424B3 1 a08-28790_2424b3.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 a diversified portfolio of commercial real estate including retail, multi-family, industrial, lodging, office and student housing 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 reserve the right to reallocate the shares of common stock we are offering between the primary offering and our distribution reinvestment plan.  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 24. 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

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

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

·             we have a limited operating history

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

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

·             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

·             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 rely on our business manager and property managers to manage our business and assets

·             we may not continue to qualify as a REIT

·             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 Financial Industry Regulatory Authority, or FINRA. 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 January 7, 2009.  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 January 7, 2009.

 



 

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.

 

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, Oregon 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 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.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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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.

 

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.

 

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TABLE OF CONTENTS

 

 

PAGE

PROSPECTUS SUMMARY

1

QUESTIONS AND ANSWERS ABOUT THE OFFERING

20

RISK FACTORS

24

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

49

ESTIMATED USE OF PROCEEDS

50

MANAGEMENT

51

CONFLICTS OF INTEREST

73

BUSINESS AND POLICIES

76

DESCRIPTION OF SECURITIES

89

SHARES ELIGIBLE FOR FUTURE SALE

96

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

98

SUMMARY OF OUR ORGANIZATIONAL DOCUMENTS

100

FEDERAL INCOME TAX CONSIDERATIONS

110

ERISA CONSIDERATIONS

129

PLAN OF DISTRIBUTION

134

HOW TO SUBSCRIBE

140

SALES LITERATURE

142

DISTRIBUTION REINVESTMENT PLAN AND SHARE REPURCHASE PROGRAM

143

OPTIONAL INDIVIDUAL RETIREMENT ACCOUNT PROGRAM

147

REPORTS TO STOCKHOLDERS

149

PRIVACY POLICY NOTICE

150

RELATIONSHIPS AND RELATED TRANSACTIONS

150

LEGAL MATTERS

152

ELECTRONIC DELIVERY OF DOCUMENTS

153

WHERE YOU CAN FIND MORE INFORMATION

153

 

 

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

 

v



 

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., Inland American Orchard Hotels, Inc., Inland American Urban 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 as of the close of business on July 31, 2007. We sold a total of 469,598,762 shares in the “best efforts” public offering and a total of 9,720,990.849 shares pursuant to our distribution reinvestment plan, resulting in aggregate gross offering proceeds of approximately $4,788,337,083. 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 reserve the right to reallocate the shares of common stock we are offering between the primary offering and 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 24 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 Real Estate Group, Inc.

 

Our sponsor, Inland Real Estate Investment Corporation, or “IREIC,” is an affiliate of The Inland Real Estate Group, Inc., or “TIREG,” which is wholly owned by The Inland Group, Inc.  IREIC, our Business Manager and TIREG are part of The Inland Real Estate Group of Companies, Inc., which is comprised of independent legal entities that are either subsidiaries of the same entity, affiliates of each other, share some common ownership or were previously sponsored and managed by subsidiaries of IREIC, some or all of which are sometimes referred to herein as “Inland.”  The Inland entities have 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 forty 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 Delaware limited liability companies, the sole member of which is Inland American Holdco LLC, which has four members, all corporations, which are controlled by the four principals of The Inland Group.  Inland Real Estate Acquisitions, Inc., or “IREA,” an indirect wholly owned subsidiary of The Inland Group, and Inland Capital Markets Group, Inc. and Inland Institutional Capital Partners Corporation, wholly owned subsidiaries of IREIC, 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 IREA, 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 eight members on our board of directors, six 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 September 30, 2008, we had 150 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:

 

·                                          retail properties;

 

·                                          multi-family properties;

 

·                                          industrial facilities;

 

·                                          lodging facilities;

 

4



 

·                                          office buildings;

 

·                                          student housing 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 commercial 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.  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. See “Business and Policies – Borrowing Policy” for additional discussion of our borrowing policies.

 

Conflicts of Interest

 

Conflicts of interest exist between us and other entities including REITs sponsored by IREIC, including Inland Real Estate Corporation, referred to herein as “IRC,” Inland Western Retail Real Estate Trust, Inc., referred to herein as “Inland Western,” and Inland Diversified Real Estate Trust, Inc., referred to herein as “Inland Diversified,” with respect to certain properties. IRC and Inland Western acquire and manage retail properties.  IRC focuses on neighborhood, community, power and lifestyle retail centers and single-tenant retail properties, located primarily in the Midwest, and Inland Western owns a national retail portfolio including lifestyle, power and community centers as well as single-tenant net lease properties.  Inland Diversified, which has filed a registration statement with the SEC but has not commenced its initial public offering, intends to purchase, acquire and develop commercial real estate located in the United States and internationally. Inland Diversified also intends to invest in joint ventures, development projects, real estate loans and marketable securities, and selectively acquire REITs and other real estate operating companies.  Each of these entities also may purchase single tenant net-leased properties located anywhere in the United States.  We will actively seek to invest in the same type of assets as these entities.

 

5



 

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 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 Affiliates of IREIC

 

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 500,000,000 shares is sold in our “best efforts” offering, and there are no special sales, we will pay a total of $375 million in selling commissions. We do not pay commissions in connection with shares of common stock issued through our distribution reinvestment plan.

 

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SELLING COMMISSIONS

 

Type of Compensation
and Recipient

 

Method of compensation

 

Estimated amount

 

 

 

 

 

 

 

Each soliciting dealer and its 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 million in the aggregate for marketing and due diligence if we sell the maximum number of 500,000,000 shares in our “best efforts offering.” We do not pay these fees in connection with shares of common stock issued through our distribution reinvestment plan.

 

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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 FINRA 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 $50.5 million.

 

 

 

SEC Filing Fees

FINRA Filing Fee

Printing & Mailing Exp.

Blue Sky Fees/Exp.

Legal Fees/Exp.

Accounting Fees/Exp.

Advertising/Sales Lit.

Transfer Agent Fees

Data Processing Fees

Bank Fees and Other
Admin. Exp.

 

$575,660

$75,500

$20,000,000

$1,000,000

$2,500,000

$2,500,000

$16,500,000

$3,500,000

$1,000,000

$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.

 

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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.

 

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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.

 

 

 

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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 up to 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.

 

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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.

 

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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 will pay annual fees totaling 1% of the first $1 to $5 million of marketable securities under management, 0.85% of marketable securities from $5 to $10 million, 0.75% of marketable securities from $10 to $25 million, 0.65% of marketable securities from $25 to $50 million, 0.60% of marketable securities from $50 to $100 million and 0.50% of marketable securities above $100 million. Notwithstanding the above, the total annual fees paid to Inland Investment Advisors plus the annual business management fee paid to our Business Manager may 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 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.

 

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

 

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Subordinated Payments

 

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

 

Operational Stage

 

ASSET MANAGEMENT FEE

 

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. This fee terminates if we acquire our Business Manager.

 

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

 

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ASSET MANAGEMENT FEE

 

Type of Compensation and 
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

 

 

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:

 

Our total operating expenses did not exceed the 2% or 25% limitations for the years ended December 31, 2007, 2006 or 2005.

 

 

 

 

 

 

 

·      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.

 

 

 

 

 

 

 

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 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

 

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.

 

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ASSET MANAGEMENT FEE

 

Type of Compensation and
Recipient

 

Method of Compensation

 

Estimated Amount

 

 

 

 

 

 

 

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.

 

 

 

Investment Objectives

 

Our investment objectives are:

 

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

 

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

 

To achieve these objectives, we 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.

 

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 as of the close of business on July 31, 2007. We sold a total of 469,598,762 shares in the “best efforts” public offering and a total of 9,720,990.849 shares pursuant to our distribution reinvestment plan, resulting in aggregate gross offering proceeds of approximately $4,788,337,083. 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.  See “Risk Factors – Risks Related to the Offering” for additional discussion regarding a “best efforts” offering.

 

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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 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 Corporate Structure” 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 reserve the right to reallocate the shares of common stock we are offering between the primary offering and the 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.

 

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Distribution Reinvestment Plan

 

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

 

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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 a diversified portfolio of commercial real estate, primarily retail, multi-family, industrial, lodging, office and student housing 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 commercial mortgage-backed securities. Investments in commercial 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 Investments in Other Real Estate Assets” 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 FINRA 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, Bank of America, 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

 

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commencement of this offering. We sold approximately 479,319,753 shares in our initial public offering, generating approximately $4,788,337,083 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 reserve the right to reallocate the shares of common stock we are offering between the primary offering and the 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:  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 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.

 

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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 have used and expect to continue using 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 commercial 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.

 

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

 

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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 will 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).

 

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.

 

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. The occurrence of any of the risks discussed in this prospectus could have a material adverse affect on our business, financial condition, results of operations and ability to pay distributions to you.  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.

 

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

 

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

 

Risks Related to Our Business

 

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

 

We 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.

 

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 of construction, it typically takes several months to complete construction and rent available space.  Further, 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.

 

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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 not 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, IREA 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.

 

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

 

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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 will 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).

 

Although IREIC or its affiliates have  previously foregone or deferred advisor fees in an effort to increase 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 fee due them from us and 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 nine months ended September 30, 2008, we incurred a $18.5 million business management fee and an investment advisory fee of approximately $1.8 million, together which are less than the full 1% fee that the Business Manager could be paid.  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 Retail Real Estate Trust, Inc., or “Inland Western,” IREIC also advanced monies to Inland Western to pay distributions. 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.

 

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. One of these entities, Inland Diversified Real Estate Trust, Inc., relies on an affiliate of our Business Manager to serve as its business manager.  Inland Diversified intends to invest in the same broad range of asset types as us.  As a result, we may be seeking to buy properties and other real estate assets at the same time as Inland Diversified.  The resolution of conflicts in favor of other IREIC-sponsored entities could result in us losing investment opportunities.

 

Actions of our joint venture partners could negatively impact our performance.

 

We have entered into, and may in the future enter into, joint ventures with third parties.  Our organizational documents do not limit the amount of available funds that we may invest in these joint ventures, and we intend to continue to develop and acquire properties through joint ventures with other persons or entities when warranted by the circumstances. In many cases, our existing venture partners share, and future partners may share, certain approval rights over major decisions and these investments may involve risks not otherwise present with other methods of investment in real estate, including, but not limited to:

 

·              that our co-member, co-venturer or partner in an investment might become bankrupt, which would mean that we and any other remaining general partners, members or co-venturers would generally remain liable for the partnership’s, limited liability company’s or joint venture’s liabilities;

 

·              that our co-member, co-venturer or partner may at any time have economic or business interests or goals which are or which become inconsistent with our business interests or goals;

 

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·              that our co-member, co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our current policy with respect to maintaining our qualification as a REIT;

 

·              that, if our partners fail to fund their share of any required capital contributions, we may be required to contribute that capital;

 

·              that joint venture, limited liability company and partnership agreements often restrict the transfer of a co-venturer’s, member’s or partner’s interest or may otherwise restrict our ability to sell the interest when we desire or on advantageous terms;

 

·              that our relationships with our partners, co-members or co-venturers are contractual in nature and may be terminated or dissolved under the terms of the agreements and, in each event, we may not continue to own or operate the interests or assets underlying the relationship or may need to purchase these interests or assets at an above-market price to continue ownership;

 

·              that disputes between us and our partners, co-members or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business; and

 

·              that we may in certain circumstances be liable for the actions of our partners, co-members or co-venturers.

 

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.

 

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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.

 

Risks Related to Investments in Real Estate

 

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, our investments may not generate revenues sufficient to meet operating expenses.

 

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

 

Because we invest primarily in commercial real estate, we are impacted 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;

 

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·              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.

 

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.  In addition, if a tenant at one of our “single-user facilities,” properties designed or built primarily for a particular tenant or a specific type of use, 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.

 

Further, with respect to our retail properties, 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.

 

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.

 

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.

 

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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.

 

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

 

The lodging 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.

 

Conditions of franchise agreements could adversely affect us.

 

Our lodging properties are operated pursuant to franchise or license agreements with nationally recognized hotel brands 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.

 

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 two hotels, aggregating 319 rooms, which expire in March 2009 and November 2010, will not be renewed.

 

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

 

Our ability to sell real estate assets is limited by the provisions governing our continued qualifications as a REIT as well as by many other 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.

 

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.

 

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.

 

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.

 

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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, including renovations and improvements required by existing franchise agreements, 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.

 

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

 

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.

 

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.

 

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,

 

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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.

 

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.

 

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

 

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

 

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

 

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

 

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

 

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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.

 

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.

 

Risks Related to Investments in Other Real Estate Assets

 

We may own equity interests in a number of REITs or other real estate operating companies that invest in real estate or real estate related assets and are, therefore, subject to the risks impacting each entity’s assets.

 

We have invested, and may continue to invest, in real estate related securities of both publicly traded and private real estate companies.  Real estate related equity securities are always unsecured and subordinated to other obligations of the issuer.  Investments in real estate related equity securities are subject to risks of: (1) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities; (2) substantial market price volatility resulting from changes in prevailing interest rates in the case of traded equity securities; (3) subordination to the liabilities of the entity; (4) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to redeem the securities; and (5) the possibility that earnings of the issuer may be insufficient to meet its debt service and distribution obligations.  In addition, investments in real estate related securities will involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer.  Issuers of real estate related securities generally invest in real estate or real estate related assets and are subject to the inherent risks associated with real estate related investments discussed in this prospectus, including:

 

·              fluctuations in value due to changes in interest rates;

 

·              interest rate caps on adjustable mortgage-backed securities;

 

·              increases in levels of prepayments;

 

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·              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.

 

These risks may adversely affect the value of outstanding real estate related equity securities and the ability of the issuers thereof to repay principal and interest or make distribution payments.

 

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

 

We have invested, and may continue to invest, in commercial mortgage-backed securities, which may increase our exposure to credit and interest rate risk. In this context, credit risk is the risk that borrowers will default on the mortgages underlying the commercial mortgage-backed securities. Interest rate risk occurs as prevailing market interest rates change relative to the current yield on the commercial 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 commercial 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 commercial mortgage-backed securities. We may be unable to manage these risks.

 

Recent market conditions and the risk of continued market deterioration may reduce the value of any real estate related securities in which we may invest.

 

Recently the U.S. credit markets and the sub-prime residential mortgage market have experienced severe dislocations and liquidity disruptions. Sub-prime mortgage loans have experienced increasing rates of delinquency, foreclosure and loss. These and other related events have had a significant impact on the capital markets associated not only with sub-prime mortgage-backed securities, asset-backed securities and collateralized debt obligations, but also with the U.S. credit and financial markets as a whole.

 

Our investments in real estate related securities, including commercial mortgage-backed securities, sometimes referred to herein as “CMBS,” expose us to the volatility of the credit markets.  Turmoil in the credit market may have a material adverse effect on the value of our securities portfolio.

 

Because there may be significant uncertainty in the valuation of, or in the stability of the value of, securities holdings, the fair values of these investments might not reflect the prices that we would obtain if we sold these investments. Furthermore, due to the recent market events, these investments are subject to rapid changes in value caused by sudden developments that could have a material adverse affect on the value of these investments.

 

To the extent that these volatile market conditions persist or deteriorate, they have and may continue to negatively impact our ability to both acquire and potentially sell our real estate related securities holdings at a price and with terms acceptable to us, and we may be required to recognize additional impairment charges or unrealized losses.

 

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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;

 

·              poor 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. 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.

 

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Risks Associated with Debt Financing

 

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. 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.

 

Recent disruptions in the financial markets and deteriorating economic conditions could adversely affect our ability to service our existing indebtedness, our ability to refinance or secure additional debt financing on attractive terms and the values of our investments.

 

The capital and credit markets have been experiencing extreme volatility and disruption. Liquidity in the global credit market has been severely contracted by these market disruptions, making it costly to obtain new lines of credit or refinance existing debt. As a result of the ongoing credit market turmoil, we may not be able to refinance our existing indebtedness or to obtain additional financing on attractive terms. Accordingly, we may be forced to use a greater proportion of our offering proceeds to finance our acquisitions. If the current debt market environment persists, we may modify our investment strategy in order to optimize our portfolio performance. Our options would include limiting or eliminating the use of debt and focusing on those investments that do not require the use of leverage.

 

The disruptions in the financial markets and deteriorating economic conditions could adversely affect the values of our investments. Turmoil in the capital markets has constrained equity and debt capital available for investment in commercial real estate, resulting in fewer buyers seeking to acquire commercial properties and possible increases in cap rates and lower property values. Further, these deteriorating economic conditions could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio and in the collateral securing any loan investments we may make, which could have the following negative effects:

 

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·              the values of our investments in commercial properties could decrease below the amounts paid for such investments;

 

·              the value of collateral securing any loan investment we may make could decrease below the outstanding principal amounts of such loans;

 

·              revenues from our properties could decrease due to fewer tenants or lower rental rates, making it more difficult for us to pay distributions or meet our debt service obligations on debt financing; or

 

·              revenues on the properties and other assets underlying any loan investments we may make could decrease, making it more difficult for borrowers to meet their payment obligations to us.

 

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

 

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

 

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.

 

From time to time, we use derivative financial instruments to hedge exposures to changes in interest rates on certain loans secured by our assets.  Our derivative instruments currently consist of interest rate swap contracts but may, in the future, include, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions are determined in light of the facts and circumstances existing at the time of the hedge and may differ from our currently anticipated hedging strategy.  There is no assurance that our hedging strategy will achieve our objectives.

 

To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we are exposed to credit risk, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. 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. 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. There is no assurance we will be able to manage these risks effectively.

 

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 by using derivative financial instruments.

 

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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.

 

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.

 

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.

 

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

 

We do not have our own acquisition group.

 

Except for the persons employed by our lodging and student housing subsidiaries, 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, Inc. 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 Mr. Parks and Ms. Gujral are both directors of IREIC and two of the other REITs formed and organized by IREIC. 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

 

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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 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.

 

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.

 

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 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.

 

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 you.  We have also issued stock to our Business Manager in consideration of acquisition fees earned by the Business Manager and may do so again in the future.  These issuances have the effect of reducing the percentage of our outstanding shares owned by investors purchasing shares in this offering.

 

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

 

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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.

 

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, IREA, 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 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.

 

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.

 

Risks Related to Our Corporate Structure

 

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

 

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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.

 

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.

 

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.

 

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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.

 

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.

 

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.

 

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

 

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(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.

 

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.

 

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.

 

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;

 

45



 

·              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.

 

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.

 

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.

 

46



 

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.

 

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.

 

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.

 

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.

 

47



 

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 not constitute gross income for purposes of the 75%  and 95% income requirements applicable to REITs. In addition, any income from foreign currency or other hedging transactions generally does not constitute gross income for purposes of both the 75% and 95% income tests. However, 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.

 

Legislative or regulatory action could adversely affect investors.

 

In recent years, numerous legislative, judicial and administrative changes have been made in the federal income tax laws applicable to investments similar to an investment in shares of our common stock.  Additional changes to the tax laws are likely to continue to occur, and we cannot assure you that any of these changes will not adversely affect the taxation of a stockholder.  Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets.  You are urged to consult with your own tax advisor with respect to the impact of recent legislation on your investment in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.  You also should note that our counsel’s tax opinion is based upon existing law and Treasury Regulations, applicable as of the date of its opinion, all of which are subject to change, either prospectively or retroactively.

 

Congress passed major federal tax legislation in 2003, with modifications to that legislation in 2005.  One of the changes effected by that legislation generally reduced the tax rate on dividends paid by corporations to individuals to a maximum of 15% prior to 2011.  REIT distributions generally do not qualify for this reduced rate.  The tax changes did not, however, reduce the corporate tax rates.  Therefore, the maximum corporate tax rate of 35% has not been affected.  However, as a REIT, we generally would not be subject to federal or state corporate income taxes on that portion of our ordinary income or capital gain that we distribute currently to our stockholders, and we thus expect to avoid the “double taxation” that other corporations are typically subject to.

 

Although REITs continue to receive substantially better tax treatment than entities taxed as corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be taxed for federal income tax purposes as a corporation.  As a result, our articles provide our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a corporation, without the vote of our stockholders.

 

48



 

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.

 

49



 

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, FINRA 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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MANAGEMENT

 

Board of Directors

 

We operate under the direction of our board of directors, which is responsible for managing and controlling our business affairs.  The board has retained Inland American Business Manager & Advisor, Inc. to serve as our Business Manager and to manage our day-to-day operations.  Our articles and bylaws provide that the number of our directors may be established by a majority of the entire board of directors but may not be more than eleven.  The articles further provide that the majority of our directors must be “independent.”  An “independent director” is a person who is not one of our officers or employees or an officer or employee of our Business Manager, Property Managers or their respective affiliates either currently or at any time in the previous two years.  An ownership interest in another program sponsored by IREIC will not, by itself, preclude status as an independent director.

 

Each director serves until the next annual meeting of stockholders or until his or her successor has been duly elected and qualified.  Although the number of directors may be increased or decreased, a decrease will not have the effect of shortening the term of any incumbent director.  A director may resign at any time and be removed with or without cause by the stockholders upon the affirmative vote of at least a majority of all the votes entitled to be cast at a meeting called for the purpose of the proposed removal.  The notice of the meeting must indicate that the purpose of the meeting is to determine if the director is to be removed.  Unless filled by a vote of the stockholders, a vacancy created by an increase in the number of the directors or by the death, resignation, removal, adjudicated incompetence or other incapacity of a director will be filled by a vote of a majority of the remaining directors.

 

Our directors and officers are not required to devote all of their time to our business; however, our directors meet at least once each quarter.  In the exercise of their duties, our directors rely heavily on our Business Manager, Property Managers and their affiliates.  Our board has the power to set the compensation of all officers that it selects and to negotiate the terms and conditions of the agreements with all third parties including our Business Manager and Property Managers.

 

Our directors may establish further written policies on investments and borrowings and will monitor the administrative procedures, investment operations and performance to ensure that the policies are fulfilled and are in the best interest of our stockholders.  We follow the policies on investments and borrowing set forth in our organizational documents and described in this prospectus until and unless they are modified by our directors or amended in the manner described in “Summary of our Organizational Documents – Amendment of the Organizational Documents.”

 

Inland Affiliated Companies

 

Our sponsor, Inland Real Estate Investment Corporation, or IREIC, is an affiliate of The Inland Real Estate Group, Inc., or TIREG, which is wholly owned by The Inland Group, Inc.  The first Inland entity was formed by a group of Chicago schoolteachers in 1967, and incorporated the following year.  TIREG and its affiliates are still centered in the Chicago metropolitan area.  Over the past forty years, TIREG’s affiliates have experienced significant growth and now make up a fully-integrated group of legally and financially separate companies that have been engaged in diverse facets of real estate providing property management, leasing, marketing, acquisition, disposition, development, redevelopment, renovation, construction, finance, investment products and other related services.  IREIC, our Business Manager and TIREG are part of The Inland Real Estate Group of Companies, Inc., which is comprised of independent legal entities that are either subsidiaries of the same entity, affiliates of each other, share some common ownership or were previously sponsored and managed by subsidiaries of IREIC.  These entities, some or all of which are sometimes referred to herein as “Inland,” were, in the

 

51



 

aggregate, ranked by Crain’s Chicago Business in April 2007 as the sixteenth largest privately held company headquartered in the Chicago area.  In April 2007, Retail Traffic ranked the entities that comprise The Inland Real Estate Group of Companies as the fifth top owner and manager in the United States.  In July 2007, National Real Estate Investor ranked The Inland Real Estate Group of Companies twenty-first in a survey of the top twenty-five owners of office space as of December 31, 2006.  Inland is one of the largest real estate management firms in Illinois and one of the largest commercial real estate and mortgage banking firms in the Midwest.  As of September 30, 2008, Inland affiliates or related parties have raised more than $16.3 billion from investment product sales to over 335,000 investors.  Inland has completed more than 391 investment programs, and in each case, no investor has received less than his or her contributed capital.

 

As of September 30, 2008, Inland affiliates or related parties cumulatively had 1,225 employees, owned properties in forty-six states and managed assets with a value exceeding $26 billion.  As of September 30, 2008, IREIC was the general partner of limited partnerships which owned in excess of 2,058 acres of pre-development land in the Chicago area, as well as over 2.4 million square feet of real property and 2,247 apartment units.  Another affiliate, Inland Real Estate Brokerage, Inc., in the last six years has completed more than $604 million in commercial real estate sales and leases and has been involved in the sale of more than 4,675 multi-family units and the sale and lease of over sixty-nine million square feet of commercial property.   As of September 30, 2008, another affiliate, Inland Mortgage Brokerage Corporation, had originated more than $12.7 billion in financing including loans to third parties and affiliated entities and owned a loan portfolio totaling approximately $340 million.  Another affiliate, Inland Commercial Mortgage Corporation, had originated more than $327 million in financing as of September 30, 2008.  Inland Mortgage Servicing Corporation services a loan portfolio with a face value exceeding $10.8 billion.

 

As of September 30, 2008, Inland was responsible for managing approximately 105.9 million square feet of commercial properties located in forty-six states.  A substantial portion of the portfolio, approximately 32.1 million square feet, consists of properties leased on a triple-net lease basis.  A triple-net lease means that the tenant operates and maintains the property and pays rent that is net of taxes, insurance, and operating expenses.  This group also manages more than 5,827 multi-family units that are principally located in the Chicago metropolitan area.  Inland Real Estate Acquisitions, another affiliate, has extensive experience in acquiring real estate for investment.  Over the years, through Inland Real Estate Acquisitions and other affiliates, Inland has acquired more than 2,704 properties.

 

 Another affiliate, Inland Real Estate Development Corporation, has handled the design, approval and entitlement of parcels that have included in excess of 11,000 residential units, 13.5 million square feet of retail land and 7.6 million square feet of industrial land.  Inland Real Estate Development has been responsible for the land development of over 3,300 of those residential units, 7.6 million square feet of the retail land and all 7.6 million square feet of the industrial land.  Inland Real Estate Development currently manages an inventory of over 3,500 acres of land for development of which approximately 1,500 acres it or its affiliates own.

 

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The following sets forth information with respect to the directors and principal executive officers of The Inland Group:

 

Name

 

Age*

 

Position

Daniel L. Goodwin

 

65

 

Chairman and Chief Executive Officer

Robert H. Baum

 

65

 

Vice Chairman, Executive Vice President and General Counsel

G. Joseph Cosenza

 

65

 

Vice Chairman

Robert D. Parks

 

65

 

Director

 


*As of January 1, 2009

 

Messrs. Goodwin, Baum, Cosenza and Parks are the principals of The Inland Group.

 

Daniel L. Goodwin was the founder of the Inland real estate organization in May 1968 and is currently the controlling stockholder, chairman of the board and chief executive officer of The Inland Group, Inc., a holding company that was formed in July 1982.  Mr. Goodwin also serves as a director or officer of entities wholly owned or controlled by The Inland Group.  In addition, Mr. Goodwin has served as the chairman of the board and chief executive officer of Inland Mortgage Investment Corporation since March 1990 and chairman and chief executive officer of Inland Bancorp, Inc., a bank holding company, since January 2001.  Mr. Goodwin also has served as a director of Inland Real Estate Corporation, a publicly traded real estate investment trust, since 2001, and served as its chairman of the board from 2004 to April 2008.

 

Housing.  Mr. Goodwin is a member of the National Association of Realtors, the Illinois Association of Realtors, the Northern Illinois Commercial Association of Realtors, and was inducted into the Hall of Fame of the Chicago Association of Realtors in 2005.  He is also the author of a nationally recognized real estate reference book for the management of residential properties.  Mr. Goodwin served on the Board of the Illinois State Affordable Housing Trust Fund.  He served as an advisor for the Office of Housing Coordination Services of the State of Illinois, and as a member of the Seniors Housing Committee of the National Multi-Housing Council.  He has served as Chairman of the DuPage County Affordable Housing Task Force.  Mr. Goodwin also founded New Directions Affordable Housing Corporation, a not for profit entity.

 

Education.  Mr. Goodwin obtained his bachelor degree from Northeastern Illinois University and his master’s degree from Northern Illinois University.  Following graduation, he taught for five years in the Chicago Public Schools.  Over the past twenty years, Mr. Goodwin served as a member of the Board of Governors of Illinois State Colleges and Universities, vice chairman of the Board of Trustees of Benedictine University, vice chairman of the Board of Trustees of Springfield College, and chairman of the Board of Trustees of Northeastern Illinois University.

 

Robert H. Baum has been a principal of the Inland real estate organization since May 1968 and is currently the vice-chairman and executive vice-president and general counsel of The Inland Group, positions he has held since July 1982.  In his capacity as general counsel, Mr. Baum is responsible for supervising the legal activities of The Inland Group and its affiliates.  This includes supervising the Inland Law Department and serving as liaison with outside counsel.

 

Mr. Baum has served as a member of the North American Securities Administrators Association Real Estate Advisory Committee and as a member of the Securities Advisory Committee to the Secretary of State of Illinois.  He is a member of the American Corporation Counsel Association and has also been a guest lecturer for the Illinois State Bar Association.  Mr. Baum has been admitted to practice before the Supreme Court of the United States, as well as the bars of several federal courts of appeals and federal district courts and the State of Illinois.  He is also an Illinois licensed real estate broker.  He has served as

 

53



 

a director of American National Bank of DuPage and Inland Bank and currently serves as a director of Inland Bancorp, Inc., a bank holding company.  Mr. Baum is a past member of the Men’s Council of the Museum of Contemporary Art in Chicago.

 

Mr. Baum is a member of the board of directors of Wellness House, a charitable organization that exists to improve the quality of life for people whose lives have been affected by cancer and its treatment by providing psychosocial and educational support to cancer patients, their families and friends.  He also is a governing member of the Chicago Symphony Orchestra.  Mr. Baum received a bachelor degree from The University of Wisconsin and a juris doctor degree from The Northwestern School of Law.

 

G. Joseph Cosenza has been a principal of the Inland real estate organization since May 1968 and is currently the president of Inland Real Estate Acquisitions, Inc., a position he has held since November 1988.   Mr. Cosenza immediately supervises a staff of twenty-five persons who engage in property acquisitions and due diligence. Mr. Cosenza has been a consultant to other real estate entities and lending institutions on property appraisal methods. He has directly overseen the purchases of more than $28 billion of income-producing real estate from 1968 to the present.

 

Mr. Cosenza received his bachelor degree from Northeastern Illinois University and his master’s degree from Northern Illinois University. From 1967 to 1972, he taught in the LaGrange and Wheeling, Illinois School Districts where he also served as assistant principal while operating Inland with Messrs. Goodwin, Parks, and Baum on a part time basis. Mr. Cosenza has been a licensed real estate broker since 1968 and has previously been active in various national and local real estate associations, including the National Association of REALTORS®, the Urban Land Institute, and the Northern Illinois Association of REALTORS®.

 

Mr. Cosenza was chairman of the board of American National Bank of DuPage from 1983 to 1990 and served as chairman, 1981 to 1983, and a director, 1983 to 1990, of Continental Bank of Oakbrook Terrace. He also served as a director of Inland Bank & Trust (formerly known as Westbank) from 1996 to 2005, and was chairman for a short time.  He was also a director on the board of Inland Bancorp, Inc., which owns Inland Bank & Trust and which recently combined three banks having a total of eleven locations in the Chicago area. Mr. Cosenza was a director and a member of the management committee of Inland Real Estate Corporation from 1994 to 2005.

 

Robert D. Parks has been a principal of the Inland real estate organization since May 1968 and is currently chairman of IREIC, a position he has held since November 1984.  Mr. Parks has also served as a director of Inland Securities since August 1984 and a director of Inland Investment Advisors, Inc. since June 1995.  Mr. Parks served as a director of Inland Real Estate Corporation from 1994 to June 2008, and served as chairman of the board from May 1994 to May 2004 and president and chief executive officer from 1994 to April 2008.  He also served as a director and chairman of the board of Inland Retail Real Estate Trust, Inc. from its inception in September 1998 to March 2006, and as chief executive officer until December 2004.  Mr. Parks also has served as the chairman of the board and a director of Inland Diversified Real Estate Trust, Inc. since its inception in June 2008 and as the chairman of the board and a director of Inland Western Retail Real Estate Trust since its inception in March 2003.  Mr. Parks is responsible for the ongoing administration of existing investment programs, corporate budgeting and administration for IREIC.  He oversees and coordinates the marketing of all investments and investor relations.

 

He received his bachelor degree from Northeastern Illinois University, Chicago, Illinois, and his master’s degree from the University of Chicago and later taught in Chicago’s public schools. He is a registered Direct Participation Program Limited Principal with FINRA.  He is a member of the Real Estate Investment Association, the Financial Planning Association, the Foundation for Financial Planning and the National Association of Real Estate Investment Trusts, or “NAREIT.”

 

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Our Directors and Executive Officers

 

The following table sets forth information with respect to our directors and executive officers.  The biography of Mr. Parks is set forth above.

 

Name

 

Age*

 

Position

Robert D. Parks

 

65

 

Director and Chairman of the Board

Brenda G. Gujral

 

66

 

Director and President

J. Michael Borden

 

72

 

Independent Director

Thomas F. Glavin

 

48

 

Independent Director

David Mahon

 

46

 

Independent Director

Thomas F. Meagher

 

78

 

Independent Director

Paula Saban

 

55

 

Independent Director

William J. Wierzbicki

 

62

 

Independent Director

Roberta S. Matlin

 

64

 

Vice President – Administration

Lori Foust

 

44

 

Treasurer and Principal Financial Officer

Jack Potts

 

39

 

Principal Accounting Officer

Scott W. Wilton

 

48

 

Secretary

 


*As of January 1, 2009

 

Brenda G. Gujral, president and director, also serves as president, chief executive officer and a director of IREIC, our sponsor and the parent company of our Business Manager.  She served as president and a director of IREIC from July 1987 through June 1992.  Upon her return to IREIC in January 1998, she was again named president and a director.  She was named chief executive officer of IREIC in January 2008.  She has been the president, chief operating officer and a director of Inland Securities Corporation since January 1997.  Additionally, Ms. Gujral has served as a director of Inland Investment Advisors, Inc., an investment advisor, since January 2001 and has been a director of Inland Western Retail Real Estate Trust, Inc. since its inception in March 2003 and served as its chief executive officer from June 2005 until November 2007.  Ms. Gujral also has served as president and a director of Inland Diversified Real Estate Trust, Inc. since its inception in June 2008 and has been the chairman of the board of Inland Real Estate Exchange Corporation since May 2001.  Ms. Gujral was a director of Inland Retail Real Estate Trust, Inc. from its inception in September 1998 until it was acquired in February 2007.

 

Ms. Gujral has overall responsibility for the operations of IREIC, including investor relations, regulatory compliance and filings, review of asset management activities and broker-dealer marketing and communication.   Ms. Gujral works with internal and outside legal counsel in structuring IREIC’s investment programs and in connection with preparing offering documents and registering the related securities with the SEC and state securities commissions.

 

Ms. Gujral has been with the Inland organization for twenty-five years, becoming an officer in 1982. Prior to joining the Inland organization, she worked for the Land Use Planning Commission, establishing an office in Portland, Oregon, to implement land use legislation for that state. Ms. Gujral is a graduate of California State University.  She holds Series 7, 22, 39 and 63 certifications from FINRA, and is a licensed real estate salesperson and a member of the National Association of Real Estate Investment Trusts.

 

J. Michael Borden, an independent director, is president and chief executive officer of Freedom Plastics, Inc., Rock Valley Trucking Co., Inc., Total Quality Plastics, Inc., Rock Valley Leasing, Inc., Hufcor Inc., Airwall, Inc. and Soft Heat.  Mr. Borden also is the chief executive officer of Hufcor Asia

 

55



 

Pacific in China and Hong Kong, Marashumi Corp. in Malaysia, Hufcor Australia Group, and F. P. Investments a Real Estate Investment Company.  Over the last twenty-five years, Mr. Borden’s various businesses have routinely entered into real estate transactions in the ordinary course of business, allowing him to develop experience in acquiring, leasing, developing and redeveloping real estate assets.  He currently serves on the board of directors of SSI Technologies, Inc., Dowco, Inc., M&I Bank, Competitive Wisconsin, St. Anthony of Padua Charitable Trust and Great Lakes Packaging, is a trustee of The Nature Conservancy and is a regent of the Milwaukee School of Engineering.  Mr. Borden previously served as chairman of the board of the Wisconsin Workforce Development Board and as a member of the SBA Advisory Council and the Federal Reserve Bank Advisory Council.  He was named Wisconsin entrepreneur of the year in 1998. Mr. Borden received a bachelor degree in accounting and finance from Marquette University, Milwaukee, Wisconsin.  He also attended a master of business administration program in finance at Marquette University.

 

Thomas F. Glavin, an independent director since October 2007, is the owner of Thomas F. Glavin & Associates, Inc., a certified public accounting firm that he started in 1988. In that capacity, Mr. Glavin specializes in providing accounting and tax services to closely held companies.  Mr. Glavin has worked in the accounting profession for over twenty-five years.   Mr. Glavin began his career at Vavrus & Associates, a real estate firm, located in Joliet, Illinois, that owned and managed apartment buildings and health clubs.  At Vavrus & Associates, Mr. Glavin was an internal auditor responsible for reviewing and implementing internal controls.  In 1984, Mr. Glavin began working in the tax department of Touche Ross & Co., where he specialized in international taxation.  In addition to his accounting experience, Mr. Glavin also has been involved in the real estate business for the past fifteen years.  Since 1997, Mr. Glavin has been a partner in Gateway Homes, which has zoned, developed and managed a 440 unit manufactured home park in Frankfort, Illinois as well as single family home sites.  Mr. Glavin received his bachelor degree in accounting from Michigan State University in East Lansing, Michigan and a master of science in taxation from DePaul University in Chicago, Illinois.  Mr. Glavin is a member of the Illinois CPA Society and the American Institute of Certified Public Accountants.

 

David Mahon, an independent director, currently serves as managing director of GE Antares Capital and is one of GE Antares’ senior professionals with over eighteen years of leveraged finance experience.  Mr. Mahon is responsible for structuring and syndicating GE Antares’ transactions.  Previously, Mr. Mahon also was primarily responsible for purchasing and trading investments for Antares’ securitized investment funds.  Prior to forming Antares, Mr. Mahon spent six years at Heller Financial, the last three years of which he worked within the capital markets group.  He also spent three years with Citicorp’s leveraged capital group and started his career at Arthur Andersen.  Mr. Mahon currently serves on the board of directors for Noodles & Company, an operator of approximately 150 casual dining restaurants based in Boulder, Colorado.  Mr. Mahon is a certified public accountant and a graduate of Augustana College, Rock Island, Illinois.  He holds Series 7 and 63 certifications from FINRA.

 

Thomas F. Meagher, an independent director, currently serves on the board of directors of DuPage Airport Authority and the TWA Plan Oversight Committee.  He also is a former member of the board of trustees of Edward Lowe Foundation, The Private Bank Corp. and the Chicago Chamber of Commerce.  Mr. Meagher has previously served on the board of directors of UNR Industries, Rohn Towers, Greyhound Lines Inc., Festival Airlines, Lakeside Bank and Trans World Airlines, where he served as chairman of the board for two years and participated in the sale of the company to American Airlines.

 

Mr. Meagher began his business career in 1958 when he was selected by American Airlines for its management training program.  He subsequently joined Continental Air Transport of Chicago as

 

56



 

Executive Vice-President in 1964. In 1970, Mr. Meagher was appointed the first president and chief executive officer of the Chicago Convention and Tourism Bureau, returning to Continental Air Transport as president and chief executive officer in 1972. In 1980, Mr. Meagher purchased Howell Tractor and Equipment Company, a large heavy construction equipment dealership, and sold the company in April 2005. He is the principal stockholder and chairman of Professional Golf Cars of Florida.

 

Mr. Meagher received his bachelor degree from St. Mary’s University of Minnesota.  Upon graduation, he entered the U.S. Marine Corps Officer Candidate Program, serving with the 2nd Marine Air Wing and achieving the rank of Captain.  Mr. Meagher also attended graduate business school at the University of Chicago.

 

Paula Saban, an independent director, has worked in the financial services and banking industry for over twenty-five years.  She began her career in 1978 with Continental Bank, which later merged into Bank of America.  From 1978 to 1990, Ms. Saban held various consultative sales roles in treasury management and in traditional lending areas.  She also managed client service teams and developed numerous client satisfaction programs.  In 1990, Ms. Saban began designing and implementing various financial solutions for clients with Bank of America’s Private Bank and Banc of America Investment Services, Inc. Her clients included top management of publicly-held companies and entrepreneurs.  In addition to managing a diverse client portfolio, she was responsible for client management and overall client satisfaction.  She recently retired from Bank of America as a senior vice president/private client manager.  In 1994, Ms. Saban and her husband started a construction products company, Newport Distribution, Inc., of which she is president and a principal stockholder.

 

Ms. Saban received her bachelor degree from MacMurray College, Jacksonville, Illinois, and her master of business administration from DePaul University, Chicago, Illinois.  She holds Series 7 and 63 certifications from FINRA. She is president of the Fairview Elementary School PTA and is a former trustee of both the Goodman Theatre and Urban Gateways.

 

William J. Wierzbicki, an independent director, is a registered Professional Planner in the Province of Ontario, Canada, and is a member of both the Canadian Institute of Planners and the Ontario Professional Planners Institute.  Mr. Wierzbicki is the sole proprietor of “Planning Advisory Services,” a land-use planning consulting service providing consultation and advice to various local governments, developers and individuals.

 

Mr. Wierzbicki is retired from his position as the Coordinator of Current Planning with the City of Sault Ste. Marie, Ontario.  In that capacity, his expertise was in the review of residential, commercial and industrial development proposals.  Mr. Wierzbicki led the program to develop a new Comprehensive Zoning By-Law for the City of Sault Ste. Marie.  Mr. Wierzbicki was the leader of the team that developed the Sault Ste. Marie’s Industrial Development Strategy, which identified approximately 1,000 acres of land that has the potential for industrial development.  He also administered the implementation of the first phase of the strategy, which resulted in the city purchasing, servicing, and putting approximately 150 acres on the market at competitive prices.  The program is designed to use and replenish the city’s Industrial Development Fund.

 

Mr. Wierzbicki is the chairman of the Sault North Planning Board, which is responsible for land-use planning for thirty-two unorganized townships north of the City of Sault Ste. Marie.  Membership on the Sault North Planning Board is through a provincial government appointment.  He has served four consecutive three-year terms with nine years as the chairman of the board.  Mr. Wierzbicki is an independent director on the Sault Area Hospital board of directors and sits on that board’s New Hospital Planning Committee and the Quality and Performance Committee.  Mr. Wierzbicki received an architectural technologist diploma from the Sault Ste. Marie Technical and Vocational School in Ontario, Canada.

 

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Roberta S. Matlin has been our vice president – administration since our formation in October 2004. Ms. Matlin joined IREIC in 1984 as director of investor administration and currently serves as a director and senior vice president of IREIC, in the latter capacity directing its day-to-day internal operations.  Ms. Matlin also has been a director of Inland Real Estate Exchange Corporation since May 2001, a director of Inland Institutional Capital Partners Corporation since May 2006 and a director of Pan American Bank since December 2007.  She also has served as a director and president of Inland Investment Advisors, Inc. since June 1995 and Intervest Southern Real Estate Corporation since July 1995 and a director and vice president of Inland Securities Corporation since July 1995.  Ms. Matlin also has served as the president of our Business Manager since its inception in October 2004.  She has served as vice president of Inland Diversified Real Estate Trust, Inc. since June 2008.  Ms. Matlin served as vice president of administration of Inland Western Retail Real Estate Trust, Inc. from 2003 until 2007, vice president of administration of Inland Retail Real Estate Trust, Inc. from 1998 until 2004, vice president of administration of Inland Real Estate Corporation from 1995 until 2000 and trustee and executive vice president of Inland Mutual Fund Trust from 2001 until 2004. Prior to joining Inland, Ms. Matlin worked for the Chicago Region of the Social Security Administration of the United States Department of Health and Human Services.  Ms. Matlin is a graduate of the University of Illinois in Champaign.  She holds Series 7, 22, 24, 39, 63 and 65 certifications from FINRA.

 

Lori J. Foust has been our treasurer and the chief financial officer of our Business Manager since October 2005, and became our principal financial officer in September 2007.  Ms. Foust also has served as the treasurer of Inland Diversified Real Estate Trust, Inc. since June 2008 and served as the principal accounting officer of Inland Western Retail Real Estate Trust, Inc. from February 2004 to December 2005. Ms. Foust joined the Inland organization in 2003, in the capacity of vice president of Inland Western Retail Real Estate Advisory Services, Inc. Prior to joining the Inland organization, Ms. Foust worked in the field of public accounting and was a senior manager in the real estate division for Ernst and Young, LLP. She received her bachelor of science degree in accounting and her master of business administration from the University of Central Florida.  Ms. Foust is a certified public accountant and a member of the American Institute of Certified Public Accountants.

 

Jack Potts became our principal accounting officer and the chief accounting officer of our Business Manager on September 18, 2007. Prior to joining the Inland organization, Mr. Potts held various positions with Equity Office Properties Trust, Inc., or “EOP,” in accounting and financial reporting. Prior to working at EOP, Mr. Potts worked in the field of public accounting and was a manager in the real estate division for Ernst and Young LLP.  He received a bachelor degree in accounting from the Michigan State University in East Lansing, Michigan. Mr. Potts is a certified public accountant.

 

Scott W. Wilton, has been our secretary since our formation in October 2004. Mr. Wilton joined The Inland Group in January 1995. He is assistant vice president of The Inland Real Estate Group, Inc. and assistant counsel with The Inland Real Estate Group law department.  In 1998, Mr. Wilton became secretary of Inland Retail Real Estate Trust, Inc. and Inland Retail Real Estate Advisory Services, Inc. In 2001, he became the secretary of Inland Real Estate Exchange Corporation.  In 2003, he became secretary of Inland Western Retail Real Estate Trust, Inc. Mr. Wilton is involved in all aspects of The Inland Group’s business, including real estate acquisitions and financing, securities law and corporate governance matters, leasing and tenant matters and litigation management.  He received bachelor degrees in economics and history from the University of Illinois, Champaign, in 1982 and his law degree from Loyola University, Chicago, Illinois, in 1985. Prior to joining The Inland Group, Mr. Wilton worked for the Chicago law firm of Williams, Rutstein, Goldfarb, Sibrava and Midura, Ltd., specializing in real estate, corporate transactions and litigation.

 

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Our Business Manager

 

Our Business Manager, Inland American Business Manager & Advisor, Inc., is an Illinois corporation and a wholly owned subsidiary of IREIC.  The following table sets forth information regarding its executive officers and directors.  The biographies of Messrs. Goodwin, Parks and Cosenza are set forth above under “– Inland Affiliated Companies” and the biographies of Ms. Matlin, Ms. Foust, Mr. Potts and Mr. Wilton are set forth above under “– Our Directors and Executive Officers.”

 

Name

 

Age*

 

Position

Daniel L. Goodwin

 

65

 

Director

Robert D. Parks

 

65

 

Director

G. Joseph Cosenza

 

65

 

Director

Roberta S. Matlin

 

64

 

President

Lori Foust

 

44

 

Chief Financial Officer

Jack Potts

 

39

 

Chief Accounting Officer

Scott W. Wilton

 

48

 

Secretary

Debra J. Randall

 

53

 

Vice President/Controller

Michael Podboy

 

31

 

Vice President - Asset Management

 


*As of January 1, 2009

 

Debra J. Randall became vice president and controller of our Business Manager in January 2006. Ms. Randall oversees our financial and SEC reporting compliance.  She joined the Inland organization in January 2004, serving as assistant vice president of our Business Manager and assistant controller of Inland Western Retail Real Estate Advisory Services, Inc., which position she held until December 2005.  Prior to joining the Inland organization, Ms. Randall was a corporate controller for a privately held real estate company.  She also has over ten years of real estate experience at several public accounting firms.  She received her bachelor degree in liberal arts from DePaul University in Chicago, Illinois.  Ms. Randall is a certified public accountant and licensed real estate salesperson.

 

Michael Podboy became the vice president – asset management of our Business Manager in May 2007.  Prior to joining the Inland organization, Mr. Podboy worked in the field of public accounting and was a senior manager in the real estate division for KPMG LLP.  He received his bachelor degree in accounting from the University of Saint Thomas in Saint Paul, Minnesota.  Mr. Podboy is a certified public accountant and a member of the American Institute of Certified Public Accountants.

 

Our Property Managers

 

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 Delaware limited liability companies, the sole member of which is Inland American Holdco LLC, which has four members, all corporations, which are controlled by The Inland Group.  Each Property Manager manages the specific type of property indicated by its name.  For example, Inland American Retail Management LLC manages any retail properties we acquire and Inland American Office Management LLC manages any office buildings we acquire.  Each Property Manager conducts its activities at its principal executive office at 2901 Butterfield Road in Oak Brook, Illinois.   All of our lodging properties are managed by third party managers, unaffiliated with us or our sponsor and its affiliates.

 

The following table sets forth information regarding the executive officers and directors of the parent corporations of our Property Managers.

 

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Name

 

Age*

 

Position

Thomas P. McGuinness

 

54

 

Chairman, Director and Chief Executive Officer

Robert M. Barg

 

55

 

Director, Senior Vice President, Treasurer and Secretary

JoAnn Armenta

 

34

 

Senior Vice President

Elizabeth D. McNeeley

 

53

 

Director and Vice President

Alan F. Kremin

 

62

 

Director

Ulana Horalewskyj

 

62

 

Director

Thomas Lithgow

 

46

 

Senior Vice President

 


*As of January 1, 2009

 

Thomas P. McGuinness joined Inland Property Management in 1982 and became president of Mid-America Management Corporation in July 1990 and chairman in 2001.  He has served as the president of Inland Property Management, Inc. since January 1, 1991 and a director of Inland Commercial Property Management since June 2000.  Mr. McGuinness also has served as the president of Inland American Holdco Management, LLC since August 2, 2005 and, in that capacity, oversees a staff of 150, with four senior vice presidents reporting directly to him on the day-to-day operations of that company and its four subsidiaries.  Mr. McGuinness is responsible for the performance and activities of diverse platforms created within Inland American Real Estate Trust Inc., including Inland American Winston Hotels, Inc., Inland American Lodging Corporation, Inland American Communities Group, Inc., and Inland Public Properties Development, Inc., and is responsible for new acquisitions and partnerships.  Mr. McGuinness oversees a diverse and nationally-positioned portfolio of 45 million square feet, including retail, office, and industrial properties, and 15,015 hotel rooms.  In past positions with Inland he has been responsible for over 60 million square feet of real estate assets.

 

Mr. McGuinness is a licensed real estate broker and is past president of the Chicagoland Apartment Association and past regional vice president of the National Apartment Association.  He was on the board of directors of the Apartment Building Owners and Managers Association, and was a trustee with the Service Employees’ Local No. 1 Health and Welfare Fund, as well as the Pension Fund and holds CLS and CSM accreditations from the International Council of Shopping Centers.

 

Robert M. Barg joined the Inland organization in 1986 and is currently the treasurer of Inland Property Management Group, Inc.  During his tenure with Inland, Mr. Barg has been an officer and director of all of the Inland management companies.  He has served as a senior vice president and treasurer for Inland North American Property Management Corp. since November 2004, Inland Continental Property Management Corp. since September 2004 and Mid America Management Corp. since January 1998.  Prior to joining the Inland organization, Mr. Barg was an accounting manager of the Charles H. Shaw Co.   He received his bachelor of science degree in business administration from the University of Illinois at Chicago, served a year as a VISTA Volunteer and received a master’s degree in accounting from Western Illinois University in Macomb, Illinois.   Mr. Barg is a certified public accountant and member of the Illinois CPA Society and holds a real estate broker’s license in Illinois.

 

JoAnn Armenta joined the Inland organization in 1992.  Ms. Armenta currently serves as the senior vice president and director of due diligence for Inland’s management companies, overseeing the department that performs due diligence on the majority of Inland’s acquisitions, and that is responsible for all financial modeling, property inspection, capital projections and all other processes involved with purchasing an asset for the Inland Real Estate Group of Companies.  Ms. Armenta originally joined the multi-family/residential management division of Mid-America Management in 1992 and began overseeing the management of retail, office and industrial properties in 1995.

 

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In 2001, Ms. Armenta became president of property management for the portfolio of Inland Retail Real Estate Trust, Inc.  Her responsibilities in this role included complete oversight of the company’s management, leasing, marketing and operations, including supervising 165 employees located in thirteen offices through out the eastern part of the United States. Ms. Armenta was the 2008 Dean of Open Air Centers for the University of Shopping Centers at the Wharton Business School and holds SCSM, SCLS, SCMD and a CDP accreditations with the International Council of Shopping Centers, or ICSC.

 

Elizabeth D. McNeeley joined Inland Southeast Property Management as a property accountant in January 2002.  In January 2003 she was promoted to senior property accountant for Inland Western Management Corp., and in July 2003 was promoted to a vice president of Inland Northwest Management Corp., Inland Pacific Management Corp., Inland Southwest Management Corp., and Inland Western Management Corp.  Ms. McNeeley also has served as a vice president of Inland American Retail Management Corp., Inland American Office Management Corp. and Inland American Industrial Management LLC, since August 2005.  Prior to joining Inland, Ms. McNeeley was an accountant for the Burlington Northern Railroad, Pinnacle Relocation and Trase Miller Teleservices.  She also taught mathematics at both the middle school and junior college level.  Ms. McNeeley holds a bachelor degree from North Central College, Naperville, Illinois, and a master’s degree from DePaul University, Chicago, Illinois.  She is a licensed real estate broker.

 

Alan F. Kremin joined The Inland Group in 1982.  Mr. Kremin was promoted to treasurer of The Inland Group, Inland Commercial Property Management, Inc. and various other subsidiaries of The Inland Group in March 1991.  As the chief financial officer of The Inland Group, a position he has held since 1991, his responsibilities include financial management, corporate asset management, cash budgeting and corporate tax planning for the consolidated group and serving as a director for various subsidiaries of The Inland Group, Inc.  Mr. Kremin has served as vice president of finance and manager of Inland Real Estate Development, LLC since November 2004.  He also has served as treasurer and director of Midwest Real Estate Equities, Inc. since June 1999, chief financial officer and director of Inland Atlantic Development Corporation since March 2007 and treasurer and manager of Metropolitan Construction Services, LLC since November 1999.  He also serves as director of Inland North American Property Management Corp., Inland North American Retail Management Corp., Inland North American Office Management Corp., Inland Continental Property Management Corp., Mid-America Management Corp. and Community Property Management Corp.  Mr. Kremin also served as treasurer of IREIC from 1986 to 1990, when he supervised the daily operations of its accounting department.  Prior to joining The Inland Group, Mr. Kremin served for three years as a controller of JMB Realty Corporation.  Prior thereto, Mr. Kremin worked eight years in public accounting, including four years at Arthur Young & Company.  He received his bachelor degree in accounting from Loyola University in Chicago, Illinois.  Mr. Kremin is a certified public accountant, holds securities and insurance licenses and is a licensed real estate broker.

 

Ulana Horalewskyj joined Inland in 1990 and is currently senior vice president of IREIC and president of Partnership Ownership.  She is also a vice president of Intervest Southern Real Estate Corporation and a director of Midwest Real Estate Equities, Inc. In her capacity as senior vice president of IREIC, Ms. Horalewskyj oversees the cash management and accounting for over 190 Inland private limited partnerships.  She was the treasurer of Inland Real Estate Exchange Corporation, or IREX, from 2002 through 2005. Prior to joining Inland, Ms. Horalewskyj spent four years working for an accounting firm and ten years in the banking industry.  Ms. Horalewskyj received her bachelor degree from Roosevelt University, Chicago, Illinois.

 

Thomas Lithgow joined Inland in 2004 and was promoted to vice president.  Mr. Lithgow is responsible for leasing and property management for 35 million square feet of commercial property

 

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throughout the United States.  Prior to joining Inland, Mr. Lithgow was the due diligence director for Heritage Realty.  Mr. Lithgow has twenty years of real estate experience in the areas of accounting, finance, asset management, due diligence, acquisitions and dispositions.  Mr. Lithgow received his bachelor degree from Eastern Illinois University, Charleston, Illinois, and is a certified public accountant.

 

The Business Management Agreement

 

Duties of Our Business Manager.  We have entered into a business management agreement with Inland American Business Manager & Advisor, Inc. to serve as our Business Manager with responsibility for overseeing and managing our day-to-day operations including:

 

·

 

identifying potential investment opportunities in real estate assets and assisting our board of directors in evaluating those opportunities;

 

 

 

·

 

preparing, on our behalf, all reports and regulatory filings including those required by federal and state securities law;

 

 

 

·

 

administering our bookkeeping and accounting functions; and

 

 

 

·

 

undertaking and performing all services or other activities necessary and proper to carry out our investment objectives.

 

See “Risk Factors – Risks Related to Our Business Manager, Property Managers and their Affiliates” for additional discussion regarding the business management agreement.  To assist the Business Manager in handling its responsibilities, the Business Manager has established a management and disclosure committee to review and critique our periodic reports and other public disclosures, as well as our day-to-day business practices, controls and procedures.  The committee includes certain of our officers and directors, officers and directors of our Business Manager and the parent corporations owning our Property Managers, and officers and directors of The Inland Group or its affiliates.  The responsibilities and powers of the management and disclosure committee are set forth in a written charter approved by our board.  Notwithstanding the formation of the committee, our business management agreement provides that the Business Manager is deemed to be in a fiduciary relationship with us and our stockholders.

 

Ancillary Agreements.  Under the business management agreement, the Business Manager is obligated to provide, either directly or indirectly through affiliates, various services and licenses needed to operate our business.  To do so, the Business Manager, or we in the case of the trademark license agreement, have entered into various agreements with IREIC and its affiliates.  We have agreed to reimburse the Business Manager, IREIC and its affiliates, each referred to as a “service provider” or, collectively, the “service providers,” for the expenses paid or incurred to provide these services including all direct expenses and the costs of salaries and benefits of persons employed by these entities and performing services for us. Direct expenses include, but are not limited to:

 

·

 

taxes and assessments on income or real property and taxes;

 

 

 

·

 

premiums and other associated fees for insurance policies including director and officer liability insurance;

 

 

 

·

 

all expenses associated with stockholder communications including the cost of preparing, printing and mailing annual reports, proxy statements and other reports required by governmental entities;

 

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·

 

administrative service expenses;

 

 

 

·

 

audit, accounting and legal fees paid to third parties;

 

 

 

·

 

transfer agent and registrar’s fees and charges paid to third parties; and

 

 

 

·

 

expenses relating to any offices or office facilities maintained solely for our benefit that are separate and distinct from our executive offices.

 

We also reimburse the service providers for salaries and benefits of persons employed by these entities and performing services for us. In the case of IREIC, whose employees also provide services for other entities sponsored by, or affiliated with, IREIC, we reimburse only a pro rata portion of the salary and benefits of these persons based on the amount of time spent by that person on matters for us compared to the time spent by that same person on all matters including our matters.  Except in the case of computer services provided by Inland Computer Services, Inc., which is described below, the salary and benefit costs for each service provider other than IREIC is determined by multiplying (i) the number of hours spent by all employees of the service provider in providing services for us by (ii) that service provider’s “hourly billing rate.” For these purposes, the “hourly billing rate” approximates the hourly cost to the service provider to provide services to us based on:

 

·

 

the average amount of all salaries and bonuses paid to the employees of the service provider; and

 

 

 

·

 

an allocation for overhead including employee benefits, rent, materials, fees, taxes, and other operating expenses incurred by the service provider in operating its business except for direct expenses for which we reimburse the service provider, as described above.

 

All billing rates are subject to change, but we believe that the billing rates we pay do not exceed 90% of the market rates for similar services.  These ancillary agreements will terminate upon the termination of the business management agreement unless the Business Manager or the service provider agrees otherwise.

 

·

 

Communications Services. Inland Communications, Inc. provides marketing, communications and media relations services, including designing and placing advertisements; editing marketing materials; preparing and reviewing press releases; distributing certain stockholder communications; and maintaining branding standards.

 

 

 

·

 

Computer Services. Inland Computer Services, Inc., or ICS, provides data processing, computer equipment and support services and other information technology services, including custom application, development and programming; support and troubleshooting; data storage and backup; email services; printing services; and networking services, including Internet access. ICS is compensated for all direct costs incurred and reasonable expenses paid in providing computer services, including programming and consulting time, printing costs and usage charges, equipment rentals and computer usage.

 

 

 

·

 

Mortgage Brokerage Services. Inland Commercial Mortgage Corporation provides mortgage brokerage services, including identifying and working with lenders throughout the financing process, reviewing and negotiating loan documents on our Business Manager’s behalf and maintaining summaries or our proposed and existing mortgage loans.

 

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·

 

Insurance and Risk Management Services. Inland Risk and Insurance Management Services, Inc. provides insurance and risk management services, including negotiating and obtaining insurance policies; managing and settling claims; and reviewing and monitoring our insurance policies.

 

 

 

·

 

Legal Services. The Inland Real Estate Group, Inc. provides legal services, including drafting and negotiating real estate purchase and sales contracts, leases and other real estate or corporate agreements and documents; performing due diligence; and rendering legal opinions.

 

 

 

·

 

Office and Facilities Management Services. Inland Office Services, Inc. and Inland Facilities Management, Inc. provide office and facilities management services, including purchasing and maintaining office supplies and furniture; installing telephones; maintaining security; providing mailroom, courier and switchboard services; and contracting with and supervising housekeeping and other facilities maintenance service providers.

 

 

 

·

 

Personnel Services. Inland Human Resource Services, Inc. provides personnel services, including pre-employment services; new hire services; human resources; benefit administration; and payroll and tax administration.

 

 

 

·

 

Property Tax Services. Investors Property Tax Services, Inc. provides property tax services, including tax reduction, such as monitoring properties and seeking ways to lower assessed valuations, and tax administration, such as coordinating payment of real estate taxes.

 

 

 

·

 

Software License. ICS has granted the Business Manager a non-exclusive and royalty- free right and license to use and copy software owned by ICS and to use certain third party software according to the terms of the applicable third party licenses to ICS, all in connection with the Business Manager’s obligations under the business management agreement. ICS provides the Business Manager with all upgrades to the licensed software.

 

 

 

·

 

Trademark License. We have entered into a license agreement with The Inland Real Estate Group, Inc., or “TIREG,” granting us a non-exclusive, royalty-free right and license to use the “Inland” name and marks, and the goodwill associated with them, in connection with our business. TIREG retains exclusive ownership of all trademarks and, except for permitted sublicenses, we will not be able to transfer, sell, assign or modify any right granted to us under the trademark license agreement. The license agreement contains customary and usual representations, warranties and covenants for agreements of this type, and requires us to indemnify TIREG for any damages resulting from a breach of its obligations under the trademark license agreement.  Either party may terminate the license agreement upon thirty days prior written notice.  If TIREG terminates the agreement, we will have a reasonable opportunity to transition to other trademarks.

 

Term.  The business management agreement has a term of one year and is renewable for successive one year terms upon the mutual consent of the parties, including an affirmative vote of a majority of our independent directors.  The agreement may be terminated by mutual consent of the parties.  We may terminate the agreement without cause or penalty upon a vote by a majority of the independent directors on sixty days written notice to our Business Manager.  The agreement also will

 

64



 

terminate upon a business combination with our Business Manager, as described below.  If the business management agreement is terminated, our Business Manager must cooperate with us and take all reasonable steps requested by our board to assist it in making an orderly transition.

 

Compensation.  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 a 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, “invested capital” means the original issue price paid for the shares of our common stock reduced by prior distributions from the sale or financing of our properties.  For these purposes, “average invested assets” means, for any period, the average of the aggregate book value of our assets, including lease intangibles, invested, directly or indirectly, in financial instruments, debt and equity securities and equity interests in and loans secured by real estate assets, including amounts invested in REITs and other “real estate operating companies,” before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of the values at the end of each month during the period.

 

In addition, any time we acquire a controlling interest in a REIT or other “real estate operating company,” we pay our Business Manager or its designee a fee equal to 2.5% of the aggregate purchase price paid to acquire the controlling interest.  See “– Property Acquisition Agreement” below for a discussion of what constitutes a “real estate operating company.”  We pay these 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 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.  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 set forth in our articles to permit the issuance of the additional shares.  If our board does not waive the limit, any excess fee will be paid in cash.  See “Risk Factors – Risks Related to Our Business Manager, Property Managers and their Affiliates” for additional discussion regarding the acquisition fee.

 

Further, after our stockholders have first received a 10% per annum cumulative, non-compounded return on, plus return of, their invested capital, as defined above, we will pay our Business Manager an incentive fee equal to 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.

 

If our Business Manager or its affiliates perform services that are outside of the scope of those required under the business management agreement, we will compensate our Business Manager at rates and in amounts approved by our board of directors.  See “Risk Factors – Risks Related to Our Business Manager, Property Managers and their Affiliates” for additional discussion regarding fees paid to the Business Manager.

 

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Reimbursement.  Notwithstanding the above, our Business Manager is required to reimburse us for the amounts, if any, that 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, before any additions to, or allowance for, reserves for depreciation, amortization or bad debts or other similar reserves before any gain from the sale of our assets, for that fiscal year.

 

Items such as organization and offering expenses, property expenses, interest payments, taxes, non-cash charges and acquisition fees and expenses are excluded from the definition of total operating expenses.  Our Business Manager also is obligated to pay organization and offering expenses exceeding specified levels.  See “Compensation Table” for a description of the fees and reimbursements to which our Business Manager is entitled.

 

Business Combination.  We will consider internalizing the functions of the Business Manager once our assets and income are of sufficient size such that internalizing these functions is, in our board’s view, in the best interests of our stockholders.  For a detailed discussion of a potential business combination with our Business Manager, see “– Business Combinations” below.

 

Liability and Indemnification.  Under the business management agreement, and the property management agreements described below, we are required to indemnify our Business Manager, Property Managers and each of their officers, directors, employees and agents and to pay or reimburse its or their reasonable expenses in advance of the final disposition of a proceeding so long as:

 

·

 

the person seeking indemnity determined in good faith that the course of conduct that caused the loss, liability or expense was in our best interest;

 

 

 

·

 

the person seeking indemnity was acting on behalf of, or performing services for, us;

 

 

 

·

 

the liability or loss was not the result of negligence or misconduct on the part of the person seeking indemnity; and

 

 

 

·

 

the indemnification or agreement to hold harmless is recoverable only out of our net assets and not from the assets of our stockholders.

 

We will not indemnify any person or entity for losses, liabilities or expenses arising from, or out of, an alleged violation of federal or state securities laws by any party seeking indemnity unless one or more of the following conditions are met:

 

·

 

there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular person or entity;

 

 

 

·

 

the claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular person or entity; or

 

 

 

·

 

a court approves a settlement of the claims and finds that indemnification of the settlement and related costs should be made and the court has been advised of the position of the SEC and the published opinions of any state securities regulatory authority

 

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in which our securities were offered and sold with respect to the availability or propriety of indemnification for securities law violations.

 

We will advance amounts to any person seeking indemnity for legal and other expenses only if:

 

·

 

the legal action relates to acts or omissions concerning the performance of duties or services by the person seeking indemnification for or on our behalf;

 

 

 

·

 

the legal action is initiated by a third party and a court of competent jurisdiction specifically approves the advance; and

 

 

 

·

 

the person receiving the advance undertakes to repay any monies advanced, together with interest thereon at the applicable rate, if a court finds that the person is not entitled to be indemnified.

 

Property Management Agreements

 

We have entered into property management agreements, sometimes referred to herein as “master management agreements,” with each of our Property Managers.

 

Duties of our Property Managers.  Our Property Managers, their affiliates or agents manage each of our real properties that is not internally managed by persons employed by companies that we acquire.  If we acquire a property that we would like any of our Property Managers to manage, we will enter into a separate agreement specific to that property with the applicable Property Manager.  See “Risk Factors – Risks Related to Our Business Manager, Property Managers and their Affiliates” for additional discussion regarding the property management agreements.

 

Compensation.  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 up to 4.5% of the gross income from the property.  We pay this fee for services in connection with renting, leasing, operating and managing each property.  As is customary in the industry, we reimburse each Property Manager, its affiliates and agents for property-level expenses that it or they pay such as salaries and benefit expenses for on-site employees and other miscellaneous expenses.

 

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.  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 do any of our Property Managers receive a property management fee and an oversight fee with respect to a particular property.  Further, in no event does 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 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. See “Risk Factors – Risks Related to Our Business Manager, Property Managers and their Affiliates” for additional discussion regarding fees paid to our Property Managers.

 

Term. The master management agreement with each Property Manager has a term of one year and is renewable for successive one year terms upon the mutual consent of the parties, including an affirmative vote of a majority of our independent directors.  Each master management agreement may be terminated by mutual consent of the parties.  We also may terminate each master management agreement

 

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without cause or penalty upon a vote by a majority of the independent directors on sixty days written notice to the respective Property Manager.  If any master management agreement is terminated, the respective Property Manager must cooperate with us and take all reasonable steps requested by our board to assist it in making an orderly transition.

 

Each property is managed pursuant to a separate agreement with a term ending on December 31 of the year in which the property is acquired.  Each property-specific agreement provides for successive one-year renewals, unless either party notifies the other in writing of its intent to terminate between sixty and ninety days prior to the expiration of the initial or renewal term.  We also may terminate these agreements without cause or penalty upon a vote by a majority of the independent directors on sixty days written notice to the applicable Property Manager.

 

The Property Manager may subcontract with an affiliate or a third party agent to provide the required property management services for less than the management fee provided in the management agreement.  Our Property Managers or their ultimate parent corporations may form additional subsidiary property management companies as necessary to manage the properties we acquire, and may approve of the change of management of a property from one manager to another.

 

Business Combination.  We will consider internalizing the functions of our Property Managers once our assets and income are of sufficient size such that internalizing these functions is, in our board’s view, in the best interests of our stockholders.  For a detailed discussion of a potential business combination with our Property Managers, see “– Business Combinations” below.

 

Property Management Agreements – Our Lodging Facilities

 

To qualify as a REIT, we generally cannot operate hotels.   To date, we have relied on our three taxable REIT subsidiaries, Barclay Hospitality Services Inc. (“Barclay Hospitality”), Barclay Holding, Inc. (“Barclay Holding” and together with Barclay Hospitality, “Barclay”) and Inland American Lodging Operations TRS, Inc. (“IA Operating TRS”), to operate our wholly owned lodging facilities.   Barclay and IA Operating TRS have engaged hotel management companies to manage these hotels under management contracts.  These third-party managers have direct control of the daily operations of our hotels.

 

Pursuant to the management agreements with these third party property managers, each of which we succeeded to upon acquiring the various hotels, Barclay and IA Operating TRS pay property management fees ranging from 2.25% to 7% (which may include amounts allocated to pay certain other fees) of the total revenue of the hotels under management.   Barclay and IA Operating TRS are also required to pay the respective property managers an annual incentive fee, calculated based upon the financial performance of the hotels that the property manager manages.   The agreements typically have terms ranging from five to twenty years, and give Barclay or IA Operating TRS the right to terminate the agreement upon ninety days’ notice.  The agreements also generally give the property manager the right terminate the agreement upon six months’ notice, or upon thirty days’ notice in the event that Barclay or IA Operating TRS transfers its rights in the agreement or there is a change in control of the entity controlling Barclay or IA Operating TRS.

 

Property Acquisition Agreement

 

We have entered into an agreement with Inland Real Estate Acquisitions, Inc., or IREA, under which IREA assists us in acquiring properties, REITs, real estate operating companies or other real estate assets.  This agreement will continue until the date that none of the directors affiliated with The Inland Group and none of the officers or directors of The Inland Group, IREA or our Business Manager or their affiliates are then serving as our officers and directors.  See “Risk Factors – Risks Related to Our

 

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Business Manager, Property Managers and their Affiliates” for additional discussion regarding the property acquisition agreement.

 

Duties of IREA.  Under the terms of this agreement, IREA has granted us a right of first refusal to acquire all properties, REITs or real estate operating companies that it identifies, acquires or obtains the right to acquire.  This right is subject to prior rights granted by IREA to certain entities sponsored by IREIC to acquire neighborhood retail facilities, community centers or single-user properties located throughout the United States.  A neighborhood retail facility is real estate improved for use as a shopping center with a gross leasable area ranging in size from 5,000 to 150,000 square feet.  A community center is real estate improved for use as a shopping center with gross leasable retail area exceeding 150,000 square feet but less than 300,000 square feet.  A single user property is real estate improved for use as a single tenant or commercial property.  If these entities do not exercise their respective rights, we have been granted a subsequent right of first refusal to acquire these properties.

 

Compensation.  At any time we acquire a controlling interest in a REIT or other “real estate operating company,” we pay our Business Manager or its designee a fee equal to 2.5% of the aggregate purchase price paid to acquire the controlling interest.  This fee is not paid when we acquire only a property but not the REIT or other real estate operating company owning the property.  See “Risk Factors – Risks Related to Our Business Manager, Property Managers and their Affiliates” for additional discussion regarding this fee paid to the Business Manager.  For these purposes, “control” means owning 50.1% or more of the voting securities of the entity in question.  For these purposes “real estate operating company” means:

 

·

 

any entity that has equity securities registered under Sections 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”);

 

 

 

·

 

any entity that files periodic reports under Sections 13 or 15(d) of the Exchange Act; or

 

 

 

·

 

any entity that, either itself or through its subsidiaries:

 

 

 

 

 

·

owns and operates interests in real estate on a going concern basis rather than as a conduit vehicle for investors to participate in the ownership of assets for a limited period of time;

 

 

 

 

 

 

·

has a policy or purpose of reinvesting sale, financing or refinancing proceeds or cash from operations;

 

 

 

 

 

 

·

has its own directors, managers or managing general partners, as applicable; and

 

 

 

 

 

 

·

either:

 

 

 

 

 

 

 

 

·

has its own officers and employees that, on a daily basis, actively operate the entity and its subsidiaries and businesses; or

 

 

 

 

 

 

 

 

·

has retained the services of an affiliate or sponsor of, or advisor to, the entity to, on a daily basis, actively operate the entity and its subsidiaries and businesses.

 

We pay acquisition fees either in cash or by issuing shares of our common stock valued per share at the greater of (i) the per share offering price of our common stock in our most recent public offering, (ii) if applicable, the per share price ascribed to shares of our common stock used in our most recent

 

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acquisition of a controlling interest in a REIT or other real estate operating company and (iii) $10.00 per share.  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 set forth in our articles to permit the issuance of the additional shares.  If our board does not waive the limit, any excess fee will be paid in cash.  See “Federal Income Tax Considerations – General Share Ownership Tests” and “Description of Securities – Restrictions on Ownership and Transfer.”

 

Other Agreements with Affiliates of IREIC

 

We have entered into agreements with other affiliates of IREIC to provide services to us.  Specifically, we have entered into an investment advisory agreement with Inland Investment Advisors, Inc., referred to herein as “Inland Advisors,” under which Inland Advisors will serve as our investment advisor.  The agreement provides that Inland Advisors has full discretionary authority with respect to the investment and reinvestment of our assets, subject to certain investment guidelines that we may provide from time to time, and which take effect generally fifteen days after notice to Inland Advisors.  The agreement also gives Inland Advisors the power to act as our proxy and attorney-in-fact to vote, tender or direct the voting or tendering of all of the assets of our accounts.  We will pay Inland Advisors a monthly fee for providing investment advisory services in connection with our investments in marketable securities. We will pay annual fees totaling 1% of the first $1 to $5 million of marketable securities under management, 0.85% of marketable securities from $5 to $10 million, 0.75% of marketable securities from $10 to $25 million, 0.65% of marketable securities from $25 to $50 million, 0.60% of marketable securities from $50 to $100 million and 0.50% of marketable securities above $100 million.   Both we and Inland Advisors may terminate the agreement upon thirty days’ written notice.

 

Business Combinations

 

Many REITs that are listed on a national securities exchange are considered self-administered, which means that they employ persons or agents to perform all significant management functions.  The costs to perform these management functions are “internalized” rather than external and no third-party fees, such as advisory fees, are paid by the REIT.  We will consider becoming a self-administered REIT once our assets and income are, in our board’s view, of sufficient size such that internalizing the management functions performed by our Business Manager and Property Managers is in the best interests of our stockholders.

 

If our board should make this determination in the future, we have agreed to pay one-half of the costs, and our Business Manager and Property Managers have agreed to pay the other half, of an independent investment banking firm.  This firm would jointly advise us and IREIC on the value of our Business Manager and Property Managers.  After the investment banking firm completes its analyses, we will require it to prepare a written report and make a formal presentation to our board.

 

Following the presentation by the investment banking firm, our board would form a special committee comprised entirely of independent directors to consider a possible business combination with our Business Manager and Property Managers.  The board will, subject to applicable law, delegate all of its decision-making power and authority to the special committee with respect to these matters.  The special committee also will be authorized to retain its own financial advisors and legal counsel to, among other things, negotiate with representatives of our Business Manager and Property Managers regarding a possible business combination.  In any event, before we can complete any business combination with either our Business Manager or Property Managers, our articles require that the following two conditions be satisfied:

 

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·

 

the special committee receives an opinion from a recognized investment banking firm, separate and distinct from the firm jointly retained to provide a valuation analysis, concluding that the consideration to be paid to acquire our Business Manager or Property Managers, as the case may be, is fair to our stockholders from a financial point of view; and

 

 

 

·

 

the holders of a majority of the votes cast at a meeting of our stockholders called for such purpose (if a quorum is present at the meeting) approves the acquisition; provided that, for these purposes only, any shares held by The Inland Group, Inc., IREIC or any of their affiliates will be counted for purposes of determining the presence of quorum. The shares will not, however, initially constitute a vote cast for purposes of determining the number of votes necessary to approve the acquisition. If the proposal receives the necessary votes to approve the acquisition, these shares may then be voted in favor of the transaction.

 

We anticipate that any consideration we may offer in connection with a business combination with our Business Manager and Property Managers will be payable solely in shares of our common stock.  Unless and until definitive documentation is executed, we will not be obligated to complete a business combination with our Business Manager or Property Managers.

 

Inland Securities Corporation

 

Inland Securities Corporation, our dealer manager, was formed in 1984 and is registered under the applicable federal and state securities laws as a securities broker-dealer throughout the United States.  Inland Securities also is licensed to sell securities in the province of Ontario, Canada as an international dealer.  Since being formed, Inland Securities has served as the dealer manager in connection with the offering of investment products sponsored by IREIC.  Inland Securities has not rendered these services to anyone other than affiliates of The Inland Group.  Inland Securities is a member firm of the FINRA.  See “Risk Factors – Risks Related to Our Business Manager, Property Managers and their Affiliates” for additional discussion regarding Inland Securities.

 

The following table sets forth information about the directors, officers and principal employees of Inland Securities.  Mr. Parks’ biography is set forth above under “– Inland Affiliated Companies” in this section.  The biographies of Ms. Gujral and Ms. Matlin are set forth above under “– Our Directors and Executive Officers” in this section.

 

Name

 

Age*

 

Position

Brenda G. Gujral

 

66

 

Director, President and Chief Operating Officer

Roberta S. Matlin

 

64

 

Director and Vice President

Catherine L. Lynch

 

50

 

Director, Treasurer and Secretary

Robert D. Parks

 

65

 

Director

Brian M. Conlon

 

50

 

Executive Vice President - National Sales Director

R. Martel Day

 

59

 

Executive Vice President - Director of Business Development

Fred C. Fisher

 

64

 

Senior Vice President

David Bassitt

 

66

 

Senior Vice President

John Cunningham

 

50

 

Senior Vice President

 


*As of January 1, 2009

 

Catherine L. Lynch joined the Inland organization in 1989.  Ms. Lynch has served as the treasurer and secretary of IREIC since January 1995, as a director and treasurer of Inland Investment Advisors, Inc. since June 1995, as treasurer

 

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and secretary of Inland Securities Corp. since June 1995, as treasurer of Inland Institutional Capital Partners, Inc. since May 2006 and as treasurer of Inland Capital Markets Group, Inc. since January 2008.  Ms. Lynch worked for KPMG Peat Marwick LLP from 1980 to 1989.  Ms. Lynch received her bachelor degree in accounting from Illinois State University, Normal, Illinois.  Ms. Lynch is a certified public accountant and a member of the American Institute of Certified Public Accountants and the Illinois CPA Society.  Ms. Lynch also is registered with FINRA as a financial operations principal.

 

Brian M. Conlon joined Inland Securities Corporation as executive vice president in September 1999. Prior to joining Inland, Mr. Conlon was executive vice president and chief operating officer of Wells Real Estate Funds, where he was responsible for overseeing day-to-day operations of the company’s real estate investment and capital raising initiatives.  Mr. Conlon is a general securities principal, is licensed as a real estate broker in Georgia, and has earned the certified financial planner and certified commercial investment member designations.  Mr. Conlon served on the national board of directors for the Financial Planning Association in 2001 and 2002.  Mr. Conlon received his bachelor degree from Georgia State University in Atlanta, Georgia and received a master’s degree in business administration from the University of Dallas, in Dallas, Texas.  Mr. Conlon holds Series 7, 24 and 63 certifications with FINRA.

 

R. Martel Day is executive vice president and director of business development for Inland Securities Corporation.  He joined Inland Securities Corporation in 1984 as a regional representative in the southeast.  Since then, he has served as regional vice president, senior vice president, national marketing director and national sales director.  Mr. Day is currently responsible for developing and maintaining the selling group for Inland’s investment products.

 

Mr. Day graduated with an engineering degree from the Georgia Institute of Technology, Atlanta, Georgia.  Mr. Day is president and a director of the Investment Program Association, a member of the Financial Planning Association and a member of the National Association of Real Estate Investment Trusts.  Mr. Day holds general securities and registered investment advisor licenses with FINRA.

 

Fred C. Fisher is a senior vice president of Inland Securities Corporation, which he joined in 1984. Mr. Fisher began his career with Inland Securities Corporation as regional vice president for the Midwest region.  In 1994, he was promoted to senior vice president.  Mr. Fisher received his bachelor degree from John Carroll University, University Heights, Ohio.  Before joining Inland Securities Corporation, he spent nine years as a regional sales manager for the S.S. Pierce Company.  Mr. Fisher holds Series 7, 22 and 63 certifications with FINRA.

 

David Bassitt joined Inland Securities Corporation as a senior vice president in March 2001. Prior to joining Inland, Mr. Bassitt was director of financial services with AEI Fund Management, Inc. and was responsible for wholesaling public and private net lease real estate investments and 1031 property exchanges to financial planners.  Mr. Bassitt received a bachelor degree from Ferris State University, Big Rapids, Michigan, and a master degree from St. Cloud University, St. Cloud, Minnesota.  Mr. Bassitt holds Series 6, 7, 22 and 63 certifications with FINRA.

 

John Cunningham is a senior vice president of Inland Securities Corporation.  He joined an affiliate of TIREG in January 1995 as a commercial real estate broker and joined Inland Securities Corporation as a regional representative for the western region in March 1997. He became a vice president in 1999. In 2002, he became senior vice president of the western region.  Mr. Cunningham graduated from Governors State University, University Park, Illinois, with a bachelor degree in business administration, concentrating in marketing.  Before joining the Inland organization, Mr. Cunningham owned and operated his own business and developed real estate.  He holds Series 7 and 63 certifications with FINRA.

 

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CONFLICTS OF INTEREST

 

Conflicts of Interest

 

Conflicts of interest exist between us and other entities sponsored by, or affiliated with, IREIC.  The most significant conflicts of interest we may face in operating our business are described below.

 

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

 

Our Business Manager and Property Managers share employees with IREIC, its affiliates and other REITs 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.  During times of intense activity, these individuals may not be able to devote all of their time and resources to our business.

 

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 or any other affiliates of IREIC were negotiated at arm’s-length.  Although 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, we believe that these agreements and arrangements are no less favorable to us than those available from an unaffiliated party under the same circumstances.  Further, a majority of our independent directors makes all decisions regarding enforcing these agreements or arrangements with our Business Manager, Property Managers and other affiliates of IREIC.

 

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.

 

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 and other real estate operating companies.  Further, our Property Managers receive fees based on the gross income from properties under management and for overseeing the management of our properties.  Other parties related to, or affiliated with our Business Manager or Property Managers may also receive fees or cost reimbursements from us.  These compensation arrangements may cause these entities to take or not take certain actions.  For example, these compensation arrangements may provide an incentive for our Business Manager to: (1) borrow more money than prudent to increase the amount we can invest; (2) retain instead of sell assets, even if our stockholders may be better served by sale or disposition of the assets; or (3) avoid reducing the carrying value of assets that may otherwise be viewed as impaired.  In addition, 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.

 

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We compete with other REITs sponsored by IREIC for certain properties and other real estate related investments.

 

IREIC has sponsored four REITs with similar investment objectives as ours.  One of these entities, Inland Diversified Real Estate Trust, Inc., will rely on an affiliate of our Business Manager to oversee and run its day-to-day operations and will seek to invest in a broad range of asset types, including the types of assets in which we intend to invest.  As a result, we may be seeking to buy properties and other real estate assets at the same time that Inland Diversified intends to do so.  We, along with Inland Diversified, rely to some degree on IREA to identify and assist in acquiring real estate assets.  IREA is an indirect wholly owned indirect subsidiary of The Inland Group.  Mr. Parks is a director of The Inland Group and Mr. Parks and Ms. Gujral are both directors of IREIC and two of the other REITs.  See “Management” above for additional discussion on the positions held by Mr. Parks and Ms. Gujral with these entities.

 

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 real estate operating companies that it identifies, acquires or obtains the right to acquire.  This right is subject to prior rights granted by IREA to two of the other REITs sponsored by IREIC to acquire neighborhood retail facilities, community centers or single-user properties located throughout the United States.  If these entities do not exercise their respective rights, we have been granted a subsequent right of first refusal to acquire these properties.  Under principles of corporate law known as the “corporate opportunity doctrine,” a director may not take for him or herself, either directly or through a controlled entity, any opportunity that the corporation has a reasonable expectancy to because it falls within the corporation’s line of business.  In our case, the agreement with IREA may result in a property being offered to another entity sponsored or affiliated with IREIC, even though we may also be interested in, and have the ability to acquire, the subject property.

 

We acquire real estate assets from affiliates of IREIC.

 

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 properties or other assets by the affiliate plus any costs incurred by the affiliate in acquiring or financing the property or asset, it is possible that we could have negotiated a better price if we had negotiated directly with the seller.  Our articles require a majority of our directors, who have no financial interest in the transaction, to approve the transaction and conclude that it is fair and reasonable to us. If the price to us exceeds the cost paid by our affiliate, there must be substantial justification for the excess cost.

 

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, IREA or our Property Managers who also perform services for IREIC or these other affiliates may have a conflict in representing our interests in these transactions on the one hand and the interests of IREIC and its affiliates in preserving or furthering their respective relationships on the other hand.

 

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

 

Our Business Manager may seek to acquire an interest in a real estate asset through a joint venture with affiliates of IREIC.  In these circumstances, persons employed by our Business Manager who also are employed by IREIC or its affiliates may have a fiduciary duty to both us and the affiliates of IREIC participating in the joint venture.  In order to minimize the conflict between these fiduciary duties, our articles require a majority of our disinterested directors to determine that the transaction is fair and reasonable to us and is on terms and conditions no less favorable than from unaffiliated third parties entering into the joint venture.

 

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

 

Inland Securities Corporation, our dealer manager, 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.

 

Policies and Procedures with Respect to Related Party Transactions

 

Our articles contain provisions setting forth our ability to engage in certain transactions.  Our board reviews all of these transactions as well as any related party transactions.  As a general rule, any related party transactions must be approved by a majority of the directors not otherwise interested in the transaction.  In determining whether to approve or authorize a particular related party transaction, these persons will consider whether the transaction between us and the related party is fair and reasonable to us and has terms and conditions no less favorable to us than those available from unaffiliated third parties.

 

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BUSINESS AND POLICIES

 

We were formed on October 4, 2004 to acquire and develop a diversified portfolio of commercial real estate, primarily retail, multi-family, industrial, lodging, office and student housing 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 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” above 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 commercial mortgage-backed securities.  Investments in commercial 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 Investments in Other Real Estate Assets” 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.  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 such as commercial mortgage-backed securities.  We do not intend to acquire real estate assets located outside of the United States and Canada.

 

We are a diversified REIT, and intend to maximize stockholder value by utilizing the depth of our expertise to capitalize on opportunities in the real estate industry.  Our business model is depicted below:

 

 

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We have been qualified to be taxed as a real estate investment trust, or REIT, commencing with the tax year ending December 31, 2005.  A real estate investment trust or REIT is a company that owns and, in most cases, operates income-producing properties.  To qualify as a REIT, a company must generally distribute at least 90% of its “REIT taxable income” to its stockholders on an annual basis.

 

Investment Strategy

 

We have used and expect to continue using substantially all of the net proceeds from this offering primarily to acquire:

 

·

retail properties;

 

 

·

multi-family properties;

 

 

·

industrial facilities;

 

 

·

lodging facilities;

 

 

·

office buildings;

 

 

·

student housing properties; and

 

 

·

triple-net, single-use properties.

 

We do not focus our property acquisitions in any one particular geographic location within the United States.  Although we also may purchase properties located in Canada, we have not done so to date.  We generally endeavor to acquire multiple properties within the same major metropolitan market so that we can efficiently manage each property.  However, we also seek properties with existing “net” leases.  “Net” leases require tenants to pay a share, either prorated or fixed, of all, or a majority, of a particular property’s operating expenses, including real estate taxes, special assessments, utilities, insurance, common area maintenance and building repairs, as well as base rent payments.  We also may enter into sale and leaseback transactions in which we purchase a property and lease the property back to the seller.

 

To provide us with a competitive advantage over other potential purchasers, we generally do not condition any acquisition on our ability to secure financing.  See “Risk Factors – Risks Associated with Debt Financing” beginning on page 38 for additional discussion regarding our ability to secure financing.  We also may agree to acquire a property once construction is completed.  In this case, we would be obligated to purchase the property if the completed property conforms to definitive plans, specifications and costs approved by us.  We also may require the developer to have entered into leases for a certain percentage of the property.  We also may construct or develop properties and render services in connection with developing or constructing the property so long as providing these services does not cause us to lose our qualification to be taxed as a REIT.

 

We also may seek to acquire publicly traded or privately owned entities that own commercial real estate assets.  These entities may include REITs and other “real estate operating companies,” such as real estate management companies and real estate development companies.  We do not have, and do not expect to adopt, any policies limiting our acquisitions of REITs or other real estate operating companies to those conducting a certain type of real estate business or owning a specific property type or real estate asset.  In most cases, we will evaluate the feasibility of acquiring these entities using the same criteria we will use in evaluating a particular property.  Each acquired entity would be operated as either a wholly owned or controlled subsidiary.  As part of any such acquisition or shortly thereafter, we may sell certain

 

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properties to affiliates of our sponsor or others, that, in our view, would not be consistent with the remaining properties in our portfolio.  We may acquire these entities in negotiated transactions or through tender offers.  Any acquisition must, however, be consistent with maintaining our qualification to be taxed as a REIT.  See “Risk Factors – Risks Related to Investments in Other Real Estate Assets” for additional discussion regarding the acquisition of REITs and other real estate operating companies.

 

Change in Investment Objectives and Policies

 

Our board of directors is responsible for implementing our investment objectives and policies. 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.

 

Our board may make material changes to the restrictions on investment objectives and policies set forth in our articles only by amending the articles.  Any amendment requires the affirmative vote of a majority of our then outstanding shares of common stock.  For these purposes, shares held by IREIC and its affiliates will be counted toward the majority vote required to amend the articles and change the restrictions on our investment objectives and policies.  See “Summary of Our Organizational Documents – Restrictions on Investments.”

 

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.  For example, although we enter into leases that contain scheduled rent escalation provisions, our operating expenses may increase with inflation and may not be offset by increases in scheduled rent payments.  Further, our board does not anticipate evaluating a listing of our shares until at least 2010.  There is no assurance that we will list our shares or that a public market will develop if we list our shares.  See “Risk Factors – Risks Related to the Offering” and “—Risks Related to Our Business” for additional discussion of these risks.

 

Investment Limitations

 

We do not intend to:

 

·

 

invest in commodities or commodity future contracts;

 

 

 

·

 

issue redeemable shares of common stock;

 

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·

 

issue shares on a deferred payment basis or other similar arrangement; or

 

 

 

·

 

operate in such a manner as to be classified as an “investment company” for purposes of the Investment Company Act.

 

See “Summary of Our Organizational Documents – Restrictions on Investments” for additional investment limitations.  We do not intend to engage in hedging or similar activities for speculative purposes.  We may invest proceeds from this offering or other funds for the purpose of exercising control over REITs or other real estate operating companies.  Subject to the limits set forth above, we also may invest in the securities of other entities regardless of whether they own commercial real estate or other developed or undeveloped properties and we may make loans to third parties owning commercial real estate or other developed or undeveloped properties.

 

Acquisition Standards

 

We consider a number of factors in evaluating whether to acquire any particular asset, including:

 

·

 

geographic location and property type;

 

 

 

·

 

condition and use of the assets;

 

 

 

·

 

historical performance;

 

 

 

·

 

current and projected cash flow;

 

 

 

·

 

potential for capital appreciation;

 

 

 

·

 

potential for economic growth in the area where the assets are located;

 

 

 

·

 

presence of existing and potential competition;

 

 

 

·

 

prospects for liquidity through sale, financing or refinancing of the assets; and

 

 

 

·

 

tax considerations.

 

With respect to our lodging facilities, we focus on acquiring hotels with strong national franchise affiliations, or hotel properties with the potential to obtain these franchise affiliations, in the “full service,” “extended stay,” “mid-scale without food and beverage,” “upscale” and “upper upscale” market segments.  We focus on properties in locations with relatively high demand for rooms, a relatively low supply of hotel properties and relatively high barriers to entry into the hotel business, such as a scarcity of suitable sites or zoning restrictions, as well as hotels that will benefit from repositioning or substantial rehabilitation, or from new management and additional capital.

 

Borrowing Policy

 

In some instances, we borrow money to acquire real estate assets either at closing or at sometime thereafter.  These borrowings may take the form of temporary, interim or permanent financing from banks, institutional investors and other lenders including lenders affiliated with IREIC or us.  These borrowings generally are secured solely by a mortgage on one or more of our properties but also may require us to be directly or indirectly (through a guarantee) liable for the borrowings.  We may borrow at either fixed or variable interest rates and on terms that require us to repay the principal on a typical, level

 

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schedule or at one-time in “balloon” payments.  In addition, in certain circumstances we may enter into derivative transactions for the purpose of fixing or capping the rates on any floating interest rate debt where the principal amount of the indebtedness does not exceed $100 million.  We also may establish a revolving line of credit for short-term cash management and bridge financing purposes.  See “Risk Factors – Risks Associated with Debt Financing” for additional discussion regarding our borrowings.

 

As a matter of policy, the aggregate borrowings secured by all of our assets will 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.  In the case of assets acquired through a merger, we will use the value accorded to the assets on the acquisition balance sheet.  In addition, we may borrow money in connection with developing certain construction projects so long as the aggregate borrowing per property does not exceed $30 million and the loan to cost ratio for the loan does not exceed 75%.  We may fully guarantee any construction loan that satisfies these criteria.  Our articles limit the amount we may borrow, in the aggregate, to 300% of our net assets, which are defined as total assets, other than intangibles, at cost before deducting depreciation or other non-cash reserves less total liabilities, calculated at least quarterly on a basis consistently applied.  Any borrowings over this limit must be approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report along with the reason for exceeding the limit.  In addition, a majority of the holders of common stock present at a meeting of the stockholders must approve any issuance of preferred stock that would cause our aggregate borrowings, including amounts payable by us in respect of the preferred stock, to exceed 300% of our net assets.

 

Our Assets

 

We typically own real estate assets (1) directly, through ownership of a “fee simple interest,” (2) indirectly through joint ventures (3) through our wholly owned operating subsidiaries or (4) as investments in REIT marketable securities.  In addition, we may make 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.  These operating platforms are discussed in more detail below.

 

Our “Fee Simple” Properties

 

As of September 30, 2008, we owned fee simple and leasehold interests in 793 properties, excluding our lodging and development properties, located in 35 states and the District of Columbia.

 

Our Joint Ventures

 

We have entered into joint ventures to acquire, develop and improve properties.  For financial statement reporting purposes, we determine whether we are required to consolidate our investment in these joint ventures in accordance with generally accepted accounting principles.  If we are required to consolidate any joint venture, the assets, liabilities, equity and results of operations of the joint venture entities are consolidated in our financial statements.  In the future, we may acquire, develop or improve properties through additional joint ventures, partnerships, co-tenancies and other co-ownership arrangements or participations with real estate developers, owners and other affiliated or unaffiliated third parties.  We generally will invest in joint ventures where we have a right to purchase the co-venturer’s interest in the venture.  Nevertheless, our interests may not be totally aligned.  For example, if the co-venturer elects to sell a property, we may not have sufficient funds to exercise our right of first refusal to buy the other co-venturer’s interest in the property.  We may only enter into joint ventures with affiliates if a majority of our independent directors determine that the transaction is fair and reasonable to us. Our significant joint ventures are discussed in detail below.

 

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MB REIT.  On October 11, 2005, we entered into a joint venture with Minto Delaware, Inc., referred to herein as Minto Delaware, which owned all of the outstanding equity of Minto Builders (Florida), Inc., referred to herein as “MB REIT.”  We have invested approximately $1.17 billion in MB REIT, and now own 920,000 shares of MB REIT common stock, or approximately 98% of its outstanding common stock.  We have appointed Ms. Gujral, Ms. Foust and Mr. Parks to serve on MB REIT’s five-member board of directors as our designees.  In addition, our Business Manager and Property Managers perform services for MB REIT on terms and conditions substantially similar to the terms and conditions set forth in the agreements that we have with these entities.  Our independent directors retain the same rights of approval and termination under these agreements on behalf of MB REIT as they have under the agreements that we have with our Business Manager and Property Managers.  Similarly, MB REIT is obligated to pay fees under its agreements with the Business Manager and Property Managers in amounts no greater than we would pay for the same services.

 

We are required to redeem or purchase Minto Delaware’s investment in MB REIT at Minto Delaware’s request, which can be accomplished no earlier than October 11, 2011.  Specifically, on October 11, 2011, and subject to complying with notice requirements, Minto Delaware can require us to purchase its series A preferred stock for an amount equal to $264 million plus accrued and unpaid dividends and its common stock as follows: (1) if our common stock is listed on a national securities exchange, Minto Delaware must exchange its common stock in MB REIT for approximately three million shares of our common stock; or (2) if our stock is not so listed, approximately $29 million in cash.  If Minto Delaware chooses to wait until October 11, 2012 to exercise its redemption right, and subject to complying with notice requirements, Minto Delaware can require us to purchase its series A preferred stock for an amount equal to $264 million plus accrued and unpaid dividends and its common stock as follows: (x) if our common stock is listed on a national securities exchange, Minto Delaware must exchange its common stock in MB REIT for approximately three million shares of our common stock; or (y) if our common stock is not so listed, we will be required to purchase or redeem the common stock for cash at a value determined by a formula contained in the purchase agreement with Minto Delaware.

 

As a holder of shares of MB REIT common stock, we are entitled to receive distributions, paid on a monthly basis from available cash, after dividends have been paid on MB REIT’s series A and B preferred stock including any accrued and unpaid dividends, and so long as the distributions do not exceed its funds from operations or “FFO.”  From October 11, 2005 through September 30, 2008, MB REIT had paid cash distributions in the aggregate amount of $178.3 million to all common stockholders of record, including approximately $172.5 million in distributions to us.

 

Our Operating Companies

 

Inland American Urban Hotels, Inc.  On February 8, 2008, we completed a merger with RLJ Urban Lodging Master, LLC (referred to herein as “Lodging Master”) and RLJ Urban Lodging REIT, LLC and RLJ Urban Lodging REIT (PF#1), LLC, which together owned all of the membership interests of Lodging Master, together referred to herein as the “sellers.”  Lodging Master merged with and into Inland American Urban Hotels, Inc., our indirect wholly owned subsidiary (referred to herein as “Urban Hotels”), with Urban Hotels continuing as the surviving entity of the merger.  At the closing of the merger, we paid a total of $893.4 million, including debt assumed as part of the merger plus new debt incurred concurrent with closing, to purchase all of the membership interests of Lodging Master.  On February 26, 2008, we paid our Business Manager an acquisition fee of $22.3 million in connection with the merger.

 

As noted above, at closing Lodging Master had approximately $364.2 million of long-term debt which is treated as part of the purchase price paid for Lodging Master.  We also borrowed an additional $62.4 million.

 

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The daily hotel operations of Urban Hotels’ hotels are managed under various management agreements with third party property managers Marriott International, Inc. (“Marriott”), Hilton Hotels Corporation (“Hilton”), Interstate Hotel and Resorts, Inc. (“Interstate”), Davidson Hotel Group (“Davidson”), Urgo Hotels (“Urgo”), Hyatt Select Hotels Group, LLC (“Hyatt Select”) and White Lodging Services Corporation (“White Lodging”).  These management agreements typically have an initial term ranging from five to twenty years, and generally may be renewed upon the mutual consent of the parties. The agreements generally provide for payment of base management fees based on a percentage of revenue and incentive management fees paid after an owners priority return, as well as certain other fees, including fees for use of the franchisor’s name and reservation and distribution systems. Additionally, certain of these agreements permit us to terminate the agreements if the manager does not achieve certain operating results.

 

Inland American Orchard Hotels, Inc.  On October 5, 2007, we completed a merger with Apple Hospitality Five, Inc., referred to herein as “Apple,” in which we purchased each issued and outstanding unit of Apple, equal to one share of Apple’s common stock and one share of Series A preferred stock (together, a “Unit”) and each issued and outstanding share of Apple Series B convertible preferred stock, on an as-converted basis, other than any dissenting shares, as well as each option to purchase the Units, for an aggregate purchase price of approximately $700 million.  Prior to the closing of the merger, Apple defeased a loan secured by the Courtyard by Marriott hotel located in Harlingen, Texas, which we acquired in connection with the merger. The outstanding principal amount of this loan at the time of the defeasance was approximately $4.5 million. As a result of the defeasance, we substituted other income-producing collateral for the Harlingen hotel. By defeasing this loan prior to the closing of the merger, Apple was not required to obtain the lender’s consent to the merger.  Our wholly owned subsidiary, Inland American Orchard Hotels, Inc., referred to herein as “IA Orchard,” is the surviving entity of this merger.

 

Our Business Manager is responsible for overseeing IA Orchard’s property portfolio, and the daily hotel operations are managed under various management agreements with third party property managers Marriott, Hilton and Interstate.  These management agreements typically have an initial term ranging from five to thirty years, and generally may be renewed by the parties. The agreements generally provide for payment of base management fees based on a percentage of revenue and incentive management fees if the manager achieves certain operating results, as well as certain other fees, including fees for use of the franchisor’s name and reservation and distribution systems. Additionally, certain of these agreements permit us to terminate the agreements if the manager does not achieve certain operating results.

 

Inland American Winston Hotels, Inc.  On July 1, 2007, we completed a merger with Winston Hotels, Inc., referred to herein as “Winston,” in which we purchased 100% of the outstanding shares of common stock and Series B preferred stock of Winston for an aggregate purchase price of approximately $781.8 million, which includes our assumption of approximately $246 million of Winston’s outstanding debt.  In connection with the merger, we purchased 100 units of partnership interest in WINN Limited Partnership, the operating partnership of Winston (“WINN”), for a purchase price of $19.5 million, making us the sole limited partner of WINN.  Our wholly owned subsidiary, Inland American Winston Hotels, Inc., referred to herein as “IA Winston,” is the surviving entity of this merger.  A holding company, Inland American Lodging Group, Inc., owns 100% of the stock of our hotel subsidiary, including the 100 partnership units of WINN.

 

Forty-nine of IA Winston’s hotels are operated under franchises from nationally recognized franchisors including Marriott, Hilton, Intercontinental and Choice. We expect that any new hotels that we purchase likewise will be operated under franchise licenses.  IA Winston has received written notification that the franchise license agreements for two of its hotels, which expire in March 2009 and

 

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November 2010, will not be renewed.  Although we do not anticipate that these expirations will have a material impact on our results of operations, there can be no assurance that other licenses will be renewed upon the expiration thereof, and any future non-renewals could have a material adverse effect on IA Winston.

 

IA Winston also provides loans to the hotel industry, primarily by either originating single loans, purchasing participations or subordinate pieces of loans originated by others or through the purchase of the first loss piece of CMBS transactions, which typically contain mortgage loans on multiple hotel properties. The first loss piece consists of mortgage loans collateralized by some of the respective underlying hotels but which are not included in the CMBS pool. However, IA Winston also may issue whole loans and then potentially sell the senior portion of the loan. IA Winston’s hotel loan amount typically is 10% to 25% of the project’s all-in cost, ranging from approximately $1 million to approximately $25 million. IA Winston primarily will provide financing between 60% and 85% of the lesser of the project’s all-in cost or fair market value. Loans typically are issued for hotels with between 100 and 450 rooms. IA Winston does not hold an ownership interest in any of the hotels for which we provide debt financing.

 

Utley Residential Company.  On May 18, 2007, our wholly owned subsidiary, Inland American Communities Group, Inc. (“Communities”), entered into a purchase agreement with Utley Residential Company, L.P., a private real estate development company developing both student and conventional multi-family housing (“Utley”), URC GP, LLC, the general partner of Utley, and Robert K. Utley III, Steven R. Utley and John R. Allums, the limited partners of Utley, to purchase the assets of Utley related to the development of conventional and student housing for approximately $23.1 million.

 

Through Communities, we have access to Utley’s existing pipeline of student and conventional multi-family housing development projects as well as any new projects that have been presented and approved by the investment committee and our board of directors.

 

Communities and its subsidiaries have hired certain of Utley’s former employees to assist in developing any projects in the development pipeline and to generate future development deals for Communities.  Certain of the employees are the owners of Worthing Investment GP, LLC (“Worthing”), and are entitled to receive certain profits in connection with the assets of the Utley platform.  Worthing has the authority to approve “pursuit” costs incurred by Communities on any new projects, in an amount not to exceed $125,000 per project.  Each development project ultimately must be presented to, and approved by, Communities’ five-member investment committee, on which Lori Foust, Catherine Lynch and Thomas McGuinness serve as members.  Each project approved by the investment committee also must be approved by a majority of our board.  We may, through our wholly owned subsidiaries, commit up to $250 million per year in future development equity over the next four years, for an aggregate commitment not to exceed $1 billion.  We will earn a preferred return, computed like interest at a rate of 8.5%, on all capital contributions we make to Communities, which must be earned prior to the payments upon stabilization.

 

Worthing is eligible to receive compensation payable upon the development projects reaching stabilization and general and administrative expenses not exceeding certain limits.  In addition, Communities has agreed to enter into management agreements with certain of our Property Managers to manage each completed development project and, unless otherwise agreed upon by the parties in writing, each management agreement will provide for the payment of a fee to the applicable Property Manager by Communities in the amount of 3.5% of gross income of the retail portion of each project and 1% of the gross income of the non-retail portion of each project.  These management agreements may not be terminated prior to the participation agreement entered into in connection with our acquisition of Utley,

 

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which has an initial term ending on December 31, 2009 and will continue thereafter for successive one year periods unless terminated by either party.

 

Inland American Lodging Corporation.  Inland American Lodging Corporation, our wholly owned subsidiary headquartered in Orlando, Florida, focuses on the acquisition and asset management of lodging properties.  Marcel Verbaas is president and chief executive officer of Inland American Lodging Corporation.  Mr. Verbaas was previously the chief investment officer for CNL Hotels & Resorts, Inc., a lodging real estate investment trust focused on luxury and upper upscale hotels.

 

Inland Public Properties Development, Inc. Inland Public Properties Development Inc., our wholly owned subsidiary, referred to herein as Inland Public Properties, focuses on the government property niche by acquiring and developing assets leased to county, state and federal governmental entities. When considering potential transactions, Inland Public Properties may look at sale-leasebacks of existing properties, but generally focuses on build-to-suit development of properties that will be net leased to government entities.  Mr. Chuck Jones is the president and chief executive officer of Inland Public Properties.  Mr. Jones is the former chief executive officer of CentraCore Properties Trust, an owner of correctional facilities that was purchased by the GEO Group Inc. in 2007.

 

Our Investments and Lending Relationships

 

Investments in REIT Marketable Securities.  We invest in marketable securities, consisting of preferred and common stock investments in other REITs.  Under Accounting Principles Board (APB) Opinion No. 18 (“The Equity Method of Accounting for Investments in Common Stock”), we evaluate our equity method investments for impairment indicators.  This analysis considers the value of the various investments in relation to the business and activities of the underlying entity.

 

Loans.  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 addition, we generally obtain personal guarantees from the borrowers of these loans, particularly where the loans are secured by underdeveloped land.

 

Disposition of Properties and other Real Estate Assets

 

We intend to hold acquired assets for an extended period.  Circumstances may arise, however, that could result in the early sale of any asset.  We may sell an asset or assets if we believe the sale would be in the best interests of our stockholders.  Specifically, with respect to our lodging facilities, we may sell older hotels, underperforming hotels or hotels that no longer meet their yield objectives, and invest the funds in selected hotel developments. We will consider all relevant factors in determining to sell an asset including prevailing economic conditions and current tenant creditworthiness.  See “Risk Factors – Risks Related to Investments in Real Estate” for additional discussion regarding the sale of assets.

 

Appraisals

 

Prior to acquiring any property, we obtain an appraisal prepared by an independent appraiser who is a member in good standing of the Appraisal Institute.  As a matter of policy, the purchase price that we pay will not exceed the appraised value.  Appraisals are, however, only estimates of value and may not reflect true worth of realizable value.  We will not necessarily obtain appraisals to acquire a REIT or other real estate operating company.  We may, however, obtain a fairness opinion prepared by an independent third party regarding the fairness, to our stockholders, of the consideration paid and received by us in the

 

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transaction.  We maintain copies of all appraisals and fairness opinions on our records for at least five years.  These copies are available for review by our stockholders.

 

Return of Uninvested Proceeds

 

We will return any of the proceeds of this offering that are not invested in real estate assets within the later of twenty-four months from the original effective date of this prospectus or twelve months from the termination of the offering.  All funds we receive out of the escrow account are available for our general use from the time we receive them until expiration of the period discussed in the prior sentence.

 

We use these funds to:

 

·              pay expenses incurred to acquire real estate assets;

 

·              make capital contributions or additional investments in real estate assets;

 

·              reimburse IREIC for expenses it has paid;

 

·              pay property management fees or other acquisition fees; and

 

·              pay day-to-day operating expenses.

 

See “Estimated Use of Proceeds” and “Plan of Distribution – Escrow Conditions.”  We do not segregate funds from our other funds pending investment.

 

Exchange Listing and Liquidity Events

 

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.  A public market for our shares may allow us to increase our size, portfolio diversity, stockholder liquidity and access to capital.  There is no assurance however that we will list our shares or that a public market will develop if we list our shares.  Our board may decide to sell our assets individually, liquidate or seek listing at a later date.  The sale of all or substantially all of our assets as well as liquidation would require the affirmative vote of a majority of our then outstanding shares of common stock.  We will not pay a listing fee to IREIC or any of its affiliates in the event of a listing.

 

Construction and Development Activities

 

From time to time, we may construct and develop real estate assets or render services in connection with these activities.  We may be able to reduce overall purchase costs by constructing and developing property versus purchasing a finished property.  Developing and constructing properties would, however, expose us to risks such as cost overruns, carrying costs of projects under construction or development, availability and costs of materials and labor, weather conditions and government regulation.  See “Risk Factors – Risks Related to Investments in Real Estate” for additional discussion of these risks.  To comply with the applicable requirements under federal income tax law, we intend to limit our construction and development activities to performing oversight and review functions, including reviewing the construction and tenant improvement design proposals, negotiating and contracting for feasibility studies and supervising compliance with local, state or federal laws and regulations; negotiating contracts; overseeing construction; and obtaining financing.  In addition, we may use “taxable REIT subsidiaries” or retain independent contractors to carry out these oversight and review functions.

 

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See “Federal Income Tax Considerations – Federal Income Taxation as a REIT” for a discussion of a “taxable REIT subsidiary.”  We intend to retain independent contractors to perform the actual construction work on tenant improvements, such as installing heating, ventilation and air conditioning systems.

 

Competition

 

We are subject to significant competition in seeking real estate investments.  We compete with many third parties engaged in real estate investment activities including other REITs, including other REITs sponsored by IREIC, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies and other entities.  We also face competition from real estate investment programs, including three REITs, sponsored by IREIC and its affiliates for properties that may be suitable for our investment.  See “Risk Factors – Risks Related to Our Business” for additional discussion.  Some of these competitors, including larger REITs, have substantially greater financial resources than we do and generally may be able to accept more risk.  They also may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.

 

Competition may limit the number of suitable investment opportunities offered to us and result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.  In addition, competition for desirable investments could delay the investment of proceeds from this offering in desirable assets, which may in turn reduce our funds from operations and negatively affect our ability to make or maintain distributions.

 

Insurance

 

We typically purchase comprehensive liability, rental loss and all-risk property casualty insurance covering our real property investments provided by reputable companies, with commercially reasonable deductibles, limits and policy specifications customarily carried for similar properties.  There are, however, certain types of losses that may be either uninsurable or not economically insurable, such as losses due to floods, riots, terrorism or acts of war.  If an uninsured loss occurs, we could lose our “invested capital” in, and anticipated profits from, the property. 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.  See “Risk Factors – Risks Related to Investments in Real Estate” for additional discussion regarding insurance.

 

Effective October 1, 2006, we entered into an agreement with a limited liability company formed as an insurance association captive, referred to herein as the “Captive,” which is wholly owned by us and two other REITs sponsored by IREIC.  Inland Risk & Insurance Management Services, Inc., an affiliate of The Inland Group, provides services to the Captive.  The Captive was formed to more efficiently manage the respective insurance coverage of the members and the premiums associated with property casualty coverage.  The Captive will annually oversee the purchase of one or more insurance policies from a third party insurer on properties of its members that will be acceptable to all members. Portions of these insurance policies agreed upon by all members will be funded or reimbursed by insurance policies purchased from the Captive by the members. The premium associated with the non-catastrophic property and casualty insurance policies purchased from the Captive will be divided among each of the members based upon a determination by a third-party, independent actuary of the losses, loss reserves and loss expenses that each member is expected to incur, and a proportional allocation of associated operating costs.  Each member initially contributed approximately $188,000 to the Captive in the form of a capital contribution.  The Captive will use this capital to pay a portion of certain property and casualty losses and

 

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general liability losses suffered by a member under the policies purchased by the Captive subject to deductibles applicable to each occurrence.  These losses will be paid by the Captive up to and including a certain dollar limit, after which the losses are covered by the third party insurer.  Future contributions to capital will be made in the form of premium payments determined for each member based on its individualized loss experiences as well as the level of deductible each member desires.  We are required to remain as a member of the Captive for a period of five years.

 

Government Regulations

 

Our business is subject to many laws and governmental regulations.  Changes in these laws and regulations, or their interpretation by agencies and courts, occur frequently.

 

Americans With Disabilities Act.  Under the Americans With Disabilities Act, or ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons.  These requirements became effective in 1992.  Complying with the ADA requirements could require us to remove access barriers.  Failing to comply could result in the imposition of fines by the federal government or an award of damages to private litigants.  Although we intend to acquire properties that substantially comply with these requirements, we may incur additional costs to comply with the ADA.  In addition, a number of additional federal, state and local laws may require us to modify any properties we purchase, or may restrict further renovations thereof, with respect to access by disabled persons.  Additional legislation could impose financial obligations or restrictions with respect to access by disabled persons.  Although we believe that these costs will not have a material adverse effect on us, if required changes involve a greater amount of expenditures than we currently anticipate, our ability to make expected distributions could be adversely affected.

 

Environmental Matters.  Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removing or remediating hazardous or toxic substances.  These laws often impose clean-up responsibility and liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of the hazardous or toxic substances.  The costs of investigating, removing or remediating these substances may be substantial, and the presence of these substances may adversely affect our ability to rent or sell the property or to borrow using the property as collateral and may expose us to liability resulting from any release of or exposure to these substances.  If we arrange for the disposal or treatment of hazardous or toxic substances at another location, we may be liable for the costs of removing or remediating these substances at the disposal or treatment facility, whether or not the facility is owned or operated by us.  We may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site that we own or operate.  Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances.  See “Risk Factors – Risk Related to Real Estate” for additional discussion regarding environmental matters.

 

Three of our hotels contain asbestos-containing materials.  We manage and monitor these materials in accordance with current environmental laws and regulations, and if they pose a threat to human health or if any construction, renovation, remodeling or demolition occurs, we will be responsible for remediating the materials.   Additionally, 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. This Hampton Inn is restricted from use of groundwater due to excessive levels of benzene in the groundwater. We could be responsible for cleanup of this site if, for instance, the owner of the leaking tanks refuses or is unable to conduct a cleanup.

 

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Other Regulations.  The properties we acquire likely will be subject to various federal, state and local regulatory requirements, such as zoning and state and local fire and life safety requirements.  Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants.  We intend to acquire properties that are in material compliance with all such regulatory requirements.  However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have an adverse effect on our financial condition and results of operations.

 

Other Policies

 

Pending investment in real estate assets, we invest monies so as to allow us to continue to qualify as a REIT.  We seek highly liquid investments that provide for safety of principal and may include, but are not limited to, commercial mortgage-backed securities such as bonds issued by the Government National Mortgage Association, or GNMA, and real estate mortgage investment conduits also known as REMICs.  See “Federal Income Tax Considerations – Federal Income Taxation as a REIT.”

 

We will not make distributions-in-kind, except for:

 

·              distributions of readily marketable securities;

 

·              distributions of beneficial interests in a liquidating trust established for our dissolution and the liquidation of our assets in accordance with the terms of our articles; or

 

·              distributions of in-kind property which meet all of the following conditions:

 

·              our board advises each stockholder of the risks associated with direct ownership of the in-kind property;

 

·              our board offers each stockholder the election of receiving in-kind property distributions; and

 

·              we distribute in-kind property only to those stockholders who accept our offer.

 

We have no current plans to invest the proceeds of the offering, other than on a temporary basis, in non-real-estate related investments.  Although we are authorized to issue senior securities, we have no current plans to do so.  See “Description of Securities – Preferred Stock,” “– Issuance of Additional Securities and Debt Instruments” and “– Restrictions on Issuance of Securities.”

 

Employees

 

As of September 30, 2008, we had 150 full-time employees, employed primarily by our lodging and student housing subsidiaries. None of the employees is represented by a labor union.

 

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DESCRIPTION OF SECURITIES

 

We are a corporation formed under the laws of the State of Maryland.  Your rights as a stockholder are governed by Maryland law, our articles of incorporation and our bylaws.  The following summarizes the material terms of our common stock as described in our articles and bylaws which you should refer to for a full description.  Copies of these documents are filed as exhibits to the registration statement of which this prospectus is a part.  You also can obtain copies of these documents if you desire.  See “Where You Can Find More Information” below.

 

Authorized Stock

 

Our articles authorize us to issue up to 1,460,000,000 shares of common stock and 40,000,000 shares of preferred stock.  Upon completing this offering, if the maximum number of 540,000,000 shares is sold, and the maximum number of 540,000,000 shares was sold in our initial public offering, there may be up to 1,080,020,000 shares of common stock outstanding and no preferred stock outstanding.  Subject to certain restrictions, our articles contain a provision permitting the board, without any action by the stockholders, to classify or reclassify any unissued preferred stock into one or more classes or series by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or distributions, qualifications or terms or conditions of redemption of any new class or series of shares of stock.  We believe that the power of our board to issue additional authorized but unissued shares of common stock or preferred stock and to classify or reclassify shares of preferred stock will provide us with increased flexibility in structuring possible future financings and acquisitions and in meeting other business needs which might arise.  See “Risk Factors – Risks Related to Our Business” for additional discussion regarding the issuance of shares.

 

Common Stock

 

The shares issued in this offering, upon receipt of full payment in accordance with the terms of this offering, will be fully paid and nonassessable.  We expect that all shares of our common stock will be issued only in book entry form.  Subject to the preferential rights of any class or series of preferred stock and to the provisions of our articles regarding the restriction on the transfer of shares of our common stock, holders of our common stock will be entitled to receive distributions if authorized and declared by our board and to share ratably in our assets available for distribution to the stockholders in the event of a liquidation, dissolution or winding-up. We will issue fractional shares only in connection with purchases of common stock made through our distribution reinvestment plan.

 

Each outstanding share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including votes to elect directors.  There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of common stock will be able to elect all of the directors nominated for election.

 

Holders of our common stock have no conversion, sinking fund, redemption, exchange or appraisal rights, and have no preemptive rights to subscribe for any securities we may offer or issue in the future.

 

Under Maryland law and our articles, we cannot make certain material changes to our business form or operations without the approval of stockholders holding at least a majority of the shares of stock entitled to vote on the matter.  However, stockholder approval is not required for mergers that are effected through one of our wholly owned subsidiaries, where the consideration to be paid by us in the merger consists solely of cash, unless a party to the merger is an affiliate of our sponsor.

 

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Under our bylaws, the presence in person or by proxy by the holders of a majority of our outstanding shares will constitute a quorum for the transaction of business at a meeting of our stockholders.  Under our articles, the election of directors requires a majority of all the votes present in person or by proxy at a meeting of our stockholders at which a quorum is present.  Stockholders may also, upon the affirmative vote of the holders of a majority of our outstanding shares of common stock, remove any director with or without cause.

 

Distributions

 

We intend to continue paying regular monthly cash distributions to our stockholders.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is Registrar and Transfer Company.

 

Book Entry System

 

Our articles of incorporation provide that we may not issue certificates representing shares of our common stock unless expressly authorized by our board.  As a result, all shares of our common stock are issued only in book entry form.  This means that, except to the extent expressly authorized by our board, we do not issue actual share certificates to any holder of our common stock.  The use of book entry only registration protects stockholders against loss, theft or destruction of stock certificates and reduces offering costs.  Once we accept a subscription to purchase shares of our common stock, we create an account in our book entry registration system and credit the principal amount of the subscription to the individual’s account.  We will send each stockholder a book entry receipt indicating acceptance of his or her subscription.  All issuances of common stock through our distribution reinvestment plan also are made only in book entry form.

 

Preferred Stock

 

Subject to certain restrictions set forth in our articles, we may issue shares of our preferred stock in the future in one or more series as authorized by our board.  Prior to issuing the shares of any series, our board is required by Maryland law and our articles to fix the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each series.  Because our board has the power to establish the preferences, powers and rights of each series of preferred stock, it may, without any consideration or approval by our stockholders, provide the holders of any series of preferred stock with preferences, powers and rights, voting or otherwise, senior to the rights of holders of our common stock, in each case subject to the certain restrictions contained in our articles.  The issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control of us, including an extraordinary transaction such as 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 “Risk Factors – Risks Related to Our Corporate Structure” for additional discussion regarding change of control restrictions.  We have no current plans to issue any preferred stock.

 

Issuance of Additional Securities and Debt Instruments

 

We may issue additional stock or other convertible securities for cash, property or other consideration on such terms as our board deems advisable.  Subject to certain restrictions set forth in our articles, our directors also are authorized to classify, or reclassify, any unissued shares of our preferred stock without approval of the holders of our outstanding securities.  Subject to some restrictions, we may

 

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issue debt obligations, including debt with conversion privileges into more than one class of our capital stock on such terms and conditions as determined by our board in its discretion, including debt with conversion privileges, where the holders of our debt obligations may acquire our common stock.  Subject to some restrictions, we also may issue warrants, options and rights to buy our common stock on such terms as determined by our board in its discretion, as part of a financing arrangement, or pursuant to stock option plans.  See “Risk Factors – Risks Related to Our Business” for additional discussion regarding issuances of additional securities and debt instruments.

 

Restrictions on Issuance of Securities

 

We may not issue:

 

·                                          common stock which is redeemable;

 

·                                          debt securities unless the debt service coverage, on a pro forma basis after giving effect to the issuance of the debt securities, calculated as of the end of our most recently completed fiscal quarter, is equal to or greater than 1.0. For these purposes, debt service coverage means the ratio equal to annualized net income for the latest quarterly period divided by aggregate debt service.  Aggregate debt service means, for these purposes, the aggregate amount of interest expense, principal amortization and other charges payable with respect to our outstanding borrowings and indebtedness, whether secured or unsecured, including all loans, senior debt and junior debt;

 

·                                          options or warrants to purchase stock to IREIC, director(s) or any affiliates, including our Business Manager and Property Managers, except on the same terms as sold to the general public (excluding for these purposes underwriting fees, commissions and discounts) and in an amount not to exceed 9.8% of our outstanding common or preferred stock on the date of grant of any options or warrants unless waived by the board; or

 

·                                          stock on a deferred payment basis or similar arrangement.

 

We may not issue nonvoting or assessable common stock or options, warrants or similar evidences of rights to buy nonvoting or assessable common stock unless issued ratably to all holders of common stock, as part of a financing arrangement or as part of a stock plan involving our directors, officers or employees.

 

Restrictions on Ownership and Transfer

 

In order for us to continue to qualify as a REIT under the Internal Revenue Code, shares of our common stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of twelve months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year.  Also, not more than 50% of the value of our outstanding shares of common stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include some entities such as qualified person plans) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made).

 

Our articles, subject to some exceptions, prohibit any person from acquiring or holding, directly or indirectly, more than 9.8% in value or number of the aggregate outstanding shares of common stock.  Our board of directors, in its sole discretion, may exempt a person from these ownership limits, unless granting the exemption would result in us being “closely held” within the meaning of Section 856(h) of the Internal Revenue Code or otherwise would result in us failing to qualify as a REIT or if the person

 

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seeking the exemptions owns, directly or indirectly, an interest in any of our tenants (or in a tenant of any entity owned or controlled by us) that would cause us to own, directly or indirectly, more than a 9.9% interest in the tenant.  Our board may require a ruling from the Internal Revenue Service or an opinion of counsel, in either case in form and substance satisfactory to our board of directors in its sole discretion, in order to determine or ensure our status as a REIT.

 

In addition, our articles prohibit any person from beneficially or constructively owning shares of our common or preferred stock that would result in us being “closely held” within the meaning of Section 856(h) of the Internal Revenue Code.  Our articles further provide that any transfer of our common stock or preferred stock that would result in our common stock and preferred stock being beneficially owned by fewer than one hundred 100 persons will be void.  Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of our common or preferred stock that will or may violate any of the foregoing restrictions on transferability and ownership, or any person who would have owned shares of our common or preferred stock that resulted in a transfer of shares to the trust, is required to give us notice immediately and to provide us with such other information as we may request in order to determine the effect of the transfer on our status as a REIT.  The foregoing restrictions on transferability and ownership will not apply if our board determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.

 

If any transfer of shares of our common stock occurs that, if effective, would result in any person violating above transfer or ownership limitations, then the number of shares of our common stock causing the person to violate the limitations will be automatically transferred under the provisions of our articles to a trust for the exclusive benefit of one or more charitable beneficiaries within the meaning of 501(c)(3) of the Internal Revenue Code.  The proposed transferee that exceeds the ownership limits will not acquire any rights in these shares.  The automatic transfer is deemed effective as of the close of business on the business day prior to the date of the transfer violating these restrictions.  Shares of stock held in the trust will continue to be treated as issued and outstanding.  The proposed transferee will not benefit economically from ownership or any shares of stock held in the trust, will have no rights to dividends or distributions and will not have any rights to vote or other rights attributable to the shares of stock held in the trust.  The trustee of the trust will have all voting rights and rights to dividends or other distributions with respect to shares of stock held in the trust.  The voting rights and rights to dividends or distributions will be exercised for the exclusive benefit of the charitable beneficiary.  Any dividend or other distribution paid prior to our discovery that shares of stock have been transferred to the trustee will be paid by the recipient of the dividend or distribution to the trustee upon demand, and any dividend or other distributions authorized but unpaid will be paid when due to the trustee.  Subject to Maryland law, effective as of the date that such shares of stock have been transferred to the trust, the trustee will have the authority in its sole discretion: (1) to rescind as void any vote cast by the proposed transferee prior to our discovery that the shares have been transferred to the trust; and (2) to recast the vote in accordance with the desires of the trustee acting for the benefit of the charitable beneficiary.  However, if we have already taken irreversible corporate action, then the trustee will not have the authority to rescind and recast the vote.

 

Within twenty days of receiving notice from us that shares have been transferred to the trust, the trustee must sell the shares to a person or group, designated by the trustee, whose ownership of the shares will not violate the ownership limitations.  Upon the sale, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the proposed transferee and to the charitable beneficiary as follows.  The proposed transferee will receive the lesser of: (1) the price paid for the shares by the proposed transferee or, if the proposed transferee did not give value for the shares in connection with the event causing the shares to be held in the trust (e.g., a gift, devise or other such transaction), the market price, as defined in our articles, of the shares on the day of the event causing the shares to beheld in the trust; and (2) the price per share received by the trustee from the sale

 

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or other disposition of the shares held in the trust.  Sale proceeds exceeding the amount payable to the proposed transferee will be paid immediately to the charitable beneficiary.  If, prior to our discovery that shares of stock have been transferred to the trust, the shares are sold by the proposed transferee, then the shares will be deemed to have been sold on behalf of the trust; and if to the extent that the proposed transferee received an amount for the shares exceeding the amount that the proposed transferee was entitled to receive, the excess will be paid to the trustee upon demand.

 

In addition, shares of our stock held in the trust will be deemed to have been offered for sale to us or our designees, at a price per share equal to the lesser of: (1) the price per share in the transaction that resulted in the transfer to the trust, or, in the case of a devise or gift, the market price at the time of the devise or gift; and (2) the market price on the date we, or our designate, accept such offer.  We can accept this offer until the trustee has sold the shares held in the trust.  Upon a sale to us, the interest of the charitable beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the proposed transferee.

 

Our articles require all persons who own more than 5%, or any lower percentage required by the Internal Revenue Code or the regulations thereunder, of our outstanding common and preferred stock, within thirty days after the end of each taxable year, to provide to us written notice stating their name and address, the number of shares of common and preferred stock they beneficially own directly or indirectly, and a description of how the shares are held.  In addition, each beneficial owner must provide us with any additional information as we may request in order to determine the effect, if any, of their beneficial ownership on our status as a REIT to ensure compliance with the 9.8% ownership limit.  In addition, each stockholder will, upon demand, be required to provide us any information as we may request, in good faith, in order to determine our status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance.

 

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

 

As a condition to registering the shares of common stock offered by this prospectus, in the various states, the Company is required to, among other things, comply with the NASAA Statement of Policy regarding real estate investment trust adopted on May 7, 2007, referred to herein as “Policy Statement.” To the extent that our board of directors determine that the provisions of the Policy Statement conflict with the provisions of the Maryland General Corporation law, including those provisions described below, our board will cause the Company to act in accordance with the Policy Statement except to the extent that the relevant provision of the Maryland General Corporation law is mandatory.  Our board will apply the Policy Statement in this manner until our shares become listed on a national exchange or we are not otherwise subject to the Policy Statement.

 

The following paragraphs summarize provisions of Maryland corporate law and the material terms of our articles of incorporation and bylaws.  The following summary does not purport to be complete and is subject to and qualified in its entirety by reference to Maryland corporate law and our articles and bylaws.  See “Where You Can Find More Information.”

 

Business Combinations.  Under the Maryland Business Combination Act, completion of a business combination (including a merger, consolidation, share exchange or an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and an interested stockholder is prohibited for five years following the most recent date on which the interested stockholder becomes an interested stockholder.  Maryland law defines an interested stockholder as any person who beneficially owns 10% or more of the voting power of the corporation’s shares or an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation (an

 

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interested stockholder) or an affiliate of such interested stockholder.  A person is not an interested stockholder if, prior to the most recent time at which the person would otherwise have become an interested stockholder, the board of directors of the Maryland corporation approved the transaction which otherwise would have resulted in the person becoming an interested stockholder.  The board of directors may condition its approval on the person complying with terms and conditions determined by the board.  Following the five-year period, any business combination with that interested stockholder must be recommended by the board of directors and approved by the affirmative vote of at least:

 

·                                          80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

 

·                                          two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested stockholder, unless, among other conditions, the corporation’s common stockholders receive a minimum price (as defined in the Maryland business combination statute) equal to the highest price paid by the interested stockholder for its shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares.

 

These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by our board prior to the time that the interested stockholder becomes an interested stockholder.  As permitted under Maryland law, business combinations involving us and The Inland Group or any of its affiliates including our Business Manager and Property Managers are exempt from the Maryland business combinations statute.  See “Risk Factors – Risks Related to Our Corporate Structure” for additional discussion regarding these provisions of Maryland law.

 

Control Share Acquisition.  The Maryland Control Share Acquisition Act prohibits “interested stockholders” from engaging in self-dealing business combinations with a Maryland corporation, except to the extent approved by the corporation’s disinterested stockholders.  Maryland law provides that shares of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by the corporation’s disinterested stockholders by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the corporation’s disinterested stockholders, whom the statute defines as: (1) the acquiring person; (2) the corporation’s officers; and (3) employees of the corporation who are also directors.  “Control shares” mean voting shares which, if aggregated with all other voting shares owned by an acquiring person, or which the acquiring person can exercise or direct the exercise of voting power, would entitle the acquiring person to exercise or direct the exercise of voting power of shares of the corporation 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 the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval.  A “control share acquisition” occurs when, subject to some exceptions, a person directly or indirectly acquires ownership or the power to direct the exercise of voting power of issued and outstanding control shares.  A person who has made or proposes to make a control share acquisition, upon satisfaction of some specific conditions, including an undertaking to pay

 

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expenses, may compel our board to call a special meeting of stockholders to be held within fifty days after that person’s demand upon the corporation to consider the voting rights to be accorded to the control shares.  If no request for a meeting is made, we may present the question at any stockholders’ meeting.

 

If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then, subject to some statutory conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or of any meeting of stockholders at which the voting rights of such shares are considered and not approved.  If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights and be entitled to receive in cash the fair value for their shares of stock.  The fair value of the shares as determined for these purposes may not be less than the highest price per share paid by the acquirer in the control share acquisition.

 

The Control Share Acquisition Act does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is party to the transaction or to acquisition is approved or exempted by the articles of incorporation or bylaws of the corporation.  Our articles contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by The Inland Group or any affiliate of The Inland Group, including our Business Manager or Property Managers, of our shares of common stock.

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

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

 

Outstanding Securities.  Upon the completion of the offering, we expect to have up to 1,019,339,753 shares of common stock issued and outstanding including:

 

·                                          the 20,000 shares purchased by IREIC;

 

·                                          469,598,762 shares of common stock sold in the “best efforts” portion of our initial public offering;

 

·                                          9,720,990.849 shares issued under our distribution reinvestment plan in connection with our initial public offering;

 

and assuming that:

 

·                                          we sell all 500,000,000 shares of common stock offered in the “best efforts” portion of this offering;

 

·                                          we sell all 40,000,000 shares to be issued under our distribution reinvestment plan described in this prospectus; and

 

·                                          no options are exercised.

 

All of the common stock we are offering by this prospectus will be free of any restrictions on transfer by any person not otherwise affiliated with the Company, which, in this offering, is deemed an underwriter.  All common stock issued by us in this offering or otherwise will be subject to the restrictions explained under “Description Of Securities – Restrictions on Ownership and Transfer.”

 

Securities Act Restrictions

 

Shares of common stock owned by our affiliates will be subject to Rule 144 adopted under the Securities Act and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including exemptions contained in Rule 144. In general, under Rule 144, a person, or persons whose common stock is aggregated with them in accordance with Rule 144, who has beneficially owned securities acquired from an issuer or an affiliate of the issuer for at least one year, is entitled, within any three-month period, to sell a number of shares of common stock that does not exceed the greater of: (1) 1% of the then outstanding number of shares; or (2) the average weekly reported trading volume of the common stock on a national securities exchange or national market system during the four calendar weeks preceding each sale.  Sales under Rule 144 must be transacted in the manner specified by Rule 144 and must meet requirements for public notice as well as public information about us. Any person who: (1) is not deemed to have been an affiliate at any time during the three months preceding a sale; and (2) has beneficially owned our common stock for at least two years, would be entitled to sell the common stock under Rule 144(k) without regard to the volume limitations, manner of sale provisions, notice requirements or public information requirements of Rule 144. An affiliate, for purposes of the Securities Act, is a person that directly, or indirectly, through one or more intermediaries, controls, or is controlled by, or under common control with, us.

 

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Effect of Availability of Shares on Market Price of Shares

 

There is no public market for our common stock and no assurance that a public market will develop.  See “Risk Factors – Risks Related to This Offering.” If a market develops, we cannot predict the effect that future sales of common stock, including sales under Rule 144, or the availability of common stock for future sale will have on the market price, if any, prevailing from time to time.  Sales of substantial amounts of our common stock, including shares issued upon the exercise of options or the perception that these sales could occur, could adversely affect prevailing market prices of our common stock and impair our ability to obtain additional capital through the sale of equity securities.

 

Registration Rights

 

In the future we may grant “demand” or “piggyback” registration rights to persons receiving our common stock in exchange for their equity interests in assets we acquire or properties we acquire.  “Piggyback” registration rights allow the holder to have his, her or its shares registered at such time(s) in the future when we would choose to register shares.  “Demand” registration rights permit the holder of the rights to require us to register his, her or its shares at such time(s) in the future as the holder requests.  The terms and conditions of any registration rights agreement will be negotiated and determined in the future.  We could incur substantial expense in connection with filing the necessary registration statements.

 

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LIMITATION OF LIABILITY AND INDEMNIFICATION
OF DIRECTORS AND OFFICERS

 

Under Maryland law and our articles and bylaws, our officers and directors are deemed to be in a fiduciary relationship to us and our stockholders.  However, subject to the limitations contained in our articles, a director will have no liability under Maryland law for monetary damages if the director performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests, and with the care that an ordinary prudent person in a like position would use under similar circumstances.  Under Maryland law, the third party has the burden of showing that the director did not satisfy this standard of care.  We have included this limit on monetary damages in our articles and bylaws.  Thus, except as described below, our directors and officers will not be liable for monetary damages unless:

 

·                                          the person actually received an improper benefit or profit in money, property or services; and

 

·                                          the person is held liable based on a finding that the person’s action, or failure to act, was the result of active and deliberate dishonesty which was material to the cause of action before the court.

 

Notwithstanding the above, our articles provide that no director or officer may be held harmless for any loss or liability suffered by us unless:

 

·                                          the director or officer has determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests;

 

·                                          the director or officer was acting on our behalf or performing services for us;

 

·                                          the liability or loss was not the result of negligence or misconduct on the part of the director or officer; provided that if the person is or was an independent director, the independent director need only establish that the liability or loss was not the result of that person’s gross negligence or willful misconduct; and

 

·                                          the agreement to be held harmless is recoverable out of our net assets only and not from the personal assets of any stockholder.

 

In addition to the foregoing, our articles prohibits us from entering into a contract or agreement with our Business Manager or any of its affiliates that includes provisions holding our Business Manager or its affiliate, as the case may be, harmless from loss or liability unless, at a minimum, the aforementioned requirements are included in the contract or agreement and are required to be satisfied.  Notwithstanding the immediately foregoing sentence, the inclusion of these requirements in any contract or agreement between us and our Business Manager or its affiliates will not limit the exposure of the Business Manager or its affiliate, as the case may be. See “Risk Factors – Risks Related to Our Corporate Structure” for additional discussion regarding claims against our officers and directors.

 

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Notwithstanding the above, we will not indemnify any director, officer, employee or agent for losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws unless one or more of the following conditions are satisfied:

 

·                                          there has been a successful defense on the merits of each count involving alleged securities law violations;

 

·                                          the claims have been dismissed with prejudice by a court of competent jurisdiction; or

 

·                                          a court of competent jurisdiction approves a settlement of the claims and finds that indemnification of the settlement and related costs should be made; provided that the court considering the request must be advised of the Securities and Exchange Commission’s position on indemnity for securities law violations as well as the published position of any state securities regulatory authority in which our securities were offered.

 

In accordance with Maryland law, we will advance amounts to any person entitled to indemnification for legal and other expenses and costs incurred as a result of any legal action for which indemnification is being sought only if all of the following conditions are satisfied:

 

·                                          the legal action relates to acts or omissions relating to the performance of duties or services by the person seeking indemnification for us or on our behalf;

 

·                                          the legal action is initiated by a third party who is not a stockholder or the legal action is initiated by a stockholder acting in his or her capacity as such and a court of competent jurisdiction specifically permits us to advance expenses; and

 

·                                          the person seeking indemnification undertakes in writing to repay us the advanced funds, together with interest at the applicable legal rate of interest, if it is later determined that the person seeking indemnification was not entitled to indemnification.

 

We may purchase and maintain insurance or provide similar protection on behalf of any director, officer, employee or agent against any liability incurred in any such capacity with us or on our behalf.  We may not, however, pay the costs of any liability insurance that insures any person against liability for which he, she or it could not be indemnified under our articles.  We may enter into any contract requiring us to indemnify and advance expenses with any director, officer, employee or agent as may be determined by the board and as permitted by our articles.

 

We anticipate entering into separate indemnification agreements with each of our directors and officers.  These agreements will require us to indemnify our directors and officers to the fullest extent permitted by our articles and to advance all related expenses including expenses of enforcing the agreement, subject to reimbursement if it is subsequently determined that indemnification is not permitted.  Although indemnification agreements offer the same scope of coverage afforded by our articles and the bylaws, these agreements provide the directors and officers with greater assurance that indemnification will be available, because as a contract, it cannot be unilaterally modified by the board or by the stockholders.

 

We have been advised that, in the opinion of the Securities and Exchange Commission, indemnification of liabilities arising under the Securities Act is contrary to public policy and, therefore, unenforceable.

 

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SUMMARY OF OUR ORGANIZATIONAL DOCUMENTS

 

Each stockholder is bound by and is deemed to have agreed to the terms of our organizational documents by his, her or its election to become a stockholder of our company.  Our organizational documents consist of our articles of incorporation and bylaws.  Our directors have reviewed and ratified these documents.  The following summarizes the material provisions of these documents but does not purport to be complete and is qualified in its entirety by specific reference to the organizational documents filed as exhibits to our registration statement of which this prospectus is a part.  See “Where You Can Find More Information.”

 

We were formed on October 4, 2004. Our current articles of incorporation were amended and restated and filed with the State Department of Assessments and Taxation of Maryland on June 14, 2007. The articles, as so amended and restated, became operative on June 14, 2007. Our current bylaws were adopted by our board on March 27, 2008, and are effective as of April 1, 2008.  Our articles of incorporation and bylaws will remain operative in their current form throughout our existence, unless they are amended or we are dissolved.

 

Articles of Incorporation and Bylaw Provisions

 

The rights of stockholders and related matters are governed by our organizational documents and Maryland law. Certain provisions of these documents or of Maryland law, summarized below, may make it more difficult to change the composition of our board and could 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 generally “Risk Factors – Risks Related to Our Corporate Structure.”

 

Stockholders’ Meetings and Voting Rights

 

Our bylaws require us to hold an annual meeting of stockholders not less than thirty days after delivering our annual report to stockholders.  The purpose of each annual meeting will be to elect directors and to transact any other business.  The chairman, the chief executive officer, the president, a majority of the directors or a majority of the independent directors may also call a special meeting of the stockholders.  The secretary must call a special meeting when stockholders holding in the aggregate not less than 10% of our outstanding shares entitled to vote make a written request.  The written request must state the purpose(s) of the meeting and the matters to be acted upon.  The secretary will inform the stockholders making the request of the reasonably estimated cost of preparing and mailing a notice of the special meeting.  Once the stockholders making the request pay these costs, the secretary will prepare and mail a notice announcing the date of and purpose for the special meeting.  The meeting will be held on a date not less than fifteen nor more than sixty days after the notice is sent, at the time and place specified in the notice.

 

Except as provided above, we will give notice of any annual or special meeting of stockholders not less than ten nor more than ninety days before the meeting.  The notice must state the purpose of the meeting.  At any meeting of the stockholders, each stockholder is entitled to one vote for each share owned of record on the applicable record date.  In general, the presence in person or by proxy of a majority of the outstanding shares entitled to vote at the meeting will constitute a quorum.  The affirmative vote of a majority of the shares of our stock, present in person or by proxy at a meeting of stockholders at which a quorum is present, will be sufficient to take action at the meeting such as electing directors and taking any other matter that may properly come before the meeting, unless more than a majority of the votes cast is required by law or our articles.  Any action permitted or required to be taken at a meeting of stockholders may also be taken by written consent of the requisite holders.

 

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Board of Directors

 

Under our organizational documents, we must have at least three but not more than eleven directors.  We currently have eight directors.  A majority of these directors must be “independent.” A person will be “independent” if the person is not and has not been affiliated with us or IREIC and its affiliates, and has not within the two years prior to becoming a director performed any other services on our behalf.  A director may resign at any time and may be removed with or without cause by the affirmative vote of the holders of not less than a majority of the outstanding shares.  A vacancy on the board caused by the death, resignation or incapacity of a director or by an increase in the number of directors, within the limits described above, may be filled by the vote of a majority of the remaining directors whether or not the voting directors constitute a quorum.  Vacancies resulting from the removal of a director by our stockholders must be filled by a majority vote of our stockholders.  Our bylaws require our audit committee to be comprised entirely of independent directors.

 

Persons must have at least three years of relevant experience and demonstrate the knowledge required to successfully acquire and manage the type of assets that we intend to acquire to serve as a director.  Our articles provide that at least one of our independent directors must have three years of relevant real estate experience.

 

Maryland law provides that any action required or permitted to be taken at a meeting of the board also may be taken without a meeting by the unanimous written consent of all directors.

 

The approval by our board and by holders of at least a majority of our outstanding voting shares of stock is necessary for us to do any of the following:

 

·                                          amend our articles of incorporation;

 

·                                          transfer all or substantially all of our assets other than in the ordinary course of business;

 

·                                          engage in mergers, consolidations or share exchanges, except in certain circumstances; or

 

·                                          dissolve or liquidate.

 

A sale of two-thirds or more of our assets, based on the total number of assets or the current fair market value of the assets, will constitute a sale of substantially all of our assets.  See “Description of Securities — Common Stock” for an explanation of instances where stockholder approval is not required.

 

Under the articles, IREIC, the Business Manager and any affiliates including directors employed by IREIC are generally prohibited from voting any shares they own on any proposal brought to stockholders seeking to remove IREIC, the Business Manager, the directors or any affiliates or to vote on any transaction between us and any of them.  For these purposes, shares owned by IREIC, the Business Manager, the directors or any affiliates will not be included in the denominator to determine the number of votes needed to approve the matter.  In the case of a business combination with our Business Manager or Property Managers, IREIC and its affiliates will be permitted to vote their shares but only if the proposal would otherwise be approved by a vote of the other stockholders.

 

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Rights of Objecting Stockholders

 

As permitted by Maryland law, dissenting holders are typically granted, subject to satisfying certain procedures, the right to receive a cash payment representing the fair value of their shares of common stock in lieu of receiving securities.  Our articles, however, do not grant stockholders the ability to exercise the rights of an “objecting stockholder.” As a result of this provision, our stockholders will not have the right to dissent from extraordinary transactions, such as the merger of our company into another company or the sale of all or substantially all of our assets for securities.