As filed with the Securities and Exchange Commission on July 31, 1998AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 1999
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------333-_______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-----------------------------------
CORPORATE OFFICE PROPERTIES TRUST
(Exact name of Registrant as specified in its charter)
One Logan Square-----------------------
Maryland 401 City Avenue 23-2947217
(State or other jurisdiction of Suite 1105
Philadelphia,615 (IRS Employee
incorporation or organization) Bala Cynwyd, PA 19103
(215) 567-180019004 Identification Number)
(610) 538-1800
(Address, including zip code, and telephone number, including area code,
of Registrant'sregistrant's principal executive offices)
------------------
Clay---------------------------
CLAY W. Hamlin,HAMLIN, III
President and
Chief Executive Officer
One Logan SquareCorporate Office Properties Trust
401 City Avenue
Suite 1105
Philadelphia,615
Bala Cynwyd, PA 19103
(215) 567-180019004
(610) 538-1800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------
Copy---------------------------
Copies to:
JOHN F. BALES, ESQ.
MORGAN, LEWIS & BOCKIUS LLP
2000 One Logan Square
Philadelphia, PA 19103
(215) 963-5478
-----------------
Approximate date of commencement of proposed sale to the public:
John F. Bales, Esq. John H. Gurley, Esq. Robert E. King, Jr., Esq.
Morgan, Lewis & Bockius LLP Vice President & General Counsel Rogers & Wells LLP
1701 Market Street Corporate Office Properties Trust 200 Park Avenue
Philadelphia, PA 19103 401 City Avenue, Suite 615 New York, New York 10166
(215) 963-5478 Bala Cynwyd, PA 19004 (212) 878-8000
(610) 538-1800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this Registration Statement.
-----------------------
If the only securities being registered on this formForm are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this formForm 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 formForm is usedfiled 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 effective registration statement for the same offering. / /
If this formForm 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 effective 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 Shares Amount to be Proposed Maximum Proposed Maximum Amount of
Being Registered Registered Offering Price Per Share(1) Aggregate Offering Price(1) Registration Fee
---------------- ------------ --------------------------- --------------------------- ----------------- ---------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
Common Shares of Beneficial Interest
par 10,081,758 $8.46875 $85,379,888 $25,187
value $.01 per share(3)
Preferred Shares of Beneficial (1) (2)
Interest (3)(4)
Common Share Warrants (3)(5)
Preferred Share Warrants (3)(6)
- ---------------------------------------------------------------------------------------------------------------------
Total $250,000,000 $250,000,000 $69,500
- ---------------------------------------------------------------------------------------------------------------------
- -------------------
(1) The Proposed Maximum Offering Price Per Unit will be determined from time
to time by the Registrant in connection with the issuance of the
Securities.
(2) Estimated solely for purposesthe purpose of determiningcalculating the registration fee
pursuant to Rule 457(c) based on the average457(o) of the highSecurities Act of 1933, as amended (the
"Securities Act").
(3) This Registration Statement covers (a) Common Shares of Beneficial Interest
("Common Shares") issued other than on conversion of Preferred Shares of
Beneficial Interest ("Preferred Shares") or exercise of Common Share
Warrants and low salesincludes Common Shares which may be purchased by underwriters
to cover over-allotments, if any, and (b) subject to notes 5 and 6, the
number of other Securities listed above as may from time to time be issued
at indeterminate prices, but with an aggregate initial offering price for
all such Common Shares and other Securities not to exceed $250,000,000.
Also includes such presently indeterminate number of additional Common
Shares ("Additional Common Shares") as may be issued on (i) conversion of
any Preferred Shares as may be issued separately on exercise of Preferred
Share Warrants, if and to the New York Stock Exchangeextent such Preferred Shares are convertible
into Common Shares or (ii) exercise of any Common Share Warrants as may be
issued, if and to the extent exercisable for Common Shares. The Amount to
be Registered, Proposed Maximum Offering Price Per Unit, Proposed Maximum
Aggregate Offering Price and Amount of Registration Fee with respect to
such Preferred Shares and Common Share Warrants include such Additional
Common Shares.
(Footnotes continued on July __, 1998.next page)
(4) Includes Preferred Shares (a) issued other than on exercise of Preferred
Share Warrants and (b) which may be purchased by underwriters to cover
over-allotments, if any. Also includes such presently indeterminate number
of additional Preferred Shares ("Additional Preferred Shares") as may be
issued on exercise of any Preferred Share Warrants as may be issued, if and
to the extent exercisable for Preferred Shares. The Amount to be
Registered, Proposed Maximum Aggregate Offering Price and Amount of
Registration Fee with respect to such Preferred Share Warrants include such
Additional Preferred Shares.
(5) Includes Common Share Warrants which may be (a) issued other than as part
of Units of Common Share Warrants and other Securities and (b) purchased by
underwriters to cover over-allotments, if any. Also includes additional
Common Share Warrants ("Additional Common Share Warrants") which may be
offered as part of Units of Common Share Warrants and other Securities. The
Amount to be Registered, Proposed Maximum Aggregate Offering Price and
Amount of Registration Fee with respect to such Units of Common Share
Warrants and other Securities include such Additional Common Share
Warrants.
(6) Includes Preferred Share Warrants which may be (a) issued other than as
part of Units of Preferred Share Warrants and other Securities and (b)
purchased by underwriters to cover over-allotments, if any. Also includes
additional Preferred Share Warrants ("Additional Preferred Share Warrants")
which may be offered as part of Units of Preferred Share Warrants and other
Securities. The Amount to be Registered, Proposed Maximum Aggregate
Offering Price and Amount of Registration Fee with respect to such Units of
Preferred Share Warrants and other Securities include such Additional
Preferred Share Warrants.
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, AS AMENDED OR UNTIL THETHIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAIDSUCH
SECTION B(a)8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
Information contained hereinThe information in this prospectus is subject to completion or amendment. Anot complete and may be changed. We may
not sell these securities until the registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomesCommission is effective. This prospectus shallis not constitute an offer
to sell nor the
solicitation ofthese securities and it is not soliciting an offer to buy nor shall there be any sale of these
securities in any State in which suchstate where the offer solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED JULY __, 1998is not permitted.
SUBJECT TO COMPLETION, PROSPECTUS
10,081,758 SHARESDATED FEBRUARY 4, 1999
CORPORATE OFFICE PROPERTIES TRUST
$250,000,000
COMMON SHARES OF BENEFICIAL INTEREST
(PAR VALUE $.0l PER SHARE)
-------------------PREFERRED SHARES OF BENEFICIAL INTEREST
WARRANTS TO PURCHASE COMMON SHARES
WARRANTS TO PURCHASE PREFERRED SHARES
This Prospectus relates primarilyprospectus pertains to 9,481,758 Common Shares whichthe offer and sale by Corporate Office
Properties Trust may issue to certain investors who have the
right to receive either cash or Common Shares in exchange for limited
partnership interests these investors now hold. Oneof one or more of these investors
may offer and sell all or a portionits securities of their Common Shares, along with 600,000
Common Shares which certain of these investors already own, for a total of
10,081,758 Common Shares.the type identified above.
Corporate Office Properties Trust is registeringreferred to in this prospectus as "we,"
"us" or "COPT."
We may offer and sell any combination of the 10,081,758 Common
Shares pursuantsecurities described in
this prospectus in one or more offerings up to its obligationsa total dollar amount of
$250,000,000. This prospectus provides you with a general description of the
securities we may offer. Each time we offer securities, we will provide a
prospectus supplement which will accompany this prospectus. This prospectus may
not be used to sell these securities unless accompanied by a prospectus
supplement. The prospectus supplement will contain specific information about
the terms of the securities being offered at that time. The prospectus
supplement may also add, update or change information contained in this
prospectus. You should read both this prospectus and any prospectus supplement,
including the documents we have referred to under a registration rights agreement, but
the registration of those Common Shares does not necessarily mean thatheading "Where You Can
Find More Information," together with any of
those Common Shares will be offered or sold by these investors.
See "Risk Factors" beginning on page 3 for certain factors relevantadditional information you may need to
anmake your investment in the common shares.
Thedecision.
-------------------
BEFORE INVESTING IN OUR SECURITIES, YOU SHOULD REVIEW THE SECTION OF
THIS PROSPECTUS CALLED "RISK FACTORS" WHICH BEGINS ON PAGE 4.
-------------------
Our Common Shares are listed on the New York Stock Exchange under the
symbol "OFC." On February 2, 1999, the closing sale price of our Common Shares,
as reported on the New York Stock Exchange, was $8.0625. To ensure that Corporate Office Properties Trust maintains itswe
maintain our qualification as a real estate investment trust, ownership by any
person is limited to 9.8% of the lesser of the number or value of outstanding
Common Shares, withsubject to certain exceptions.
---------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon
the accuracydetermined if this
prospectus is truthful or adequacy of the prospectus.complete. Any representation to the contrary is a
criminal offense.
--------------------------
The investors referred to above from time to time may offer and sell
the Common Shares directly or through agents or broker-dealers on terms to be
determined at the time of sale. To the extent required, the names of any agent
or broker dealer and applicable commissions or discounts and any other required
information with respect to any particular offer will be set forth in an
accompanying Prospectus Supplement. See "Plan of Distribution."
The investors referred to above and any agents or broker-dealers that
participate with them in the distribution of the Common Shares may be deemed to
be "underwriters" within the meaning of the Securities Act of 1933, as amended
(the "Securities Act"), and any commission received by them and any profit on
the resale of the Common Shares may be deemed to be underwriting commissions or
discounts under the Securities Act. See "Registration Rights" for a description
of certain indemnification arrangements between Corporate Office Properties
Trust and these investors.
Corporate Office Properties Trust will not receive any proceeds from
either the issuance or the sale of the Common Shares by the investors referred
to above but has agreed to bear certain expenses of registration of such shares
under federal and state securities laws.
The date of this Prospectus is July ___,1998
TABLE OF CONTENTS
SUMMARY...........................................................................3
OUR COMPANY.......................................................................3
FORWARD-LOOKING STATEMENTS........................................................3
RISK FACTORS......................................................................4
USE OF PROCEEDS..................................................................10
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS.......10
GENERAL DESCRIPTION OF THE OFFERED SECURITIES....................................10
DESCRIPTION OF SHARES............................................................10
FEDERAL INCOME TAX MATTERS.......................................................19
PLAN OF DISTRIBUTION.............................................................28
EXPERTS..........................................................................30
LEGAL MATTERS....................................................................30
WHERE YOU CAN FIND MORE INFORMATION..............................................30
2
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements contained elsewhere in this Prospectus.
Unless the context otherwise requires, the "Company" refers to Corporate Office
Properties Trust and its predecessors and, where applicable, Corporate Office
Properties, L.P.,THIS PROSPECTUS SUMMARY CALLS YOUR ATTENTION TO SELECTED INFORMATION IN
THIS DOCUMENT, BUT IT DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO
YOU. TO UNDERSTAND US AND THE SECURITIES THAT MAY BE OFFERED THROUGH THIS
PROSPECTUS, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY THE
"RISK FACTORS" SECTION AND THE DOCUMENTS WE REFER YOU TO IN THE SECTION CALLED
"WHERE YOU CAN FIND MORE INFORMATION" BEGINNING ON PAGE 30.
OUR COMPANY
GENERAL. We are a Delaware limited partnership which the Company controls as
its sole general partner (the "Operating Partnership"fully-integrated, self-managed real estate investment
trust ("REIT"), and other subsidiaries.
This Prospectus, including the information incorporated by reference
herein, contains "forward-looking statements" relating to, without limitation,
future economic performance, and plans and objectives of management. The words
"believe," "expect," "anticipate,""estimate," and other similar expressions
which are predictions or indicate future events and trends and which do not
relate to historical matters may identify forward-looking statements. The
Company's actual results may differ significantly from the results discussed in
such forward-looking statements. Certain risk factors that might cause such a
difference are discussed in the section entitled "Risk Factors" beginning on
page 3 of this Prospectus. Prospective investors should carefully consider such
risk factors in conjunction with the other information contained or incorporated
by reference in this Prospectus before making a decision to purchase any Common
Shares. The Company cautions the reader, however, that such risk factors may not
be exhaustive.
The Company
General. The Company is a self-administered REIT which focuses principally on the acquisition, management,
ownership acquisition and managementdevelopment of suburban office properties in strong and growingtargeted suburban
submarkets principally in the Mid-Atlantic region of the United States. The Company
currently owns interests in 24As of
December 31, 1998:
- we owned 48 suburban office properties in Maryland, Pennsylvania
and New Jersey containing approximately 2.64.3 million rentable
square feet (the "Office Properties"). The Company also owns sevenfeet;
- we owned nine retail properties located in the Midwest containing approximately 370,000639,000
rentable square feet (the "Retail Properties" and, together with the Office
Properties, the "Properties"). As of June 30, 1998, the Propertiesfeet;
- our properties were over
97% leased. In addition, the Company has98.0% leased;
- we had options to purchase 44.3from related parties 156 acres of land
contiguous to certain of theour office properties; and
- we were developing three office properties totaling 269,000 square
feet.
We conduct almost all of our operations through our operating
partnership, Corporate Office Properties, L.P., a Delaware limited partnership.
We are the managing general partner of Corporate Office Properties, L.P.
Interests in our operating partnership are in the form of common and preferred
units. As of December 31, 1998, we owned approximately 85% of the outstanding
common units and approximately 32% of the outstanding preferred units. The
remaining common and preferred units in our operating partnership were owned by
related parties.
Substantiallythird parties which included certain of our officers and Trustees. If all
preferred units were converted into common units, we would have owned
approximately 62% of the Company's business pertainingcommon units as of December 31, 1998.
We are the successor to the Office
Properties is conducted through, and all of the Company's interest in the Office
Properties are held by or through, the Operating Partnership. The Company holds
Units in the Operating Partnership representing a 75.8% economic interest in the
Operating Partnership after giving effect to certain interests (the "Retained
Interests") which are required to be contributed to the Operating Partnership in
November 2000. The Company controls the Operating Partnership in its capacity as
the sole general partner.
The Company wascorporation organized in 1988 and elected to
be taxed as a REIT commencing with itsthe taxable year ended on December 31, 1992. The Company
believesWe
believe that it waswe are organized and hashave operated in a manner that permits itus to
satisfy the requirements for taxation as a REIT under the applicable provisions
of the Internal Revenue Code
of 1986, as amended, (the "Code"), and intendswe intend to continue to operate in such a manner. If
the Company qualifieswe qualify for taxation as a REIT, the Companywe generally will not be subject to federal
income tax on itsour taxable income that is distributed to itsour shareholders. A REIT
is subject to a number of organizational and operational requirements, including
a requirement that it currently distribute to its shareholders at least 95% of
its annual taxable income (excluding net capital gains).
The Company'sOur executive offices are located at One Logan Square,401 City Avenue, Suite 1105, Philadelphia, Pennsylvania 19103615, Bala
Cynwyd, PA 19004 and itsour telephone number is (215)
567-1800.
The Formation Transactions. On October 14, 1997, the Company completed
certain transactions (the "Formation Transactions") constituting the acquisition
by the Company of an interest in the Operating Partnership formed to acquire the
Office Properties.
Pursuant to the Formation Transactions, the Company became the sole
General Partner of the Operating Partnership, and the Operating Partnership
acquired all of the limited partnership interests in limited partnerships
holding the Office Properties (collectively, the "Properties Partnerships")
except for certain limited partnership interests retained by Shidler Equities,
L.P., a limited partnership controlled by Mr. Jay H. Shidler, Chairman of the
Board of the Company, and his spouse, and certain limited partnership interests
retained by Mr. Clay W. Hamlin, III, the President, Chief Executive Officer and
a trustee of the Company. These limited partnership interests held by Messrs.
Shidler and Hamlin constitute the Retained(610) 538-1800.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS AND OUR DOCUMENTS INCORPORATED BY REFERENCE HEREIN
CONTAIN "FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON OUR CURRENT EXPECTATIONS,
ESTIMATES AND PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING
STATEMENTS ABOUT OUR BELIEFS AND EXPECTATIONS, ARE FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE, EVENTS OR RESULTS AND
INVOLVE POTENTIAL RISKS AND UNCERTAINTIES. ACCORDINGLY, ACTUAL RESULTS MAY
DIFFER MATERIALLY. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
IMPORTANT FACTS THAT MAY AFFECT THESE EXPECTATIONS, ESTIMATES OR
PROJECTIONS INCLUDE, BUT ARE NOT LIMITED TO: OUR ABILITY TO BORROW ON FAVORABLE
TERMS; GENERAL ECONOMIC AND BUSINESS CONDITIONS, WHICH WILL, AMONG OTHER THINGS
AFFECT OFFICE PROPERTY DEMAND AND RENTS, TENANT CREDITWORTHINESS AND FINANCING
AVAILABILITY; ADVERSE CHANGES IN THE REAL ESTATE MARKETS INCLUDING, AMONG OTHER
THINGS, COMPETITION WITH OTHER COMPANIES; RISKS OF REAL ESTATE ACQUISITION AND
DEVELOPMENT; GOVERNMENTAL ACTIONS AND INITIATIVES; ENVIRONMENTAL REQUIREMENTS;
AND THE OTHER FACTORS DESCRIBED IN THIS PROSPECTUS UNDER THE HEADING "RISK
FACTORS" BEGINNING ON PAGE 4.
3
Interests. The Retained Interests are required to be contributed to the
Operating Partnership in November 2000 in consideration for the issuance to the
holders thereof of Units in the Operating Partnership. See "The Selling
Shareholders."
Pursuant to the Formation Transactions, in exchange for partnership
interests in various of the Properties Partnerships Messrs. Shidler and Hamlin
each acquired 300,000 Common Shares (the "Formation Shares") and certain
investors, including Messrs. Shidler and Hamlin, acquired certain limited
partnership units and/or preferred units (the "Acquired Units") of limited
partnership interest ("Units") in the Operating Partnership. Pursuant to a
registration rights agreement entered into as part of the Formation
Transactions, the holders of the Acquired Units have the right to tender the
Acquired Units to the Company for cash redemption, and the Company may, in its
sole and absolute discretion, exchange the tendered Acquired Units for Common
Shares (the "Redemption Shares"). The Formation Shares and the Redemption Shares
are hereinafter referred to together as the "Registered Shares" and the holders
thereof who offer and sell Registered Shares pursuant hereto are hereinafter
referred to as the "Selling Shareholders."
RECENT DEVELOPMENTS
On May 15, 1998, the Company and certain entities affiliated with
Constellation Real Estate Group, Inc. ("Constellation") signed an agreement
whereby the Company will acquire certain real commercial properties in the
Baltimore, Maryland - Washington, D.C. area, along with a majority interest
in a commercial property management company. Constellation is a wholly-owned
indirect subsidiary of Baltimore Gas and Electric Company. In exchange,
Constellation will receive Common Shares and cash and the Company will assume
certain Constellation debt. A special meeting of shareholders of the Company
has been set for August 21, 1998, to consider and vote to approve this
transaction (the "Constellation Transactions").
Constellation will contribute up to 18 commercial office and retail
properties with a total square footage of 1.4 million square feet. Of the
total, 196,000 square feet at two locations is currently under construction.
In addition to the office properties, Constellation will contribute certain
options and first refusal rights pursuant to which, over the next five years,
the Company may acquire 91 additional acres of undeveloped land contiguous to
the office properties being contributed. If the Company exercises its rights
to acquire all of the undeveloped land, the Company anticipates building an
additional 1.7 million square feet of office space. In addition to the real
property, Constellation will contribute its 75% ownership interest in
Constellation Management, LLC. Constellation Management, LLC provides
property and asset management services for a portfolio of 146 properties
comprising 14.8 million square feet in the suburban Baltimore, Northern
Virginia and Philadelphia areas.
The Company will pay Constellation consideration valued at
approximately $204.6 million, of which amount $107.6 million will be paid in the
form of cash or assumption of debt. The balance of the consideration will
consist of approximately 6,928,000 Common Shares and approximately 969,900
Series A Convertible Preferred Shares.
If approved, the Constellation Transactions will be consummated at
several closings. The closings for substantially all the properties and assets
to be acquired other than the Development Properties are expected to be
completed within 45 to 90 days after the special meeting of shareholders. The
closing for each of the Development Properties is contingent upon the
achievement of certain net operating income levels by July 1, 1999, and neither
closing is expected to occur in any event prior to the first quarter of 1999.
As a result of the Constellation Transactions, Constellation will have
the right, so long as it maintains certain levels of share ownership in the
Company, to designate up to two members of the Board of Trustees. Constellation
will own approximately 41.5% of the Company's Common Shares outstanding upon
closing of the Constellation Transactions, and as such will have the power to
prevent certain actions that require the approval of the holders of two thirds
of the Common Shares. Constellation, as holder of certain preferred shares in
the Company (the "Preferred Shares"), will be entitled to receive an annual
preferred, cumulative dividend payment of $1.375 per Preferred Share, equal to a
rate of 5.5% based on the $25.00 per share liquidation preference attributable
to the Preferred Shares, redeemable for Common Shares after 2 years
2
at the rate of $13.34 per Common Share. Additionally, in order to fulfill its
obligation to close on two retail properties which are part of the Constellation
Transactions (the "Development Properties"), the Company must obtain financing
commitments prior to the date of any such closing in amounts up to approximately
$25.6 million.
RISK FACTORS
An investment in the Common Shares involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus before making a decisionBEFORE YOU INVEST IN OUR SECURITIES, YOU SHOULD BE AWARE THAT THERE ARE
VARIOUS RISKS. WE HAVE DESCRIBED FOR YOU BELOW SOME OF THE RISKS INVOLVED IN
INVESTING IN THE COMMON SHARES WHICH MAY BE OFFERED UNDER THIS PROSPECTUS. A
WORD OF CAUTION: THE LIST BELOW IS NOT A COMPLETE LIST. YOU SHOULD CAREFULLY
CONSIDER EACH OF THESE FACTORS AND ALL OF THE INFORMATION BOTH IN THIS
PROSPECTUS AND THE DOCUMENTS WE REFER YOU TO IN THE SECTION CALLED "WHERE YOU
CAN FIND MORE INFORMATION" BEGINNING ON PAGE 30.
WE MAY INCUR PROBLEMS WITH OUR REAL ESTATE FINANCING
GENERALLY. Our strategy is to purchase the Common Shares offered hereby.
Real Estate Investment Risks
General Risks. Real property investments are subject to varying degrees
of risk. The yields available from equity investments in real estate depend in
large part on the amount of rental income earned and capital appreciation
generated, as well as property operating and other expenses incurred. If the
Properties do not generate revenues sufficient to meet operating expenses of the
Operating Partnership and the Company, including debt service, tenant
improvements, leasing commissions and other capital expenditures, the Operating
Partnership or the Company may have to borrow additional amounts to cover fixed
costs, and the Company's financial performance and ability to make distributions
to its shareholders may be adversely affected.
The Company's revenues and the value of the Properties may be adversely
affected by a number of factors, including (i) the national, state and local
economic climate and real estate conditions (such as oversupply of or reduced
demand for space and changes in market rental rates), (ii) the perceptions of
prospective tenants of the attractiveness, convenience and safety of the
Properties, (iii) the ability of the Company to provide adequate management,
maintenance and insurance, (iv) the ability to collect all rent from tenants on
a timely basis, (v) the expense of periodically renovating, repairing and
reletting spaces and (vi) increasing operating costs (including real estate
taxes and utilities) to the extent that such increased costs cannot be passed
through to tenants. Certain significant costs associated with investments in
real estate (such as mortgage payments, real estate taxes, insurance and
maintenance costs) generally are not reduced when circumstances cause a
reduction in rental revenues from the property and vacancies result in loss of
the ability to receive tenant reimbursements of operating costs customarily
borne by commercial real estate tenants. In addition, real estate values and
income from properties are also affected by such factors as compliance with laws
applicable to real property, including environmental and tax laws, interest rate
levels and the availability of financing. Furthermore, the amount of available
rentable square feet of commercial property is often affected by market
conditions and may therefore fluctuate over time.
Tenant Defaults and Bankruptcy. Substantially all of the Company's
income is derived, directly or through distributions from the Operating
Partnership, from rental income from properties. The distributable cash flow and
ability to make expected distributions to shareholders would be adversely
affected if any of the Company's largest tenants or a significant number of the
Company's tenants failed to meet their lease obligations. Tenants may seek the
protection of the bankruptcy laws, which could result in delays in rental
payments or in the rejection and termination of such tenant's lease and thereby
cause a reduction in the Company's cash flow and the amounts available for
distributions to its shareholders. No assurance can be given that tenants will
not file for bankruptcy protection in the future or, if any tenants file, that
they will affirm their leases and continue to make rental payments in a timely
manner. In addition, a tenant, from time to time, may experience a downturn in
its business, which may weaken its financial condition and result in the failure
to make rental payments when due. If tenant leases are not affirmed following
bankruptcy, or if a tenant's financial condition weakens, the Company's results
of operations and the amounts available for distribution to its shareholders may
be adversely affected.
Operating Risks. The Properties will be subject to operating risks
common to commercial real estate in general, any and all of which may adversely
affect occupancy and rental rates. The Properties will be subject to increases
in operating expenses such as cleaning, electricity, heating, ventilation and
air conditioning, maintenance, insurance and administrative costs, and other
general costs associated with security, landscaping, repairs and maintenance.
While the Company's current tenants generally are obligated to pay a portion of
these escalating costs, there can be no assurance that
3
tenants will agree to pay all or a portion of such costs upon renewal or that
new tenants will agree to pay such costs. If operating expenses increase, the
local rental market may limit the extent to which rents may be increased to meet
increased expenses without decreasing occupancy rates. While the Company
implements cost-saving incentive measures at each of its properties, the
Company's results of operations and ability to make distributions to
shareholders could be adversely affected if operating expenses increase without
a corresponding increase in revenues, including tenant reimbursements of
operating costs. In addition, when tenant leases expire, the Company may incur
significant retenanting costs for leasing commissions and tenant improvements.
Competition; Risk of Not Meeting Targeted Level of Leasing Activity,
Acquisitions and Development. Numerous commercial properties compete with the
Properties in attracting tenants to lease space, and additional properties can
be expected to be built in the markets in which the Properties are located. The
number and quality of competitive commercial properties in a particular area
will have a material effect on the Company's ability to lease space at its
current properties or at newly acquired properties and on the rents charged.
Some of these competing properties may be newer or better located than the
Properties. In addition, the commercial real estate market is highly competitive
particularly within the Mid-Atlantic region in which the Company presently
operates. There are a significant number of buyers of commercial property,
including other publicly traded commercial REITs, many of which have significant
financial resources. This situation has resulted in increased competition in
acquiring attractive commercial properties. Accordingly, it is possible that the
Company may not be able to meet its targeted level of property acquisitions and
developments due to such competition or other factors which may have an adverse
effect on the Company's expected growth in operations.
Possible Environmental Liabilities. Under various federal, state and
local environmental laws, ordinances and regulations, a current or previous
owner or operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such property. Such
laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect the owner's ability to
borrow using such real property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances may also be liable for
the costs of removal or remediation of hazardous substances at the disposal or
treatment facility, whether or not such facility is or ever was owned or
operated by such person. Certain environmental laws and common law principles
could be used to impose liability for release of and exposure to hazardous
substances, including asbestos-containing materials into the air, and third
parties may seek recovery from owners or operators of real properties for
personal injury or property damage associated with exposure to released
hazardous substances. As the owner of real properties, the Company may be
potentially liable for any such costs.
Effect of Americans with Disabilities Act Compliance on Cash Flow and
Distributions. Under the Americans with Disabilities Act of 1990 (the "ADA"),
all public accommodations and commercial facilities are required to meet certain
federal requirements related to access and use by disabled persons. Existing
commercial properties generally are subject to provisions requiring that
buildings be made accessible to people with disabilities. Compliance with the
ADA requirements could require removal of access barriers, and non-compliance
could result in imposition of fines by the U.S. government or an award of
damages to private litigants. While the amounts of such compliance costs, if
any, are not currently ascertainable, they are not expected to have a material
effect on the Company.
Risks Associated with Illiquidity of Real Estate. Equity real estate
investments are relatively illiquid. Such illiquidity will tend to limit the
ability of the Company to vary its portfolio promptly in response to changes in
economic or other conditions. In addition, the Code limits the ability of a REIT
to sell properties held for fewer than four years, which may affect the
Company's ability to sell properties without adversely affecting returns to
holders of Common Shares.
Risks Associated with Acquisition, Development and Construction
Activities. The Company intends to acquire existing commercial properties to the
extent that they can be acquired on advantageous terms and meet the Company's
investment criteria. Acquisitions of such properties entail general investment
risks associated with any real estate investment, including the risk that
investments will fail to perform in accordance with expectations or that
estimates of the costs of improvements to bring an acquired property up to the
Company's standards may prove inaccurate.
4
The Company also intends to grow in part through the selective
development, redevelopment and construction of commercial properties, including
build-to-suit properties and speculative development, as suitable opportunities
arise. Additional risks associated with such real estate development and
construction activities include the risk that the Company may abandon
development activities after expending significant resources to determine their
feasibility; the construction cost of a project may exceed original estimates;
occupancy rates and rents at a newly completed property may not be sufficient to
make the property profitable; financing may not be available on favorable terms
for development of a property; and the construction and lease up of a property
may not be completed on schedule (resulting in increased debt service and
construction costs). Development activities are also subject to risks relating
to inability to obtain, or delays in obtaining, necessary zoning, land-use,
building occupancy and other required governmental permits and authorizations.
If any of the above occur, the Company's results of operations and ability to
make distributions to shareholders could be adversely affected. In addition, new
development activities, regardless of whether they are ultimately successful,
may require a substantial portion of management's time and attention.
Real Estate Financing Risks
The Company intends to continue to operate in the near term with higher debt levels than most
other REITs. The Declaration of Trust by which the Company
is governed doesOur organizational documents do not limit the amount of
indebtedness that the Companywe may incur. Most of our properties have been mortgaged to
collateralize indebtedness. In addition, as a result of, among other things, the annual income
distribution requirements applicable to REITs under the Code, the Companywe will
be required to rely on borrowings either directlyto fund some
or through the Operating
Partnership, and other external sourcesall of financing to fund the costs of new property acquisitions, capital expenditures and other
items.
Accordingly,As of December 31, 1998, our total outstanding debt was $306.8 million.
Our debt to total market capitalization ratio was 58.7% based upon a market
price for Common Shares of $7.125 on December 31, 1998. Total market
capitalization is the Companysum of total debt plus the value of all outstanding Common
Shares and common units at such market price and the Operating Partnership will betotal Preferred Shares and
preferred units at their liquidation value.
Payments of principal and interest on our debt may leave us with
insufficient cash to operate our properties or pay distributions to our
shareholders required to maintain our qualification as a REIT. We are also
subject to real estate financingthe risks including changes from period to period in the availability of such
financing, the risk that the Company's or the Operating Partnership's cash flowthat:
- We may not be sufficient to cover both required debt service payments and
distributions to shareholders and the risk that indebtedness secured by
properties will not be able to be refinancedrefinance our existing indebtedness, or
that therefinance on terms of such
refinancing will not be as favorable as the terms of our existing
indebtedness. Eachindebtedness;
- Certain debt agreements of the Properties, whether directly owned or owned through the Operating
Partnership, has been mortgaged to collateralize indebtedness. If the Company or
the Operating Partnership becomes unable to meet its required mortgage payment
obligations, the property or properties subject to such mortgage indebtedness
could be foreclosed upon by or otherwise transferred to the mortgagee, with a
consequent loss of income and asset value to the Company.
In addition, to the extent the Operating Partnership was unable to meet
its debt service obligations, cash distributions to the Company could be reduced
or eliminated. Certain documentation pertaining to the financing of the
Properties contains provisions thatour operating partnership could
restrict the ability of the Operating
Partnershipour operating partnership to make cash
distributions to us, which could result in reduced distributions
to our shareholders or the Company. Not only doesneed to incur additional debt to fund
distributions; and
- If we are unable to pay our debt service on time, our lenders
could foreclose on our properties securing such debt and in some
cases other properties and assets which we own. A number of our
loans are cross-collateralized, which means that separate groups
of properties from our portfolio secure each of these loans. More
importantly, almost all of our loans are cross-defaulted, which
means that failure to pay interest or principal on any of our
loans will create a default on certain of our other loans. In
addition, if we are in default and the value of the properties
securing a loan is less than the loan balance, the lender may
require payment from our other assets.
As of December 31, 1998, approximately 19.6% of our total debt had
adjustable interest rates. Consequently, if short term interest rates were to
rise, our debt service payments would increase, which would lower our net income
and could decrease our distributions to our shareholders.
WE MUST REFINANCE OUR MORTGAGE DEBT IN THE FUTURE. Over the next five
years, our scheduled debt payments, including maturities, are as follows:
1999 $ 14,338,000
2000 179,035,000
2001 5,102,000
2002 6,871,000
2003 2,624,000
Of the debt due in 2000, we have the right to extend $100.0 million to
2002 and approximately $76.8 million to 2001.
4
We do not expect our operations to generate enough cash flow to repay
some or all of this documentation specifically limit certain distributions and contain financial
covenantsdebt without additional borrowings or new equity investment.
If we cannot refinance, extend the practical effectdebt due dates, or raise additional equity
prior to the date when our debt matures, we would default on our existing debt.
WE RELY ON A FEW TENANTS FOR MOST OF OUR REVENUE
As of December 31, 1998, ten tenants accounted for 50.6% of our
annualized office rents. Two of these tenants accounted for approximately 27.0%
of our total annualized office rents. Our largest tenant is the United States
federal government, two agencies of which lease space in nine of our office
properties. These leases represented approximately 17.0% of our total annualized
office rents as of December 31, 1998. Generally, these government leases provide
for one-year terms or provide for one-year termination rights. The government
may restrict cashterminate its leases if, among other reasons, Congress fails to provide
funding. The Congress of the United States has appropriated funds for these
leases through September of 1999. The second largest tenant, Unisys Corporation,
represented 10.0% of our annualized office rents as of December 31, 1998 and a
larger percentage of our net operating income since Unisys pays all of its
property operating expenses directly. Unisys occupies space in three of our
office properties. If either the federal government or Unisys fails to make
rental payments to us, or if the federal government elects to terminate several
of its leases and the space cannot be distributed by
the Operating Partnership, but in the event of a default by the Operating
Partnership, the lender under this documentation could require the Operating
Partnershipre-leased on satisfactory terms, our
financial performance and ability to significantly curtail or eliminate all distributions. Any
indebtedness incurred in the future by the Operating Partnership may contain
similar limitations and covenants. There can be no assurance that the lenders
under the existing indebtedness or such future indebtedness would grant waivers
of these provisions. Any reduction in distributions from the Operating
Partnership could require the Company to reducemake expected distributions to shareholders
or
incur debt to maintainwould be materially adversely affected.
OUR PROPERTIES ARE LOCATED MAINLY IN ONE REGION -- THE MID-ATLANTIC
All of our office properties are located in the current level of distributions.
As of June 30, 1998, the Company has borrowed $23.8 million under its
$100 million revolving credit facility. To complete the Constellation
Transactions, exclusiveMid-Atlantic region of
the DevelopmentUnited States, and 58.7% of our total annualized office rents as of December
31, 1998 is earned from our office properties located in the
Baltimore-Washington corridor. Consequently, we do not have a broad geographic
distribution of our properties. As a result, a decline in the real estate market
or economic conditions generally in the Mid-Atlantic region would adversely
affect us.
WE MAY HAVE DIFFICULTY MANAGING OUR RAPID GROWTH
We have grown rapidly. In 1998, we completed numerous acquisitions,
expanding our total portfolio of properties from 1.9 million square feet to 5.0
million square feet. Our recent acquisition of properties from Constellation
Properties, Inc. is our largest acquisition to date. We also plan to expand in
the Company will require
a totalfuture. In order to successfully manage our growth, we must, among other
things, integrate the personnel and operations of approximately $73.1 million in cash, which, if other financing is not
obtained, is expected to be funded from the revolving credit facility. The
aggregate purchase price for the Development Properties is approximately $25.6
million. Assumingacquired properties while
effectively managing our corporate overhead costs. We cannot assure you that closings occur as to both Development Properties, the
Company will require financing commitments in addition to those currently
available. Management is confident itwe
will be able to obtain such financing, on
reasonable terms, as mayaccomplish these goals. If we fail to successfully manage our
growth, we could be necessary to close on the Development Properties.
The Company and Constellation are currently seeking to finance certain of the
Constellation Properties simultaneous with the initial closing of the
Constellation Transactions. Although management believes appropriate financing
will be available to the Company to complete the Constellation Transactions,
there can be no assurance that such financing will be available on acceptable
terms, if at all.
5
Possible Changes in Policies Without Shareholder Approval; No Limitation on Debt
The Company's investment, financing and distribution policies, and its
policies with respect to all other activities, including growth, capitalization
and operations, will be determined by the Board of Trustees. Although the
Company's Board of Trustees has no present intention to do so, these policies
may be amended or revised at any time and from time to time at the discretion of
the Board of Trustees without a vote of the Company's shareholders. A change in
these policies couldmaterially adversely affect the Company's financial condition, results
of operations or the market price of the Common Shares. The organizational
documents of the Company do not contain any limitation on the amount of
indebtedness the Company may incur.
Risk of Inability to Sustain Distribution Level
The Company intendsaffected.
THE LEVEL OF OUR SHAREHOLDER DISTRIBUTIONS COULD DECLINE
We intend to make regular quarterly cash distributions to itsour
shareholders. However, the level of distributions is baseddistribution levels depend on a number of assumptions, including assumptions relatingfactors, some
of which are beyond our control.
Commencing on October 1, 1999, holders of preferred units in our
operating partnership will be able to convert those units into common units and,
if current distribution levels remain unchanged, receive increased
distributions. These increased distributions would total approximately $2.0
million annually if all holders of preferred units converted. Although we
believe that we would have sufficient cash flow to pay that increase, such
conversion could require a reduction in per share distributions on our Common
Shares and common units or restrict our ability to increase these distributions
in the future. Our loan agreements also contain provisions which could also
restrict future operations of the Company.
These assumptions concern, amongdistributions. Our ability to sustain our current distribution
level also will be dependent, in part, on other matters including continued
property occupancy and profitability of tenants, distributions received from the Operating Partnership, the amount of future capital
expenditures and expenses relating to the
Properties,our properties, the level of leasing
activity and future rental rates, the strength of the commercial real estate
market, competition, the costs of compliance with environmental and other laws,
our corporate overhead levels, the amount of uninsured losses and our decisions
by
the Companywhether to reinvest rather than distribute cash available for distribution.
5
A number of the assumptions described above are beyond the control of the
Company. Accordingly, no assurance can be given that the Company will be able to
maintain its distribution level.
Reliance on Major Tenants
Upon consummation of the Constellation Transactions, two major tenants
will account for approximately 29.5% of the Company's total annualized revenue
as of June 30, 1998 on a pro forma basis, one of which is the federal government
which leases space for the Department of Defense and the Department of Treasury
in two of theTHIRD PARTY COULD HAVE DIFFICULTY IN SEEKING TO ACQUIRE CONTROL OF US
CONSTELLATION'S COMMON SHARE OWNERSHIP AND OUR OWNERSHIP LIMITS ARE
IMPORTANT FACTORS. Constellation Properties, pursuant to two leases. In the event one
or moreInc. currently owns approximately
41.8% of these tenants experience financial difficulties, or default on their
obligation to make rental payments to the Company, or if the Department of
Defense elects to terminate its lease and the space cannot be re-let on
satisfactory terms, the Company's financial performance and ability to make
expected distributions to shareholders would be materially adversely affected.
Lack of Geographical Diversity
All of the Office Properties are located in the Mid-Atlantic region of
the United States. As a result, the Company does not have the benefits of
portfolio geographic diversity and is subject to any issues selectively
affecting this region. Therefore, in the long term, based upon the properties
currently owned directly or indirectly by the Company, the Company's financial
performance and ability to make expected distributions to shareholders is
dependent upon the Mid-Atlantic marketplace. There can be no assurance as to the
stability or growth conditions of that market.
Effects of Ownership Limit, Classified Board and Power to Issue Additional
Shares
Potential Effects of Ownership Limitation. For the Company to maintain
its qualification as a REIT under the Code, not more than 50% in valueour outstanding Common Shares. Under our charter, two-thirds of the
outstanding sharesCommon Shares must approve a merger, a sale of beneficial interestsubstantially all our
assets, any amendment to our charter, the removal of the Company may be owned, directly
or indirectly, by five or fewer persons (as defined in the Code to include
certain entities) at any time during the last half of any taxable year. See
"Federal Income Tax Considerations--Taxation of the Company." The Amendeda Trustee, and
Restated Declaration of Trust of the Company (the "Declaration of Trust")
authorizes the Board of Trustees, subject to certain exceptions, to take such
actions as may be necessary or desirable to preserve its qualification as a REIT
and to limit any person to direct or indirect ownership of no more than (i) 9.8%
of the Company's number of issued and outstanding shares of beneficial interest,
or (ii) 9.8% of the total equity value of such shares of beneficial interest
(the "Ownership Limit"). The Board of Trustees, upon such conditions as the
Board of Trustees, in its sole discretion (which may include receipt of an
appropriate ruling from the Internal Revenue Service (the "Service") or an
opinion of counsel), may exempt a proposed
6
transferee from the Ownership Limit. However, the Board of Trustees may not
grant an exemption from the Ownership Limit to any proposed transferee whose
ownership, direct or indirect, of shares of beneficial interest of the Company
in excess of the Ownership Limit would result in the
termination of COPT. Because Constellation Properties, Inc. owns more than
one-third of our voting stock, it has the Company's status as a REIT. The Boardability to veto any of Trustees has exempted the Common Shares
issued in the Formation and Constellation Transactions from the Ownership Limit,
as well as the Common Sharesthose
transactions, which will make it more difficult for any third party to be issued following redemption or conversion of
the Units issued in the Formation Transactions. A transfer of Common Shares in
violation of the above limits may result in the constructive transfer of the
Common Shares to a trust administered for charitable purposes and/or trigger the
Company's right to repurchase such Common Shares. The foregoing restrictions on
transferability and ownership will continue to apply until the Board of Trustees
determines that it is no longer in the best interests of the Company to attempt
to qualify, or to continue to qualify, as a REIT. The Ownership Limit may have
the effect of delaying, deferring or preventing a change inacquire
control of the
Company or other transaction that mightus. Such change of control could involve a premium over the then
prevailing market
price for the Common Shares or other attributes that the shareholders may
consider desirable. In addition, our charter limits ownership of our Common
Shares by any single shareholder to be desirable.9.8% of the number of the outstanding shares
or 9.8% of the value of the outstanding shares. We call these restrictions the
"Ownership Limit." Our charter allows our Board of Trustees to exempt
shareholders from the Ownership Limit, and the Board has exempted Constellation
Properties, Inc. from the Ownership Limit.
OUR CHARTER PROVIDES OTHER POTENTIAL DEFENSES. Subject to the
requirements of the New York Stock Exchange, the Board of Trustees has the
authority without shareholder approval to issue additional securities of COPT on
terms that could delay, defer or prevent a change in control of COPT. In
addition, our Board has the authority to reclassify any of our unissued Common
Shares into Preferred Shares. The Board may issue Preferred Shares with such
preferences, rights, powers and restrictions as the Board may determine. Our
Board has already issued the Series A Preferred Shares, which have features
which make it harder for a third party to acquire control of us. See
"Description of Common
Shares--RestrictionsShares--Series A Preferred Shares" beginning on Transfer."
Potential Effects of Staggered Elections of Trustees. Thepage 12.
Our Board of
Trustees is divided into three classes of Trustees. The terms of the
first, second and third classes of the Trustees will expire in 1999, 2000 and
2001, respectively. Beginning in 1999,In the future, we will elect Trustees of each class will be chosen for staggered
three-year terms upon the expiration of their current terms, and one class of
Trustees will be elected by the shareholders each year. The staggered terms of
the Trustees may reduce the possibility ofterms. Staggered elections make it more difficult for a tender offer or an attemptthird party
to changeacquire control of the Company, even though a tender offer or change in control
might be considered by the shareholders to be desirable.us. See "Description of
Common Shares--Classification of Board,
Vacancies and Removal of Trustees."
Potential Effects of Issuance of Additional Shares; Other Matters. The
Declaration of Trust authorizes the Board of Trustees to (i) amend the
Declaration of Trust, without shareholder approval, to increase or decrease the
aggregate number of shares of beneficial interest of any class, including Common
Shares, that the Company has the authority to issue, (ii) cause the Company to
issue additional authorized but unissued Common Shares or preferred shares of
beneficial interest, par value $0.01 per share (the "Preferred Shares"), and
(iii) classify or reclassify any unissued Common Shares and Preferred Shares and
to set the preferences, rights and other terms of such classified or
unclassified shares. See "Description of Common Shares--General." The Company
also is likely to issue a substantial number of Common Shares (or through the
Operating Partnership, Units redeemable or exchangeable for Common Shares) in
connection with acquisitions. In addition, the Board of Trustees will be
authorized pursuant to these provisions to establish a class or series of shares
of beneficial interest that could, dependingTrustees" on the term of such series, delay,
defer or prevent a change in control of the Company or other transaction that
might involve a premium over the then prevailing market price for the Common
Shares or other attributes that the shareholders may consider to be desirable.
The Declaration of Trust, the Bylaws of the Trust andpage 17.
THE MARYLAND BUSINESS STATUTES ALSO IMPOSE POTENTIAL RESTRICTIONS.
Various Maryland law also contain
other provisions thatlaws may have the effect of delaying, deferringdiscouraging offers to acquire us,
even if the acquisition would be advantageous to shareholders. Our Bylaws exempt
us from such laws, but our Board of Trustees can change our Bylaws at any time
to make these provisions applicable to us. See "Description of Shares--Possible
Antitakeover Effect of Certain Provisions of Maryland Law" on page 18.
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH THE REAL ESTATE INDUSTRY
GENERALLY. We earn income from renting our properties. Our operating
costs are mostly fixed costs, and do not necessarily fluctuate in relation to
changes in our rental income. This means our costs will not necessarily decline
even if our revenues do. Also, our operating costs may increase while our
revenues do not.
For new tenants or preventing a
change in controlupon lease expiration for existing tenants, we
generally must make improvements and pay other tenant-related costs for which we
may not receive increased rents. We also make building-related capital
improvements for which tenants may not reimburse us.
If our properties do not generate income sufficient to meet our
operating expenses and capital costs, we may have to borrow additional amounts
to cover these costs. We may have lower profits or even incur losses. Moreover,
there may be less or no cash available for distributions to our shareholders.
6
OUR LEASE RENEWALS POSE CERTAIN UNCERTAINTIES. When leases expire at
our properties, our tenants may not renew or may renew but on terms less
favorable to us than the terms of the Companyoriginal lease. Our scheduled lease
expirations, as a percentage of total annualized rents for the next five years,
are:
1999 6.3%
2000 9.1%
2001 9.3%
2002 14.3%
2003 15.1%
If a tenant leaves, we can expect to incur a vacancy for some period of
time as well as higher capital costs than if a tenant renews. In either case,
our net income and ability to make expected distributions to our shareholders
could be adversely affected.
COMPETITION MAY CAUSE DIFFICULTY IN OUR LEASING ACTIVITY. The
commercial real estate market is highly competitive. Numerous commercial
properties compete for tenants with our properties and our competitors are
building additional properties in the markets in which our properties are
located. Some of these competing properties may be newer or have more desirable
locations than our properties. If the market does not absorb newly constructed
space, market vacancies will increase and market rents may decline. As a result,
we may have difficulty leasing space at our properties and we may be forced to
lower the rents we charge on new leases to compete effectively.
COMPETITION MAY CAUSE DIFFICULTY IN OUR STRATEGY OF ACQUIRING NEW
PROPERTY. We compete for the purchase of commercial property with many entities,
including other publicly traded commercial REITs. Many of our competitors have
substantially greater financial resources than ours. In addition, our
competitors may be willing to accept lower returns on their investments. If our
competitors prevent us from buying the amount of properties that we have
targeted for acquisition, we may not be able to meet our property acquisition
and development goals.
OUR DEVELOPMENT AND CONSTRUCTION ACTIVITIES POSE CERTAIN RISKS.
Although the majority of our investments are in currently leased properties, to
a lesser extent we also develop properties, including some which are not fully
pre-leased. When we develop properties, we run the risks that development costs
will exceed our budgets, that we will experience construction or development
delays and that projected leasing will not occur.
WE ARE SUBJECT TO POSSIBLE ENVIRONMENTAL LIABILITIES. We are subject to
various federal, state and local environmental laws. These laws can impose
liability on property owners or operators for the costs of removal or
remediation of certain hazardous substances released on a property, even if the
property owner was not responsible for the release of the hazardous substances.
The presence of hazardous substances on our properties may adversely affect
occupancy and our ability to sell or borrow against those properties. In
addition to the costs of government claims under environmental laws, private
plaintiffs may bring claims for personal injury or similar reasons. Various laws
also impose liability for the costs of removal or remediation of hazardous
substances at the disposal or treatment facility. Anyone who arranges for the
disposal or treatment of hazardous substances at such a facility is potentially
liable under such laws. These laws often impose liability whether or not the
facility is or ever was owned or operated by such person.
WE CANNOT SELL OUR PROPERTIES QUICKLY. Equity real estate investments
like our properties are relatively difficult to sell and convert to cash
quickly. Such illiquidity will tend to limit our ability to vary our portfolio
of properties promptly in response to changes in economic or other transactionconditions.
In addition, the Internal Revenue Code of 1986, as amended, imposes certain
penalties on a REIT that might involvesells properties held for less than four years. As a
premium over the then prevailing market price for the Common Sharesresult, we may be unable to sell a property at an advantageous time.
WE ARE SUBJECT TO OTHER POSSIBLE LIABILITIES. Our properties may be
subject to other risks relating to current or future laws including laws
benefiting disabled persons, and other state or local zoning, construction or
other attributes that the shareholdersregulations. These laws may consider to be desirable.
Holders of Unitsrequire significant property modifications in
the Operating Partnershipfuture for which we may not have the right to cause
the Operating Partnership to redeem their Units on the occurrence of certain
events, including a transaction resulting in a group becoming the beneficial
owner of 20% or more of the Common Shares (other than Permitted Holders, as
defined in the Operating Partnership Agreement, which include Messrs. Shidlerbudgeted and Hamlin) or a merger or consolidation involving the Company. The Company has
the option to deliver cash or Common Shares in satisfaction of such redemption
obligation. This redemption provision may have the effect of delaying, deferring
or preventing a change in control of the Company or other transaction that might
involve a premium over the then prevailing market price for the Common Shares or
other attributes that the shareholders may consider to be desirable. In
addition, there is no limit on the ability of the Operating Partnership to issue
additional Units, which Units may be convertible or redeemable for Common
Shares. Existing shareholders will have no preemptive right to acquire any such
equity securities, and any such issuance of equity securities could result in dilutionfines being
levied against us. In addition, although we believe that we adequately insure
our properties, we are subject to the risk that our insurance may not cover all
of an existing shareholder's investment in the Company.
The issuance of Common Shares or Preferred Shares discussed above could
havecosts to restore a dilutive effect on shareholders.property
7
Tax Risks
Failurewhich is damaged by a fire or other similar catastrophic event. The occurrence
of any of these risks would have an adverse impact on our cash flows and ability
to Qualify as a REIT. The Company was organized and has
operated, and intendsmake distributions to operate, so as to qualifyshareholders.
WE AND OUR SHAREHOLDERS ARE SUBJECT TO CERTAIN TAX RISKS
OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE ADVERSE TAX CONSEQUENCES.
We believe that, since 1992, we have qualified for taxation as a REIT for
federal income tax purposes. We plan to continue to meet the requirements for
taxation as a REIT. Many of these requirements, however, are highly technical
and complex. The determination that we are a REIT requires an analysis of
various factual matters and circumstances that may not be totally within our
control. For example, to qualify as a REIT, at least 95% of our gross income
must come from certain sources that are itemized in the REIT tax laws. We are
also required to distribute to shareholders at least 95% of our REIT taxable
income (excluding capital gains). The fact that we hold most of our assets
through our operating partnership and its subsidiaries further complicates the
application of the REIT requirements. Even a technical or inadvertent mistake
could jeopardize our REIT status. Furthermore, Congress and the IRS might make
changes to the tax laws and regulations, and the courts might issue new rulings
that make it more difficult, or impossible for us to remain qualified as a REIT.
If the Company were towe fail to qualify as a REIT, for any taxable
year, the Company would not be allowed a deduction for distributions to its
shareholders in computing its taxable income andwe would be subject to federal income
tax (including any applicable minimum tax) on its taxable income at regular corporate rates and may also be subject to increased state and local
taxes. Unless entitled torates. Also, unless the IRS granted us relief under
certain Codestatutory provisions, the Company alsowe would beremain disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost.we first fail to qualify. If we fail to qualify as a
REIT, we would have to pay significant income taxes and would therefore have
less money available for investments or for distributions to our shareholders.
This would likely have a significant adverse effect on the value of our
securities. In addition, we would no longer be required to make any
distributions to our shareholders.
WE HAVE CERTAIN DISTRIBUTION REQUIREMENTS. As a result,REIT, we must
distribute 95% of our annual taxable income, which limits the amount of cash we
have available for distribution would be reduced for each of the years involved.
Although management intendsother business purposes, including amounts to operate the Company in a manner designed to meet
the REIT qualification requirements,fund our
growth. Also, it is possible that future economic,
market, legal, taxbecause of the differences between the time we
actually receive revenue or other considerationspay expenses and the period we report those items
for distribution purposes, we may causehave to borrow funds on a short-term basis to
meet the Board of Trustees to
revoke the REIT election.95% distribution requirement.
WE ARE ALSO SUBJECT TO OTHER TAX LIABILITIES. Even if the Company qualifieswe qualify as a
REIT, it will be
subject to certain state and local taxes on its income and property, andwe may be subject to certain federal, taxes.
In the Formation Transactions, the transfers of partnership interests
to the Operating Partnership relating to the Propertiesstate and local taxes on our income
and property. Any such taxes would reduce our operating cash flow.
When we purchased certain office properties located in Pennsylvania, were structured as transfers ofwe
only purchased 89% of the capital interests with thepartnership which owned each property. The remaining
interests to11% will be acquired by the Operating Partnershipoperating partnership not later than December 2000.
This structure is intended to comply with informal advice from the Pennsylvania
Department of Revenue that such two-stage transfers are not subject to
Pennsylvania real estate transfer taxes. However, the Company haswe have not obtained a formal
ruling from the Pennsylvania Department of Revenue on this issue. If the
Pennsylvania Department of Revenue were to successfully challengechange this structure,
or the remaining interests were required to be transferred for financing or
other purposes prior to October 14, 2000, the Operating Partnershipwe would be subject to Pennsylvania
state and local transfer taxes of approximately $2.7 million.
REIT Minimum Distribution Requirements; Possible IncurrenceA LIMITED PARTNER MAY INCUR TAX UPON EXCHANGE OF UNITS. If a limited
partner of Additional Debt. In orderour operating partnership exchanges units for Common Shares, the tax
effect to qualifythe limited partner will be the same as a REIT,sale of such units.
Consequently, such limited partner may have a taxable gain on such exchange. It
is possible that his or her tax liability could exceed the Company generally will be
required each year to distribute to its shareholders at least 95% of its net
taxable income (excluding any net capital gains). In addition, the Company will
be subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its capital
gain net income for that year and (iii) 100% of its undistributed taxable income
from prior years. The Company intends to make distributions to its shareholders
to comply with the 95% distribution requirement and to avoid the nondeductible
excise tax. The Company's income will consist primarily of its sharevalue of the incomeCommon
Shares received upon such exchange. Also, a limited partner's ability to sell
enough Common Shares to raise cash to pay such a tax liability may be
restricted, which would further reduce the value of the Operating Partnership and, to a significantly lesser extent, from
the properties it owns directly, and the cash available for distribution by the
Company to its shareholders will consist of its share of cash distributions from
the Operating Partnership and, to a significantly lesser extent, cash flow from
the properties it owns directly together with funds available to it from
borrowings. Differences in timing between (i) the actual receipt of income and
actual payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company could
require the Company, directly or indirectly through the Operating Partnership,
to borrow funds on a short-term basis to meet the 95% distribution requirement
and to avoid the nondeductible excise tax.
Conflicts of Interest
Risks Relating to Structure. The Company currently owns the Retail
Properties directly and its interest in the Office Properties indirectly through
its interests in the Operating Partnership and the Properties Partnerships. See
"The Company--The Formation Transactions". Messrs. Shidler and Hamlin, Trustees
of the Company, are limited partners of the Operating Partnership ("Limited
Partners") and are limited partners in certain of the Properties Partnerships.
Certain Trustees also own Preferred Units (as defined in the Operating
Partnership Agreement) which receive a priority returnthose shares to the Partnership Units
(as defined in the Operating Partnership Agreement) held by the Company and
other limited
partners, and it is anticipated that additional Preferred Units
will be issued in the future.partner.
ISSUANCES OF LARGE AMOUNTS OF OUR COMMON SHARES COULD CAUSE OUR SHARE PRICE TO
DECLINE
As a result, there are basically two pools of assets in which the Company has differing interests and conflicts of interest
may arise concerning, among other things, the allocation of resources (financial
or otherwise) between asset pools, assets sales and the reduction of
indebtedness.
8
The Company, as the general partner (the "General Partner") of the
Operating Partnership, may have fiduciary duties to the Limited Partners, the
discharge of which may conflict with interests of the Company's shareholders.
Pursuant to the Operating Partnership Agreement, however, the Limited Partners
have acknowledged that the Company is acting both on behalf of the Company's
shareholders and, in its capacity as General Partner, on behalf of the Limited
Partners. The Limited Partners have agreed that the Company will discharge its
fiduciary duties to the Limited Partners by acting in the best interests of the
Company's shareholders. Limited Partners will also have the right to vote on
amendments to the Operating Partnership Agreement, many of which will require
the vote of holders (other than the Company) of a majority of the Partnership
Units and the Preferred Units, voting separately, and individually to approve
certain amendments that will adversely affect their rights. These voting rightsDecember 31, 1998, 16,801,876 Common Shares were outstanding.
This prospectus may be exercised in a manner that conflicts withused for the interestsissuance of the Company's
shareholders.
In addition, distributions from the Operating Partnership and income
from the Retail Properties may not be sufficient to both pay the Company's
current overhead expenses and maintain the current level of distributions to
shareholders. To the extent that there is a mismatch between expenses and
shareholder distributions, on the one hand, and Operating Partnership
distributions and rental income, on the other hand, the Company would be
required to seek discretionary distributions or loans from the Operating
Partnership, to incur additional indebtedness in order to fund operating
expenses and distributions or to decrease shareholder distributions.
Alternatively, the Company may seek to issue additional Common Shares, although
the proceeds from such issuance would be required to be contributed to the
Operating Partnership absentShares. If we
issue a waiver by the Limited Partners.
Risks Related to Outside Investments. Mr. Shidler, the Chairman of the
Board of Trustees, also has interests in a number of other real estate
investments, including First Industrial, a REIT, of which he is Chairman of the
Board of Directors. As a result, Mr. Shidler will only spend a portion of his
time on the Company's business. Instances may arise in which Mr. Shidler's
interests with respect to his overall activities, or a given investment
opportunity, may be inconsistent with the interests of the Company. Mr. Hamlin,
President, Chief Executive Officer and a Trustee, also has interests in a number
of other real estate investments, including First Industrial and TriNet and
other REITs. Although Mr. Hamlin has entered into an employment agreement with
the Company, which requires that he devote his full business time to the affairs
of the Company and contains a non-compete clause, there can be no assurance that
instances would not arise which present conflicts of interest.
Entities controlled by Mr. Shidler and Mr. Hamlin also own undeveloped
property contiguous to certain of the Properties. Although all such entities
have granted the Company an option to acquire these properties at a discount to
fair market value, there can be no assurance that the Company will acquire these
properties. These properties could be developed and compete with the Company for
tenants.
Possible Adverse Effect of Shares Available for Future Sale on Price of Common
Shares
Sales of a substantialsignificant number of Common Shares orin a short period of time, that
activity may cause a decrease in the perception that
such sales could occur, could adversely affect the prevailing market price of the Common Shares.
Sales8
WE LACK CONTROL OVER OUR MANAGEMENT COMPANY
We receive substantially all of the economic benefits of Corporate
Office Management, Inc. ("COMI"), the company which manages our properties.
However, we are not able to elect directors or issuancesofficers of Common Shares could have a dilutive
effect on existing shareholders. In addition toCOMI because we hold
only 1% of COMI's voting stock and the Common Shares currently
outstanding, Partnership Units (excluding Partnership Unitsbalance of COMI's voting stock is owned
by persons who are not our officers or Trustees. Therefore, we cannot directly
influence the Company)operations of COMI. As a result, the board of directors and
Preferred Units were outstandingmanagement of COMI may implement business policies or decisions that would not
have been implemented by us. These policies or decisions could be adverse to our
interests or lead to adverse financial results, which were convertible undercould adversely impact our
net operating income and cash flow.
Although we believe that the contracts between us and COMI for
management services are no less favorable to us than those which could be
obtained from a third party, such contracts are not the result of arm's length
negotiations and, therefore, we cannot assure you that those contracts are just
as favorable.
CERTAIN OFFICERS AND TRUSTEES OF COPT HAVE POTENTIAL CONFLICTS OF INTEREST
The Chairman of our Board, our Chief Executive Officer, and certain
circumstances intoother officers own direct and indirect interests in office properties and other
real estate assets in which we have an aggregateinterest and the interests of 2,299,310these
persons may give rise to certain conflicts of interest concerning the
fulfillment of their responsibilities as our officers and 6,834,035 Common
Shares, respectively. HoldersTrustees. We have
adopted certain policies designed to minimize conflicts of interest. We cannot
assure you, however, that these policies will be successful in eliminating the
Retained Interests were also entitled, as
of December 31, 1997, to receive Partnership Units convertible into 282,508
Common Shares and Preferred Units redeemable into Common Units which in turn are
convertible into 665,905 Common Shares. See "The Company--The Formation
Transactions." Subject to compliance with the Operating Partnership Agreement,
the holders of the Partnership Units (the "Unit Holders") have the right to
require the Operating Partnership to redeem all or a portioninfluence of such Partnership
Units beginning on September 1, 1998 for cash. The Operating Partnership has the
option to pay such redemption price in Common Shares, which option it currently
anticipates exercising in the event any Unitsconflicts, and if they are redeemed, subject to the
limitations in the Operating Partnership Agreement. Each Preferred Unit is
convertible into 3.5714 Partnership Units, subject in turn to the right of
redemption referred to above, beginning on October 1, 1999. Upon the issuance of
Common Shares in satisfaction of the Operating Partnership's redemption
obligations, the Common Shares may be sold in
9
the public market pursuant to shelf registration statements which the Company is
obligated to file on behalf of the Unit Holders or pursuant to any available
exemptions from registration.
The Company intends to cause the Operating Partnership to offer
additional Preferred Units and Partnership Units in exchange for property or
otherwise. Existing shareholders will have no preemptive right to acquire any
such equity securities, and any such issuance of equity securitiesnot successful, decisions could result
in dilution of an existing shareholder's investment in the Company. No
prediction can be
made concerning the effect that future sales of any of such
Common Shares will have on the market prices of shares.
Control of Management; Limits on Change of Control
Trustees and executive officers of the Company, as a group,
beneficially owned, as of June 30, 1998, approximately 9.4% of the total
outstanding Common Shares (approximately 5.2% assuming issuance of Common Shares
in satisfaction of the redemption obligations with respectmight fail to the Partnership
Units and the Preferred Units owned and to be owned, following contribution of
the Retained Interests to the Operating Partnership in exchange for Units, by
such group, which Common Shares may be issued beginning September 1, 1998 (in
the case of the Partnership Units) and October 1, 1999 (in the case of the
Preferred Units)). The Company currently expects that, if permitted under the
Operating Partnership Agreement provisions designed to maintain the Company's
REIT status, in the event of any redemption, it will elect to deliver Common
Shares for such Units. Accordingly, such Trustees and executive officers will
have substantial influence on the Company, which influence might not be
consistent withreflect fully the interests of all other shareholders and may inof COPT.
For example, the future
have a substantially greater influence on the outcomeChairman of any matters submitted
to the Company's shareholders for approval following redemption of the Units.
This significant ownership interest by Trustees and executive officers may have
the effect of delaying, deferring or preventing a change in control of the
Company or other transaction that might involve a premium over the then
prevailing market price for the Common Shares or other attributes that the
shareholders may consider to be desirable.
Upon closing of the Constellation Transactions, certain of
Constellation's senior management personnel will be employed by the Company in
senior management positions, and theour Board of Trustees will be increased by two
members, toand our Chief Executive
Officer own a total of nine, by the addition of two Trustees which Constellation
will appoint. Upon closingsignificant share of the Constellation Transactions, Constellation will
own approximately 41.5%units of our operating partnership. If
our operating partnership sells or refinances certain of the Common Sharesproperties that
these officers contributed to be outstanding after the Constellation Transactions (approximately 26.5% assuming issuance of Common
Shares in exchange for all Acquired Units being tendered).
Dependence on Key Personnel
The Company isoperating partnership, they could suffer
adverse tax consequences. Therefore, they could oppose such a transaction.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We are dependent on the efforts of its trusteesour Trustees and executive officers,
including the Company'sMr. Shidler, our Chairman of the Board of Trustees, Mr. Shidler, the Company's President andHamlin, our
Chief Executive Officer, and Mr. Hamlin.
Although Mr. Hamlin has entered into an employment agreement with the Company,
there can be no assurance that he will not elect to terminate his agreement.Griffin, our President. The loss of any of
their services could have an adverse effect on our operations. Although certain
of our officers have entered into employment agreements with us, we cannot
assure you that they will remain employed with us.
WE MAY CHANGE OUR POLICIES WITHOUT SHAREHOLDER APPROVAL
Our Board of Trustees determines all of our policies, including our
investment, financing and distribution policies. Although our Board of Trustees
has no current plans to do so, it may amend or revise these policies at any time
without a vote of our shareholders. Policy changes could adversely affect our
financial condition, results of operations, or the operationsmarket price of the Company.
Risks Associated With Acquired Units
Tax ConsequencesCommon
Shares or our ability to pay dividends or distributions.
WE ARE SUBJECT TO THE "YEAR 2000 RISK"
The "Year 2000 Risk" arises because certain computer programs have been
written using two digits rather than four to define the applicable years.
Consequently, date-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of Exchangeoperations, including, among others,
building system failures, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. Our accounting
software vendor has certified that its package of Acquired Units. The exchangesoftware which we use is year
2000 compliant; however, we have not independently determined that this package
is year 2000 compliant and we cannot assure you it is free of the
Acquired Units held byYear 2000 Risk.
We rely on third-party suppliers for a limited partnernumber of the Operating Partnership
(individually, a "Limited Partner" and collectively, the "Limited Partners") for
Redemption Shares will be treated for tax purposes as a sale of such Acquired
Units by such Limited Partner. Such a sale will be fully taxablekey services. If
supplier operations are interrupted due to the Limited
PartnerYear 2000 Risk, that interruption
could affect our operations. Although some of our suppliers have assured us that
they are year 2000 compliant, we cannot assure you that our vendors are free of
Year 2000 Risk. We also depend upon our tenants for revenue and such Limited Partner will be treated as recognizing gain or loss for
income tax purposescash flow.
Interruptions in an amount equaltenant operations due to the difference between the "amount
realized" by the Limited PartnerYear 2000 Risk could result in
the exchangereduced revenue, increased receivable levels and the Limited Partner's
adjusted tax basis in the Acquired Units exchanged. Generally, the amount
realized by the Limited Partner on such an exchange will be equal to the fair
market value of the Redemption Shares received in the exchange plus any
reduction in the Limited Partner's share of liabilities of the Operating
Partnership as a result of the exchange. It is possible that the amount of gain
recognized or even the tax liability resulting from such gain could exceed the
value of the
10cash flow reductions.
9
Redemption Shares received upon such exchange. In addition, the ability of the
Limited Partner to sell a substantial number of Redemption Shares in order to
raise cash to pay tax liabilities associated with the exchange of Acquired Units
may be restricted and, as a result of fluctuations in the share price, the price
such holder receives for such shares may not equal the value of the Acquired
Units at the time of exchange.
Unit and Share Ownership Differences. If a Limited Partner of the
Operating Partnership exchanges his or her Acquired Units for Redemption Shares,
such Limited Partner will become a shareholder of the Company rather than a
Limited Partner in the Operating Partnership. Although the nature of an
investment in Common Shares is similar in certain respects to an investment in
Acquired Units, there are also differences between ownership of Acquired Units
and ownership of Common Shares relating to, among other things, form of
organization, permitted investments, policies and restrictions, management
structure, compensation and fees, investor rights and federal income taxation.
USE OF PROCEEDS
The Company will not receive any ofUnless otherwise indicated in an accompanying prospectus supplement, we
intend to use the net proceeds offrom the sale of the Registeredsecurities offered by this
prospectus for general trust purposes, including capital expenditures,
acquisition or development of additional properties, repayment of indebtedness,
repurchases of our Common Shares offered hereby.
THE SELLING SHAREHOLDERS
The Selling Shareholders are only those persons who receive Redemption
Shares upon exchange of their Acquired Units or received Formation Shares in
connection with the Formation Transactions. In connection with the Formation
Transactions, the Company agreed to file a registration statement with the
Securities and Exchange Commission covering the resale of the Registered Shares
issued to each Selling Shareholder and to indemnify each Selling Shareholder
against claims made against them arising out of, among other things, statements
made in such registration statement, of which this Prospectus is a part.
11
meeting our working capital needs.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
The following table providessets forth COPT's consolidated ratios of earnings
to combined fixed charges and Preferred Share dividends for the namesnine months
ended September 30, 1998, and for each of and the maximum number of
Registered Shares that may be owned and offered from time to time under this
Prospectus by each Selling Shareholder. The maximum number of Registered Shares
constitutes the amount of securities each Selling Shareholder held prior to this
offering. Because the Selling Shareholders may sell some, none or all of their
Registered Shares pursuant to this Prospectus, no estimate can be given as to
the number and percentage of Common Shares that will be held by each Selling
Shareholders after this offering.last five calendar years.
Units(1) Common Retained Interest(2) Total(1)(2)(3)
------------------------------- ---------------------------- ----------------
Preferred Common Shares Preferred Common Common Units
--------------Years ended
Nine Months ------------------------------------
ended 9/30/98 1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ -------------------- ---- ---- ---- ----
Jay H. Shidler (4) 126,079 2,600 300,000 -- -- 452,879
Shidler Equities L.P. 457,826 582,103 -- 153,003 231,823 2,995,440
Clay W. Hamlin, III (4) 115,334 5,235 300,000 33,452 50,685 587,294
LBCW Limited Partnership 663,808 875,284 -- 3,246,008
CHLB Partnership 41,741 63,243 212,317
Robert L. Denton 85,502 129,549 434,911
James K. Davis (4) 10,142 15,368 51,589
John E. de B. Blockey, 59,102 89,549 300,626
TrusteeRatio of the
John E. de B. Blockey Trust
Henry D. Bullock 22,914 34,718 116,553
Frederick K. Ito 11,457 17,359 58,277
LGR Investment Fund, Ltd. 52,820 80,030 268,671
Tiger South Brunswick, L.L.C. 1,898 2,875 9,654
Westbrook Real Estate 221,840 336,121 1,128,400
Fund I, L.P.
Westbrook Real Estate
Co-Inv Partnership I. L.P. 21,977 33,299 111,788
Samuel Tang 4,500 6,818 22,889
Denise J. Liszewski (4) 6,750 10,227 34,334
David P. Hartsfield (4) 6,000 9,091 30,519
Lawrence J. Taff 2,700 4,091 13,734
Kimberly F. Aquino 1,155 1,750 5,875
--------------earnings to combined fixed
charges and Preferred Share
dividends 1.24 (A) 1.23 1.21 1.27 1.39
------------- ------------ ------------ ------------ ----------------
1,913,545 2,299,310 600,000 186,455 282,508 10,081,758
------------------ ---- ---- ---- ----
------------- ------------ ------------ ------------ ----------------
-------------- ------------- ------------ ------------ ------------ -------------------- ---- ---- ---- ----
- --------------------
(1) AllFor purposes of calculating the ratio of earnings to combined fixed
charges and Preferred Share dividends, earnings were calculated by adding fixed
charges, excluding Preferred Share dividends, and minority interests of common
unitholders to net income. Fixed charges consist of interest costs,
amortization of debt issuance costs, and distributions to preferred
unitholders.
(A) During the year ended December 31, 1997, COPT's net income
included a non-recurring expense of $1,353,000 associated with the
termination of an advisory agreement. As a result, earnings were inadequate
to cover fixed charges by approximately $902,000 in the year ended December
31, 1997. If such non-recurring expense had not been incurred, COPT's ratio
of earnings to combined fixed charges and Preferred Share dividends for 1997
would have been 1.12.
GENERAL DESCRIPTION OF THE OFFERED SECURITIES
We may use this prospectus to offer our Common Units outstanding are redeemable September 1, 1998. AllShares, Preferred
Units outstanding may be convertedShares, warrants to purchase Common Units and
redeemed October 1, 1999. See "Risk Factors--Possible Adverse Effect
of Shares Available for Future Sale on Price of Common Shares."
(2)or warrants to purchase Preferred
Shares, attributablewhich we refer to collectively as the Retained Interests will be issued upon
tender"securities", or any combination
of the Retained Interests in November, 2000. See
"Company--Formation Transactions."
(3) "Total Common Units" assumes conversionforegoing, either individually or as units consisting of all Preferred Units for
Common Units and redemption of all Common Units for Common Shares.
(4) Jay H. Shidler is Chairman of the Board of Trustees. Clay W. Hamlin,
III is a Trustee and President and Chief Executive Officer. James K.
Davis is Vice President, Acquisitions. Denise Liszewski is Vice
President, Administration. David P. Hartsfield is Vice President,
Operations and Development.
12
Registration Rights
The Company has granted to the Selling Shareholders certain
registration rights. The Company is obligated to file a shelf registration
statement with respect to the Common Shares issuable upon conversion or
redemption of the Units and Common Shares issued in the Formation Transaction
(the "Registerable Securities"). The Company has made such filing and this
Prospectus constitutes a part of that shelf registration statement.
The Company agrees to use its reasonable best efforts to keep the
registration statement of which this Prospectus is a part continuously effective
under the Securities Act until such time as the aggregate number of Registerable
Securities outstanding (computed for this purpose as if all outstanding
Preferred Units have been converted into Common Units and all thereafter
outstanding. Common Units have been redeemed or exchanged for Common Shares) is
less than 5% of the aggregate number of Registerable Securities outstanding on
the date hereof (after giving effect to the Constellation Transactions), and
further agrees to supplement or amend the registration statement, if and as
required by the Securities Act or the rules and regulations thereunder. The
Company has agreed to pay the expenses incurred in connection with the
registration of the Registered Shares, but the Company has no obligation to pay
any underwriting fees, discounts or commissions attributable to the sale of the
Registered Shares by the Selling Shareholders.
The Company has agreed to indemnify the Selling Shareholders against
certain liabilities, including liabilities under the Securities Act of 1933.
PLAN OF DISTRIBUTION
The Company is registering the Registered Shares pursuant to the
Company's obligations under a registration rights agreement, but the
registration of the Registered Shares does not necessarily mean that any of the
Registered Shares will be offered or sold by the Selling Shareholders hereunder.
The distribution of the Registered Shares may be effected from time to
time in onetwo or more underwritten transactions at a fixedsuch
securities. The aggregate offering price or prices, which
may be changed, or at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. Any such
underwritten offering may be on a "best efforts" or a "firm commitment" basis.
In connection with any such underwritten offering, underwriters or agents may
receive compensation in the form of discounts, concessions or commissions from
the Selling Shareholders. Underwriters may sell the Registered Shares to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agents.
The Selling Shareholders and any underwriters, dealers or agents that
participate in the distribution of the Registered Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on the
sale of the Registered Shares by them and any discounts, commissions or
concessions received by any such underwriters, dealers or agents might be deemed
to be underwriting discounts and commissions under the Securities Act.
At a time a particular offer of Registered Shares is made by the
Selling Shareholders, a Prospectus Supplement, if required, will be distributed
that will set forth the name and names of any underwriters, dealers or agents
and any discounts, commissions and other terms constituting compensation from
the Selling Shareholders and any other required information.
The sale of Registered Shares by the Selling Shareholders may also be
effected from time to time by selling Registered Shares directly to purchasers
or to or through broker-dealers. In connection with any such sale, any such
broker-dealer may act as agent for the Selling Shareholders or may purchase from
the Selling Shareholders all or a portion of the Registered Shares as principal,
and may be made pursuant to any of the methods described below. Such sales may
be made on the New York Stock Exchange ("NYSE") or other exchanges on which the
Common Shares are then traded, in the over- the counter market, in negotiated
transactions or otherwise at prices and at terms then prevailing or at prices
related to the then-current market prices or at prices otherwise negotiated.
13
The Registered Shares may also be sold in one or more of the following
transactions: (a) block transactions (which may involve crosses) in which a
broker-dealer may sell all or a portion of such shares as agent but may position
and resell all or a portion of the block as principal to facilitate the
transaction; (b) purchases by any such broker-dealer as principal and resale by
such broker-dealer for its own account pursuant to a Prospectus Supplement; (c)
a special offering, an exchange distribution or a secondary distribution in
accordance with applicable NYSE or other stock exchange rules; (d) ordinary
brokerage transactions and transactions in which any such broker-dealer solicits
purchasers; (e) sales "at the market" to or through a market maker or into an
existing trading market, on an exchange or otherwise, for such shares; and (f)
sales in other ways not involving market makers or established trading markets,
including direct sales to purchasers. In effecting sales, broker-dealers engaged
by the Selling Shareholders may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or other compensation from the Selling
Shareholders in amounts to be negotiated immediately prior to the sale thatour securities will not exceed
those customary in the types of transactions involved. Broker-dealers
may also receive compensation from purchasers of the Registered Shares which is
not expected to exceed that customary in the types of transactions involved.
In order to comply with the$250,000,000. If securities laws of certain states, if
applicable, the Registered Shares may be sold only through registered or
licensed brokers or dealers.
All expenses incident to the offering and sale of the Registered
Shares, other than commissions, discounts and fees of underwriters,
broker-dealers or agents, shall be paidoffered by the Company. The Company has agreed
to indemnify the Selling Shareholders against certain losses, claims, damages,
actions, liabilities, costs and expenses, including liabilities under the
Securities Act. See "Registration Rights."
DESCRIPTION OF COMMON SHARES
The following summary ofthis prospectus are offered as units, the
terms of the shares of beneficial interest
of the Company does not purport tounits will be complete and is subject to and qualifiedset forth in its entirety by reference to the Declaration of Trust and the Bylaws of the
Company, copies of which are exhibits to the registration statement of which
this Prospectus is a part.
Generalrelated prospectus supplement.
DESCRIPTION OF SHARES
THE FOLLOWING SUMMARY OF THE TERMS OF THE SHARES OF CORPORATE OFFICE
PROPERTIES TRUST ("COPT") DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO AND
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DECLARATION OF TRUST AND THE
BYLAWS OF COPT, COPIES OF WHICH ARE EXHIBITS TO THE REGISTRATION STATEMENT OF
WHICH THIS PROSPECTUS IS A PART.
GENERAL
The Declaration of Trust provides that the CompanyCOPT may issue up to 45,000,000
Common Shares and 5,000,000 Preferred Shares.preferred shares of beneficial interest, par value
$.01 per share (the "Preferred Shares"). As of June 30,December 31, 1998, there were
9,771,08316,801,876 Common Shares and no984,308 Series A Convertible Preferred Shares (the
"Series A Preferred Shares") issued and outstanding. As permitted by Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended (the "Maryland REIT Law"),
theThe Declaration of Trust
contains a provision permitting the Board of Trustees, without any action by the
shareholders of the Company,COPT, to amend the Declaration of Trust to increase or decrease
the aggregate number of shares of beneficial interest or the number of shares of
any class of shares of beneficial interest that the CompanyCOPT has authority to issue. The Company believes that the power of
the Board of Trustees to issue additional shares of beneficial interest will
provide the Company with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs that might arise. The
additional shares of beneficial interest, possibly includingwhich could include Common Shares,
10
will be available for issuance without further action by COPT's shareholders,
subject to the Company's shareholders,
unless action by the shareholders is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. Although the Board of Trustees currently has
no intention of doing so, it could authorize the Company to issue a class or
series of shares that could, depending on the terms of such class or series,
delay, defer or prevent a change in controlrequirements of the Company or other transaction
that might involve a premium overNew York Stock Exchange ("NYSE").
Both Title 8 of the then prevailing market price forCorporations and Associations Article of the
Common Shares or other attributes that the shareholders may consider to be
desirable.
Both theAnnotated Code of Maryland, as amended (the "Maryland REIT LawLaw") and the
Declaration of Trust provide that no shareholder of the CompanyCOPT will be personally
liable for any obligation of the
CompanyCOPT solely as a result of such shareholder's
status as a shareholder of the
Company.COPT. The Declaration of Trust provides that the CompanyCOPT
shall have the power, to the maximum extent permitted by Maryland law in effect
from time to time, to obligate itself to indemnify, and to pay or reimburse
reasonable expenses in advance of a final disposition of a proceeding to, any
shareholder or any former shareholder from and against any claim 14
or liability to
which such person may become subject or which such person may incur by reason of
his status as a present or former shareholder of the Company.COPT. The Bylaws of the CompanyCOPT
obligate it, to the maximum extent permitted by Maryland law, to indemnify any
shareholder or any former shareholder (including, without limitation, any
individual who, while a shareholder and at the request of the Company,COPT, serves or has
served another real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a trustee,
director, officer, partner, employee or agent of such real estate investment
trust, corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise) who has been successful, on the merits or otherwise, in the
defense of a proceeding to which he was made a party by reason of being a
shareholder, against reasonable expenses incurred by him in connection with the
proceeding. Inasmuch as the CompanyCOPT carries public liability insurance which it
considers adequate, any risk of personal liability to shareholders not covered
by the Maryland REIT Law is limited to situations in which the Company'sCOPT's assets plus
its insurance coverage would be insufficient to satisfy the claims against the
CompanyCOPT
and its shareholders.
Common SharesCOMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid
and nonassessable. Subject to the preferential rights of any other shares or
series of beneficial interest and to the provisions of the Declaration of Trust
regarding the restriction on transfer of Common Shares, holders of Common Shares
are entitled to receive dividends on such shares if, as and when authorized and
declared by the Board of Trustees out of assets legally available therefor and
to share ratably in the assets of the CompanyCOPT legally available for distribution to its
shareholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of the Company.COPT.
Subject to the provisions of the Declaration of Trust regarding
restrictions on transfer of shares of beneficial interest, each outstanding
Common Share entitles the holder thereof to one vote on all matters submitted to
a vote of shareholders, including the election of Trustees, and, except as
provided with respect to any other class or series of shares of beneficial
interest, the holders of such Common Shares possess the exclusive voting power.
There is no cumulative voting in the election of Trustees, which means that the
holders of a majority of the outstanding Common Shares can elect all of the
Trustees then standing for election and the holderselection. Constellation Properties, Inc. is currently
entitled to appoint two of the remaining shares will
not be able to elect anynine Trustees. See "Description of Common
Shares--Series A Preferred Shares" below.
Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of the Company.COPT. Subject to the provisions of the Declaration of Trust
regarding the restriction on transfer of Common Shares, the Common Shares have
equal dividend, distribution, liquidation and other rights.
Under the Maryland REIT Law, a Maryland real estate investment trust
generally cannot amend its declaration of trust or merge unless approved by the
affirmative vote of shareholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all the votes entitled to be cast on the matter) is set forth in the
real estate investment trust's declaration of trust.
The Declaration of Trust provides for approval by a majority of the
votes cast by holders of Common Shares entitled to vote on the matter in all
situations permitting or requiring action by the shareholders, except with
respect to: (i) the election of Trustees (which requires a plurality of all
the votes cast at a meeting of shareholders of the CompanyCOPT at which a quorum is
present), (ii) the removal of Trustees (which requires the affirmative vote
of the holders of two-thirds of the outstanding shares of beneficial interest
of the CompanyCOPT entitled to vote generally in the election of Trustees, which action
can only be taken for cause by vote at a shareholder meeting), (iii) the
merger of COPT with another entity or the sale (or other disposition) of all
or substantially all of the assets of the CompanyCOPT (which requires the affirmative
vote of the holders of two-thirds of the outstanding shares of beneficial
interest entitled to vote on the matter), (iv) the amendment of the
Declaration of Trust by shareholders (which requires the affirmative vote of two-thirds of
all the votes entitled to be cast on the matter) and, (v) the termination of the CompanyCOPT
(which requires the affirmative vote of two-thirdstwo-
11
thirds of the outstanding shares of beneficial interest entitled to be cast
on the matter); and (vi) certain voting rights of Constellation Properties,
Inc. (See "Series A Preferred Shares" below). As allowed under the Maryland REIT Law, theThe Declaration of Trust
permits (a) the Trustees, without any action by the holders of Common Shares, (a)
by a two-thirds vote, to amend the Declaration of Trust from time to time to
qualify as a real estate investment trust under the Code or the Maryland REIT
Law without the approval of the shareholders and (b) the Trustees by a majority vote without any action by the shareholders
15
of the Company, to amend the Declaration of Trust to increase
or decrease the aggregate number of shares of beneficial interest or the
number of shares of any class of shares of beneficial interest that the CompanyCOPT has
authority to issue.
Classification or Reclassification of Common Shares or Preferred SharesCLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED SHARES
The Declaration of Trust authorizes the Board of Trustees to classify
any unissued Preferred Shares and to reclassify
any unissued shares of Common Shares and
any previously classified but unissuedor Preferred Shares into other classes or series
of any series from timeclasses of shares and to timeestablish the number of shares in one or more series, as authorized by the Board of Trustees. Prior to
issuance of classified or reclassified shares of each class or
series the Board
of Trustees is required by the Maryland REIT Law and the Declaration of Trust to set for each class or series, subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of shares of beneficial interest,
the terms, the preferences, conversion orand other rights, voting powers,
restrictions, limitations and restrictions on ownership, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such class or series. Such
rights, powers, restrictions and limitations could include the right to receive
specified dividend payments and payments on liquidation prior to any payments
being madeThus, in addition to the holders of the Common Shares. Thus,Series A
Preferred Shares, the Board of Trustees could authorize the issuance of other
Preferred Shares with terms and conditions which could also have the effect of
delaying, deferring or preventing a change in control of the CompanyCOPT or other
transaction that might involve a premium over the then prevailing market price
for Common Shares or other attributes that the shareholders may consider to be
desirable.
As ofSERIES A PREFERRED SHARES
Of the date hereof, no5,000,000 Preferred Shares are issued or outstanding.
Preferred Shares
In connection withauthorized, the Constellation Transactions, the BoardDeclaration of Trustees has authorized theTrust
designates 1,025,000 Series A Convertible Preferred Shares, par value $.01 per
share ("Series A Preferred Shares"), of which will
constitute the non-voting convertible preferred shares to be984,308 Series A Preferred Shares
were issued to Constellation in the Constellation Transactions,Properties, Inc., with terms as follows:
Voting Rights.VOTING RIGHTS. Except as set forth below and as required by applicable
law, the Series A Preferred Shares do not entitle the holder thereof to any
vote. If an amendment to the Company'sCOPT's Declaration of Trust or a reclassification of
Preferred Shares would amend, alter or repeal any of the rights, preferences or
powers of the Series A Preferred Shares, then the affirmative vote of holders of
two-thirds of the outstanding Series A Preferred Shares, voting as a separate
class, would be required for its adoption. As discussed under "Recent Developments",
Constellation Properties, Inc. has
the right to designate up to two members of the Board of Trustees depending on
Constellation'sConstellation Properties, Inc.'s ownership percentage of outstanding Shares.shares.
This right is set forth as a term of the Series A Preferred Shares, such that so
long as Constellation Properties, Inc. holds any Series A Preferred Shares (and
it beneficially owns 30% of the requisite
amount of Common Shares), Constellation Properties, Inc.
will have the right to designate up to two Trustees. Dividends.If Constellation
Properties, Inc.'s Common Share beneficial holdings fall below 30% but above
15%, Constellation Properties, Inc. may designate one Trustee.
DIVIDENDS. Holders of Series A Preferred Shares will be entitled to
cumulative dividends, payable quarterly and in preference to dividends payable
on Common Shares, accruing from the date of issue, when, as and if declared by
the Board of Trustees out of funds legally available therefor, at the annual
rate of $1.375 per share, which is 5.5% of the $25.00 liquidation preference of
the Series A Preferred Shares.
Liquidation.LIQUIDATION. In the event of any liquidation, dissolution or winding upwinding-up
of the Company'sCOPT's affairs, voluntary or otherwise, holders of Series A Preferred Shares will be entitled to
receive, out of the assets of the CompanyCOPT legally available for distribution to its
shareholders, the sum of $25.00 for each Preferred Share, plus an amount equal
to all dividends accrued and unpaid on each such Series A Preferred Share up to
the date fixed for distribution, before any distribution may be made to holders
of the Company'sCOPT's Common Shares.
Conversion.CONVERSION. The Series A Preferred Shares are convertible beginning two years
after the closing of the Constellation Transaction, into Common
Shares on the basis of 1.8748 Common Shares for each Series A Preferred Shared at $13.34 per Common Share
(subject to adjustment upon certain events, such as dividends paid in Common
Shares). as follows:
12
Series A Common Shares
Preferred if
Conversion Date Shares converted
--------------- ------ ---------
September 28, 2000 865,566 1,622,763
October 22, 2000 72,509 135,940
December 30, 2000 46,233 86,678
------- ---------
Total 984,308 1,845,381
------- ---------
Notwithstanding the foregoing, Series A Preferred Shares held by
Constellation Properties, Inc. may not be converted into Common Shares if after
such conversion Constellation Properties, Inc. and its affiliates would own 45%
or more of the Company'sCOPT's outstanding Common Shares, although in the event of such
attempted conversion, Constellation Properties, Inc. may elect to receive
dividends issued on the Common Shares it would have received if the conversion
had been completed, in lieu of dividends on its Preferred Shares.
16ADDITIONAL PARITY AND JUNIOR SHARES. Any shares issued which are senior
to the Series A Preferred Shares require an affirmative vote of two-thirds of
the holders of Series A Preferred Shares. COPT may issue any class of capital
shares with voting rights which are on parity with or junior to the Series A
Preferred Shares without consent of the holders of Series A Preferred Shares.
However, an affirmative vote of two-thirds of the holders of Series A Preferred
Shares is required for any issuance or sale of greater than $50 million in
Common Shares at a price less than $9.50 per share.
ISSUANCE OF ADDITIONAL PREFERRED SHARES
The following description of our Preferred Shares of beneficial
interest sets forth general terms and provisions of the Preferred Shares to
which any prospectus supplement may relate. The statements below describing the
Preferred Shares are in all respects subject to and qualified in their entirety
by reference to our Declaration of Trust, Bylaws and any applicable amendment to
the Declaration of Trust designating terms of a series of Preferred Shares (a
"Designating Amendment"). The Preferred Shares, when issued, will be fully paid
and non-assessable. Because our Board of Trustees has the power to establish the
preferences, powers and rights of each series of Preferred Shares, subject to
the rights of the holders of the Series A Preferred Shares, our Board may afford
the holders of any series of Preferred Shares preferences, powers and rights,
voting or otherwise, senior to the rights of holders of Common Shares. The
issuance of additional series of Preferred Shares could have the effect of
delaying or preventing a change of control that might involve a premium price
for shareholders or otherwise be in their best interest.
The rights, preferences, privileges and restrictions of the Preferred
Shares of each series will be fixed by the Designating Amendment relating to the
series. A prospectus supplement, relating to each series, will specify the terms
of the Preferred Shares, as follows:
- the title and stated value of the Preferred Shares;
- the number of Preferred Shares offered, the liquidation preference
per share and the offering price of the Preferred Shares;
- the dividend rate(s), period(s) and/or payment date(s) or
method(s) of calculation applicable to the Preferred Shares;
- the date from which dividends on the Preferred Shares will
accumulate, if applicable;
- the procedures for any auction and remarketing, if any, for the
Preferred Shares;
- the provision for a sinking fund, if any, for the Preferred
Shares;
- the provision for redemption, if applicable, of the Preferred
Shares;
13
Restrictions- any listing of the Preferred Shares on Transferany securities exchange;
- the terms and conditions, if applicable, upon which the Preferred
Shares will be convertible into our Common Shares, including the
conversion price (or manner of calculation) and conversion period;
- any other specific terms, preferences, rights, limitations or
restrictions of the Preferred Shares;
- a discussion of certain material federal income tax considerations
applicable to the Preferred Shares;
- the relative ranking and preferences of the Preferred Shares as to
dividend rights and rights upon the liquidation, dissolution or
winding up of our affairs;
- any limitation on issuance of any series of Preferred Shares
ranking senior to or on a parity with the series of Preferred
Shares as to dividend rights and rights upon the liquidation,
dissolution or winding up of our affairs; and
- any limitations on direct or beneficial ownership and restrictions
on transfer of the Preferred Shares, in each case as may be
appropriate to preserve our status as a REIT.
RESTRICTIONS ON TRANSFER
For the CompanyCOPT to qualify as a REIT under the Code, its shares of beneficial
interest generally must be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve12 months or during a proportionate part of
a shorter taxable year. Also, not more than 50% of the value of the outstanding
shares of beneficial interest 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 a taxable year (other than
the first year foryear. This test is applied by "looking
through" certain shareholders which an electionare not individuals (e.g, , corporations or
partnerships) to be a REIT has been made).determine indirect ownership of COPT by individuals.
The Declaration of Trust, subject to certain exceptions, contains
certain restrictions on the number of shares of beneficial interest of the
CompanyCOPT that
a person may own. The Declaration of Trust provides that no person may own, or
be deemed to own by virtue of the attribution provisions of the Code, more than
9.8% (the "Aggregate Share Ownership Limit") of the number or value of the
outstanding shares of beneficial interest of the Company.COPT. In addition, the Declaration
of Trust prohibits any person from acquiring or holding, directly or indirectly,
Common Shares in excess of 9.8% (in value or in number of shares, whichever is
more restrictive) of the aggregate of the outstanding Common Shares (the "Common
Share Ownership Limit").
The Board of Trustees, in its sole discretion, may exempt a proposed
transferee from the Aggregate Share Ownership Limit and the Common Share
Ownership Limit (an "Excepted Holder"). However, the Board of Trustees may not
grant such an exemption to any person if such exemption would result in the
CompanyCOPT
being "closely held" within the meaning of Section 856(h) of the Code or
otherwise would result in the CompanyCOPT failing to qualify as a REIT. In order to be
considered by the Board of Trustees as an Excepted Holder, a person also must
not own, directly or indirectly, an interest in a tenant of the CompanyCOPT (or a tenant of
any entity owned or controlled by the Company) that would cause the
Company to own, directly or indirectly, an interest in a tenant of the Company
(or a tenant of any entity owned or controlled by the Company) that would cause
the Company to own,COPT) directly or indirectly, more than a 9.9%
interest in such a tenant. The person seeking an exemption must represent to the
satisfaction of the Board of Trustees that it will not violate the two
aforementioned restrictions. The person also must agree that any violation or
attempted violation of any of the foregoing restrictions will result in the
automatic transfer of the shares of stock causing such violation to the Share
Trust (as defined below). The Aggregate Share Ownership Limit and the Common Share
Ownership Limit do not apply to the Common Shares issued in the Constellation
and Formation Transactions, as well as Common Shares to be issued following
redemption or conversion of Units issued in the Constellation and Formation
Transactions. The Board of Trustees may require a ruling from the
Service or an opinion of counsel, in either case in form and substance
satisfactory to the Board of Trustees, in its sole discretion, in order to
determine or ensure the
Company'sCOPT's status as a REIT. Constellation Properties, Inc., Mr.
Jay H. Shidler and Mr. Clay W. Hamlin, III are all Excepted Holders. However, as
of December 31, 1998, Messrs. Shidler and Hamlin collectively owned only 3.6% of
the outstanding Common Shares.
The Declaration of Trust further prohibits (a) any person from
beneficially or constructively owning shares of beneficial interest of the
CompanyCOPT that
would result in the CompanyCOPT being "closely held" under Section 856(h) of the Code or
otherwise cause the CompanyCOPT to fail to qualify as a REIT and (b) any person from
transferring shares of beneficial interest
14
of the
CompanyCOPT if such transfer would result in shares of beneficial interest of the
CompanyCOPT
being owned by fewer than 100 persons. Any person who acquires or attempts or
intends to acquire beneficial or constructive ownership of shares of beneficial
interest of the CompanyCOPT that will or may violate any of the foregoing restrictions on
transferability and ownership, or any person who would have owned shares of the
beneficial interest of the CompanyCOPT that resulted in a transfer of shares to the Share
Trust (as hereinafter defined), is required to give notice immediately to the CompanyCOPT
and provide the CompanyCOPT with such other information as the CompanyCOPT may request in order to
determine the effect of such transfer on the Company'sCOPT's status as a REIT. The foregoing
restrictions on transferability and ownership will not apply if the Board of
Trustees determines that it is no longer in the best interests of the CompanyCOPT to
attempt to qualify, or to continue to qualify, as a REIT.
If any transfer of shares of beneficial interest of the CompanyCOPT occurs which,
if effective, would result in any person beneficially or constructively owning
shares of beneficial interest of the CompanyCOPT in excess or in violation of the above
transfer or ownership limitations (a "Prohibited Owner"), then that number of
shares of beneficial interest of COPT in excess of the Company, the beneficial or
constructive ownership of which otherwise would cause such person to violate
such limitations (rounded to the nearest whole share), shalllimit will
automatically be automatically transferred to a trust (the "Share Trust") for the exclusive
benefit of one
17
or more charitable beneficiaries (the "Charitable Beneficiary"),
and the Prohibited Owner shall not acquire any rights in such shares. Such automatic
transfer shall be deemed to be effective as of the close of business on the
Business Day (as defined in the Declaration of Trust) prior to the date of such
violative transfer. Shares of beneficial interest held in the Share Trust shall
be issued and outstanding shares of beneficial interest of the Company. The
Prohibited Owner shallmay not benefit economically from ownership of any shares of
beneficial interest held in the Share Trust, shallmay have no rights to dividends and
shallmay not possess any other rights attributable to the shares of beneficial
interest held in the Share Trust. The trustee of the Share Trust (the "Share
Trustee") shallwill have all voting rights and rights to dividends or other
distributions with respect to shares of beneficial interest held in the Share
Trust, which rights shallwill be exercised for the exclusive benefit of the
Charitable Beneficiary. Any dividend or other distribution paid prior to the
discovery by the CompanyCOPT that shares of beneficial interest have been transferred to
the Share Trust shallwill be paid by the recipient of such dividend or distribution
to the Share Trustee upon demand, and any dividend or other distribution
authorized but unpaid shallwill be paid when due to the Share Trustee. Any dividend
or distribution so paid to the Share Trustee shallwill be held in the Share Trust for
the Charitable Beneficiary. The Prohibited Owner shallwill have no voting rights with
respect to shares of beneficial interest held in the Share Trust and, subject to
Maryland law, effective as of the date that such shares of beneficial interest
have been transferred to the Share Trust, the Share Trustee shallwill have the
authority (at the Share Trustee's sole discretion) (i) to rescind as void any
vote cast by a Prohibited Owner prior to the discovery by the
CompanyCOPT that such shares
have been transferred to the Share Trust and (ii) to recast such vote in
accordance with the desires of the Share Trustee acting for the benefit of the
Charitable Beneficiary. However, if the CompanyCOPT has already taken irreversible trust
action, then the Share Trustee shallwill not have the authority to rescind and recast
such vote.
Within 20 days of receiving notice from the CompanyCOPT that shares of beneficial
interest of the CompanyCOPT have been transferred to the Share Trust, the Share Trustee
shallwill sell the shares of beneficial interest held in the Share Trust to a person,
designated by the Share Trustee, whose ownership of the shares will not violate
the ownership limitations set forth in the Declaration of Trust. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold shallwill terminate and
the Share Trustee shallwill distribute the net proceeds of the sale to the Prohibited
Owner and to the Charitable Beneficiary as follows.described below. The Prohibited Owner
shallwill receive the lesser of (i) the price paid by the Prohibited Owner for the
shares or, if the Prohibited Owner did not give value for the shares in
connection with the event causing the shares to be held in the Share Trust
(e.g.(E.G., a gift, devise or other such transaction), the Market Price (as defined
in the Declaration of Trust) of such shares on the day of the event causing the
shares to be received by the Share Trustee and (ii) the price per share received
by the Share Trustee from the sale or other disposition of the Common Shares
held in the Share Trust. Any net sale proceeds in excess of the amount payable
to the Prohibited Owner shallwill be paid immediately to the Charitable Beneficiary.
If, prior to the discovery by the CompanyCOPT that shares of beneficial interest have been
transferred to the Share Trust, such shares are sold by a Prohibited Owner, then
(i) such shares shallwill be deemed to have been sold on behalf of the Share Trust
and (ii) to the extent that the Prohibited Owner received an amount for shares
that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to the aforementioned requirement,as
described above, such excess shallwill be paid to the Share Trustee upon demand.
In addition, shares of beneficial interest of the CompanyCOPT held in the Share
Trust shallwill be deemed to have been offered for sale to the Company,COPT, or its designee, at
a price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the Share Trust (or, in the case
of a devise or gift, the Market Price at the time of such devise or gift) and
(ii) the Market Price on the date the Company,COPT, or its designee, accepts such offer.
The CompanyCOPT shall have the right to accept such offer until the Share Trustee has sold
the shares of beneficial interest held in the Share Trust. Upon such a sale to
the Company,COPT, the interest of the Charitable Beneficiary in the shares sold shallwill
terminate and the Share Trustee shallwill distribute the net proceeds of the sale to
the Prohibited Owner.
15
All certificates representing Common Shares will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such other percentage as required by
the Code or the regulations promulgated thereunder) of all classes or series of
the Company'sCOPT's shares of beneficial interest, including Common Shares, is required to
give written notice to COPT within 30 days after the end of each taxable year is required to give written notice to
the Company
stating the name and address of such owner, the number of shares of each class
and series of shares of beneficial interest of the CompanyCOPT which the owner
18
beneficially
owns and a description of the manner in which such shares are held. Each such
owner shall provide to the CompanyCOPT such additional information as the
CompanyCOPT may request in
order to determine the effect, if any, of such beneficial ownership on the Company'sCOPT's
status as a REIT and to ensure compliance with the Aggregate Share Ownership
Limit. In addition, each shareholder shall upon demand be required to provide to
the CompanyCOPT such information as the CompanyCOPT may request, in good faith, in order to determine
the Company'sCOPT's status as a REIT and to comply with the requirements of any taxing
authority or governmental authority or to determine such compliance.
These ownership limitations could delay, defer or prevent a change in
control of the CompanyCOPT or other transaction that might involve a premium over the then
prevailing market priceMarket Price for the Common Shares or other attributes that the
shareholders may consider to be desirable.
ClassificationISSUANCE OF WARRANTS
We have no outstanding warrants to purchase our Common Shares ("Common
Share Warrants") or outstanding warrants to purchase our Preferred Shares
("Preferred Share Warrants" and collectively with Common Share Warrants, the
"Warrants"). We may issue Warrants for the purchase of Board, VacanciesPreferred Shares or
Common Shares. Warrants may be issued by any prospectus supplement independently
or together with any other securities offered and Removalmay be attached to or separate
from those securities. Each series of TrusteesWarrants will be issued under a separate
warrant agreement (each, a "Warrant Agreement") to be entered into between us
and a warrant agent specified in a prospectus supplement (the "Warrant Agent"),
the form of which will be filed or incorporated by reference as an exhibit to
the registration statement of which this prospectus forms a part. The Warrant
Agent will act solely as our agent in connection with the Warrants of such
series and will not assume any obligation or relationship of agency or trust for
or with any provisions of the Warrants offered hereby. Further terms of the
Warrants and the applicable Warrant Agreements will be set forth in the
applicable prospectus supplement relating to the issuance of any Warrants.
A prospectus supplement will describe the terms of the Warrants in
respect of which this prospectus is being delivered including, where applicable,
the following:
- the title of the Warrants;
- the aggregate number of the Warrants;
- the price or prices at which the Warrants will be issued;
- the designation, terms and number of Common Shares or Preferred
Shares purchasable upon exercise of the Warrants;
- the designation and terms of the securities, if any, with which
the Warrants are issued and the number of the Warrants issued with
each such offered security;
- the date, if any, on and after which the Warrants and the related
Preferred Shares or Common Shares will be separately transferable;
- the price (or manner of calculation) at which each Common Share or
Preferred Share purchasable upon exercise of the Warrants may be
purchased;
16
- the date on which the right to exercise the Warrants shall
commence and the date on which the right shall expire;
- the minimum or maximum amount of the Warrants which may be
exercised at any one time;
- information with respect to book-entry procedures, if any;
- a discussion of certain material federal income tax
considerations; and
- any other terms of the Warrants, including terms, procedures and
limitations relating to the exchange and exercise of the Warrants.
The exercise of any Warrants will be subject to and limited by the transfer and
ownership restrictions in our declaration of trust. See "Description of
Shares---Restrictions on Transfer."
CLASSIFICATION OF BOARD, VACANCIES AND REMOVAL OF TRUSTEES
The Declaration of Trust provides for a staggered Board of Trustees.
The CompanyCOPT presently has sevennine Trustees divided into three classes, with terms of three
years each and with one class to be elected at each annual meetingeach. Constellation Properties, Inc. currently may appoint two Trustees.
See "Description of shareholders. Upon consummation of the Constellation Transactions,Shares - Series A Preferred Shares." Currently, the number
of Trustees will increase to nine, with Constellation appointing two additional
Trustees.in each class and the expiration of each class's term is as follows:
Class 1 2 Trustees Expires 1999
Class 2 3 Trustees Expires 2000
Class 3 4 Trustees Expires 2001
At each annual meeting of shareholders of the Company, commencing in
1999,COPT, successors of the class of
Trustees whose term expires at that annual
meeting will be elected for a three-year
term. The Bylaws of the Company (the
"Bylaws") provide that a majority of Trustees may establish, increase or
decrease the number of Trustees. The Bylaws also permitterm and the Trustees of the
Company to fill vacancies in the Board of Trustees. The Bylaws provide that any
vacancy on the Board of Trustees shall be filled by a majority of the remaining
Trustees. Any individual so elected Trusteeother two classes will hold office for the unexpired
term of the Trustee he is replacing.
The Declaration of Trust provides that a Trustee may be removed at any
time only for cause upon the affirmative vote of at least two-thirds, rather
than a simple majority, of the votes entitled to be castcontinue in the election of
Trustees, but only by a vote taken at a shareholder meeting. This provision,
when coupled with the provision in the Bylaws authorizing the Board of Trustees
to fill vacant trusteeships, precludes shareholders from removing incumbent
trustees, except upon the existence of cause for removal and a substantial
affirmative vote, and filling the vacancies created by such removal with their
own nominees.
With a classified Board of Trustees, it will generally take holders of
a majority of the voting power two annual meetings of shareholders to elect a
majority of the Board of Trustees. As a result, aoffice. A
classified board may delay, defer or prevent a change in control of the CompanyCOPT or
other transaction that might involve a premium over the then prevailing market
price for the Common Shares or other attributes that the shareholders may
consider to be desirable. In addition, because under the Declaration of Trust a Trustee may be removed
only for cause by the affirmative voteclassification of the holders of two thirds of the
outstanding shares entitled to vote in the election of Trustees, the classified Board of Trustees
would delayprevent shareholders who do not agree with the policies of the Board of
Trustees from replacing a majority of the Board of Trustees for two years,
unless they can demonstrateexcept in the event of removal for cause.
The Bylaws of COPT (the "Bylaws") provide that any vacancy on the trustee shouldBoard
of Trustees may be filled by a majority of the remaining Trustees. Any
individual so elected Trustee will hold office for the unexpired term of the
Trustee he or she is replacing. The Declaration of Trust provides that a Trustee
may be removed at any time only for cause upon the affirmative vote of at least
two-thirds of the votes entitled to be cast in the election of Trustees, but
only by a vote taken at a shareholder meeting. These provisions preclude
shareholders from removing incumbent Trustees, except upon the existence of
cause for removal and obtaina substantial affirmative vote, and filling the requisite vote.
Advance Notice of Nominations and New Businessvacancies
created by such removal with their own nominees.
ADVANCE NOTICE OF NOMINATIONS AND NEW BUSINESS
The Bylaws provide that, (i) with respect to an annual meeting of
shareholders, nominations of persons for election to the Board of Trustees and
the proposal of business to be considered by shareholders may be made only (a)
pursuant to the Company'sCOPT's notice of the meeting, (b) by the Board of Trustees or (c) by
a shareholder who is entitled to vote at the meeting and has complied with the
advance notice procedures set forth in the Bylaws and (ii) withBylaws. With respect to special
meetings of shareholders, the Bylaws provide that only the business specified in
the
Company'sCOPT's notice of meeting may be brought before the meeting of shareholders and
nominations of persons for election to the Board of Trustees may be made only
(a) pursuant to the Company'sCOPT's notice of the meeting, (b) by the Board of Trustees or
(c) provided that the Board of Trustees has determined that Trustees shall be
elected at such meeting, by a shareholder who is entitled to vote at the meeting
and has complied with the advance notice provisions set forth in the Bylaws.
1917
Changes in Control PursuantPOSSIBLE ANTITAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW
The Maryland General Corporations Law ("MGCL") contains provisions that
may be deemed to Maryland Law
Certain Business Combinations.have an antitakeover effect. The provisions applicable to COPT
are set forth below.
CERTAIN BUSINESS COMBINATIONS. Under the MGCL, as applicable to
Maryland real estate investment trusts, certain business combinations (including
certain mergers, consolidations, share exchanges and asset transfers and certain
issuances and reclassifications of equity securities) between a Maryland real
estate investment trust and any person who beneficially owns ten percent or more
of the voting power of the trust's shares or an affiliate of the trust who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting shares of such trust (an "Interested Shareholder"), or an
affiliate of such an Interested Shareholder, are prohibited for five years after
the most recent date on which the Interested Shareholder becomes an Interested
Shareholder. Thereafter, any such business combination must be recommended by
the board of trustees of such trust and approved by the affirmative votevotes of at
least (i) 80% of the votes entitled to be cast by holders of outstanding voting
shares of beneficial interest of the trust and (ii) two-thirds of the votes entitled to be cast by
holders of voting shares of the trust other than shares held by the Interested
Shareholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the trust's common shareholders
receive a minimum price (as defined in the MGCL) for their shares and the
consideration is received in cash or in the same form as previously paid by the
Interested Shareholder for its shares. These provisions of Maryland law do not
apply, however, to business combinations that are approved or exempted by the
board of trustees of the trust prior to the time that the Interested Shareholder
becomes an Interested Shareholder. The Board of Trustees has opted out of this
statute by resolution. Control Share Acquisitions.The Board of Trustees may, however, rescind its
resolution at any time to make these provisions of Maryland law applicable to
COPT.
CONTROL SHARE PROVISIONS. The MGCL as applicable to Maryland real
estate investment trusts,generally provides that control
shares ("Control Shares (as defined below)Shares") of a Maryland real estate investment trust acquired in
a control share acquisition (as defined below) have no voting rights except to the extentunless those rights are
approved by a vote of two-thirds of the votes entitled to be cast on the matter, excludingdisinterested shares of beneficial interest owned(generally shares
held by persons other than the acquiror, by officers or by trustees who are employees
of the trust.trust). An acquiror is deemed to own Control Shares are voting shares of beneficial interest
which, if aggregated with all other such shares of beneficial interest
previously acquired by the acquiror or in respect of whichfirst time that
the acquiror is able
to exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exerciseacquiror's voting power in electing trustees withinenters into one of the
following ranges of voting power: (i) one-
fifthone-fifth or more but less than one-third,
(ii) one-third or more but less than a majority or (iii) a majority or more of
all voting power. Control Shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained shareholder
approval. A control share acquisition means the acquisition of Control Shares,
subject to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of trustees of the trust to call a special
meeting of shareholders to be held within 50 days of demand to consider whether
the shares will have voting rights of the shares. If no request for a meeting is made, therights. The trust may
itself present the question at any
shareholders' meeting.meeting on its own initiative.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the trust may
redeem any or all of the Control Shares (except those for which voting rights
have previously been approved) for fair value, determined without regard to the
absence of voting rights for the Control Shares,Shares. Fair value will be determined
as of the date of the last control share acquisition by the acquiror or of any
meeting of shareholders at which the voting rights of such shares are considered
and not approved. If voting rights for Control Shares are approved at a
shareholders' meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other shareholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid by the
acquiror in the control share acquisition.
The control share acquisition statute doesprovisions do not apply (a) to shares acquired in a
merger, consolidation or share exchange if the trust is a party to the
transaction or (b) to acquisitions approved or exempted by the declaration of
trust or bylaws of the trust. The Bylaws contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of
the Company'sCOPT's shares of beneficial interest. The Board of Trustees may, however, amend
the Bylaws at any time to eliminate such provision, either prospectively or
retroactively.
18
DISSOLUTION OF THE COMPANY; TERMINATION OF REIT STATUS
The Declaration of Trust permits the termination of COPT and the
discontinuation of the operations of COPT by the affirmative vote of the holders
of not less than two-thirds of the outstanding Common Shares entitled to be cast
on the matter at a meeting of shareholders or by written consent. In addition,
the Declaration of Trust permits the termination of COPT's qualification as a
REIT if such qualification, in the opinion of the Board of Trustees, is no
longer advantageous to the shareholders.
FEDERAL INCOME TAX MATTERS
COPT was organized in 1988 and elected to be taxed as a REIT commencing
with its taxable year ended December 31, 1992. COPT believes that it was
organized and has operated in a manner that permits it to satisfy the
requirements for taxation as a REIT under the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code") and intends to continue
to operate in such a manner. No assurance can be given, however, that such
requirements have been or will continue to be met. The following is a summary of
the material federal income tax considerations that may be relevant to COPT and
its shareholders, including the continued treatment of COPT as a REIT for
federal income tax purposes. For purposes of this discussion of "FEDERAL INCOME
TAX MATTERS" the term "COPT" refers only to Corporate Office Properties Trust
and not to any other affiliated entities.
The following discussion is based on the law existing and in effect on
the date hereof and COPT's qualification and taxation as a REIT will depend on
compliance with such law and with any future amendments or modifications to such
law. The qualification and taxation as a REIT will further depend upon the
ability to meet, on a continuing basis through actual operating results, the
various qualification tests imposed under the Code discussed below. No assurance
can be given that COPT will satisfy such tests on a continuing basis.
In brief, an entity that invests primarily in real estate can, if it
meets the REIT provisions of the Code described below, claim a tax deduction for
the dividends it pays to its shareholders. Such an entity generally is not taxed
on its "REIT taxable income" to the extent such income is currently distributed
to shareholders, thereby substantially eliminating the "double taxation" (I.E.,
at both the entity and shareholder levels) that generally results from an
investment in an entity which is taxed as a corporation. However, as discussed
in greater detail below, such an entity remains subject to tax in certain
circumstances even if it qualifies as a REIT. Further, if the entity were to
fail to qualify as a REIT in any year, it would not be able to deduct any
portion of the dividends it paid to its shareholders and would be subject to
full federal corporate income taxation on its earnings, thereby significantly
reducing or eliminating the cash available for distribution to its shareholders.
Morgan, Lewis & Bockius LLP has opined that, for federal income tax
purposes, COPT has properly elected and otherwise qualified to be taxed as a
REIT under the Code for taxable years commencing on or after June 1, 1992 and
that its proposed method of operations as described in this prospectus and as
represented to Morgan, Lewis & Bockius LLP by COPT will enable COPT to continue
to satisfy the requirements for such qualification and taxation as a REIT under
the Code for future taxable years. This opinion, however, is based upon certain
factual assumptions and representations made by COPT. Moreover, such
qualification and taxation as a REIT depends upon the ability of COPT to meet,
for each taxable year, various tests imposed under the Code as discussed below,
and Morgan, Lewis & Bockius LLP has not reviewed in the past, and may not review
in the future, COPT's compliance with these tests. Accordingly, no assurance can
be given that the actual results of the operations of COPT for any particular
taxable year will satisfy such requirements.
TAXATION OF COPT
GENERAL. In any year in which COPT qualifies as a REIT, it will not
generally be subject to federal income tax on that portion of its REIT taxable
income or capital gain which is distributed to shareholders. COPT will, however,
be subject to tax at normal corporate rates upon any taxable income or capital
gains not distributed. Under recently enacted legislation, shareholders are
required to include their proportionate share of the REIT's undistributed
long-term capital gain in income but would receive a credit for their share of
any taxes paid on such gain by the REIT.
19
Notwithstanding its qualification as a REIT, COPT also may be subject
to taxation in certain other circumstances. If COPT should fail to satisfy
either the 75% or the 95% gross income test (each as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the greater of the
amount by which COPT fails either the 75% or the 95% test, multiplied by a
fraction intended to reflect COPT's profitability. COPT will also be subject to
a tax of 100% on net income from any "prohibited transaction" (as described
below), and if COPT has (i) 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 (ii) other non-qualifying income from foreclosure
property, it will be subject to tax on such income from foreclosure property at
the highest corporate rate. In addition, if COPT should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such year
and (iii) any undistributed taxable income from prior years, COPT would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. COPT also may be subject to the corporate
alternative minimum tax, as well as to tax in certain situations not presently
contemplated. COPT will use the calendar year both for federal income tax
purposes, as is required of a REIT under the Code, and for financial reporting
purposes.
FAILURE TO QUALIFY. If COPT fails to qualify for taxation as a REIT in
any taxable year and the relief provisions do not apply, COPT will be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which COPT
fails to qualify as a REIT will not be deductible by COPT, nor generally will
they be required to be made under the Code. In such event, to the extent of
current and accumulated earnings and profits, all distributions to shareholders
will be taxable as ordinary income, and subject to certain limitations in the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, COPT
also will be disqualified from reelecting taxation as a REIT for the four
taxable years following the year during which qualification was lost.
REIT QUALIFICATION REQUIREMENTS
In order to qualify as a REIT, COPT must meet the following
requirements, among others:
SHARE OWNERSHIP TESTS. COPT's shares of beneficial interest must be
held by a minimum of 100 persons for at least 335 days in each taxable year (or
a proportionate number of days in any short taxable year). In addition, at all
times during the second half of each taxable year, no more than 50% in value of
the outstanding shares of beneficial interest of COPT may be owned, directly or
indirectly and taking into account the effects of certain constructive ownership
rules, by five or fewer individuals, which for this purpose includes certain
tax-exempt entities (the "50% Limitation"). However, for purposes of this test,
any shares of beneficial interest held by a qualified domestic pension or other
retirement trust will be treated as held directly by its beneficiaries in
proportion to their actuarial interest in such trust rather than by such trust.
In addition, for purposes of the 50% Limitation, shares of beneficial interest
owned, directly or indirectly, by a corporation will be considered as being
owned proportionately by its shareholders.
In order to attempt to ensure compliance with the foregoing share
ownership tests, COPT's Declaration of Trust places certain restrictions on the
transfer of its shares of beneficial interest to prevent additional
concentration of stock ownership. Moreover, to evidence compliance with these
requirements, Treasury Regulations require COPT to maintain records which
disclose the actual ownership of its outstanding shares of beneficial interest.
In fulfilling its obligations to maintain records, COPT must and will demand
written statements each year from the record holders of designated percentages
of its shares of beneficial interest disclosing the actual owners of such shares
of beneficial interest (as prescribed by Treasury Regulations). A list of those
persons failing or refusing to comply with such demand must be maintained as
part of COPT's records. A shareholder failing or refusing to comply with COPT's
written demand must submit with his tax return a similar statement disclosing
the actual ownership of COPT shares of beneficial interest and certain other
information.
Currently, Constellation Properties, Inc. owns approximately 41.8% of
the Common Shares outstanding, and 984,308 Series A Convertible Preferred Shares
convertible into 1,845,381 Common Shares. Under COPT's Declaration of Trust a
person is generally prohibited from owning more than 9.8% of the aggregate
outstanding Common Shares or more than 9.8% in value of the aggregate
outstanding shares of beneficial interest unless such
20
Possible Antitakeover Effectperson makes certain representations to the Board of Certain ProvisionsTrustees and the Board of
Maryland Law
andTrustees ascertains that ownership of a greater percentage of shares will not
cause COPT to violate either the 50% Limitation or the gross income tests
described below. The Board of Trustees has exempted Constellation Properties,
Inc. from the 9.8% limitation set forth in the Declaration of Trust and has
determined that Constellation Properties, Inc. may hold up to 45% of the
Bylawsoutstanding Common Shares. The Board of Trustees has determined, based upon
representations made by Constellation Properties, Inc., that this will not
result in a violation of the 50% Limitation or otherwise adversely affect COPT's
ability to qualify as a REIT for federal income tax purposes.
ASSET TESTS. At the close of each quarter of COPT's taxable year, COPT
must satisfy two tests relating to the nature of its assets (determined in
accordance with generally accepted accounting principles). First, at least 75%
of the value of COPT's total assets must be represented by interests in real
property, interests in mortgages on real property, shares in other REITs, cash,
cash items, government securities and qualified temporary investments. Second,
although the remaining 25% of COPT's assets generally may be invested without
restriction, securities in this class may not exceed (i) in the case of
securities of any one non-government issuer, 5% of the value of COPT's total
assets (the "Value Test") or (ii) 10% of the outstanding voting securities of
any one such issuer (the "Voting Stock Test"). Where COPT invests in a
partnership (such as the operating partnership), it will be deemed to own a
proportionate share of the partnership's assets, and the partnership interest
will not constitute a security for purposes of these tests. Accordingly, COPT's
investment in real properties through its interests in the operating partnership
(which itself holds real properties through other partnerships) will constitute
an investment in qualified assets for purposes of the 75% asset test.
GROSS INCOME TESTS. There are two separate percentage tests relating to
the sources of COPT's gross income which must be satisfied for each taxable
year. For purposes of these tests, where COPT invests in a partnership, COPT
will be treated as receiving its share of the income and loss of the
partnership, and the gross income of the partnership will retain the same
character in the hands of COPT as it has in the hands of the partnership. The
two tests are described below.
THE 75% TEST. At least 75% of COPT's gross income for the taxable year
must be "qualifying income." Qualifying income generally includes: (i) rents
from real property (except as modified below); (ii) interest on obligations
secured by mortgages on, or interests in, real property; (iii) gains from the
sale or other disposition of interests in real property and real estate
mortgages, other than gain from property held primarily for sale to customers in
the ordinary course of COPT's trade or business ("dealer property"); (iv)
dividends or other distributions on shares in other REITS, as well as gain from
the sale of such shares; (v) abatements and refunds of real property taxes; (vi)
income from the operation, and gain from the sale, of property acquired at or in
lieu of a foreclosure of the mortgage secured by such property ("foreclosure
property"); and (vii) commitment fees received for agreeing to make loans
secured by mortgages on real property or to purchase or lease real property.
Rents received from a tenant will not, however, qualify as rents from
real property in satisfying the 75% gross income test (or the 95% gross income
test described below) if COPT, or an owner of 10% or more of COPT, directly or
constructively owns 10% or more of such tenant. In addition, 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 such personal property will not qualify as
rents from real property. Moreover, an amount received or accrued will not
qualify as rents from real property (or as interest income) for purposes of the
75% and 95% gross income tests if it is based in whole or in part on the income
or profits of any person, although an amount received or accrued generally will
not be excluded from "rents from real property" solely by reason of being based
on a fixed percentage or percentages of receipts or sales. Finally, for rents
received to qualify as rents from real property for purposes of the 75% and 95%
gross income tests, COPT generally must not operate or manage the property or
furnish or render services to customers, other than through an "independent
contractor" from whom COPT derives no income, except that the "independent
contractor" requirement does not apply to the extent that the services provided
by COPT are "usually or customarily rendered" in connection with the rental of
space for occupancy only, and are not otherwise considered "rendered to the
occupant for his convenience." In addition, under recently enacted legislation,
beginning with its taxable year ending December 31, 1998, COPT may directly
perform a de minimis amount of non-customary services. COPT believes that the
services provided with regard to COPT's properties by the operating partnership
(or its agents) are now (and, it is believed, will in the future be) usual or
customary services. Any services that cannot be provided directly by the
operating partnership will be performed by independent contractors.
21
THE 95% TEST. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of COPT's gross income for the taxable year
must be derived from the above-described qualifying income or from dividends,
interest, or gains from the sale or other disposition of stock or other
securities that are not dealer property. Dividends and interest on obligations
not collateralized by an interest in real property are included for purposes of
the 95% test, but not for purposes of the 75% test. COPT intends to monitor
closely its non-qualifying income and anticipates that non-qualifying income
from its activities will not result in COPT failing to satisfy either the 75% or
95% gross income test.
For purposes of determining whether COPT complies with the 75% and the
95% gross income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property (excluding
foreclosure property); however, a sale of property will not be a prohibited
transaction if such property is held for at least four years and certain other
requirements (relating to the number of properties sold in a year, their tax
bases and the cost of improvements made thereto) are satisfied.
Even if COPT fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it may still qualify as a REIT for such year
if it is entitled to relief under certain provisions of the DeclarationCode. These relief
provisions will generally be available if: (i) COPT's failure to comply is due
to reasonable cause and not to willful neglect; (ii) COPT reports the nature and
amount of Trusteach item of its income included in the tests on classificationa schedule attached
to its tax return; and (iii) any incorrect information on this schedule is not
due to fraud with intent to evade tax. If these relief provisions apply,
however, COPT will nonetheless be subject to a 100% tax on the greater of the
Boardamount by which it fails either the 75% or 95% gross income test, multiplied by
a fraction intended to reflect COPT's profitability.
COMPLIANCE WITH INCOME TESTS. Constellation Properties, Inc. and
certain affiliated companies are obligated as tenants to pay annual rent of
Trustees,approximately $960,000 with respect to properties owned by the removaloperating
partnership. Some of Trusteesthis rental income may not constitute qualifying rental
income for purposes of the 75% and 95% gross income tests. COPT expects, based
on current rent levels, that its annual gross income in 1999 will be at least
$70 million. Accordingly, COPT estimates that it can earn up to $3.5 million of
non-qualifying income per year without violating the 95% gross income test.
Aside from this rental income, COPT does not expect that it will earn material
amounts of non-qualifying income from either Constellation Properties, Inc. or
its existing properties. Based on the foregoing, COPT has determined that it
will continue to satisfy the 75% and 95% gross income tests. The fact that
affiliates of Constellation Properties, Inc. will be paying substantial amounts
of non-qualifying income may, however, restrict the ability of COPT and the
restrictionsoperating partnership to acquire additional properties that generate
non-qualifying income.
To avoid a violation of the 95% gross income test, the operating
partnership established Corporate Office Management, Inc. ("COMI") in 1998 to
own a 75% interest in Corporate Realty Management, LLC, the operating
partnership's property management company ("CRM"). In addition, COMI has entered
into a services agreement with Constellation Properties, Inc. for development
and other services, since income from such services is also considered
non-qualifying income.
The operating partnership currently holds indebtedness issued by COMI
and 95% of the aggregate amount of voting and non-voting common stock issued by
COMI, but only holds 1% of the aggregate amount of voting common stock issued by
COMI. As discussed above, to satisfy the Voting Stock Test COPT may not directly
or indirectly hold 10% or more of the voting stock of COMI. In addition to
holding the 75% interest in CRM, COMI provides, either directly or through
subsidiaries, management and development services to affiliates of Constellation
Properties, Inc., the operating partnership and unrelated parties.
Because it is a corporate entity (as opposed to a partnership) which is
not wholly-owned by COPT, the management fee income earned by COMI as a result
of its ownership interest in CRM, or as a result of management or development
services performed by COMI or its subsidiaries, although it is non-qualifying
income, is not treated as non-qualifying income earned by COPT for purposes of
the 95% or 75% gross income tests. However, any interest or dividends paid or
distributed by COMI to the operating partnership is considered as qualifying
income for purposes of the 95% test, but is not considered qualifying income for
purposes of the 75% gross income test. To the
22
extent that COMI earns net taxable income from its activities, it is required to
pay federal and state income taxes, which reduces the amount of dividends it is
able to pay to the operating partnership and its other shareholders.
On February 1, 1999, the United States Department of the Treasury
released its General Explanations of the Administration's Revenue Proposals,
outlining proposed amendments to the Code. Among such proposals is a
recommendation that the Voting Stock Test described above be changed to a "vote
or value" test, which change is intended to prevent REITs from undertaking
prohibited activities through "preferred stock subsidiaries," such as COMI. The
proposal would also include an exception to the five-percent and 10% asset
tests, as modified, so that REITs could own either of two types of "taxable REIT
subsidiaries" without violating the asset tests. Such taxable REIT subsidiaries
would be permitted to undertake certain types of activities - including
non-tenant related activities that currently generate non-qualifying income for
a REIT (such as third-party management and development), and non-customary and
other currently prohibited services with respect to REIT tenants - without
jeopardizing the REIT's status as a REIT under the Code. A number of constraints
would be imposed on such taxable REIT subsidiaries, however, to insure that the
REIT could not, through such subsidiaries, engage in substantial non-real estate
activities, and to insure that such subsidiaries pay corporate-level tax on
their earnings. Such constraints would include (1) limitations on the percentage
of a REIT's total asset value which could be composed of taxable REIT
subsidiaries; (2) disallowance of interest paid by any such taxable REIT
subsidiaries to the REIT; (3) a 100% excise tax imposed on certain excess
payments and expenses made or shared between the taxable REIT subsidiaries and
the REIT; and (4) limitations on the level of intercompany rentals between the
taxable REIT subsidiaries and the REIT. The proposal is intended to be effective
after the date of enactment, but would provide considerable time for a REIT to
restructure its operations and investments so as to convert preferred stock
subsidiaries into taxable REIT subsidiaries on a tax-free basis.
COPT believes that the Administration's proposed amendment to the
Voting Stock Test should not have a significant impact on COPT's current
operations or assets, even if enacted in its proposed form. COPT intends to
monitor this and any other proposed legislation closely, however, to assess the
possible effect of any such legislation on its future operations and tax
profile.
COPT intends to continue to monitor its operations and investments in
the context of these standards so as to continue to satisfy the 75% and 95%
gross income tests. While the operating partnership or its affiliates provide
certain services with respect to the properties in which COPT owns interests and
possibly with respect to any newly acquired properties, COPT believes that for
purposes of the 75% and 95% gross income tests the services provided at such
properties and any other services and amenities provided by the operating
partnership or its agents with respect to such properties will be of the type
usually or customarily rendered in connection with the rental of space for
occupancy only and not rendered to the occupants of such properties. COPT
intends that services that cannot be provided directly by the operating
partnership or other agents will be performed by independent contractors.
ANNUAL DISTRIBUTION REQUIREMENTS. In order to qualify as a REIT, COPT
is required to distribute dividends to its shareholders each year in an amount
at least equal to (A) the sum of (i) 95% of COPT's REIT taxable income (computed
without regard to the dividends received deduction and COPT's net capital gain)
and (ii) 95% of the net income (after tax), if any, for foreclosure property,
minus (B) the sum of certain items of non-cash income. Such distributions must
be paid in the taxable year to which they relate, or in the following taxable
year if declared before COPT timely files its tax return for such year and if
paid on or before the first regular dividend payment after the declaration. To
the extent that COPT does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its REIT taxable income, as
adjusted, it will be subject to tax on the undistributed amount at regular
capital gain or ordinary corporate tax rates, as the case may be.
COPT intends to make timely distributions sufficient to satisfy the
annual distribution requirements described in the first sentence of the
preceding paragraph. In this regard, the operating partnership Agreement
authorizes COPT in its capacity 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 COPT to meet the distribution requirements. It is
possible that COPT may not have sufficient cash or other liquid assets to meet
the 95% distribution requirement, either due to timing differences between the
actual receipt of income and actual payment of expenses on the one hand, and the
inclusion of such income and deduction of such expenses in computing COPT's REIT
taxable income on the other hand, or for other reasons. COPT will monitor
closely the relationship between its REIT taxable income and cash flow and, if
necessary, intends to borrow funds (or cause the operating partnership or other
23
affiliates to borrow funds) in order to satisfy the distribution requirement.
However, there can be no assurance that such borrowing would be available at
such time.
If COPT fails to meet the 95% distribution requirement as a result of
an adjustment to COPT's tax return by the Service, COPT may retroactively cure
the failure by paying a "deficiency dividend" (plus applicable penalties and
interest) within a specified period.
TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS. As long as COPT qualifies as
a REIT, distributions made to its taxable domestic shareholders out of current
or accumulated earnings and profits (and not designated as capital gain
dividends) will constitute dividends taxable as ordinary income, and corporate
shareholders will not be eligible for the dividends received deduction as to
such amounts. Distributions that are designated as capital gain dividends will
be taxed as gain from the sale or exchange of a capital asset (to the extent
they do not exceed COPT's actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held its shares. In the event
COPT designates any portion of a dividend as a capital gain dividend, a
shareholder's share of such capital gain dividend would be an amount which bears
the same ratio to the total amount of dividends paid to such shareholder for the
taxable year as the total amount of capital gain dividends bears to the total
amount of all dividends paid on all classes of share for the taxable year.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. COPT may elect to retain and pay
income tax on any net long-term capital gain, in which case its domestic
shareholders would include in their income as long-term capital gain their
proportionate share of such undistributed net long-term capital gain. A domestic
shareholder would also receive a refundable tax credit for such shareholder's
proportionate share of the tax paid by COPT on such retained capital gains and
an increase in its basis in its shares in an amount equal to the difference
between the undistributed long-term capital gains and the amount of tax paid by
COPT. See "--Capital Gains and Losses" below.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares of beneficial interest, but rather
will reduce the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a shareholder's shares of beneficial
interest, they will be included in income as short-term or long-term capital
gain (depending on the length of time the shares have been held), assuming the
shares are capital assets in the hands of the shareholder. In addition, any
dividend declared by COPT in October, November or December of any year and
payable to a shareholder of record on a specific date in any such month shall be
treated as both paid by COPT and received by the shareholder on December 31 of
such year, provided that the dividend is actually paid by COPT during January of
the following calendar year.
Domestic shareholders may not include in their individual income tax
returns any of COPT's net operating losses or capital losses. Instead, such
losses would be carried over by COPT for potential offset against future income
(subject to certain limitations). Distributions made by COPT and gain arising
from the sale or exchange of shares will not be treated as passive activity
income, and, as a result, shareholders generally will not be able to apply any
"passive losses" against such income and gain. In addition, taxable
distributions from COPT generally will be treated as investment income. Capital
gain dividends (including distributions treated as such) and capital gain from
the disposition of shares, however, will be treated as investment income only if
a shareholder so elects, in which case such capital gain will be taxed at
ordinary income rates. COPT will notify shareholders after the close of its
taxable year as to the portions of distributions attributable to that year that
constitute ordinary income, return of capital and capital gain.
In general, a domestic shareholder will realize capital gain or loss on
the disposition of COPT's shares of beneficial interest equal to the difference
between (i) the amount of cash and the fair market value of any property
received on such disposition, and (ii) the shareholder's adjusted basis of such
shares of beneficial interest. Such gain or loss generally will constitute
short-term capital gain or loss if the shareholder has not held such shares for
more than one year and long-term capital gain or loss if the shareholder has
held such shares for more than one year. See "--Capital Gains and Losses" below.
Loss upon a sale or exchange of COPT's shares of beneficial interest by a
shareholder who has held such shares for six months or less (after applying
certain holding period rules) will be
24
treated as a long-term capital loss to the extent of distributions from COPT
required to be treated by such shareholder as long-term capital gain.
CAPITAL GAINS AND LOSSES. The maximum marginal individual income tax
rate is 39.6%. The maximum tax rate on net capital gains applicable to
individuals, trusts and estates from the sale or exchange of capital assets held
for more than 18 months is 20%, and the maximum rate is reduced to 18% for
assets acquired after December 31, 2000 and held for more than five years. For
individuals, trusts and estates who would be subject to a maximum tax rate of
15%, the rate on net capital gains is reduced to 10%, and, effective for taxable
years commencing after December 31, 2000, the rate is reduced to 8% for assets
held for more than five years. The maximum rate for net capital gains
attributable to the sale of depreciable real property held for more than 18
months is 25% to the extent of the deductions for depreciation (other than
certain depreciation recapture taxable as ordinary income) with respect to such
property. The maximum rate of capital gains tax for capital assets held more
than one year but not more than 18 months is 28%. Accordingly, the tax rate
differential between capital gain and ordinary income for noncorporate taxpayers
may be significant. In addition, the characterization of income as capital or
ordinary may affect the deductibility of capital losses. Capital losses not
offset by capital gains may be deducted against a noncorporate taxpayer's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
BACKUP WITHHOLDING. COPT will report to its domestic shareholders and
the IRS the amount of dividends paid during each calendar year and the amount of
tax withheld, if any, with respect thereto. Under the backup withholding rules,
a shareholder may be subject to backup withholding at the rate of 31% with
respect to dividends paid unless such holder (i) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact or (ii) provides a taxpayer identification number, certifies as to no loss
of exemption and otherwise complies with the applicable requirements of the
backup withholdings rules. Any amount paid as backup withholding will be
creditable against the shareholder's income tax liability. The United States
Treasury has recently issued final regulations (the "Final Regulations")
regarding the withholding and information reporting rules discussed above. In
general, the Final Regulations do not alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify and modify reliance standards. The Final Regulations are
generally effective for payments made on or after January 1, 2000, subject to
certain transition rules. Prospective investors should consult their own tax
advisors concerning the adoption of the Final Regulations and the potential
effect on their ownership of COPT's shares of beneficial interest.
In addition, COPT may be required to withhold a portion of capital gain
distributions made to shareholders that fail to certify their non-foreign status
to COPT. See "--Taxation of Foreign Shareholders" below.
TAXATION OF TAX-EXEMPT SHAREHOLDERS. The IRS has ruled that amounts
distributed as dividends by a REIT generally do not constitute unrelated
business taxable income ("UBTI") when received by a tax-exempt entity. Based on
that ruling, dividend income from COPT's shares of beneficial interest will not
be UBTI to a tax-exempt shareholder, provided that the tax-exempt shareholder
has not held its shares as "debt financed property" within the meaning of the
Code and such shares are not otherwise used in a trade or business. Similarly,
income from the sale of COPT's shares of beneficial interest will not constitute
UBTI unless such tax-exempt shareholder has held such shares as "debt financed
property" within the meaning of the Code or has used the shares in a trade or
business.
Notwithstanding the above, however, a portion of the dividends paid by
a "pension held REIT" will be treated as UBTI as to any trust which is described
in Section 401(a) of the Code, is tax-exempt under Section 501(a) of the Code (a
"qualified trust") and which holds more than 10% (by value) of the interests in
the REIT. A REIT is a "pension held REIT" if (i) it would not have qualified as
a REIT but for the application of a "look-through" exception to the 50%
Limitation applicable to qualified trusts, and (ii) either (1) at least one such
qualified trust holds more than 25% (by value) of the interests in the REIT, or
(2) one or more such qualified trusts, each of which owns more than 10% (by
value) of the interests in the REIT, hold in the aggregate more than 50% (by
value) of the interests in the REIT. The percentage of any REIT dividend treated
as UBTI is equal to the ratio of (i) the gross income (less direct expenses
related thereto) of the REIT from unrelated trades or businesses (determined as
if the REIT were a qualified trust) to (ii) the total gross income (less direct
expenses related thereto) of the REIT. A de minimis exception applies where this
percentage is less than 5% for any year. The provisions requiring qualified
25
trusts to treat a portion of REIT distributions as UBTI will not apply if the
REIT is able to satisfy the 50% Limitation without relying upon the
"look-through" exception with respect to qualified trusts. As a result of
certain limitations on transfer and ownership of COPT's shares of beneficial
interest contained in the Charter, COPT does not expect to be classified as a
"pension held REIT."
TAXATION OF FOREIGN SHAREHOLDERS. The rules governing the United States
federal income taxation of the ownership and disposition of COPT's shares of
beneficial interest by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively, "Non-U.S. Shareholders") are complex
and no attempt will be made herein to provide more than a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO
AN INVESTMENT IN COPT'S SHARES OF BENEFICIAL INTEREST, INCLUDING ANY REPORTING
REQUIREMENTS, AS WELL AS THE TAX TREATMENT OF SUCH AN INVESTMENT UNDER THEIR
HOME COUNTRY LAWS.
In general, Non-U.S. Shareholders will be subject to regular United
States federal income taxation with respect to their investment in COPT's shares
of beneficial interest in the same manner as a U.S. shareholder (i.e., at
graduated rates on a net basis, after allowance of deductions) if such
investment is "effectively connected" with the conduct by such Non-U.S.
Shareholder of a trade or business in the United States. A Non-U.S. Shareholder
that is a corporation and that receives income with respect to its investment in
COPT's shares of beneficial interest that is (or is treated as) "effectively
connected" with the conduct of a trade or business in the United States may also
be subject to the 30% branch profits tax imposed under Section 884 of the Code,
which is payable in addition to the regular United States corporate income tax.
The following discussion addresses only the federal income taxation of Non-U.S.
Shareholders whose investment in COPT's shares of beneficial interest is not
"effectively connected" with the conduct of a trade or business in the United
States. Prospective investors whose investment in COPT's shares of beneficial
interest may be "effectively connected" with the conduct of a United States
trade or business should consult their own tax advisors as to the tax
consequences thereof.
Distributions that are not attributable to gain from sales or exchanges
of United States real property interests and that are not designated by COPT as
capital gains dividends will be treated as dividends of ordinary income to the
extent that they are made out of COPT's current or accumulated earnings and
profits. Such distributions ordinarily will be subject to a withholding tax
equal to 30% of the gross amount of the distribution unless an applicable tax
treaty reduces or eliminates that tax. Pursuant to the Final Regulations,
dividends paid to an address in a country outside the United States will no
longer be presumed to be paid to a resident of such country for purposes of
determining the applicability of withholding discussed above and the
availability of a reduced tax treaty rate. A Non-U.S. Shareholder who wishes to
claim the benefit of an applicable treaty rate will now be required to satisfy
certain certification and other requirements. Distributions that COPT makes in
excess of its current and accumulated earnings and profits will not be taxable
to a Non-U.S. Shareholder to the extent they do not exceed the adjusted basis of
such Non-U.S. Shareholder's shares, but rather will reduce the adjusted basis of
such shares (but not below zero). To the extent that such distributions exceed
the adjusted basis of a Non-U.S. Shareholder's shares, they will give rise to
tax liability if such Non-U.S. Shareholder would otherwise be subject to tax on
any gain from the sale or disposition of shares, as described below.
For withholding tax purposes, COPT is currently required to treat all
distributions as if made out of its current or accumulated earnings and profits
and thus intends to withhold at the rate of 30% (or a reduced treaty rate if
applicable) on the amount of any distribution (other than distributions
designated as capital gain dividends) made to a Non-U.S. Shareholder. Under the
Final Regulations, generally effective for distributions on or after January 1,
2000, COPT would not be required to withhold at the 30% rate on distributions
COPT reasonably estimates to be in excess of its current and accumulated
earnings and profits. If it cannot be determined at the time a distribution is
made whether such distribution will be in excess of current and accumulated
earnings and profits, the distribution will be subject to withholding at the
rate applicable to ordinary dividends. However, a Non-U.S. Shareholder may seek
a refund of such amounts from the IRS if it is subsequently determined that such
distribution was, in fact, in excess of its current or accumulated earnings and
profits, and the amount withheld exceeded the Non-U.S. Shareholder's United
States tax liability, if any, with respect to the distribution.
26
For any year in which COPT qualifies as a REIT, distributions that are
attributable to gain from sales or exchanges of United States real property
interests will be taxed to a Non-U.S. Shareholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
these distributions are taxed to a Non-U.S. Shareholder as if such gain were
effectively connected with the conduct of a United States trade or business.
Non-U.S. Shareholders would thus be taxed at the normal capital gain rates
applicable to domestic shareholders (subject to applicable alternative minimum
tax and special alternative minimum tax in the case of nonresident alien
individuals), without regard as to whether such distributions are designated by
COPT as capital gain dividends. Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a foreign corporate
shareholder not entitled to treaty exemption. COPT is required by Treasury
Regulations to withhold 35% of any distribution to a Non-U.S. Shareholder that
could be designated as a capital gain dividend. This amount is creditable
against the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of COPT's shares
of beneficial interest generally will not be subject to United States taxation
unless such shares constitute a "United States real property interest" within
the meaning of FIRPTA. COPT's shares of beneficial interest will not constitute
a "United States real property interest" so long as COPT is a "domestically
controlled REIT." A "domestically controlled REIT" is generally a REIT in which
at all times during a specified testing period less than 50% in value of its
share was held directly or indirectly by Non-U.S. Shareholders. COPT believes
that it will be a "domestically controlled REIT" and therefore, the sale of
COPT's shares of beneficial interest will not be subject to taxation under
FIRPTA. However, because COPT's shares of beneficial interest will be publicly
traded, no assurance can be given that COPT will continue to be a "domestically
controlled REIT." Notwithstanding the foregoing, gain from the sale or exchange
of its shares not otherwise subject to FIRPTA generally will be taxable to a
Non-U.S. Shareholder if the Non-U.S. Shareholder 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 such case, the
nonresident alien individual will be subject to a 30% United States withholding
tax on the amount of such individual's gain.
If COPT does not qualify as or ceases to be a "domestically controlled
REIT," whether gain arising from the sale or exchange by a Non-U.S. Shareholder
of COPT's shares of beneficial interest would be subject to U.S. taxation under
FIRPTA will depend on whether the shares are "regularly traded" (as defined in
applicable Treasury Regulations) on an established securities market (such as
the NYSE on which COPT's shares of beneficial interest are traded) and on the
size of the selling Non-U.S. Shareholder's interest in COPT. If the gain on the
sale of COPT's shares of beneficial interest were to be subject to tax under
FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as a
domestic shareholder with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals and the possible application of the 30% branch
profits tax in the case of foreign corporations), and the purchaser would be
required to withhold and remit to the IRS 10% of the purchase price. In
addition, if COPT is not a "domestically controlled REIT," distributions in
excess of its current and accumulated earnings and profits would be subject to
withholding at a rate of 10%.
Dividends paid in the United States with respect to COPT's shares of
beneficial interest, and proceeds from the advance notice provisionssale of COPT's shares of beneficial
interest, through a United States broker (or certain brokers having significant
connections with the United States) may be subject to the information reporting
requirements of the BylawsCode. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 31% unless such shareholder (i)
is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (ii) provides a taxpayer identification
number and certifies as to no loss of exemption, and otherwise complies with the
applicable requirements of the backup withholding rules. Non-U.S. Shareholders
are generally exempt from information reporting and backup withholding, but may
be required to provide a properly completed Form W-8 or otherwise comply with
applicable certification and identification procedures in order to prove their
exemption. Any amount paid as backup withholding will be creditable against the
Non-U.S. Shareholder's United States income tax liability.
The Final Regulations, issued by the United States Treasury on October
6, 1997, affect the rules applicable to payments to foreign persons. In general,
the Final Regulations do not alter the substantive withholding and information
reporting requirements but unify current certification procedures and modify
reliance standards. In addition, the Final Regulations also address certain
issues relating to intermediary certification procedures designed to simplify
compliance by withholding agents. The Final Regulations are generally effective
for payments made on
27
or after January 1, 2000, subject to certain transition rules. Prospective
investors should consult their own tax advisors concerning the adoption of the
Final Regulations and the potential effect on their ownership of COPT's shares
of beneficial interest.
OTHER TAX CONSIDERATIONS
EFFECT OF TAX STATUS OF THE OPERATING PARTNERSHIP ON REIT
QUALIFICATION. All of COPT's investments are through the operating partnership.
COPT believes that the operating partnership is properly treated as a
partnership for tax purposes (and not as an association taxable as a
corporation). If, however, the operating partnership were to be treated as an
association taxable as a corporation, COPT would cease to qualify as a REIT.
Furthermore, in such a situation, the operating partnership would be subject to
corporate income taxes and COPT would not be able to deduct its share of any
losses generated by the operating partnership in computing its taxable income.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. The operating
partnership was formed, in part, by way of contributions of appreciated
property. When property is contributed to a partnership in exchange for an
interest in the partnership, the partnership generally takes a carryover basis
in that property for tax purposes equal to the adjusted basis of the
contributing partner in the property, rather than a basis equal to the fair
market value of the property at the time of contribution (this difference is
referred to as a "Book-Tax Difference"). The partnership agreement of the
operating partnership requires allocations of income, gain, loss and deduction
with respect to contributed property to be made in a manner consistent with the
special rules in Section 704(c) of the Code, and the regulations thereunder,
which tend to eliminate the Book-Tax Differences with respect to the contributed
properties over the depreciable lives of the contributed properties. However,
because of certain technical limitations, the special allocation rules of
Section 704(c) may 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 properties in the hands of the
operating partnership could cause COPT to be allocated lower amounts of
depreciation and other deductions for tax purposes than would be allocated to
COPT if all properties were to have a tax basis equal to their fair market value
at the time of acquisition. The foregoing principles also apply in determining
its earnings and profits for purposes of determining the portion of
distributions taxable as dividend income. The application of these rules over
time may result in a higher portion of distributions being taxed as dividends
than would have occurred had COPT purchased its interests in all properties at
their agreed value.
Treasury Regulations under Section 704(c) of the Code allow
partnerships to use any reasonable method of accounting for Book-Tax Differences
so that the contributing partner receives the tax benefits and burdens of any
built-in gain or loss associated with the property. The operating partnership
has determined to use the "traditional method" (which is specifically approved
in the Treasury Regulations) for accounting for Book-Tax Differences with
respect to the contributed properties.
STATE AND LOCAL TAXES. COPT and its shareholders may be subject to
state or local taxation in various state or local jurisdictions, including those
in which COPT or they transact business or reside. The state and local tax
treatment of us and our shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult with their own tax advisors regarding the effect of delaying, deferringstate, local and
other tax laws of any investment in COPT's shares of beneficial interest.
PLAN OF DISTRIBUTION
We may sell the securities offered pursuant to this prospectus and the
accompanying prospectus supplement to or preventing a changethrough one or more underwriters or
dealers or may sell the securities to investors directly or through agents. Any
such underwriter or agent involved in controlthe offer and sale of the Companysecurities will
be named in the applicable prospectus supplement. We may sell securities
directly to investors on our own behalf in those jurisdictions where we are
authorized to do so.
Underwriters may offer and sell the securities at a fixed price or
prices, which may be changed, at market prices prevailing at the time of sale,
at prices related to such prevailing market prices or at negotiated prices. We
also may, from time to time, authorize dealers or agents to offer and sell these
securities upon such terms and
28
conditions as may be set forth in the applicable prospectus supplement. In
connection with the sale of any of these securities, underwriters may receive
compensation from us in the form of underwriting discounts or commissions and
may also receive commissions from purchasers of the securities for whom they may
act as agent. Underwriters may sell the securities to or through dealers, and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters or commissions from the purchasers for which
they may act as agents.
The Common Shares may also be sold in one or more of the following
transactions: (a) block transactions (which may involve crosses) in which a
broker-dealer may sell all or a portion of such shares as agent but may position
and resell all or a portion of the block as principal to facilitate the
transaction; (b) purchases by any such broker-dealer as principal and resale by
such broker-dealer for its own account pursuant to a prospectus supplement; (c)
a special offering, an exchange distribution or a secondary distribution in
accordance with applicable NYSE or other transactionstock exchange rules; (d) ordinary
brokerage transactions and transactions in which any such broker-dealer solicits
purchasers; (e) sales "at the market" to or through a market maker or into an
existing trading market, on an exchange or otherwise, for such shares; and (f)
sales in other ways not involving market markers or established trading markets,
including direct sales to purchasers. In effecting sales, broker-dealers engaged
by the selling shareholders may arrange for other broker-dealers to participate.
Broker-dealers will receive commissions or other compensation from the selling
shareholders in amounts to be negotiated immediately prior to the sale that might involve a premium overwill
not exceed those customary in the then
prevailing market price fortypes of transactions involved. Broker-dealers
may also receive compensation from purchasers of the Common Shares which is not
expected to exceed that customary in the types of transactions involved.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of these securities, and any discounts or
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement. Dealers and agents
participating in the distribution of the securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the securities may be deemed to be underwriting
discounts and commissions.
Underwriters, dealers and agents may be entitled, under agreements
entered into with us, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act. Unless
otherwise set forth in the accompanying prospectus supplement, the obligations
of any underwriters to purchase any of these securities will be subject to
certain conditions precedent, and the underwriters will be obligated to purchase
all of such series of securities, if any are purchased.
Underwriters, dealers and agents may engage in transactions with, or
perform services for, us and our affiliates in the ordinary course of business.
In connection with the offering of the securities hereby, certain
underwriters, and selling group members and their respective affiliates may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the applicable securities. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M promulgated by
the Securities and Exchange Commission (the "Commission") pursuant to which such
persons may bid for or purchase securities for the purpose of stabilizing their
market price. The underwriters in an offering of securities may also create a
"short position" for their account by selling more securities in connection with
the offering than they are committed to purchase from us. In such case, the
underwriters could cover all or a portion of such short position by either
purchasing securities in the open market following completion of the offering of
such securities or by exercising any over-allotment option granted to them by
us. In addition, the managing underwriter may impose "penalty bids" under
contractual arrangements with other attributesunderwriters, which means that they can
reclaim from an underwriter (or any selling group member participating in the
shareholdersoffering) for the account of the other underwriters, the selling concession with
respect to securities that are distributed in the offering but subsequently
purchased for the account of the underwriters in the open market. Any of the
transactions described in this paragraph or comparable transactions that are
described in any accompanying prospectus supplement may consider desirable.result in the
maintenance of the price of the securities at a level above that which might
otherwise prevail in the open market. None of such transactions described in
this paragraph or in an accompanying prospectus supplement are required to be
taken by any underwriters and, if they are undertaken, may be discontinued at
any time.
29
The Common Shares are listed on the New York Stock Exchange under the
symbol "OFC." The Preferred Shares and the Warrants will be new issues of
securities with no established trading market and may or may not be listed in a
national securities exchange. Any underwriters or agents to or through which
securities are sold by us may make a market in such securities, but such
underwriters or agents will not be obligated to do so and any of them may
discontinue any market making at any time without notice. No assurance can be
given as to the liquidity of or trading market for any Preferred Shares or
Warrants.
EXPERTS
The financial statements and schedules incorporated in this prospectus by reference
in
this Prospectusto the Annual Report on Form 10-K of Corporate Office Properties Trust, Inc. for
the year ended December 31, 1997, and (1) the registrationcombined statement of which this Prospectus is a
partrevenue and
certain expenses of the Wagman Acquisition Properties included in the Company's
Form 8-K/A filed on July 7, 1998, (2) the combined statement of revenue and
certain expenses of the Airport Square Acquisition Properties included in the
Company's Form 8-K/A filed on July 7, 1998, (3) the combined statement of
revenue and certain expenses of the Riverwood Acquisition Property included in
the Company's Form 8-K/A filed on December 11, 1998, (4) the combined statement
of revenue and certain expenses of the Constellation Properties included in the
Company's Form 8-K/A filed on December 11, 1998, (5) the consolidated financial
statements of Constellation Service Companies included in the Company's Form
8-K/A filed on December 11, 1998, (6) the combined statement of revenue and
certain expenses of the Centerpoint Properties included in the Company's Form
8-K/A filed on January 14, 1999, and (7) the combined statement of revenue and
certain expenses of the Gateway Properties included in the Company's Form 8-K/A
filed on February 2, 1999, have been audited byso incorporated in reliance on the reports
of PricewaterhouseCoopers LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upongiven on the authority
of said firm as experts in accountingauditing and auditing in giving said reports.accounting.
LEGAL MATTERS
The validity of the Common Shares offered hereby are being passed upon
for the CompanyCOPT by Morgan, Lewis & Bockius LLP. AVAILABLE INFORMATION
The Companyopinion of counsel as described
under the heading "Federal Income Tax Matters" is being rendered by Morgan,
Lewis & Bockius LLP, which opinion is subject to the informational requirementsvarious assumptions and is
based on current tax law. The validity of the securities offered by this
prospectus may be passed upon for any of the underwriters or agents by counsel
named in the applicable prospectus supplement.
WHERE YOU CAN FIND MORE INFORMATION
COPT has filed a registration statement on Form S-3 with the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"),Commission in connection with this offering. In addition, COPT
files annual, quarterly, and in
accordance therewith, files under Exchange Act file number 1-12590current reports, proxy statements and other
information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statementsCommission. You may read and copy
the registration statement and any other information can be
inspected and copieddocuments filed by COPT at the
public reference facilities maintained by the
CommissionSecurities and Exchange Commission's Public Reference Room at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549; Midwest
Regional office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511;20549. Please call the Securities and Northeast Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such material can be obtainedExchange Commission
at the
prescribed rates from1-800-SEC-0330 for further information on the Public Reference SectionRoom. COPT's
Securities and Exchange Commission filings are also available to the public at
the Securities and Exchange Commission's Internet site at HTTP://WWW.SEC.GOV.
This prospectus is part of the Commission at its
principal office in Washington, D.C. In addition, the Company files such
material electronically with the Commission,registration statement and the Commission maintains a Web
site (http://www.sec.gov) that contains reports proxy and information statements
and other information regarding registrants (including the Company) that file
electronically with the Commission. The Common Shares are listed on the NYSE and
such reports, proxy statements and other information concerning the Company can
also be inspected at the officedoes not
contain all of the New York Stock Exchange, 20 Broad Street,
New York, New York 10005.
The Company has filed withinformation included in the Commissionregistration statement. If a registration statement on
Form S-3 under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Registered Shares. For further information with respect to
the Company and the Registered Shares,
reference is made to the Registration
Statement and exhibits thereto. Statements contained in this Prospectus asprospectus or any prospectus supplement to
the contents of any
contract or other documents aredocument of COPT, the reference may not necessarilybe complete and in each instance, reference is madeyou
should refer to the copyexhibits that are a part of such contract or
documents filed as an exhibit to the registration statement each such statement
being qualified in all respectsfor a
copy of the contract or document.
The Securities and Exchange Commission allows COPT to "incorporate by
such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed byreference" into this prospectus the Companyinformation COPT files with the Commission,
pursuantwhich means that COPT can disclose important information to Section 13you by referring you
to those documents. Information incorporated by reference is part of this
prospectus. Later information filed with the Securities and SectionExchange Commission
will update and supersede this information.
30
COPT incorporates by reference the documents listed below and any
future filings made with the Securities and Exchange Commission under Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (File No. 1-13274), are incorporated herein by reference:
(a) theuntil this
offering is completed:
- Annual Report on Form 10-K for the year ended December 31, 1997, (b) the1997.
- Quarterly ReportReports on Form 10-Q for the quarterquarters ended March 31,
1998, (c) theJune 30, 1998 and September 30, 1998.
- Current Reports on Forms 8-K and 8-K/A, fileddated January 5, 1998,
January 22, 1998, March 6, 1998, March 20, 1998, May 14, 1998, May
29, 1998, June 21
10, 1998, and July 7, 1998, (d) the Proxy Statement/Prospectus dated FebruaryAugust 12, 1998, October
13, 1998, October 28, 1998, November 16, 1998, December 11, 1998,
January 14, 1999 and (e) theFebruary 3, 1999.
- Proxy Statement dated July 22, 1998.
In addition, all documents subsequently filed with the CommissionYou may request a copy of these filings, at no cost, by the Company pursuant to Sections 13(a) and 13(c), Section 14 and Section 15(d)
of the Exchange Act prior to the filing of a post-effective amendment hereto
that indicates that all securities offered hereunder have been sold or that
deregisters all securities then remaining unsold, shall be deemed to be
incorporated by reference in this registration statement and to be a part hereof
from the date of filing of such documents.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, in any applicable Prospectus Supplement or in any other
document subsequently filed with the Commission which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
To the extent that this prospectus incorporates documents by reference
which are not presented herein or delivered herewith, copies of such documents
(except the exhibits to such documents unless they are specifically incorporated
by reference in such documents) are available on request. Requests for such
copies should be directed to Janet Point, One Logan Square,contacting
COPT, Vice President-Investor Relations, 401 City Avenue, Suite 1105,
Philadelphia,615, Bala
Cynwyd, Pennsylvania 19103, or19004, by telephone at 215-567-1800.
22610-538-1800, by facsimile at
610-538-1801, or by e-mail at IR@COPT.COM.
31
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered are set forth in the following table (all amounts
except the registration fee are estimated):
Registration fee --fee-- Securities and Exchange Commission....................... $
Accountants'Commission $69,500
Accountant's fees and expenses...............................................expenses
Legal fees and expenses
.....................................................
Miscellaneous................................................................
TOTAL........................................................................Miscellaneous
-------
TOTAL $
---------
----------------
-------
All expenses in connection with the issuance and distribution of the
securities being offered shall be borne by the Company.COPT.
ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS.
The Maryland REIT Law permits a Maryland real estate investment trust
to include in its declaration of trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (i) actual receipt of an improper benefit or profit
in money, property or services or (ii) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust contains such a provision limiting such liability to the
maximum extent permitted by Maryland law.
The Declaration of Trust authorizes the Company,COPT, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer or (b) any individual who, while a
Trustee of the CompanyCOPT and at the request of the
Company,COPT, serves or has served another real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a trustee, director, officer,
partner, employee or agent of such entity from and against any claim or
liability to which such person may become subject or which such person may incur
by reason of service in such capacity. The Bylaws obligate the Company,COPT, to the maximum
extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (i) any
present or former Trustee or officer who is made a party to the proceeding by
reason of his or her service in that capacity or (ii) any such Trustee or
officer who, at the request of the Company,COPT, serves or has served another real estate
investment trust, corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director, officer, partner,
employee or agent of such entity and who is made a party to the proceeding by
reason of his service in that capacity against any claim or liability to which
he may become subject by reason of his or her status as a present or former
Trustee or officer of the Company.COPT. The Declaration of Trust and the Bylaws also permit
the CompanyCOPT to provide indemnification to any person who served a predecessor of the CompanyCOPT
in any of the capacities described above and to any employee or agent of the CompanyCOPT or
a predecessor of the Company.COPT. The Bylaws require the CompanyCOPT to indemnify a trusteeTrustee or officer
who has been successful, on the merits or otherwise, in the defense of any
proceeding to which he or she is made a party by reason of his or her service in
that capacity.
The Maryland REIT Law permits a Maryland real estate investment trust
to indemnify, and to advance expenses to, its trustees and officers, to the same
extent as permitted by the MGCL for directorsTrustees and officers of Maryland
corporations. The MGCL permits a corporation to indemnify its present and former
directorsTrustees 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 (i) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (a) was committed in bad faith or (b) was the result of active
and deliberate dishonesty, (ii) the director or officer actually received 23
an
improper personal benefit in money, property or services or (iii) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In
II-1
addition, the MGCL permits a corporation to advance reasonable expenses to a
director or officer upon the corporation's receipt of (a) a written affirmation
by the director or officer of his good faithor her good-faith belief that he or she has
met the standard of conduct necessary for indemnification by the corporation and
(b) a written undertaking by him or her or on his or her behalf to repay the
amount paid or reimbursed by the corporation if it shall ultimately be
determined that the standard of conduct was not met. Under the MGCL, rights to
indemnification and expenses are nonexclusive, in that they need not be limited
to those expressly provided by statute.
The Maryland REIT Law and the Bylaws may permit indemnification for
liabilities arising under the Securities Act or the Securities Exchange Act
of 1934, as amended.Act. The Board of
Trustees has been advised that, in the opinion of the Commission,
indemnification for liabilities arising under the Securities Act or the Exchange
Act is contrary to public policy and is therefore unenforceable, absent a
decision to the contrary by a court of appropriate jurisdiction.
24
ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- ------------NO.
2.2 Formation/Contribution Agreement dated September 7, 1997, as amended, by and among the
Company and certain subsidiary corporations and partnerships regarding the Transactions
(filed with the Company's Current Report on Form 8-K on October 29, 1997 and incorporated
herein by reference).
2.4 Limited Partnership Agreement of the Operating Partnership dated October 14, 1997 (filed
with the Company's Current Report on Form 8-K on October 29, 1997 and incorporated
herein by reference).
3.1 Amended and Restated Declaration of Trust of Registrant (filed with the Registrant's
Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated
herein by reference).
3.2 Bylaws of Registrant (filed with the Registrant's Registration Statement on Form S-4
(Commission File No. 333-45649) and incorporated herein by reference).
4.1 Form of certificate for the Registrant's Common Shares of Beneficial
Interest, $0.01 par value per share (filed with the Registrant's
Registration Statement on Form S-4 (Commission File No. 333-45649) and
incorporated herein by reference.
4.2 Amended and Restated Declaration of Trust of Registrant (filed with the
Registrant's Registration Statement on Form S-4 (Commission File No.
333-45649) and incorporated herein by reference).
4.3 Bylaws of Registrant (filed with the Registrant's Registration
Statement on Form S-4 (Commission File No. 333-45649) and incorporated
herein by reference).
4.4 Form of certificate for the Registrant's Common Shares of Beneficial
Interest, $0.01 par value per share (filed with the Registrant's
Registration Statement on Form S-4 (Commission File No. 333-45649) and
incorporated herein by reference).
4.5 Amended and Restated Registration Rights Agreement dated March 16, 1998
for the benefit of certain shareholders of the Registrant (filed with
the Registrant's Quarterly Report on Form 10-Q on August 12, 1998 and
incorporated herein by reference).
4.6 Registration Rights Agreement dated September 28, 1998 for the benefit
of certain shareholders of the Registrant.
4.7 Articles Supplementary of Corporate Office Properties Trust Series A
Convertible Preferred Shares, dated September 28, 1998 (filed with the
Registrant's Current Report on Form 8-K on October 13, 1998 and
incorporated herein by reference).
4.8.1 Amended and Restated Limited Partnership Agreement of the Operating
Partnership dated March 16, 1998 (filed with the Registrant's Quarterly
Report on Form 10-Q on August 12, 1998 and incorporated herein by
reference).
4.8.2 First Amendment to Amended and Restated Limited Partnership Agreement
of the Operating Partnership, dated September 28, 1998 (filed with the
Registrant's Current Report on Form 8-K on October 13, 1998 and
incorporated herein by reference).
4.8.3 Second Amendment to Amended and Restated Limited Partnership Agreement
of the Operating Partnership, dated as of October 13, 1998 (filed with
the Registrant's Current Report on Form 8-K on October 28, 1998 and
incorporated herein by reference).
5.1 Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the
securities being registered hereby.*
8.1 Opinion of Morgan, Lewis & Bockius LLP as to certain tax matters.*
10.1 Clay W. Hamlin III Employment Agreement dated October 14, 1997 with the Operating
Partnership (filed with the Company's Current Report on Form 8-K on October 29, 1997,12.1 Calculation of Ratios of Earnings to Combined Fixed Charges and
incorporated herein by reference).
10.2 Registration Rights Agreement dated October 14, 1997, as amended, for the benefit of certain
shareholders of the Registrant (filed with the Company's Current Report on Form 8-K on
October 29, 1997, and incorporated herein by reference).
10.5 Corporate Office Properties Trust 1998 Long Term Incentive Plan (filed with the Registrant's
Registration Statement on Form S-4 (Commission File No. 333-45649) and incorporated
herein by reference).
10.6 Stock Option Plan for Directors (filed with Royale Investments, Inc.'s Form 10-KSB for the
year ended December 31, 1993 (Commission File No. 0-20047) and incorporated herein by
reference).
10.14 Thomas D. Cassel Employment Agreement dated October 20, 1997 with the Operating
Partnership (filed with the Registrant's 1997 Annual Report on Form 10-K and incorporated
herein by reference).Preferred Share Dividends.
21.1 Subsidiaries of Registrant (filed with the Registrant's 1997 Annual
Report on Form 10-K and incorporated herein by reference).
23.1 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1).*
23.2 Consent of PricewaterhouseCoopers LLP.*
24.1 Powers of attorney (included on signature page to the Registration
Statement).
- ---------------------
* - To be filed by Amendment.TO BE FILED BY AMENDMENT.
II-2
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
25
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
Registration Statement;Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would
not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement; and
(iii) 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;
provided, however,PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Securities and
Exchange Commission by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for the purpose 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 this Registration Statement shall be
deemed to be a new registration statement relating to the securities
offered herein and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors,Trustees, 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 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,Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
II-3
asserted by such director,Trustee, 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 Act and will be governed by the final adjudication of
such issue.
26II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of 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 Philadelphia,Bala Cynwyd, State of Pennsylvania on July 31,
1998.February
3, 1999.
CORPORATE OFFICE PROPERTIES TRUST
By: /s/ /S/Clay W. Hamlin, III
-------------------------------------------------------------------------
Name: Clay W. Hamlin, III
Title: President and Chief Executive Officer
By: /s/ Thomas D. Cassel
-------------------------------------/S/Roger A. Waesche, Jr.
------------------------------------
Name: Thomas D. CasselRoger A. Waesche, Jr.
Title: Senior Vice President - Finance 27and
Chief Accounting Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directorsTrustees of Corporate Office Properties Trust hereby severally constitute Clay
W. Hamlin, III and Thomas D. Cassel, and each of them singly, our true and
lawful attorneys with full power to them, and each of thethem singly, to sign for
us and in our names in the capacities indicated below, the registration statement
filed herewith and any and all
amendments (including post-effective amendments) to saidthis registration statement
and to file the same with all exhibits thereto, and generally to do all such
things in our names and in our capacities as officers and directorsTrustees to enable
Corporate Office Properties Trust to comply with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys, or any of them, to said registration statement
and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Capacity Date
--------- -------- ----SIGNATURE CAPACITY DATE
/s/Jay H. Shidler
- ----------------------------- Chairman of the Board and Trustee July 31, 1998February 3, 1999
- ----------------------------
Jay H. Shidler
/s/Clay W. Hamlin, III - ----------------------------- President and Chief Executive Officer and Trustee July 31, 1998February 3, 1999
- ---------------------------- (Principal Executive Officer)
Clay W. Hamlin, III
(Principal Executive Officer)
/s/ Thomas D. CasselRoger A. Waesche, Jr. Senior Vice President--Finance and Chief February 3, 1999
- ----------------------------- Vice President, Finance July 31, 1998
Thomas D. Cassel---------------------------- Accounting Officer (Principal Accounting and
Roger A. Waesche, Jr. Financial Officer)
/s/Vernon R. Beck
- ----------------------------- Vice Chairman of the Board and Trustee July 31, 1998February 3, 1999
- ----------------------------
Vernon R. Beck
/s/Kenneth D. Wethe Trustee February 3, 1999
- ----------------------------- Trustee July 31, 1998----------------------------
Kenneth D. Wethe
/s/Allen C. Gehrke
- --------------------------------------------------------- Trustee July 31, 1998February 3, 1999
Allen C. Gehrke
- ----------------------------- Trustee July __, 1998
/s/William H. Walton, III
- --------------------------------------------------------- Trustee July __, 1998
February 3, 1999
William H. Walton, III
/s/Kenneth S. Sweet, Jr.
- ---------------------------- Trustee February 3, 1999
Kenneth S. Sweet, Jr.
/s/Steven D. Kesler
- ---------------------------- Trustee February 3, 1999
Steven D. Kesler
/s/Edward A. Crooke
- ---------------------------- Trustee February 3, 1999
Edward A. Crooke
28