SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 13, 2002
SENIOR HOUSING PROPERTIES TRUST
(Exact name of registrant as specified in charter)
MARYLAND 001-15319 04-3445278
(State or other jurisdiction (Commission (I.R.S. employer
of incorporation) file number) identification number)
400 CENTRE STREET, NEWTON, MASSACHUSETTS 02458
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 617-796-8350
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 INCLUDING THOSE RELATING TO THE
SETTLEMENT OF THE COMMON SHARES, OUR ABILITY TO MAKE FUTURE DISTRIBUTIONS, OUR
TAX STATUS AS A REAL ESTATE INVESTMENT TRUST OR IMPLICATIONS ARISING FROM SUCH
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED UPON OUR PRESENT
EXPECTATIONS, BUT THESE STATEMENTS AND THE IMPLICATIONS OF THESE STATEMENTS ARE
NOT GUARANTEED. READERS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS
ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTAINED IN OR IMPLIED BY THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. SUCH FACTORS INCLUDE,
WITHOUT LIMITATION, THE STATUS OF THE ECONOMY AND THE CAPITAL MARKETS (INCLUDING
PREVAILING INTEREST RATES), COMPETITION WITHIN THE HEALTHCARE AND SENIOR LIVING
INDUSTRIES, AND CHANGES IN FEDERAL, STATE AND LOCAL LEGISLATION. THE INFORMATION
CONTAINED IN OUR ANNUAL REPORT ON FORM 10-K FOR OUR FISCAL YEAR ENDED DECEMBER
31, 2000 INCLUDING UNDER THE HEADINGS "BUSINESS" AND "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," IDENTIFIES OTHER
IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES.
ITEM 5. OTHER EVENTS.
A. SALE OF COMMON SHARES OF BENEFICIAL INTEREST.
On February 15, 2002, we priced an underwritten public offering of
15 million common shares of beneficial interest. We expect to issue and
deliver these 15 million shares on or about February 21, 2002. The public
offering price was $13.72 per share. We expect to use the $195 million of net
proceeds (after estimated expenses and underwriters' commissions) of the
offering to repay our $25 million 10% unsecured promissory note issued to the
seller of the 31 senior living communities we acquired, to repay $170 million
of borrowings outstanding under our revolving bank credit facility and for
general business purposes. We also granted the underwriters an option to
purchase an additional 2,250,000 common shares to cover over-allotments. The
net proceeds (after estimated expenses and underwriters' commissions) to us
will be $225 million if the underwriters' over-allotment option is exercised
in full.
B. AMENDMENT TO DECLARATION OF TRUST.
On February 13, 2002 we filed Articles of Amendment to our
Declaration of Trust increasing the number of our authorized shares from
50,000,000 to 62,000,000. All of our authorized shares are currently
classified as common shares of beneficial interest.
C. FEDERAL INCOME TAX AND ERISA CONSIDERATIONS.
The following is a summary of federal income tax and ERISA
considerations relating to the acquisition, ownership and disposition of our
shares giving effect to our spin-off of Five Star
Quality Care, Inc. and our acquisition of 31 senior living communities on
January 11, 2002. This summary updates the description of these matters in our
Annual Report on Form 10-K for the year ended December 31, 2000 as supplemented
by the Current Report on Form 8-K dated September 21, 2001.
The following summary of federal income tax consequences is based on
existing law, and is limited to investors who own our shares as investment
assets rather than as inventory or as property used in a trade or business. The
summary does not discuss the particular tax consequences that might be relevant
to you if you are subject to special rules under the federal income tax law, for
example if you are:
o a bank, life insurance company, regulated investment company, or other
financial institution,
o a broker or dealer in securities or foreign currency,
o a person who has a functional currency other than the U.S. dollar,
o a person who acquires our shares in connection with employment or other
performance of services,
o a person subject to alternative minimum tax,
o a person who owns our shares as part of a straddle, hedging transaction,
constructive sale transaction, or conversion transaction, or
o except as specifically described in the following summary, a tax-exempt
entity or a foreign person.
The sections of the Internal Revenue Code that govern the federal income tax
qualification and treatment of a REIT and its shareholders are complex. This
presentation is a summary of applicable Internal Revenue Code provisions,
related rules and regulations and administrative and judicial interpretations,
all of which are subject to change, possibly with retroactive effect. Future
legislative, judicial, or administrative actions or decisions could affect the
accuracy of statements made in this summary. We have not received a ruling from
the IRS with respect to any matter described in this summary, and we cannot
assure you that the IRS or a court will agree with the statements made in this
summary. In addition, the following summary is not exhaustive of all possible
tax consequences, and does not discuss any estate, gift, state, local, or
foreign tax consequences. For all these reasons, we urge you and any prospective
acquiror of our shares to
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consult with a tax advisor about the federal income tax and other tax
consequences of the acquisition, ownership and disposition of our shares.
Your federal income tax consequences may differ depending on whether or
not you are a "U.S. shareholder." For purposes of this summary, a "U.S.
shareholder" for federal income tax purposes is:
o a citizen or resident of the United States, including an alien
individual who is a lawful permanent resident of the United States or
meets the substantial presence residency test under the federal income
tax laws,
o a corporation, partnership or other entity treated as a corporation or
partnership for federal income tax purposes, that is created or
organized in or under the laws of the United States, any state thereof
or the District of Columbia, unless otherwise provided by Treasury
regulations,
o an estate the income of which is subject to federal income taxation
regardless of its source, or
o a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions
of the trust, or electing trusts in existence on August 20, 1996 to the
extent provided in Treasury regulations,
whose status as a U.S. shareholder is not overridden by an applicable tax
treaty. Conversely, a "non-U.S. shareholder" is a beneficial owner of our shares
who is not a U.S. shareholder.
TAXATION AS A REIT
We have elected to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code, commencing with our taxable year ending December 31,
1999. Our REIT election, assuming continuing compliance with the qualification
tests summarized below, continues in effect for subsequent taxable years.
Although no assurance can be given, we believe that we are organized, have
operated, and will continue to operate in a manner that qualifies us to be taxed
under the Internal Revenue Code as a REIT.
As a REIT, we generally will not be subject to federal income tax on
our net income distributed as dividends to our shareholders. Distributions to
our shareholders generally will be includable in their income as dividends to
the extent of our current or accumulated earnings and profits. A portion of
these dividends may be treated as capital gain dividends, as explained below.
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No portion of any dividends will be eligible for the dividends received
deduction for corporate shareholders. Distributions in excess of current or
accumulated earnings and profits generally will be treated for federal income
tax purposes as a return of capital to the extent of a recipient shareholder's
basis in our shares, and will reduce this basis. Our current or accumulated
earnings and profits will generally be allocated first to distributions made on
our preferred shares, if any, and thereafter to distributions made on our common
shares.
Our counsel, Sullivan & Worcester LLP, has opined that we have been
organized and have qualified as a REIT under the Internal Revenue Code for our
1999 through 2001 taxable years, and that our current investments and plan of
operation will enable us to meet the requirements for qualification and taxation
as a REIT under the Internal Revenue Code. Our actual qualification and taxation
as a REIT will depend upon our ability to meet the various qualification tests
imposed under the Internal Revenue Code and summarized below. While we believe
that we will operate in a manner to satisfy the various REIT qualification
tests, our counsel has not reviewed and will not review compliance with these
tests on a continuing basis. If we fail to qualify as a REIT in any year, we
will be subject to federal income taxation as if we were a C corporation, and
our shareholders will be taxed like shareholders of C corporations. In this
event, we could be subject to significant tax liabilities, and the amount of
cash available for distribution to our shareholders may be reduced or
eliminated.
If we qualify as a REIT and meet the annual distribution tests
described below, we generally will not be subject to federal income taxes on the
amounts we distribute. However, even if we qualify as a REIT, we may be subject
to federal tax in the following circumstances:
o We will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including our undistributed net
capital gains.
o If our alternative minimum taxable income exceeds our taxable income, we
may be subject to the corporate alternative minimum tax on our items of
tax preference.
o If we have net income from the sale or other disposition of "foreclosure
property" that is held primarily for sale to customers in the ordinary
course of business or other nonqualifying income from foreclosure
property, we will be subject to tax on this net income from foreclosure
property at the highest regular corporate rate, which is currently 35%.
We expect to have little or no net income from foreclosure property in
2001 or 2002.
o If we have net income from prohibited transactions, including sales or
other dispositions of inventory or property held primarily for sale to
customers in the ordinary course of business other than foreclosure
property, we will be subject to tax on this income at a 100% rate.
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o If we fail to satisfy the 75% gross income test or the 95% gross income
test discussed below, but nonetheless maintain our qualification as a
REIT, we will be subject to tax at a 100% rate on the greater of the
amount by which we fail the 75% or the 95% test, multiplied by a
fraction intended to reflect our profitability.
o If we fail to distribute for any calendar year at least the sum of 85%
of our REIT ordinary income for that year, 95% of our REIT capital gain
net income for that year, and any undistributed taxable income from
prior periods, we will be subject to a 4% excise tax on the excess of
the required distribution over the amounts actually distributed.
o If we acquire an asset from a corporation in a transaction in which our
basis in the asset is determined by reference to the basis of the asset
in the hands of a present or former C corporation, and if we
subsequently recognize gain on the disposition of this asset during the
ten-year period beginning on the date on which the asset ceased to be
owned by the C corporation, then we will pay tax at the highest regular
corporate tax rate, which is currently 35%, on the lesser of the excess
of the fair market value of the asset over the C corporation's basis in
the asset on the date the asset ceased to be owned by the C corporation,
or the gain recognized in the disposition.
o If we have succeeded to undistributed earnings and profits from an
acquired C corporation, to preserve our status as a REIT we must
generally distribute all of these undistributed earnings and profits not
later than the end of the taxable year of the acquisition. However, if
we fail to do so, relief provisions would allow us to maintain our
status as a REIT provided we distribute any subsequently discovered C
corporation earnings and profits and pay an interest charge in respect
of the period of delayed distribution. As discussed below, we acquired
several C corporations on January 11, 2002 as part of our acquisition of
31 senior living facilities. Some of these C corporations had operated
for several years as subsidiaries of different parent companies. Our
investigation of these C corporations indicates that they do not have
retained earnings and profits that will jeopardize our status as a REIT.
However, upon review or audit, the IRS may disagree with our conclusion.
o As explained below, we are permitted within limits to own stock and
securities of a "taxable REIT subsidiary." A taxable REIT subsidiary of
ours will be separately taxed on its net income as a C corporation, and
will be subject to limitations on the deductibility of interest expense
paid to us. In addition, we will be subject to a 100% tax on
redetermined rents, redetermined deductions, and excess interest
expense, in order to ensure that transactions between and among us, our
tenants, and our taxable REIT subsidiaries are at arm's length.
If we invest in properties in foreign countries, our profits from those
investments will generally be subject to tax in the countries where those
properties are located. The nature and
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amount of this taxation will depend on the laws of the countries where the
properties are located. If we operate as we currently intend, then we will
distribute our taxable income to our shareholders and we will generally not pay
federal income tax, and thus we generally cannot recover the cost of foreign
taxes imposed on our foreign investments by claiming foreign tax credits against
our federal income tax liability. Also, we cannot pass through to our
shareholders any foreign tax credits.
If we fail to qualify or elect not to qualify as a REIT in any taxable
year, then we will be subject to federal income tax in the same manner as a C
corporation. Any distributions to our shareholders in a year in which we fail to
qualify as a REIT will not be deductible, nor will these distributions be
required under the Internal Revenue Code. In that event, to the extent of our
current and accumulated earnings and profits, any distributions to our
shareholders will be taxable as ordinary dividends and, subject to limitations
in the Internal Revenue Code, will be eligible for the dividends received
deduction for corporate recipients. Also, we will generally be disqualified from
federal income taxation as a REIT for the four taxable years following
disqualification. Failure to qualify for federal income taxation as a REIT for
even one year could result in reduction or elimination of distributions to our
shareholders, or in our incurring substantial indebtedness or liquidating
substantial investments in order to pay the resulting corporate-level taxes.
REIT QUALIFICATION REQUIREMENTS
GENERAL REQUIREMENTS. Section 856(a) of the Internal Revenue Code
defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(3) that would be taxable, but for Sections 856 through 859 of the
Internal Revenue Code, as a C corporation;
(4) that is not a financial institution or an insurance company subject
to special provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) that is not "closely held" as defined under the personal holding
company stock ownership test, as described below; and
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(7) that meets other tests regarding income, assets and distributions,
all as described below.
Section 856(b) of the Internal Revenue Code provides that conditions (1) to (4),
inclusive, must be met during the entire taxable year and that condition (5)
must be met during at least 335 days of a taxable year of 12 months, or during a
pro rata part of a taxable year of less than 12 months. Section 856(h)(2) of the
Internal Revenue Code provides that neither condition (5) nor (6) need be met
for our first taxable year as a REIT. We believe that we have satisfied
conditions (1) to (6), inclusive, during each of the requisite periods ending on
or before December 31, 2001, and that we will continue to satisfy those
conditions in future taxable years. There can, however, be no assurance in this
regard.
By reason of condition (6) above, we will fail to qualify as a REIT for
a taxable year if at any time during the last half of the year more than 50% in
value of our outstanding shares is owned directly or indirectly by five or fewer
individuals. To help comply with condition (6), our declaration of trust
restricts transfers of our shares. In addition, if we comply with applicable
Treasury regulations to ascertain the ownership of our shares and do not know,
or by exercising reasonable diligence would not have known, that we failed
condition (6), then we will be treated as satisfying condition (6). However, our
failure to comply with these regulations for ascertaining ownership may result
in a penalty of $25,000, or $50,000 for intentional violations. Accordingly, we
intend to comply with these regulations, and to request annually from record
holders of significant percentages of our shares information regarding the
ownership of our shares. Under our declaration of trust, our shareholders are
required to respond to these requests for information.
For purposes of condition (6) above, REIT shares held by a pension
trust are treated as held directly by the pension trust's beneficiaries in
proportion to their actuarial interests in the pension trust. Consequently, five
or fewer pension trusts could own more than 50% of the interests in an entity
without jeopardizing that entity's federal income tax qualification as a REIT.
However, as discussed below, if a REIT is a "pension-held REIT," each pension
trust owning more than 10% of the REIT's shares by value generally may be taxed
on a portion of the dividends it receives from the REIT.
OUR WHOLLY-OWNED SUBSIDIARIES AND OUR INVESTMENTS THROUGH PARTNERSHIPS.
Except in respect of taxable REIT subsidiaries as discussed below, Section
856(i) of the Internal Revenue Code provides that any corporation, 100% of whose
stock is held by a REIT, is a qualified REIT subsidiary and shall not be treated
as a separate corporation. The assets, liabilities and items of income,
deduction and credit of a qualified REIT subsidiary are treated as the REIT's.
We believe that each of our direct and indirect wholly-owned subsidiaries, other
than the taxable REIT subsidiaries discussed below, will either be a qualified
REIT subsidiary within the meaning of Section 856(i) of the Internal Revenue
Code, or a noncorporate entity that for federal income tax purposes is not
treated as separate from its owner under regulations issued under Section 7701
of the Internal Revenue Code. Thus, except for the taxable REIT subsidiaries
discussed below, in applying all the federal income tax REIT qualification
requirements described in this summary, all
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assets, liabilities and items of income, deduction and credit of our direct and
indirect wholly-owned subsidiaries are treated as ours.
We may invest in real estate through one or more limited or general
partnerships or limited liability companies that are treated as partnerships for
federal income tax purposes. In the case of a REIT that is a partner in a
partnership, regulations under the Internal Revenue Code provide that, for
purposes of the REIT qualification requirements regarding income and assets
discussed below, the REIT is deemed to own its proportionate share of the assets
of the partnership corresponding to the REIT's proportionate capital interest in
the partnership and is deemed to be entitled to the income of the partnership
attributable to this proportionate share. In addition, for these purposes, the
character of the assets and gross income of the partnership generally retain the
same character in the hands of the REIT. Accordingly, our proportionate share of
the assets, liabilities, and items of income of each partnership in which we are
a partner is treated as ours for purposes of the income tests and asset tests
discussed below. In contrast, for purposes of the distribution requirement
discussed below, we must take into account as a partner our share of the
partnership's income as determined under the general federal income tax rules
governing partners and partnerships under Sections 701 through 777 of the
Internal Revenue Code.
TAXABLE REIT SUBSIDIARIES. We are permitted to own any or all of the
securities of a "taxable REIT subsidiary" as defined in Section 856(l) of the
Internal Revenue Code, provided that no more than 20% of our assets, at the
close of each quarter of our taxable year, is comprised of our investments in
the stock or securities of our taxable REIT subsidiaries. Among other
requirements, a taxable REIT subsidiary must:
(1) be a non-REIT corporation for federal income tax purposes in which
we directly or indirectly own shares,
(2) join with us in making a taxable REIT subsidiary election,
(3) not directly or indirectly operate or manage a lodging facility or
a health care facility, and
(4) not directly or indirectly provide to any person, under a
franchise, license, or otherwise, rights to any brand name under which any
lodging facility or health care facility is operated, except that in limited
circumstances a subfranchise, sublicense or similar right can be granted to an
independent contractor to operate or manage a lodging facility.
In addition, a corporation other than a REIT in which a taxable REIT
subsidiary directly or indirectly owns more than 35% of the voting power or
value will automatically be treated as a taxable REIT subsidiary. Subject to the
discussion below, we believe that we and each of our taxable REIT subsidiaries
have complied with, and will continue to comply with, the requirements
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for taxable REIT subsidiary status during all times each subsidiary's taxable
REIT subsidiary election remains in effect, and we believe that the same will be
true for any taxable REIT subsidiary that we later form or acquire.
Our ownership of stock and securities in taxable REIT subsidiaries is
exempt from the 10% and 5% REIT asset tests discussed below. Also, as discussed
below, taxable REIT subsidiaries can perform services for our tenants without
disqualifying the rents we receive from those tenants under the 75% or 95% gross
income tests discussed below. Moreover, because taxable REIT subsidiaries are
taxed as C corporations that are separate from us, their assets, liabilities and
items of income, deduction and credit are not imputed to us for purposes of the
REIT qualification requirements described in this summary. Therefore, taxable
REIT subsidiaries can generally undertake third-party management and development
activities and activities not related to real estate.
Restrictions are imposed on taxable REIT subsidiaries to ensure that
they will be subject to an appropriate level of federal income taxation. For
example, a taxable REIT subsidiary may not deduct interest paid in any year to
an affiliated REIT to the extent that the interest payments exceed, generally,
50% of the taxable REIT subsidiary's adjusted taxable income for that year.
However, the taxable REIT subsidiary may carry forward the disallowed interest
expense to a succeeding year, and deduct the interest in that later year subject
to that year's 50% adjusted taxable income limitation. In addition, if a taxable
REIT subsidiary pays interest, rent, or other amounts to its affiliated REIT in
an amount that exceeds what an unrelated third party would have paid in an arm's
length transaction, then the REIT generally will be subject to an excise tax
equal to 100% of the excessive portion of the payment. Finally, if in comparison
to an arm's length transaction, a tenant has overpaid rent to the REIT in
exchange for underpaying the taxable REIT subsidiary for services rendered, then
the REIT may be subject to an excise tax equal to 100% of the overpayment. There
can be no assurance that arrangements involving our taxable REIT subsidiaries
will not result in the imposition of one or more of these deduction limitations
or excise taxes, but we do not believe that we are or will be subject to these
impositions.
In our 2000 taxable year, we took title to several healthcare
facilities, valued in the aggregate at less than $9 million, through corporate
subsidiaries in which we owned 99% of the outstanding common stock, all of which
was nonvoting, and in which individual shareholders owned 1% of the outstanding
common stock, all of which was voting. We could not take direct title to these
particular facilities and operate them under the "foreclosure property" rules
discussed below, because the facilities were not leased by or mortgaged to us at
the time of our tenant-mortgagor's default with respect to other facilities, nor
could we lease these facilities on suitable terms because of market conditions
at that time. Accordingly, our 99% subsidiaries took title to these particular
facilities and retained an independent contractor to operate and manage the
facilities. Although there can be no assurance in this regard, we believe that
these 99% subsidiaries' ownership and operational structure during our 2000
taxable year satisfied the then applicable REIT asset tests discussed below,
because we did not own more than 10% of the voting securities of the 99%
subsidiaries. As of January 1, 2001, we acquired 100% ownership of the formerly
99% owned corporate subsidiaries, and filed a taxable REIT subsidiary election
with each
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of these subsidiaries effective January 1, 2001. These elections were revoked
early in taxable year 2002, in connection with the spin-off of Five Star Quality
Care, Inc. and our diminished ownership of these subsidiaries. We have received
an opinion of counsel that, although the matter is not free from doubt, it is
more likely than not that these subsidiaries were taxable REIT subsidiaries from
January 1, 2001 until the revocation of the taxable REIT subsidiary elections.
We had submitted a private letter ruling request to the IRS to confirm that
these subsidiaries complied with the requirement that prohibits the direct or
indirect operation or management of a healthcare facility by a taxable REIT
subsidiary, but withdrew this request before any IRS ruling was issued. If it is
determined that these subsidiaries were ineligible for taxable REIT subsidiary
status, we believe that the subsidiaries would instead have been qualified REIT
subsidiaries under Section 856(i) of the Internal Revenue Code because we owned
100% of them and they were not properly classified as taxable REIT subsidiaries.
As our qualified REIT subsidiaries, the gross income from the subsidiaries'
healthcare facilities would be treated as our own, and as a general matter would
be nonqualifying income for purposes of the 75% and 95% gross income tests
discussed below. We expect to take steps to qualify for the 75% and 95% gross
income tests under the relief provision described below, including for example
attaching an applicable schedule of gross income to our 2001 federal income tax
return as required by Section 856(c)(6)(A) of the Internal Revenue Code. Thus,
even if the IRS or a court ultimately determines that these subsidiaries failed
to qualify as our taxable REIT subsidiaries, and that this failure thereby
implicated our compliance with the 75% and 95% gross income tests discussed
below, we expect we would qualify for the gross income tests' relief provision
and thereby preserve our qualification as a REIT. If this relief provision were
to apply to us, we would be subject to tax at a 100% rate on the greater of the
amount by which we failed the 75% or the 95% gross income test, with
adjustments, multiplied by a fraction intended to reflect our profitability for
the taxable year; however, we would expect to owe little or no tax in these
circumstances.
INCOME TESTS. There are two gross income requirements for qualification
as a REIT under the Internal Revenue Code:
o At least 75% of our gross income, excluding gross income from sales or
other dispositions of property held primarily for sale, must be derived
from investments relating to real property, including "rents from real
property" as defined under Section 856 of the Internal Revenue Code,
mortgages on real property, or shares in other REITs. When we receive
new capital in exchange for our shares or in a public offering of
five-year or longer debt instruments, income attributable to the
temporary investment of this new capital in stock or a debt instrument,
if received or accrued within one year of our receipt of the new
capital, is generally also qualifying income under the 75% test.
o At least 95% of our gross income, excluding gross income from sales or
other dispositions of property held primarily for sale, must be derived
from a combination of items of real property income that satisfy the 75%
test described above, dividends, interest, payments under interest rate
swap or cap agreements, options, futures contracts, forward rate
agreements, or similar financial instruments, and gains from the sale or
disposition of stock, securities, or real property.
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For purposes of these two requirements, income derived from a "shared
appreciation provision" in a mortgage loan is generally treated as gain
recognized on the sale of the property to which it relates. Although we will use
our best efforts to ensure that the income generated by our investments will be
of a type which satisfies both the 75% and 95% gross income tests, there can be
no assurance in this regard.
In order to qualify as "rents from real property" under Section 856 of
the Internal Revenue Code, several requirements must be met:
o The amount of rent received generally must not be based on the income or
profits of any person, but may be based on receipts or sales.
o Rents do not qualify if the REIT owns 10% or more by vote or value of
the tenant, whether directly or after application of attribution rules.
While we intend not to lease property to any party if rents from that
property would not qualify as rents from real property, application of
the 10% ownership rule is dependent upon complex attribution rules and
circumstances that may be beyond our control. For example, an
unaffiliated third party's ownership directly or by attribution of 10%
or more by value of our shares, or 10% or more by value of HRPT
Properties Trust's shares for so long as HRPT Properties Trust owns 10%
or more by value of us, as well as 10% or more by vote or value of the
stock of one of our tenants, would result in that tenant's rents not
qualifying as rents from real property. Our declaration of trust
disallows transfers or purported acquisitions, directly or by
attribution, of our shares that could result in disqualification as a
REIT under the Internal Revenue Code and permits our trustees to
repurchase the shares to the extent necessary to maintain our status as
a REIT under the Internal Revenue Code. Nevertheless, there can be no
assurance that these provisions in our declaration of trust will be
effective to prevent REIT status under the Internal Revenue Code from
being jeopardized under the 10% affiliated tenant rule. Furthermore,
there can be no assurance that we will be able to monitor and enforce
these restrictions, nor will our shareholders necessarily be aware of
ownership of shares attributed to them under the Internal Revenue Code's
attribution rules.
o For our 2001 taxable year and thereafter, there is a limited exception
to the above prohibition on earning "rents from real property" from a
10% affiliated tenant, if the tenant is a taxable REIT subsidiary. If at
least 90% of the leased space of a property is leased to tenants other
than taxable REIT subsidiaries and 10% affiliated tenants, and if the
taxable REIT subsidiary's rent for space at that property is
substantially comparable to the rents paid by nonaffiliated tenants for
comparable space at the property, then otherwise qualifying rents paid
by the taxable REIT subsidiary to the REIT will not be disqualified on
account of the rule prohibiting 10% affiliated tenants.
o In order for rents to qualify, we generally must not manage the property
or furnish or render services to the tenants of the property, except
through an independent contractor from whom we derive no income or, for
our 2001 taxable year and thereafter, through one
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of our taxable REIT subsidiaries. There is an exception to this rule
permitting a REIT to perform customary tenant services of the sort which
a tax-exempt organization could perform without being considered in
receipt of "unrelated business taxable income" as defined in Section
512(b)(3) of the Internal Revenue Code. In addition, a DE MINIMIS amount
of noncustomary services will not disqualify income as "rents from real
property" so long as the value of the impermissible services does not
exceed 1% of the gross income from the property.
o If rent attributable to personal property leased in connection with a
lease of real property is 15% or less of the total rent received under
the lease, then the rent attributable to personal property will qualify
as "rents from real property", if this 15% threshold is exceeded, the
rent attributable to personal property will not so qualify. For our
taxable years through December 31, 2000, the portion of rental income
treated as attributable to personal property is determined according to
the ratio of the tax basis of the personal property to the total tax
basis of the real and personal property which is rented. For our 2001
taxable year and thereafter, the ratio will be determined by reference
to fair market values rather than tax bases.
We believe that all or substantially all our rents have qualified and will
qualify as rents from real property for purposes of Section 856 of the Internal
Revenue Code.
In order to qualify as mortgage interest on real property for purposes
of the 75% test, interest must derive from a mortgage loan secured by real
property with a fair market value, at the time the loan is made, at least equal
to the amount of the loan. If the amount of the loan exceeds the fair market
value of the real property, the interest will be treated as interest on a
mortgage loan in a ratio equal to the ratio of the fair market value of the real
property to the total amount of the mortgage loan.
In our 2000 taxable year, we reduced to possession several healthcare
facilities, including both the real property and the incidental personal
property at these facilities, in each case after a default or imminent default
on either a loan secured by the facility or a lease of the facility. As of and
subsequent to December 31, 2001, these facilities are leased to Five Star
Quality Care, Inc., and we believe the rents from these facilities qualify as
"rents from real property". For periods before we began leasing these facilities
to Five Star Quality Care, Inc., gross operating income from the facilities
would not have qualified under the 75% and 95% gross income tests in the absence
of "foreclosure property" treatment under Section 856(e) of the Internal Revenue
Code, and would likely have disqualified us from being a REIT. As foreclosure
property, however, gross operating income from our repossessed facilities
qualified under the 75% and 95% gross income tests. Further, any gain we
recognized on the sale of foreclosure property, plus any income we received from
foreclosure property that would not qualify under the 75% gross income test in
the absence of foreclosure property treatment, reduced by our expenses directly
connected with the production of those items of income, was subject to tax at
the maximum corporate rate of 35%.
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We believe that we were eligible, pursuant to Section 856(e) of the
Internal Revenue Code, to treat our repossessed facilities as "foreclosure
property," and we made an election to that effect with our 2000 federal income
tax return. However, a repossessed facility's status as foreclosure property
would have ceased upon the earlier of:
o the date we began to lease the facility on terms that gave rise to
income that did not qualify under the 75% gross income test, or the date
we began to receive or accrue income pursuant to a lease, directly or
indirectly, that did not qualify under the 75% gross income test,
o the first day after repossession on which construction took place, other
than completion of a building or other improvement where more than 10%
of the construction was completed before our tenant's or debtor's
default became imminent, or
o the first day more than 90 days after repossession that we did not
retain an independent contractor, from whom we did not derive or receive
any income, to operate the facility on our behalf.
We do not believe that foreclosure property status for the repossessed
facilities terminated at any point before our lease of these properties to Five
Star Quality Care, Inc. began. We retained an independent contractor from whom
we did not derive or receive any income to oversee the day-to-day operation of
our repossessed facilities, and although there can be no assurance in this
regard, we believe that our repossessed facilities qualified as foreclosure
property under Section 856(e) of the Internal Revenue Code. Accordingly, we
believe that gross operating income from these repossessed facilities qualified
under the 75% and 95% gross income tests.
Other than sales of foreclosure property, any gain we realize on the
sale of property held as inventory or other property held primarily for sale to
customers in the ordinary course of business will be treated as income from a
prohibited transaction that is subject to a penalty tax at a 100% rate. This
prohibited transaction income also may adversely affect our ability to satisfy
the 75% and 95% gross income tests for federal income tax qualification as a
REIT. We cannot provide assurances as to whether or not the IRS might
successfully assert that one or more of our dispositions is subject to the 100%
penalty tax. However, we believe that dispositions of assets that we might make
will not be subject to the 100% penalty tax, because we intend to:
o own our assets for investment with a view to long-term income production
and capital appreciation;
o engage in the business of developing, owning and operating our existing
properties and acquiring, developing, owning and operating new
properties; and
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o make occasional dispositions of our assets consistent with our long-term
investment objectives.
If we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for that year if:
o our failure to meet the test was due to reasonable cause and not due to
willful neglect;
o we report the nature and amount of each item of our income included in
the 75% or 95% gross income tests for that taxable year on a schedule
attached to our tax return; and
o any incorrect information on the schedule was not due to fraud with
intent to evade tax.
It is impossible to state whether in all circumstances we would be entitled to
the benefit of this relief provision for the 75% and 95% gross income tests.
Even if this relief provision did apply, a special tax equal to 100% is imposed
upon the greater of the amount by which we failed the 75% test or the 95% test
with certain adjustments, multiplied by a fraction intended to reflect our
profitability.
ASSET TESTS. At the close of each quarter of each taxable year, we must
also satisfy these asset percentage tests in order to qualify as a REIT for
federal income tax purposes:
o At least 75% of our total assets must consist of real estate assets,
cash and cash items, shares in other REITs, government securities, and
stock or debt instruments purchased with proceeds of a stock offering or
an offering of our debt with a term of at least five years, but only for
the one-year period commencing with our receipt of the offering
proceeds.
o Not more than 25% of our total assets may be represented by securities
other than those securities that count favorably toward the preceding
75% asset test.
o Of the investments included in the preceding 25% asset class, the value
of any one non-REIT issuer's securities that we own may not exceed 5% of
the value of our total assets, and we may not own more than 10% of any
one non-REIT issuer's outstanding voting securities. For our 2001
taxable year and thereafter, we may not own more than 10% of the vote or
value of any one non-REIT issuer's outstanding securities, unless that
issuer is our taxable REIT subsidiary or the securities are straight
debt securities.
o For our 2001 taxable year and thereafter, our stock and securities in a
taxable REIT subsidiary are exempted from the preceding 10% and 5% asset
tests. However, no more
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than 20% of our total assets may be represented by stock or securities
of taxable REIT subsidiaries.
When a failure to satisfy the above asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close of
that quarter. We intend to maintain records of the value of our assets to
document our compliance with the above asset tests, and to take actions as may
be required to cure any failure to satisfy the tests within 30 days after the
close of any quarter.
OUR RELATIONSHIP WITH FIVE STAR. In 2001, we and HRPT Properties Trust
spun off substantially all of our Five Star Quality Care, Inc. common shares. In
addition, our leases with Five Star, Five Star's charter and bylaws, and the
transaction agreement governing the spin-off collectively contain restrictions
upon the ownership of Five Star common shares and require Five Star to refrain
from taking any actions that may jeopardize our qualification as a REIT under
the Internal Revenue Code, including actions which would result in our or our
principal shareholder, HRPT Properties Trust, obtaining actual or constructive
ownership of 10% or more of the Five Star common shares. Accordingly, commencing
with our 2002 taxable year, we expect that the rental income we receive from
Five Star and its subsidiaries will be "rents from real property," and thus
qualifying income under the 75% and 95% gross income tests described above.
ANNUAL DISTRIBUTION REQUIREMENTS. In order to qualify for taxation as a
REIT under the Internal Revenue Code, we are required to make annual
distributions other than capital gain dividends to our shareholders in an amount
at least equal to the excess of:
(A) the sum of 90% of our "real estate investment trust taxable
income," as defined in Section 857 of the Internal Revenue Code, computed by
excluding any net capital gain and before taking into account any dividends paid
deduction for which we are eligible, and 90% of our net income after tax, if
any, from property received in foreclosure, over
(B) the sum of our qualifying noncash income, E.G., imputed rental
income or income from transactions inadvertently failing to qualify as like-kind
exchanges.
Prior to our 2001 taxable year, the preceding 90% percentages were 95%. The
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before we timely file our tax return for the
earlier taxable year and if paid on or before the first regular distribution
payment after that declaration. If a dividend is declared in October, November,
or December to shareholders of record during one of those months, and if the
dividend is paid during the following January, then for federal income tax
purposes the dividend will be treated as having been both paid and received on
December 31 of the prior taxable year. A distribution which is not pro rata
within a class of our beneficial interests entitled to a distribution, or which
is not consistent with the rights to distributions among our classes of
beneficial interests, is a preferential distribution that is not taken into
consideration for purposes of the distribution requirements, and
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accordingly the payment of a preferential distribution could affect our ability
to meet the distribution requirements. Taking into account our distribution
policies, including the dividend reinvestment plan we have adopted, we expect
that we will not make any preferential distributions. The distribution
requirements may be waived by the IRS if a REIT establishes that it failed to
meet them by reason of distributions previously made to meet the requirements of
the 4% excise tax discussed below. To the extent that we do not distribute all
of our net capital gain and all of our real estate investment trust taxable
income, as adjusted, we will be subject to tax on undistributed amounts.
In addition, we will be subject to a 4% excise tax to the extent we
fail within a calendar year to make required distributions to our shareholders
of 85% of our ordinary income and 95% of our capital gain net income plus the
excess, if any, of the "grossed up required distribution" for the preceding
calendar year over the amount treated as distributed for that preceding calendar
year. For this purpose, the term "grossed up required distribution" for any
calendar year is the sum of our taxable income for the calendar year without
regard to the deduction for dividends paid and all amounts from earlier years
that are not treated as having been distributed under the provision.
If we do not have enough cash or other liquid assets to meet the 90%
distribution requirements, we may find it necessary to arrange for new debt or
equity financing to provide funds for required distributions, or else our REIT
status for federal income tax purposes could be jeopardized. We can provide no
assurance that financing would be available for these purposes on favorable
terms.
If we fail to distribute sufficient dividends for any year, we may be
able to rectify this failure by paying "deficiency dividends" to shareholders in
a later year. These deficiency dividends may be included in our deduction for
dividends paid for the earlier year, but an interest charge would be imposed
upon us for the delay in distribution. Although we may be able to avoid being
taxed on amounts distributed as deficiency dividends, we will remain liable for
the 4% excise tax discussed above.
In addition to the other distribution requirements above, to preserve
our status as a REIT we are required to timely distribute earnings and profits
that we inherit from acquired C corporations, for example, the subsidiaries we
acquired on January 11, 2002. However, as explained below, our investigation
indicates that we did not inherit earnings and profits from these subsidiaries
that will jeopardize our status as a REIT.
THE ACQUISITION OF 31 SENIOR LIVING COMMUNITIES
On January 11, 2002, we acquired all of the outstanding stock of a
subsidiary of a domestic C corporation. At the time of that acquisition, this
subsidiary directly or indirectly
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owned all of the outstanding equity interests in lower tier, corporate and
noncorporate subsidiaries. Upon our acquisition, each of the acquired entities
became either our qualified REIT subsidiary under Section 856(i) of the Internal
Revenue Code or a disregarded entity under Treasury regulations issued under
Section 7701 of the Internal Revenue Code. Thus, after the acquisition, all
assets, liabilities and items of income, deduction and credit of wholly-owned
subsidiaries have been treated as ours for purposes of the various REIT
qualification tests described above. In addition, we generally are treated as
the successor to the acquired subsidiaries' federal income tax attributes, such
as those entities' adjusted tax bases in their assets and their depreciation
schedules; we are also treated as the successor to the acquired corporate
subsidiaries' earnings and profits for federal income tax purposes, if any.
BUILT-IN GAINS FROM C CORPORATIONS. As described above, notwithstanding
our qualification and taxation as a REIT, we may still be subject to corporate
taxation in particular circumstances. Specifically, if we acquire an asset from
a C corporation in a transaction in which our adjusted tax basis in the asset is
determined by reference to the adjusted tax basis of that asset in the hands of
the C corporation, and if we subsequently recognize gain on the disposition of
that asset during the ten year period following the acquisition, then we will
generally pay tax at the highest regular corporate tax rate, currently 35%, on
the lesser of (1) the excess at the time we acquired the asset, if any, of the
asset's fair market value over its then adjusted tax basis, or (2) our gain
recognized in the disposition. Accordingly, any taxable disposition of an asset
acquired in the January 11, 2002 transaction during the ten-year period
commencing on that date could be subject to tax under these rules. However,
except as described below, we have not disposed, and have no present plan or
intent to dispose, of any assets acquired in this transaction.
Also on January 11, 2002, we conveyed to Five Star and its subsidiaries
operating assets that were of a type that are typically owned by the tenant of a
senior living facility. In exchange, Five Star and its subsidiaries assumed
related operating liabilities. The aggregate adjusted tax basis in the
transferred operating assets was less than the related liabilities assumed, and
Five Star and its subsidiaries have received a cash payment from us in the
amount of the estimated difference. We believe that the fair market value of
these conveyed operating assets will equal their adjusted tax bases, and we and
Five Star agreed to do our respective tax return reporting to that effect.
Accordingly, although Sullivan & Worcester LLP is unable to render an opinion on
factual determinations such as assets' fair market value, we expect to report no
gain or loss, and therefore to owe no corporate level tax under the rules for
dispositions of former C corporation assets, in respect of this conveyance of
operating assets to Five Star.
EARNINGS AND PROFITS. A REIT may not at the end of any taxable year
have any undistributed earnings and profits for federal income tax purposes that
are attributable to a C corporation. Upon the closing of the January 11, 2002
transaction, we succeeded to the undistributed earnings and profits, if any, of
the acquired corporate subsidiaries. Thus, we need
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to distribute all of these earnings and profits no later than December 31, 2002.
If we fail to do so, we will not qualify as a REIT for 2002 and thereafter
unless a relief provision applies.
Although Sullivan & Worcester LLP is unable to render an opinion on
factual determinations such as the amount of undistributed earnings and profits,
we have made a preliminary investigation of the amount of undistributed earnings
and profits that we inherited in the January 11, 2002 transaction. At present,
we believe that we did not acquire any undistributed earnings and profits in
this transaction that will remain undistributed on December 31, 2002 after
taking into account our anticipated distributions for 2002. However, there can
be no assurance that the IRS would not, upon subsequent examination, propose
adjustments to the undistributed earnings and profits that we inherited as a
result of the January 11, 2002 transaction. In examining the calculation of
undistributed earnings and profits that we inherited, the IRS might consider all
taxable years of the acquired subsidiaries as open for review for purposes of
its proposed adjustments.
If we discover that we have inherited undistributed earnings and
profits in the January 11, 2002 transaction that would not be eliminated by
December 31, 2002 through our distributions made during 2002, we may choose to
preserve our qualification and taxation as a REIT by making a special
distribution for our 2002 taxable year. If, despite these best efforts during
our 2002 taxable year, it is subsequently determined that we had undistributed
earnings and profits from the January 11, 2002 transaction at December 31, 2002,
we may be eligible for a relief provision similar to the "deficiency dividends"
procedure described above. To utilize this relief provision, we would have to
pay an interest charge for the delay in distributing the undistributed earnings
and profits; in addition, we would be required to distribute to our
shareholders, in addition to our other REIT distribution requirements, the
amount of the undistributed earnings and profits less the interest charge paid.
DEPRECIATION AND FEDERAL INCOME TAX TREATMENT OF LEASES
Our initial tax bases in our assets will generally be our acquisition
cost. We will generally depreciate our real property on a straight-line basis
over 40 years and our personal property over 12 years. These depreciation
schedules may vary for properties that we acquire through tax-free or carryover
basis acquisitions.
The initial tax bases and depreciation schedules for our assets we held
immediately after we were spun off from HRPT Properties Trust depends upon
whether the deemed exchange that resulted from that spin-off was an exchange
under Section 351(a) of the Internal Revenue Code. We believe that Section
351(a) treatment was appropriate. Therefore, we carried over HRPT Properties
Trust's tax basis and depreciation schedule in each of the assets, and to the
extent that
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HRPT Properties Trust recognized gain on an asset in the deemed exchange, we
obtained additional tax basis in that asset which we depreciate in the same
manner as we depreciate newly purchased assets. In contrast, if Section 351(a)
treatment was not appropriate for the deemed exchange, then we will be treated
as though we acquired all our assets at the time of the spin-off in a fully
taxable acquisition, thereby acquiring aggregate tax bases in these assets equal
to the aggregate amount realized by HRPT Properties Trust in the deemed
exchange, and it would then be appropriate to depreciate these tax bases in the
same manner as we depreciate newly purchased assets. We believe, and Sullivan &
Worcester LLP has opined, that it is likely that the deemed exchange was an
exchange under Section 351(a) of the Internal Revenue Code, and we will perform
all our tax reporting accordingly. We may be required to amend these tax
reports, including those sent to our shareholders, if the IRS successfully
challenges our position that the deemed exchange is an exchange under Section
351(a) of the Internal Revenue Code. We intend to comply with the annual REIT
distribution requirements regardless of whether the deemed exchange was an
exchange under Section 351(a) of the Internal Revenue Code.
We will be entitled to depreciation deductions from our facilities only
if we are treated for federal income tax purposes as the owner of the
facilities. This means that the leases of the facilities must be classified for
federal income tax purposes as true leases, rather than as sales or financing
arrangements, and we believe this to be the case. In the case of sale-leaseback
arrangements, the IRS could assert that we realized prepaid rental income in the
year of purchase to the extent that the value of a leased property, at the time
of purchase, exceeded the purchase price for that property. While we believe
that the value of leased property at the time of purchase did not exceed
purchase prices, because of the lack of clear precedent we cannot provide
assurances as to whether the IRS might successfully assert the existence of
prepaid rental income in any of our sale-leaseback transactions.
TAXATION OF U.S. SHAREHOLDERS
As long as we qualify as a REIT for federal income tax purposes, a
distribution to our U.S. shareholders that we do not designate as a capital gain
dividend will be treated as an ordinary income dividend to the extent that it is
made out of current or accumulated earnings and profits. Distributions made out
of our current or accumulated earnings and profits that we properly designate as
capital gain dividends will be taxed as long-term capital gains, as discussed
below, to the extent they do not exceed our actual net capital gain for the
taxable year. However, corporate shareholders may be required to treat up to 20%
of any capital gain dividend as ordinary income under Section 291 of the
Internal Revenue Code.
In addition, we may elect to retain net capital gain income and treat
it as constructively distributed. In that case:
(1) we will be taxed at regular corporate capital gains tax rates on
retained amounts,
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(2) each U.S. shareholder will be taxed on its designated proportionate
share of our retained net capital gains as though that amount were distributed
and designated a capital gain dividend,
(3) each U.S. shareholder will receive a credit for its designated
proportionate share of the tax that we pay,
(4) each U.S. shareholder will increase its adjusted basis in our
shares by the excess of the amount of its proportionate share of these retained
net capital gains over its proportionate share of this tax that we pay, and
(5) both we and our corporate shareholders will make commensurate
adjustments in our respective earnings and profits for federal income tax
purposes.
If we elect to retain our net capital gains in this fashion, we will notify our
U.S. shareholders of the relevant tax information within 60 days after the close
of the affected taxable year.
For noncorporate U.S. shareholders, long-term capital gains are
generally taxed at maximum rates of 20% or 25%, depending upon the type of
property disposed of and the previously claimed depreciation with respect to
this property. If for any taxable year we designate as capital gain dividends
any portion of the dividends paid or made available for the year to our U.S.
shareholders, including our retained capital gains treated as capital gain
dividends, then the portion of the capital gain dividends so designated that
will be allocated to the holders of a particular class of shares will on a
percentage basis equal the ratio of the amount of the total dividends paid or
made available for the year to the holders of that class of shares to the total
dividends paid or made available for the year to holders of all classes of our
shares. We will similarly designate the portion of any capital gain dividend
that is to be taxed to noncorporate U.S. shareholders at the maximum rates of
20% or 25% so that the designations will be proportionate among all classes of
our shares.
Distributions in excess of current or accumulated earnings and profits
will not be taxable to a U.S. shareholder to the extent that they do not exceed
the shareholder's adjusted basis in the shareholder's shares, but will reduce
the shareholder's basis in those shares. To the extent that these excess
distributions exceed the adjusted basis of a U.S. shareholder's shares, they
will be included in income as capital gain, with long-term gain generally taxed
to noncorporate U.S. shareholders at a maximum rate of 20%. No U.S. shareholder
may include on his federal income tax return any of our net operating losses or
any of our capital losses.
Dividends that we declare in October, November or December of a taxable
year to U.S. shareholders of record on a date in those months will be deemed to
have been received by shareholders on December 31 of that taxable year, provided
we actually pay these dividends during
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the following January. Also, items that are treated differently for regular and
alternative minimum tax purposes are to be allocated between a REIT and its
shareholders under Treasury regulations which are to be prescribed. It is
possible that these Treasury regulations will require tax preference items to be
allocated to our shareholders with respect to any accelerated depreciation or
other tax preference items that we claim.
A U.S. shareholder's sale or exchange of our shares will result in
recognition of gain or loss in an amount equal to the difference between the
amount realized and the shareholder's adjusted basis in the shares sold or
exchanged. This gain or loss will be capital gain or loss, and will be long-term
capital gain or loss if the shareholder's holding period in the shares exceeds
one year. In addition, any loss upon a sale or exchange of our shares held for
six months or less will generally be treated as a long-term capital loss to the
extent of our long-term capital gain dividends during the holding period.
Noncorporate U.S. shareholders who borrow funds to finance their
acquisition of our shares could be limited in the amount of deductions allowed
for the interest paid on the indebtedness incurred. Under Section 163(d) of the
Internal Revenue Code, interest paid or accrued on indebtedness incurred or
continued to purchase or carry property held for investment is generally
deductible only to the extent of the investor's net investment income. A U.S.
shareholder's net investment income will include ordinary income dividend
distributions received from us and, if an appropriate election is made by the
shareholder, capital gain dividend distributions received from us; however,
distributions treated as a nontaxable return of the shareholder's basis will not
enter into the computation of net investment income.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a
REIT to a tax-exempt employees' pension trust did not constitute "unrelated
business taxable income," even though the REIT may have financed some its
activities with acquisition indebtedness. Although revenue rulings are
interpretive in nature and subject to revocation or modification by the IRS,
based upon the analysis and conclusion of Revenue Ruling 66-106, our
distributions made to shareholders that are tax-exempt pension plans, individual
retirement accounts, or other qualifying tax-exempt entities should not
constitute unrelated business taxable income, unless the shareholder has
financed its acquisition of our shares with "acquisition indebtedness" within
the meaning of the Internal Revenue Code.
Special rules apply to tax-exempt pension trusts, including so-called
401(k) plans but excluding individual retirement accounts or government pension
plans, that own more than 10% by value of a "pension-held REIT" at any time
during a taxable year. The pension trust may be required to treat a percentage
of all dividends received from the pension-held REIT during the year as
unrelated business taxable income. This percentage is equal to the ratio of:
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(1) the pension-held REIT's gross income derived from the conduct of
unrelated trades or businesses, determined as if the pension-held REIT were a
tax-exempt pension fund, less direct expenses related to that income, to
(2) the pension-held REIT's gross income from all sources, less direct
expenses related to that income,
except that this percentage shall be deemed to be zero unless it would otherwise
equal or exceed 5%. A REIT is a pension-held REIT if:
o the REIT is "predominantly held" by tax-exempt pension trusts, and
o the REIT would otherwise fail to satisfy the "closely held" ownership
requirement discussed above if the stock or beneficial interests in the
REIT held by tax-exempt pension trusts were viewed as held by tax-exempt
pension trusts rather than by their respective beneficiaries.
A REIT is predominantly held by tax-exempt pension trusts if at least one
tax-exempt pension trust owns more than 25% by value of the REIT's stock or
beneficial interests, or if one or more tax-exempt pension trusts, each owning
more than 10% by value of the REIT's stock or beneficial interests, own in the
aggregate more than 50% by value of the REIT's stock or beneficial interests.
Because of the restrictions in our declaration of trust regarding the ownership
concentration of our shares, we believe that we are not and will not be a
pension-held REIT. However, because our shares are publicly traded, we cannot
completely control whether or not we are or will become a pension-held REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing the United States federal income taxation of
non-U.S. shareholders are complex, and the following discussion is intended only
as a summary of these rules. If you are a non-U.S. shareholder, we urge you to
consult with your own tax advisor to determine the impact of United States
federal, state, local, and foreign tax laws, including any tax return filing and
other reporting requirements, with respect to your investment in our shares.
In general, a non-U.S. shareholder will be subject to regular United
States federal income tax in the same manner as a U.S. shareholder with respect
to its investment in our shares if that investment is effectively connected with
the non-U.S. shareholder's conduct of a trade or business in the United States.
In addition, a corporate non-U.S. shareholder that receives income that is or is
deemed effectively connected with a trade or business in the United States may
also be subject to the 30% branch profits tax under Section 884 of the Internal
Revenue Code, which is payable in
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addition to regular United States federal corporate income tax. The balance of
this discussion of the United States federal income taxation of non-U.S.
shareholders addresses only those non-U.S. shareholders whose investment in our
shares is not effectively connected with the conduct of a trade or business in
the United States.
A distribution by us to a non-U.S. shareholder that is not attributable
to gain from the sale or exchange of a United States real property interest and
that is not designated as a capital gain dividend will be treated as an ordinary
income dividend to the extent that it is made out of current or accumulated
earnings and profits. A distribution of this type will generally be subject to
United States federal income tax and withholding at the rate of 30%, or the
lower rate that may be specified by a tax treaty if the non-U.S. shareholder has
in the manner prescribed by the IRS demonstrated its entitlement to benefits
under a tax treaty. Because we cannot determine our current and accumulated
earnings and profits until the end of the taxable year, withholding at the rate
of 30% or applicable lower treaty rate will generally be imposed on the gross
amount of any distribution to a non-U.S. shareholder that we make and do not
designate a capital gain dividend. Notwithstanding this withholding on
distributions in excess of our current and accumulated earnings and profits,
these distributions are a nontaxable return of capital to the extent that they
do not exceed the non-U.S. shareholder's adjusted basis in our shares, and the
nontaxable return of capital will reduce the adjusted basis in these shares. To
the extent that distributions in excess of current and accumulated earnings and
profits exceed the non-U.S. shareholder's adjusted basis in our shares, the
distributions will give rise to tax liability if the non-U.S. shareholder would
otherwise be subject to tax on any gain from the sale or exchange of these
shares, as discussed below. A non-U.S. shareholder may seek a refund from the
IRS of amounts withheld on distributions to him in excess of our current and
accumulated earnings and profits.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from the sale or exchange of a United States real property
interest are taxed to a non-U.S. shareholder as if these distributions were
gains effectively connected with a trade or business in the United States
conducted by the non-U.S. shareholder. Accordingly, a non-U.S. shareholder will
be taxed on these amounts at the normal capital gain rates applicable to a U.S.
shareholder, subject to any applicable alternative minimum tax and to a special
alternative minimum tax in the case of nonresident alien individuals; the
non-U.S. shareholder will be required to file a United States federal income tax
return reporting these amounts, even if applicable withholding is imposed as
described below; and corporate non-U.S. shareholders may owe the 30% branch
profits tax under Section 884 of the Internal Revenue Code in respect of these
amounts. We will be required to withhold from distributions to non-U.S.
shareholders, and remit to the IRS, 35% of the maximum amount of any
distribution that could be designated as a capital gain dividend. In addition,
for purposes of this withholding rule, if we designate prior distributions as
capital gain dividends, then subsequent distributions up to the amount of the
designated prior distributions will be treated as capital gain dividends. The
amount of any tax withheld is creditable against the non-U.S. shareholder's
United States federal income tax liability, and any amount of tax withheld in
excess of that tax liability may be refunded if an appropriate claim for refund
is filed with the IRS. If for any taxable year we designate as capital gain
dividends any portion of the dividends paid or made available for the year to
our shareholders, including our retained capital gains treated as capital gain
dividends, then the portion of the capital gain dividends so designated that
will be allocated to
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the holders of a particular class of shares will on a percentage basis equal the
ratio of the amount of the total dividends paid or made available for the year
to the holders of that class of shares to the total dividends paid or made
available for the year to holders of all classes of our shares.
Tax treaties may reduce the withholding obligations on our
distributions. Under some treaties, however, rates below 30% that are applicable
to ordinary income dividends from United States corporations may not apply to
ordinary income dividends from a REIT. You must generally use an applicable IRS
Form W-8, or substantially similar form, to claim tax treaty benefits. If the
amount of tax withheld by us with respect to a distribution to a non-U.S.
shareholder exceeds the shareholder's United States federal income tax liability
with respect to the distribution, the non-U.S. shareholder may file for a refund
of the excess from the IRS. In this regard, note that the 35% withholding tax
rate on capital gain dividends corresponds to the maximum income tax rate
applicable to corporate non-U.S. shareholders but is higher than the 20% and 25%
maximum rates on capital gains generally applicable to noncorporate non-U.S.
shareholders. Treasury regulations also provide special rules to determine
whether, for purposes of determining the applicability of a tax treaty, our
distributions to a non-U.S. shareholder that is an entity should be treated as
paid to the entity or to those owning an interest in that entity, and whether
the entity or its owners are entitled to benefits under the tax treaty. These
Treasury regulations require the use of the IRS Forms W-8 series.
If our shares are not "United States real property interests" within
the meaning of Section 897 of the Internal Revenue Code, a non-U.S.
shareholder's gain on sale of these shares generally will not be subject to
United States federal income taxation, except that a nonresident alien
individual who was present in the United States for 183 days or more during the
taxable year will be subject to a 30% tax on this gain. Our shares will not
constitute a United States real property interest if we are a "domestically
controlled REIT." A domestically controlled REIT is a REIT in which at all times
during the preceding five-year period less than 50% in value of its shares is
held directly or indirectly by foreign persons. We believe that we are and will
be a domestically controlled REIT and thus a non-U.S. shareholder's gain on sale
of our shares will not be subject to United States federal income taxation.
However, because our shares are publicly traded, we can provide no assurance
that we will be a domestically controlled REIT. If we are not a domestically
controlled REIT, a non-U.S. shareholder's gain on sale of our shares will not be
subject to United States federal income taxation as a sale of a United States
real property interest, if that class of shares is "regularly traded," as
defined by applicable Treasury regulations, on an established securities market
like the New York Stock Exchange, and the non-U.S. shareholder has at all times
during the preceding five years owned 5% or less by value of that class of
shares. If the gain on the sale of our shares were subject to United States
federal income taxation, the non-U.S. shareholder will generally be subject to
the same treatment as a U.S. shareholder with respect to its gain, will be
required to file a United States federal income tax return reporting that gain,
and in the case of corporate non-U.S. shareholders might owe branch profits tax
under Section 884 of the Internal Revenue Code. A purchaser of our shares from a
non-U.S. shareholder will not be required to withhold on the purchase price if
the purchased shares are regularly traded on an established securities market or
if we are a domestically controlled REIT. Otherwise, a purchaser of our shares
from a non-U.S. shareholder may be required to withhold 10% of the purchase
price paid to the non-U.S. shareholder and to remit the withheld amount to the
IRS.
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BACKUP WITHHOLDING AND INFORMATION REPORTING
Information reporting and backup withholding may apply to distributions
or proceeds paid to our shareholders under the circumstances discussed below.
The backup withholding rate is currently 30%, but this rate will fall to 28%
over the next several years. Amounts withheld under backup withholding are
generally not an additional tax and may be refunded or credited against the REIT
shareholder's federal income tax liability.
A U.S. shareholder will be subject to backup withholding when it
receives distributions on our shares or proceeds upon the sale, exchange,
redemption, retirement or other disposition of our shares, unless the U.S.
shareholder properly executes under penalties of perjury an IRS Form W-9 or
substantially similar form that:
o provides the U.S. shareholder's correct taxpayer identification number;
and
o certifies that the U.S. shareholder is exempt from backup withholding
because it is a corporation or comes within another exempt category, it
has not been notified by the IRS that it is subject to backup
withholding, or it has been notified by the IRS that it is no longer
subject to backup withholding.
If the U.S. shareholder does not provide its correct taxpayer identification
number on the IRS Form W-9 or substantially similar form, it may be subject to
penalties imposed by the IRS and the REIT or other withholding agent may have to
withhold a portion of any capital gain distributions paid to it. Unless the U.S.
shareholder has established on a properly executed IRS Form W-9 or substantially
similar form that it is a corporation or comes within another exempt category,
distributions on our shares paid to it during the calendar year, and the amount
of tax withheld, if any, will be reported to it and to the IRS.
Distributions on our shares to a non-U.S. shareholder during each
calendar year and the amount of tax withheld, if any, will generally be reported
to the non-U.S. shareholder and to the IRS. This information reporting
requirement applies regardless of whether the non-U.S. shareholder is subject to
withholding on distributions on our shares or whether the withholding was
reduced or eliminated by an applicable tax treaty. Also, distributions paid to a
non-U.S. shareholder on our shares may be subject to backup withholding, unless
the non-U.S. shareholder properly certifies its non-U.S. shareholder status on
an IRS Form W-8 or substantially similar form in the manner described above.
Similarly, information reporting and backup withholding will not apply to
proceeds a non-U.S. shareholder receives upon the sale, exchange, redemption,
retirement or other disposition of our shares, if the non-U.S. shareholder
properly certifies its non-U.S. shareholder status on an IRS Form W-8 or
substantially similar form. Even without having executed an IRS Form W-8 or
substantially similar form, however, in some cases information reporting and
backup withholding will not apply to proceeds that a non-U.S. shareholder
receives upon the sale, exchange, redemption, retirement or other disposition of
our shares if the non-U.S. shareholder receives those proceeds through a
broker's foreign office.
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OTHER TAX CONSEQUENCES
You should recognize that our and our shareholders' federal income tax
treatment may be modified by legislative, judicial, or administrative actions at
any time, which actions may be retroactive in effect. The rules dealing with
federal income taxation are constantly under review by the Congress, the IRS and
the Treasury Department, and statutory changes, new regulations, revisions to
existing regulations, and revised interpretations of established concepts are
issued frequently. No prediction can be made as to the likelihood of passage of
new tax legislation or other provisions either directly or indirectly affecting
us and our shareholders. Revisions in federal income tax laws and
interpretations of these laws could adversely affect the tax consequences of an
investment in our shares. We and our shareholders may also be subject to state
or local taxation in various state or local jurisdictions, including those in
which we or our shareholders transact business or reside. State and local tax
consequences may not be comparable to the federal income tax consequences
discussed above. For example, if a state has not updated its REIT taxation
provisions to permit taxable REIT subsidiaries, then our use of a taxable REIT
subsidiary may disqualify us from favorable taxation as a REIT in that state.
ERISA PLANS, KEOGH PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
GENERAL FIDUCIARY OBLIGATIONS. Fiduciaries of a pension, profit-sharing
or other employee benefit plan subject to Title I of the Employee Retirement
Income Security Act of 1974, ERISA, must consider whether:
o their investment in our shares satisfies the diversification
requirements of ERISA;
o the investment is prudent in light of possible limitations on the
marketability of our shares;
o they have authority to acquire our shares under the applicable governing
instrument and Title I of ERISA; and
o the investment is otherwise consistent with their fiduciary
responsibilities.
Trustees and other fiduciaries of an ERISA plan may incur personal
liability for any loss suffered by the plan on account of a violation of their
fiduciary responsibilities. In addition, these fiduciaries may be subject to a
civil penalty of up to 20% of any amount recovered by the plan on account of a
violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualified
retirement plan not subject to Title I of ERISA, referred to as "non-ERISA
plans," should consider that a plan may only make investments that are
authorized by the appropriate governing instrument. Fiduciary shareholders
should consult their own legal advisors if they have any concern as to whether
the investment is consistent with the foregoing criteria.
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PROHIBITED TRANSACTIONS. Fiduciaries of ERISA plans and persons making
the investment decision for an IRA or other non-ERISA plan should consider the
application of the prohibited transaction provisions of ERISA and the Internal
Revenue Code in making their investment decision. Sales and other transactions
between an ERISA or non-ERISA plan, and persons related to it, are prohibited
transactions. The particular facts concerning the sponsorship, operations and
other investments of an ERISA plan or non-ERISA plan may cause a wide range of
other persons to be treated as disqualified persons or parties in interest with
respect to it. A prohibited transaction, in addition to imposing potential
personal liability upon fiduciaries of ERISA plans, may also result in the
imposition of an excise tax under the Internal Revenue Code or a penalty under
ERISA upon the disqualified person or party in interest with respect to the
plan. If the disqualified person who engages in the transaction is the
individual on behalf of whom an IRA or Roth IRA is maintained or his
beneficiary, the IRA or Roth IRA may lose its tax-exempt status and its assets
may be deemed to have been distributed to the individual in a taxable
distribution on account of the prohibited transaction, but no excise tax will be
imposed. Fiduciary shareholders should consult their own legal advisors as to
whether the ownership of our shares involves a prohibited transaction.
SPECIAL FIDUCIARY AND PROHIBITED TRANSACTIONS CONSEQUENCES. The
Department of Labor, which has administrative responsibility over ERISA plans as
well as non-ERISA plans, has issued a regulation defining "plan assets." The
regulation generally provides that when an ERISA or non-ERISA plan acquires a
security that is an equity interest in an entity and that security is neither a
"publicly offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the ERISA plan's or
non-ERISA plan's assets include both the equity interest and an undivided
interest in each of the underlying assets of the entity, unless it is
established either that the entity is an operating company or that equity
participation in the entity by benefit plan investors is not significant.
Each class of our shares, that is, our common shares and any class of
preferred shares that we may issue, must be analyzed separately to ascertain
whether it is a publicly offered security. The regulation defines a publicly
offered security as a security that is "widely held," "freely transferable" and
either part of a class of securities registered under the Securities Exchange
Act of 1934, or sold under an effective registration statement under the
Securities Act of 1933, provided the securities are registered under the
Securities Exchange Act of 1934 within 120 days after the end of the fiscal year
of the issuer during which the offering occurred. All our outstanding shares
have been registered under the Securities Exchange Act of 1934.
The regulation provides that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. However, a security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the initial public offering as a result of events beyond the
issuer's control. Our common shares have been widely held and we expect our
common shares to continue to be widely held. We expect the same to be true of
any class of preferred stock that we may issue, but we can give no assurance in
that regard.
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The regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The regulation further provides that, where a
security is part of an offering in which the minimum investment is $10,000 or
less, some restrictions on transfer ordinarily will not, alone or in
combination, affect a finding that these securities are freely transferable. The
restrictions on transfer enumerated in the regulation as not affecting that
finding include:
o any restriction on or prohibition against any transfer or assignment
which would result in a termination or reclassification for federal or
state tax purposes, or would otherwise violate any state or federal law
or court order;
o any requirement that advance notice of a transfer or assignment be given
to the issuer and any requirement that either the transferor or
transferee, or both, execute documentation setting forth representations
as to compliance with any restrictions on transfer which are among those
enumerated in the regulation as not affecting free transferability,
including those described in the preceding clause of this sentence;
o any administrative procedure which establishes an effective date, or an
event prior to which a transfer or assignment will not be effective; and
o any limitation or restriction on transfer or assignment which is not
imposed by the issuer or a person acting on behalf of the issuer.
We believe that the restrictions imposed under our declaration of trust
on the transfer of shares do not result in the failure of our shares to be
"freely transferable." Furthermore, we believe that at present there exist no
other facts or circumstances limiting the transferability of our shares which
are not included among those enumerated as not affecting their free
transferability under the regulation, and we do not expect or intend to impose
in the future, or to permit any person to impose on our behalf, any limitations
or restrictions on transfer which would not be among the enumerated permissible
limitations or restrictions.
Assuming that each class of our shares will be "widely held" and that
no other facts and circumstances exist which restrict transferability of these
shares, we have received an opinion of our counsel Sullivan & Worcester LLP that
our shares will not fail to be "freely transferable" for purposes of the
regulation due to the restrictions on transfer of the shares under our
declaration of trust and that under the regulation the shares are publicly
offered securities and our assets will not be deemed to be "plan assets" of any
ERISA plan or non-ERISA plan that invests in our shares.
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ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits
1.1 Underwriting Agreement, dated as of February 15, 2002, between Senior
Housing Properties Trust and the underwriters named therein relating to
the sale of 15,000,000 common shares of beneficial interest.
3.1 Articles of Amendment to the Declaration of Trust of Senior Housing
Properties Trust dated February 13, 2002.
4.1 Supplemental Indenture No. 1 by and between Senior Housing Properties
Trust and State Street Bank and Trust Company as of December 20, 2001
relating to 8 5/8% Senior Notes due 2012.
4.2 Supplemental Indenture No. 2 by and between Senior Housing Properties
Trust and State Street Bank and Trust Company as of December 28, 2001
relating to 8 5/8% Senior Notes due 2012.
8.1 Legal Opinion of Sullivan & Worcester LLP as to tax matters.
23.1 Consent of Sullivan & Worcester LLP (contained in Exhibit 8.1).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SENIOR HOUSING PROPERTIES TRUST
By: /s/ David J. Hegarty
---------------------------------------
Name: David J. Hegarty
Title: President, Chief Operating
Officer and Secretary
Date: February 19, 2002