424B3 1 a07-20593_1424b3.htm 424B3

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-139504

PROSPECTUS



INLAND AMERICAN REAL ESTATE TRUST, INC.

540,000,000                                    shares of common stock

We are a Maryland corporation sponsored by Inland Real Estate Investment Corporation, or IREIC, and formed to acquire and develop commercial real estate, primarily multi-family, office and industrial/distribution buildings, lodging facilities and retail properties, as well as triple-net, single-use properties of a similar type, 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 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 have elected to be taxed as a real estate investment trust, or REIT, commencing with the tax year ending December 31, 2005 and we intend to continue to qualify as a REIT for tax purposes. Shares of our common stock generally are issued only in book entry form.

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 Factorsbeginning on page 18. 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 a limited operating history

·      the number and type of real estate assets we initially can 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 face competing demands for their time and service and may have conflicts in allocating their time to our business

·      we may not continue to qualify as a REIT

·      we may borrow up to 300% of our net assets, and principal and interest payments will reduce the funds available for distribution

·      we 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

·      you will not have the opportunity to evaluate our investments before we make them because we have not identified all of the specific assets that we will acquire in the future

·      we rely 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

Inland Securities, our dealer manager, is a member of the National Association of Securities Dealers, Inc. This offering will end no later than August 1, 2009, unless extended. The minimum purchase requirement in this offering 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 1, 2007. We will amend or supplement this prospectus if there are any material changes in our affairs.

 

Per Share

 

Maximum Offering

 

Public offering price, primary shares

 

$

10.00

 

$

5,000,000,000

 

Public offering price, distribution reinvestment plan

 

$

9.50

 

$

380,000,000

 

Commissions(1)

 

$

1.05

 

$

525,000,000

 

Proceeds, before expenses, to us(2)

 

$

8.95

 

$

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% of the gross offering proceeds.

The date of this prospectus is August 1, 2007.




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.

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.

FOR RESIDENTS OF PENNSYLVANIA ONLY

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.




SUITABILITY STANDARDS

An investment in our common stock involves significant risk and is suitable only for persons who have adequate financial means, desire a relatively long-term investment and who will not need immediate liquidity from their investment. Persons who meet this standard and seek to diversify their personal portfolios with a finite-life, real estate-based investment, preserve capital, receive current income, obtain the benefits of potential long-term capital appreciation and who are able to hold their investment for a time period consistent with our liquidity plans are most likely to benefit from an investment in our company. On the other hand, we caution persons who require immediate liquidity or guaranteed income, or who seek a short-term investment not to consider an investment in our common stock as meeting these needs.

In order to purchase shares in this offering, you must:

·                                          meet the applicable financial suitability standards as described below; and

·                                          purchase at least the minimum number of shares as described below.

We have established suitability standards for initial stockholders and subsequent purchasers of shares from our stockholders. These suitability standards require that a purchaser of shares have, excluding the value of a purchaser’s home, home furnishings and automobiles, either:

·                                          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.

The minimum purchase is 300 shares ($3,000). You may not transfer fewer shares than the minimum purchase requirement. In addition, you may not transfer, fractionalize or subdivide your shares so as to retain less than the number of shares required for the minimum purchase. In order to satisfy the minimum purchase requirements for retirement plans, unless otherwise prohibited by state law, a husband and wife may jointly contribute funds from their separate IRAs, provided that each such contribution is made in increments of $100. You should note that an investment in shares of our common stock will not, in itself, create a retirement plan and that, in order to create a retirement plan, you must comply with all applicable provisions of the Internal Revenue Code of 1986, as amended (referred to herein as the “Code”).

Several states have established suitability requirements that are more stringent than the standards that we have established and described above. Shares will be sold to investors in these states only if they meet the special suitability standards set forth below. In each case, these special suitability standards exclude from the calculation of net worth the value of the investor’s home, home furnishings and automobiles.

·                                          Kentucky, Massachusetts, Michigan, Missouri, Ohio or Pennsylvania – In addition to meeting the applicable minimum suitability standards set forth above, your investment may not exceed 10% of your liquid net worth, which may be defined as the remaining

ii




balance of cash and other assets easily converted to cash after subtracting the investor’s total liabilities from total assets.

·                                          Kansas – In addition to meeting the applicable minimum suitability standards set forth above, the Office of the Kansas Securities Commissioner recommends that an investor’s aggregate investment in our securities and similar direct participation investments should not exceed 10% of the investor’s liquid net worth. For these purposes, “liquid net worth” is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities.

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 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.

RESTRICTIONS IMPOSED BY THE PATRIOT AND RELATED ACTS

The shares of common stock offered hereby may not be offered, sold, transferred or delivered, directly or indirectly, to any “unacceptable investor.” “Unacceptable investor” means any person who is a:

·                                          person or entity who is a “designated national,” “specially designated national,” “specially designated terrorist,” “specially designated global terrorist,” “foreign terrorist organization” or “blocked person” within the definitions set forth in the Foreign Assets Control Regulations of the U.S. Treasury Department;

·                                          person acting on behalf of, or any entity owned or controlled by, any government against whom the U.S. maintains economic sanctions or embargoes under the Regulations of the U.S. Treasury Department;

·                                          person or entity who is within the scope of Executive Order 13224-Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten to Commit, or Support Terrorism, effective September 24, 2001;

·                                          person or entity subject to additional restrictions imposed by the following statutes or regulations and executive orders issued thereunder: the Trading with the Enemy Act, the Iraq Sanctions Act, the National Emergencies Act, the Antiterrorism and Effective Death Penalty Act of 1996, the International Emergency Economic Powers Act, the United Nations Participation Act, the International Security and Development Cooperation Act, the Nuclear Proliferation Prevention Act of 1994, the Foreign Narcotics Kingpin Designation Act, the Iran and Libya Sanctions Act of 1996, the Cuban Democracy Act, the Cuban Liberty and Democratic Solidarity Act and the Foreign Operations, Export Financing and Related Programs Appropriations Act or any other law of similar import as to any non-U.S. country, as each such act or law has been or may be amended, adjusted, modified or reviewed from time to time; or

·                                          person or entity designated or blocked, associated or involved in terrorism, or subject to restrictions under laws, regulations or executive orders as may apply in the future similar to those set forth above.

iii




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

 

Page

 

 

 

PROSPECTUS SUMMARY

 

1

Inland American Real Estate Trust, Inc.

 

1

Risk Factors

 

2

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

 

3

Description of Real Estate Assets

 

4

We May Borrow Money

 

5

Estimated Use of Proceeds of Offering

 

5

Conflicts of Interest

 

5

Compensation Paid To Our Affiliates

 

7

Investment Objectives

 

9

Distribution Policy

 

10

ERISA Considerations

 

10

Shares Sold Before the Offering

 

10

Stockholder Voting Rights and Limitations

 

10

Restriction on Share Ownership

 

11

Terms of the Offering

 

11

Appropriateness of Investment

 

11

Distribution Reinvestment Plan

 

11

Estimated Use of Proceeds

 

12

 

 

 

QUESTIONS AND ANSWERS ABOUT THE OFFERING

 

13

 

 

 

RISK FACTORS

 

18

Risks Related to the Offering

 

18

We have a limited operating history, and neither our prior performance nor the prior performance of programs sponsored by IREIC should be used to predict our future results

 

18

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

 

18

You will not have the opportunity to evaluate our investments before we make them

 

18

This is a “best efforts” offering and the number and type of investments will depend on the proceeds raised in this offering

 

19

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

 

19

Risks Related to Our Business

 

19

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

 

19

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

 

20

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

 

21

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

 

21

 

v




 

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

 

22

We do not have our own acquisition group

 

22

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

 

23

Neither we nor our Business Manager or its affiliates have experience in the lodging industry

 

23

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

 

23

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

 

23

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

 

24

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

 

24

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

 

24

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

 

25

Any mortgage loans that we originate or purchase are subject to the risks of delinquency and foreclosure

 

26

We may make a mortgage loan to affiliates of, or entities sponsored by, IREIC

 

26

There are inherent risks with real estate investments

 

27

The hotel market is highly competitive and generally subject to greater volatility than our other market segments

 

27

We 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

 

27

Because we are a REIT, we must rely on third parties to operate our hotels

 

28

Conditions of franchise agreements could adversely affect us

 

28

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

 

28

We may be restricted from re-leasing space

 

29

We currently rely on one tenant for a significant portion of our revenue, and rental payment defaults by this significant tenant could adversely affect our results of operations

 

29

Geographic concentration of our portfolio may make us particularly susceptible to adverse economic developments in the real estate markets of those areas

 

29

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

 

29

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

 

30

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

 

30

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

 

30

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 continue to forgo or defer its business management fee

 

31

Terrorist attacks and other acts of violence or war may affect the markets in which we operate, our operations and our profitability

 

31

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

 

31

 

vi




 

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

 

32

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

 

32

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

 

32

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

 

33

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

 

33

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

 

34

We may incur significant costs to comply with the Americans With Disabilities Act

 

34

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

 

35

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

 

35

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

 

35

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

 

36

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

 

36

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

 

37

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

 

37

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

 

38

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

 

38

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

 

38

Our Business Manager receives 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

 

38

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

 

39

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

 

39

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

 

39

From time to time, we 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

 

39

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

 

40

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

 

40

Federal Income Tax Risks

 

40

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

 

40

 

vii




 

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

 

41

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

 

41

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

 

41

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

 

42

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

 

42

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

 

43

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

 

43

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

 

43

Complying with REIT requirements may limit our ability to hedge effectively

 

43

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

44

 

 

 

SELECTED FINANCIAL DATA

 

45

 

 

 

CAPITALIZATION

 

47

 

 

 

COMPENSATION TABLE

 

48

Nonsubordinated Payments

 

48

Subordinated Payments

 

56

Actual Compensation

 

58

 

 

 

ESTIMATED USE OF PROCEEDS

 

59

 

 

 

PRIOR PERFORMANCE OF IREIC AFFILIATES

 

60

Prior Investment Programs

 

60

Summary Information

 

61

Publicly Registered REITs

 

63

Private Partnerships

 

69

1031 Exchange Private Placement Offering Program

 

70

 

 

 

MANAGEMENT

 

98

Board of Directors

 

98

Inland Affiliated Companies

 

98

Our Directors and Executive Officers

 

102

Committees of Our Board of Directors

 

105

Compensation of Directors and Officers

 

105

Compensation of Executive Officers

 

107

Our Business Manager

 

108

Our Property Managers

 

108

The Business Management Agreement

 

110

Property Management Agreements

 

115

Property Management Agreements – Our Lodging Facilities

 

116

 

viii




 

Property Acquisition Agreement

 

116

Business Combinations

 

118

Inland Securities Corporation

 

119

 

 

 

CONFLICTS OF INTEREST

 

124

Conflicts of Interest

 

124

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

 

124

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

 

124

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

 

124

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

 

125

We acquire real estate assets from affiliates of IREIC

 

125

From time to time, we 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

 

125

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

 

126

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

 

126

Policies and Procedures with Respect to Related Party Transactions

 

126

 

 

 

PRINCIPAL STOCKHOLDERS

 

127

 

 

 

BUSINESS AND POLICIES

 

128

Investment Strategy

 

128

Change in Investment Objectives and Policies

 

129

Appropriateness of Investment

 

130

Investment Limitations

 

130

Acquisition Standards

 

130

Borrowing Policy

 

131

Our Assets

 

132

Disposition of Properties and other Real Estate Assets

 

145

Appraisals

 

145

Return of Uninvested Proceeds

 

146

Exchange Listing and Liquidity Events

 

146

Construction and Development Activities

 

146

Competition

 

147

Insurance

 

147

Government Regulations

 

148

Other Policies

 

149

Employees

 

149

Distributions

 

150

 

 

 

DESCRIPTION OF REAL ESTATE ASSETS

 

151

Significant Acquisitions

 

159

Potential Acquisitions

 

168

Financing Transactions

 

169

Competition

 

172

 

ix




 

Repairs and Improvements

 

172

Insurance

 

172

Depreciation Expense

 

172

 

 

 

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

 

173

Overview

 

173

Results of Operations

 

180

Liquidity and Capital Resources

 

198

Contractual Obligations

 

204

Quantitative and Qualitative Disclosures About Market Risk

 

205

 

 

 

DESCRIPTION OF SECURITIES

 

207

Authorized Stock

 

207

Common Stock

 

207

Distributions

 

208

Transfer Agent and Registrar

 

208

Book Entry System

 

208

Preferred Stock

 

208

Issuance of Additional Securities and Debt Instruments

 

209

Restrictions on Issuance of Securities

 

209

Restrictions on Ownership and Transfer

 

210

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

 

211

 

 

 

SHARES ELIGIBLE FOR FUTURE SALE

 

214

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

 

214

Securities Act Restrictions

 

214

Independent Director Stock Option Plan

 

215

Effect of Availability of Shares on Market Price of Shares

 

215

Registration Rights

 

215

 

 

 

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

 

216

 

 

 

SUMMARY OF OUR ORGANIZATIONAL DOCUMENTS

 

218

Articles of Incorporation and Bylaw Provisions

 

218

Stockholders’ Meetings and Voting Rights

 

218

Board of Directors

 

219

Rights of Objecting Stockholders

 

220

Inspection of Books and Records; Stockholder Lists

 

220

Amendment of the Organizational Documents

 

220

Dissolution or Termination of the Company

 

220

Advance Notice of Director Nominations and New Business

 

221

Restrictions on Certain Conversion Transactions and Roll-ups

 

222

Limitation on Total Operating Expenses

 

224

Transactions with Affiliates

 

224

Restrictions on Borrowing

 

225

Restrictions on Investments

 

225

 

x




 

FEDERAL INCOME TAX CONSIDERATIONS

 

228

Federal Income Taxation as a REIT

 

229

General

 

230

Tax Aspects of Investments in Partnerships

 

239

Federal Income Taxation of Stockholders

 

240

Other Tax Considerations

 

244

 

 

 

ERISA CONSIDERATIONS

 

246

Fiduciary Obligations—Prohibited Transactions

 

247

Plan Assets—Definition

 

247

Publicly Offered Securities Exemption

 

248

Real Estate Operating Company Exemption

 

248

Consequences of Holding Plan Assets

 

249

Prohibited Transactions

 

249

Prohibited Transactions—Consequences

 

249

Valuation

 

250

 

 

 

PLAN OF DISTRIBUTION

 

251

General

 

251

Escrow Conditions

 

251

Subscription Process

 

251

Representations and Warranties in the Subscription Agreement

 

252

Determination of Your Suitability as an Investor

 

252

Compensation We Pay For the Sale of Our Shares

 

253

Volume Discounts

 

254

Indemnification

 

255

 

 

 

HOW TO SUBSCRIBE

 

257

 

 

 

SALES LITERATURE

 

259

 

 

 

DISTRIBUTION REINVESTMENT PLAN AND SHARE REPURCHASE PROGRAM

 

260

Distribution Reinvestment Plan

 

260

Share Repurchase Program

 

262

 

 

 

OPTIONAL INDIVIDUAL RETIREMENT ACCOUNT PROGRAM

 

264

 

 

 

REPORTS TO STOCKHOLDERS

 

266

 

 

 

PRIVACY POLICY NOTICE

 

267

 

 

 

RELATIONSHIPS AND RELATED TRANSACTIONS

 

267

 

 

 

LEGAL MATTERS

 

273

 

 

 

EXPERTS

 

273

 

 

 

ELECTRONIC DELIVERY OF DOCUMENTS

 

275

 

 

 

WHERE YOU CAN FIND MORE INFORMATION

 

276

 

xi




 

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

 

xii




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. References in this prospectus to “we,” “us” or “our company” refer to Inland American Real Estate Trust, Inc. and its consolidated wholly owned or majority owned subsidiaries, including Inland American Winston Hotels, Inc., Minto Builders (Florida), Inc. (referred to herein as “MB REIT”), Inland American Lodging Corporation and Inland Public Properties Development, Inc., except in each case where the context indicates otherwise.

Inland American Real Estate Trust, Inc.

We are a Maryland corporation that currently qualifies to be taxed as a REIT for federal and state income tax purposes. 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 90% 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.

We had our initial “best efforts” public offering of 500,000,000 shares of our common stock at $10.00 per share. We also offered up to 40,000,000 additional shares at $9.50 per share under our distribution reinvestment plan. These shares were offered pursuant to a registration statement on Form S-11, which was declared effective by the Securities and Exchange Commission on August 31, 2005. Our initial public offering commenced on August 31, 2005 and was terminated on August 1, 2007. We sold approximately 471,475,000 shares in our initial public offering, generating approximately $4,710,659,000 in gross offering proceeds. Following the termination of our initial public offering, we commenced this “best efforts” public offering of up to $5,380,000,000 in shares of our common stock. We are offering 500,000,000 shares of our common stock in our primary offering at $10.00 per share, and 40,000,000 additional shares at $9.50 per share under our distribution reinvestment plan. We are offering our shares pursuant to a registration statement on Form S-11, which was declared effective by the Securities and Exchange Commission on August 1, 2007. This public offering commenced on August 1, 2007 and will be terminated on or before August 1, 2009, unless extended with respect to shares offered under our distribution reinvestment plan or as otherwise permitted under applicable law. The proceeds raised in this offering will be used to make real estate investments, pay fees and expenses and for general corporate purposes.




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 18 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 to us.

·                                          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% 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 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 pay significant fees to affiliates of our sponsor including our Business Manager and Property Managers.

·                                          We have a limited 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 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.

·                                          You will not have the opportunity to evaluate our investments before we make them because we have not identified all of the specific assets that we will acquire in the future.

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

·                                          We rely 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, also are employed by IREIC or its affiliates and 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.

2




·                                          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 not continue to qualify as a REIT.

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

Our sponsor, 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-nine years. Various affiliates of IREIC are 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., Inland Capital Markets Group, Inc. and Inland Institutional Capital Partners Corporation, indirect wholly owned subsidiaries of The Inland Group, provide acquisition 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 Fifth 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, five 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. In addition, as of July 15, 2007, we had fifty-two employees that perform various management and corporate functions related to our lodging facilities and student and conventional multi-family housing development projects.  We reimburse our Business Manager and Property Managers for certain expenses, described herein.

3




The following chart depicts the services that affiliates of our sponsor have or may render to us, and our organizational structure:

We also own 1,000 shares of common stock in The Inland Real Estate Group of Companies, a marketing entity whose primary function is to promote the business interests of its individual stockholder members, including other entities previously sponsored by IREIC. The Inland Real Estate Group of Companies coordinates, among other things, marketing to prospective tenants as well as identifying and monitoring legislation that may impact us and our stockholders.

Description of Real Estate Assets

We focus on acquiring commercial real estate located throughout the United States, including REITs or other real estate operating companies. We also may acquire properties located in Canada. We focus on properties or entities owning properties such as:

·              multi-family properties, including both conventional apartment buildings and student housing;

·              office buildings;

·              industrial/distribution facilities;

4




·              lodging facilities;

·              retail properties; and

·              triple-net, single-use properties.

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 have not adopted any policies limiting the amount or percentage of assets that we may invest in commercial real estate, entities owning commercial real estate or other real estate assets such as collateralized mortgage-backed securities. You will not have the opportunity to evaluate our investments before we make them because we have not identified all of the specific assets that we will acquire in the future. See “Risk Factors – Risks Related to the Offering” for additional discussion regarding our investments.

Please refer to the “Description of Real Estate Assets” section of this prospectus for a description of our material investments to date. We will supplement or amend this prospectus from time to time to describe any new material investments.

We May Borrow Money

In some instances, we finance a portion of the purchase price of any real estate asset 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 also may borrow monies to acquire a REIT or other real estate operating company. Any money that we borrow typically is the subject of a written loan agreement and secured by a mortgage or other interest in the real estate asset. 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 may not exceed 55% of their combined fair market value. For these purposes, the fair market value of each asset is 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 300% of our net assets unless our board determines that a higher level is appropriate. The loan agreements with our lenders may impose additional restrictions on the amount we may borrow. As of March 31, 2007, on a consolidated basis, we had mortgage debt excluding mortgage discounts associated with debt assumed at acquisition secured by sixty-five properties totaling approximately $1.3 billion, equivalent to approximately 45% of the combined fair market value of our assets on a consolidated basis. The weighted average interest rate on these loans was 5.35% as of March 31, 2007. See “Business and Policies – Borrowing” for additional discussion of our borrowing policies.

Estimated Use of Proceeds of Offering

We anticipate investing approximately 88% of the gross proceeds of this offering, assuming the maximum offering 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.

Conflicts of Interest

Conflicts of interest exist between us and other entities including REITs sponsored by IREIC, including Inland Western Retail Real Estate Trust, Inc. and Inland Real Estate Corporation, with respect to certain properties. Inland Western Retail Real Estate Trust, Inc. purchases neighborhood and community shopping centers located generally west of the Mississippi River. Inland Real Estate Corporation also focuses on this property type although to date it generally has limited its focus to properties located within

5




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 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 share employees with IREIC, its affiliates and other entities sponsored by IREIC. These individuals 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 properties such as shopping centers and single tenant net-leased properties. We, along with certain 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 fact that we 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.

6




Compensation Paid To Our Affiliates

We pay fees to Inland Securities, our Business Manager, our Property Managers, The Inland Group and their affiliates. We also 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 that we pay, or expect to pay, to 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, and we have not given effect to any special sales or volume discounts that could reduce selling commissions. We do 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 reimburse IREIC for costs and other expenses of issuance and distribution that it pays on our behalf in connection with this offering. Our Business Manager has agreed to pay any organization and offering expenses that exceed 15% of the gross offering proceeds.

 

 

 

Operational Stage

 

 

 

 

 

Acquisition Expenses

 

We reimburse our Business Manager, the Inland Real Estate Transactions Group, Inc., Inland Real Estate Acquisitions, Inland Institutional Capital Partners Corporation 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 6% of the contract price of any real estate asset acquired or, in the case of a loan, 6% of the funds advanced. For the year ended December 31, 2006 and the three months ended March 31, 2007, we reimbursed acquisition expenses of approximately $0.6 million and $0.9 million, respectively.

 

 

 

Acquisition Fee

 

We pay our Business Manager or its designee a fee for services

 

7




 

 

performed in connection with acquiring a controlling interest in a REIT or other real estate operating company. Acquisition fees, however, are not paid for acquisitions solely of a fee interest in property. The amount of the acquisition fee is equal to 2.5% of the aggregate purchase price paid to acquire the controlling interest. We had paid no acquisition fees as of March 31, 2007.

 

 

 

Property Management Fee

 

For each property managed directly by any of our Property Managers, their affiliates or agents, we pay the applicable Property Manager a monthly fee equal to a total of 4.5% of the gross income from each property. For the year ended December 31, 2006 and the three months ended March 31, 2007, we paid property management fees of approximately $4.9 million and $2.7 million, respectively.

 

 

 

Oversight Fee

 

For each property managed directly by entities other than our Property Managers, their affiliates or agents, we pay the applicable Property Manager, based on the type of property managed, a monthly oversight fee of up to 1% of the gross income from each such property. In no event do our Property Managers receive both a property management fee and an oversight fee with respect to a particular property. We had paid no oversight fees as of March 31, 2007.

 

 

 

Business Management Fee

 

After all of our stockholders have received a non-cumulative, non-compounded return of 5% per annum on their “invested capital,” we pay our Business Manager an annual business management fee of up to 1% of our “average invested assets.” Separate and distinct from any business management fee, we also 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. For the year ended December 31, 2006 and the three months ended March 31, 2007, we paid business management fees of approximately $2.4 million and $1.5 million, respectively.

 

 

 

Incentive Fee

 

After our stockholders have first received a 10% per annum cumulative, non-compounded return on, plus return of, their “invested capital,” we will pay our Business Manager an incentive fee equal to 15% of the net proceeds from the sale of real estate assets. We had paid no incentive fees as of March 31, 2007.

 

 

 

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. We had paid no interest as of March 31, 2007.

 

 

 

Service Fee Associated with Purchasing, Selling and Servicing Mortgages

 


We pay Inland Mortgage Servicing Corporation $225 per loan per month for servicing our loans and our consolidated joint venture, MB REIT, pays $200 per loan per month for servicing its loans. In

 

8




 

 

addition, we pay Inland Mortgage Brokerage Corporation 0.2% of the principal amount of each loan placed for us by Inland Mortgage Brokerage Corporation. For the year ended December 31, 2006 and the three months ended March 31, 2007, we paid mortgage-related service fees of approximately $2.2 million and $0.5 million, respectively.

 

 

 

Ancillary Services Reimbursements

 

We reimburse IREIC, our Business Manager and their respective affiliates for any expenses that they pay or incur in providing services to us. For the year ended December 31, 2006 and the three months ended March 31, 2007, we reimbursed approximately $3.2 million and $0.7 million, respectively.

 

 

 

Investment Advisor Fee

 

We pay Inland Investment Advisors, Inc. a monthly fee for providing investment advisory services in connection with our investments in marketable securities. We pay annual fees totaling 1% of the first $10 million of marketable securities under management, 0.90% of marketable securities from $10 million to $25 million, 0.80% of marketable securities from $25 million to $50 million and 0.75% of the remaining balance. In addition, we pay an annual performance fee of 0.5% of marketable securities under management if the annualized net profit is between 15% and 20%, or 1% if the annualized net profit is greater than 20%. Notwithstanding the above, the total annual fees paid to Inland Investment Advisors plus the annual business management fee paid to our Business Manager will not exceed the amounts we may pay as the annual business management fee. For the year ended December 31, 2006, we paid investment advisory fees of approximately $2.1 million, and for the three months ended March 31, 2007, we incurred investment advisory fees of approximately $0.4 million.

 

 

 

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) 3% of the contract sales price of the property; or (2) 50% 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 6% of the contract sales price. We had paid no property disposition fees as of March 31, 2007.

 

 

 

 

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.

9




To achieve these objectives, we 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 continue paying regular monthly cash distributions to our stockholders. For the period from August 31, 2005 (when we commenced our initial public offering) through July 31, 2007, we have paid cash distributions to our stockholders aggregating approximately $130.9 million.  We paid or declared cash distributions per share of $0.50 on an annualized basis prior to January 1, 2006 and $0.60 on an annualized basis from January 1, 2006 to November 1, 2006. Effective November 1, 2006, we began paying cash distributions per share equal to $0.61 on an annualized basis, which is equivalent to an annual distribution rate of 6.1% assuming the share was purchased for $10.00 per share. Because we pay distributions in arrears, the cash distribution paid in December 2006 was the first distribution to reflect this increase.

For the seven months ended July 31, 2007, we paid cash distributions of approximately $97.4 million, all of which were funded with cash provided from our operating and investing activities. For the period from August 31, 2005 (when we commenced our initial public offering) through December 31, 2006, we paid cash distributions of approximately $33.5 million.  Approximately $33.4 million of these distributions were funded with cash provided from our operating and investing activities and approximately $0.1 million of the distributions were funded from financing activities including contributions from our sponsor.   

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

In our initial “best efforts” public offering, we offered 500,000,000 shares of our common stock at $10.00 per share and up to 40,000,000 additional shares at $9.50 per share under our distribution reinvestment plan. These shares were offered pursuant to a registration statement on Form S-11, which was declared effective by the Securities and Exchange Commission on August 31, 2005. Our initial public offering commenced on August 31, 2005 and was terminated on August 1, 2007. We sold approximately 471,475,000 shares in our initial public offering, generating approximately $4,710,659,000 in gross offering proceeds. In addition, 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 in connection with our formation. Also, through July 31, 2007, we had issued options to purchase 20,000 shares of our common stock under our independent stock option plan. None of these options has been exercised. See “Risk Factors – Risks Related to the Offering” for additional discussion regarding a “best efforts” offering.

Stockholder Voting Rights and Limitations

We 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

10




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.

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 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 continue paying regular monthly cash distributions to our stockholders.

·              You seek a hedge against inflation, because we typically 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 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

11




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 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 days notice to plan participants. See “Risk Factors – Risks Related to Our Business” for additional discussion regarding our distribution reinvestment plan.

Estimated Use of Proceeds

The amounts reflected below represent our good faith estimate of the use of offering proceeds assuming we sell 500,000,000 shares in the “best efforts” portion of the offering at $10.00 per share. Organization and offering expenses may not be greater than 15% 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 15% of the gross offering proceeds. This table does not give effect to any special sales or volume discounts which could reduce selling commissions. In addition, we do not pay commissions in connection with shares of common stock issued through our distribution reinvestment plan.

 

 

Estimated Use of Proceeds

 

 

 

Amount

 

Percent

 

Gross Offering Proceeds

 

$

5,000,000,000

 

100.00

%

Less Expenses:

 

 

 

 

 

Selling Commissions

 

$

375,000,000

 

7.50

%

Marketing Contribution

 

$

125,000,000

 

2.50

%

Due Diligence Expense Allowance

 

$

25,000,000

 

0.50

%

Organization and Offering Expenses (1)

 

$

50,500,000

 

1.01

%

TOTAL EXPENSES:

 

$

575,500,000

 

11.51

%

Gross Amount Available

 

$

4,424,500,000

 

88.49

%

Less:

 

 

 

 

 

Acquisition Expenses (2)

 

$

25,000,000

 

0.50

%

NET CASH AVAILABLE FOR ADDITIONAL INVESTMENT:

 

$

4,399,500,000

 

87.99

%

 


(1)      Organization and offering expenses include amounts for SEC 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 of the offering.

(2)      The amount of acquisition expenses depends on numerous factors including the type of real estate asset acquired, the aggregate purchase price paid 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.

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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 and develop commercial real estate, primarily multi-family, office and industrial/distribution buildings, lodging facilities and retail properties, as well as triple-net, single-use properties of a similar type, located in the United States and Canada. We 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 acquire assets through joint ventures, including joint ventures in which we do not own a controlling interest. 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 third parties or 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 85% of the appraised value of the property or the entity securing the loan. We are managed by our Business Manager, Inland American Business Manager & Advisor, Inc. We currently qualify 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 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 effortsoffering 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 in this offering. If you choose to purchase shares in this offering, you will need to fill out a subscription agreement, forms of which are included in this prospectus as Appendix C-1, and pay for the shares at the time you subscribe. If you decide to purchase shares, our escrow agent, LaSalle Bank, N.A., will hold your funds in escrow, along with those of other subscribers, until we accept your subscription. Generally, we accept or reject subscriptions within ten days of receipt.

Q:  Have you made other offerings of your common stock?

A:   Yes. We had our initial “best efforts” public offering of 500,000,000 shares of our common stock at $10.00 per share. We also offered up to 40,000,000 additional shares at $9.50 per share under our distribution reinvestment plan. These shares were offered pursuant to a registration statement on Form S-11, which was declared effective by the Securities and Exchange Commission on August 31, 2005. Our initial public offering commenced on August 31, 2005 and was terminated concurrent with the commencement of this offering. We sold approximately 471,475,000 shares in our initial public offering, generating approximately $4,710,659,000 in gross offering proceeds. Following the termination

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of our initial public offering, we commenced this “best efforts” public offering of up to $5,380,000,000 in shares of our common stock. We are offering 500,000,000 shares of our common stock in our primary offering at $10.00 per share, and 40,000,000 additional shares at $9.50 per share under our distribution reinvestment plan. We are offering our shares pursuant to a registration statement on Form S-11, which was declared effective by the Securities and Exchange Commission on August 1, 2007. This public offering commenced on August 1, 2007 and will be terminated on or before August 1, 2009, unless extended with respect to shares offered under our distribution reinvestment plan or as otherwise permitted under applicable law.

Q:  How long will the offering last?

A:   This offering will end no later than August 1, 2009 unless we elect to extend it to a later date in any jurisdiction that allows us to extend. 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, all common stock is issued only in book entry form. The use of book entry registration protects against loss, theft or destruction of stock certificates and reduces our offering costs.

Q:  Are fractional shares issued?

A:   We 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, other than investments through our distribution reinvestment plan, is $100.

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

A:   Our shares are not listed for trading on any national securities exchange and we do not expect to list the shares 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 who have held their shares for at least one year may request that we repurchase any whole number of

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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. Through July 15, 2007, we have repurchased approximately 438,000 shares under our share repurchase program.

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, as our board of directors, 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 month period to 5% of the number of outstanding shares of common stock at the beginning of that twelve month period. The share repurchase program will be terminated if our shares become listed for trading on a national securities exchange 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 expect 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 third parties or 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 85% 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 limiting 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 have not adopted any policies limiting the amount or percentage of assets that we may invest in commercial real estate, entities owning commercial real estate or other real estate assets. We also may 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 this offering, we expect to have approximately $4,399,500,000 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 do you select investments and make investment decisions?

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

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Q:  What real estate assets do you currently own?

A:   As of July 15, 2007, we, directly or indirectly, through joint ventures in which we have a controlling interest, owned fee simple interests in 326 properties, excluding our lodging facilities, located in thirty states. In the aggregate, these properties represent approximately 27 million leasable square feet.  In addition, through our wholly owned subsidiary, Inland American Winston Hotels, Inc., we owned fifty hotels in eighteen states, having an aggregate of 6,782 rooms. Also, as of March 31, 2007, we had investments in marketable securities of $222.1 million, consisting of investments in the preferred and common stock of other REITs.

As of July 15, 2007, we also had entered into joint venture agreements with two entities for the purpose of funding the development or ownership of real estate projects in the office, distribution, retail, healthcare and mixed use markets. We have invested a total of $119.4 million in cash in both joint ventures, which we do not consolidate for financial reporting purposes. As of July 15, 2007, we had funded a total of approximately $250.1 million of loans 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.

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

A:   We intend to continue paying regular monthly cash distributions to our stockholders. The actual amount and timing of distributions is determined by our board of directors in its discretion and typically depends on the amount of funds available, which depends 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 90% of our “REIT taxable income” each year. 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 to the extent of your tax basis and thereafter shall result in the recognition of capital gain (long-term or short-term, depending on whether you have held your stock for more than a year). As of November 1, 2006, we began paying cash distributions per share equal to $0.61 per year.

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 cash distributions in additional shares?

A:   Yes, our distribution reinvestment plan allows investors to reinvest cash 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.

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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 a limited operating history, and neither our prior performance nor the prior performance of programs sponsored by IREIC should be used to predict our future results.

We have a limited operating history. You should not rely on our past performance or 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 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, 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.

You will not have the opportunity to evaluate our investments before we make them.

Because we have not identified all of the specific assets that we will acquire in the future, 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 effortsoffering and the number and type of investments will depend on the proceeds raised in this offering.

The amount of proceeds that we ultimately raise in this offering will affect the diversity of our 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 the maximum 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.

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. 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.

Risks Related to Our Business

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

We compete with numerous other persons or entities seeking to buy real estate assets, or to attract tenants to properties we already own, including REITs or other real estate operating companies. These persons or entities may have greater experience and financial strength. There is no assurance that we will be able to acquire additional real estate assets or attract tenants on favorable terms, if at all. For example, our competitors may be willing to offer space at properties that compete with ours at rental rates below our existing 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.

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

Even if we are able to access sufficient capital, we may suffer from delays in deploying the capital into properties or other real estate assets. Delays may occur, for example, as a result of our relying on our Business Manager and its affiliates, including IREA, to identify these opportunities given that these entities 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 investor returns. In addition, when we acquire a property prior to the start of construction or during the early stages

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of construction, it typically takes 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 deploy capital not otherwise invested 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 all of the 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 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 also may invest all proceeds we receive from this offering in short-term, highly-liquid investments. These short-term investments typically yield less than investments in commercial real estate. Further, we may use the principal amount of these investments, and any returns generated on these investments, to pay fees in connection with our current 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 do have preemptive rights to any shares issued by us in the future. Our articles authorize us to issue up to 1.5 billion shares of capital stock, of which 1.46 billion shares are designated as common stock and 40 million are 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;

·                                          classify or reclassify any unissued shares of preferred stock by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, or terms or conditions of redemption of the preferred stock;

·                                          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 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 any 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 is directly affected by general economic and regulatory factors that impact real estate investments.

Because we invest primarily in commercial real estate, our financial condition, results of operations and our ability to pay distributions is 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 conditions such as an oversupply of space or reduced demand for real estate assets of the type that we own or seek to acquire, including, with respect to our lodging facilities, quick changes in supply of and demand for rooms that are rented or leased on a day-to-day basis;

·              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;

·                                          increases in energy costs or airline fares or terrorist incidents which impact the propensity of people to travel and therefore impact revenues from our lodging facilities, although operating costs cannot be adjusted as quickly;

·                                          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.

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;

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·                                          increases in levels of prepayments;

·                                          fluctuations in the market value of mortgage-backed securities;

·                                          increases in borrower defaults;

·                                          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.

In some instances, we acquire real estate assets by using either existing financing or borrowing new monies. Our articles generally limit the total amount we may borrow to 300% 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 90% 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 reduce the funds available for, among other things, distributions to our stockholders because cash otherwise available for distribution is required to pay principal and interest associated with amounts we borrow.

Defaults on loans secured by a property we own may result in us losing the property or properties securing the loan that is in default as a result of foreclosure actions initiated by a lender. 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 gain 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 mortgage contains 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 will be adversely affected.

We do not have our own acquisition group.

We do not employ directly any person(s) responsible for identifying and acquiring properties or other real estate assets. Instead, we rely on entities affiliated with IREIC such as IREA, Inland Capital Markets Group and Inland Institutional Capital Partners Corporation to identify and acquire other real estate assets. Other entities formed and organized by IREIC likewise utilize these entities to identify and acquire real estate assets, including the type of assets that we seek to acquire. IREA is a wholly owned indirect subsidiary of The Inland Group, Inc. Mr. Parks is a director of The Inland Group and two of the other REITs formed and organized by IREIC. Ms. Gujral is a director of IREIC and one of the other REITs. Under the property acquisition agreement we have entered into with IREA, we have been granted certain rights to acquire all properties, REITs or real estate operating companies IREA identifies, acquires or obtains the right to acquire. This right is subject to prior rights granted by IREA to other REITs formed and organized by IREIC, which grant these entities rights superior to ours to acquire neighborhood retail facilities, community centers or single-user properties located throughout the United States. The  

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agreement with IREA may result in a property being offered to another entity, even though we may also be interested in, and have the ability to acquire, the subject property.

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 sponsored by IREIC. The business plans of these entities focus on purchasing shopping centers located throughout the United States. Each of these entities also may purchase single tenant net-leased properties located anywhere in the United States. We 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.

Neither we nor our Business Manager or its affiliates have experience in the lodging industry.

On July 1, 2007, we acquired Winston Hotels, Inc., referred to herein as “Winston,” a REIT that owns hotels. Lodging properties present challenges that are different from the challenges presented by owning other property types. There is no assurance we will be able to oversee management of these properties in an efficient manner or that we will be able to integrate and adapt the existing systems and procedures of any entity that we have acquired or may acquire to our existing systems and procedures. Failure to do so could have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.

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 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,

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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 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. 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

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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.

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

Our articles generally limit the total amount we may borrow to 300% 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.

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Any mortgage loans that we originate or purchase are subject to the risks of delinquency and foreclosure.

We may originate and purchase mortgage loans, including indirectly through our lodging subsidiaries. These loans are subject to risks of delinquency and foreclosure, and risks of loss. Typically we do not have recourse to the personal assets of our borrowers. The ability of a borrower to repay a loan secured by an income-producing property depends primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. A property’s net operating income can be affected by, among other things:

·                                          increased costs, including, with respect to our lodging facilities, added costs imposed by franchisors for improvements or operating changes required, from time to time, under the franchise agreements;

·                                          property management decisions;

·                                          property location and condition;

·                                          competition from comparable types of properties;

·                                          changes in specific industry segments;

·                                          declines in regional or local real estate values, or occupancy rates; and

·                                          increases in interest rates, real estate tax rates and other operating expenses.

We bear the risks of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations and limit amounts available for distribution to you. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to that borrower will be deemed to be collateralized only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. We may also be forced to foreclose on certain properties, be unable to sell these properties and be forced to incur substantial expenses to improve operations at the property.

We may make a mortgage loan to affiliates of, or entities sponsored by, IREIC.

If we have excess working capital, we may, from time to time, and subject to the conditions in our articles, make a mortgage loan to affiliates of, or entities sponsored by, IREIC. 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 arrangements with a third-party borrower not affiliated with these entities. Further, defaults on any of these loans could have an adverse effect on our financial condition, results of operations and ability to pay distributions.

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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;

·                                          the attractiveness of a property to tenants; and

·                                          labor and material costs.

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.

The hotel market is highly competitive and generally subject to greater volatility than our other market segments.

The hotel business is highly competitive and influenced by factors such as location, room rates and quality, service levels, reputation and reservation systems, among many other factors. There are many competitors in the lodging market, and these competitors may have substantially greater marketing and financial resources than those available to us. This competition, along with other factors, such as over-building in the hotel industry and certain deterrents to traveling, may increase the number of rooms available and may decrease the average occupancy and room rates of our hotels. The demand for our hotel rooms will change much more rapidly than the demand for space at our other properties such as office buildings and shopping centers. This volatility in room demand and occupancy rates could have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.

We 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 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, 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 co­tenancy 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.

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Because we are a REIT, we must rely on third parties to operate our hotels.

To continue qualifying as a REIT, we may not, among other things, operate any hotel, or directly participate in the decisions affecting the daily operations of any hotel. Thus, we have retained third party managers to operate our hotel properties. We do not have the authority to directly control any particular aspect of the daily operations of any hotel, such as setting room rates. Thus, even if we believe our hotels are being operated in an inefficient or sub-optimal manner, we may not be able to require an immediate change to the method of operation. Our only alternative for changing the operation of our hotels may be to replace the third party manager of one or more hotels in situations where the applicable management agreement permits us to terminate the existing manager. Certain of these agreements may not be terminated without cause, which generally includes fraud, misrepresentation and other illegal acts. Even if we terminate or replace any manager, there is no assurance that we will be able to find another manager or that we will be able to enter into new management agreements favorable to us. Any change of hotel management would cause a disruption in operations that could have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.

Conditions of franchise agreements could adversely affect us.

As of July 15, 2007, a total of fifty of our wholly owned or partially owned properties were operated under franchises with nationally recognized franchisors including Marriott International, Inc., Hilton Hotels Corporation, Intercontinental Hotels Group PLC and Choice Hotels International. These agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of a hotel in order to maintain uniformity within the franchisor’s system. These standards are subject to change over time, in some cases at the discretion of the franchisor, and may restrict our ability to make improvements or modifications to a hotel without the consent of the franchisor. Conversely, these standards may require us to make certain improvements or modifications to a hotel, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment. Compliance with these standards could require us to incur significant expenses or capital expenditures, all of which could have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.

These agreements also permit the franchisor to terminate the agreement in certain cases such as a failure to pay royalties and fees or perform our other covenants under the franchise agreement, bankruptcy, abandonment of the franchise, commission of a felony, assignment of the franchise without the consent of the franchisor or failure to comply with applicable law or maintain applicable standards in the operation and condition of the relevant hotel. If a franchise license terminates due to our failure to make required improvements or to otherwise comply with its terms, we may be liable to the franchisor for a termination payment. These payments vary. Also, these franchise agreements do not renew automatically. We received notice from a franchisor that the franchise license agreements for three hotels, aggregating 455 rooms, which expire in January 2008, March 2009 and November 2010, will not be renewed. There can be no assurance that other licenses will be renewed upon the expiration thereof. The loss of a number of franchise licenses and the related termination payments 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 costs to enforce our rights as a landlord against the defaulting tenant, all of which could adversely affect our revenues and expenses and reduce the cash available for distribution.

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We may be restricted from re-leasing space.

In the case of leases with retail tenants, the majority of the leases 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 currently rely on one tenant for a significant portion of our revenue, and rental payment defaults by this significant tenant could adversely affect our results of operations.

As of March 31, 2007, approximately 20% of our rental revenue was generated by the SBC Center in Hoffman Estates, Illinois, One AT&T Center in St. Louis, Missouri and AT&T Center in Cleveland, Ohio. One tenant, AT&T, Inc., leases 100% of the total gross leasable area of these three properties. As a result of the concentration of revenue generated from these properties, if AT&T were to cease paying rent or fulfilling its other monetary obligations, we could have significantly reduced rental revenues or higher expenses until the defaults were cured or the three properties were leased to a new tenant or tenants.

Geographic concentration of our portfolio may make us particularly susceptible to adverse economic developments in the real estate markets of those areas.

In the event that we have a concentration of properties in a particular geographic area, our operating results and ability to make distributions are likely to be impacted by economic changes affecting the real estate markets in that area. A stockholder’s investment will be subject to greater risk to the extent that we lack a geographically diversified portfolio of properties. For example, as of July 15, 2007, approximately 5%, 12%, 13% and 14% of our base rental income of our consolidated portfolio, excluding our lodging facilities, was generated by properties located in the Dallas, Minneapolis, Chicago and Houston metropolitan areas, respectively.  Consequently, our financial condition and ability to make distributions could be materially and adversely affected by any significant adverse developments in those markets.

Additionally, at July 15, 2007, thirty-one of our lodging facilities, or approximately 61% of our lodging portfolio, were located in the seven eastern seaboard states ranging from Connecticut to Florida, including fourteen hotels located in North Carolina. Thus, adverse events in these areas, such as recessions, hurricanes or other natural disasters, could cause a loss of revenues from these hotels. Further, several of the hotels are located near the Atlantic Ocean and are exposed to more severe weather than hotels located inland. Elements such as salt water and humidity can increase or accelerate wear on the hotels’ weatherproofing and mechanical, electrical and other systems, and cause mold issues. As a result, we may incur additional operating costs and expenditures for capital improvements at these hotels.  This geographic concentration also exposes us to risks of oversupply and competition in these markets. Significant increases in the supply of certain property types, including hotels, without corresponding increases in demand could have a material adverse effect on our financial condition, results of operations and our ability to pay distributions to you.

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

Our ability to sell real estate assets is 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.

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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 or other asset 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 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.

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

We typically 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 generally do not 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.

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

We intend to continue paying regular monthly cash distributions to our stockholders. However, 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 continue paying distributions or that the amount of distributions will increase over time.

Even if we are able to continue paying distributions, the actual amount and timing of distributions is determined by our board of directors in its discretion and typically depends on the amount of funds available for distribution, which depends 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. 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 to the extent of your tax basis and thereafter shall result in the recognition of capital gain (long-term or short-term, depending on whether you have held your stock for more than a year). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Distributions” and “Description of Securities – Distributions” for additional discussion regarding distributions.

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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 continue to forgo or defer its business management fee.

From time to time, IREIC or its affiliates have 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. For the three months ended March 31, 2007, we paid our Business Manager a business management fee of $1.5 million, or approximately 0.22% of our average invested assets on an annual basis, which is less than the full 1% fee that the Business Manager is entitled to receive. In each case, IREIC or its affiliates, including our Business Manager, 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. There is no assurance that our Business Manager will continue to forgo or defer all or a portion of its business management fee during the periods that we are raising capital, which may affect our ability to pay distributions or have less cash available to acquire real estate assets.

Terrorist attacks 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. Any terrorist incident may, for example, deter people from traveling, which could affect the ability of our hotels to generate operating income and therefore our ability to pay distributions to you. Additionally, increased economic volatility 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.

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.

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

We 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, and in lodging facilities, which typically must be renovated or otherwise improved on a regular basis, subjects 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 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.

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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 condition of our properties may be affected by tenants, the 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. For instance, portions of the soil and groundwater under our Durham, North Carolina Hampton Inn have been contaminated by one or more leaking underground storage tanks from an adjacent property owned by a third-party. While we believe that liability for future cleanup, if any, of this subsurface contamination most likely would be imposed on the third-party owner of the leaking underground storage tanks and not our subsidiary, we could be responsible for cleaning up this site if the owner of the leaking tanks refused or were financially unable to conduct a cleanup.  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.  In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, our ability to borrow funds using the property as collateral or to sell the property.

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

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which could have a material adverse effect on our financial condition, results of operations and ability to pay distributions to you.

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. In addition, 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.

We may incur significant costs to comply with the Americans With Disabilities Act.

Investment in real estate assets also may 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 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 may, however, be required to spend significant monies to comply with this act. 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 have entered into, and may continue to 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. We also expect it to 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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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, or, in the case of our independent directors, actions taken in good faith without gross negligence or willful 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 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, our board of directors would have the power under Maryland law to, among other things, amend our articles without stockholder approval to:

·                                          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.

36




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:

·                                          80% 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 continue to qualify as a REIT, no more than 50% of the 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.

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 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 or 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.

37




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-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 receives 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

38




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

We pay significant fees to our Business Manager, Property Managers and other affiliates of IREIC for services provided to us. Because these fees generally are 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 reduce funds available for distribution to our stockholders. 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 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 investment programs previously sponsored by IREIC. These individuals face competing demands for their time and service and may have conflicts in allocating their time between our business and the business of IREIC, its affiliates and the other entities formed and organized by IREIC. These individuals may not be able to devote all of their time and resources to our business even if needed, which could have an adverse effect on our financial condition, results of operations and ability to pay distributions.

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

We have acquired real estate assets from affiliates of IREIC, and may do so in the future. Although the purchase price we paid for the assets was equal to the price paid for the assets by the affiliate plus any costs incurred by the affiliate in acquiring or financing the property or asset, it is possible that we could have negotiated a better price if we had negotiated directly with the seller.

From time to time, we 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.

From time to time, we 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, our Property Managers, Inland Capital Markets Group or Inland Institutional Capital Partners 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  

39




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. 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 in any taxable year, our operations and distributions to stockholders will be adversely affected.

We intend to operate so as to continue qualifying 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.

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.

40




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 “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 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.

41




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

·                                          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. See “ERISA Considerations – Valuation” for additional discussion regarding the annual statement of value.

42




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 generally will constitute income that does not qualify for purposes of the 75% income requirement applicable to REITs, and also will be treated as nonqualifying income for purposes of the 95% 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 75% and 95% 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.

43




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.

44




SELECTED FINANCIAL DATA

The following table shows our consolidated selected financial data relating to the historical financial condition and results of operations. This selected data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes to the consolidated financial statements appearing elsewhere in this prospectus. All dollar amounts are stated in thousands, except per share amounts.



 

As of
March 31,
2007

 

 

 

As of
December 31,
2006

 

As of
December 31,
2005

 

As of
December 31,
2004

 

 

 

(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

4,293,091

 

 

 

3,040,544

 

865,851

 

731

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgages and margins payable

 

$

1,323,953

 

 

 

1,107,113

 

227,654

 

 

 

 

 

Three
Months
Ended
March 31,

 

Three
Months
Ended
March 31,

 

Year Ended
December 31,

 

Year Ended
December 31,

 

For the period
October 4, 2004
(inception) to
December 31,

 

 

 

2007

 

2006

 

2006

 

2005

 

2004

 

 

 

(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total income

 

$

63,731

 

17,721

 

123,202

 

6,668

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest and dividend income

 

$

10,722

 

2,086

 

23,289

 

1,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) applicable to common shares

 

$

12,089

 

(1,456

)

1,131

 

(1,373

)

(24

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders per common share, basic and diluted (a)

 

$

.06

 

(.07

)

.02

 

(1.55

)

(1.20

)

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared to common stockholders

 

$

31,374

 

2,913

 

41,178

 

438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions per weighted average common share (a)

 

$

.15

 

.15

 

.60

 

.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds From Operations (b)

 

$

38,080

 

4,413

 

45,626

 

(775

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows provided by (used in) operating activities

 

$

30,043

 

7,063

 

65,883

 

11,498

 

(14

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows (used) in investing activities

 

$

(449,782

)

(159,486

)

(1,552,014

)

(810,725

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows provided by financing activities

 

$

1,197,987

 

325,400

 

1,751,494

 

836,155

 

214

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding, basic and diluted

 

205,589,116

 

19,485,272

 

68,374,630

 

884,058

 

20,000

 

 

45




(a)           The net income (loss) per basic and diluted share is based upon the weighted average number of common shares outstanding for the three months ended March 31, 2007 and 2006, and for the years ended December 31, 2006 and 2005 and the period from October 4, 2004 (inception) to December 31, 2004, respectively. The distributions per common share are based upon the weighted average number of common shares outstanding for the three months ended March 31, 2007 and 2006, and the year ended December 31, 2006 and for the period from August 31, 2005 (commencement of the initial public offering) to December 31, 2005. See Footnote (b) below for information regarding our calculation of FFO.  Our distributions of our current and accumulated earnings and profits for federal income tax purposes are taxable to stockholders as ordinary income. Distributions in excess of these earnings and profits generally are treated as a non-taxable reduction of the stockholder’s basis in the shares to the extent thereof, and thereafter as taxable gain for tax purposes. Distributions in excess of earnings and profits have the effect of deferring taxation of the amount of the distributions until the sale of the stockholder’s shares. In order to maintain our qualification as a REIT, we must make annual distributions to stockholders of at least 90% of our REIT taxable income. REIT taxable income does not include net capital gains. Under certain circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet the REIT distribution requirements.

(b)           One of our objectives is to provide cash distributions to our stockholders from cash generated by our operations. Cash generated from operations is not equivalent to our net income from continuing operations as determined under U.S. generally accepted accounting principles, or GAAP. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a standard known as “Funds from Operations,” or “FFO,” which it believes more accurately reflects the operating performance of a REIT. As defined by NAREIT, FFO means net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization on real property and after adjustments for unconsolidated partnerships and joint ventures in which we hold an interest. We have adopted the NAREIT definition for computing FFO because management believes that, subject to the following limitations, FFO provides a basis for comparing our performance to those of other REITs. The calculation of FFO may vary from entity to entity because capitalization and expense policies tend to vary from entity to entity. Items that are capitalized do not impact FFO, whereas items that are expensed reduce FFO. Consequently, our presentation of FFO may not be comparable to other similarly-titled measures presented by other REITs. FFO is not intended to be an alternative to “net income” as an indicator of our operating performance nor to “cash flows from operating activities” as determined by GAAP as a measure of our capacity to pay distributions. We believe that FFO is a better measure of our performance because FFO excludes non-cash items from GAAP net income. This allows us to compare our relative property performance to determine our return on capital.  Management uses the calculation of FFO for several reasons. We use FFO to compare our performance to that of other REITs. Additionally, we use FFO in conjunction with our acquisition policy to determine investment capitalization strategy. FFO is calculated as follows:

 

 

 

For the three
months ended
March 31,

 

For the three
months ended
March 31,

 

For the year
ended
December 31,

 

For the year
ended
December 31,

 

 

 

2007

 

2006

 

2006

 

2005

 

 

 

(In Thousands)

 

 

Net income (loss) applicable to common shares

 

$

12,089

 

(1,456

)

1,131

 

(1,373

)

Add:

Depreciation and amortization related to investment properties

 

26,570

 

7,821

 

49,681

 

3,459

 

Less:

Minority interests’ share of the above adjustment

 

579

 

1,952

 

5,186

 

2,861

 

 

 

 

 

 

 

 

 

 

 

 

 

Funds from Operations

 

$

38,080

 

4,413

 

45,626

 

(775

)

 

46




CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2007 and December 31, 2006. 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.”

 

 

March 31,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(In Thousands)

 

Debt:

 

 

 

 

 

Mortgage Notes Payable

 

$

1,259,475

 

$

1,062,703

 

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, 281,176,200 and 168,620,150 shares issued and outstanding as of March 31, 2007 and December 31, 2006, respectively

 

281

 

169

 

Additional Paid-In Capital (1)

 

2,511,522

 

1,504,503

 

Accumulated distributions in excess of net income (loss)

 

(61,167

)

(41,882

)

Accumulated other comprehensive income

 

22,264

 

21,658

 

Total Stockholders’ Equity:

 

2,472,900

 

1,484,448

 

 

 

 

 

 

 

Total Capitalization:

 

$

3,732,375

 

$

2,547,151

 

 


(1)          Additional paid-in capital is net of offering costs of $291,970 and $178,012 as of March 31, 2007 and December 31, 2006, respectively.

47




COMPENSATION TABLE

The following tables describe the compensation we pay, or expect to pay, 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. As used herein, the term “net income” excludes certain items from income, such as the gain from the sale of our assets or expenses such as depreciation and non-cash reserves. 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. Thus, our net income calculated in accordance with GAAP may be greater or less than our net income calculated under the NASAA REIT Statement.

Nonsubordinated Payments

The following compensation, allowances and fees we pay, or expect to 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.

 

We pay Inland Securities a selling commission equal to 7.5% (up to 7% of which may be reallowed to participating dealers) of the sale price for each share sold in the “best efforts” offering, subject to reduction for special sales under the circumstances as described in the “Plan of Distribution - Compensation We Pay for the Sale of Our Shares.”

Inland Securities, or any of its directors, officers, employees or affiliates, may 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 5%.

 

The actual amount depends on the number of shares sold.  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 do not pay commissions in connection with shares of common stock issued through our distribution reinvestment plan.

 

48




SELLING COMMISSIONS

Type of Compensation
and Recipient

 

Method of compensation

 

Estimated amount

 

 

 

 

 

 

 

Each soliciting dealer and their respective directors, officers, employees or affiliates initially may purchase shares net of selling commissions for $9.30 per share; however, the discount on any subsequent purchases of shares may not exceed 5%.

 

 

 

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 pay a marketing contribution equal to 2.5% of the gross offering proceeds from shares sold in the “best efforts” offering to Inland Securities, which may reallow up to 1.5% to soliciting dealers.  We pay an additional 0.5% of these gross offering proceeds to Inland Securities, which may reallow all or a portion to the soliciting dealers for bona fide due diligence expenses.  We do 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 no special sales, we will pay $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 do not pay these fees in connection with shares of common stock issued through our distribution reinvestment plan.

 

49




 

Expenses of Issuances and Distribution

Type of Compensation
and Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

Other expenses of issuances and distribution.

 

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

 

 

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

SEC Filing Fees

 

$             575,660

NASD Filing Fee

 

$               75,500

Printing & Mailing Exp.

 

$        20,000,000

Blue Sky Fees/Exp.

 

$          1,000,000

Legal Fees/Exp.

 

$          2,500,000

Accounting Fees/Exp.

 

$          2,500,000

Advertising/Sales Lit.

 

$        16,500,000

Transfer Agent Fees

 

$          3,500,000

Data Processing Fees

 

$          1,000,000

Bank Fees and Other Admin. Exp.

 

$

2,848,840

 

 

 

 

 

 

 

We reimburse IREIC for costs and other expenses of issuance and distribution that it pays on our behalf in connection with this offering.  However, 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 15% of the gross offering proceeds.

 

We may reimburse IREIC up to $225 million if we sell the maximum offering amount.

 

50




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, Inland Institutional Capital Partners Corporation and each of their respective affiliates.

 

We reimburse our Business Manager and The Inland Real Estate Transactions Group, Inc., Inland Real Estate Acquisitions, Inland Institutional Capital Partners Corporation 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 6% of the contract price of any real estate asset acquired or, in the case of a loan, 6% 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 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, are not paid for acquisitions solely of a fee interest in property.  The amount of the acquisition fee is equal to 2.5% of the aggregate purchase price paid to acquire the controlling interest.  We pay acquisition fees either in cash or by issuing shares of our common stock, valued per share at the greater of (1) the per share offering price of our common stock in our most recent public offering, (2) if applicable, the per share price

 

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

 

51




ACQUISITION EXPENSES

Type of Compensation
and Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

 

 

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 (3) $10.00 per share.  Any shares issued are 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.

 

 

 

 

52




The following table sets forth other fees and expenses that we pay, or expect to 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, we believe that the billing rates we pay do not exceed 90% of the market rates for similar services.

Other Operational Expenses

Type of Compensation
and Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

Property management fee paid to our Property Managers. 

 

We pay the applicable Property Manager a monthly fee equal to a total of 4.5% of the gross income of each property managed directly by the Property Manager, its affiliates or agents.  We pay this fee for services in connection with renting, leasing, operating and managing each property.  As is customary in the industry, we 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 pay the applicable Property Manager, based on the type of property managed, a monthly oversight fee of up to 1% of the gross income from each property managed directly by entities other than our Property Managers, their affiliates or agents. We 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 plus the oversight fee paid to any

 

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.

 

53




Other Operational Expenses

Type of Compensation
and Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

 

 

Property Manager exceed a total of 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 pay Inland Mortgage Servicing Corporation and Inland Mortgage Brokerage Corporation for purchasing, selling and servicing mortgages.

 

We pay Inland Mortgage Servicing Corporation $225 per loan per month for servicing our loans and our consolidated joint venture, MB REIT, pays $200 per loan per month for servicing its loans. In addition, we pay Inland Mortgage Brokerage Corporation 0.2% of the principal amount of each loan placed for us by Inland Mortgage Brokerage Corporation. Any of these 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 reimburse IREIC, our Business Manager and their respective affiliates for providing ancillary services.

 

We 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.

 

54




Other Operational Expenses

Type of Compensation
and Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

We pay Inland Investment Advisors, Inc. a monthly fee for providing investment advisory services in connection with our investments in marketable securities. 

 

We pay annual fees totaling 1% of the first $10 million of marketable securities under management, 0.90% of marketable securities from $10 million to $25 million, 0.80% of marketable securities from $25 million to $50 million and 0.75% of the remaining balance.  In addition, we pay an annual performance fee of 0.5% of marketable securities under management if the annualized net profit is between 15% and 20%, or 1% if the annualized net profit is greater than 20%. Notwithstanding the above, the total annual fees paid to Inland Investment Advisors plus the annual business management fee paid to our Business Manager will not exceed the amounts we may pay as the annual business management fee.

 

The actual amount depends on the total amount of marketable securities under management and cannot be determined at this time.

 

Liquidation Stage

Liquidation Stage

Type of 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:

·                       3% of the contract sales price of the property; or

·                       50% of the customary commission which would be paid to a third party broker for the sale of a comparable property.

 

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

 

 

 

 

 

 

 

The amount paid, when added to the sums paid to unaffiliated parties, may not exceed either the customary commission or an amount equal to 6% 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. 

 

 

 

55




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

Type of Compensation
and Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

Business management fee paid to our Business Manager.

 

After all of our stockholders have received a non-cumulative, non compounded return of 5% per annum on their “invested capital,” we pay our Business Manager an annual business management fee of up to 1% of our “average invested assets,” payable quarterly in an amount equal to 0.25% of our average invested assets as of the last day of the immediately preceding quarter.  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 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 bookkeeping and accounting functions, consulting with our board, overseeing our real estate assets and providing other services as our board deems appropriate.

 

The actual amount depends on the amount of our assets and distributions paid to our stockholders and cannot be determined at the present time.  As of March 31, 2007, our Business Manager had agreed to waive all fees allowed but not taken to which it was entitled.

 

56




ASSET MANAGEMENT FEE

Type of Compensation
and Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

 

 

This fee terminates if we acquire our Business Manager.  Separate and distinct from any business management fee, we also 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:

·   2% of our average invested assets for that fiscal year; or

·   25% 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.

 

Our total operating expenses did not exceed the 2% or 25% limitations for the years ended December 31, 2006 or 2005.

 

 

 

 

 

Incentive fee paid to our Business Manager.

 

After our stockholders have first received a 10% per annum cumulative, non-compounded return on, plus return of, their “invested capital,” we will pay our Business Manager an incentive fee equal to

 

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.

 

57




ASSET MANAGEMENT FEE

Type of Compensation
and Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

 

 

15% 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.

 

 

 

Actual Compensation

Our Business Manager has agreed to pay all organization and offering expenses (excluding selling commissions and the marketing contribution and the due diligence expense allowance) in excess of 4.5% of the gross offering proceeds.  Our Business Manager also has agreed to pay all organization and offering expenses, including selling commissions and the other fees payable to Inland Securities, in excess of 15% of the gross offering proceeds. We anticipate that these costs will not exceed these limitations upon completion of the offering.

We have paid or incurred the following operating expenses in connection with our operational stage activities (all dollar amounts are rounded to the nearest thousand):

Operational Stage

 

For the three months
ended March 31, 2007

 

For the year ended
December 31, 2006

 

Acquisition expenses

 

$

919,000

 

$

627,000

 

Acquisition fees

 

 

 

Property management fees

 

2,697,000

 

4,850,000

 

Oversight fees

 

 

 

Interest expense

 

 

 

Service fee associated with purchasing, selling and servicing mortgages

 

470,000

 

2,246,000

 

Ancillary services reimbursements

 

735,000

 

3,244,000

 

Business management fees(1)

 

1,500,000

 

2,400,000

 

Investment advisor fees

 

354,000

 

2,086,000

 

Incentive fees

 

 

 

Total operating fees and expenses:(2)

 

$

6,675,000

 

$

15,453,000

 

 


(1)                   For the periods indicated, the Business Manager agreed to waive all fees allowed but not taken to which it was entitled.

(2)                   Our total operating expenses did not exceed the 2% or 25% limitations for the years ended December 31, 2006 or 2005, and therefore the Business Manager has not been required to reimburse us for any excess amounts.

We have not sold any properties and, therefore, we have not paid or incurred any disposition fees for the period from October 4, 2004 (inception) through March 31, 2007.

58




ESTIMATED USE OF PROCEEDS

The amounts reflected below represent our good faith estimate of the use of offering proceeds assuming we sell 500,000,000 shares in the “best efforts” portion of the offering at $10.00 per share. Organization and offering expenses may not be greater than 15% 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 15% of the gross offering proceeds. This table does not give effect to any special sales or volume discounts which could reduce selling commissions. In addition, we do not pay commissions in connection with shares of common stock issued through our distribution reinvestment plan.

 

 

Estimated Use of Proceeds

 

 

 

Amount

 

Percent

 

Gross Offering Proceeds

 

$

5,000,000,000

 

100.00

%

Less Expenses:

 

 

 

 

 

Selling Commissions

 

$

375,000,000

 

7.50

%

Marketing Contribution

 

$

125,000,000

 

2.50

%

Due Diligence Expense Allowance

 

$

25,000,000

 

0.50

%

Organization and Offering Expenses (1)

 

$

50,500,000

 

1.01

%

TOTAL EXPENSES:

 

$

575,500,000

 

11.51

%

Gross Amount Available

 

$

4,424,500,000

 

88.49

%

Less:

 

 

 

 

 

Acquisition Expenses (2)

 

$

25,000,000

 

0.50

%

NET CASH AVAILABLE FOR

ADDITIONAL INVESTMENT:

 

$

4,399,500,000

 

87.99

%

 


(1)       Organization and offering expenses include amounts for SEC 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 of the offering.

(2)       The amount of acquisition expenses depends on numerous factors including the type of real estate asset acquired, the aggregate purchase price paid 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.

59




PRIOR PERFORMANCE OF IREIC AFFILIATES

Prior Investment Programs

During the ten year period ending March 31, 2007, IREIC and its affiliates have sponsored three other REITs and fifty-seven real estate exchange private placements, which altogether have raised more than $8.1 billion from over 180,800 investors in offerings for which Inland Securities has served as dealer manager. During that period, Inland Western Retail Real Estate Trust, Inc., Inland Real Estate Corporation and Inland Retail Real Estate Trust, Inc., the other REITs sponsored by IREIC, the latter two of which are self-administered REITs, raised approximately $7.5 billion from over 181,600 investors. Inland Western Retail Real Estate Trust, Inc. and Inland Real Estate Corporation 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 Inland Real Estate Corporation has, to date, limited its focus to properties located within 400 miles of Oak Brook, Illinois.  Although we too 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. Another entity sponsored by IREIC, Inland Real Estate Exchange Corporation, offers real estate exchange transactions, on a private basis, designed, among other things, 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 a policy or strategy of acquiring controlling interests in REITs or other real estate operating companies. The three REITs that seek current income and capital appreciation represent approximately 94% of the aggregate amount raised in offerings for which Inland Securities has served as dealer manager, approximately 99% of the aggregate number of investors, approximately 93% of properties purchased and approximately 93% of the aggregate cost of the properties purchased by the prior programs sponsored by IREIC and its affiliates.

With respect to the disclosures set forth herein, we have not provided information for Inland Retail Real Estate Trust, Inc., or IRRETI, at or for the three months ended March 31, 2007. On February 27, 2007, IRRETI and Developers Diversified Realty Corporation (“DDR”) consummated the transactions contemplated by the Agreement and Plan of Merger, dated October 20, 2006, among DDR, a subsidiary of the DDR and IRRETI.  Pursuant to the agreement, DDR acquired IRRETI for a total merger consideration of $14.00 per share plus accrued but unpaid dividends for the month of February in cash, prorated in accordance with the agreement. DDR elected to pay the merger consideration to the IRRETI stockholders through combination of $12.50 in cash and $1.50 in common shares of DDR, which equates to a 0.021569 common share of DDR. The transaction had a total enterprise value of approximately $6.2 billion. No further information regarding IRRETI is available.

We pay fees to Inland Securities and our Business Manager, Property Managers, The Inland Group and their affiliates. We also reimburse these entities for expenses incurred in performing services on our behalf. We pay selling commissions, marketing contributions and a due diligence expense allowance to Inland Securities, a portion of which is reallowed to soliciting dealers. In addition, we reimburse IREIC for costs and other expenses of the offering. We also reimburse our Business Manager and The Inland Real Estate Transactions Group, Inc., Inland Real Estate Acquisitions, Inland Institutional Capital Partners Corporation and each of their respective affiliates for acquisition expenses. We also 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

60




received a minimum return on their invested capital on an annual basis. In addition, we 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 pay interest on any money that we may borrow from our Business Manager and its affiliates and we pay fees to Inland Mortgage Servicing Corporation and Inland Mortgage Brokerage Corporation for all mortgages serviced or loans placed, respectively. We generally 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.

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. Further, we 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 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 the 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 IREIC’s experience 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, with the exception of Inland Retail Real Estate Trust, Inc., for the ten year period ending March 31, 2007, 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. With respect to Inland Retail Real Estate Trust, Inc., information is presented for the ten year period ended September 30, 2006. This information set forth in this table, and in the narrative that follows, represents capital raised by these prior programs only through offerings for which Inland Securities has served as dealer manager. All information regarding Inland Western Retail Real Estate Trust, Inc., Inland Real Estate Corporation and Inland Retail Real Estate Trust, Inc. is derived from the public filings by

61




these entities. 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.

 

 

Inland Western
Retail Real
Estate Trust, Inc.
REIT
Program as of
March 31, 2007

 

Inland Retail
Real Estate
Trust, Inc.
REIT
Program as of
September 30,
2006

 

Inland Real
Estate
Corporation
REIT
Program as of
March 31, 
2007 (1)

 

Inland Real
Estate Exchange
Private
Placement
Offerings as of
March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

Number of programs sponsored

 

1

 

1

 

1

 

57

 

Aggregate amount raised from investors

 

$

4,472,189,000

 

2,424,515,000

 

716,486,000

 

480,813,000

 

Approximate aggregate number of investors

 

116,000

 

57,600

 

6,100

 

1,100

 

Number of properties purchased

 

307

 

287

 

166

 

59

 

Aggregate cost of properties

 

$

7,734,332,000

 

4,138,046,000

 

1,778,354,000

 

977,704,000

 

Number of mortgages/notes receivable

 

6

 

0

 

0

 

0

 

Principal amount of mortgages/notes receivable

 

$

135,328,000

 

0

 

0

 

0

 

Percentage of properties (based on cost) that were:

 

 

 

 

 

 

 

 

 

Commercial—

 

 

 

 

 

 

 

 

 

Retail

 

70.00

%

89.00

%

85.00

%

37.00

%

Single-user net lease

 

30.00

%

11.00

%

15.00

%

10.00

%

Nursing homes

 

0.00

%

0.00

%

0.00

%

0.00

%

Offices

 

0.00

%

0.00

%

0.00

%

45.00

%

Industrial

 

0.00

%

0.00

%

0.00

%

8.00

%

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)

 

36.00

%

39.00

%

36.00

%

27.00

%

Existing construction

 

64.00

%

61.00

%

64.00

%

73.00

%

 

 

 

 

 

 

 

 

 

 

Number of properties sold in whole or in part

 

0

 

13

 

19

 

1

 

 

 

 

 

 

 

 

 

 

 

Number of properties exchanged

 

0

 

0

 

0

 

0

 

 


(1)

On November 13, 2006, Inland Real Estate Corporation, or IRC, issued $180 million aggregate principal amount of its 4.625% convertible senior notes due 2026, which included the exercise by the initial purchasers of their option to purchase an additional $10 million to cover over-allotments.  IRC received net proceeds of approximately $177.3 million after deducting selling discounts and commission. IRC used the net proceeds from the offering to repurchase 2,776,000 shares of its common stock at a price equal to $18.01 per share (approximately $50 million in the aggregate) concurrently with the closing of the offering.  Neither Inland Securities nor any Inland affiliate received any fees in connection with this private placement.  Accordingly, information regarding this private placement has been excluded from the table and the narrative below.

 

During the three years prior to March 31, 2007, Inland Western Retail Real Estate Trust, Inc. purchased 299 properties and Inland Real Estate Corporation purchased twenty commercial properties. During the three years prior to September 30, 2006, Inland Retail Real Estate Trust, Inc. purchased sixty-eight commercial properties. Upon written request, you may obtain, without charge, a copy of Table VI

 

62




 

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 months. We will provide exhibits to each such Form 10-K upon payment of a reasonable fee for copying and mailing expenses.

 

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 51.6 million shares of common stock. In addition, through March 31, 2007, IRC had issued approximately 15.2 million shares of common stock through its distribution reinvestment program and repurchased approximately 5.3 million shares of common stock through its share repurchase program. As a result, IRC has realized total gross offering proceeds of approximately $666.3 million as of March 31, 2007. On June 9, 2004, IRC listed its shares on the New York Stock Exchange and began trading under the ticker “IRC”. On July 30, 2007, the closing price of the stock on the New York Stock Exchange was $14.93 per share.

IRC focuses on purchasing shopping centers that provide convenience goods, personal services, wearing apparel and hardware and appliances. All of its centers are 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 March 31, 2007, the properties owned by IRC were generating sufficient cash flow to pay operating expenses and an annual cash distribution of $0.96 per share, equal portions of which are paid monthly. Effective with the April 27, 2007 cash distribution, IRC began paying an annual cash distribution of $0.98 per share.

As of March 31, 2007, IRC owned 147 properties for an aggregate purchase price of approximately $1.8 billion. These properties were purchased in part with proceeds received from the above described offerings of shares of its common stock, borrowings secured by its properties and draws on its line of credit or sales proceeds from previous sales of properties. As of March 31, 2007, IRC had debt of approximately $669.9 million secured by its properties and had $45 million 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. As a result of the merger, IREIC, the sole stockholder of the advisor, and The Inland Property Management Group, Inc., the sole stockholder of its property manager, received an aggregate of approximately 6.2 million shares of IRC’s common stock valued at $11.00 per share, or approximately 9% 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 by Inland Securities in 2003, Inland Retail Real Estate Trust, Inc., which we refer to herein as IRRETI, sold a total of approximately 213.7 million shares of its common stock. In addition, through September 30, 2006, IRRETI had issued approximately 41.1 million shares through its distribution reinvestment program, and has repurchased a total of approximately 11.4 million shares through the share reinvestment program. As a result, IRRETI had realized total net offering proceeds of approximately $2.4 billion as of September 30, 2006. On December 29, 2004, IRRETI issued approximately 19.7 million shares as a result of a merger with its advisor and property managers, as described below.

63




IRRETI focused on purchasing shopping centers located east of the Mississippi River in addition to single-user retail properties in locations throughout the United States. IRRETI sought to provide investors with regular cash distributions and a hedge against inflation through capital appreciation. As of September 30, 2006, 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 was paid monthly.

As of September 30, 2006, IRRETI owned 287 properties for an aggregate purchase price of approximately $4.1 billion. These properties were purchased with proceeds received from the above described offerings of shares of its common stock, financings sole of properties and the line of credit. As of September 30, 2006, IRRETI had borrowed approximately $2.3 billion secured by its properties.

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 stockholder of the business manager and advisor, and the stockholders of the property managers, an aggregate of approximately 19.7 million 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.

On February 27, 2007, IRRETI and DDR consummated the transactions contemplated by the Agreement and Plan of Merger, dated October 20, 2006, among DDR, a subsidiary of the DDR and IRRETI. Pursuant to the agreement, DDR acquired IRRETI for a total merger consideration of $14.00 per share plus accrued but unpaid dividends for the month of February in cash, prorated in accordance with the agreement. DDR elected to pay the merger consideration to the IRRETI stockholders through combination of $12.50 in cash and $1.50 in common shares of DDR, which equates to a 0.021569 common share of DDR. The transaction had a total enterprise value of approximately $6.2 billion.

Inland Western Retail Real Estate Trust, Inc. was formed in March 2003. Through a total of two public offerings, the last of which was completed in 2005, Inland Western Retail Real Estate Trust, Inc., which we refer to herein as Inland Western, sold a total of approximately 422 million shares of its common stock. In addition, through March 31, 2007, Inland Western had issued approximately 35 million shares through its distribution reinvestment program and had repurchased approximately 9 million shares through its share repurchase program. As a result, Inland Western has realized total gross offering proceeds of approximately $4.4 billion as of March 31, 2007.

Inland Western focuses on purchasing multi-tenant shopping centers and single-user net lease 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 March 31, 2007, the properties owned by Inland Western were generating sufficient cash flow to pay operating expenses and an annualized cash distribution of $0.6425 per share, a portion of which is paid monthly.

As of March 31, 2007, Inland Western owned 307 properties for an aggregate purchase price of approximately $7.7 billion. These properties were purchased with proceeds received from the above described offering of shares of its common stock and financings. As of March 31, 2007, Inland Western had borrowed approximately $4.3 billion secured by its properties.

The following tables summarize distributions paid by IRC and Inland Western from the date each was formed or commenced its offering through March 31, 2007, and, in the case of IRRETI, through September 30, 2006. The rate at which each company raises capital, acquires properties and generates cash from all sources determines the amount of cash available for distribution. As described in more detail

64




below, IREIC or its affiliates agreed, from time to time, to either forgo or defer all or a portion of the business management and advisory fees due them to increase the amount of cash available to pay distributions while each REIT raised capital and acquired properties. As described below, IREIC also advanced monies to Inland Western to pay distributions. Inland Western has since repaid these advances. With respect to IRC, from 1995 through 2000, IREIC or its affiliates agreed to forgo approximately $10.5 million in advisor fees. With respect to IRRETI, from 1999 through 2004, IREIC or its affiliates agreed to forgo approximately $3.2 million and deferred an additional $13.1 million 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 through March 31, 2007, IREIC or its affiliates received approximately $60.4 million in advisor fees and agreed to forgo an additional $104.0 million. During this time, IREIC also advanced funds to Inland Western to pay distributions. In 2003 and 2004, Inland Western received approximately $1.2 million and $4.7 million, respectively, for an aggregate amount of approximately $5.9 million. IREIC forgave approximately $2.4 million of this amount, which is included as “additional paid in capital” in Inland Western’s financial statements, and Inland Western had repaid the remaining $3.5 million.

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. For the three months ended March 31, 2007, we paid our Business Manager a business management fee of $1.5 million, or approximately 0.22% of our average invested assets on an annual basis, which is less than the full 1% fee that the Business Manager is entitled to receive. 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 with this capital. Our Business Manager is not, however, obligated to continue foregoing any portion of this fee, 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.

Inland Real Estate Corporation – Last Offering By Inland Securities Completed In 1998

 

Total
Distribution

 

Ordinary
Income(1)

 

Non Taxable
Distribution(2)

 

Capital Gain
Distribution(3)

 

Total 
Distributions
per Share

 

 

 

$

 

$

 

$

 

$

 

$             

 

1995

 

736,627

 

694,213

 

42,414

 

 

.76

 

1996

 

3,704,943

 

3,093,525

 

611,418

 

 

.82

 

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

 

 

.90

 

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