-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VpgQppCjab6P79ruyZ1Xg5ZXcnsUrghm7+GNDUUs+eL/jt+Au5ygmAnLQbEOsQYz 06YOKJR3mJgCDi19CCDoEA== 0000923118-99-000023.txt : 19991230 0000923118-99-000023.hdr.sgml : 19991230 ACCESSION NUMBER: 0000923118-99-000023 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19991229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOME PROPERTIES OF NEW YORK INC CENTRAL INDEX KEY: 0000923118 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 161455126 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-93761 FILM NUMBER: 99782709 BUSINESS ADDRESS: STREET 1: 850 CLINTON SQ CITY: ROCHESTER STATE: NY ZIP: 14604 BUSINESS PHONE: 7162464105 MAIL ADDRESS: STREET 1: 850 CLINTON SQUARE CITY: ROCHESTER STATE: NY ZIP: 14604 S-3 1 As filed with the Securities and Exchange Commission on December 29, 1999 Registration No. 333- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM S-3 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ---------------------- HOME PROPERTIES OF NEW YORK, INC. (Exact name of registrant as specified in charter) ------------------------ Maryland 16-1455126 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 850 Clinton Square Rochester, New York 14604 (716) 546-4900 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------- Ann M. McCormick, Esq. Vice President, Secretary and General Counsel Home Properties of New York, Inc. 850 Clinton Square Rochester, New York 14604 (716) 246-4105 Facsimile (716) 232-3147 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------- Copies to: Deborah McLean Quinn, Esq. Nixon Peabody LLP 1300 Clinton Square Rochester, New York 14604 (716) 263-1307 Facsimile (716) 263-1600 ---------------- Approximate date of commencement of proposed sale to public: As soon as practicable after this Registration Statement becomes effective. If only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /x/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. / / If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. / /
CALCULATION OF REGISTRATION FEE Title of Each Proposed Proposed Class of Amount to Maximum Maximum Securites to be be Offering Price Aggregate Registra- Registered Registered Share (1) Offering Price tion Fee - -------------- ---------- ------------- -------------- -------- Common Stock par value $.01 1,679,543 sh. $ 26.875 $45,137,718.12 $11,916.36
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933 and based upon the prices reported on the New York Stock Exchange on December 27, 1999 of $26.875. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. 1,679,543 Shares HOME PROPERTIES OF NEW YORK, INC. COMMON STOCK This Prospectus relates to the offering and sale of 1,679,543 shares of Common Stock, par value $.01 per share, of Home Properties of New York, Inc. by the person which holds those shares. See "Selling Shareholder." We will not receive any proceeds of the sale of the shares offered hereby. The Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "HME." The last reported sale price of the Common Stock on the NYSE was $26.875 on December 27, 1999. We have agreed to register the shares of Common Stock which may be issued to the Selling Shareholder upon conversion of the 2,000,000 shares of Series B Cumulative Convertible Preferred Stock of Home Properties held by the Selling Shareholder and to pay the costs of the registration. See "Plan of Distribution." The price and the commissions (if any) paid in connection with any sale will be on terms to be determined at the time of each sale. We will not receive any of the proceeds of any sales of the shares offered by the Selling Shareholder. There is no public market for our Series A Convertible Preferred Stock or our Series B Cumulative Convertible Preferred Stock. The preferred stock has priority over the common stock in the payment of dividends and in the event of liquidation, is non-voting except in limited circumstances and is convertible into common stock. See "Description of Capital Stock." --------------------- PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATERIAL RISKS SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE --------------------- The date of this Prospectus is December __, 1999. TABLE OF CONTENTS Home Properties 1 Risk Factors 2 Where You Can Find More Information 8 Special Note Regarding Forward-Looking Statements 10 Selling Shareholder 10 Description of Capital Stock 10 Common Stock 11 Preferred Stock 12 Restriction on Transfer Ownership Limits 14 Ownership Reports 16 Certain Other Provisions of Maryland Law and Charter Documents 16 Federal Income Tax Considerations 18 Taxation of Home Properties 19 Failure to Qualify 28 Taxation of Taxable U.S. Stockholders 28 Dispositions of Common Stock 30 Backup Withholding 30 Taxation of Tax-Exempt Stockholders 30 Taxation of Non-U.S. Stockholders 31 Tax Aspects of the Operating Partnership 35 Other Tax Consequences 39 Ratio of Earnings to Combined Fixed Charges and Preferred Dividends 40 Plan of Distribution 40 Experts 41 THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS OR INCORPORATED HEREIN OR THEREIN BY REFERENCE. REFERENCES TO "HOME PROPERTIES," "WE" OR "US" IN THIS PROSPECTUS MEAN, EXCEPT AS THE CONTEXT OTHERWISE REQUIRES, HOME PROPERTIES OF NEW YORK, INC., A MARYLAND CORPORATION, HOME PROPERTIES OF NEW YORK, L.P., A NEW YORK LIMITED PARTNERSHIP (THE "OPERATING PARTNERSHIP"), HOME PROPERTIES TRUST, A MARYLAND TRUST (THE "TRUST"), HP MANAGEMENT, INC., A MARYLAND CORPORATION ("HP MANAGEMENT"), CONIFER REALTY CORPORATION, A MARYLAND CORPORATION ("CONIFER REALTY" AND, TOGETHER WITH HP MANAGEMENT, THE "MANAGEMENT COMPANIES"), AND ALL OTHER SUBSIDIARIES OF HOME PROPERTIES ON A CONSOLIDATED BASIS. HOME PROPERTIES Home Properties is a fully integrated, self-administered, and self- managed real estate investment trust specializing in apartment communities in select Northeast, Midwest, and Mid-Atlantic markets. We currently operate 292 communities containing 45,475 apartment units. Of these, 33,807 units in 126 communities are wholly owned directly or indirectly by Home Properties, 7,710 units are partially owned and managed by Home Properties as general partner, and 3,958 units are managed for other owners. The communities are located throughout the Northeastern quadrant of the United States, including New York, Michigan, Pennsylvania, Maryland, New Jersey, Virginia, Connecticut, Maine, Ohio, Illinois, Indiana, and Delaware. In addition, Home Properties manages 1.7 million square feet of commercial space. We refer to the owned and managed properties as the "Properties". Home Properties has a strategy of acquiring apartment communities at prices significantly below replacement costs and repositioning them for long-term growth. Home Properties focuses on stable markets with limited new construction activity, where the majority of the existing multifamily housing stock is over 20 years old. Home Properties' communities, which generally have brick exteriors and mature landscaping, are typically located in established suburban neighborhoods. With a commitment to customer service and the ability to provide quality housing at affordable prices, Home Properties' communities appeal to a broad range of senior and middle-income residents. Home Properties maintains 11 regional property management offices that provide support for the on-site property management teams. Home Properties, which was incorporated under the laws of the State of Maryland in November 1993, was formed to continue and expand the multifamily apartment community investment, management acquisition and development operations of Home Leasing Corporation. In 1996, Home Properties combined its operations with those of Conifer Realty Inc. and its affiliates, an owner and operator of multifamily communities with an expertise in the area of government-assisted and affordable housing. Home Properties and its predecessors have operated multifamily communities for over 30 years and its 24 officers have been employed by such entities for an average of 13 years. As of December 15, 1999, Home Properties had approximately 1,920 employees. RISK FACTORS An investment in the Common Stock of Home Properties involves various risks. In addition to general investment risks and those factors set forth elsewhere in this Prospectus, prospective investors should consider, among other things, the following factors: ASSIMILATION OF A SUBSTANTIAL NUMBER OF NEW ACQUISITIONS CREATES MANAGEMENT AND OPERATIONAL RISKS. Since its formation, Home Properties has undertaken a strategy of aggressive growth through acquisitions. Home Properties' ability to manage its growth effectively requires us, among other things, to successfully apply its experience in managing its existing portfolio to an increased number of properties. In addition, we will be required to successfully manage the integration of a substantial number of new personnel. There can be no assurances that Home Properties will be able to integrate and manage these operations effectively or maintain or improve on their historical financial performance. REAL ESTATE FINANCING RISKS OUR REAL ESTATE IS MORTGAGED AND REQUIRES SUBSTANTIAL CASH FLOW FOR DEBT SERVICE. Home Properties is subject to the customary risks associated with debt financing including the potential inability to refinance existing mortgage indebtedness upon maturity on favorable terms. If a property is mortgaged to secure payment of indebtedness and we are is unable to meet its debt service obligations, the property could be foreclosed upon. This could adversely affect Home Properties' cash flow and, consequently, the amount available for distributions to stockholders. OUR DEBT IS NOT LIMITED BY OUR CHARTER AND COULD BE INCREASED WITHOUT A VOTE OF SHAREHOLDERS. The Board of Directors has adopted a policy of limiting Home Properties' indebtedness to approximately 50% of its total market capitalization (i.e., the market value of issued and outstanding shares of Common Stock and limited partnership interests in the Operating Partnership ("Units") plus total debt), but the organizational documents of Home Properties do not contain any limitation on the amount or percentage of indebtedness, funded or otherwise, we may incur. Accordingly, the Board of Directors could alter or eliminate its current policy on borrowing. If this policy were changed, Home Properties could become more highly leveraged, resulting in an increase in debt service that could adversely affect our ability to make expected distributions to its stockholders and an increased risk of default on our indebtedness. Home Properties' debt to total market capitalization ratio fluctuates based on the timing of acquisitions and financings. Our bank agreements and certain agreements with holders of our preferred stock limit the amount indebtedness Home Properties may incur. OUR DEBT IS NOT FULLY SELF-AMORTIZING AND WILL REQUIRE REFINANCING. Home Properties is subject to the risks normally associated with debt financing, including the risk that our cash flow will be insufficient to meet the required payments of principal and interest. Because much of the financing is not fully self-amortizing, we anticipate that only a portion of the principal of Home Properties' indebtedness will be repaid prior to maturity. So, we will need to refinance debt. Accordingly, there is a risk that we will not be successful in refinancing existing indebtedness or that the terms of such refinancing will not be as favorable as the terms of the existing indebtedness. Home Properties aims to stagger its debt maturities with the goal of minimizing the amount of debt which must be refinanced in any year. REAL ESTATE INVESTMENT RISKS CASH FLOW FROM OUR APARTMENT COMMUNITIES IS SUBJECT TO FLUCTUATIONS BASED ON FACTORS OVER WHICH WE HAVE NO CONTROL. Real property investments are subject to varying degrees of risk. If our communities do not generate revenues sufficient to meet operating expenses, including debt service and capital expenditures, Home Properties' cash flow and ability to make distributions to its stockholders will be adversely affected. A multifamily apartment community's revenues and value may be adversely affected by the general economic climates; the local economic climate; local real estate considerations (such as over supply of or reduced demand for apartments); the perception by prospective residents of the safety, convenience and attractiveness of the communities or neighborhoods in which they are located and the quality of local schools and other amenities; and increased operating costs (including real estate taxes and utilities). Certain significant fixed expenses are generally not reduced when circumstances cause a reduction in income from the investment. RENTALS AT OUR APARTMENT COMMUNITIES DEPEND ON OUR ABILITY TO ATTRACT AND RETAIN TENANTS AND THEIR ABILITY TO PAY RENTS. Home Properties is dependent on rental income to pay operating expenses and to generate cash to enable Home Properties to make distributions to its stockholders. If we are unable to attract and retain residents or if our residents are unable, due to an adverse change in the economic condition of the region or otherwise, to pay their rental obligations, our ability to make expected distributions will be adversely affected. APARTMENT COMMUNITIES ARE RELATIVELY ILLIQUID. Real estate investments are relatively illiquid and, therefore, Home Properties has limited ability to vary its portfolio quickly in response to changes in economic or other conditions. In addition, the prohibition in the Code on REITs holding property for sale and related regulations may affect our ability to sell properties without adversely affecting distributions to stockholders. A significant number of our properties were acquired using Units restrict our ability to sell such properties in transactions which would create current taxable income to the former owners. COMPLIANCE WITH LAWS AND REGULATIONS CAN REQUIRE CAPITAL EXPENDITURES IN EXCESS OF BUDGET. Many laws and governmental regulations are applicable to the Properties and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the "ADA"), all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requires removal of structural barriers to handicapped access in certain public areas of the Properties, where such removal is "readily achievable." The ADA does not, however, consider residential properties, such as apartment communities, to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as a leasing office, are open to the public. A number of additional federal, state and local laws exist which also may require modifications to the Properties, or restrict certain further renovations thereof, with respect to access thereto by disabled persons. For example, the Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment communities first occupied after March 13, 1990 to be accessible to the handicapped. Noncompliance with the ADA or the FHAA could result in the imposition of fines or an award of damages to private litigants. Although management believes that the Properties are substantially in compliance with present requirements, Home Properties may incur additional costs in complying with the ADA for both existing properties and properties acquired in the future. Home Properties believes that the Properties that are subject to the FHAA are in compliance with such laws. Under the federal Fair Housing Act and state fair housing laws, discrimination on the basis of certain protected classes is prohibited. Home Properties has a policy against any kind of discriminatory behavior and trains its employees to avoid discrimination or the appearance of discrimination. There is no assurance, however, that an employee will not violate Home Properties' policy against discrimination and violate the fair housing laws. Such a violation could subject Home Properties to legal action and the possible awards of damages. Under various laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be held liable for the costs of removal or remediation of certain hazardous or toxic substances located on, under or in the property. These laws often impose liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of such substances. The presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the owner's ability to rent or sell the property or use the property as collateral. Independent environmental consultants conducted "Phase I" environmental audits (which involve visual inspection but not soil or groundwater analysis) of substantially all of the Properties owned by Home Properties prior to their acquisition by Home Properties. The Phase I audit reports did not reveal any significant issues of environmental concern, nor are we aware of any environmental liability that we believes would have a material adverse effect on Home Properties. There is no assurance that Phase I reports would reveal all environmental liabilities or that environmental conditions not known to us may exist now or in the future on existing properties or those subsequently acquired which would result in liability to Home Properties for remediation or fines, either under existing laws and regulations or future changes to such requirements. If compliance with the various laws and regulations, now existing or hereafter adopted, exceeds our budgets for such items, our ability to make expected distributions could be adversely affected. COMPETITION FOR RESIDENTS MAY ADVERSLEY EFFECT CASH FLOW. Home Properties plans to continue to acquire additional multifamily residential properties in the Northeast, Midwest and Mid- Atlantic regions of the United States. There are a number of multifamily developers and other real estate companies that compete with Home Properties in seeking properties for acquisition, prospective residents and land for development. Most of our Properties are in developed areas where there are other properties of the same type. Competition from other properties may affect Home Properties' ability to attract and retain residents, to increase rental rates and to minimize expenses of operation. Virtually all of the leases for the Properties are short-term leases (i.e., one year or less). UNINSURED LOSSES MAY REQUIRE UNBUDGETED EXPENSES. Certain extraordinary losses may not be covered by Home Properties' comprehensive liability, fire, extended and rental loss insurance. If an uninsured loss occurred, we could lose our investment in and cash flow from the affected Property (but would be required to repay any indebtedness secured by that Property and related taxes and other charges). FEDERAL INCOME TAX RISKS. WE BELIEVE, BUT CANNOT GUARANTEE, THAT WE QUALIFY AS A REIT. We believe that we have been organized and have operated in such manner so as to qualify as a REIT under the Internal Revenue Code, commencing with our taxable year ending December 31, 1994. A REIT generally is not taxed at the corporate level on income it currently distributes to its shareholders as long as it distributes currently at least 95% of its taxable income (excluding net capital gain). This requirement will be reduced to 90% in years beginning after December 31, 2000. No assurance can be provided, however, that we will qualify as a REIT or that new legislation, Treasury Regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of such qualification. Required distributions and payments. In order to continue to qualify as a REIT, we currently are required each year to distribute to our shareholders at least 95% of our taxable income (excluding net capital gain), and we will be required to distribute 90% of this amount for years beginning after December 31, 2000. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions made by us with respect to the calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income for that year, and any undistributed taxable income from prior periods. We intend to make distributions to our shareholders to comply with the 95% distribution requirement and to avoid the nondeductible excise tax and will rely for this purpose on distributions from the Operating Partnership. However, differences in timing between taxable income and cash available for distribution could require us to borrow funds or to issue additional equity to enable us to meet the 95% distribution requirement (and therefore to maintain our REIT status) and to avoid the nondeductible excise tax. The Operating Partnership is required to pay (or reimburse us, as its general partner, for) certain taxes and other liabilities and expenses that we incur, including any taxes that we must pay in the event we were to fail to qualify as a REIT. In addition, because we are unable to retain earnings (resulting from out distribution requirements), we will generally be required to refinance debt that matures with additional debt or equity. There can be no assurance that any of these sources of funds, if available at all, would be available to meet our distribution and tax obligations. Adverse consequences of our failure to qualify as a REIT. If we fail to qualify as a REIT, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. In addition, unless entitled to relief under certain statutory provisions, we will be disqualified from treatment as a REIT for the four taxable years following the year during which REIT qualification is lost. The additional tax burden on us would significantly reduce the cash available for distribution by us to our shareholders. Our failure to qualify as a REIT could reduce materially the value of our common stock and would cause all our distributions to shareholders to be taxable as ordinary income to the extent of our current and accumulated earnings and profits (although, subject to certain limitations under the Internal Revenue Code, corporate distributees may be eligible for the dividends received deduction with respect to these distributions). See "Failure to Qualify." The Operating Partnership's failure to qualify as a partnership. We believe that the Operating Partnership qualifies as a partnership for federal income tax purposes. No assurance can be provided, however, that the IRS will not challenge its status as a partnership for federal income tax purposes, or that a court would not sustain such a challenge. If the IRS were to be successful in treating the Operating Partnership as an entity that is taxable as a corporation, we would cease to qualify as a REIT because the value our ownership interest in the Operating Partnership would exceed 5% of our assets and because we would be considered to hold more than 10% of the voting securities of another corporation. See "Taxation of Home Properties - Asset Tests." Also, the imposition of a corporate tax on the Operating Partnership would reduce significantly the amount of cash available for distribution to its limited partners. See "Tax Aspects of the Operating Partnership." Finally, the classification of the Operating Partnership as a corporation would cause its limited partners to recognize gain (upon the event that causes the Operating Partnership to be classified as a corporation) at least equal to their "negative capital accounts" (and possibly more, depending upon the circumstances). WE HAVE AN OWNERSHIP LIMIT ON OUR SHARES. In order for Home Properties to maintain its qualification as a REIT, not more than 50% in value of our outstanding stock of the may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of its taxable year. Home Properties has limited ownership of the issued and outstanding shares of Common Stock by any single stockholder to 8.0% of the outstanding shares. Shares of Common Stock held by certain entities, such as qualified pension plans, are treated as if the beneficial owners of such entities were the holders of the Common Stock. These restrictions can be waived by the Board of Directors if it were satisfied, based upon the advice of tax counsel or otherwise, that such action would be in the best interests of Home Properties. Shares acquired or transferred in breach of the limitation may be redeemed by Home Properties for the lesser of the price paid or the average closing price for the ten trading days immediately preceding redemption or may be sold at the direction of Home Properties. A transfer of shares of Common Stock to a person who, as a result of the transfer, violates the ownership limit will be void and the shares will automatically be converted into shares of "Excess Stock", which is subject to a number of limitations. See "Description of Capital Stock -- Restrictions on Transfer" for additional information regarding the ownership limits. OUR CHARTER AND VARIOUS AGREEMENTS MAY INHIBIT A CHANGE OF CONTROL. The Articles of Amendment and Restatement of the Articles of Incorporation, as amended, (the "Articles of Incorporation") authorize the Board of Directors to issue up to a total of 80 million shares of Common Stock and 10 million shares of preferred stock and to establish the rights and preferences of any shares issued. No shares of preferred stock are currently issued or outstanding. Further, under the Articles of Incorporation, the stockholders do not have cumulative voting rights. The percentage ownership limit, the issuance of preferred stock in the future and the absence of cumulative voting rights could have the effect of (i) delaying or preventing a change of control of Home Properties even if a change in control were in stockholders' interest; (ii) deterring tender offers for the Common Stock that may be beneficial to the stockholders; or (iii) limiting the opportunity for stockholders to receive a premium for their Common Stock that might otherwise exist if an investor attempted to assemble a block of Shares in excess of the percentage ownership limit or otherwise to effect a change of control of Home Properties. We have various agreements which may have the effect of discouraging a change of control of Home Properties due to the costs involved. The Articles Supplementary to our Articles of Incorporation under which our Series B Cumulative Convertible Preferred Stock was issued provide that upon a change of control of Home Properties or the Operating Partnership, under certain circumstances, the holder of such stock may require us to redeem it. Also, to assure that our management has appropriate incentives to focus on our business and Properties in the face of a change of control situation, we have adopted an executive, retention plan which provides some key employees with salary, bonus and certain benefit continuation in the event of a change of control. POTENTIAL CONFLICTS OF INTEREST MAY AFFECT MANAGEMENT DECISIONS. Unlike persons acquiring Common Stock, our executive officers own most of their interest in Home Properties through Units. As a result of their status as holders of Units, the executive officers and other limited partners may have interests that conflict with stockholders with respect to business decisions affecting Home Properties and the Operating Partnership. In particular, certain executive officers may suffer different or more adverse tax consequence than Home Properties upon the sale or refinancing of some of the Properties as a result of unrealized gain attributable to certain Properties. Thus, executive officers and the stockholders may have different objectives regarding the appropriate pricing and timing of any sale or refinancing of Properties. In addition, executive officers of Home Properties, as limited partners of the Operating Partnership, have the right to approve certain fundamental transactions such as the sale of all or substantially all of the assets of the Operating Partnership, merger or consolidation or dissolution of the Operating Partnership and certain amendments to the Operating Partnership Agreement. We manage multifamily residential properties through the Operating Partnership and commercial and development properties and certain multifamily residential properties not owned by the Company through the Management Companies. As a result, officers of the Company will devote a significant portion of their business time and efforts to the management of properties not owned by Home Properties. Some officers of Home Properties have a significant interest in certain of the managed properties as the only stockholders of the general partners of the partnerships that own such managed properties and as holders of other ownership interests. Accordingly, such officers will have conflicts of interest between their fiduciary obligations to the partnerships that own such managed properties and their fiduciary obligations as officers and directors of the Company, particularly with respect to the enforcement of the management contracts and timing of the sale of the managed properties. In order to comply with technical requirements of the Code pertaining to the qualification of REITs, the Operating Partnership owns all of the outstanding non-voting common stock (990 shares) of one of the Management Companies, Home Properties Management, Inc., and Norman and Nelson Leenhouts own all of the outstanding voting common stock (52 shares). The Operating Partnership also owns all of the outstanding non-voting common stock (891 shares) of the other Management Company, Conifer Realty Corporation, and Norman and Nelson Leenhouts and Richard Crossed own all of the outstanding voting common stock (48 shares). As a result, although Home Properties will receive substantially all of the economic benefits of the business carried on by the Management Companies through the Company's right to receive dividends, Home Properties will not be able to elect directors and officers of the Management Companies and, therefore, the Company's ability to cause dividends to be declared or paid or influence the day-to-day operations of the Management Companies will be limited. Furthermore, although Home Properties will receive a management fee for managing the managed properties, this fee has not been negotiated at arm's length and may not represent a fair price for the services rendered. SHARES AVAILABLE FOR FUTURE SALE MAY AFFECT MARKET PRICES FOR OUR COMMON STOCK. Sales of substantial amounts of shares of Common Stock in the public market or the perception that such sales might occur could adversely affect the market price of the Common Stock. The Operating Partnership has issued approximately 15,702,000 Units through December 15, 1999 to persons other than Home Properties or the Trust which may be exchanged on a one-for-one basis for shares of Common Stock under certain circumstances. We have issued Class A Convertible Preferred Stock and Class B Cumulative Convertible Preferred Stock which are convertible into approximately 3,346,000 shares of Common Stock in the aggregate. In addition, as of December 15, 1999, Home Properties has granted options to purchase approximately 1,290,000 shares of Common Stock to certain directors, officers and employees of Home Properties. All of the shares of Common Stock issuable upon the exchange of Units or the exercise of options will be "restricted securities" within the meaning of Rule 144 under the Securities Act and may not be transferred unless they are registered under the Securities Act or are otherwise transferrable under Rule 144. The Company has filed or expects to file registration statements with respect to such shares of Common Stock, thereby allowing shares issuable under our stock benefit plans and in exchange for Units to be transferred or resold without restriction under the Securities Act. This Prospectus relates to the registration of the 1,679,543 shares issuable upon conversion of the Class B Cumulative Preferred Stock. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy reports, statements or other information at the SEC's public reference rooms in Washington D.C., New York, New York or Chicago, Illinois. Please call the SEC at 1- 800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at http://www.sec.gov. You can also review copies of our SEC filings at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. We have filed with the SEC a registration statement on Form S-3 to register the securities. This prospectus is part of that registration statement and, as permitted by the SEC's rules, does not contain all the information set forth in the registration statement. For further information you may refer to the registration statement and to the exhibits and schedules filed as part of the registration statement. You can review and copy the registration statement and its exhibits and schedules at the public reference facilities maintained by the SEC as described above. The registration statement, including its exhibits and schedules, is also available on the SEC's web site. The SEC allows us to "incorporate by reference" the information we file with it, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be part of this prospectus and the information that we file with the SEC later will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934: - - Annual Report on Form 10-K for the fiscal year ended December 31, 1998; - - Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 1999, June 30, 1999 and September 30, 1999; - - Current Reports on Form 8-K and Form 8-K/A dated July 2, 1999, July 29, 1999, July 30, 1999, October 5, 1999 and November 12, 1999; and - - The description of the common stock contained in our registration statement on Form 8-A filed under Section 12 of the Securities Exchange Act, including all amendments and reports filed for the purpose of updating that description. You may request a copy of these filings, at no cost, by writing or telephoning us at: Home Properties of New York, Inc., Attention: Ann M. McCormick, Secretary, 850 Clinton Square, Rochester, New York 14604; telephone number (716) 546-4900. YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR PROVIDED IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains, or incorporates by reference, statements that may be deemed to be "forward-looking" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Although Home Properties believes expectations reflected in such forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved. Factors that may cause actual results to differ include general economic and local real estate conditions, other conditions that might affect operating expenses, and the timely completion of repositioning activities within anticipated budgets, the actual pace of future acquisitions and developments, and continued access to capital to fund growth. Home Properties' actual results could differ materially from those set forth in the forward-looking statements. Other factors that might cause such a difference are discussed in the section entitled "Risk Factors." SELLING SHAREHOLDER Home Properties agreed to register the resale by GE Capital Equity Investments, Inc., called the Selling Shareholder, of the 1,679,543 shares of Common Stock underlying its 2,000,000 Series B Cumulative Convertible Preferred Stock, which we refer to as the Series B Preferred Stock. The Selling Shareholder purchased the Series B Preferred Stock on September 29, 1999 in a direct placement by Home Properties. Our registration of the Common Stock does not necessarily mean that the Selling Shareholder will convert its Series B Preferred Stock into 1,679,543 shares of Common Stock (subject to certain adjustments) or that the Selling Shareholder will sell all or any of the shares of Common Stock issuable upon such conversion. We cannot estimate the number of shares that the Selling Shareholder will own upon completion of the offering. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of Home Properties consists of 80 million shares of common stock, $0.01 par value, of which approximately 19.6 million shares were outstanding on December 22, 1999; 10 million shares of preferred stock, $0.01 par value, 1,666,667 shares of which have been designated Series A Convertible Preferred Stock, all of which were outstanding as of December 22, 1999 and 2,000,000 shares of which have been designated Series B Preferred Stock, all of which were outstanding on December 22, 1999, and 10 million shares of "excess stock," $0.01 par value, of which no shares were outstanding on such date. For more detail about our Articles of Amendment and Restatement of Articles of Incorporation, as amended, and the Articles Supplementary thereto relating to the Series A Convertible Preferred Stock and the Series B Preferred Stock (sometimes collectively referred to as our "charter") and bylaws you should refer to the charter and bylaws, which have been filed as exhibits either to the registration statement of which this prospectus is a part, or to other reports incorporated by reference into this prospectus. In addition, for a discussion of limitations on the ownership of our capital stock, see "Risk Factors." COMMON STOCK All shares of Common Stock offered will be duly authorized, fully paid, and nonassessable. Holders of the Common Stock will have no conversion, redemption, sinking fund or preemptive rights; however, shares of Common Stock will automatically convert into shares of Excess Stock as described below. Under the Maryland General Corporation Law ("MGCL"), stockholders are generally not liable for Home Properties' debts or obligations, and the holders of shares will not be liable for further calls or assessments by Home Properties. Subject to the provisions of Home Properties' Articles of Incorporation regarding Excess Stock described below, all shares of Common Stock have equal dividend, distribution, liquidation and other rights and will have no preference or exchange rights. Subject to the right of any holders of Preferred Stock to receive preferential distributions, the holders of the shares of Common Stock will be entitled to receive distributions in the form of dividends if and when declared by the Board of Directors of Home Properties out of funds legally available therefor, and, upon liquidation of Home Properties, each outstanding share of Common Stock will be entitled to participate pro rata in the assets remaining after payment of, or adequate provision for, all known debts and liabilities of Home Properties, including debts and liabilities arising out of its status as general partner of the Operating Partnership, and any liquidation preference of issued and outstanding Preferred Stock. Home Properties intends to continue paying quarterly distributions. The holder of each outstanding share of Common Stock is entitled to one vote on all matters presented to stockholders for a vote, subject to the provisions of Home Properties' Articles of Incorporation regarding Excess Stock described below. As described below, the Board of Directors of Home Properties has, and may in the future, grant holders of one or more series of Preferred Stock the right to vote with respect to certain matters when it fixes the attributes of such series of Preferred Stock. Pursuant to the MGCL, Home Properties cannot dissolve, amend its charter, merge another entity, sell all or substantially all its assets, engage in a share exchange or engage in similar transactions unless such action is approved by stockholders holding a majority of the outstanding shares entitled to vote on such matter. In addition, the Second Amended and Restated Partnership Agreement of the Operating Partnership, as amended (the "Partnership Agreement") requires that any merger or sale of all or substantially all of the assets of Operating Partnership be approved by partners holding a majority of the outstanding Units, excluding Operating Partnership Units held by Home Properties or the Trust. Home Properties' Articles of Incorporation provide that its Bylaws may be amended by its Board of Directors. The holder of each outstanding share of Common Stock is entitled to one vote in the election of directors who serve for terms of one year. Holders of the shares of Common Stock will have no right to cumulative voting for the election of directors. Consequently, at each annual meeting of stockholders, the holders of a majority of the shares entitled to vote in the election of directors will be able to elect all of the directors, subject to certain rights of the holders of Preferred Stock, described below. Directors may be removed only for cause and only with the affirmative vote of the holders of a majority of the shares entitled to vote in the election of directors. PREFERRED STOCK We may issue shares of Preferred Stock from time to time, in one or more series, as authorized by the Board of Directors of Home Properties. The Board of Directors will fix the attributes of any Preferred Stock that it authorizes for issuance. Because the Board of Directors has the power to establish the preferences and rights of each series of Preferred Stock, it may afford the holders of any series of Preferred Stock preferences, powers and rights, voting or otherwise, senior to the rights of holders of shares of Common Stock. The issuance of Preferred Stock could have the effect of delaying or preventing a change in control of Home Properties. Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of Home Properties, then, before any distribution or payment shall be made to the holders of any shares of Common Stock, any Excess Shares or any other class or series of capital stock of Home Properties ranking junior to any outstanding Preferred Stock in the distribution of assets upon any liquidation, dissolution or winding up of Home Properties, the holders of shares of each series of Preferred Stock shall be entitled to receive out of assets of Home Properties legally available for distribution to shareholders liquidating distributions in the amount of the liquidation preference per share, plus an amount equal to all dividends accrued and unpaid thereon (which shall not include any accumulation in respect of unpaid dividends for prior dividend periods if such shares of Preferred Stock do not have cumulative dividend). After payment of the full amount of the liquidating distributions to which they are entitled, the holders of shares of Preferred Stock will have no right or claim to any of the remaining assets of Home Properties. In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the available assets of Home Properties are insufficient to pay the amount of the liquidating distributions on all outstanding shares of Preferred Stock and the corresponding amounts payable on all shares of other classes or series of capital stock of Home Properties ranking on a parity with such shares of Preferred Stock in the distribution of assets, then the holders of such shares of Preferred Stock and all other such classes or series of capital stock shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they would otherwise be respectively entitled. We have filed Articles Supplementary to our charter creating a series of preferred stock designated as "Series A Convertible Preferred Stock" which has substantially the same rights, privileges and preferences as the Class A limited partnership interest in the Operating Partnership formerly held by the State of Michigan Retirement System. The State of Michigan acquired the Class A limited partnership interest in December 1996 for $35,000,000. At the request of Home Properties, the State of Michigan Retirement System has exchanged its Class A Limited Partnership interest for 1,666,667 shares of the Series A Convertible Preferred Stock as of December 22, 1999. The rights, privileges and preferences of the Series A Convertible Preferred Stock are set forth in the Articles Supplementary to the charter creating that class of preferred stock. The Series A Convertible Preferred Stock has a preference over the Series B Cumulative Convertible Preferred Stock and the Common Stock as to dividends, which are payable quarterly at a rate equal to the greater of 9% per year or the rate declared and payable on comparable number of shares of Common Stock through December 30, 2003 on a cumulative basis. The Series A Convertible Preferred Stock also has a liquidation preference equal to $35,000,000 in the aggregate for all outstanding shares (or $21.00 per share). Pursuant to the terms of the agreement pursuant to which the State of Michigan Retirement System invested, we agreed to elect a nominee of the State of Michigan Retirement System to the Board of Directors of Home Properties and to nominate such director for reelection annually. Under the Articles Supplementary and the agreement pursuant to which Michigan invested, Home Properties has agreed not take certain actions without the consent of the State of Michigan such as creating any stock senior or on a parity with the Series A Convertible Preferred Stock, consolidating, merging or selling all or substantially all of its assets to another entity except under circumstances where the rights and preferences of the Series A Convertible Preferred Stock are protected. amending its charter or by-laws in a manner adverse to the holders of the Series A Preferred Stock and certain other matters described in those documents (each of which is filed as an exhibit to one of our filings with the Securities and Exchange Commission which is incorporated herein by reference). The Series A Convertible Preferred Stock is convertible into Common Stock on a one-for-one basis, subject to adjustment. Home Properties may call the Series A Preferred Stock for redemption on or after December 30, 2006 but the holders may elect to convert the shares into Common Stock prior to redemption. On September 30, 1999, Home Properties issued 2,000,000 shares of its newly authorized Series B Convertible Cumulative Preferred Stock, which we refer to as the "Series B Preferred Stock," in a private placement to the Selling Shareholder for $50,000,000. The Articles Supplementary to the charter establishing the Series B Preferred Stock sets forth the rights, privileges and preferences of that stock. The Series B Preferred Stock is junior to the right of payment to the Series A Convertible Preferred Stock, is entitled to a liquidation preference of $25.00 per share and dividends equal to the greater of the dividends payable on the shares of Common Stock into which the Series B Preferred Stock is convertible, or 8.36% of the liquidation preference (or $2.09 per share) each year. The Series B Preferred Stock is redeemable at the option of Home Properties after September 29, 2004 at the liquidation preference. Upon the occurrence of certain events, the Series B Preferred Stock may be subject to mandatory redemption at the option of the holders and, in certain instances, at a premium over the liquidation preference. Those events include: a change in control of Home Properties or the Operating Partnership, a merger, consolidation or sale of all or substantially all of the assets, incurrence of indebtedness in excess of 70% of total market capitalization, a loss of REIT status and other events described in the Articles Supplementary. The holders of the Series B Preferred Stock also have the right to elect two directors to the Board of Directors of Home Properties in the event that the preferred dividends are in arrears for six quarters (whether consecutive of not). The Series B Preferred Stock is convertible into 1,679,543 shares of Common Stock, subject to adjustment. RESTRICTIONS ON TRANSFER OWNERSHIP LIMITS Our charter contains certain restrictions on the number of shares of capital stock that stockholders may own. For Home Properties to qualify as a REIT under the Code, no more than 50% in value of its outstanding shares of capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code of 1986, as amended, to include certain entities) during the last half of a taxable year or during a proportionate part of a shorter taxable year. The capital stock must also be beneficially owned by 100 or more persons during at least 335 days of a taxable year or during a proportionate part of a shorter taxable year. Because Home Properties expects to continue to qualify as a REIT, its charter contains restrictions on the ownership and transfer of shares of its capital stock intended to ensure compliance with these requirements. Subject to certain exceptions specified in the charter, no holder may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 8.0% (the "Ownership Limit") of the value of the issued and outstanding shares of capital stock of Home Properties. Certain entities, such as qualified pension plans, are treated as if their beneficial owners were the holders of the Common Stock held by such entities. Stockholders ("Existing Holders") whose holdings exceeded the Ownership Limit immediately after Home Properties' initial public offering of its Common Stock, assuming that all Units of the Operating Partnership are counted as shares of Common Stock, are permitted to continue to hold the number of shares they held on such date and may acquire additional shares of capital stock upon (i) the exchange of Units for Shares, (ii) the exercise of stock options or receipt of grants of shares of capital stock pursuant to a stock benefit plan, (iii) the acquisition of shares of capital stock pursuant to a dividend reinvestment plan, (iv) the transfer of shares of capital stock from another Existing Holder or the estate of an Existing Holder by devise, gift or otherwise, or (v) the foreclosure on a pledge of shares of capital stock; provided, no such acquisition may cause any Existing Holder to own, directly or by attribution, more than 17.5% (the "Existing Holder Limit") of the issued and outstanding Shares, subject to certain additional restrictions. The Board of Directors of Home Properties may increase or decrease the Ownership Limit and Existing Holder Limit from time to time, but may not do so to the extent that after giving effect to such increase or decrease (i) five beneficial owners of Shares could beneficially own in the aggregate more than 49.5% of the aggregate value of the outstanding capital stock of Home Properties or (ii) any beneficial owner of capital stock would violate the Ownership Limit or Existing Holder Limit as a result of a decrease. The Board of Directors may waive the Ownership Limit or the Existing Holder Limit with respect to a holder if such holder provides evidence acceptable to the Board of Directors that such holder's ownership will not jeopardize Home Properties' status as a REIT. Any transfer of outstanding capital stock of Home Properties ("Outstanding Stock") that would (i) cause any holder, directly or by attribution, to own capital stock having a value in excess of the Ownership Limit or Existing Holder Limit, (ii) result in shares of capital stock other than Excess Stock, if any, to be owned by fewer than 100 persons, (iii) result in Home Properties being closely held within the meaning of section 856(h) of the Code, or (iv) otherwise prevent Home Properties from satisfying any criteria necessary for it to qualify as a REIT, is null and void, and the purported transferee acquires no rights to such Outstanding Stock. Outstanding Stock owned by or attributable to a stockholder or shares of Outstanding Stock purportedly transferred to a stockholder which cause such stockholder or any other stockholder to own shares of capital stock in excess of the Ownership Limit or Existing Holder Limit will automatically convert into shares of Excess Stock. Such Excess Stock will be transferred by operation of law to a separate trust, with Home Properties acting as trustee, for the exclusive benefit of the person or persons to whom such Outstanding Stock may be ultimately transferred without violating the Ownership Limit or Existing Holder Limit. Excess Stock is not treasury stock, but rather constitutes a separate class of issued and outstanding stock of Home Properties. While the Excess Stock is held in trust, it will not be entitled to vote, will not be considered for purposes of any stockholder vote or the determination of a quorum for such vote and will not be entitled to participate in dividends or other distributions. Any record owner or purported transferee of Outstanding Stock which has converted into Excess Stock (the "Excess Holder") who receives a dividend or distribution prior to the discovery by Home Properties that such Outstanding Stock has been converted into Excess Stock must repay such dividend or distribution upon demand. While Excess Stock is held in trust, Home Properties will have the right to purchase it from the trust for the lesser of (i) the price paid for the Outstanding Stock which converted into Excess Stock by the Excess Holder (or the market value of the Outstanding Stock on the date of conversion if no consideration was given for the Outstanding Stock)or (ii) the market price of shares of capital stock equivalent to the Outstanding Stock which converted into Excess Stock (as determined in the manner set forth in the Articles of Incorporation) on the date Home Properties exercises its option to purchase. Home Properties must exercise this right within the 90-day period beginning on the date on which it receives written notice of the transfer or other event resulting in the conversion of Outstanding Stock into Excess Stock. Upon the liquidation of Home Properties, distributions will be made with respect to such Excess Stock as if it consisted of the Outstanding Stock from which it was converted. Any Excess Holder, with respect to each trust created upon the conversion of Outstanding Stock into Excess Stock, may designate any individual as a beneficiary of such trust; provided, such person would be permitted to own the Outstanding Stock which converted into the Excess Stock held by the trust under the Ownership Limit or Existing Holder Limit and the consideration paid to such Excess Holder in exchange for designating such person as the beneficiary is not in excess of the price paid for the Outstanding Stock which converted into Excess Stock by the Excess Holder (or the market value of the Outstanding Stock on the date of conversion if no consideration was given for the Outstanding Stock). Home Properties' redemption right must have expired or been waived prior to such designation. Immediately upon the designation of a permitted beneficiary, the Excess Stock, if any, will automatically convert into shares of the Outstanding Stock from which it was converted and Home Properties as trustee of the trust will transfer such shares, if any, and any proceeds from redemption or liquidation to the beneficiary. If the restrictions on ownership and transfer, conversion provisions or trust arrangements in Home Properties' Articles of Incorporation are determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the Excess Holder of any Outstanding Stock that would have converted into shares of Excess Stock if the conversion provisions of the Articles of Incorporation were enforceable and valid shall be deemed to have acted as an agent on behalf of Home Properties in acquiring such Outstanding Stock and to hold such Outstanding Stock on behalf of Home Properties unless Home Properties waives its right to this remedy. The foregoing ownership and transfer limitations may have the effect of precluding acquisition of control of Home Properties without the consent of its Board of Directors. All certificates representing shares of capital stock will bear a legend referring to the restrictions described above. The foregoing restrictions on transferability and ownership will not apply if the Board of Directors determines, and the stockholders concur, that it is no longer in the best interests of Home Properties to attempt to qualify, or to continue to qualify, as a REIT. Approval of the limited partners of the Operating Partnership to terminate REIT status is also required. OWNERSHIP REPORTS Every owner of more than 5% of the issued and outstanding shares of capital stock of Home Properties must file a written notice with Home Properties containing the information specified in the Articles of Incorporation no later than January 31 of each year. In addition, each stockholder shall, upon demand, be required to disclose to Home Properties in writing such information as Home Properties may request in order to determine the effect of such stockholder's direct, indirect and attributed ownership of shares of capital stock on Home Properties' status as a REIT or to comply with any requirements of any taxing authority or other governmental agency. CERTAIN OTHER PROVISIONS OF MARYLAND LAW AND CHARTER DOCUMENTS The following discussion summarizes certain provisions of MGCL and Home Properties' Articles of Incorporation and Bylaws. This summary does not purport to be complete and is subject to and qualified in its entirety by reference to the Articles of Incorporation and Bylaws, copies of which are filed as exhibits to the Registration Statement of which this Prospectus constitutes a part. See "Additional Information. - Limitation of Liability and Indemnification." The Articles of Incorporation and Bylaws limit the liability of directors and officers to Home Properties and its stockholders to the fullest extent permitted from time to time by the MGCL and require Home Properties to indemnify its directors, officers and certain other parties to the fullest extent permitted from time to time by the MGCL. Business Combinations. Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns 10% or more of the voting power of the outstanding voting stock of the corporation or an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then-outstanding voting stock of the corporation (an "Interested Stockholder") or an affiliate thereof, are prohibited for five years after the most recent date on which the Interested Stockholder became an Interested Stockholder. Thereafter, in addition to any other required vote, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation, voting together as a single voting group, and (ii) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation (other than voting stock held by the Interested Stockholder who will, or whose affiliate will, be a party to the business combination or by an affiliate or associate of the Interested Stockholder) voting together as a single voting group. The extraordinary voting provisions do not apply if, among other things, the corporation's stockholders receive a price for their shares determined in accordance with the MGCL 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 the MGCL do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. The Articles of Incorporation of Home Properties contain a provision exempting from these provisions of the MGCL any business combination involving the Leenhoutses (or their affiliates) or any other person acting in concert or as a group with any of the foregoing persons. Control Share Acquisitions. The MGCL provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by the affirmative vote of two- thirds of the votes entitled to be cast on the matter other than "interested shares" (shares of stock in respect of which any of the following persons is entitled to exercise or direct the exercise of the voting power of shares of stock of the corporation in the election of directors: an "acquiring person," an officer of the corporation or an employee of the corporation who is also a director). "Control shares" are shares of stock which, if aggregated with all other such shares of stock owned by the acquiring person, or in respect of which such person is entitled to exercise or direct the exercise of voting power of shares of stock of the corporation in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority of more of all voting power. Control shares do not include shares the acquiring person is entitled to vote as a result of having previously obtained stockholder approval. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted by the charter or bylaws of the corporation. A person who has made or proposes to make a control share acquisition, under certain conditions (including an undertaking to pay expenses), may compel the board of directors to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the control shares upon delivery of an acquiring person statement containing certain information required by the MGCL, including a representation that the acquiring person has the financial capacity to make the proposed control share acquisition, and a written undertaking to pay the corporation's expenses of the special meeting (other than the expenses of those opposing approval of the voting rights). If no request for a meeting is made, the corporation may itself 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 MGCL, then, subject to certain 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 control shares, as of the date of the last control share acquisition or, if a stockholder meeting is held, as of the date of the 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 before the control share acquisition and the acquiring person becomes entitled to exercise or direct the exercise of a majority or more of all voting power, all other stockholders may exercise rights of objecting stockholders under Maryland law to receive the fair value of their Shares. The fair value of the Shares for such purposes may not be less than the highest price per share paid by the acquiring person in the control share acquisition. Certain limitations and restrictions otherwise applicable to the exercise of objecting stockholders' rights do not apply in the context of a control share acquisition. The Articles of Incorporation contain a provision exempting from the control share acquisition statute any and all acquisitions to the extent that such acquisitions would not violate the Ownership Limit or Existing Owner Limit. There can be no assurance that such provision will not be amended or eliminated at any point in the future. FEDERAL INCOME TAX CONSIDERATIONS The following summary of material federal income tax consequences regarding Home Properties and the common stock we are registering is based on current law, is for general information only and is not tax advice. The information in this section is based on the Internal Revenue Code as currently in effect, current, temporary and proposed Treasury Regulations promulgated under the Internal Revenue Code, the legislative history of the Internal Revenue Code, current administrative interpretations and practices of the IRS, including its practices and policies as expressed in private letter rulings which are not binding on the IRS except with respect to the particular taxpayers who requested and received such rulings, and court decisions, all as of the date of this prospectus. There is no assurance that future legislation, Treasury Regulations, administrative interpretations and practices or court decisions will not adversely affect existing interpretations. Any change could apply retroactively to transactions preceding the date of the change. We have not requested, and do not plan to request, any rulings from the IRS concerning our tax treatment and the statements in this prospectus are not binding on the IRS or a court. Thus, we can provide no assurance that these statements will not be challenged by the IRS or sustained by a court if challenged by the IRS. The tax treatment to holders of common stock will vary depending on a holder's particular situation and this discussion does not purport to deal with all aspects of taxation that may be relevant to a holder of common stock in light of his or her personal investments or tax circumstances, or to stockholders subject to special treatment under the federal income tax laws except to the extent discussed under the headings "Taxation of Tax-Exempt Stockholders" and "Taxation of Non-U.S. Stockholders." Stockholders subject to special treatment include, without limitation, insurance companies, financial institutions or broker- dealers, tax-exempt organizations, stockholders holding securities as part of a conversion transaction or hedge or hedging transaction or as a position in a straddle for tax purposes, foreign corporations and persons who are not citizens or residents of the United States. In addition, the summary below does not consider the effect of any foreign, state, local or other tax laws that may be applicable to holders of the common stock. If we meet the detailed requirements in the Internal Revenue Code for qualification as a REIT, which are summarized below, we will be treated as a REIT for federal income tax purposes. In this case, we generally will not be subject to federal corporate income taxes on our net income that is currently distributed to our stockholders. This treatment substantially eliminates the "double taxation" that generally results from investments in a corporation. Double taxation refers to the imposition of corporate level tax on income earned by a corporation and taxation at the shareholder level on funds distributed to a corporation's shareholders. If we fail to qualify as a REIT in any taxable year, we would not be allowed a deduction for dividends paid to our stockholders in computing taxable income and would be subject to federal income tax at regular corporate rates. Unless entitled to relief under specific statutory provisions, we would be ineligible to be taxed as a REIT for the four succeeding tax years. As a result, the funds available for distribution to our stockholders would be reduced. Each prospective purchaser should consult his or her own tax advisor regarding the specific tax consequences of the purchase, ownership and sale of common stock, including the federal, state, local, foreign and other tax consequences of such purchase, ownership and sale and of potential changes in applicable tax laws. TAXATION OF HOME PROPERTIES General. We elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with our taxable year ended December 31, 1994. We believe we have been organized and have operated in a manner which qualifies for taxation as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 1994. We intend to continue to operate in this manner. However, our qualification and taxation as a REIT depends upon our ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Internal Revenue Code. Accordingly, there is no assurance that we have operated or will continue to operate in a manner so as to qualify or remain qualified as a REIT. Further, legislative, administrative or judicial action may change, perhaps retroactively, the anticipated income tax treatment described in this prospectus. See "Failure to Qualify." Home Properties was organized in conformity with the requirements for qualification as a REIT, and its method of operation has enabled it to meet the requirements for qualification and taxation as a REIT under the Code. This opinion is based on certain assumptions and is conditioned upon certain representations made by Home Properties as to certain factual matters relating to Home Properties' organization, manner of operation, income and assets. Nixon Peabody LLP is not aware of any facts or circumstances that are inconsistent with these assumptions and representations. Home Properties' qualification and taxation as a REIT will depend upon Home Properties' satisfaction of the requirements necessary to be classified as a REIT, discussed below, on a continuing basis. Nixon Peabody LLP will not review compliance with these tests on a continuing basis. Therefore, no assurance can be given that Home Properties will satisfy such tests on a continuing basis. The sections of the Internal Revenue Code that relate to the qualification and operation as a REIT are highly technical and complex. The following sets forth the material aspects of the sections of the Internal Revenue Code that govern the federal income tax treatment of a REIT and its stockholders. This summary is qualified in its entirety by the applicable Internal Revenue Code provisions, relevant rules and regulations promulgated under the Internal Revenue Code, and administrative and judicial interpretations of the Internal Revenue Code, and these rules and these regulations. If we qualify for taxation as a REIT, we generally will not be subject to federal corporate income taxes on our net income that is currently distributed to our stockholders. This treatment substantially eliminates the "double taxation" that generally results from investment in a corporation. However, Home Properties will be subject to federal income tax as follows: First, we will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains; provided, however, that properly designated undistributed capital gains will effectively avoid taxation at the stockholder level. A REIT's "REIT taxable income" is the otherwise taxable income of the REIT subject to certain adjustments, including a deduction for dividends paid. Second, we may be subject to the "alternative minimum tax" on our items of tax preference under some circumstances. Third, if we have (a) net income from the sale or other disposition of "foreclosure property" which is held primarily for sale to customers in the ordinary course of business or (b) other nonqualifying income from foreclosure property, we will be subject to tax at the highest corporate rate on this income. Foreclosure property is defined generally as property we acquired through foreclosure or after a default on a loan secured by the property or a lease of the property. Fourth, we will be subject to a 100% tax on any net income from prohibited transactions. Prohibited transactions generally include sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than the sale or disposition of foreclosure property. Fifth, we will be subject to a 100% tax on an amount equal to (a) the gross income attributable to the greater of the amount by which we fail the 75% or 95% test multiplied by (b) a fraction intended to reflect our profitability, if we fail to satisfy the 75% gross income test or the 95% gross income test but have maintained our qualification as a REIT because we satisfied other requirements. The gross income tests are discussed below. Sixth, we would be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed if we fail to distribute during each calendar year at least the sum of: 85% of our REIT ordinary income for the year, 95% of our REIT capital gain net income for the year, and any undistributed taxable income from prior periods. Seventh, if we acquire any asset from a corporation which is or has been a C corporation in a transaction in which the basis of the acquired asset in our hands is determined by reference to the basis of the asset in the hands of the C corporation, and we subsequently recognize gain on the disposition of the asset during the ten-year period beginning on the date on which we acquired the asset, then we will be subject to tax at the highest regular corporate tax rate on this gain to the extent of the "built-in-gain" of the asset. The built-in- gain of an asset equals the excess of (a) the fair market value of the asset over (b) our adjusted basis in the asset, determined as of the date we acquired the asset from the C corporation. A C corporation is generally a corporation subject to full corporate-level tax. The results described in this paragraph with respect to the recognition of built-in gain assume that we will make an election pursuant to IRS Notice 88-19. Requirements for Qualification as a REIT. The Internal Revenue Code defines a REIT as a corporation, trust or association that: 1. is managed by one or more trustees or directors; 2. uses transferable shares or transferable certificates to evidence beneficial ownership; 3. would be taxable as a domestic corporation, but for Sections 856 through 860 of the Internal Revenue Code; 4. is not a financial institution referred to in Section 582(c) of the Internal Revenue Code or an insurance company to which subchapter L of the Internal Revenue Code applies; 5. is beneficially owned by 100 or more persons; 6. during the last half of each taxable year not more than 50% in value of its outstanding stock is owned, actually or constructively, by five or fewer individuals, as defined in the Internal Revenue Code to include the entities set forth in Section 542(a)(2) of the Internal Revenue Code; and 7. meets other tests, described below, regarding the nature of its income and assets and the amount of its distributions. The Internal Revenue Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of twelve months, or during a proportionate part of a taxable year of less than twelve months. Conditions (5) and (6) do not apply until after the first taxable year for which an election made to be taxed as a REIT. For purposes of condition (6), pension funds and some other tax-exempt entities are treated as individuals, subject to a "look-through" exception in the case of pension funds. We have satisfied condition (5) and believe that we have issued sufficient shares to satisfy condition (6). In addition, our articles of incorporation provides for restrictions regarding ownership and transfer of shares. These restrictions are intended to assist us in continuing to satisfy the share ownership requirements described in (5) and (6) above. These ownership and transfer restrictions are described in "Description of Capital Stock- Restrictions on Transfer." Primarily, though not exclusively, as a result of fluctuations in value among the different classes of our stock, these restrictions may not ensure that we will, in all cases, be able to satisfy the share ownership requirements described (5) and (6) above. If we fail to satisfy these share ownership requirements, our status as a REIT will terminate. However, if we comply with the rules contained in applicable Treasury Regulations that require us to ascertain the actual ownership of our shares and we do not know, or would not have known through the exercise of reasonable diligence, that we failed to meet the requirement described in condition (6) above, we will be treated as having met this requirement. See "Failure to Qualify." In addition, a corporation may not elect to become a REIT unless its taxable year is the calendar year. We have and will continue to have a calendar taxable year. Ownership of Subsidiaries. Internal Revenue Code Section 856(i) provides that a corporation which is a "qualified REIT subsidiary" shall not be treated as a separate corporation, and all assets, liabilities, and items of income, deduction and credit of a "qualified REIT subsidiary" shall be treated as assets, liabilities and items of income of the REIT for all purposes of the Internal Revenue Code, including the REIT qualification tests. A "qualified REIT subsidiary" is defined for taxable years beginning on or before August 5, 1997, as any corporation if 100 percent of the stock of the corporation is held by the REIT at all times during the period the corporation was in existence. A "qualified REIT subsidiary" is defined for taxable years beginning after August 5, 1997, as any corporation 100 percent of the stock of which is owned by the REIT, without regard to prior ownership, and that is not a taxable REIT subsidiary. Each of our subsidiaries qualifies as a "qualified REIT subsidiary." Thus, in applying the requirements described herein, our subsidiaries are ignored, and all of our subsidiaries, assets, liabilities and items of income, deduction and credit are treated as our assets, liabilities and items of income, deduction, and credit for all purposes of the Internal Revenue Code, including the REIT qualification tests. For this reason, references under "Federal Income Tax Consequences" to our income and assets include the income and assets of the our subsidiaries. Because our subsidiaries are treated as "qualified REIT subsidiaries" they will not be subject to federal income tax. In addition, our ownership of the voting securities of the subsidiaries will not violate the restrictions against ownership of securities of any one issuer which constitutes more than 10% of such issuer's voting securities or more than 5% in value of our assets, described below under "Asset Tests." Ownership of a Partnership Interest. In the case of a REIT which is a partner in a partnership, IRS regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership. Also, a partner in a partnership will be deemed to be entitled to the income of the partnership attributable to its proportionate share. The character of the assets and gross income of the partnership retains the same character in the hands of Home Properties for purposes of Section 856 of the Internal Revenue Code, including satisfying the gross income tests and the asset tests. Thus, our proportionate share of the assets, liabilities and items of income of the Operating Partnership, including the Operating Partnership's share of these items for any partnership or limited liability company, are treated as our assets, liabilities and items of income for purposes of applying the requirements described in this prospectus. We have included a summary of the rules governing the Federal income taxation of partnerships and their partners below in "Tax Aspects of the Operating Partnership." We have direct control of the Operating Partnership and will continue to operate it consistent with the requirements for qualification as a REIT. Income Tests. We must satisfy two gross income requirements annually to maintain our qualification as a REIT. First, each taxable year we must derive directly or indirectly at least 75% of our gross income from investments relating to real property or mortgages on real property, including "rents from real property" and, in specific circumstances, interest, or from particular types of temporary investments. Gross income from prohibited transactions is excluded for purposes of determining if we satisfy this test. Second, each taxable year we must derive at least 95% of our gross income from these real property investments, dividends, interest and gain from the sale or disposition of stock or securities, or from any combination of the foregoing. Gross income from prohibited transactions is excluded for purposes of determining if we satisfy this test. The term "interest" generally does not include any amount received or accrued, directly or indirectly, if the determination of the amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage or percentages of receipts or sales. Rents we receive will qualify as "rents from real property" in satisfying the gross income requirements for a REIT described above only if several conditions are met. First, the amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales. Second, the Internal Revenue Code provides that rents received from a "related party tenant" will not qualify as "rents from real property" in satisfying the gross income tests. A related party tenant is a tenant of Home Properties that Home Properties, or one or more actual or constructive owners of 10% or more of Home Properties, actually or constructively own in the aggregate 10% or more of such tenant. As a result of the passage of the Ticket to Work and Work Incentives Act of 1999 as enacted on December 17, 1999 (we refer to this as the "REIT Modernization Act"), for taxable years after December 31, 2000, Home Properties will be able to lease its properties to a taxable REIT subsidiary and the rents received from that subsidiary will not be disqualified from being "rents from real property" by reason of Home Properties' ownership interest in the subsidiary so long as the property is operated on behalf of the taxable REIT subsidiary by an "eligible independent contractor." A taxable REIT subsidiary is a corporation other than a REIT in which a REIT directly or indirectly holds stock and that has made a joint election with the REIT to be treated as a taxable REIT subsidiary. A taxable REIT subsidiary will be subject to federal income tax. Third, if rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to personal property will not qualify as "rents from real property." Under currently effective law, this 15% test is based on relative adjusted tax bases. As a result of the passage of the REIT Modernization Act, however, for taxable years beginning after December 31, 2000, the test will be based on relative fair market values. Finally, for rents received to qualify as "rents from real property," Home Properties generally must not operate or manage the property or furnish or render "impermissible services" to the tenants of the property, other than through an independent contractor from whom Home Properties derives no revenue. Home Properties may, however, directly perform services that are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant" of the property. For Home Properties' taxable years beginning after December 31, 2000, impermissible services can be provided to tenants at a property by a taxable REIT subsidiary. It is expected that Home Properties' real estate investments will continue to give rise to income that will enable it to satisfy all of the income tests described above. Substantially all of Home Properties' income will be derived from its interest in the Operating Partnership, which will, for the most part, qualify as "rents from real property" for purposes of the 75% and the 95% gross income tests. We generally do not and do not intend to: charge rent for any property that is based in whole or in part on the income or profits of any person, except by reason of being based on a percentage of receipts or sales, as described above; rent any property to a related party tenant (except for leases to a taxable REIT subsidiary after December 31, 2000); derive rental income attributable to personal property, other than personal property leased in connection with the lease of real property, the amount of which is less than 15% of the total rent received under the lease; or perform services considered to be rendered to the occupant of the property, other than through an independent contractor from whom we derive no revenue. Notwithstanding the foregoing, we may have taken and may continue to take the actions set forth above to the extent these actions will not, based on the advice of our tax counsel, jeopardize our status as a REIT. The Operating Partnership owns all of the non-voting common stock of the Management Companies, corporations that are taxable as regular corporations. The Management Companies will perform management, development, construction and leasing services for certain properties which the Company owns, holds general partnership interests in or manages. The income earned by and taxed to the Management Companies would be nonqualifying income if earned by Home Properties through the Operating Partnership. As a result of the corporate structure, the income will be earned by and taxed to the Management Companies and will be received by the Operating Partnership only indirectly as dividends that qualify under the 95% test, but not the 75% gross income test. We believe that the aggregate amount of any non-qualifying income in any taxable year has not exceeded and will not exceed the limit on non- qualifying income under the gross income tests. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for the year if we are entitled to relief under specific provisions of the Internal Revenue Code. Generally, we may avail ourselves of the relief provisions if: our failure to meet these tests was due to reasonable cause and not due to willful neglect; we attach a schedule of the sources of our income to our federal income tax return; and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances we would be entitled to the benefit of these relief provisions. For example, if we fail to satisfy the gross income tests because nonqualifying income that we intentionally incur exceeds the limits on nonqualifying income, the IRS could conclude that our failure to satisfy the tests was not due to reasonable cause. If these relief provisions do not apply to a particular set of circumstances, we will not qualify as a REIT. As discussed above in "Taxation of Home Properties -General," even if these relief provisions apply, and we retain our status as a REIT, a tax would be imposed with respect to our excess net income. We may not always be able to maintain compliance with the gross income tests for REIT qualification despite our periodic monitoring of our income. Prohibited Transaction Income. Any gain realized by us on the sale of any property held as inventory or other property held primarily for sale to customers in the ordinary course of business, including our share of any such gain realized by the Operating Partnership, will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. This prohibited transaction income may also adversely effect our ability to satisfy the income tests for qualification as a REIT. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Operating Partnership intends to hold the properties for investment with a view to long- term appreciation, to engage in the business of acquiring, developing, owning, and operating its properties and to make occasional sales of the properties as are consistent with the Operating Partnership's investment objectives. However, the IRS may contend that one or more of these sales is subject to the 100% penalty tax. Asset Tests. At the close of each quarter of our taxable year, we also must satisfy three tests relating to the nature and diversification of our assets. First, at least 75% of the value of our total assets must be represented by real estate assets, cash, cash items and government securities. For purposes of this test, real estate assets include stock or debt instruments held for one year or less that are purchased with the proceeds of a stock offering or a long-term (at least five years) debt offering. Second, not more than 25% of our total assets may be represented by securities, other than those securities includable in the 75% asset test. Third, of the investments included in the 25% asset class, the value of any one issuer's securities may not exceed 5% of the value of our total assets and we may not own more than 10% of any one issuer's outstanding voting securities. The Operating Partnership owns 100% of the nonvoting preferred stock of the Management Companies. The Operating Partnership does not and will not own any of the voting securities of the Management Companies. Therefore we will not be considered to own more than 10% of the voting securities of the Management Companies. In addition, we believe that the value of our pro rata share of the securities of the Management Companies held by the Operating Partnership did not exceed at any time up to and including the date of this prospectus 5% of the total value of our assets and will not exceed this amount in the future. No independent appraisals have been obtained. Counsel, in rendering its opinion as to the qualification of Home Properties as a REIT, is relying on the conclusions of management regarding the value of such securities of the Management Companies. As previously discussed, Home Properties is deemed to own its proportionate share of the assets of a partnership in which it is a partner so that the partnership interest, itself, is not a security for purposes of this asset test. After initially meeting the asset tests at the close of any quarter, we will not lose our status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If we fail to satisfy the asset tests because we acquire additional securities of the Management Companies or other securities or other property during a quarter, including an increase in our interests in the Operating Partnership, we can cure this failure by disposing of sufficient nonqualifying assets within 30 days after the close of that quarter. We have maintained and will continue to maintain adequate records of the value of our assets to ensure compliance with the asset tests and to take such other actions within the 30 days after the close of any quarter as may be required to cure any noncompliance. If we fail to cure noncompliance with the asset tests within this time period, we would cease to qualify as a REIT. As a result of the REIT Modernization Act, for taxable years beginning after December 31, 2000, the 5% value test and the 10% voting security test will be modified in two respects. First, the 10% voting security test will be expanded so that Home Properties also will be prohibited from owning more than 10% of the value of the outstanding securities of any one issuer. Second, an exception to these tests will be created so that Home Properties will be permitted to own securities of a subsidiary that exceed the 5% value test and the new 10% vote or value test if the subsidiary elects to be a taxable REIT subsidiary. The Operating Partnership currently owns more than 10% of the total value of the outstanding securities of each of the non-controlled subsidiaries. The expanded 10% vote or value test, however, will not apply to a subsidiary unless either of the following occurs: the subsidiary engages in a substantial new line of business or acquires any substantial asset after July 12, 1999; or Home Properties has acquired, or acquires, additional securities of the subsidiary after July 12, 1999. At the present time, a final decision has not been made regarding which non-controlled subsidiaries, if any, will elect to be treated as taxable REIT subsidiaries. For taxable years beginning after December 31, 2000, not more than 20% of the value of our total assets will be permitted to be represented by securities of taxable REIT subsidiaries. It should be noted that the REIT Modernization Act contains two provisions that will ensure that taxable REIT subsidiaries will be subject to an appropriate level of federal income taxation. First, taxable REIT subsidiaries will be limited in their ability to deduct interest payments made to an affiliated REIT. Second, if a taxable REIT subsidiary pays an amount to a REIT that exceeds the amount that would be paid to an unrelated party in an arm's length transaction, the REIT generally will be subject to an excise tax equal to 100% of such excess. Annual Distribution Requirements. To maintain our qualification as a REIT, we are required to distribute dividends, other than capital gain dividends, to our stockholders in an amount at least equal to: the sum of: 95% (90% for taxable years beginning after December 31, 2000) of our "REIT taxable income," computed without regard to the dividends paid deduction and our net capital gain, and 95% (90% for taxable years beginning after December 31, 2000) of the after tax net income, if any, from foreclosure property, minus: the excess of the sum of particular items of noncash income over 5% of "REIT taxable income" as described above. These distributions must be paid in the taxable year to which they relate, or in the following taxable year if they are declared before we timely file our tax return for such year and if paid on or before the first regular dividend payment after such declaration. These distributions are taxable to holders of common stock and convertible preferred stock, other than tax-exempt entities, as discussed below, in the year in which paid. This is so even though these distributions relate to the prior year for purposes of our 95% (90% for taxable years beginning after December 31, 2000) distribution requirement. The amount distributed must not be preferential (e.g., every shareholder of the class of stock to which a distribution is made must be treated the same as every other shareholder of that class, and no class of stock may be treated otherwise than in accordance with its dividend rights as a class). To the extent that we do not distribute all of our net capital gain or distribute at least 95% (90% for taxable years beginning after December 31, 2000), but less than 100%, of our "REIT taxable income," as adjusted, we will be subject to tax thereon at regular ordinary and capital gain corporate tax rates. We have made and intend to make timely distributions sufficient to satisfy these annual distribution requirements. We expect that our REIT taxable income will be less than our cash flow due to the allowance of depreciation and other non-cash charges in computing REIT taxable income. Accordingly, we anticipate that we will generally have sufficient cash or liquid assets to enable us to satisfy the distribution requirements described above. In this regard, the Partnership Agreement of the Operating Partnership authorizes Home Properties, as general partner, to take such steps as may be necessary to cause the Operating Partnership to distribute to its partners an amount sufficient to permit Home Properties to meet these distribution requirements. However, from time to time, we may not have sufficient cash or other liquid assets to meet these distribution requirements due to timing differences between the actual receipt of income and actual payment of deductible expenses, and the inclusion of income and deduction of expenses in arriving at our taxable income. If these timing differences occur, in order to meet the distribution requirements, we may need to arrange for short-term, or possibly long-term, borrowings or need to pay dividends in the form of taxable stock dividends. Under specific circumstances identified in the Internal Revenue Code, we may be able to rectify a failure to meet the distribution requirement for a year by paying "deficiency dividends" to stockholders in a later year, which may be included in our deduction for dividends paid for the earlier year. Thus, we may be able to avoid being taxed on amounts distributed as deficiency dividends. However, we will be required to pay interest based upon the amount of any deduction taken for deficiency dividends. Furthermore, we would be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed if we should fail to distribute during each calendar year, or in the case of distributions with declaration and record dates falling in the last three months of the calendar year, by the end of January immediately following such year, at least the sum of: 85% of our REIT ordinary income for such year, 95% of our REIT capital gain income for the year, and any undistributed taxable income from prior periods. Any REIT taxable income and net capital gain on which this excise tax is imposed for any year is treated as an amount distributed during that year for purposes of calculating such tax. FAILURE TO QUALIFY If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. Distributions to stockholders in any year in which we fail to qualify will not be deductible by us and we will not be required to distribute any amounts to our stockholders. As a result, our failure to qualify as a REIT would reduce the cash available for distribution by us to our stockholders. In addition, if we fail to qualify as a REIT, all distributions to stockholders will be taxable as ordinary income to the extent of our current and accumulated earnings and profits, and subject to limitations identified in the Internal Revenue Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, we will also be ineligible to be taxed as a REIT for the four tax years following the year during which we lost our qualification. It is not possible to state whether in all circumstances we would be entitled to this statutory relief. TAXATION OF TAXABLE U.S. STOCKHOLDERS As used below, the term "U.S. stockholder" means a holder of shares of common stock who, for United States federal income tax purposes: is a citizen or resident of the United States; is a corporation, partnership, or other entity created or organized in or under the laws of the United States or of any state thereof or in the District of Columbia, unless, in the case of a partnership, Treasury Regulations provide otherwise; is an estate the income of which is subject to United States federal income taxation regardless of its source; or is a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust. Notwithstanding the preceding sentence, to the extent provided in Treasury Regulations, some trusts in existence on August 20, 1996, and treated as United States persons prior to this date that elect to continue to be treated as United States persons, are also considered U.S. stockholders. Distributions Generally. As long as we qualify as a REIT, distributions out of our current or accumulated earnings and profits, other than capital gain dividends discussed below, will constitute dividends taxable to our taxable U.S. stockholders as ordinary income. These distributions will not be eligible for the dividends-received deduction in the case of U.S. stockholders that are corporations. To the extent that we make distributions, other than capital gain dividends discussed below, in excess of our current and accumulated earnings and profits, these distributions will be treated first as a tax-free return of capital to each U.S. stockholder. This treatment will reduce the adjusted basis which each U.S. stockholder has in his shares of stock for tax purposes by the amount of the distribution. This reduction will not, however, reduce a holder's adjusted basis below zero. Distributions in excess of a U.S. stockholder's adjusted basis in his shares will be taxable as capital gain, provided that the shares have been held as a capital asset. In addition, these distributions will be taxable as long-term capital gain if the shares have been held for more than one year. Dividends that we declare in October, November, or December of any year and that are payable to a stockholder of record on a specified date in any of these months shall be treated as both paid by us and received by the stockholder on December 31 of that year, provided we actually pay the dividend on or before January 31 of the following calendar year. Stockholders may not include in their own income tax returns any of our net operating losses or capital losses. Capital Gain Distributions. Distributions that we properly designate as capital gain dividends will be taxable to taxable U.S. stockholders as gains, to the extent that they do not exceed our actual net capital gain for the taxable year, from the sale or disposition of a capital asset. Depending on the period of time we have held the assets which produced these gains, and on designations which we may make, these gains may be taxable to non-corporate U.S. stockholders at a 20% or 25% rate. U.S. stockholders that are corporations may, however, be required to treat up to 20% of some capital gain dividends as ordinary income. Passive Activity Losses and Investment Interest Limitations. Distributions we make and gain arising from the sale or exchange by a U.S. stockholder of our shares will not be treated as passive activity income. As a result, U.S. stockholders generally will not be able to apply any "passive losses" against this income or gain. Distributions we make, to the extent they do not constitute a return of capital, generally will be treated as investment income for purposes of computing the investment income limitation. Gain arising from the sale or other disposition of our shares, however, will not be treated as investment income under some circumstances. Retention of Net Long-Term Capital Gains. We may elect to retain, rather than distribute as a capital gain dividend, our net long-term capital gains. If we make this election, we would pay tax on our retained net long-term capital gains. In addition, to the extent we designate, a U.S. stockholder generally would: include its proportionate share of our undistributed long-term capital gains in computing its long-term capital gains in its return for its taxable year in which the last day of our taxable year falls subject to limitations as to the amount that is includable; be deemed to have paid the capital gains tax imposed on us on the designated amounts included in the U.S. stockholder's long-term capital gains; receive a credit or refund for the amount of tax deemed paid by it; increase the adjusted basis of its common stock by the difference between the amount of includable gains and the tax deemed to have been paid by it; and in the case of a U.S. stockholder that is a corporation, appropriately adjust its earnings and profits for the retained capital gains in accordance with Treasury Regulations to be prescribed by the IRS. DISPOSITIONS OF COMMON STOCK If you are a U.S. stockholder and you sell or dispose of your shares of common stock, you will recognize gain or loss for federal income tax purposes in an amount equal to the difference between the amount of cash and the fair market value of any property you receive on the sale or other disposition and your adjusted basis in the shares for tax purposes. This gain or loss will be capital if you have held the common stock as a capital asset and will be long- term capital gain or loss if you have held the common stock for more than one year. In general, if you are a U.S. stockholder and you recognize loss upon the sale or other disposition of common stock that you have held for six months or less, after applying holding period rules set forth in the Internal Revenue Code, the loss you recognize will be treated as a long-term capital loss, to the extent you received distributions from us which were required to be treated as long- term capital gains. BACKUP WITHHOLDING We report to our U.S. stockholders and the IRS the amount of dividends paid during each calendar year, and the amount of any tax withheld. Under the backup withholding rules, a stockholder may be subject to backup withholding at the rate of 31% with respect to dividends paid unless the holder is a corporation or comes within other exempt categories and, when required, demonstrates this fact, or provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A U.S. stockholder that does not provide us with his correct taxpayer identification number may also be subject to penalties imposed by the IRS. Any amount paid as backup withholding will be creditable against the stockholder's income tax liability. In addition, we may be required to withhold a portion of capital gain distributions to any stockholders who fail to certify their non-foreign status. See "Taxation of Non-U.S. Stockholders." TAXATION OF TAX-EXEMPT STOCKHOLDERS The IRS has ruled that amounts distributed as dividends by a qualified REIT do not constitute unrelated business taxable income when received by a tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder, except tax-exempt shareholders described below, has not held its shares as "debt financed property" within the meaning of the Internal Revenue Code and the shares are not otherwise used in a trade or business, dividend income from us will not be unrelated business taxable income to a tax-exempt shareholder. Similarly, income from the sale of shares will not constitute unrelated business taxable income unless a tax-exempt shareholder has held its shares as "debt financed property" within the meaning of the Internal Revenue Code or has used the shares in its trade or business. For tax-exempt shareholders which are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from federal income taxation under Internal Revenue Code Section 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an investment in our shares will constitute unrelated business taxable income unless the organization is able to properly deduct amounts set aside or placed in reserve for certain purposes so as to offset the income generated by its investment in our shares. These prospective investors should consult their own tax advisors concerning these "set aside" and reserve requirements. Notwithstanding the above, however, the Omnibus Budget Reconciliation Act of 1993 provides that, effective for taxable years beginning in 1994, a portion of the dividends paid by a "pension held REIT" shall be treated as unrelated business taxable income as to any trust which: is described in Section 401(a) of the Internal Revenue Code; is tax-exempt under Section 501(a) of the Internal Revenue Code; and holds more than 10%, by value, of the interests in a REIT. Tax-exempt pension funds that are described in Section 401(a) of the Internal Revenue Code are referred to below as "qualified trusts." A REIT is a "pension held REIT" if: it would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Internal Revenue Code provides that stock owned by qualified trusts shall be treated, for purposes of the "not closely held" requirement, as owned by the beneficiaries of the trust, rather than by the trust itself; and either at least one such qualified trust holds more than 25%, by value, of the interests in a REIT, or one or more such qualified trusts, each of which owns more than 10%, by value, of the interests in a REIT, holds in the aggregate more than 50%, by value, of the interests in the REIT. The percentage of any REIT dividend treated as unrelated business taxable income is equal to the ratio of: the unrelated business taxable income earned by Home Properties, treating Home Properties as if it were a qualified trust and therefore subject to tax on unrelated business taxable income, to the total gross income of Home Properties. A de minimis exception applies where the percentage is less than 5% for any year. The provisions requiring qualified trusts to treat a portion of REIT distributions as unrelated business taxable income will not apply if Home Properties is able to satisfy the "not closely held" requirement without relying upon the "look-through" exception with respect to qualified trusts. As a result of the limitations on the transfer and ownership of stock contained in our articles of incorporation, we are not and do not expect to be classified as a "pension held REIT." TAXATION OF NON-U.S. STOCKHOLDERS When we use the term "non-U.S. stockholders," we mean holders of shares of common stock that are nonresident alien individuals, foreign corporations, foreign partnerships or foreign estates or trusts. The rules governing United States federal income taxation of the ownership and disposition of stock by persons that are non-U.S. stockholders are complex. No attempt is made in this prospectus to provide more than a brief summary of these rules. Accordingly, this discussion does not address all aspects of United States federal income tax and does not address state, local or foreign tax consequences that may be relevant to a non-U.S. stockholder in light of its particular circumstances. In addition, this discussion is based on current law, which is subject to change, and assumes that we qualify for taxation as a REIT. Prospective non- U.S. stockholders should consult with their own tax advisers to determine the impact of federal, state, local and foreign income tax laws with regard to an investment in stock, including any reporting requirements. Distributions. If we make a distribution that is not attributable to gain from the sale or exchange of United States real property interests and is not designated as capital gains dividends, then the distribution will be treated as dividends of ordinary income to the extent it is made out of current or accumulated earnings and profits. These distributions ordinarily will be subject to withholding of United States federal income tax on a gross basis at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. However, if the dividends are treated as effectively connected with the conduct by the non-U.S. stockholder of a United States trade or business, or if an income tax treaty applies, as attributable to a United States permanent establishment of the non-U.S. stockholder, the dividends will be subject to tax on a net basis at graduated rates, in the same manner as domestic stockholders are taxed with respect to such dividends and are generally not subject to withholding. Any such dividends received by a non-U.S. stockholder that is a corporation may also be subject to an additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. Under current Treasury Regulations, dividends paid to an address in a country outside the United States are generally presumed to be paid to a resident of the country for purposes of determining the applicability of the withholding rules discussed above and the applicability of a tax treaty rate. Under some treaties, lower withholding rates generally applicable to dividends do not apply to dividends from a REIT. Certification and disclosure requirements must be satisfied to be exempt from withholding under the effectively connected income and permanent establishment exemptions discussed above. Distributions we make in excess of our current or accumulated earnings and profits will not be taxable to a non-U.S. stockholder to the extent that they do not exceed the adjusted basis of the stockholder's stock, but rather will reduce the adjusted basis of such stock. To the extent that these distributions exceed the adjusted basis of a non-U.S. stockholder's stock, they will give rise to gain from the sale or exchange of his stock. The tax treatment of this gain is described below. If it cannot be determined at the time a distribution is made whether or not a distribution will be in excess of current or accumulated earnings and profits, the distribution will generally be treated as a dividend for withholding purposes. However, the IRS will generally refund amounts that are withheld if it is subsequently determined that the distribution was, in fact, in excess of our current or accumulated earnings and profits. Distributions to a non-U.S. stockholder that we designate at the time of distribution as capital gains dividends, other than those arising from the disposition of a United States real property interest, generally will not be subject to United States federal income taxation, unless: investment in the stock is effectively connected with the non-U.S. stockholder's United States trade or business, in which case the non-U.S. stockholder will be subject to the same treatment as domestic stockholders with respect to such gain, except that a stockholder that is a foreign corporation may also be subject to the 30% branch profits tax, as discussed above; or the non-U.S. stockholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and has a "tax home" in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. Distributions to a non-U.S. stockholder that are attributable to gain from our sale or exchange of United States real property interests will cause the non- U.S. stockholder to be treated as recognizing this gain as income effectively connected with a United States trade or business. Non- U.S. stockholders would thus generally be taxed at the same rates applicable to domestic stockholders, subject to a special alternative minimum tax in the case of nonresident alien individuals. Also, this gain may be subject to a 30% branch profits tax in the hands of a non-U.S. stockholder that is a corporation, as discussed above. We are required to withhold 35% of any such distribution. That amount is creditable against the non-U.S. stockholder's United States federal income tax liability. We or any nominee (e.g., a broker holding shares in street name) may rely on a certificate of non-foreign status on Form W-8 or Form W-9 to determine whether withholding is required on gains realized from the disposition of United States real property interests. A domestic person who holds shares of common stock on behalf of a non-U.S. stockholder will bear the burden of withholding, provided that we have properly designated the appropriate portion of a distribution as a capital gain dividend. Sale of Stock. If you are a non-U.S. stockholder and you recognize gain upon the sale or exchange of shares of stock, the gain generally will not be subject to United States taxation unless the stock constitutes a "United States real property interest" within the meaning of FIRPTA. If we are a "domestically controlled REIT," then the stock will not constitute a "United States real property interest." A "domestically-controlled REIT" is a REIT in which at all times during a specified testing period less than 50% in value of its stock is held directly or indirectly by non-U.S. stockholders. Because our shares of stock are publicly traded, there is no assurance that we are or will continue to be a "domestically-controlled REIT." Notwithstanding the foregoing, if you are a non-U.S. stockholder and you recognize gain upon the sale or exchange of shares of stock and the gain is not subject to FIRPTA, the gain will be subject to United States taxation if: your investment in the stock is effectively connected with a United States trade or business, or, if an income treaty applies, is attributable to a United States permanent establishment; or you are a nonresident alien individual who is present in the United States for 183 days or more during the taxable year and you have a "tax home" in the United States. In this case, a nonresident alien individual will be subject to a 30% United States withholding tax on the amount of such individual's gain. If we are not or cease to be a "domestically-controlled REIT" whether gain arising from the sale or exchange by a non-U.S. stockholder of shares of stock would be subject to United States taxation under FIRPTA as a sale of a "United States real property interest" will depend on whether the shares are "regularly traded," as defined by applicable Treasury Regulations, on an established securities market and on the size of the selling non-U.S. stockholder's interest in our shares. If gain on the sale or exchange of shares of stock were subject to taxation under FIRPTA, the non-U.S. stockholder would be subject to regular United States income tax on this gain in the same manner as a U.S. stockholder and the purchaser of the stock would be required to withhold and remit to the IRS 10% of the purchase price. In addition in this case, non- U.S. stockholder would be subject to any applicable alternative minimum tax, nonresident alien individuals may be subject to a special alternative minimum tax and foreign corporations may be subject to the 30% branch profits tax. Backup Withholding Tax and Information Reporting. Backup withholding tax generally is a withholding tax imposed at the rate of 31% on reportable payments, as defined in Section 3406 of the Internal Revenue Code, to persons that fail to furnish the required information under the United States information reporting requirements. Backup withholding tax and information reporting will generally not apply to distributions paid to non-U.S. stockholders outside the United States that are treated as: dividends subject to the 30%, or lower treaty rate, withholding tax discussed above; capital gains dividends; or distributions attributable to gain from our sale or exchange of United States real property interests. As a general matter, backup withholding and information reporting will not apply to a payment of the proceeds of a sale of stock by or through a foreign office of a foreign broker. Information reporting, but not backup withholding, will apply, however, to a payment of the proceeds of a sale of stock by a foreign office of a broker that: is a United States person; derives 50% or more of its gross income for specific periods from the conduct of a trade or business in the United States; or is a "controlled foreign corporation" for United States tax purposes. Information Reporting will not apply if the broker has documentary evidence in its records that the holder is a non-U.S. stockholder and other conditions are met, or the stockholder otherwise establishes an exemption. Payment to or through a United States office of a broker of the proceeds of sale of stocks is subject to both backup withholding and information reporting unless the stockholder certifies under penalties of perjury that the stockholder is a non-U.S. stockholder, or otherwise establishes an exemption. A non-U.S. stockholder may obtain a refund of any amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS. New Withholding Regulations. Final regulations dealing with withholding tax on income paid to foreign persons and related matters were recently promulgated. In general, these new withholding regulations do not significantly alter the substantive withholding and information reporting requirements, but unify current certification procedures and forms and clarify reliance standards. For example, these new withholding regulations adopt a certification rule under which a foreign stockholder who wishes to claim the benefit of an applicable treaty rate with respect to dividends received from a United Stated corporation will be required to satisfy certification and other requirements. In addition, these new withholding regulations require a corporation that is a REIT to treat as a dividend the portion of a distribution that is not designated as a capital gain dividend or return of basis and apply the 30% withholding tax, subject to any applicable deduction or exemption, to such portion, and to apply the FIRPTA withholding rules, discussed above, with respect to the portion of the distribution designated by Home Properties as capital gain dividend. These new withholding regulations will generally be effective for payments made after December 31, 2000, subject to transition rules. The discussion set forth above in "Taxation of Non-U.S. Stockholders" does not take these new withholding regulations into account. Prospective non-U.S. stockholders are strongly urged to consult their own tax advisors with respect to these new withholding regulations. TAX ASPECTS OF THE OPERATING PARTNERSHIP General. Substantially all of our investments will be held indirectly through the Operating Partnership. In general, partnerships are "pass- through" entities which are not subject to federal income tax. Rather, partners are allocated their proportionate shares of the items of income, gain, loss, deduction and credit of a partnership, and are potentially subject to tax thereon, without regard to whether the partners receive a distribution from the partnership. We will include in our income our proportionate share of the foregoing partnership items for purposes of the various REIT income tests and in the computation of our REIT taxable income. Moreover, for purposes of the REIT asset tests, we will include our proportionate share of assets held by the Operating Partnership. See "Taxation of Home Properties." Entity Classification. Our interests in the Operating Partnership involve special tax considerations, including the possibility of a challenge by the IRS of the status of the Operating Partnership as a partnership, as opposed to an association taxable as a corporation, for federal income tax purposes. If the Operating Partnership were treated as an association, it would be taxable as a corporation and therefore be subject to an entity-level tax on its income. In such a situation, the character of our assets and items of gross income would change and preclude us from satisfying the asset tests and possibly the income tests (see "Taxation of Home Properties - Asset Tests" and "-Income Tests"). This, in turn, would prevent us from qualifying as a REIT. See "Taxation of Home Properties - Failure to Qualify" above for a discussion of the effect of our failure to meet these tests for a taxable year. In addition, a change in the Operating Partnership's status for tax purposes might be treated as a taxable event. If so, we might incur a tax liability without any related cash distributions. Treasury Regulations that apply for tax period beginning on or after January 1, 1997 provide that an "eligible entity" may elect to be taxed as a partnership for federal income tax purposes. An eligible entity is a domestic business entity not otherwise classified as a corporation and which has at least two members. Unless it elects otherwise, an eligible entity in existence prior to January 1, 1997, will have the same classification for federal income tax purposes that it claimed under the entity classification Treasury Regulations in effect prior to this date. In addition, an eligible entity which did not exist, or did not claim a classification, prior to January 1, 1997, will be classified as a partnership for federal income tax purposes unless it elects otherwise. The Operating Partnership intends to claim classification as a partnership under these regulations. Even if the Operating Partnership is taxable as a partnership under these Treasury Regulations, it could be treated as a corporation for federal income tax purposes under the "publicly traded partnership" rules of Section 7704 of the Internal Revenue Code. A publicly traded partnership is a partnership whose interests trade on an established securities market or are readily tradable on a secondary market, or the substantial equivalent thereof. While units of the Operating Partnership are not and will not be traded on an established trading market, there is some risk that the IRS might treat the units held by the limited partners of the Operating Partnership as readily tradable because, after any applicable holding period, they may be exchanged for our common stock, which is traded on an established market. A publicly traded partnership will be treated as a corporation for federal income tax purposes unless at least 90% of such partnership's gross income for a taxable year consists of "qualifying income" under the publicly traded partnership provisions of Section 7704 of the Internal Revenue Code. "Qualifying income" under Section 7704 of the Internal Revenue Code includes interest, dividends, real property rents, gains from the disposition of real property, and certain income or gains from the exploitation of natural resources. Therefore, qualifying income under Section 7704 of the Internal Revenue Code generally includes any income that is qualifying income for purposes of the 95% gross income test applicable to REITs. We anticipate that the Operating Partnership will satisfy the 90% qualifying income test under Section 7704 of the Internal Revenue Code and, thus, will not be taxed as a corporation. There is one significant difference, however, regarding rent received from related party tenants. For a REIT, rent from a tenant does not qualify as rents from real property if the REIT and/or one or more actual or constructive owners of 10% or more of the REIT actually or constructively own 10% or more of the tenant. See "Taxation of Home Properties - Income Tests." Under Section 7704 of the Internal Revenue Code, rent from a tenant is not qualifying income if a partnership and/or one or more actual or constructive owners of 5% or more of the partnership actually or constructively own 10% or more of the tenant. As described above, as a result of the passage of the REIT Modernization Act, for taxable years beginning after December 31, 2000, the Operating Partnership should be able to lease its real properties to a taxable REIT subsidiary and the rents received from that subsidiary would not be disqualified from being "rents from real property" under the REIT rules by reason of the Operating Partnership's ownership interest in the subsidiary. See "Federal Income Taxation of Home Properties-Income Tests." Home Properties and the Operating Partnership have not made a decision whether or not to lease any properties to taxable REIT subsidiaries in the future. If should be noted, though, that as a further result of the passage of the REIT Modernization Act, rent received from a taxable REIT subsidiary also would not be disqualified from being "qualifying income" under Section 7704 of the Internal Revenue Code because of the Operating Partnership's ownership of the taxable REIT subsidiary. Accordingly, Home Properties could lease its real property to one or more taxable REIT subsidiaries without, by virtue of that act, causing the Operating Partnership to be treated as a corporation for federal income tax purposes. Accordingly, we will need to monitor compliance with both the REIT rules and the publicly traded partnership rules. The Operating Partnership has not requested, nor does it intend to request, a ruling from the IRS that it will be treated as a partnership for federal income tax purposes. In the opinion of Nixon Peabody LLP, which is based on the provisions of the partnership agreement of the Operating Partnership and on certain factual assumptions and representations of Home Properties, the Operating Partnership has a reasonable basis for its claim to be classified as a partnership for federal income tax purposes and therefore should be taxed as a partnership rather than an association taxable as a corporation for periods prior to January 1, 1997. Nixon Peabody LLP's opinion is not binding on the IRS or the courts. Partnership Allocations. A partnership agreement will generally determine the allocation of income and losses among partners. However, these allocations will be disregarded for tax purposes if they do not comply with the provisions of Section 704(b) of the Internal Revenue Code and the Treasury Regulations promulgated under this section of the Internal Revenue Code. Generally, Section 704(b) and the Treasury Regulations promulgated under this section of the Internal Revenue Code require that partnership allocations respect the economic arrangement of the partners. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners' interests in the partnership. This reallocation will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. The Operating Partnership's allocations of taxable income and loss are intended to comply with the requirements of Section 704(b) of the Internal Revenue Code and the Treasury Regulations promulgated under this section of the Internal Revenue Code. Tax Allocations with Respect to the Properties. Under Section 704(c) of the Internal Revenue Code, income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership, must be allocated in a manner so that the contributing partner is charged with the "book-tax difference" associated with the property at the time of the contribution. The book-tax difference with respect to property that is contributed to a partnership is generally equal to the difference between the fair market value of contributed property at the time of contribution and the adjusted tax basis of the property at the time of contribution. These allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the partners. The Operating Partnership was formed by way of contributions of appreciated property, including some of the properties. Moreover, subsequent to the formation of the Operating Partnership, additional persons have contributed appreciated property to the Operating Partnership in exchange for interests in the Operating Partnership. The partnership agreement requires that these allocations be made in a manner consistent with Section 704(c) of the Internal Revenue Code. In general, limited partners of the Operating Partnership who acquired their limited partnership interests through a contribution of appreciated property will be allocated depreciation deductions for tax purposes which are lower than these deductions would be if determined on a pro rata basis. In addition, in the event of the disposition of any of the contributed assets which have a book-tax difference all income attributable to the book-tax difference will generally be allocated to the limited partners who contributed the property, and we will generally be allocated only our share of capital gains attributable to appreciation, if any, occurring after the time of contribution to the Operating Partnership. This will tend to eliminate the book-tax difference over the life of the Operating Partnership. However, the special allocation rules of Section 704(c) do not always entirely eliminate the book-tax difference on an annual basis or with respect to a specific taxable transaction such as a sale. Thus, the carryover basis of the contributed assets in the hands the Operating Partnership may cause us to be allocated lower depreciation and other deductions. Possibly we could be allocated an amount of taxable income in the event of a sale of these contributed assets in excess of the economic or book income allocated to us as a result of the sale. This may cause us to recognize taxable income in excess of cash proceeds, which might adversely affect our ability to comply with the REIT distribution requirements. See "Taxation of Home Properties - Annual Distribution Requirements." Treasury Regulations issued under Section 704(c) of the Internal Revenue Code provide partnerships with a choice of several methods of accounting for book- tax differences, including retention of the "traditional method" or the election of other methods which would permit any distortions caused by a book-tax difference to be entirely rectified on an annual basis or with respect to a specific taxable transaction such as a sale. We and the Operating Partnership have determined to use the "traditional method" for accounting for book-tax differences for the properties initially contributed to the Operating Partnership and for some assets acquired subsequently. We and the Operating Partnerships have not yet decided what method will be used to account for book-tax differences for properties acquired by the Operating Partnership in the future. Any property acquired by the Operating Partnership in a taxable transaction will initially have a tax basis equal to its fair market value, and Section 704(c) of the Internal Revenue Code will not apply. Basis in the Operating Partnership Interest. The adjusted tax basis in our interest in the Operating Partnership generally will be equal to: the amount of cash and the basis of any other property we contribute to the Operating Partnership, increased by our allocable share of the Operating Partnership's income and our allocable share of indebtedness of the Operating Partnership, and reduced, but not below zero, by our allocable share of losses suffered by the Operating Partnership, the amount of cash distributed to us and constructive distributions resulting from a reduction in our share of indebtedness of the Operating Partnership. If the allocation of our distributive share of the Operating Partnership's loss exceeds the adjusted tax basis of our partnership interest in the Operating Partnership, the recognition of this excess loss will be deferred until such time and to the extent that we have adjusted tax basis in our interest in the Operating Partnership. We will recognize taxable income to the extent that the Operating Partnership's distributions, or any decrease in our share of the indebtedness of the Operating Partnership, exceeds our adjusted tax basis in the Operating Partnership. A decrease in our share of the indebtedness of the Operating Partnership is considered a cash distribution. Sale of Partnership Property. Generally, any gain realized by a partnership on the sale of property held by the partnership for more than one year will be long-term capital gain, except for any portion of such gain that is treated as depreciation or cost recovery recapture. However, under the REIT Requirements, Home Properties' share as a partner of any gain realized by the Operating Partnership on the sale of any property held as inventory or other property held primarily for sale to customers in the ordinary course of a trade or business will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. See "Taxation of Home Properties." Such prohibited transaction income will also have an adverse effect upon Home Properties' ability to satisfy the income tests for REIT status. Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business is a question of fact that depends on all the facts and circumstances with respect to the particular transaction. A safe harbor to avoid classification as a prohibited transaction exists as to real estate assets held for the production of rental income by a REIT for at least four years where in any taxable year the REIT has made no more than seven sales of property or, in the alternative, the aggregate of the adjusted bases of all properties sold does not exceed 10% of the adjusted bases of all of the REIT's properties during the year and the expenditures includable in a property's basis made during the four-year period prior to disposition must not exceed 30% of the property's net sales price. The Operating Partnership intends to hold its properties for investment with a view to long- term appreciation, to engage in the business of acquiring, developing, owning, and operating and leasing the properties and to make such occasional sales of the properties, including adjoining land, as are consistent with Home Properties' and the Operating Partnership's investment objectives. No assurance can be given, however, that every property sale by the Operating Partnership will constitute a sale of property held for investment. OTHER TAX CONSEQUENCES State and Local Tax Considerations. We may be subject to state or local taxation in various state or local jurisdictions, including those in which we transact business and our stockholders may be subject to state or local taxation in various state or local jurisdiction, including those in which they reside. Our state and local tax treatment may not conform to the federal income tax consequences discussed above. In addition, your state and local tax treatment may not conform to the federal income tax consequences discussed above. Consequently, you should consult your own tax advisors regarding the effect of state and local tax laws on an investment in our shares. The Management Companies. A portion of the cash to be used by the Operating Partnership to fund distributions to partners is expected to come from the Management Companies, through interest payments and dividends on non-voting preferred stock to be held by the Operating Partnership. The Management Companies will pay federal and state tax on their net income at full corporate rates, which will reduce the cash available for distribution to stockholders. Home Properties expects that the Management Companies' income, after deducting its expenses, will not give rise to significant corporate tax liabilities. The amount of corporate tax liability will increase if the IRS disallows the items of expense which Home Properties expects to be allocated to the Management Companies. As described above in "Taxation of Home Properties - Income Tests" and " - Asset Tests," some of the non-controlled subsidiaries may elect to be treated as a taxable REIT subsidiary for years commencing after December 31, 2000. The non-controlled subsidiaries that make this election will be restrained in their ability to reduce their tax liability for two reasons. First, taxable REIT subsidiaries will be limited in their ability to deduct interest payments made to an affiliated REIT. Accordingly, if a non- controlled subsidiary elects to be treated as a taxable REIT subsidiary, it will be limited significantly in its ability to deduct interest payments on notes issued to the Operating Partnership. Second, if a taxable REIT subsidiary pays an amount to a REIT that exceeds the amount that would be paid in an arm's length transaction, the REIT generally will be subject to an excise tax equal to 100% of the excess. This rule generally will apply to amounts paid to the Operating Partnership by a non-controlled subsidiary that elects to be treated as a taxable REIT subsidiary. Possible Federal Tax Developments. The rules dealing with federal income taxation are constantly under review by the IRS, the Treasury Department and Congress. New federal tax legislation or other provisions may be enacted into law or new interpretations, rulings or Treasury Regulations could be adopted, all of which could affect the taxation of Home Properties or of its stockholders. No prediction can be made as to the likelihood of passage of any new tax legislation or other provisions either directly or indirectly affecting Home Properties or its stockholders. Consequently, the tax treatment described herein may be modified prospectively or retroactively by legislative, judicial or administrative action. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
For The Three Original Months Properties* Ended Aug. 4- Jan. 1- Sep. 30, Year Ended December 31, Dec. 31, Aug. 3, 1999 1998 1997 1996 1995 1994 1994 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 1.77 2.31 2.06 1.52 1.68 2.78 1.24
*Original Properties is not a legal entity but rather a combination of twelve entities which were wholly owned by the predecessor corporation and its affiliates prior to the Company's initial public offering on August 4, 1994. For purposes of computing the ratio of earnings to combined fixed charges, "earnings" consists of income from operations before Federal income taxes and fixed charges. "Fixed charges" consists of interest expense, capitalized interest, amortization of debt expense, such portion of rental expense as can be demonstrated to be representative of the interest factor in the particular case and preferred stock dividend requirements. Please refer to Exhibit 12.1 for detailed computation. PLAN OF DISTRIBUTION This Prospectus relates to the offer by the Selling Shareholder of 1,679,543 shares of Common Stock issuable upon conversion of the Series B Preferred Stock. The Selling Shareholder is offering the shares for its own account, and not for the account of Home Properties. Home Properties will not receive any proceeds from the sale of the shares by the Selling Shareholder. The Common Stock offered hereby may be sold by the Selling Shareholder or by pledgees, donees, transferees or other successors-in-interest (including sales after exercise of conversion privileges). Such sales may be made in the over-the-counter market, in privately negotiated transactions, or otherwise, at prices and at terms then prevailing, at prices related to the then-current market prices or at negotiated prices, or, with respect to the common stock, in transactions on the New York Stock Exchange. The shares may be sold by one or more of the following methods: a block trade in which the broker or dealer so engaged will attempt to sell the stock as agent but may position and resell a portion of the block as principal in order to consummate the transaction; a purchase by a broker or dealer as principal, and the resale by such broker or dealer for its account pursuant to this prospectus, including resale to another broker or dealer; or ordinary brokerage transactions and transactions in which the broker solicits purchasers. In effecting sales, brokers or dealers engaged by the Selling Shareholder may arrange for other brokers or dealers to participate. Any such brokers or dealers will receive commissions or discounts from a selling shareholder in amounts to be negotiated immediately prior to the sale. Such brokers or dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act of 1933. Any gain realized by such a broker or dealer on the sale of shares that it purchases as a principal may be deemed to be compensation to the broker or dealer in addition to any commission paid to the broker by the Selling Shareholder. The Selling Shareholder may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of shares against certain liabilities, including liabilities arising under the Securities Act of 1933. The Selling Shareholder has not advised Home Properties that it has entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of its shares, or that there is an underwriter or coordinating broker acting in connection with the proposed sale of shares by the Selling Shareholder. The securities covered by this prospectus may also be sold under Rule 144 instead of under this prospectus. Rule 144 provides an exemption from registration for the resale of securities by persons other than the issuer after the securities have been held by persons for at least one year from original issuance, and such securities are sold in strict compliance with Rule 144 "manner of sale" requirements and maximum number of shares requirements. Home Properties will pay all reasonable expenses of registration of the Common Stock (other than fees and expenses of investment bankers, brokerage commissions and the Selling Shareholder's counsel fees and expenses, if any). In addition, we have agreed to indemnify the Selling Shareholder against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Selling Shareholder will be subject to the prospectus delivery requirements of the Securities Act of 1933, which may include, with respect to the Common Stock, delivery through the facilities of the New York Stock Exchange pursuant to Rule 153. The anti-manipulation rules of Regulation M under the Securities Exchange Act of 1934 may apply to sales of the shares in the market and to the activities of the Selling Shareholder. There is no assurance that the Selling Shareholder will sell any or all of the shares offered hereby. EXPERTS The consolidated balance sheets as of December 31, 1998 and 1997, and the consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998, incorporated in this Prospectus by reference to the Annual Report on Form 10-K, have been incorporated herein in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. In addition, the Statement of Revenues and Certain Expenses for the year ended December 31, 1998, incorporated by reference in this Prospectus, for the audits of (1) CRC Portfolio included in Form 8-K/A Amendment No. 1 dated July 1, 1999 and filed on July 29, 1999; (2) the Mid Atlantic Portfolio included in Form 8-K dated July 15, 1999 and filed July 30, 1999; and (3) the Ridley Portfolio and the Colony Apartments included in Form 8-K/A Amendment No. 1 dated February 18, 1999 and filed on November 12, 1999, have been incorporated herein in reliance on the reports, of PricewaterhouseCoopers LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. LEGAL MATTERS The legality of the shares of Common Stock offered hereby, which is to be issued upon conversion of the Series B Preferred Stock, will be passed upon by Nixon Peabody LLP. In addition, Nixon Peabody LLP will provide an opinion with respect to certain tax matters described under "Federal Income Tax Considerations." PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 14. Other Expenses of Issuance and Distribution The following table is an itemized listing of expenses to be incurred by Home Properties in connection with the issuance and distribution of the shares of Common Stock being registered hereby, other than discounts and commissions: SEC Registration Fee ........................... $11,916.36 NYSE Listing Fee ........................... 2,000.00* Legal Fees and Expenses .................... 3,500.00* Accounting Fees and Expenses ............... 1,500.00* Miscellaneous .............................. 2,000.00* ---------- Total ................................ $20,916.36* *Estimate Item 15. Indemnification of Directors and Officers Home Properties' officers and directors are and will be indemnified under Maryland law, the Articles of Incorporation of Home Properties and the Partnership Agreement ("Operating Partnership Agreement") of Home Properties of New York, L.P., a New York limited partnership of which Home Properties is the general partner, against certain liabilities. The Articles of Incorporation require Home Properties to indemnify its directors and officers to the fullest extent permitted from time to time by the laws of Maryland. The Bylaws contain provisions which implement the indemnification provisions of the Articles of Incorporation. The Maryland General Corporation Law ("MGCL") permits a corporation to indemnify its directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that the act or omission of the director or officer was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty, or the director or officer actually received an improper personal benefit in money, property or services, or in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. No amendment of the Articles of Incorporation of Home Properties shall limit or eliminate the right to indemnification provided with respect to acts or omissions occurring prior to such amendment or repeal. Maryland law permits Home Properties to provide indemnification to an officer to the same extent as a director, although additional indemnification may be provided if such officer is not also a director. The MGCL permits the articles of incorporation of a Maryland corporation to include a provision limiting the liability of its directors and officers to the II-1 corporation and its stockholders for money damages, subject to specified restrictions. The MGCL does not, however, permit the liability of directors and officers to the corporation or its stockholders to be limited to the extent that (1) it is proved that the person actually received an improper benefit or profit in money, property or services (to the extent such benefit or profit was received) or (2) a judgment or other final adjudication adverse to such person is entered in a proceeding based on a finding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding. The Articles of Incorporation of Home Properties contain a provision consistent with the MGCL. No amendment of the Articles of Incorporation shall limit or eliminate the limitation of liability with respect to acts or omissions occurring prior to such amendment or repeal. The Operating Partnership Agreement also provides for indemnification of Home Properties and its officers and directors to the same extent indemnification is provided to officers and directors of Home Properties in its Articles of Incorporation, and limits the liability of Home Properties and its officers and directors to the Operating Partnership and its partners to the same extent liability of officers and directors of Home Properties to Home Properties and its stockholders is limited under Home Properties' Articles of Incorporation. Home Properties has entered into indemnification agreements with each of Home Properties' directors and certain of its officers. The indemnification agreements require, among other things, that Home Properties indemnify its directors and those officers to the fullest extent permitted by law, and advance to the directors and officers all related expenses, subject to reimbursement if it is subsequently determined that indemnification is not permitted. Home Properties also must indemnify and advance all expenses incurred by directors and officers seeking to enforce their rights under the indemnification agreements, and cover directors and officers under Home Properties' directors' and officers' liability insurance. Although the form of indemnification agreement offers substantially the same scope of coverage afforded by provisions in the Articles of Incorporation and the Bylaws and the Operating Partnership Agreement of the Operating Partnership, it provides greater assurance to directors and officers that indemnification will be available, because, as a contract, it cannot be modified unilaterally in the future by the Board of Directors or by the stockholders to eliminate the rights it provides. Home Properties has purchased insurance under a policy that insures both Home Properties and its officers and directors against exposure and liability normally insured against under such policies, including exposure on the indemnities described above. Item 16. Exhibits 3.1 Articles Supplementary with respect to the Series A Convertible Preferred Stock* 4.1 Amendment to Partnership Interest Purchase Agreement and Exchange Agreement* 4.2 Amendment No. 27 to Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership* 5.1 Opinion of Nixon Peabody LLP as to legality of Common Stock* 8.1 Opinion of Nixon Peabody LLP as to certain tax matters* 12.1 Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend* 23.1 Consent of Nixon Peabody LLP (included as part of Exhibits 5.1 and 8.1) 23.2 Consent of PricewaterhouseCoopers LLP* 24 Power of Attorney (included on signature page) * Included with this filing. Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) To file, during any period in which offers or sales are being made, a post- effective amendment to this registration statement to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) For purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (4) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Rochester, New York, on the 28th day of December, 1999. HOME PROPERTIES OF NEW YORK, INC. By: /s/ Amy L. Tait --------------------------- Amy L. Tait Executive Vice President KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby severally constitutes and appoints Norman P. Leenhouts, Nelson B. Leenhouts, Richard J. Crossed and Amy L. Tait, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post- effective amendments) to the Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorney-in-fact and agents, and each of them, full power and authority to do and person each and every act and thing requisite or necessary that he might do in person. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date /S/ NORMAN P. LEENHOUTS Director, Chairman December 28, 1999 Norman P. Leenhouts and Co-Chief Executive Officer (Principal Executive Officer) /S/ NELSON B. LEENHOUTS Director, President December 28, 1999 Nelson B. Leenhouts and Co-Chief Executive Officer (Principal Executive Officer) /S/ RICHARD J. CROSSED Director, Executive December 28, 1999 Richard J. Crossed Vice President /S/ AMY L. TAIT Director, Executive December 28, 1999 Amy L. Tait Vice President and Chief Operating Officer /S/ DAVID P. GARDNER Vice President,Chief December 28, 1999 David P. Gardner Financial Officer and Treasurer (Principal Financial and Accounting Officer) /S/ BURTON S. AUGUST, SR Director December 28, 1999 Burton S. August, Sr /S/ WILLIAM BALDERSTON, III Director December 28, 1999 William Balderston, III /S/ LEONARD F. HELBIG, III Director December 28, 1999 Leonard F. Helbig, III /S/ ALAN L. GOSULE Director December 28, 1999 Alan L. Gosule /S/ ROGER W. KOBER Director December 28, 1999 Roger W. Kober /S/ ALBERT H. SMALL Director December 28, 1999 Albert H. Small /S/ CLIFFORD W. SMITH, JR Director December 28, 1999 Clifford W. Smith, Jr. /S/ PAUL L. SMITH Director December 28, 1999 Paul L. Smith EXHIBIT INDEX Home Properties of New York, Inc. (the "Company") Registration Statement on Form S-3 No. 333-______ NUMBER DESCRIPTION LOCATION 3.1 Articles Supplementary with respect * to the Series A Convertible Preferred Stock 4.1 Amendment to Partnership Interest * Purchase Agreement and Exchange Agreement 4.2 Amendment No. 27 to Second Amended * and Restated Agreement of Limited Partnership of the Operating Partnership 5.1 Opinion of Nixon Peabody LLP regarding * the legality of the Common Stock being registered 8.1 Opinion of Nixon Peabody LLP regarding * certain tax matters 12.1 Computation of Ratios of Earnings to * Combined Fixed Charges and Preferred Stock Dividend 23.1 Consent of Nixon Peabody LLP Included with Exhibits 5.1 and 8.1 23.2 Consent of PricewaterhouseCoopers LLP * 24 Power of Attorney Included on signature page * Filed herewith EX-3 2 EXHIBIT 3.1 ARTICLES SUPPLEMENTARY OF SERIES A SENIOR CONVERTIBLE PREFERRED STOCK OF HOME PROPERTIES OF NEW YORK, INC. Home Properties of New York, Inc., a corporation organized and existing under the laws of the State of Maryland (the "COMPANY"), hereby certifies to the State Department of Assessments and Taxation of Maryland that: FIRST: Pursuant to the authority granted to and vested in the Board of Directors of the Company (the "BOARD OF DIRECTORS") in accordance with Article VI of the Articles of Amendment and Restatement of the Articles of Incorporation of the Company, including these Articles Supplementary (the "CHARTER"), the Board of Directors adopted resolutions reclassifying 1,666,667 shares (the "SHARES") of Preferred Stock (as defined in the Charter) as a separate class of stock, Series A Senior Convertible Preferred Stock, $.01 par value per share (the "SERIES A PREFERRED STOCK"), and authorizing the issuance of the Series A Preferred Stock, with the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, and terms and conditions of redemption set forth below. Series A Senior Convertible Preferred Stock. 1. DESIGNATION AND AMOUNT There shall be a series of Preferred Stock that shall be designated as "Series A Senior Convertible Preferred Stock" (hereinafter referred to as "SERIES A PREFERRED STOCK") and the number of shares constituting such series shall be 1,666,667. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A Preferred Stock to fewer than the number of shares then issued and outstanding plus the number of shares issuable upon exercise of outstanding rights, options, warrants or upon conversion of outstanding securities issued by the Company or otherwise issuable pursuant to Section 5 below. 2. CERTAIN DEFINITIONS. As used in these Articles Supplementary, the following terms have the meaning set forth below: "Accrued Return" has the meaning set forth in Section 3(e). "Affiliate of SMRS" means any Person that controls, is controlled by or is under common control with SMRS, as evidenced by contract or agreement. "Articles Supplementary" shall mean these Articles Supplementary relating to the Series A Preferred Stock. "Board of Directors" shall mean the Board of Directors of the Company. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. "Common Stock" means the Company's common stock, par value $.01 per share. "Conversion Date" has the meaning set forth in Section 5(a) "Conversion Notice" has the meaning set forth in Section 5(a). "Conversion Price" has the meaning set forth in Section 5(b). "Conversion Right" has the meaning set forth in Section 5(a). "Conversion Shares" means the shares of Common Stock received on conversion of all or any of the shares of Series A Preferred Stock that have not previously been sold or otherwise transferred on a Public Basis. "Convertible Securities" has the meaning set forth in Section 5(b). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Junior Stock" has the meaning set forth in Section 6(c). "Market Value" means, with respect to a share of Common Stock, the average of the daily market price for the 10 consecutive trading days immediately preceding the date on which the Market Value is to be determined. The market price for each such trading day shall be: (i) if the shares of Common Stock are listed or admitted to trading on any securities exchange or the NASDAQ-National Market System, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, or (ii) if the shares of Common Stock are not listed or admitted to trading on any securities exchange or the NASDAQ-National Market System, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the Company, or if no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the Company, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 10 days prior to the date in question) for which prices have been so reported; provided, that if there are no bid and asked prices reported during the 10 days prior to the date in question, the Market Value of a share of Common Stock shall be determined by the Company acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate provided that the holders of the Series A Preferred Stock, by accepting the issuance or assignment to them of shares of the Series A Preferred Stock or the Conversion Shares, covenant and agree that, during the 10 consecutive trading days immediately preceding the date on which the Market Value is to be determined, they will not purchase or sell any shares of Common Stock, cause the purchase and sale of any shares of Common Stock or take any other actions that are intended to or that actually affect the market price of shares of Common Stock. "9.0% Preferred Return Period" has the meaning set forth in Section 3(a). "Operating Partnership" means Home Properties of New York, L.P. "Parity Stock" has the meaning set forth in Section 6(b). "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Preferred Return" has the meaning set forth in Section 3(a). "Preferred Return Payment Date" has the meaning set forth in Section 3(c). "Public Basis" means the sale of any shares of Common Stock by means of any public stock exchange or in any Public Offering. "Public Offering" means a public offering of shares of Common Stock or shares of Preferred Stock of the Company or interests in the Operating Partnership (including Units), other than a registration relating solely to the sale of securities to participants in a dividend reinvestment plan, a registration relating to a business combination or similar transaction permitted to be registered on a Form S-4 or any form serving a comparable purpose, a registration relating solely to the sale of securities to participants in a stock or employee benefit plan, or a registration permitted under Rule 462 under the Securities Act registering additional securities of the same class as were included in an earlier registration statement for the same offering and declared effective. "Qualified REIT Subsidiary" means the Operating Partnership or any other qualified real estate investment trust subsidiary, as such term in defined in the Code, of the Company. "Securities Act" means the Securities Act of 1933, as amended. "Senior Stock" has the meaning set forth in Section 6(a). "Series A Issuance Date" has the meaning set forth in Section 3(c). "Series A Liquidation Preference" has the meaning set forth in Section 8(a). "Series A Preferred Stock" has the meaning set forth in Section 1. "SMRS" means Michigan Public School Employees' Retirement System, State Employees' Retirement System, Michigan State Police Retirement System and Michigan Judges' Retirement System. "Units" means the limited partnership units of the Operating Partnership. 3. PREFERRED RETURN. (a) The Company shall pay a distribution equal to the Preferred Return to the holders of the shares of Series A Preferred Stock, then outstanding, on a quarterly basis in accordance with Section 3(c) prior to the payment of any distributions to the holders of Junior Stock, whether such distributions constitute dividends or a return of capital. Commencing on the date of issuance of the shares of Series A Preferred Stock and, except as provided below in this subparagraph, continuing to December 30, 2003 (the "9.0% PREFERRED RETURN PERIOD"), the holders of the Series A Preferred Stock shall receive, on a quarterly basis in accordance with Section 3(c), a distribution equal to the greater of: (x) an amount equal to the product of (i) the number of outstanding shares of Series A Preferred Stock held by such holders multiplied by the Series A Liquidation Preference and (ii) 2.25% (or 9.0% per annum), or (y) an amount equal to the dividends and other distributions that would have been paid on the number of shares of Common Stock equal to $35,000,000 divided by the Conversion Price (as such may be adjusted from time to time pursuant to Section 3(d)) (the "PREFERRED RETURN"). Notwithstanding the above, if on December 30, 2003, the holders of Series A Preferred Stock have not been paid actual distributions of at least $809,375 (as such may be adjusted from time to time pursuant to Section 3(d)) on each of the prior eight (8) consecutive Preferred Return Payment Dates (as hereinafter defined) or any distribution of a Preferred Return from any prior period remains unpaid, the 9.0% Preferred Return Period shall continue until the Preferred Return Payment Date which shall be the eighth (8th) consecutive Preferred Return Payment Date thereafter occurring on which the holders of Series A Preferred Stock have been paid actual distributions of at least $809,375 (as such may be adjusted from time to time pursuant to Section 3(d)) and until there remains outstanding no unpaid distribution of a Preferred Return. (b) On and after December 30, 2003, the holders of the Series A Preferred Stock shall continue to receive, on a quarterly basis in accordance with Section 3(c), an amount equal to the dividends and other distributions that would have been paid on the number of shares of Common Stock equal to $35,000,000 divided by the Conversion Price (as such may be adjusted from time to time pursuant to Section 3(d)). (c) The distributions required by this Section 3 shall be cumulative, shall accrue from the Series A Issuance Date (as hereinafter defined) and shall be payable to the holders of the Series A Preferred Stock, when, as and if declared by the Company's Board of Directors, out of funds legally available for the payment of distributions, on a calendar quarterly basis on the same date that the Company pays a quarterly dividend or other distribution to the holders of Common Stock. If the Company does not pay a distribution to the holders of Common Stock, the distributions required by this Section 3 shall be payable on the fourth Tuesday of each of February, May, August and November or on the next Business Day thereafter if such day shall not be a Business Day. Each of the dates on which such a distribution shall be so payable shall be a "PREFERRED RETURN PAYMENT DATE." The first distribution payable to the holders of the Series A Preferred Stock shall be pro-rated for the number of days occurring from the date the 1,666,667 shares of Series A Preferred Stock are originally issued (the "SERIES A ISSUANCE DATE") to and including the last day of the calendar quarter in which the Series A Issuance Date occurs. (d) To the extent that the holders of the Series A Preferred Stock convert any or all of the shares of Series A Preferred Stock held by them into shares of Common Stock as permitted by Section 5 below, the distributions described in Sections 3(a) and 3(b) above shall terminate with respect to those shares of Series A Preferred Stock so converted; provided, however, that on the next Preferred Return Payment Date the holders of the Common Stock issued upon the conversion of the Series A Preferred Stock shall receive a distribution equal to the distribution which would otherwise have been payable with respect to such shares of Series A Preferred Stock multiplied by a fraction, the numerator of which is the number of days between the Preferred Return Payment Date immediately preceding the conversion and the date of the conversion and the denominator of which is 90, less any dividend payable to the holders of Common Stock during the same 90 day period. (e) To the extent that a distribution required by this Section 3 is not paid on any Preferred Return Payment Date, the amount not paid shall accumulate and accrue interest at the rate of 9.0% per annum during the 9.0% Preferred Return Period, compounded quarterly on each Preferred Return Payment Date that it remains unpaid (the "ACCRUED RETURN"). Thereafter, any distributions paid by the Company shall first be applied to pay any Accrued Return previously due, but not paid. (f) So long as any of the shares of Series A Preferred Stock are outstanding, no distributions (other than dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Junior Stock) shall be declared or paid or set apart for payment by the Company or other distribution of cash or other property declared or made directly or indirectly by the Company or any affiliate or any Person acting on behalf of the Company or any of its affiliates with respect to any shares of Junior Stock, nor shall any shares of Junior Stock be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of Common Stock made for purposes of an employee incentive or benefit plan of the Company or any subsidiary) for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) directly or indirectly by the Company or any affiliate or any Person acting on behalf of the Company or any of its affiliates (except by conversion into or exchange for Junior Stock), nor shall any other cash or other property otherwise be paid or distributed to or for the benefit of any holder of shares of Junior Stock in respect thereof, directly or indirectly, by the Company or any affiliate or any Person acting on behalf of the Company or any of its affiliates unless in each case (i) the full cumulative dividends (including all accumulated, accrued and unpaid dividends) on all outstanding shares of the Series A Preferred Stock and any other Parity Stock of the Company shall have been paid or such dividends have been declared and set apart for payment for all past dividend periods with respect to the Series A Preferred Stock and all past dividend periods with respect to such Parity Stock and (ii) sufficient funds shall have been paid or set apart for the payment of the full dividend for the current dividend period with respect to the Series A Preferred Stock and the current dividend period with respect to such Parity Stock. In addition, none of the actions described in this Section 3(f) regarding Junior Stock, shall be made with respect to Parity Stock, other than on a pari passu basis with the Series A Preferred Stock. 4. TRANSFER RIGHTS. (a) Shares of the Series A Preferred Stock may be transferred at any time providing that: (i) no transfer of all or any of the shares of Series A Preferred Stock to any Person other than an Affiliate of SMRS may be made to a Person unless, in the written opinion of legal counsel reasonably acceptable to the Company, such transfer would not require the registration of such securities under the Securities Act or any state securities laws; and (ii) no transfer of all or any of the shares of Series A Preferred Stock shall be valid and effective and the Company shall not recognize the same for the payment of the Preferred Return or Approval Rights (as hereinafter defined) until the certificate(s) representing such shares with a duly executed assignment or stock power is delivered to the Company or its stock transfer agent. (b) The following legend shall be required to be placed on each certificate representing shares of the Series A Preferred Stock: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE, AND SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AND REPURCHASE OPTIONS SET FORTH IN AN AGREEMENT BETWEEN THE ISSUER OF SUCH SECURITIES AND THE INITIAL HOLDER OF SUCH SECURITIES." 5. CONVERSION RIGHTS. (a) Any holder of Series A Preferred Stock shall have the right to convert all or any of its shares of Series A Preferred Stock into shares of Common Stock (the "CONVERSION RIGHT"). In the event that any holder of the Series A Preferred Stock wishes to exercise its Conversion Right, it shall so notify the Company in writing (the "CONVERSION NOTICE"), specifying the number of shares of Series A Preferred Stock that it wishes to convert. Within 10 days after the receipt of a Conversion Notice (the "CONVERSION DATE"), the Company will issue and deliver, or will cause to be issued and delivered, to the holder requesting conversion, on the holder's written order, a certificate or certificates representing the number of full shares of Common Stock issuable upon the conversion of the number of shares of Series A Preferred Stock specified in such Conversion Notice. Any fractional share of Common Stock arising upon a conversion will be settled as provided in Section 4(e). Each conversion will be deemed to have been effected on the Conversion Date and the Person in whose name a certificate for shares of Common Stock is to be issued upon a conversion will be deemed to have become the holder of record of the shares of Common Stock represented by that certificate at such effective time. All shares of Common Stock delivered upon conversion of shares of Series A Preferred Stock will, upon delivery, be duly and validly issued and fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights. The shares of Series A Preferred Stock so converted will no longer be deemed to be outstanding and all rights of the holder with respect to those shares so converted will immediately terminate, except the right to receive shares of Common Stock and any unpaid Accrued Return and/or other accumulated, accrued and unpaid dividends. (b) Upon each conversion, the holder of the shares of Series A Preferred Stock so converted will receive that number of shares of Common Stock as shall equal the product of (i) the percentage determined by dividing the number of shares of Series A Preferred Stock so converted by such holder by the 1,666,667 shares of the Series A Preferred Stock originally issued hereby and (ii) $35,000,000, divided by the conversion price, which as of the effective date of these Articles Supplementary was $21.00 and is subject to adjustment as follows from time to time if any of the events described below occurs (the "CONVERSION PRICE"): (i) If the Company: (x) pays a dividend or makes a distribution on Common Stock in shares of Common Stock; (y) subdivides the outstanding shares of Common Stock into a greater number of shares of Common Stock; or (z) combines the outstanding shares of Common Stock into a smaller number of shares of Common Stock, the Conversion Price in effect immediately prior to that event will be adjusted so that the holder of all or any of the shares of Series A Preferred Stock to be converted after that event will receive the number of shares of Common Stock which such holder would have received as a result of such event if the shares of Series A Preferred Stock to be converted had been converted immediately before the happening of such event (or, if there is more than one such event, if the shares of Series A Preferred Stock to be converted had been converted immediately before the first of those events and the holder had retained all of the Common Stock or other securities or assets received after the conversion). An adjustment made pursuant to this Section 4(b)(i) will become effective immediately after the record date in the case of a dividend or distribution, and will become effective immediately after the effective date in the case of a subdivision or combination. If such dividend or distribution is declared but is not paid or made, the Conversion Price then in effect will be appropriately readjusted. However, a readjustment of the Conversion Price will not affect any conversion which takes place before the readjustment. (ii) If the Company issues rights or warrants to the holders of the Common Stock as a class entitling them to subscribe for or purchase shares of Common Stock at a price per share less than the Conversion Price in effect on the record date for the determination of shareholders entitled to receive the rights or warrants, the Conversion Price in effect immediately before the issuance of the rights or warrants will be reduced in accordance with the equation set forth on EXHIBIT A hereto, which is hereby incorporated by reference herein. The adjustment provided for this Section 5(b)(ii) will be made successively whenever any rights or warrants are issued, and will become effective immediately after each record date. In determining whether any rights or warrants entitle the holders of Common Stock to subscribe for or purchase shares of Common Stock at less than the Conversion Price, and in determining the aggregate sale price of the shares of Common Stock issuable on the exercise of rights or warrants, there will be taken into account any consideration received by the Company for the rights or warrants, with the value of that consideration, if other than cash, to be determined by the Board of Directors of the Company (whose determination, if made in good faith, will be conclusive). If any rights or warrants which lead to an adjustment of the Conversion Price expire or terminate without having been exercised, the Conversion Price then in effect will be appropriately readjusted. However, a readjustment of the Conversion Price will not affect any conversion which takes place before the readjustment. (iii) If the Company distributes to the holders of Common Stock as a class any shares of stock of the Company (other than Common Stock) or evidences of indebtedness or assets (other than cash dividends or distributions) or rights or warrants (other than those referred to in Section 5(b)(ii)) to subscribe for or purchase any of its securities, then, in each such case, the Conversion Price will be reduced so that it will equal the price determined by multiplying the Conversion Price in effect immediately prior to the record date for the distribution by a fraction of which the numerator is the Market Value of the Common Stock on the record date for the distribution less the then fair market value (as determined by the Board of Directors, whose determination, if made in good faith, will be conclusive) of the stock, evidences of indebtedness, assets, rights or warrants which are distributed with respect to one share of Common Stock, and of which the denominator is the Market Value of the Common Stock on that record date. Each adjustment will become effective immediately after the record date for the determination of the shareholders entitled to receive the distribution. If any distribution is declared but not made, or if any rights or warrants expire or terminate without having been exercised, effective immediately after the decision is made not to make the distribution or the rights or warrants expire or terminate, the Conversion Price then in effect will be appropriately readjusted. However, a readjustment will not affect any conversion which takes place before the readjustment. (iv) If the Company issues or sells (or the Operating Partnership or any Qualified REIT Subsidiary of the Company issues or sells) any equity or debt securities which are convertible, directly or indirectly, into or exchangeable for shares of Common Stock ("CONVERTIBLE SECURITIES") or any rights, options (other than the issuance or exercise after December 23, 1996 of stock options covering no more than 699,778 shares of Common Stock, the exercise price of which will be no less than the Market Value of the Common Stock on the date of grant as determined in good faith by the Board of Directors, which number of shares of Common Stock shall be subject to appropriate adjustment to the extent that the Company: (x) pays a dividend or makes a distribution on the Common Stock; (y) subdivides the outstanding shares of Common Stock into a greater number of shares; or (z) combines the outstanding shares of Common Stock into a smaller number of shares, issued to employees or directors of the Company and its subsidiaries under the Company's existing employee stock incentive plans) or warrants to purchase shares of Common Stock at a conversion, exchange or exercise price per share which is less than the Conversion Price, unless the provisions of Section 5(b)(ii) or (iii) are applicable, the Company will be deemed to have issued or sold, on the later of the date on which the Convertible Securities, rights, options or warrants are issued or the date on which they first may be converted, exchanged or exercised, the maximum number of shares of Common Stock into or for which the Convertible Securities may then be converted or exchanged or which are then issuable upon the exercise of the rights, options or warrants immediately prior to the close of business on the later of the date on which the Convertible Securities, rights, options or warrants are issued or the date on which they may first be converted, exchanged or exercised, and the Conversion Price shall be adjusted downward as if it were an event covered by Section 5(b)(v). However, no further adjustment of the Conversion Price will be made as a result of the actual issuance of shares of Common Stock upon conversion, exchange or exercise of the Convertible Securities, rights, options or warrants. If any Convertible Securities, rights, options or warrants to which this Section applies are redeemed, retired or otherwise extinguished or expire without any shares of Common Stock having been issued upon conversion, exchange or exercise thereof, effective immediately after the Convertible Securities, rights, options or warrants expire, the Conversion Price then in effect will be readjusted to what it would have been if those Convertible Securities, rights options or warrants had not been issued. However, a readjustment will not affect any conversion which takes place before the readjustment. For the purposes of this Section 5(b)(iv), (x) the price of shares of Common Stock issued or sold upon conversion or exchange of Convertible Securities or upon exercise of rights, options or warrants will be: (A) the consideration paid to the Company for the Convertible Securities, rights, options or warrants, plus (B) the consideration contemplated to be paid to the Company upon conversion, exchange or exercise of the Convertible Securities, rights, options or warrants, with the value of the consideration, if other than cash, to be determined by the Board of Directors of the Company (whose determination, if made in good faith, will be conclusive) and (y) any change in the conversion or exchange price of Convertible Securities or the exercise price of rights, options or warrants will be treated as an extinguishment, when the change becomes effective, of the Convertible Securities, rights, options or warrants which had the old conversion, exchange or exercise price and an immediate issuance of new Convertible Securities, rights, options or warrants with the new conversion, exchange or exercise price. (v) If the Company issues or sells any shares of Common Stock (other than on conversion or exchange of Convertible Securities or exercise of rights, options or warrants to which Section 5(b)(ii), (iii) or (iv) applies) for a consideration per share less than the Conversion Price on the date of the issuance or sale (or on exercise of options or warrants, for less than the Conversion Price on the day the options or warrants are issued), upon consummation of the issuance or sale, the Conversion Price in effect immediately prior to the issuance or sale will be reduced in accordance with the equation set forth on EXHIBIT A hereto, which is hereby incorporated by reference herein. (vi) If there is a reclassification or change of outstanding shares of Common Stock (other than a change in par value, or as a result of a subdivision or combination), or a merger or consolidation of the Company with any other entity that results in a reclassification, change, conversion, exchange or cancellation of outstanding shares of Common Stock, or a sale or transfer of all or substantially all of the assets of the Company or the Operating Partnership, upon any subsequent conversion of any shares of Series A Preferred Stock, each holder of the Series A Preferred Stock so converted will be entitled to receive the kind and amount of securities, cash and other property which the holder would have received if the holder had converted the Series A Preferred Stock into shares of Common Stock immediately before the first of any of the foregoing events and had retained all the securities, cash and other assets received as a result of such events. In the event that a transaction may be viewed as causing this Section 5(b)(vi) to be applicable and Section 5(b)(iii) is also applicable, then Section 5(b)(iii) will be applied and this Section 5(b)(vi) will not be applied. (vii) Notwithstanding anything to the contrary above, no adjustment in the Conversion Price will be required in the following situations: (x) the Company issues (or the Operating Partnership or a Qualified REIT Subsidiary issues) any shares of Common Stock or interests in the Operating Partnership or any equity or debt securities which are convertible, directly or indirectly, into or exchangeable for shares of Common Stock at a price or exchange or exercise price per share which is less than the Conversion Price as consideration for all or a portion of the purchase price in connection with the acquisition of property or real estate operating businesses; (y) the Company issues or sells (or the Operating Partnership or any Qualified REIT Subsidiary issues or sells) to the Series A Preferred Stock Holders any shares of Common Stock or any equity or debt securities which are convertible, directly or indirectly, into or exchangeable for shares of Common Stock at a price or exchange or exercise price per share which is less than the Conversion Price; and (z) the Company issues shares of Common Stock at less than the Conversion Price pursuant to the dividend reinvestment portion of the Company's Dividend Reinvestment, Stock Purchase, Resident Stock Purchase and Employee Stock Purchase Plan. (viii) No adjustment in the Conversion Price will be required unless the adjustment would require a change of at least 1% in the Conversion Price; provided, however, that any adjustments which are not made because of this Section 5(b)(viii) will be carried forward and taken into account in any subsequent adjustments. All calculations under this Section 5 will be made to the nearest cent or to the nearest one hundredth of a share, as the case may be. (ix) Whenever the Conversion Price is adjusted, the Company will promptly send each holder of Series A Preferred Stock a notice of the adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which the adjustment becomes effective and containing a brief description of the events which caused the adjustment. (c) If any one of the events in Section 5(b)(i) through 5(b)(v) occurs, then the Company will mail to each of the holders of record of the Series A Preferred Stock, no later than 15 Business Days after the applicable date specified below, a notice stating, as applicable, one of the following: (i) the date on which a record was taken for the purpose of the dividend, distribution or grant of rights or warrants, or, if no record was taken, the date as of which the holders of Common Stock of record who were entitled to the dividend, distribution or rights or warrants was determined; (ii) the date on which the Convertible Securities were issued or the date on which the change in the conversion, exchange or exercise price of the Convertible Securities, rights, options or warrants was effective; (iii) the date on which the Company sold shares of Common Stock for less than the Conversion Price on the date of the sale; or (vi) the date on which the reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up became effective, and the date on which holders of record of Common Stock were entitled to exchange their shares of Common Stock for securities or other property deliverable upon the reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up. Failure to give any such notice or any defect in the notice will not affect the legality or validity of the reclassification, consolidation, merger, share exchange, sale, transfer, dissolution, liquidation or winding up. (d) (i) The Company will at all times reserve and keep available, free from preemptive rights, out of the authorized but unissued shares of Common Stock, for the purpose of effecting conversion of the Series A Preferred Stock, the maximum number of shares of Common Stock which the Company would be required to deliver upon the conversion of all the outstanding Series A Preferred Stock. For the purpose of this Section 5(d)(i), the number of shares of Common Stock which the Company would be required to deliver upon the conversion of all the outstanding shares of Series A Preferred Stock will be computed as if at the time of the computation all the outstanding shares of Series A Preferred Stock were held by a single holder; and (ii) Before taking any such action which would cause an adjustment reducing the Conversion Price below the then par value (if any) of the Common Stock deliverable upon conversion of the Series A Preferred Stock, the Company will take all corporate action which may, in the written opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and non-assessable Common Stock at the adjusted Conversion Price. (e) No fractional shares of Common Stock will be issued upon conversion of the Series A Preferred Stock. Any fractional interest in a share of Common Stock resulting from conversion of the Series A Preferred Stock will be paid in cash (computed to the nearest cent) based on the Market Value of the Common Stock on the trading day next preceding the Conversion Date. (f) With respect to Conversion Dates occurring on or after December 31, 2001, a holder of the shares of Series A Preferred Stock so converted shall receive, in addition to the shares of Common Stock to be issued pursuant to Section 4(b), that additional number of shares of Common Stock, if any, as shall be necessary in order that such holder will receive, on the next date on which dividends are paid by the Company with respect to Common Stock, dividends equal to $.4725 per share of the Series A Preferred Stock converted, assuming that the dividend paid per share of Common Stock did at the time of conversion not change from the dividend paid on the dividend payment date immediately preceding the Conversion Date. 6. RANKING. (a) Any class or series of capital stock of the Company shall be deemed to rank: (i) prior or senior to the Series A Preferred Stock, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of the Series A Preferred Stock ("SENIOR STOCK"); (ii) on a parity with the Series A Preferred Stock, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof be different from those of the Series A Preferred Stock, if the holders of such class of stock or series and the Series A Preferred Stock shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or liquidation preferences, without preference or priority of one over the other ("PARITY STOCK"); and (iii) junior to the Series A Preferred Stock, as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, if such stock or series shall be Common Stock or if the holder of the Series A Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of shares of such class or series (the "JUNIOR STOCK"). (b) The Series A Preferred Stock is prior in right and senior to the Series B Convertible Cumulative Preferred Stock, par value $0.01 per share, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up. 7. VOTING RIGHTS. (a) GENERAL. The Series A Preferred Stock will not have any voting rights, except as set forth below. (b) CERTAIN VOTING RIGHTS. So long as any shares of Series A Preferred Stock remain outstanding, the Company shall not, without the affirmative vote of the holders of at least a majority of the Series A Preferred Stock outstanding at the time: (i) designate or create, or increase the authorized or issued amount of any Senior Stock or reclassify any authorized shares of the Company into any such shares, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such shares, (ii) designate or create, or increase the authorized or issued amount of, any Parity Stock or reclassify any authorized shares of the Company into any such shares, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such shares, or (iii) either (A) consolidate, merge into or with, or convey, transfer or lease its assets substantially as an entirety, to any corporation or other entity, or (B) amend, alter or repeal the provisions of the Company's Articles of Incorporation (including these Articles Supplementary) or By-laws, whether by merger, consolidation or otherwise, in each case that would materially and adversely affect the powers, special rights, preferences, privileges or voting power of the Series A Preferred Stock or the holders thereof; provided, however, that with respect to the occurrence of a merger, consolidation or a sale or lease of all of the Company's assets as an entirety, so long as (a) the Company is the surviving entity and the Series A Preferred Stock remains outstanding with the terms thereof unchanged, or (b) the resulting, surviving or transferee entity is a corporation organized under the laws of any state and substitutes the Series A Preferred Stock for other preferred stock having substantially the same terms and same rights as the Series A Preferred Stock, including with respect to distributions, voting rights and rights upon liquidation, dissolution or winding-up, then the occurrence of any such event shall not be deemed to materially and adversely affect such rights, privileges or voting powers of the holders of the Series A Preferred Stock; provided, further, that any increase in the amount of authorized Preferred Stock or the creation or issuance of any other class or series of Preferred Stock, or any increase in an amount or authorized shares of each class or series, in each case ranking either junior to the Series A Preferred Stock with respect to payment of distributions and the distribution of assets upon liquidation, dissolution or winding-up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. 8. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) Upon liquidation, dissolution, or winding up (voluntary or otherwise) of the Company, the holders of Series A Preferred Stock shall receive an amount equal to $35,000,000 multiplied by a fraction, the numerator of which is the number of shares of Series A Preferred Stock outstanding and the denominator of which is 1,666,667, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "SERIES A LIQUIDATION PREFERENCE"). Following the payment of the full amount of the Series A Liquidation Preference, and the capital adjustment in respect of all outstanding shares of Series A Preferred Stock and Common Stock, respectively, shall receive their ratable and proportionate share of the remaining assets to be distributed with respect to such Preferred Stock and Common Stock, and a per share basis, respectively. (b) For purposes of this Section 8, a consolidation or a merger of the Company with another entity wherein the Company is not the surviving entity, or a sale of all or substantially all of the Company's assets for cash or securities, will be considered a liquidation of the Company. 9. REDEMPTION OF THE SERIES A PREFERRED STOCK (a) Shares of the Series A Preferred Stock are not redeemable by the Company prior to December 30, 2006. On and after December 30, 2006, the Company at its option, upon not less than 35 Business Days written notice, may redeem, in whole but not in part, the remaining shares of the Series A Preferred Stock that have not yet been converted into Common Stock, at a redemption price per share equal to $35,000,000 multiplied by a fraction, the numerator of which is the number of shares of Series A Preferred Stock outstanding and the denominator of which is 1,666,667, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such redemption. Within 30 Business Days after receipt of the above described notice of intention from the Company, the holders of the shares of Series A Preferred Stock shall notify the Company as to whether they plan to exercise their Conversion Right with respect to such remaining shares of Series A Preferred Stock prior to the redemption of the Series A Preferred Stock. If the holders do not so exercise their Conversion Right, then upon payment of the Redemption Price, all of the rights of the holders of the Series A Preferred Stock under these Articles Supplementary shall terminate. (b) Unless full cumulative distributions on all shares of Series A Preferred Stock and Parity Stock shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, no shares of Series A Preferred Stock and Parity Stock shall be redeemed unless all shares of Series A Preferred Stock and Parity Stock are simultaneously redeemed; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of Series A Preferred Stock and Parity Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of Series A Preferred Stock and Parity Stock, as the case may be. Furthermore, unless full cumulative distributions on all outstanding shares of Series A Preferred Stock and Parity Stock have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, the Company shall not purchase or otherwise acquire, directly or indirectly, any shares of Series A Preferred Stock and Parity Stock (except by conversion into or exchange for shares of Junior Stock). (c) Series A Preferred Stock will not be subject to any sinking fund or mandatory redemption. 10. STOCK TO BE RETIRED All shares of Series A Preferred Stock which shall have been issued and reacquired in any manner by the Company shall be restored to the status of authorized, but unissued shares of Preferred Stock, without designation as to series. The Company may also retire any unissued shares of Series A Preferred Stock, and such shares shall then be restored to the status of authorized by unissued shares of Preferred Stock, without designation as to series. 11. RECORD HOLDERS The Company and the Transfer Agent may deem and treat the record holder of any share of the Series A Preferred Stock as the true and lawful owner thereof and for all purposes, and neither the Company nor the Transfer Agent shall be affected by any notice to the contrary. SECOND: The Shares have been reclassified by the Board of Directors pursuant to Article VI of the Charter. THIRD: These Articles Supplementary have been approved by the Board of Directors in the manner and by the vote required by law. FOURTH: The undersigned President of the Company acknowledges these Articles Supplementary to be the corporate act of the Company and, as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. IN WITNESS WHEREOF, the Company has caused these Articles Supplementary to be signed in its name and on its behalf by its Executive Vice President and attested to by its Secretary on this 9th day of December, 1999. Home Properties of New York, Inc. /S/ Amy L. Tait Amy L. Tait Executive Vice President Attest: /s/ Ann M. McCormick Ann M. McCormick Secretary EXHIBIT A HOME PROPERTIES OF NEW YORK, INC. SERIES A SENIOR CONVERTIBLE PREFERRED STOCK ("Adjustment Formula") OBJECTIVE: To keep the holders of Series A Senior Convertible Preferred Stock relative ownership percentage constant (as compared to a transaction consummated at the Conversion Price), upon the issuance of a "New Dilutive Security" (see definition below), the then applicable Conversion Price of each share the Series A Senior Convertible Preferred Stock will be adjusted as follows:
PRIOR ANTI-DILUTION ADJUSTED CONVERSION PRICE ADJUSTMENT CONVERSION FORMULA PRICE PCP x (A+B+C)+EX = ACP (A+B+C*)+EX*
.*.must be solved for per calculation included in example below DEFINITIONS: PCP - Conversion Price of Series A Senior Convertible Preferred Stock prior to issuance of "New Dilutive Security." "New Dilutive Security" - A Common Stock or Common Stock equivalent issuance at a price below PCP. ACP - Conversion Price of share of Series A Senior Convertible Preferred Stock adjusted for issuance of "New Dilutive Security". A - The number of Common Stock equivalent shares outstanding which includes: (i) shares of Common Stock issued and outstanding; (ii) all Dilutive (defined below) convertible securities outstanding, excluding Units of limited partnership in Home Properties of New York, L.P. and the number of shares of Common Stock issuable upon conversion of the 1,666,667 shares of Series A Senior Convertible Preferred Stock; and (iii) all Dilutive options issued and outstanding on an as-exercised basis (excluding stock options covering 699,778 shares of Common Stock) prior to issuance of "New Dilutive Security". For purposes of this definition, a security described under (ii) or (iii) will be considered "Dilutive" in all subsequent applications of the Adjustment Formula if it triggers the Adjustment Formula upon issuance. B - Shares of Common Stock issuable upon conversion of all Units outstanding prior to issuance of "New Dilutive Security" C - Shares of Common Stock issuable upon conversion of the entire 1,666,667 shares of Series A Senior Convertible Preferred Stock, assuming the prior Conversion Price (or PCP). C* - Shares of Common Stock issuable upon conversion of the entire 1,666,667 shares of Series A Senior Convertible Preferred Stock, assuming the adjusted Conversion Price for the New Dilutive Security issuance (or ACP). EX - "New Dilutive Security" equivalent common shares, assuming the prior Conversion Price (or PCP). EX* - "New Dilutive Security" equivalent common shares, based on actual conversion of security. EXAMPLE: Assume a 1.5 million share Common Stock issuance at $19.50/share (the "New Dilutive Security") following an investment of $35 million for the 1,666,667 shares of Series A Senior Convertible Preferred Stock at a $21.00 Conversion Price: SOLUTION: Prior to solving for C*, the following table must be created:
POST NEW DILUTIVE POST NEW DILUTIVE SECURITY SECURITY ISSUANCE AT ISSUANCE AT $19.50/SHARE $21.00/SHARE UNADJUSTED SHARE # OF SHARES PERCENTAGE # OF SHARES PERCENTAGE CAPITALIZATION Common Stock (A) 5,900,000 58.0328 5,900,000 58.6509 Partnership Units Outstanding in 1,100,000 10.8197 1,100,000 10.9349 Home Properties of New York, L.P. (B) Shares Series A Senior 1,666,667 16.3934 1,666,667 16.5681 Convertible Preferred Stock (C) New Dilutive Security Shares (EX*/EX) 1,500,000 14.7541 1,392,857 13.8461 TOTAL 10,166,667 100.00% 10,059,524 100.00%
C* is the number of Common Stock into which the outstanding 1,666,667 shares of Series A Senior Convertible Preferred Stock must convert in order to maintain the holders of Series A Senior Convertible Preferred Stock ownership percentage at 16.5681 (i.e., as if the issuance were done at the Conversion Price prior to the issuance (or PCP) given the new Dilutive Security issuance at $19.50 per Common Stock). To solve for C*, the following calculations must be made:
# OF COMMON EQUIVALENT SHARES Share Capitalization, post New Dilutive Security Issuance 10,166,667 as issued at $19.50 per share and unadjusted - - (C) (1,666,667) = Share Capitalization less 1,666,667 shares of/(100% - 8,500,000 --------- 16.5681) or 100% less ownership percentage holders of .834319 Series A Senior Convertible Preferred Stock are to maintain = Total Share Capitalization Requires for Series A Senior 10,187,950 Convertible Preferred Stock to maintain ownership percentage at 16.5681% x Requires ownership percentage pursuant to above 16.5681% =C* 1,687,950
GIVEN C*, ONE SOLVES FOR ACP AS FOLLOWS:
PRICE CONVERSION ADJUSTMENT FORMULA PRICE OR PCP $21.00 X (5,900,000+1,100,000+1,666,667)+($29,250,000/21) (5,900,000+1,100,000+1,687,950)+($29,250,000/19.50)= $21.00 X 98.7394% = $20.74 = ACP
PROOF OF CALCULATION:
POST-NEW DILUTIVE SECURITY ISSUANCE AS ISSUED AT $19.50 PER SHARE AND AS ADJUSTED # OF SHARES % Share Capitalization of 5,900,000 57.9115 Common Stock (A) Partnership Units (B) 1,100,000 10.7971 Shares of Series A Senior Convertible 1,687,950 16.5681 Preferred Stock (C*/C) New Dilutive Security 1,500,000 14.7233 Shares (EX*/EX) TOTAL 10,187,950 100.00%
NOTE: Some of the numbers included in this Exhibit A are not the actual numbers and are included for illustration purposes only. EX-4 3 EXHIBIT 4.1 AMENDMENT TO PARTNERSHIP INTEREST PURCHASE AGREEMENT AND EXCHANGE AGREEMENT This Amendment to Partnership Interest Purchase Agreement and Exchange Agreement (the "Amendment") is made as of December 22, 1999 by and among Home Properties of New York, L.P., a New York limited partnership (the "Partnership"), Home Properties of New York, Inc., a Maryland corporation (the "General Partner"), Home Properties Trust, a Maryland real estate investment trust and wholly owned subsidiary of the General Partner (the "Trust"), and the State Treasurer of the State of Michigan, Custodian of Michigan Public School Employees' Retirement System, State Employees' Retirement System, Michigan State Police Retirement System and Michigan Judges' Retirement System (collectively, "SMRS") and amends, to the extent set forth herein, and supplements the Partnership Interest Purchase Agreement (the "Agreement"), dated as of December 23, 1996, among the Partnership, the General Partner and SMRS, pursuant to which SMRS acquired a Class A limited partnership interest (the "Class A Interest") in the Partnership. Terms otherwise not defined in this Amendment shall have the meanings ascribed to them in the Agreement. WHEREAS, pursuant to the terms of the Agreement, SMRS purchased from the Partnership for $35,000,000 the Class A Interest containing such rights, preferences and terms as described in Amendment No. 9 to the Partnership's Agreement of Limited Partnership. WHEREAS, the Company and SMRS have determined to exchange SMRS' Class A Interest for 1,666,667 shares of Series A Senior Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock"), of the Company having the same rights, preferences and terms as the Class A Interest as such are described in the Company's Articles Supplementary relating to the Series A Preferred Stock and this Amendment; WHEREAS, pursuant to the terms of this Amendment, SMRS has agreed to contribute the Class A Interest to the Trust in exchange for 1,666,667 shares of Series A Preferred Stock; WHEREAS, pursuant to the terms of the Articles Supplementary and this Amendment, the Series A Preferred Stock shall be convertible, at the option of the holder thereof, into shares of common stock, par value $0.01 per share, of the Company; NOW, THEREFORE, in consideration of the mutual covenants and agreements contained in this Amendment, SMRS, the Partnership, the General Partner and the Trust agree as follows: I. EXCHANGE. On the date of this Amendment, the Trust hereby exchanges its 1,666,667 shares of Series A Preferred Stock of the General Partner for all of the interest of SMRS in and to the Class A Interest. To effect the transfer, SMRS hereby assigns the Class A Interest to the Trust, and the General Partner hereby consents to such assignment and to the admission of the Trust as a limited partner of the Partnership holding the Class A Interest. To reflect the withdrawal of SMRS as a partner of the Partnership and the admission of the Trust as holder of the Class A Interest, and to make certain changes to the rights of the holders of the Class A Interest, the General Partner, the Trust and SMRS shall execute Amendment No. 26 to the Partnership Agreement. The Trust herewith assigns and delivers to SMRS a certificate representing 1,666,667 shares of the Series A Preferred Stock of the General Partner and a stock power, executed in blank, with respect thereto. II. AMENDMENTS AND MODIFICATIONS TO THE AGREEMENT. *A. The Agreement is hereby amended as follows: *B. Unless the context shall otherwise require, each reference to the term "Class A Interest" in the Agreement shall be deemed to be a reference to the "Series A Preferred Stock," as such term is defined herein. *C. Each reference to the term "Class A Interest Holder" in the Agreement shall be deemed to be a reference to any Person holding all or any of the shares of Series A Preferred Stock. *D. The following definitions are hereby added to Section 1 of the Agreement in appropriate alphabetical order: "Affiliate of SMRS" means any Person that controls, is controlled by or is under common control with SMRS, as evidenced by contract or agreement. "Articles Supplementary" means the Articles Supplementary to the General Partner's Articles of Incorporation relating to the Series A Preferred Stock. "Business Combination" has the meaning set forth in Section 6.5 below. "Change of Control" means the occurrence of any of the following events: (i) the General Partner takes or fails to take any action such that it ceases to be required to file reports under Section 13 of the Exchange Act, or any successor to that Section; (ii) any "person" (as defined in Sections 13(d) and 14(d) of the Exchange Act) is permitted by the General Partner or any of its Qualified REIT Subsidiaries, or their respective Boards of Directors, to become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of either (a) 30% of more of the outstanding shares of Common Stock, or (b) 30% or more (by right to vote or grant or withhold any approval) of the outstanding securities of any other class or classes which individually or together have the power to elect a majority of the members of such Board of Directors; (iii) the Board of Directors of the General Partner or any of the Qualified REIT Subsidiaries, as the case may be, determines to recommend the acceptance of any proposal set forth in a tender offer statement or proxy statement filed by any person with the Securities and Exchange Commission which indicates the intention on the part of that person to acquire, or acceptance of which would otherwise have the effect of that person acquiring, control of the General Partner or any such Qualified REIT Subsidiaries; (iv) the General Partner ceases to be the sole general partner of the Operating Partnership or grants or sells to any third party the power to control or direct the actions of such partnership as if such third party were a general partner of such partnership; or (v) the Operating Partnership is a party to any entity conversion or any merger or consolidation in which such partnership is not the surviving entity in such merger or consolidation. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Market/Offer Price" means the product of: (i) the greater of (a) the highest price (or value of other consideration) per share of Common Stock agreed upon during any 12-month period pursuant to any Business Combination, which was made during such 12-month period and was not terminated or withdrawn prior to the end of such period; and (b) the average closing price per share of Common Stock as shown on the composite tape of the New York Stock Exchange over such 12-month period; and (ii) the number of shares of Common Stock that would have been received upon conversion of shares of Series A Preferred Stock had such shares not been repurchased by the General Partner pursuant to Section 6.5. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Related Entity" means the Partnership, the General Partner or any person in which the Partnership or the General Partner has beneficial ownership, whether direct or indirect, of: (x) 50% or more of the outstanding shares of any class of stock or any class of ownership interest or (y) such lower percentage of the outstanding shares of any class of stock or any class of such other ownership interest as is sufficient to render such person a subsidiary of the Partnership or the General Partner for purposes of generally accepted accounting principles as in effect at the time of determination of the status of such Person for purposes of this definition. "Total Capitalization" means the aggregate of the Equity Capitalization plus the aggregate outstanding principal amount at the time the determination is made of all liabilities of the Partnership and the General Partner arising from the borrowing of any money or the deferral of any of the purchase price of any asset or pursuant to any capital lease. *A. The definitions of the following terms set forth in the Agreement are hereby replaced in their entirety as follows: 1.3 "Approval Breach" shall mean the taking by the General Partner of any of the actions described in Sections 6.4 and 6.5 of the Agreement without obtaining the prior approvals specified in those Sections. 1.12 "Equity Capitalization" shall mean the aggregate of the Value of the Series A Preferred Stock, the Value of the Units not owned by the General Partner or the Trust and the Market Value of all outstanding HP Shares at the time that the determination is made. 1.13 "Equity Ownership" shall mean, with respect to each Holder of Series A Preferred Stock, the percentage obtained by dividing the sum of the Value of the shares of Series A Preferred Stock and the Value of the HP Conversion Shares held by that Holder on the date that the calculation is made by the Equity Capitalization. 1.16 "HP Conversion Shares" shall mean the HP Shares received on conversion of all or any shares of the Series A Preferred Stock that have not previously been transferred on a Public Basis. 1.18 "Investor Group Representative" shall mean the Person appointed by the Rights Holders to act as their representative as described paragraph (d) of Section 6.4 and paragraph (c) of Section 6.5 of this Agreement. 1.25 "Market Value" shall have the meaning given it in Section 2 of the Articles Supplementary, provided that the Rights Holders, by accepting the issuance or assignment to them of any shares of Series A Preferred Stock or HP Conversion Shares, covenant and agree that during the ten (10) consecutive trading days immediately preceding the date on which the Market Value is to be determined, they will not purchase or sell any HP Shares, cause the purchase and sale of any HP Shares or take any other actions that are intended to or that actually affect the market price of HP Shares. 1.29 "Preferred Return" shall mean the distribution payable to the holders of Series A Preferred Stock as described in the Articles Supplementary. 1.39 "Rights Holders" shall mean, collectively, the Holders of the Series A Preferred Stock and the holders of HP Conversion Shares. 1.40 "Rights Termination Date" shall mean the date on which the combined Value of the Series A Preferred Stock and the Value of the HP Conversion Shares held by the Rights Holders: (i) shall be less than $35,000,000 and (ii) shall cease to exceed 8% of the Equity Capitalization for a period of 30 consecutive trading days. 1.47 "Value of the Series A Preferred Stock" shall mean the Market Value of the HP Shares into which the Series A Preferred Stock can be converted. *A. The following new section "Section 6.5" is hereby added as follows: 6.5 VOTING RIGHTS. (a) Prior to the Rights Termination Date, the General Partner or the Partnership, as the case may be, shall not take any of the following actions without obtaining the prior written approval of the Rights Holders, voting as a group: (i) permit the outstanding principal liabilities of the Related Entities arising from the borrowing of any money (for this purpose, any indebtedness or other liability which is guaranteed, endorsed or discounted with recourse by a Related Entity shall be deemed to be a principal liability of such Related Entity) or the deferral of the purchase price of any asset or pursuant to any capital lease to exceed 50% of the Total Capitalization; (ii) purchase of any assets in a single transaction or series of related transactions (including by way of merger, consolidation or other combination with any other Person or the purchase of equity interests in the entity owning such assets) if the consideration to be paid for those assets exceeds 25% of Total Capitalization; (iii) sell, exchange, lease or otherwise dispose of any assets or securities in a single transaction or a series of related transactions (including by way of merger, consolidation or other combination with any other Person or the sale of equity interests in the entity owning such assets) if the assets or securities to be sold, exchanged, leased or otherwise disposed of have a value exceeding 25% of the Total Capitalization; (iv) amend any provision of the Articles of Incorporation or By-laws of the General Partner, the Partnership Agreement of the Operating Partnership or the Articles Supplementary if such amendment would adversely affect the rights of the holders of the Series A Preferred Stock; (v) liquidate or dissolve any Related Entity; (vi) with respect to any Related Entity, commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law; (vii) terminate the election, or take any action which would cause termination other than by election, of the General Partner as a real estate investment trust under the Code; (viii) alter any business purpose (as may be stated in the Articles of Incorporation of the General Partner and the Subsidiaries, the Partnership Agreement of the Operating Partnership or otherwise) of, or allow a Change of Control to occur with respect to, any Related Entity; (ix) create or issue any security which would be pari passu or senior in right, either as to distributions or upon liquidation, to the Series A Preferred Stock or reclassify the Series A Preferred Stock or any shares of capital stock if such creation, issuance or reclassification would adversely affect the rights or benefits of the holders of the Series A Preferred Stock; (x) increase the size of the Board of the General Partner, except to the extent necessary to add an Investor Nominee pursuant to the Agreement; and (xi) except as otherwise provided in the Articles Supplementary, require the exchange of the Series A Preferred Stock for other securities. (b) The General Partner shall provide the Investor Group Representative with a written request for the approval of any matter described in paragraph (a) of this Section 6.5. Such written notice shall include a reasonable description of the matter for which approval is sought and shall be made in writing and delivered personally, sent by documented overnight delivery service or, to the extent receipt is confirmed, telecopy, telefax or other electronic transmission serviced to the appropriate address or number specified by the person to receive such notice. If the Investor Group Representative does not respond within fifteen (15) Business Days after the date of receipt of such a written request the Rights Holders shall be deemed to have approved the matter as to which their approval was sought. (c) With respect to their approval rights pursuant to paragraph (a) of this Section 6.5, the Rights Holders shall only be permitted to act as a group. In the event that there is more than one Rights Holder, the Rights Holders shall select one Person to act as their Investor Group Representative and shall so notify the General Partner. Upon failure of the Rights Holders to select an Investor Group Representative, the largest single holder of shares of Series A Preferred Stock shall be designated by the General Partner as the Investor Group Representative. The General Partner and the Partnership shall be entitled and obligated to rely on any and all notifications and directions given to it by the Investor Group Representative and shall have no obligation to verify that such notifications and directions constitute the consensus of the Rights Holders. In addition, upon receipt of notice from any or all other Rights Holders that such notifications and directions do not constitute the consensus of the Rights Holders, the General Partner shall still be obligated to follow the directions of the Investor Group Representative. (d) If the General Partner solicits the approval of the Rights Holders for any of the matters described in paragraph (b) of Section 6.4 of the Agreement or this Section 6.5 and is informed by the Investor Group Representative that the Rights Holders do not approve of the matter submitted, then the General Partner shall have the right to purchase the remaining shares of Series A Preferred Stock from the holders thereof at a price (the "Series A Purchase Price") that is equal to 105% of the greater of: (i) the Value of the Series A Preferred Stock as of the date of purchase (the "Purchase Closing"), including any Accrued Return; and (ii) $35,000,000, plus any Accrued Return, times the percentage of the 1,666,667 shares of Series A Preferred Stock originally issued that has not been converted to shares of Common Stock. Upon full payment of the purchase right described in this paragraph (d) of Section 6.5 (the "Purchase Right"), the holder of any HP Conversion Shares shall cease to be a Rights Holder for purposes hereof and of the Agreement. If the General Partner intends to exercise its Purchase Right, it shall so notify the holders of Series A Preferred Stock in writing within five (5) Business Days after receipt of notice that the Rights Holders have not approved any matter submitted to them for approval pursuant to this Section 6.5 or Section 6.4 of the Agreement. Payment of the Series A Purchase Price as described above shall be made in cash within twenty (20) Business Days after receipt of that notice by the holders of the Series A Preferred Stock. In the event that the General Partner exercises its Purchase Right in connection with the refusal of the Rights Holders to approve any tender or exchange offer or merger, consolidation, share exchange, business combination, or similar transaction involving the General Partner (each, a "Business Combination"), then at the completion of the 12-month period following the Purchase Closing, the General Partner shall determine the Market/Offer Price for shares of Common Stock. If the Market/Offer Price is higher than the Series A Purchase Price paid at the Purchase Closing, the General Partner shall pay over to the holders of record of the Series A Preferred Stock as of the date of the Purchase Closing, an additional amount (the "Additional Amount") equal to such difference. The payment of the Additional Amount shall be due on the earlier of: (i) ten days after the end of such 12-month period; or (ii) the closing date of any Business Combination Transaction closed during such period. In the event that the Rights Holders on two occasions do not approve a matter submitted for their approval pursuant to paragraph (b) of Section 6.4 of the Agreement or this Section 6.5 and the General Partner does not exercise its Purchase Right, then the Rights Holders may request from the General Partner a waiver of the Volume Limitation, as defined in the letter agreement from SMRS to the General Partner whereby SMRS acknowledges certain restrictions on the sale of the HP Conversion Shares. The General Partner shall not unreasonably withhold its approval of such a waiver, provided that it shall not be unreasonable for the General Partner to withhold its approval if the sale of shares of Common Stock beyond the Volume Limitation is reasonably anticipated to have a material negative effect on the market for, and the market price of, shares of Common Stock. *A. The rights and obligations of each SMRS, the General Partner and the Partnership contained in the Agreement are hereby modified as follows: *B. To the extent that any rights and/or obligations or SMRS, the General Partner and the Partnership contained in the Agreement conflict with any of the rights and/or obligations contained in the Articles Supplementary such terms and/or obligations contained in the Articles Supplementary shall be deemed to govern; provided, however, that this provision shall not be deemed to apply to any rights and/or obligations contained in Sections 6 or 7 of the Agreement; and *C. To the extent that the Agreement provides rights to, or imposes obligations on, SMRS, the General Partner and the Partnership which are not set forth in the Articles Supplementary, such terms and/or obligations contained in the Agreement shall continue to remain in full force and effect. *D. Except as otherwise amended or modified in this Section 2, the Agreement shall remain in full force and effect and, as amended and modified, is hereby ratified by SMRS, the General Partner and the Partnership. Further, the parties hereto acknowledge and agree that nothing contained herein or in the Articles Supplementary shall be deemed or construed to modify, alter or amend the rights and obligations or each of SMRS, the General Partner and the Partnership contained in Sections 6 and 7 of the Agreement. II. REPRESENTATIONS AND WARRANTIES OF THE GENERAL PARTNER AND THE PARTNERSHIP. The General Partner, the Partnership and the Trust hereby represent and warrant as follows: **1. ORGANIZATION AND QUALIFICATION. *B. The General Partner is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Maryland. The General Partner has all requisite corporate power and authority to enter into this Amendment, the Articles Supplementary, the Amendment to the Registration Rights Agreement and the Amendment to the Lock- Up Letter and to perform its obligations hereunder and thereunder. The General Partner has all the requisite governmental licenses, authorizations, consents and approvals to own, operate, lease and encumber its properties and carry on its business as now conducted, except where the failure to do so could not, individually or in the aggregate, reasonably be expected to result in a material adverse effect. *C. The Partnership is a limited partnership duly organized, validly existing and in good standing under the laws of the State of New York. The Partnership is duly qualified and in good standing in each jurisdiction in which it owns real property. The Partnership has all requisite partnership power and authority to enter into this Amendment, to consent to the transfer of the Class A Interest to the Trust and to admit the Trust as the holder of the Class A Interest. The Partnership has all the requisite governmental licenses, authorizations, consents and approvals to own, operate, lease and encumber its properties and carry on its business as now conducted, except where the failure to do so could not, individually or in the aggregate, reasonably be expected to result in a material adverse effect. *D. The Trust is a Maryland real estate investment trust duly organized and validly existing under the laws of the State of Maryland. The Trust has all requisite power and authority to enter into this Amendment and to perform its obligations hereunder. **1. AUTHORITY RELATIVE TO AGREEMENTS; BOARD APPROVAL. *E. The execution, delivery and performance of this Amendment, the Amendment to the Registration Rights Agreement, and the Amendment to the Lock- Up Letter by the General Partner, the Partnership and the Trust, as the case may be, the execution and filing with the State Department of Assessment and Taxation of Maryland of the Articles Supplementary by the General Partner and the issuance and delivery of the 1,666,667 shares of Series A Preferred Stock and the issuance of shares of Common Stock on conversion of such Series A Preferred Stock in accordance with the Articles Supplementary have been duly and validly authorized by all necessary corporate action on the part of the General Partner. This Amendment and the transactions contemplated thereby have been duly authorized by the Trust. This Amendment and Amendment No. 26 and the transactions contemplated hereby and thereby have been duly authorized by all necessary partnership action on the part of the Partnership. Each of this Amendment, the Amendment to the Registration Rights Agreement, and the Amendment to the Lock-Up Letter has been duly executed and delivered by the General Partner for itself and as the general partner of the Partnership and by the Trust, to the extent each is a party thereto, and constitutes the valid and legally binding obligations of the General Partner, the Partnership and the Trust, respectively, enforceable against the General Partner, the Partnership and the Trust to the extent such entity is a party thereto, in accordance with their respective terms. *F. The Board has, as of the date hereof, approved the transactions contemplated hereby, the filing of the Articles Supplementary, the issuance of the 1,666,667 shares of Series A Preferred Stock to the Trust and the exchange of such shares by the Trust for the Class A Interest, and the Registration Rights Agreement, as amended, and the Lock-Up Letter, as amended. *G. The shares of Series A Preferred Stock to be acquired pursuant to this Amendment have been duly authorized for issuance by the General Partner, and upon issuance will be duly and validly issued, fully paid and nonassessable. The shares of Common Stock issuable by the General Partner upon conversion of the shares of Series A Preferred Stock, or any portion thereof, have been duly and validly reserved for such issuance and, when issued upon such conversion in accordance with the Articles Supplementary, will be duly and validly issued, fully paid and nonassessable. *H. The issuance of the Series A Preferred Stock and the issuance of shares of Common Stock by the General Partner upon conversion of the Series A Preferred Stock or any portion thereof will not: (i) require the approval of any partner of the Partnership or any stockholder of the General Partner; (ii) result in the violation or a breach of any provision of the Partnership Agreement of the Partnership, the Articles of Incorporation or By-laws of the General Partner or the General Corporation Law of the State of Maryland; or (iii) require the additional approval of any stockholder of the General Partner under, or result in the violation or a breach of any provision of, the rules, regulations or requirements of the New York Stock Exchange. **1. CAPITAL STOCK AND UNITS. *I. The authorized capital stock of the General Partner on the date hereof consists of 50,000,000 shares of Common Stock, par value $0.01 per share, 10,000,000 shares of Preferred Stock, par value $0.01 per share, and 10,000,000 shares of Excess Stock, par value $.01 per share. Of the authorized Preferred Stock, 1,666,667 shares have been designated in the Articles Supplementary as Series A Preferred Stock and 2,000,000 have been designated as Series B Convertible Cumulative Preferred Stock, par value $0.01 per share. *J. The only Class A Interest in the Partnership is the Class A Interest issued to SMRS. *K. SMRS has been exempted from the "Ownership Limit" set forth in Article VII of the Articles of Incorporation with respect to the Series A Preferred Shares and the Common Stock issuable upon conversion of the Series A Preferred Shares with the result that the issuance of the Series A Preferred Shares to SMRS and the conversion of the Series A Preferred Shares to Common Stock will not violate the Ownership Limit. *L. The General Partner has taken all steps that may be necessary to irrevocably exempt SMRS and the present or future affiliates or associates of SMRS or any other person acting in concert or as a group with any of the foregoing from the business combination provisions of Section 3-601 et seq. and from the control share provisions of Section 3-701 et seq. of the Maryland General Corporation Law or any successor statutory provisions. *M. As of the date of this Amendment, the Common Stock is approved for listing on the New York Stock Exchange subject to official notice of issuance. The General Partner will hereafter continue the listing of the Common Stock required to be delivered upon conversion of all or any portion of the Class A Preferred Shares, on the New York Stock Exchange or on each national securities exchange, if any, upon which the outstanding Common Stock are listed as the time of delivery. **1. NO CONFLICTS; NO DEFAULTS; REQUIRED FILINGS AND CONSENTS. Except as contemplated hereby, neither the execution and delivery by the General Partner, the Partnership or the Trust of this Amendment nor the consummation by the General Partner, the Partnership or the Trust of the transactions contemplated hereby in accordance with the terms hereof will: *N. conflict with or result in a breach of any provisions of the Articles of Incorporation as amended by the Articles Supplementary or by-laws of the General Partner or the Partnership Agreement of the Partnership or the organizational documents of the Trust; *O. result in a breach or violation of, a default under, or the triggering of any payment or other obligations pursuant to, or accelerate vesting under the stock option plan of the General Partner, or similar compensation plan, or any grant or award made under the foregoing; *P. violate or conflict with any statute, regulation, judgment, order, writ, decree or injunction applicable to the General Partner, the Partnership or the Trust; *Q. violate or conflict with or result in a breach of any provision of, or constitute a default (or any event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or in a right of termination or cancellation of, or accelerate the performance required by, or result in the creation of any Lien upon any of the Properties of the General Partner, the Partnership or the Trust under, or result in being declared void, voidable or without further binding effect, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust or any license, franchise, permit, lease, contract, agreement or other instrument, commitment or obligation to which the General Partner, the Partnership or the Subsidiaries is a party, or by which the General Partner, the Partnership or the Subsidiaries or any of their Properties is bound or affected; or *R. require any consent, approval or authorization of, or declaration, notice to, filing or registration with, any Governmental or Regulatory Authority, except for the filing of a Current Report on Form 8-K with the SEC and the NYSE disclosing this Amendment and the Articles Supplementary and the consummation of the transactions contemplated hereby. **1. SEC AND OTHER DOCUMENTS. *S. The General Partner has made available to SMRS each of its registration statements, reports, proxy statements and exhibits thereto (the "Company Reports") filed with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934 (the "Securities Laws") since January 1, 1997. The Company Reports were filed with the SEC in a timely manner and constitute all forms, reports and documents required to be filed by the General Partner under the Securities Laws through the date of this Amendment. As of their respective dates, the Company Reports (i) complied as to form in all material respects with the applicable requirements of the Securities Laws; and (ii) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. There is no unresolved comments issued or violation asserted by the SEC or any other Governmental or Regulatory Authority with respect to any of the Company Reports. *T. Each of the consolidated balance sheets of the General Partner included in or incorporated by reference into the Company Reports (including the related notes and schedules) fairly presented the consolidated financial position of the General Partner or other entities to which it relates as of its date and each of the statements or operations, stockholders' equity (deficit) and cash flows included in or incorporated by reference into the Company Reports (including any related notes and schedules) fairly presented the results of operations, retained earnings or cash flows, as the case may be, of the General Partner on a consolidated basis for the periods set forth therein, in each case in accordance with GAAP consistently applied during the periods involved, except as may be noted therein and except, in the case of any unaudited statements, normal recurring year-end adjustments which would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. **1. LITIGATION; COMPLIANCE WITH LAW. *U. There are no legal actions pending or, to the General Partner's knowledge, threatened against the General Partner, the Partnership or any Subsidiaries that would, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect, or to result in any material change in the equity ownership of the General Partner, the Partnership or any Subsidiaries, or which question the validity of this Amendment, the Articles Supplementary, the Registration Rights Agreement, as amended, Amendment No. 26 or the Lock-Up Letter, as amended, or any action taken or to be taken in connection herewith or therewith. *V. None of the General Partner, the Partnership or any of the Subsidiaries is in violation of any statute, rule, regulation, order, writ, decree or injunction of any Governmental or Regulatory Authority or any body having jurisdiction over them or any of their respective Properties which, if enforced, could, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. **1. INVESTMENT COMPANY. The General Partner and the Partnership are not, and after giving effect to the sale and issuance of the Series A Preferred Stock, will not be, an "investment company" required to be registered under the Investment Company Act of 1940, as amended. **2. SOLICITATION; ACCESS TO INFORMATION. No form of general solicitation or general advertising was used by the General Partner or the Partnership or any other person acting on their behalf in respect of or in connection with the offer and sale of the Series A Preferred Stock. **3. TAX MATTERS; REIT AND PARTNERSHIP STATUS. *W. Each of the General Partner, the Partnership and the Trust has timely filed with the appropriate taxing authority all tax returns required to be filed by it or has timely requested extensions and any such request has been granted and has not expired. Each such tax return is true, complete and correct in all respects. Each of the General Partner, the Partnership and the Trust have paid within the time and manner prescribed by law, all taxes that are due and payable. *X. The General Partner: (i) was eligible and has elected in its federal income tax return for its taxable year ended December 31, 1994 to be taxed as a REIT and such election has and will continue to remain in effect for each of the General Partner's subsequent taxable years and has complied (or will comply) with all applicable provisions of the Code relating to a REIT, for each of its taxable years; (ii) has operated, and intends to continue to operate, in such a manner as to qualify as a REIT for each of its taxable years; (iii) has not taken or omitted to take any action which would reasonably be expected to result in a challenge to its status as a REIT, and, to the General Partner's knowledge, no such challenge is pending or threatened; and (iv) assuming the accuracy of SMRS' representation in Section 4.5, will not be rendered unable to qualify as a REIT for federal income tax purposes as a consequence of the transactions contemplated hereby. **1. EMPLOYEE BENEFIT PLANS. All of the employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), and plans, programs, policies, practices, arrangements or contracts (whether group or individual) providing for payments, benefits or reimbursements to employees, former employees and independent contractors, or their beneficiaries and dependents, under which such employees, former employees or independent contractors, or their beneficiaries or dependents, are covered due to an employment or other contractual relationship with the General Partner, the Partnership or any entity required to be aggregated in a controlled group or affiliated service group with the General Partner for purposes of ERISA or the Code, including without limitation, under Section 414(b), (c), (m) or (o) of the Code or Section 4001 of ERISA, at any relevant time are referred to herein as the "Benefit Plans". With respect to each Benefit Plan, to the extent applicable: (i) Such Benefit Plan has been maintained and operated in material compliance with its terms and with the applicable provisions of ERISA, the Code and all other applicable governmental laws and regulations; each such Benefit Plan intended to qualify under Section 401(a) of the Code is the subject of a favorable unrevoked determination letter issued by the IRS as to its tax- qualified status under the Code; (ii) There is no material suit, action, dispute, claim, arbitration or legal, administrative or other proceeding or governmental investigation pending, or threatened, alleging any breach of the terms of any such Benefit Plan or of any fiduciary duties thereunder or violation of any applicable statute, law, rule or regulation with respect to any Benefit Plan; (iii) No Benefit Plan is or has ever been subject to Title IV of ERISA or Section 412 of the Code; and (iv) None of the General Partner, the Partnership or any Subsidiary, or any "party in interest" (as defined in Section 3(14) of ERISA) or any "disqualified person" (as defined in Section 4975 of the Code) with respect to any such Benefit Plan, has engaged in a non-exempt "prohibited transaction" within the meaning of Section 4975 of the Code or Section 406 of ERISA. SMRS nor any plan maintained by SMRS or any of its Affiliates shall be subject to any tax, fine, penalty or other liability of any kind whatsoever, that would not have been incurred by SMRS or any of its Affiliates but for the transactions contemplated hereby. **2. DEFAULTS UNDER AGREEMENTS. Neither the General Partner nor the Trust is in default under or in violation of any provision of its Articles of Incorporation or by-laws. The Partnership is not in default under or in violation of the Partnership Agreement. None of the General Partner, the Partnership or the Trust is in default under or violation of any agreement filed as an exhibit to the Company Reports except where such default or violation would not result in a Material Adverse Effect. I. REPRESENTATIONS AND WARRANTIES OF SMRS. SMRS hereby represents and warrants to the General Partner and the Partnership as follows: **(1) ORGANIZATION. SMRS is a government sponsored retirement system, duly created, validly existing and in good standing under the laws of the State of Michigan. SMRS has all requisite power and authority to enter into this Amendment, Amendment No. 26, the Amendment to the Registration Rights Agreement and the Amendment to the Lock-Up Letter and to perform its obligations hereunder and thereunder. **(2) DUE AUTHORIZATION. The execution, delivery and performance of this Amendment, Amendment No. 26, the Amendment to the Registration Rights Agreement, and the Amendment to the Lock-Up Letter have been duly and validly authorized by all necessary action on the part of SMRS. This Amendment, Amendment No. 26, the Amendment to the Registration Rights Agreement and the Amendment to the Lock-Up Letter have been duly executed and delivered by and constitute the valid and legally binding obligations of SMRS, enforceable against SMRS in accordance with their terms, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights or general principles of equity. **(3) CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the execution and delivery of this Amendment, Amendment No. 26, the Amendment to the Registration Rights Agreement, and the Amendment to the Lock-Up Letter nor the performance by SMRS of its obligations herein or thereunder will conflict with, result in a breach of the terms, conditions or provisions of, constitute a default under, result in the creation of any mortgage, security interest, encumbrance, lien or charge of any kind upon any of the properties or assets of SMRS, pursuant to, or require any consent, approval or other action by or any notice to or filing with any government authority other than those consents or approvals that have already been obtained or actions that have already been taken as of the date hereof. **(4) ACQUISITION FOR INVESTMENT; SOPHISTICATION. SMRS is acquiring the shares of Series A Preferred Stock for its own account for the purpose of investment and not with a view to or for sale in connection with any distribution thereof, and SMRS has no present intention or plan to effect any distribution of the shares of Series A Preferred Stock; provided, however, that the disposition of the Series A Preferred Stock and the shares of Common Stock to which the shares of Series A Preferred Stock can be converted shall at all times be and remain within its control, subject to the provisions of this Amendment, the Agreement, the Registration Rights Agreement, as amended, and the Lock-Up Letter, as amended. SMRS is able to bear the economic risk of the acquisition of the shares of Series A Preferred Stock pursuant hereto and can afford to sustain a total loss on such investment, and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the proposed investment, and therefore has the capacity to protect its own interests in connection with the acquisition of the Series A Preferred Stock pursuant hereto. **(5) REIT QUALIFICATION MATTERS. SMRS is a "qualified trust" described in Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code. Under Section 856(h) of the Code, SMRS will not be treated as an "individual" for purposes of Section 542(a)(2) of the Code (as modified by Section 856(h) of the Code) and no "individual" owns or would be considered to own (taking into account the ownership attribution rules under Section 544 of the Code, as modified by Section 856(h) of the Code) in excess of 5.0% of the value of the outstanding equity interests in SMRS. **(6) TAX MATTERS. SMRS acknowledges that none of the General Partner, the Partnership, the Trust nor their respective officers, directors, employees or agents have provided advice to SMRS regarding the tax consequences of its investment in the Class A Interest, the exchange of the Class A Interest for the shares of Series A Preferred Stock, or shares of Common Stock into which it may be converted, and SMRS has consulted with its tax advisors regarding such consequences. II. CERTAIN ADDITIONAL COVENANTS. **(a) RESALE. SMRS acknowledges and agrees that the shares of Series A Preferred Stock that SMRS will acquire will not be registered under the Securities Act or the securities laws of any state and that it may be sold or otherwise disposed of only in one or more transactions registered under the Securities Act and, where applicable, such state securities laws or as to which an exemption from the registration requirements of the Securities Act and, where applicable, such state securities laws is available. **(b) TAKING OF NECESSARY ACTION. Each party hereto agrees to use their best efforts promptly to take or cause to be taken all action and promptly to do or cause to be done all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Amendment, the Articles Supplementary, the Amendment to the Registration Rights Agreement, the Amendment to the Lock Up Letter and Amendment No. 26, subject to the terms and conditions hereof and thereof. **(c) CONVERSION. The General Partner hereby covenants and agrees that it shall take, or refrain from taking, as the case may be, any and all actions reasonably necessary or appropriate to allow the holders of the Series A Preferred Stock to convert all or a portion of the shares of the Series A Preferred Stock into HP Shares as described in the Articles Supplementary. **(a) PUBLIC ANNOUNCEMENTS; CONFIDENTIALITY. *B. Subject to each party's disclosure obligations imposed by law and any stock exchange or similar rules and the confidentiality provisions contained in Section 5.4(b), the General Partner, the Partnership and SMRS will cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Amendment, the amendment to the Registration Rights Agreement, Amendment No. 26, the amendment to the Lock-Up Letter and any of the transactions contemplated hereby or thereby. *C. The General Partner, the Partnership and the Trust agree that all information provided to them or any of their representatives pursuant to this Amendment shall be kept confidential, and the General Partner, the Partnership and the Trust shall not disclose such information to any persons other than the directors, officers, employees, financial advisors, legal advisors, accountants, consultants and affiliates of the General Partner, the Partnership or the Trust, as the case may be, who reasonably need to have access to the confidential information and who are advised of the confidential nature of such information; provided, however, the foregoing obligation of the General Partner, the Partnership and the Trust shall not: (i) relate to any information that: (1) is or becomes generally available other than as a result of unauthorized disclosure by the General Partner, the Partnership and the Trust or by persons to whom they have made such information available; or (2) is or becomes available to the General Partner, the Partnership and the Trust on a non-confidential basis from a third party that is not, to the knowledge of the General Partner, the Partnership and the Trust, bound by any other confidentiality agreement with SMRS; or (ii) prohibit disclosure of any information if required or requested by law, rule, regulation, court order or other legal or governmental process. *D. SMRS covenants and agrees that all information provided to them and their representatives pursuant to this Amendment shall be kept confidential and that SMRS shall not disclose such information to any persons other than its directors, officers, employees, financial advisors, legal advisors, accountants, consultants and affiliates, as the case may be, who reasonably need to have access to the confidential information and who are advised of the confidential nature of such information; provided, however, the foregoing obligation of SMRS shall not: (i) relate to any information that: (1) is or becomes generally available other than as a result of unauthorized disclosure by SMRS or by persons to whom they have made such information available; or (2) is or becomes available to SMRS on a non-confidential basis from a third party that is not, to the knowledge of SMRS, bound by any other confidentiality agreement with the General Partner and the Partnership; or (ii) prohibit disclosure of any information if required or requested by law, rule, regulation, court order or other legal or governmental process. **(a) INFORMATION AND ACCESS. Prior to the Rights Termination Date, the General Partner, the Partnership and each of the Subsidiaries shall afford to SMRS and its accountants, counsel and other representatives full and reasonable access during normal business hours (and at such other times as the parties may mutually agree) to its Properties, books, contracts, commitments, records and personnel and, during such period, shall furnish promptly to SMRS (i) a copy of each report, schedule, and other document filed or received by it pursuant to the requirements of the Securities Laws; and (ii) all other information concerning its business, personnel and properties as SMRS may reasonably request. SMRS and its accountants, counsel and other representatives shall, in the exercise of the rights described in this Section, not unduly interfere with the operation of the business of the General Partner, the Partnership or the Trust. **(b) REVOCATION OF EXEMPTION. The Board has approved the exemption of SMRS from the Ownership Limit, as defined in the Articles of Incorporation, with respect to (i) the Class A Interest and the Common Stock into which the Class A Interest can be converted and (ii) the Series A Preferred Stock and the Common Stock into which the Series A Preferred Stock can be converted. In the event that the exemption is revoked for any reason, other than the fact that a re-structuring or re-organization of SMRS causes it to cease to be entitled to "look-through" treatment pursuant to Section 856(h)(3) of the Code ("SMRS Change"), then, at the request of SMRS, the General Partner shall purchase all of the Common Stock or Series A Preferred Stock then held by SMRS that shall have become Excess Stock, as defined in the Articles of Incorporation (the "Exemption Right"). Such request by SMRS shall be made within twenty (20) Business Days of the receipt of written notice by SMRS from the General Partner that the exemption described above has been revoked. The purchase price (the "Exemption Purchase Price") for the Common Stock or Series A Preferred Stock, as the case may be, to be so purchased pursuant to this Section 5.6 shall be 110% of the greater of: (i) the Value of the Common Stock or the Value of the Series A Preferred Stock, as the case may be, as of the date of purchase; and (ii) the Original Investment, including any Accrued Return, times the percentage of the number of shares of Series A Preferred Stock originally issued hereby still held by SMRS (with all shares of Common Stock issued upon conversion of Series A Preferred Stock held by SMRS being treated for the purposes of this calculation as if they had not been converted), with the result multiplied by the percentage of the number of shares of Series A Preferred Stock originally issued hereby or shares of Common Stock issued upon conversion of Series A Preferred Stock, as the case may be, still held by SMRS that have become Excess Stock. Payment of the Exemption Purchase Price shall be made in cash within twenty (20) Business Days after receipt by the General Partner of notice from SMRS that SMRS is requiring the General Partner to purchase the Common Stock or Series A Preferred Stock, as the case may be, that have become Excess Stock. In the event that the exemption is revoked as a result of a SMRS Change, then SMRS shall still have the Exemption Right, but the Exemption Purchase Price shall be 100% of the greater of: (i) Value of the Series A Preferred Stock or the Value of the Common Stock into which it has been converted, as the case may be, as of the date of purchase; and (ii) the Original Investment, including any Accrued Return, times the percentage of the number of shares of Series A Preferred Stock still held by SMRS (with all shares of Common Stock which the Series A Preferred Stock has been converted held by SMRS being treated for purposes of this calculation as if they had not been converted), with the result multiplied by the percentage of the number of shares of Series A Preferred Stock originally issued hereby or shares of Common Stock into which the Series A Preferred Stock has been converted, as the case may be, still held by SMRS that have become Excess Stock. **(c) NEW YORK STOCK EXCHANGE LISTING. The General Partner will confirm the approval for listing on the New York Stock Exchange of the shares of Common Stock into which the Series A Preferred Stock may be converted subject to official notice of issuance. The General Partner will cause to be continued such listing on the New York Stock Exchange or on each national securities exchange, if any, upon which the outstanding shares of Common Stock are listed at the time of delivery of the shares of Common Stock required to be delivered upon conversion of all or any portion of the shares of Series A Preferred Stock. I. MISCELLANEOUS PROVISIONS. **(a) SURVIVAL. All representations, warranties and covenants and agreements of the parties contained herein, including indemnity or indemnification agreements contained herein, or in any Schedule or Exhibit hereto, or any certificate, documents or other instrument delivered in connection herewith shall survive the transfer of the Class A Interest to the Trust and the delivery of the Shares of Series A Preferred Stock to SMRS. **(b) INDEMNIFICATION BY THE GENERAL PARTNER AND THE PARTNERSHIP. From and after the date of this Amendment, the General Partner and the Partnership shall indemnify and hold harmless SMRS, its successors and assigns, from and against any and all loss and expenses (including, without limitation, reasonable attorneys' fees and expenses), suffered, directly or indirectly, by SMRS by reason of, or arising out of: (i) any breach as of the date made or deemed made or required to be true of any representation or warranty made by the General Partner or the Partnership in or pursuant to this Amendment and any statements made in any certificate delivered pursuant to this Amendment; or (ii) any failure by the General Partner or the Partnership to perform or fulfill any of their covenants or agreements set forth herein, or in any other agreement contemplated hereby. Notwithstanding any other provision of this Amendment to the contrary, in no event shall loss and expenses include a party's incidental or consequential damages. **(c) THIRD-PARTY CLAIMS. If a claim by a third party is made against an indemnified party and if such indemnified party intends to seek indemnity with respect thereto under Section 6.2, such indemnified party shall promptly notify the General Partner and the Partnership in writing of such claims setting forth such claims in reasonable detail. The General Partner and the Partnership shall have 10 days after receipt of such notice to undertake, through counsel of its own choosing and at its own expense, the settlement or defense thereof, and the indemnified party shall cooperate with it in connection therewith. Notwithstanding the above, the indemnified party may participate in such settlement or defense through counsel chosen by such indemnified party, provided that the fees and expenses of such counsel shall be borne by such indemnified party, unless: (i) the employment of counsel by the indemnified party has been authorized by the General PARTNER and the Partnership; or (ii) the indemnified party shall have reasonably concluded that there may be a conflict of interest between the General Partner and the Partnership on the one hand and the indemnified party on the other in the conduct of the defense of such action which would materially hinder the ability of counsel to the General Partner and the Partnership to represent the indemnified party. The indemnified party shall not pay or settle any claim which the General Partner or the Partnership is contesting. Notwithstanding the foregoing, the indemnified party shall have the right to pay or settle any such claim, provided that in such event it shall waive any right to indemnity therefor by the General Partner and the Partnership. If the General Partner or the Partnership does not promptly notify the indemnified party within 10 days after the receipt of the indemnified party's notice of a claim of indemnity hereunder that it elects to undertake the defense thereof, the indemnified party shall have the right to contest, settle or compromise the claim at the expense of the General Partner and the Partnership, but shall not thereby waive any right to indemnity therefor pursuant to this Amendment. **(d) COUNTERPARTS. This Amendment may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other party. Copies of executed counterparts transmitted by telecopy, telefax or other electronic transmission SERVICE shall be considered original executed counterparts for purposes of this Section, provided receipt of copies of such counterparts is confirmed. **(e) GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of New York without reference to the choice of law principles thereof. **(f) ENTIRE AGREEMENT. This Amendment, the ARTICLES Supplementary, the Agreement, the Partnership Agreement, Amendment No. 26, the Registration Rights Agreement, as amended, the Lock-up Letter, as amended, and all other agreements or other instruments executed by the parties hereto on or prior to the date of this Amendment and referred to herein contain the entire agreement between the parties with respect to the subject matter hereof and there are no agreements, understandings, representations or warranties between the parties other than those set forth or referred to herein. This Amendment is not intended to confer upon any person not a party hereto (and their successors and assigns) any rights or remedies hereunder. NOTICES. All notices and other communications hereunder shall be sufficiently given for all purposes hereunder if in writing and delivered personally, sent by documented overnight delivery service or, to the extent receipt is confirmed, telecopy, telefax or other electronic transmission service to the appropriate address or number as set forth below. Notices to the General Partner and the Partnership shall be addressed to: Home Properties of New York, Inc. 850 Clinton Square Rochester, New York 14604 Attn: Amy L. Tait (716) 546-4900 Telecopier No.: (716) 546-5433 with a copy to: Ann M. McCormick, Esq. c/o Home Properties of New York, Inc. 850 Clinton Square Rochester, New York 14604 (716) 546-4900 Telecopier No.: (716) 546-5433 or at such other address and to the attention of such other person as the General Partner or the Partnership may designate by written notice to SMRS. Notices to SMRS shall be addressed to: Express Mail: Michigan Department of Treasury Bureau of Investments 2501 Coolidge Road, Suite 400 East Lansing, Michigan 48823 Attn: Administrator (517) 373-0702 Telecopy No: (517) 373-0635 Other Mail: Michigan Department of Treasury Bureau of Investments 2501 Coolidge Road, Suite 400 East Lansing, Michigan 48823 Attn: Administrator with a copy to: Michigan Department of Attorney General Finance Division One Michigan Avenue Building 120 North Washington Square Lansing, Michigan 48933 Attn: Assistant in Charge (517) 373-1130 Telecopy No: (517) 335-3088 and an additional copy to: Rogers & Wells 200 Park Avenue New York, New York 10166-0153 Attn: Jay Bernstein or at such other address and to the attention of such other person as SMRS may designate by written notice to the General Partner. Notices to other Rights Holders, the Holders and the Investor Group Representative shall be by the above means and to such addresses and to the attention of such person as the Rights Holders, Holders and the Investor Group Representative may designate by written notice to the General Partner. For purposes of this Agreement, the Investor Group Representative and SMRS will only be deemed to have received any notice upon the written acknowledgment by one individual designated by the Investor Group Representative with authority to acknowledge such receipt or upon refusal by any such designee to accept receipt of any notice. The Investor Group Representative shall at all times provide the General Partner with a written designation of at least two individuals or titles of positions that are so designated with authority to acknowledge receipt of written notices. In all cases where a failure by the Rights Holders, the Holders and/or the Investor Group Representative to respond within a specified time frame shall be deemed to be their approval pursuant to this Agreement or to mean that they do not wish to purchase securities pursuant to this Agreement, then the written notice or request provided by the General Partner as described in this agreement hereof shall specifically state that a failure to respond within the indicated time frame shall be deemed to be an approval of the matter for which approval was sought. **(a) SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective SUCCESSORS. It is hereby agreed that any internal re- structuring or re-organization of SMRS shall not be deemed to be an assignment to a third party. **(b) HEADINGS. The Section, Article and other headings contained in this Amendment are inserted for convenience of reference only and will not affect the meaning or interpretation of this Amendment. All references to Sections or Articles contained herein mean Sections or Articles of this Amendment unless otherwise stated. **(c) AMENDMENTS AND WAIVERS. This Amendment may not be modified or amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modification or amendment is sought. Either party hereto may, only by an instrument in writing, waive compliance by the other party hereto with any term or provision hereof on the party of such other party hereto to be performed or complied with. The waiver by any party hereto of a breach of any term or provision hereof shall not be construed as a waiver of any subsequent breach. **(d) INTERPRETATION. For the purposes hereof: (i) words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other gender as the context requires; (ii) terms "hereof", "herein", and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Amendment as a whole and not to any particular provision of this Amendment, and Article, Section, references are to the Articles, Sections, paragraphs, Exhibits and Schedules to this Amendment unless otherwise specified; (iii) the word "including" and words of similar import when used in this Amendment shall mean "including, without limitation," unless the context otherwise requires or unless otherwise specified; (iv) the word "or "shall not be exclusive; and (v) provisions shall apply, when appropriate, to successive events and transactions. **(e) SEVERABILITY. Any provision hereof which is invalid or unenforceable shall be ineffective to the extent of such invalidity or un-enforceability, without affecting in any way the remaining provisions hereof. **(f) FURTHER ASSURANCES. The General Partner, the Partnership and SMRS agree that, from time to time, each of them will execute and deliver such further instruments of conveyance and transfer and take such other action as may be necessary to carry out the purposes and intents hereof. **(g) SPECIFIC PERFORMANCE. The General Partner, the Partnership, the Trust and SMRS each acknowledge that, in view of the uniqueness of the parties hereto, the parties hereto would not have an adequate remedy at law for money damages in the event that this Amendment were not performed in accordance with its terms, and therefore agree that the parties hereto shall be entitled to specific enforcement of the terms hereof in addition to any other remedy to which the parties hereto may be entitled at law or in equity. IN WITNESS WHEREOF, this Amendment has been signed by or on behalf of each of the parties hereto on the dates set forth below to be effective as of August 1, 1999 as of the day first above written. HOME PROPERTIES OF NEW YORK, INC. By: Amy L. Tait, Executive Vice President HOME PROPERTIES OF NEW YORK, L.P. By: Home Properties of New York, Inc. General Partner By: Amy L. Tait, Executive Vice President STATE TREASURER OF THE STATE OF MICHIGAN, CUSTODIAN OF MICHIGAN PUBLIC SCHOOL EMPLOYEES' RETIREMENT SYSTEM, STATE, EMPLOYEES' RETIREMENT SYSTEM, MICHIGAN STATE POLICE RETIREMENT SYSTEM AND MICHIGAN JUDGES' RETIREMENT SYSTEM By: Jon Braeutigam Administrator EX-4 4 EXHIBIT 4.2 HOME PROPERTIES OF NEW YORK, L.P. AMENDMENT NO. 27 TO SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP This Amendment amends, as of December 22, 1999, the Second Amended and Restated Agreement of Limited Partnership, as amended ("Partnership Agreement"), dated as of September 23, 1997, of Home Properties of New York L.P. (the "Partnership") among Home Properties of New York, Inc., as general partner (the "General Partner"), and each of the persons listed on Schedule A to the Partnership Agreement, as amended from time to time, as limited partners. WHEREAS, the Class A Limited Partnership Interest ("Class A Interest") was created pursuant to Article X of the Partnership Agreement and was issued to the State Treasurer of the State of Michigan, Custodian of Michigan Public School Employees' Retirement System, State Employees' Retirement System, Michigan State Police Retirement System and Michigan Judges' Retirement System (collectively, the "SMRS") as of December 30, 1996. WHEREAS, the General Partner has been advised that it is preferable for SMRS to hold their investment through a class of preferred stock of the General Partner rather than through the existing Class A Interest in the Partnership; and WHEREAS, the General Partner has created a new class of preferred stock entitled "Series A Convertible Preferred Stock" (the "Series A Preferred Stock") with substantially the same rights and privileges as the Class A Interest pursuant to the terms of Articles Supplementary (the "Articles Supplementary") to the Amended and Restated Articles of Incorporation of the General Partner, as amended; and WHEREAS, the General Partner has contributed 1,666,667 shares of the Series A Preferred Stock to the capital of its wholly-owned "qualified REIT subsidiary" Home Properties Trust (the "QRS") so that the QRS may deliver the 1,666,667 shares of Series A Preferred Stock to SMRS in exchange for the Class A Interest currently held by SMRS and, thereafter, hold such Class A Interest pursuant to the terms of the Amendment to Partnership Interest Purchase Agreement and Exchange Agreement, dated as of the date hereof, among the General Partner, the Partnership and SMRS (the "Exchange Agreement"); and WHEREAS, SMRS has agreed to exchange its Class A Interest for 1,666,667 shares of the Series A Preferred Stock as further provided in the Exchange Agreement; and WHEREAS, the parties desire to reflect the withdrawal, as of December 22, 1999, of SMRS as a partner of the Partnership and to reflect to admission of the QRS as holder of all of the Class A Interest and to amend certain rights and benefits of the Class A Interest to parallel those set forth for the Series A Preferred Stock in the Articles Supplementary. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained in the Exchange Agreement and this Amendment, SMRS, the Partnership, and the General Partner agree as follows: 1. Except as otherwise defined herein, capitalized terms used in this Amendment shall have the meaning ascribed thereto in the Partnership Agreement. 2. SMRS hereby transfers and assigns the Class A Interest to the QRS and the QRS assumes such Class A Interest, modified as set forth below, and SMRS hereby withdraws as a limited partner of the Partnership effective as of December 1, 1999. The General Partner hereby consents to the admission of the QRS as a limited partner of the Partnership holding the Class A Interest and the Trust is so admitted. 3. Article X of the Partnership Agreement is hereby deleted and replaced in its entirety with the following: ARTICLE X CLASS A LIMITED PARTNERSHIP INTERESTS Section 10.01 NAME. Pursuant to Section 3.03 of this Partnership Agreement, a class of Partnership Interest was created as of December 30, 1996 known as the Class A Limited Partnership Interest (the "Class A Interest"). Section 10.02 CAPITAL CONTRIBUTION. On December 30, 1996, the State Treasurer of the State of Michigan, Custodian of Michigan Public School Employees' Retirement System, State Employees' Retirement System, Michigan State Police Retirement System and Michigan Judges' Retirement System ("SMRS") contributed $35,000,000 (the "Original Investment") to the Partnership in consideration for the issuance to it by the Partnership of the Class A Interest which was deemed to be the Capital Contribution of the Class A Interest Holder(s). The QRS shall assume the Capital Account of SMRS with respect to the Class A Interest as of December 1, 1999. Section 10.03 STATUS OF HOLDERS. Holder(s) of all or any portion of the Class A Interest shall be Limited Partner(s) of the Partnership and, except as otherwise provided herein, shall be entitled to all of the rights and privileges of the other Limited Partners, as well as the additional rights and privileges described below. For purposes of voting on matters that must be approved by the Limited Partners, the Class A Interest Holder(s) shall be deemed to hold the number of Units equal to $35,000,000 divided by the Conversion Price times the percentage of the Class A Interest originally issued hereby that has not been converted into Conversion Units (as defined in, and subject to adjustment in accordance with, Section 10.06(b) below) provided, however, if at any time the Class A Interest is held by an Affiliated Person, the Class A Interest Holder(s) shall have no right to vote on matters that must be approved by the Limited Partners other than those matters to be voted on by the Class A Interest Holder(s) as a class, as set forth in Section 10.08 below. Section 10.04 CERTAIN ADDITIONAL DEFINITIONS. As used in this Article X, the following terms have the meaning set forth below: "Accrued Return" has the meaning set forth in Section 10.05(e). "Articles Supplementary" shall mean the Articles Supplementary relating to the Series A Preferred Stock. "Board of Directors" shall mean the Board of Directors of the General Partner. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York are authorized or required by law to close. "Code" means the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. "Common Stock" means the General Partner's common stock, par value $.01 per share. "Conversion Date" has the meaning set forth in Section 10.06(a) "Conversion Notice" has the meaning set forth in Section 10.06(a). "Conversion Price" has the meaning set forth in Section 10.06(b). "Conversion Right" has the meaning set forth in Section 10.06(a). "Conversion Units" means the Units received on conversion of all or any of the Series A Interest that have not previously been sold or otherwise transferred on a Public Basis. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Junior Units" has the meaning set forth in Section 10.07(a). "Market Value" means, with respect to a share of Common Stock, the average of the daily market price for the 10 consecutive trading days immediately preceding the date on which the Market Value is to be determined. The market price for each such trading day shall be: (i) if the shares of Common Stock are listed or admitted to trading on any securities exchange or the NASDAQ-National Market System, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day, or (ii) if the shares of Common Stock are not listed or admitted to trading on any securities exchange or the NASDAQ-National Market System, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the General Partner, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 10 days prior to the date in question) for which prices have been so reported; provided, that if there are no bid and asked prices reported during the 10 days prior to the date in question, the Market Value of a share of Common Stock shall be determined by the General Partner acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate. "9.0% Preferred Return Period" has the meaning set forth in Section 10.05(a). "Parity Units" has the meaning set forth in Section10.07(a). "Preferred Return" has the meaning set forth in Section 10.05(a). "Preferred Return Payment Date" has the meaning set forth in Section 10.05(c). "Public Basis" means the sale of any shares of Common Stock by means of any public stock exchange or in any Public Offering. "Public Offering" means a public offering of shares of Common Stock or shares of Preferred Stock of the General Partner or interests in the Partnership (including Units), other than a registration relating solely to the sale of securities to participants in a dividend reinvestment plan, a registration relating to a business combination or similar transaction permitted to be registered on a Form S-4 or any form serving a comparable purpose, a registration relating solely to the sale of securities to participants in a stock or employee benefit plan, or a registration permitted under Rule 462 under the Securities Act registering additional securities of the same class as were included in an earlier registration statement for the same offering and declared effective. "Qualified REIT Subsidiary" means the Partnership, the QRS or any other qualified real estate investment trust subsidiary, as such term in defined in the Code, of the General Partner. "Securities Act" means the Securities Act of 1933, as amended. "Senior Units" has the meaning set forth in Section 10.07(a). "Series A Issuance Date" has the meaning set forth in Section 10.05(c). "Series A Liquidation Preference" has the meaning set forth in Section 10.09(a). "Series A Preferred Stock" means the class of preferred stock described in the Articles Supplementary and designated "Series A Convertible Preferred Stock ." "SMRS" means Michigan Public School Employees' Retirement System, State Employees' Retirement System, Michigan State Police Retirement System and Michigan Judges' Retirement System. Section 10.05 PREFERRED RETURN. (a) The General Partner shall pay a distribution equal to the Preferred Return to the holders of the Series A Interest on a quarterly basis in accordance with Section 10.05(c) prior to the payment of any distributions to the holders of Junior Units, whether such distributions constitute Available Cash, a return of capital or other distribution. Commencing as of December 1, 1999 and, except as provided below in this subparagraph, continuing to December 30, 2003 (the "9.0% PREFERRED RETURN PERIOD"), the holders of the Class A Interest shall receive, on a quarterly basis in accordance with Section 10.05 (c), a distribution equal to the greater of: (x) an amount equal to the product of (i) the number of Units equal to $35,000,000 divided by the Conversion Price times the percentage of the Class A Interest originally issued hereby that has not been converted into Conversion Units (as defined in, and subject to adjustment in accordance with, Section 10.06(b) below) held by such holders multiplied by the Series A Liquidation Preference and (ii) 2.25% (or 9.0% per annum), or (y) an amount equal to the dividends and other distributions that would have been paid on the number of Conversion Units equal to $35,000,000 divided by the Conversion Price (as such may be adjusted from time to time pursuant to Section 10.05(d)) (the "PREFERRED RETURN"). Notwithstanding the above, if on December 30, 2003, the holders of the Class A Interest have not been paid actual distributions of at least $809,375 (as such may be adjusted from time to time pursuant to Section 10.05(d)) on each of the prior eight (8) consecutive Preferred Return Payment Dates (as hereinafter defined) or any distribution of a Preferred Return from any prior period remains unpaid, the 9.0% Preferred Return Period shall continue until the Preferred Return Payment Date which shall be the eighth (8th) consecutive Preferred Return Payment Date thereafter occurring on which the holders of the Class A Interest have been paid actual distributions of at least $809,375 (as such may be adjusted from time to time pursuant to Section 10.05(d)) and until there remains outstanding no unpaid distribution of a Preferred Return. (b) On and after December 30, 2003, the holders of the Class A Interest shall continue to receive, on a quarterly basis in accordance with Section 10.05(c), an amount equal to the dividends and other distributions that would have been paid on the number of Conversion Units equal to $35,000,000 divided by the Conversion Price (as such may be adjusted from time to time pursuant to Section 10.06(b)). (c) The distributions required by this Section 10.05 shall be cumulative, shall accrue from the Series A Issuance Date (as hereinafter defined) and shall be payable to the holders of the Class A Interest, when, as and if declared by the Board of Directors, out of funds legally available for the payment of distributions, on a calendar quarterly basis on the same date that the General Partner pays a quarterly or other distribution to the holders of the Units. If the General Partner does not pay a distribution to the holders of the Units, the distributions required by this Section 10.05 shall be payable on the fourth Tuesday of each of February, May, August and November or on the next Business Day thereafter if such day shall not be a Business Day. Each of the dates on which such a distribution shall be so payable shall be a "PREFERRED RETURN PAYMENT DATE." The first distribution payable to the holders of the Class A Interest after the Series A Issuance Date shall be pro-rated for the number of days occurring from the date the 1,666,667 shares of Series A Preferred Stock are originally issued to SMRS (the "SERIES A ISSUANCE DATE") to and including the last day of the calendar quarter in which the Series A Issuance Date occurs. (d) To the extent that any portion of the Class A interest is converted into Conversion Units in accordance with Section 10.06 below, the distributions described in Sections 10.05(a) and 10.05(b) above shall terminate with respect to the portion of the Class A Interest so converted; provided, however, that on the next Preferred Return Payment Date the holders of the Conversion Units issued upon the conversion of the Class A Interest corresponding to the number of Series A Preferred Stock converted shall receive a distribution equal to the distribution which would otherwise have been payable with respect to such the equivalent portion of the Class A Interest multiplied by a fraction, the numerator of which is the number of days between the Preferred Return Payment Date immediately preceding the conversion and the date of the conversion and the denominator of which is 90, less any distribution payable to the holders of Units during the same 90 day period. (e) To the extent that a distribution required by this Section 10.05 is not paid on any Preferred Return Payment Date, the amount not paid shall accumulate and accrue interest at the rate of 9.0% per annum during the 9.0% Preferred Return Period, compounded quarterly on each Preferred Return Payment Date that it remains unpaid (the "ACCRUED RETURN"). Thereafter, any distributions paid by the General Partner shall first be applied to pay any Accrued Return previously due, but not paid. (f) So long as any of the Class A Interest is outstanding, no distributions (other than dividends or distributions paid in kind, or options, warrants or rights to subscribe for or purchase of, Junior Units) shall be declared or paid or set apart for payment by the General Partner or the Partnership or other distribution of cash or other property declared or made directly or indirectly by the General Partner, the Partnership or any affiliate or any Person acting on behalf of the General Partner or the Partnership or any of their affiliates with respect to any Junior Units, nor shall any shares of Junior Units, be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of Units made for purposes of an employee incentive or benefit plan of the General Partner or any subsidiary or an acquisition of an immaterial number of Units as determined by the Board of Directors to be in the best interests of the General Partner and/or the Partnership) for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any such Units) directly or indirectly by the General Partner, the Partnership or any affiliate or any Person acting on behalf of the General Partner, the Partnership or any of their affiliates (except by conversion into or exchange for Junior Units or Conversion Units), nor shall any other cash or other property otherwise be paid or distributed to or for the benefit of any holder of Junior Units in respect thereof, directly or indirectly, by the General Partner, the Partnership or any affiliate or any Person acting on behalf of the General Partner, the Partnership or any of their affiliates unless in each case (i) the full cumulative distributions (including all accumulated, accrued and unpaid dividends) on the Class A Interest and any other Parity Units of the Partnership shall have been paid or such distributions have been declared and set apart for payment for all past periods with respect to the Class A Units and all past distribution periods with respect to such Parity Units and (ii) sufficient funds shall have been paid or set apart for the payment of the full dividend for the current dividend period with respect to the Class A Interest and the current dividend period with respect to such Parity Units. In addition, none of the actions described in this Section 10.05(f) regarding Junior Units, shall be made with respect to Parity Units, other than on a pari passu basis with the Class A Interest. Section 10.06. CONVERSION RIGHTS. (a) All or a portion of the Class A Interest shall be deemed to have automatically converted into Conversion Units upon any conversion of the Series A Preferred Stock as provided in the Articles Supplementary (the "CONVERSION RIGHT"). In the event that any holder of the Series A Preferred Stock has exercised its Conversion Right, the General Partner shall notify the holders of the Class A Interest that their interest shall automatically be converted on a pro rata basis with respect to that portion of the Class A Interest corresponding to the number of shares of Series A Preferred Stock that are to be converted (the "CONVERSION NOTICE"). Within 10 days after the giving of a Conversion Notice (the "CONVERSION DATE"), the General Partner will notify each holder of the Class A Interest of the number of Units issuable upon the conversion of the portion of the Class A Interest specified in such Conversion Notice. Any fractional Unit arising upon a conversion will be settled as provided in Section 10.06(e). The portion of the Class A Interest so redeemed will no longer be deemed to be outstanding and all rights of the holder with respect to that potion of the Class A Interest so converted will immediately terminate, except the right to receive Units and any unpaid Accrued Return and/or other accumulated, accrued and unpaid distributions. (b) Upon each conversion, the holder of the shares of Class A Interest so converted will receive that number of Conversion Units as shall equal the product of (i) the percentage determined by dividing the number of shares of Series A Preferred Stock so converted by the 1,666,667 shares of the Series A Preferred Stock originally issued hereby and (ii) $35,000,000, divided by the Conversion Price, for the shares of Class A Preferred Stock determined in accordance with the Articles Supplementary, which as of December 1, 1999 was $21.00, and is subject to adjustment as provided in the Articles Supplementary (the "CONVERSION PRICE"). (c) The General Partner will at all times reserve and keep available, free from preemptive rights, for the purpose of effecting conversion of the Class A Interest, the maximum number of Units which the General Partner would be required to deliver upon the conversion of all the outstanding Class A Interest. For the purpose of this Section 10.06(c), the number of Units which the General Partner would be required to deliver upon the conversion of all of the Class A Interest will be computed as if at the time of the computation all the outstanding Class A Interest were held by a single holder. (d) No fractional Units will be issued upon conversion of the Class A Interest. Any fractional Unit resulting from conversion of the Class A Interest will be paid in cash (computed to the nearest cent) based on the Market Value of the HP Shares on the trading day next preceding the Conversion Date. (e) With respect to Conversion Dates occurring on or after December 31, 2001, a holder of the Class A Interest so converted shall receive, in addition to the Units to be issued pursuant to Section 10.06(b), that additional number of Units, if any, as shall be necessary in order that such holder will receive, on the next date on which distributions are paid by the General Partner with respect to the Units, distributions equal to $.4725 per share of the Conversion Units converted, assuming that the distribution paid per Unit did at the time of conversion not change from the distribution paid on the payment date immediately preceding the Conversion Date. (f) Except as otherwise provided in Sections 10.06(a) and (b), the Class A Interest shall not be convertible in to any other securities of the Partnership or the General Partner. Section 10.07. RANKING. (a) Any class or series of interests in the Partnership shall be deemed to rank: (i) prior or senior to the Class A Interest, as to the payment of periodic distributions and as to distribution of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of the Class A Interest ("SENIOR UNITS"); (ii) on a parity with the Class A Interest, as to the payment of periodic distributions and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the distribution rates, payment dates or redemption or liquidation prices per share thereof be different from those of the Class A Interest, if the holders of such class of stock or series and the Class A Interest shall be entitled to the receipt of periodic distributions and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid distributions per share or liquidation preferences, without preference or priority of one over the other ("PARITY UNITS"); and (iii) junior to the Class A Interest, as to the payment of periodic distributions or as to the distribution of assets upon liquidation, dissolution or winding up, if such class or series shall be Units or if the holder of the Class A Interest shall be entitled to receipt of periodic distributions or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of such class or series (the "JUNIOR UNITS"). (b) The Class A Interest is prior in right and senior to the Class B Interest as to the payment of periodic distributions and as to distribution of assets upon liquidation, dissolution or winding up. Section 10.08. VOTING RIGHTS. (a) GENERAL. Except as set forth below, the holders of the Class A Interest shall vote together with the other Limited Partners as a single class, provided, however, that any portion of the Class A Interest held by an Affiliated Person, will not have any voting rights, except as set forth below. (b) CERTAIN VOTING RIGHTS. So long as any portion of the Class A Interests remain outstanding, the Partnership shall not, without the affirmative vote of the holders of at least a majority in interest of the Class A Interest outstanding at the time (i) designate or create, or increase the authorized or issued amount of any class or series of Senior Units or reclassify any authorized interests in the Partnership into any such class or series, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such class of series of Senior Units, (ii) designate or create, or increase the authorized or issued amount of, any class or series of Parity Units or reclassify any authorized interests in the Partnership into any such class or series, or create, authorize or issue any obligations or security convertible into or evidencing the right to purchase any such class or series, or (iii) either (A) consolidate, merge into or with, or convey, transfer or lease its assets substantially as an entirety, to any corporation or other entity, or (B) amend, alter or repeal the provisions of the Partnership Agreement (including this Article X), whether by merger, consolidation or otherwise, in each case that would materially and adversely affect the powers, special rights, preferences, privileges or voting power of the Class A Interest or the holders thereof; provided, however, that with respect to the occurrence of a merger, consolidation or a sale or lease of all of the Partnership's assets as an entirety, so long as (a) the Partnership or the General Partner is the surviving entity and the Class A Interest or a Convertible Units remains outstanding with the terms thereof unchanged, or (b) the resulting, surviving or transferee entity is a corporation, partnership or similar entity organized under the laws of any state and substitutes the Class A Interest for other preferred securities having substantially the same terms and same rights as the Class A Interest, including with respect to distributions, voting rights and rights upon liquidation, dissolution or winding-up, then the occurrence of any such event shall not be deemed to materially and adversely affect such rights, privileges or voting powers of the holders of the Class A Interest; provided, further, that any increase in the amount of authorized preferred interest or the creation or issuance of any other class or series of preferred interest, or any increase in an amount or authorized number of each class or series, in each case ranking either junior to the Class A Interest with respect to payment of periodic distributions and the distribution of assets upon liquidation, dissolution or winding-up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers. Section 10.09 LIQUIDATION, DISSOLUTION OR WINDING UP. (a) Upon liquidation, dissolution, or winding up (voluntary or otherwise) of the Partnership, the holders of Class A Interest shall receive an amount equal to $35,000,000 multiplied by a fraction, the numerator of which is the number of shares of Series A Preferred Stock outstanding and the denominator of which is 1,666,667, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, and the capital adjustment in respect of all outstanding preferred interests and Units, respectively, shall receive their ratable and proportionate share of the remaining assets to be distributed with respect to such preferred interests and Units, on a per unit equivalent basis, respectively. (b) For purposes of this Section 10.09, a consolidation or a merger of the Partnership with another entity wherein the Partnership, the General Partner or an Affiliated Person is not the surviving entity, or a sale of all or substantially all of the Partnership's assets for cash or securities other than to the General Partner or an Affiliated Person, will be considered a liquidation of the Partnership. Section 10.10. REDEMPTION OF THE CLASS A INTEREST (a) The Class A Interest is not redeemable by the Partnership prior to December 30, 2006. On and after December 30, 2006, the Partnership, upon not less than 20 Business Days written notice, shall redeem, in whole but not in part, the remaining Class A Interest to the extent that the General Partner redeems shares of the Series A Preferred Stock that have not yet been converted into Common Stock, at a redemption price per share equal to $35,000,000 multiplied by a fraction, the numerator of which is the number of shares of Series A Preferred Stock then outstanding and the denominator of which is 1,666,667 plus an amount equal to accrued and unpaid distributions thereon, whether or not declared, to the date of such redemption. Within 10 Business Days prior to such redemption, the General Partner shall notify the holders of the Class A Interest as to whether any holders of the Series A Preferred Stock plan to exercise their right under the Articles Supplementary to convert such remaining shares of Series A Preferred Stock into Common Stock prior to the redemption of the Series A Preferred Stock. If the holders of the Series A Preferred Stock do not so exercise their Conversion Right and, accordingly, none of the Class A Interest is converted into Conversion Units as provided in Section 10.06, then upon payment of the Redemption Price, all of the rights of the holders of the Class A Interest under this Partnership Agreement shall terminate. (b) Unless full cumulative distributions on all shares of Senior Units and Parity Units shall have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, none of the Class A Interest, any other Senior Units or any Parity Units shall be redeemed unless all of the Class A Interest, other Senior Units and Parity Units are simultaneously redeemed. Furthermore, unless full cumulative distributions on any outstanding Class A Interest, other Senior Units and Parity Units have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for payment for all past distribution periods and the then current distribution period, neither the Partnership nor the General Partner shall purchase or otherwise acquire, directly or indirectly, the Class A Interest, any other Senior Units or any Parity Units (except by conversion into or exchange for shares of Junior Units). (c) The Class A Interest will not be subject to any sinking fund or mandatory redemption. Section 10.11 TRANSFER RIGHTS. The Class A Interest shall not be transferred by the QRS in whole or in part except to the General Partner or any Affiliated Person (which is not an individual). Upon receipt of a duly executed assignment of Class A Interest to such a permitted transferee, the General Partner shall execute an amendment to this Partnership Agreement adding the name or names of such Persons to Schedule A and the assignee shall be admitted to the Partnership as an Additional Limited Partner. 4. Entire Agreement. This Amendment, the Partnership Agreement, the Articles Supplementary and the Exchange Agreement contain the entire agreement between the parties with respect to the matters contained herein, and supersede all negotiations, agreements, representations, warranties, commitments, whether in writing or oral, prior to the date hereof. 5. Execution and Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, and such counterparts together shall constitute one instrument. Each party shall receive a duplicate original of the counterpart copy or copies executed by it and by the General Partner. 6. Full Force and Effect. Except as expressly set forth in this Amendment the Partnership Agreement shall continue in full force and effect as written and shall be enforceable against the parties thereto in accordance with its terms except as amended hereby. IN WITNESS WHEREOF, this Amendment No. 27 to the Second Amended and Restated Agreement of Limited Partnership of Home Properties of New York, L.P. is hereby executed on the dates set forth below to be effective as of the date first above written. Date: December 22, 1999 GENERAL PARTNER HOME PROPERTIES OF NEW YORK, INC. By:/S/ Norman P. Leenhouts Norman P. Leenhouts Its: Chairman WITHDRAWING CLASS A LIMITED PARTNER Date: December 22, 1999 STATE TREASURER OF THE STATE OF MICHIGAN, CUSTODIAN OF MICHIGAN PUBLIC SCHOOL EMPLOYEES' RETIREMENT SYSTEM, STATE EMPLOYEES' RETIREMENT SYSTEM, MICHIGAN STATE POLICE RETIREMENT SYSTEM AND MICHIGAN JUDGES' RETIREMENT SYSTEM By: /s/ Jon Braeutigam ------------------------- Jon Braeutigam, Administrator NEW CLASS A LIMITED PARTNER HOME PROPERTIES TRUST Date: December 22, 1999 By:/s/ Norman Leenhouts Title: Date: December __, 1999 LIMITED PARTNERS LISTED ON ATTACHED SCHEDULE A: By: Home Properties of New York, Inc., as attorney-in-fact By: ___________________ Title: __________________ EX-5 5 Exhibit 5.1 Nixon Peabody LLP Attorneys at Law Clinton Square Post Office Box 1051 Rochester, New York 14603-1051 (716) 263-1000 Fax: (716) 263-1600 December 28, 1999 Home Properties of New York, Inc. 850 Clinton Square Rochester, New York 14604 Ladies and Gentlemen: We have acted as counsel to Home Properties of New York, Inc.(the "Company") in connection with the Registration Statement on Form S-3, filed today, by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended, relating to the offer and sale of up to 1,679,543 of shares of common stock, par value $0.01 per share (the "Common Stock"), which may be issued from time to time to the "Selling Shareholders" named in the prospectus ("Prospectus") forming a portion of the Registration Statement. This opinion is being provided to you in connection with the filing of the Registration Statement. We have examined the originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and all such agreements, certificates of public officials, certificates of officers o other representatives of the Company, and such other documents, certificates and corporate or other records as we have deemed necessary or appropriate as a basis for the opinions set forth herein, including (i) the Articles of Amendment and Restatement of the Articles of Incorporation of the Company, as amended to the date hereof (the "Articles of Incorporation"), (ii) the Amended and Restated By-Laws of the Company, as amended to the date hereof (the "By-Laws"), (iii) certified copies of certain resolutions duly adopted by the Board of Directors of the Company, and (iv) the Second Amended and Restated Agreement of Limited Partnership, as amended (the "Partnership Agreement") of Home Properties of New York, L.P. (the "Operating Partnership"). As to factual matters material to the opinions set forth below we have relied, without investigation, upon the representations and statements of the Company in the Registration Statement and in such certificates of government officials and officers of the Company as we have deemed necessary for the purposed of the opinions expressed herein. The opinions stated herein are limited to the federal laws of the United States, the laws of the State of New York and the General Corporation Law of the State of Maryland. Based upon and subject to the conditions and limitations set forth herein, we are of the opinion that: When the Registration Statement has become effective under the Act and the shares of Common Stock have been issued in exchange for Units as described in the Partnership Agreement, and the certificates representing such shares of Common Stock are authenticated and delivered, such shares of Common Stock issued will be duly authorized, validly issued, fully paid and non-assessable by the Company. We hereby consent to the filing of this opinion as an exhibit to the above-referenced Registration Statement and to the use of our name as it appears under the caption "Legal Matters" in the Prospectus contained in such Registration Statement. Very truly yours, /s/ Nixon Peabody LLP EX-8 6 EXHIBIT 8.1 NIXON PEABODY LLP Attorneys at Law Clinton Square Post Office Box 1051 Rochester, New York 14603-1051 (716) 263-1000 Fax: (716) 263-1600 December 28, 1999 Home Properties of New York, Inc. 850 Clinton Square Rochester, New York 14604 Gentlemen: We have acted as counsel to Home Properties of New York, Inc. ("Home Properties") in connection with the Registration Statement on Form S-3 filed with the Securities and Exchange Commission today (the "Registration Statement"). This opinion relates to the Company's qualification for federal income tax purposes as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), for taxable years beginning with the taxable year ending December 31, 1994 and to the accuracy of the "FEDERAL INCOME TAX CONSIDERATIONS" section of the Registration Statement. All capitalized terms used but not defined herein shall have the meaning assigned to them in the Registration Statement. For the purpose of rendering our opinion, we have examined and are relying upon the truth and accuracy, at all relevant times, of the statements, covenants, representations and warranties contained in the following documents: 1. The Articles of Amendment and Restatement of the Articles of Incorporation of Home Properties, as amended, and the Articles of Incorporation of the Management Companies. 2. The By-Laws of Home Properties, as amended, and the By-Laws of the Management Companies. 3. The Certificate of Limited Partnership and the Second Amended and Restated Agreement of Limited Partnership of Home Properties of New York, L.P., as amended (the "Operating Partnership"). 4. The Registration Statement. 5. Representations made to us by officers of Home Properties, the Operating Partnership and the Management Companies in certificates (the "Certificates") delivered to us in connection with the Registration Statement or this opinion, which we have no reason to believe contain any material inaccuracies. In connection with rendering this opinion, we have assumed and are relying upon, without any independent investigation or review thereof, the following: (i) the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as copies, and authenticity of the originals of such documents; (ii) that neither Home Properties, the Operating Partnership nor the Management Companies will make any amendments to its organizational documents after the date of this opinion that would adversely affect Home Properties' qualification as a REIT for any taxable year (iii) that no actions will be taken by Home Properties, the Operating Partnership or the Management Companies after the date hereof that would have the effect of altering the facts upon which the opinions set forth below are based; and (iv) that all documents, certificates, representations, warranties and covenants on which we have relied in rendering the opinions set forth below and that were given or dated earlier than the date of this opinion continue to remain accurate, insofar as relevant to the opinions set forth herein, from such earlier date through and including the date of this letter. We have neither independently investigated nor verified such representations, and we assume that such representations are true, correct and complete. We assume that Home Properties has been and will operated in accordance with applicable laws and the terms and that the descriptions of Home Properties, the Operating Partnership and the Management Companies and their activities, operations and governance set forth in the Registration Statement are true and correct. Based on our examination of the foregoing items, subject to the assumptions, exceptions, limitations and qualifications set forth herein, we are of the opinion that: 1. Commencing with Home Properties' taxable year ending December 31, 1994, Home Properties was organized in conformity with the requirements for qualification as a REIT under the Internal Revenue of 1986, as amended (the "Code"), its method of operation has enabled it to meet the requirements for qualification and taxation as a REIT under the Code, and the proposed method of operation described in the Prospectus included in the Registration Statement will enable Home Properties to satisfy the requirements for such qualification under the Code for subsequent taxable years. 2. Home Properties is properly treated as a partner for federal income tax purposes in the Operating Partnership, and the Operating Partnership is properly classified as a partnership for federal income tax purposes and not as an association taxable as a corporation. 3. The statements in the Prospectus included in the Registration Statement under the caption "FEDERAL INCOME TAX CONSIDERATIONS" to the extent such information constitutes matters of law, summaries of legal matters or legal conclusions, have been reviewed by us and are accurate in all material respect and fairly summarize the federal income tax considerations that are likely to be material to holders of common stock who are United States citizens or residents or domestic corporations and who are not subject to special treatment under the tax laws. Our opinions expressed herein are based upon our interpretation of the current provisions of the Code and existing judicial decisions, administrative regulations and published rulings and procedures (including the practices and policies in issuing private letter rulings, which are not binding on the Internal Revenue Service except with respect to the taxpayer who receives such ruling). Our opinions are not binding upon the Internal Revenue Service or courts and there is no assurance that the Internal Revenue Service will not successfully challenge the conclusions set forth herein. The Internal Revenue Service has not yet issued regulations or administrative interpretations with respect to various provisions of the Code relating to REIT qualification. Consequently, no assurance can be given that future legislative, judicial or administrative changes, on either a prospective or retroactive basis, would not adversely affect the accuracy of the conclusions stated herein. We undertake no obligation to advise you of changes in law which may occur after the date hereof. Our opinions are limited to the federal income tax matters and the federal law of the United States of America addressed herein, and no other opinions are rendered with respect to any other matter not specifically set forth in the foregoing opinion and we assume no responsibility as to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction. Home Properties' qualification and taxation as a real estate investment trust depend upon Home Properties' ability to satisfy, through actual operating results, the applicable asset composition, source of income, shareholder diversification, distribution, record keeping and other requirements of the Code necessary to qualify and be taxed as a REIT. The foregoing opinions are based upon the method of operation as described in the Registration Statement and facts stated in the Certificates and other documents described herein. We undertake no obligation to review at any time in the future whether Home Properties has fulfilled the requirements listed in this paragraph and, consequently, no assurance can be given that the actual results of Home Properties' operations for any taxable year will satisfy the requirements of the Code necessary to qualify or be taxed as a REIT. In the event any one of the statements, representations, warranties or assumptions we have relied upon to issue this opinion is incorrect in a material respect, our opinions might be adversely affected and may not be relied upon. We hereby consent to the reference to us under the captions "FEDERAL INCOME TAX CONSIDERATIONS" and "LEGAL MATTERS" in the Registration Statement, and to the filing of this opinion as an Exhibit to the Registration Statement, without implying or admitting that we are experts within the meaning of the Securities Act of 1933, as amended, with respect to any part of the Registration Statement. This letter is furnished to Home Properties, the Operating Partnership and the Management Companies and is solely for your benefit. This letter may not be relied upon by any other person or for any other purpose and may not be referred to or quoted from without our prior written consent. Very truly yours, /s/ Nixon Peabody LLP EX-12 7 EXHIBIT 12.1
Home Properties of New York, Inc. Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend (In Thousands) For The Three Original Months Properties* Ended Aug. 4- Jan. 1- Sep. 30, Year Ended December 31, Dec. 31, Aug. 3, 1999 1998 1997 1996 1995 1994 1994 Income before loss on disposition of property, minority interest and extraordinary item $ 9,243 $32,251 $12,958 $ 5,044 $ 4,500 $2,641 $ 783 Interest expense (including debt amortization) 11,606 23,980 11,967 9,208 6,432 1,444 3,126 Adjusted income 20,849 56,231 24,925 14,252 10,932 4,085 3,909 Fixed charges: Interest expense 11,606 23,980 11,967 9,208 6,432 1,444 3,126 Capitalized interest 51 189 - 63 - - - Rent expense 85 219 123 126 67 28 39 Preferred stock dividend 12 - - - - - - Total fixed charges 11,754 24,388 12,090 9,397 6,499 1,472 3,165 Ratio 1.77 2.31 2.06 1.52 1.68 2.78 1.24
* Original Properties is not a legal entity but rather a combination of twelve entities which were wholly owned by the predecessor corporation and its affiliates prior to the Company's initial public offering on August 4, 1994. EX-23 8 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-3 of our report dated January 30, 1999 relating to the consolidated financial statements, which appears in Home Properties of New York, Inc.'s Annual Report on Form 10-K as of December 31, 1998. We also consent to the incorporation by reference of our report dated January 30, 1999 relating to the financial statement schedule, which appears in such Annual Report on Form 10-K. We also consent to the incorporation by reference of our reports (1) dated June 18, 1999 on our audit of the CRC Portfolio for the year ended December 31, 1998, which report is included in Form 8-K/A Amendment No. 1 dated July 1, 1999 and filed on July 29, 1999, (2) dated July 1, 1999 on our audit of the Mid-Atlantic Portfolio for the year ended December 31, 1998, which report is included in Form 8-K dated July 15, 1999 and filed on July 30, 1999, and (3) dated October 26, 1999 and November 2, 1999 on our audits of the Ridley Portfolio and Colony Apartments, respectively, for the year ended December 31, 1998, which are included in Form 8-K/A Amendment No. 1 dated February 18, 1999 and filed on November 12, 1999. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Rochester, New York December 28, 1999 -----END PRIVACY-ENHANCED MESSAGE-----