Distribution, Inc., an Illinois corporation, in Davenport, Iowa in April 2003 from Ryan Companies US, Inc., a Minnesota corporation.  The lease is fully guaranteed by Deere & Company, a Delaware corporation. The L.L.C. financed its acquisition of the property with a loan from Bear Stearns Commercial Mortgage, Inc.  In August 2003, Davenport 1031, L.L.C. began offering ninety-nine percent (99.0%) of the undivided tenant in common interests in the real estate and improvements thereon located at 2900 Research Parkway, Davenport, Scott County, Iowa for $15,543,000 in cash plus the assumption of the existing indebtedness to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $28,200,000, which consisted of $12,500,000 in debt assumption and $15,700,000 in equity investment, one percent (1.0%) of which was required by the lender to be retained by Davenport 1031, L.L.C. $100,000 of the offering proceeds was allocated to a property reserve account.  The offering was completed in April 2004 when the maximum offering was raised.

 

Grand Chute DST, a Delaware statutory trust, purchased a multi-tenant retail shopping center in Grand Chute, Wisconsin in October 2002 from Continental 56 Fund Limited Partnership.  The trust funded the acquisition of the property with cash from the sale of one hundred percent (100.0%) of the beneficial interests in the trust to Grand Chute, L.L.C., a Delaware limited liability company.  Subsequent to the acquisition of the property, the trust obtained a $5,678,350 loan from Bank of America, N.A. and the proceeds of the loan were distributed to Grand Chute, L.L.C. as a partial return of its capital contribution.  In January 2003, Grand Chute, L.L.C. began offering all of its beneficial interests in the trust to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $12,048,350, which consisted of $5,678,350 in debt assumption and $6,370,000 in equity investment. $478,350 of the offering proceeds was allocated to four separate property reserve accounts, three of which were required by the lender.  In September 2003, certain information in the offering was amended and supplemented through the release of the First Supplement to

 

64



 

Private Placement Memorandum.  The offering was completed in March 2004 when the maximum offering amount was raised.

 

Macon Office DST, a Delaware statutory trust, purchased a single-tenant office complex in Macon, Georgia in October 2002 from UTF Macon, L.L.C.  The trust funded the acquisition of the property with cash from the sale of one hundred percent (100.0%) of the beneficial interests in the trust to Macon Office, L.L.C., a Delaware limited liability company.  Subsequent to the acquisition of the property, the trust obtained a $5,560,000 loan from Bank of America, N.A. and the proceeds of the loan were distributed to Macon Office, L.L.C. as a partial return of its capital contribution.  In October 2003, Macon Office, L.L.C. began offering all of its beneficial interests in the trust to certain qualified persons seeking a cash investment, in addition to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $12,160,000, which consisted of $5,560,000 in debt assumption and $6,600,000 in equity investment. $100,000 of the offering proceeds was allocated to a property reserve account.  The offering was completed in March 2004 when the maximum offering amount was raised.

 

White Settlement Road Investment, LLC, a Delaware limited liability company, acquired a retail property currently leased to Eckerd Corporation in Fort Worth, Texas in July 2003.  The LLC funded the acquisition of the property with cash from an affiliate and with a short-term loan from Parkway Bank and Trust Co., an Illinois banking corporation, in the amount of $2,041,000.  In November 2003, Fort Worth Exchange, LLC, a Delaware limited liability company and initial beneficiary of White Settlement Road Investment, LLC, offered its entire membership interest in the LLC to a qualified person in need of a replacement property to complete a 1031 tax-deferred exchange.  The total price was $2,840,000, which consisted of $1,420,000 in debt assumption and $1,420,000 in equity investment.  The offering was completed in December 2003.  Simultaneous with the completion of the offering, the short-term loan with Parkway was converted to a permanent loan and the terms of the loan documents were modified in accordance with a loan commitment from Parkway.

 

Plainfield Marketplace.  Plainfield 1031, L.L.C., a Delaware limited liability company, purchased a multi-tenant shopping center located in Plainfield, Illinois on December 16, 2003 from Ryan Companies US, Inc., a Minnesota corporation.  The L.L.C. financed its acquisition of the property with a loan from Bear Stearns Commercial Mortgage, Inc, a New York corporation.  In January 2004, Plainfield 1031, L.L.C. began offering ninety-nine percent (99.0%) of the undivided tenant in common interests in the real estate and improvements thereon located at 11840 South Route 59, Plainfield, Will County, Illinois for $12,350,250 in cash plus the assumption of the existing indebtedness to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $24,400,000, which consisted of $11,925,000 in debt assumption and $12,475,000 in equity investment, one percent (1.0%) of which was required by the lender to be retained by Plainfield 1031, L.L.C.  The difference between the real estate acquisition price of $21,700,000 and the total price of $24,400,000 consists of $950,000 acquisition fee, $150,000 for a property reserve account, and $1,600,000 of estimated costs and expenses.  The offering was completed in June 2004 when the maximum offering amount was raised.

 

Pier 1 Retail Center.  Butterfield-Highland 1031, L.L.C., a Delaware limited liability company, purchased a multi-tenant retail shopping center on December 30, 2003 from the beneficiary of Trust No. 2314, an unrelated third party, which trust was held by North Side Community Bank as Trustee under the Trust Agreement dated December 12, 2003.  The L.L.C. financed its acquisition of the property with a loan from Bear Stearns Commercial Mortgage, Inc, a New York corporation.  In March 2004, Butterfield-Highland 1031, L.L.C. began offering ninety-nine percent (99.0%) of the undivided tenant in common interests in the real estate and improvements thereon located at 2830 S. Highland Avenue, Lombard, Illinois for $4,257,000 in cash plus the assumption of the existing indebtedness to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $8,150,000, which consisted of $3,850,000 in debt assumption and $4,300,000 in equity investment, a

 

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minimum of one percent (1.0%) of which is required by the lender to be retained by Butterfield-Highland 1031, L.L.C.  The difference between the real estate acquisition price of $7,025,000 and the total price of $8,150,000 consists of $350,000 acquisition fee, $100,000 for a property reserve account, and $675,000 of estimated costs and expenses.  The offering was completed in June 2004 when the maximum offering amount was raised.

 

Long Run 1031, L.L.CLR 1031, L.L.C., a Delaware limited liability company, purchased a multi-tenant retail shopping center on January 27, 2003 from Ryan Lemont, L.L.C., the third party seller and developer of the property.  The L.L.C. financed its acquisition of the property with cash and, on April 24, 2003, placed a loan on the Property in the amount of $4,700,000 from Principal Commercial Funding, LLC.  In June 2004, LR 1031, L.L.C. a Delaware limited liability company and initial beneficiary of Long Run 1031, L.L.C. offered its entire membership interest in the LLC to a qualified person in need of a replacement property to complete a 1031 tax-deferred exchange.  The total price was $4,935,000 in cash plus the assumption of the existing indebtedness to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $9,635,000, which consisted of $4,700,000 in debt assumption and $4,935,000 in equity investment.  The difference between the real estate acquisition price of $8,500,000 and the total price of $9,635,000 consists of $451,347 acquisition fee, $50,000 for a property reserve account, and $658,653 of estimated costs and expenses.  The offering was completed in June 2004 when the maximum offering amount was raised.

 

Forestville 1031, L.L.C.  Forestville Exchange, L.L.C., a Delaware limited liability company, purchased a single-tenant retail shopping center on November 13, 2003 from Silver Hill, L.L.C., a North Carolina limited liability company, the property’s developer.  The L.L.C. financed its acquisition of the property with cash.  In May 2004, Forestville Exchange, L.L.C. a Delaware limited liability company and initial beneficiary of Forestville 1031, L.L.C. offered its entire membership interest in the LLC to a qualified person in need of a replacement property to complete a 1031 tax-deferred exchange.  The total price was $3,900,000, which consisted of $1,793,630 in mortgage financing from Parkway Bank and Trust Co. and $2,106,370 in equity investment.  The difference between the real estate acquisition price of $3,450,000 and the total price of $3,900,000 consists of $172,500 acquisition fee and $277,500 of estimated costs and expenses.  The offering was completed in May 2004 when the maximum offering amount was raised.

 

Bed Bath & Beyond Retail Center. BBY Schaumburg 1031, L.L.C., a Delaware limited liability company, purchased a multi-tenant retail shopping center on April 20, 2004 from the American Real Estate Holdings, L.P. a Delaware limited partnership, an unrelated third party.  The L.L.C. financed its acquisition of the property with a loan from Bear Stearns Commercial Mortgage, Inc, a New York corporation. In June 2004, BBY Schaumburg 1031, L.L.C. began offering ninety-nine percent (99.0%) of the undivided tenant in common interests in the real estate and improvements thereon located at 905-915 East Golf Road, Schaumburg, Illinois for $6,633,000 in cash plus the assumption of the existing indebtedness to certain qualified persons in need of replacement properties to complete a 1031 tax-deferred exchange.  The total price was $13,605,000, which consisted of $6,905,000 in debt assumption and $6,700,000 in equity investment, one percent (1.0%) of which was required by the lender to be retained by BBY Schaumburg 1031, L.L.C.  The difference between the real estate acquisition price of $11,655,110 and the total price of $13,605,000 consists of $600,000 acquisition fee, $400,000 for property reserve accounts, and $949,890 of estimated costs and expenses.  The offering was completed in October 2004 when the maximum offering amount was raised.

 

Cross Creek Commons Shopping Center.  Cross Creek 1031, L.L.C., a Delaware limited liability company, purchased a multi-tenant retail shopping center on February 17, 2004 from Buckley Shuler Real Estate, L.L.C., a Georgia limited liability company, an unrelated third party.  The L.L.C. financed its acquisition of the property with cash and subsequently placed a loan from Bear Stearns Commercial Mortgage on the property.  In March 2004, Cross Creek 1031, L.L.C. began offering ninety-nine percent (99.0%) of the undivided tenant in common interests in the real estate and improvements thereon located

 

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