As Filed Pursuant to Rule 424(b)(5)
Reg No. 333-32946
P R O S P E C T U S____S U P P L E M E N T
(TO PROSPECTUS DATED DECEMBER 31, 2001)
10,000,000 SHARES
[LOGO]
COMMON STOCK
-------------
All of the shares of iStar Financial common stock are being offered by the
selling stockholder identified in this prospectus supplement. iStar Financial
will not receive any of the proceeds from the offering.
Our common stock trades on the New York Stock Exchange under the symbol
"SFI." The last reported sale price of our common stock on May 15, 2002 was
$30.85 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE RISK
FACTORS SECTION BEGINNING ON PAGE S-1 OF THIS PROSPECTUS SUPPLEMENT AND
PAGE FOUR OF THE ACCOMPANYING PROSPECTUS.
----------------
The underwriter has agreed to purchase the shares from the selling
stockholder for $29.00 per share. The proceeds to the selling stockholder from
the sale will be $290,000,000.
The shares may be offered by the underwriter from time to time to purchasers
directly or through agents, or through brokers in brokerage transactions on the
New York Stock Exchange, or to dealers in negotiated transactions or in a
combination of such methods of sale, at a fixed 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.
The underwriter may also purchase up to an additional 1,500,000 shares from
the selling stockholder for $29.00 per share within 30 days from the date of
this prospectus supplement to cover overallotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
The common stock will be ready for delivery on or about May 21, 2002.
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MERRILL LYNCH & CO.
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The date of this prospectus supplement is May 15, 2002.
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUPPLEMENT
Forward-Looking Statements............ ii
iStar Financial Inc................... S-1
Risk Factors.......................... S-1
Use of Proceeds....................... S-2
Selling Stockholder................... S-3
Federal Income Tax Consequences....... S-4
Underwriting.......................... S-6
Legal Matters......................... S-7
Experts............................... S-7
PAGE
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PROSPECTUS
Where You Can Find More Information... 2
Incorporation of Certain Documents by
Reference........................... 2
Forward-Looking Statements............ 3
The Company........................... 4
Risk Factors.......................... 4
Use of Proceeds....................... 8
Price Range of Shares and
Distributions....................... 9
Participating Securityholders......... 10
Certain Relationships Between the
Company and the Participating
Securityholders..................... 13
Plan of Distribution.................. 14
Description of Securities to be
Registered.......................... 15
Federal Income Tax Considerations..... 17
Legal Matters......................... 31
Experts............................... 31
------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not, and the underwriter has not, authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriter is not, making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should assume that the information
appearing in this prospectus supplement, the accompanying prospectus and the
documents incorporated by reference is accurate only as of their respective
dates. Our business, financial condition, results of operations and prospects
may have changed since those dates.
i
FORWARD-LOOKING STATEMENTS
We make statements in this prospectus supplement, the accompanying
prospectus and the documents we incorporate by reference that are considered
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are
usually identified by the use of words such as "will," "anticipates,"
"believes," "estimates," "expects," "projects," "plans," "intends," "should" or
similar expressions. We intend these forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Reform Act of 1995 and are including this statement for
purposes of complying with those safe harbor provisions. These forward-looking
statements reflect our current views about our plans, strategies and prospects,
which are based on the information currently available to us and on assumptions
we have made. Although we believe that our plans, intentions and expectations as
reflected in or suggested by those forward-looking statements are reasonable, we
can give no assurance that the plans, intentions or expectations will be
achieved. We have discussed in this prospectus supplement and the accompanying
prospectus some important risks, uncertainties and contingencies which could
cause our actual results, performance or achievements to be materially different
from the forward-looking statements we make in these documents.
We assume no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. In
evaluating forward-looking statements, you should consider these risks and
uncertainties, together with the other risks described from time to time in our
reports and documents filed with the SEC, and you should not place undue
reliance on those statements.
ii
ISTAR FINANCIAL INC.
We are the leading publicly-traded finance company focused on the commercial
real estate industry. We provide structured financing to private and corporate
owners of real estate nationwide, including senior and junior mortgage debt,
corporate mezzanine and subordinated capital and corporate net lease financing.
Our objective is to deliver superior risk-adjusted returns on equity to our
stockholders by providing innovative and value-added financing solutions to our
customers. We are taxed as a real estate investment trust.
RISK FACTORS
THIS SECTION DESCRIBES SOME, BUT NOT ALL, OF THE RISKS OF PURCHASING OUR
COMMON STOCK IN THE OFFERING. YOU SHOULD CAREFULLY CONSIDER THESE RISKS, AND THE
RISK DESCRIBED UNDER THE CORRESPONDING HEADING BEGINNING ON PAGE FOUR OF THE
ACCOMPANYING PROSPECTUS, BEFORE PURCHASING OUR COMMON STOCK IN THE OFFERING. IN
CONNECTION WITH THE FORWARD-LOOKING STATEMENTS THAT APPEAR IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD ALSO CAREFULLY REVIEW THE
CAUTIONARY STATEMENTS REFERRED TO IN "FORWARD-LOOKING STATEMENTS."
FUTURE SALES OF OUR COMMON STOCK BY THE SELLING STOCKHOLDER COULD ADVERSELY
AFFECT OUR STOCK PRICE
If the selling stockholder were to sell a substantial number of the shares
of our common stock which it will own after this offering, the prevailing market
prices for our common stock could be adversely affected. The selling stockholder
has agreed not to sell or transfer any shares of common stock or to engage in
certain hedging transactions with respect to the common stock for a period of
60 days after the date of this prospectus supplement, except in certain
circumstances. The selling stockholder is permitted to include shares for sale
in a public primary equity offering by us, subject to certain limitations. The
selling stockholder has pledged 25,267,462 shares of common stock owned by it
under a $150.0 million margin loan that is fully recourse to the selling
stockholder. In the event that the selling stockholder were to default in the
performance of its obligations under that loan, the lender could foreclose upon
those pledged shares and sell them in the open market at any time. In addition,
unless Starwood Opportunity Fund IV, L.P. (the entity which owns the selling
stockholder), is able to extend its terms, it will have to begin, on
February 27, 2005, distributing its investments to its investors, selling its
investments to third parties, or a combination of the two. Any such sales or
distributions could adversely affect the prevailing market prices for our common
stock. See "Selling Stockholder."
WE ARE SUBJECT TO RISKS RELATING TO OUR ASSET CONCENTRATION
As of March 31, 2002, the average size of our lending and leasing
investments was $24.5 million. No single investment represented more than 3.8%
of our total revenues for the fiscal quarter ended March 31, 2002. While our
asset base is diversified by product line, asset type, obligor, property type
and geographic location, it is possible that if we suffer losses on a portion of
our larger assets, our financial performance could be adversely impacted.
BECAUSE WE MUST DISTRIBUTE A PORTION OF OUR INCOME, WE WILL CONTINUE TO NEED
ADDITIONAL DEBT AND/OR EQUITY CAPITAL TO GROW
We must distribute at least 90% of our taxable net income to our
stockholders to maintain our REIT status. As a result, those earnings will not
be available to fund investment activities. We have historically funded our
investments by borrowing from financial institutions and raising capital in the
public and private capital markets. We expect to continue to fund our
investments this way. If we fail to obtain funds from these sources, it could
limit our ability to grow, which could have a material adverse effect on the
value of our common stock. Our taxable net income has historically been lower
than the
S-1
cash flow generated by our business activities, primarily because our taxable
net income is reduced by non-cash expenses, such as depreciation and
amortization. As a result, our dividend payout ratio as a percentage of free
cash flow has generally been lower than our payout ratio as a percentage of
taxable net income. Our common stock dividends for the quarter ended March 31,
2002 represented approximately 84.0% of our adjusted earnings for that quarter.
QUARTERLY RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE QUARTERLY
PERFORMANCE
Our quarterly operating results could fluctuate; therefore, you should not
rely on past quarterly results to be indicative of our performance in future
quarters. Factors that could cause quarterly operating results to fluctuate
include, among others, variations in our investment origination volume,
variations in the timing of prepayments, the degree to which we encounter
competition in our markets and general economic conditions.
THE SELLING STOCKHOLDER WILL CONTINUE TO BE A SIGNIFICANT STOCKHOLDER AFTER THE
OFFERING
The selling stockholder will hold approximately 25.5%, on a diluted basis,
or 25.8%, on an outstanding basis, of our common stock (or 27.2% and 27.5%,
respectively, if the overallotment option is not exercised) after the offering.
Four of the 16 members of our Board of Directors are employed by an affiliate of
the selling stockholder and own interests in the selling stockholder, as does
our chairman and chief executive officer. As a result of its ownership interest,
the selling stockholder will have significant influence over our affairs with
respect to matters that require stockholder approval, and the selling
stockholder's interest may conflict with our interests and the interests of our
other stockholders. In addition, members of our Board who have relationships
with the selling stockholder may be faced with decisions which could create, or
appear to create, potential conflicts of interest.
USE OF PROCEEDS
The selling stockholder will receive all of the proceeds from selling the
common stock offered hereby. See "Selling Stockholder." We will not receive any
of the proceeds from this offering.
S-2
SELLING STOCKHOLDER
This prospectus supplement relates to the offer and sale for the account of
the selling stockholder described below of an aggregate of 10,000,000 shares of
common stock. The following chart shows, according to our records as of
March 31, 2002, the number of shares of common stock beneficially owned by the
selling stockholder and the number of shares of common stock being offered
hereby:
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
OWNED PRIOR TO THE OFFERING OWNED AFTER THE OFFERING(1)
----------------------------------- SHARES -----------------------------------
NUMBER OF PERCENTAGE BEING NUMBER OF PERCENTAGE
SELLING STOCKHOLDER SHARES OF CLASS OFFERED SHARES OF CLASS
- ------------------- ---------- ---------------------- ---------- ---------- ----------------------
SOFI-IV SMT Holdings, L.L.C....... 34,388,338 38.3% 10,000,000 24,388,338 27.2%
- ------------------------
(1) If the underwriter exercises its overallotment option, SOFI-IV SMT
Holdings, L.L.C. will sell up to an additional 1,500,000 shares.
SOFI-IV SMT Holdings, L.L.C. is an entity owned by Starwood Opportunity Fund
IV, L.P. Starwood Opportunity Fund IV, L.P. is an investment fund formed on
July 3, 1996. SOFI IV Management, L.L.C. is its general partner. Starwood
Opportunity Fund IV, L.P.'s initial term expires on February 27, 2005, but may
be extended by the general partner with the consent of its advisory committee
for up to two additional one-year periods.
The selling stockholder is controlled by entities which are controlled by
Barry S. Sternlicht, one of our directors. Jay Sugarman, our chairman and chief
executive officer, and Jeffrey G. Dishner, Madison F. Grose and Merrick R.
Kleeman, each of whom is a director of iStar Financial, also have interests in
the selling stockholder or entities that control the selling stockholder.
Additional information regarding the selling stockholder may be found in
"Participating Securityholders" and "Certain Relationships Between the Company
and the Participating Securityholders" contained in the accompanying prospectus.
S-3
FEDERAL INCOME TAX CONSEQUENCES
The following supplements the discussion contained in the accompanying
prospectus under the heading "Federal Income Tax Considerations," which
discussion (to the extent not inconsistent with the following) is incorporated
in its entirety in this prospectus supplement. The discussions contained under
the headings herein are intended to supplement the discussions contained in the
corresponding headings of the accompanying prospectus.
THE FOLLOWING IS A SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES
ANTICIPATED TO BE MATERIAL TO AN INVESTOR IN iSTAR FINANCIAL. THIS SUMMARY IS
BASED ON CURRENT LAW, IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
YOUR TAX CONSEQUENCES RELATED TO AN INVESTMENT IN iSTAR FINANCIAL MAY VARY
DEPENDING ON YOUR PARTICULAR SITUATION AND THIS DISCUSSION DOES NOT PURPORT TO
DISCUSS ALL ASPECTS OF TAXATION THAT MAY BE RELEVANT TO A HOLDER OF OUR
SECURITIES IN LIGHT OF HIS OR HER PERSONAL INVESTMENT OR TAX CIRCUMSTANCES, OR
TO HOLDERS OF OUR SECURITIES SUBJECT TO SPECIAL TREATMENT UNDER THE FEDERAL
INCOME TAX LAWS EXCEPT TO THE EXTENT DISCUSSED UNDER THE HEADINGS "--TAXATION OF
TAX-EXEMPT STOCKHOLDERS" AND "--TAXATION OF FOREIGN STOCKHOLDERS." INVESTORS
SUBJECT TO SPECIAL TREATMENT INCLUDE, WITHOUT LIMITATION, INSURANCE COMPANIES,
FINANCIAL INSTITUTIONS, BROKER-DEALERS, TAX-EXEMPT ORGANIZATIONS, INVESTORS
HOLDING SECURITIES AS PART OF A CONVERSION TRANSACTION, OR A HEDGE OR HEDGING
TRANSACTION OR AS A POSITION IN A STRADDLE FOR TAX PURPOSES, FOREIGN
CORPORATIONS OR PARTNERSHIPS, AND PERSONS WHO ARE NOT CITIZENS OR RESIDENTS OF
THE UNITED STATES. IN ADDITION, THE SUMMARY BELOW DOES NOT CONSIDER THE EFFECT
OF ANY FOREIGN, STATE, LOCAL OR OTHER TAX LAWS THAT MAY BE APPLICABLE TO YOU AS
A HOLDER OF OUR SECURITIES.
The information in this summary is based on the Internal Revenue Code of
1986, as amended, current, temporary and proposed Treasury regulations
promulgated under the Internal Revenue Code, the legislative history of the
Internal Revenue Code, current administrative interpretations and practices of
the Internal Revenue Service, and court decisions, all as of the date of this
prospectus. The administrative interpretations and practices of the Internal
Revenue Service upon which this summary is based include its practices and
policies as expressed in private letter rulings which are not binding on the
Internal Revenue Service, except with respect to the taxpayers who requested and
received such rulings. Future legislation, Treasury regulations, administrative
interpretations and practices, and court decisions may affect the tax
consequences contained in this summary, possibly on a retroactive basis. We have
not requested, and do not plan to request, any rulings from the Internal Revenue
Service concerning our tax treatment or the tax consequences contained in this
summary, and the statements in this prospectus are not binding on the Internal
Revenue Service or a court. Thus, we can provide no assurance that the tax
consequences contained in this summary will not be challenged by the Internal
Revenue Service or sustained by a court if challenged by the Internal Revenue
Service.
YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO YOU OF: (1) THE ACQUISITION, OWNERSHIP AND SALE OR OTHER
DISPOSITION OF OUR SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES; (2) OUR ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT
TRUST FOR FEDERAL INCOME TAX PURPOSES; AND (3) POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
S-4
TAXATION OF THE COMPANY
ASSET TESTS:
As discussed in the accompanying prospectus under the heading "--Other Tax
Considerations--Possible Legislative or Other Actions Affecting Tax
Consequences," subject to certain "grandfather" rules, we may generally not own
more than 10% of the value of the outstanding securities of any issuer, other
than securities of a "qualified REIT subsidiary," another REIT, or a "taxable
REIT subsidiary." We have taken appropriate steps to ensure that, since
January 1, 2001 (and will take appropriate steps to ensure that in the future),
with respect to any issuer, other than a qualified REIT subsidiary or another
REIT, either: (1) we have owned 10% or less of the value of the outstanding
securities of such issuer; (2) such issuer has qualified as a "taxable REIT
subsidiary," or (3) the securities we own of such issuer are exempted under the
aforementioned "grandfather" rules. Additionally, we believe that not more than
20% of the total value of our gross assets was or is represented by the
securities of one or more taxable REIT subsidiaries, and we will monitor our
assets to ensure that we will continue to meet this test at all applicable times
in the future. However, there can be no assurance that the Internal Revenue
Service will not contend that the value of the securities of taxable REIT
subsidiaries represents more than 20% of the total value of our gross assets.
TAXATION OF SECURITYHOLDERS
EXCESS INCLUSION INCOME:
A portion of our net income attributable to assets financed through our
STARs(SM) program (and, therefore, a portion of the dividends payable by us) may
be treated as Excess Inclusion income from a REMIC residual interest. See
"--Taxation of Securityholders--Taxation of Tax-Exempt Stockholders" in the
accompanying prospectus. These amounts have historically been immaterial and we
expect that they will be immaterial in the future. Prospective stockholders
should consult their own tax advisors regarding the federal income tax
consequences to them of incurring Excess Inclusion income.
BACKUP WITHHOLDING:
Currently, the backup withholding rate is 30% and will decrease as federal
ordinary income tax rates decrease.
S-5
UNDERWRITING
GENERAL
Subject to the terms and conditions set forth in the underwriting agreement
among Merrill Lynch, Pierce, Fenner & Smith Incorporated, as underwriter, the
selling stockholder and us, the selling stockholder has agreed to sell to the
underwriter, and the underwriter has agreed to purchase from the selling
stockholder, 10,000,000 shares of common stock at $29.00 per share.
According to the terms of the underwriting agreement, the underwriter will
either purchase all of the shares or none of them.
The underwriter will offer the shares subject to prior sale and subject to
receipt and acceptance of the shares by the underwriter. The underwriter may
reject any order to purchase shares in whole or in part.
The proceeds to the selling stockholder from the sale of the shares of
common stock will be $290,000,000. We will not receive any proceeds from the
sale of the shares of common stock by the selling stockholder.
The expenses of the offering are estimated at $150,000, $125,000 of which
are payable by us and $25,000 of which are payable by the selling stockholder.
The distribution of the 10,000,000 shares of common stock by the underwriter
may be effected from time to time to purchasers directly or through agents, or
through brokers in brokerage transactions on the New York Stock Exchange, or to
dealers in negotiated transactions or in a combination of such methods of sale,
at a fixed 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. In connection with the sale of any shares of common stock
hereby, the underwriter may be deemed to have received compensation from the
selling stockholder equal to the difference between the amount received by the
underwriter upon the sale of such common stock and the price at which the
underwriter purchased such common stock from the selling stockholder. In
addition, if the underwriter sells common stock to or through certain dealers,
such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the underwriter and/or any purchasers of common
stock for whom they may act as agent. The underwriter may also receive
compensation from the purchasers of common stock for whom it may act as agent.
We and the selling stockholder have agreed to indemnify the underwriter and
its controlling persons against certain liabilities, including liabilities under
the Securities Act.
OVERALLOTMENT OPTION
The underwriter has the option to purchase up to an aggregate of 1,500,000
additional shares of common stock from the selling stockholder at the same price
it is paying for the 10,000,000 shares offered hereby. The underwriter may
purchase additional shares only to cover overallotments made in connection with
this offering and only within 30 days after the date of this prospectus
supplement. The underwriter will offer any additional shares that it purchases
on the terms described above.
NO SALES OF SIMILAR SECURITIES
The selling stockholder has agreed not to sell or transfer any shares of
common stock or to engage in certain hedging transactions with respect to the
common stock for a period of 60 days after the date of this prospectus
supplement without first obtaining the written consent of the underwriter,
except in certain circumstances. The selling stockholder is permitted to include
shares for sale in a public primary equity offering by us, subject to certain
limitations. The selling stockholder has pledged 25,267,462 shares of common
stock owned by it under a $150.0 million margin loan that is fully recourse to
the
S-6
selling stockholder. In the event that the selling stockholder were to default
in the performance of its obligations under the loan, the lender could foreclose
upon those pledged shares and sell them in the open market at any time.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriter to
bid for and purchase shares of common stock. As an exception to these rules, the
underwriter is permitted to engage in certain transactions that stabilize the
price of the common stock. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the common stock.
If the underwriter creates a short position in the common stock in
connection with this offering, i.e., the underwriter sells more shares of common
stock than are set forth on the cover page of this prospectus supplement, the
underwriter may reduce that short position by purchasing shares of common stock
in the open market. The underwriter may also elect to reduce any short position
through the exercise of all or part of the overallotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases.
Neither we nor the underwriter make any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the common stock. In addition, neither we nor the
underwriter make any representation that the underwriter will engage in these
transactions or that these transactions, once commenced, will not be
discontinued without notice.
OTHER RELATIONSHIPS
The underwriter has engaged in, and may in the future engage in, investment
banking and other commercial dealings in the ordinary course of business with us
and the selling stockholder and its affiliates. The underwriter has received
customary fees and commissions for these transactions.
LEGAL MATTERS
The legality of the common stock offered by this prospectus supplement and
the accompanying prospectus will be passed upon for us by Clifford Chance
Rogers & Wells LLP, New York, New York. Certain legal matters will be passed
upon for the underwriter by Skadden, Arps, Slate, Meagher & Flom LLP, New York,
New York. Clifford Chance Rogers & Wells LLP will rely upon the opinion of
Ballard Spahr Andrews & Ingersoll, LLP with respect to matters of Maryland law.
EXPERTS
The financial statements incorporated in this prospectus supplement by
reference to the Annual Report on Form 10-K for the year ended December 31, 2001
have been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
S-7
P R O S P E C T U S
ISTAR FINANCIAL INC.
66,295,537 SHARES OF COMMON STOCK
6,113,165 WARRANTS
This prospectus relates to the offer and sale of up to 66,295,537 shares of
our common stock (of which 8,558,294 are issuable upon exercise of warrants and
options) and 6,113,165 warrants. These securities may be offered and sold from
time to time by the securityholders specified in this prospectus or their
successors in interest, subject to compliance with agreements restricting sales
by some of the securityholders. See "Participating Securityholders." The Company
will not receive any of the proceeds from the sale of the securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
An investment in the securities entails certain material risks and
uncertainties that should be considered. See "RISK FACTORS" on page four of this
prospectus.
December 31, 2001
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy such reports, proxy or
information statements and other information at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Regional Offices of the SEC at 233 Broadway, New York, New York 10279 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
You may also obtain copies of such materials from the Public Reference Section
of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room. The SEC maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
You can also inspect and copy reports, proxy or information statements and other
information about us at the offices of the New York Stock Exchange, Public
Reference Section, 20 Broad Street, New York, New York 10005.
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act of 1933, as amended, with respect to the securities offered
hereby. This prospectus does not contain all the information set forth in the
registration statement, certain portions of which have been omitted as permitted
by the rules and regulations of the SEC. Statements contained in this prospectus
as to the contents of any contract or other document filed as an exhibit to the
registration statement are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document so filed, each such
statement being qualified in all respects by such reference. For further
information about us and the securities, please see the registration statement
and exhibits thereto.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be a part of this prospectus, and information that we file later with the SEC
will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
until the Participating Securityholders sell all the securities being offered or
this offering is otherwise terminated:
1. Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
2. Current Report on Form 8-K dated August 15, 2001.
3. Quarterly Reports on Form 10-Q for the quarters ended March 31, 2001 and
June 30, 2001.
4. The description of the shares of common stock contained in the
Registration Statement on Form 8-A filed on October 5, 1999.
You may request a copy of these filings, at no cost, by writing to us at
iStar Financial Inc., 1114 Avenue of the Americas, 27th Floor, New York, NY
10036; Attention: Investor Relations, telephone number 212-930-9400.
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. No one is making an offer
of the securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of those documents.
Except as the context may otherwise require, when we refer to "SFI," "the
Company," "we," "us" or "our" in this prospectus, we mean iStar Financial Inc.
and its predecessors, consolidated subsidiaries and joint ventures.
2
FORWARD-LOOKING STATEMENTS
We make statements in this prospectus and the documents we incorporate by
reference that are considered "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are usually identified by the use of words such as
"will," "anticipates," "believes," "estimates," "expects," "projects," "plans,"
"intends," "should" or similar expressions. We intend those forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995 and are
including this statement for purposes of complying with these safe harbor
provisions. These forward-looking statements reflect our current views about the
company's plans, strategies and prospects, which are based on the information
currently available to us and on assumptions we have made. Although we believe
that our plans, intentions and expectations as reflected in or suggested by
those forward-looking statements are reasonable, we can give no assurance that
the plans, intentions or expectations will be achieved. We have listed below and
have discussed elsewhere in this prospectus some important risks, uncertainties
and contingencies which could cause the company's actual results, performances
or achievements to be materially different from the forward- looking statements
we make in this prospectus. These risks, uncertainties and contingencies
include, but are not limited to, the following:
1. The success or failure of our efforts to implement our current business
strategy.
2. Economic conditions generally and in the commercial real estate and
finance markets specifically.
3. The performance and financial condition of borrowers and tenants.
4. The actions of our competitors and our ability to respond to those
actions.
5. The cost of our capital, which depends in part on our asset quality, the
nature of our relationships with our lenders and other capital providers,
our business prospects and outlook, and general market conditions.
6. Changes in governmental regulations, tax rates and similar matters.
7. Legislative and regulatory changes (including changes to laws governing
the taxation of REITs).
8. Other factors discussed under the heading "Risk Factors" and elsewhere
in this prospectus.
We assume no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. In
evaluating forward-looking statements, you should consider these risks and
uncertainties, together with the other risks described from time to time in our
reports and documents filed with the SEC, and you should not place undue
reliance on those statements.
3
THE COMPANY
THE COMPANY
We are the largest publicly traded finance company focused exclusively on
the commercial real estate industry. We provide structured financing to private
and corporate owners of real estate nationwide, including senior and junior
mortgage debt, corporate mezzanine and subordinated capital and corporate net
lease financing. We seek to deliver superior risk-adjusted returns on equity to
our stockholders by providing innovative and value-added financing solutions to
our customers. We are taxed as a real estate investment trust.
RISK FACTORS
THIS SECTION DESCRIBES SOME, BUT NOT ALL, OF THE RISKS OF PURCHASING OUR
COMMON STOCK AND WARRANTS. YOU SHOULD CAREFULLY CONSIDER THESE RISKS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS OR INCORPORATED
BY REFERENCE, BEFORE PURCHASING ANY OF THE SECURITIES OFFERED HEREBY. IN
CONNECTION WITH THE FORWARD-LOOKING STATEMENTS THAT APPEAR IN THIS PROSPECTUS,
YOU SHOULD CAREFULLY REVIEW THE FACTORS DISCUSSED BELOW AND THE CAUTIONARY
STATEMENTS REFERRED TO IN "FORWARD-LOOKING STATEMENTS."
WE ARE SUBJECT TO REAL ESTATE RISKS
Our real estate finance business is subject to risks, including the
following:
1. Defaults by borrowers on non-recourse loans where underlying property
values fall below the loan amount.
2. Costs and delays associated with the foreclosure process.
3. Borrower bankruptcies.
4. Possible unenforceability of loan terms, such as prepayment provisions.
5. Acts or omissions by owners or managers of the underlying real estate.
6. Borrower defaults on debt senior to our loans, if any.
7. Where debt senior to our loans exists, the presence of intercreditor
arrangements limiting our ability to amend our loan documents, assign our
loans, accept prepayments, exercise our remedies (through "standstill"
periods) and control decisions made in bankruptcy proceedings relating to
borrowers.
8. Lack of control over the underlying asset prior to a default.
The risks described above could impact our ability to realize on our
collateral or collect expected amounts on account of our assets. Where
applicable, these risks could also require us to expend funds in order to
protect our position as a subordinated lender. Unanticipated costs may also be
incurred by us after a foreclosure. Bankruptcy and borrower litigation can
significantly increase the time needed for us to acquire underlying collateral
in the event of a default, during which time the collateral may decline in
value.
WE ARE SUBJECT TO RISKS RELATING TO OUR CORPORATE TENANT LEASE BUSINESS
Our corporate tenant lease business is subject to risks, including the
following:
1. Lease expirations may result in reduced revenues if prevailing market
lease rates at the time of such expirations are less than the contractual
lease rates under the expiring leases. In addition, if corporate tenants
under expiring leases elect not to renew their leases, we could
experience long vacancy periods and incur substantial capital
expenditures in order to obtain replacement corporate tenants. As of
December 31, 2001, the percentage of our revenues
4
(based on total revenues for the quarter ended December 31, 2001,
annualized) that are subject to expiring leases during each year from
2002 through 2006 is as follows:
2002........................................................ 2.2%
2003........................................................ 3.4%
2004........................................................ 4.8%
2005........................................................ 2.9%
2006........................................................ 6.0%
2. Lease defaults by one or more significant corporate tenants or lease
terminations by corporate tenants following events of casualty or takings
by eminent domain could result in long vacancy periods and require us to
incur substantial capital expenditures in order to obtain replacement
corporate tenants. In addition, there can be no assurance that the lease
payments received from replacement corporate tenants will be equal to the
lease payments received from the defaulting or terminating corporate
tenants. As of December 31, 2001, 11.3% of our annualized total revenues
for the quarter ended December 31, 2001, were derived from our five
largest corporate tenants.
3. Illiquidity of ownership interests in corporate facilities.
4. Risks associated with joint ventures, such as lack of full management
control over venture activities and risk of non-performance by venture
partners.
5. Possible need for significant tenant improvements, including conversions
of single tenant buildings to multi-tenant buildings.
6. Competition from newer, more updated facilities.
Factors 1, 2, 5 and 6 would likely have negative impacts on our net income.
Factors 3, 4 and 5 may decrease our flexibility to vary our investment strategy
promptly to respond to changes in market conditions.
OUR GROWTH IS DEPENDENT ON LEVERAGE, WHICH MAY CREATE OTHER RISKS
Our success is dependent, in part, upon our ability to grow our assets
through the use of leverage. We currently intend to leverage our portfolio
primarily through secured and unsecured borrowings. Our ability to obtain the
leverage necessary for execution of our business plan will ultimately depend
upon our ability to maintain interest coverage ratios meeting market
underwriting standards that will vary according to lenders' assessments of our
creditworthiness and the terms of the borrowings.
The percentage of leverage used will vary depending on our estimate of the
stability of the portfolio's cash flow. To the extent that changes in market
conditions cause the cost of such financing to increase relative to the income
that can be derived from the assets acquired, we may reduce the amount of our
leverage.
Leverage creates an opportunity for increased net income, but at the same
time creates risks. For example, leveraging magnifies changes in our net worth.
We will leverage assets only when there is an expectation that it will enhance
returns, although there can be no assurance that our use of leverage will prove
to be beneficial. Moreover, there can be no assurance that we will be able to
meet our debt service obligations and, to the extent that we cannot, we risk the
loss of some or all of our assets or a financial loss if we are required to
liquidate assets at a commercially inopportune time.
We and our subsidiaries are parties to agreements and debt instruments that
restrict future indebtedness and the payment of dividends, including indirect
restrictions (through, for example, covenants requiring the maintenance of
specified levels of net worth and earnings to debt service ratios) and direct
restrictions. As a result, in the event of a deterioration in our financial
condition, these agreements or debt instruments could restrict our ability to
pay dividends. Moreover, if we fail to pay dividends as required by the Internal
Revenue Code, whether as a result of restrictive covenants in
5
our debt instruments or otherwise, we may lose our status as a REIT. For more
information regarding the consequences of loss of REIT status, please read the
risk factor entitled "We May Be Subject to Adverse Consequences if We Fail to
Qualify as a Real Estate Investment Trust."
WE FACE A RISK OF LIABILITY UNDER ENVIRONMENTAL LAWS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real estate (including, in certain
circumstances, a secured lender that succeeds to ownership or control of a
property) may become liable for the costs of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. Those laws
typically impose cleanup responsibility and liability without regard to whether
the owner or control party knew of or was responsible for the release or
presence of such hazardous or toxic substances. The costs of investigation,
remediation or removal of those substances may be substantial. The owner or
control party of a site may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating
from a site. Certain environmental laws also impose liability in connection with
the handling of or exposure to asbestos-containing materials, pursuant to which
third parties may seek recovery from owners of real properties for personal
injuries associated with asbestos-containing materials. Absent succeeding to
ownership or control of real property, a secured lender is not likely to be
subject to any of these forms of environmental liability.
CERTAIN PROVISIONS IN OUR CHARTER MAY INHIBIT A CHANGE IN CONTROL
Generally, to maintain our qualification as a REIT under the Internal
Revenue Code, not more than 50% in value of our outstanding shares of stock may
be owned, directly or indirectly, by five or fewer individuals at any time
during the last half of our taxable year. The Internal Revenue Code defines
"individuals" for purposes of the requirement described in the preceding
sentence to include some types of entities. Under our charter, no person may own
more than 9.8% of the outstanding shares of stock, with some exceptions. The
restrictions on transferability and ownership may delay, deter or prevent a
change in control or other transaction that might involve a premium price or
otherwise be in the best interest of the securityholders.
Our Board of Directors is divided into two classes. Directors of each class
are chosen for two-year staggered terms. Staggered terms of directors may reduce
the possibility of a tender offer or an attempt to change control, even though a
tender offer or change in control might be in the best interest of our
securityholders. Our charter authorizes our Board of Directors:
1. To cause us to issue additional authorized but unissued shares of common
or preferred stock.
2. To classify or reclassify, in one or more series, any of our unissued
preferred shares.
3. To set the preferences, rights and other terms of any classified or
reclassified securities that we issue.
ADVERSE CHANGES IN GENERAL ECONOMIC CONDITIONS CAN ADVERSELY AFFECT OUR BUSINESS
Our success is dependent upon the general economic conditions in the
geographic areas in which a substantial number of our investments are located.
Adverse changes in national economic conditions or in the economic conditions of
the regions in which we conduct substantial business likely would have an
adverse effect on real estate values, interest rates and, accordingly, our
business.
WE MAY BE SUBJECT TO ADVERSE CONSEQUENCES IF WE FAIL TO QUALIFY AS A REAL ESTATE
INVESTMENT TRUST
We intend to operate so as to qualify as a real estate investment trust for
federal income tax purposes. We have received an opinion of our legal counsel
that, based on certain assumptions, representations and an opinion of another
law firm delivered to us last year described in "Federal
6
Income Tax Consequences," our existing legal organization and our actual and
proposed method of operation described in this prospectus, as set forth in our
organizational documents and as represented by us to our counsel, enable us to
satisfy the requirements for qualification as a real estate investment trust
under the Internal Revenue Code in the ordinary course of our actual and
proposed operations. Investors should be aware, however, that opinions of
counsel are not binding on the Internal Revenue Service or any court. The real
estate investment trust qualification opinion only represents the view of our
counsel based on such counsel's review and analysis of existing law, which
includes no controlling precedent. Furthermore, both the validity of the opinion
and our qualification as a real estate investment trust will depend on our
continuing ability to meet various requirements concerning, among other things,
the ownership of our outstanding stock, the nature of our assets, the sources of
our income and the amount of our distributions to our stockholders. See "Federal
Income Tax Consequences--Taxation of the Company."
If we were to fail to qualify as a real estate investment trust for any
taxable year, we would not be allowed a deduction for distributions to our
stockholders in computing our taxable income and would be subject to federal
income tax, including any applicable minimum tax, on our taxable income at
regular corporate rates. Unless entitled to relief under certain Internal
Revenue Code provisions, we also would be disqualified from treatment as a real
estate investment trust for the four subsequent taxable years following the year
during which qualification was lost. As a result, cash available for
distribution would be reduced for each of the years involved. Furthermore, it is
possible that future economic, market, legal, tax or other considerations may
cause the Board of Directors to revoke the real estate investment trust
election. See "Federal Income Tax Consequences."
Even if we qualify as a real estate investment trust for federal income tax
purpose, we may be subject to certain state and local taxes on our income and
property, and may be subject to certain federal taxes. See "Federal Income Tax
Consequences--Taxation of the Company."
TAX-EXEMPT STOCKHOLDERS MAY BE SUBJECT TO TAXATION
The Internal Revenue Service (the "IRS") has issued a revenue ruling in
which it held that amounts distributed by a REIT to a tax-exempt employees'
pension trust do not constitute unrelated business taxable income ("UBTI"). In
general, subject to the discussion below regarding a "pension-held REIT" and
subject to the following sentence, based upon such ruling and the statutory
framework of the Internal Revenue Code, distributions to a stockholder of a real
estate investment trust that is a tax-exempt entity should not constitute UBTI,
provided that:
1. The tax-exempt entity has not financed the acquisition of its shares of
common stock with "acquisition indebtedness" within the meaning of the
Internal Revenue Code.
2. The shares of common stock are not otherwise used in an unrelated trade
or business of the tax-exempt entity.
3. The real estate investment trust does not hold a residual interest in a
real estate mortgage investment conduit ("REMIC") that is an entity or
arrangement that satisfies the standards set forth in Section 860D of the
Internal Revenue Code.
However, because we may invest in certain classes of REMICs that are
designated as the residual interest in the related REMIC (a "REMIC residual
interest"), any dividends received by a stockholder that is a tax-exempt entity
that are allocable to Excess Inclusion income (as defined below) will be treated
as UBTI. Certain taxable income produced by REMIC residual interests may cause
our stockholders to suffer certain adverse tax consequences. See "Federal Income
Tax Consequences."
If any pension or other retirement trust that qualifies under
Section 401(a) of the Internal Revenue Code (a "qualified pension trust") holds
more than 10% by value of the interests in a "pension-held REIT" at any time
during a taxable year, a portion of the dividends paid to the qualified
7
pension trust by such REIT may constitute UBTI. For these purposes, a
"pension-held REIT" is defined as a REIT: (1) that would not have qualified as a
REIT but for the provisions of the Internal Revenue Code which look through such
a qualified pension trust in determining ownership of securities of the REIT;
and (2) as to which at least one qualified pension trust holds more than 25% by
value of the interests of such REIT or one or more qualified pension trusts
(each owning more than a 10% interest by value in the REIT) hold in the
aggregate more than 50% by value of the interests in such REIT.
We do not expect that we will be a "pension-held REIT." However,
notwithstanding our current belief that we will not be a "pension-held REIT," no
assurance can be given that we will not become a "pension-held REIT" in the
future.
If we were to become a "pension-held REIT" in the future and were to acquire
investments using debt, or otherwise were to engage in a transaction resulting
in UBTI, determined as though we were a qualified pension plan, any qualified
pension plan owning 10% or more of our shares, by value, would have a portion of
its dividend income from us taxed as UBTI. Even if we were not a "pension-held
REIT," certain amounts received by a stockholder that is a tax-exempt entity may
be treated as UBTI. See "Federal Income Tax Consequences."
SOFI-IV SMT HOLDINGS, L.L.C. IS A SIGNIFICANT STOCKHOLDER.
SOFI-IV SMT Holdings, L.L.C. holds a significant number of shares of our
common stock. Four of the 16 members of our Board of Directors are employed by
an affiliate of SOFI-IV SMT Holdings, L.L.C. and own interests in SOFI-IV SMT
Holdings, L.L.C., as does our chairman and chief executive officer. As a result
of its ownership interest, SOFI-IV SMT Holdings, L.L.C. will have significant
influence over our affairs with respect to matters that require stockholder
approval, and its interest may conflict with our interests and the interests of
our other stockholders. In addition, members of our Board who have relationships
with SOFI-IV SMT Holdings, L.L.C. may be faced with decisions which could
create, or appear to create, potential conflicts of interest.
USE OF PROCEEDS
The Participating Securityholders shall receive all of the proceeds from
selling the Securities offered hereby. See "Participating Securityholders." The
Company will not receive any of the proceeds.
8
COMMON STOCK PRICE AND DIVIDEND PERFORMANCE
Our common stock is listed on the New York Stock Exchange under the symbol
"SFI." The high and low sales prices per share and the dividends paid or
declared by us on our common stock are each set forth below for the quarters
indicated.
PRICE RANGE OF OUR
COMMON STOCK
-------------------
QUARTERLY PERIOD ENDED HIGH LOW DIVIDEND/SHARE
- ---------------------- -------- -------- --------------
2000:
March 31, 2000............................................. $18.7500 $16.6250 $ 0.60
June 30, 2000.............................................. $20.9375 $17.3750 $ 0.60
September 30, 2000......................................... $22.4375 $20.2500 $ 0.60
December 31, 2000.......................................... $21.6250 $19.0625 $ 0.60
2001:
March 31, 2001............................................. $25.7000 $19.1875 $ 0.6125
June 30, 2001.............................................. $28.2000 $22.7400 $ 0.6125
September 30, 2001......................................... $28.4600 $22.4900 $ 0.6125
9
PARTICIPATING SECURITYHOLDERS
This prospectus relates to the offer and sale for the account of the
Participating Securityholders from time to time of an aggregate of up to
66,295,537 shares of common stock and up to 6,113,165 warrants, as adjusted.
There is no assurance that the Participating Securityholders will sell any or
all of the shares of common stock, warrants or options.
Some of the Participating Securityholders are parties to agreements that
restrict their ability to sell shares of common stock even though those shares
of common stock have been registered with the SEC. In connection with the
acquisition of the Leasing Subsidiary, each of SOFI-IV SMT, Mezzanine and BLLC
executed lock-up agreements in which they agreed, subject to customary
exceptions (including pledges to lenders):
1. Not to transfer or encumber any shares of common stock during the first
six months after November 4, 1999 (the closing date of the acquisition),
other than 5% of such holdings that may be transferred in any manner, 20%
that may be transferred in connection with public offerings by us and 30%
that may be transferred in off-market transactions (all shares of common
stock transferred under any exemption also counting against the amount
transferable under the other two exemptions).
2. Not to transfer or encumber any shares of common stock during the second
six months after the closing of the acquisition, other than one third of
the shares of common stock such stockholder held as of the six-month
anniversary of the closing of the acquisition.
3. Not to transfer or encumber any of our shares of common stock during the
third six months after the closing of the acquisition, other than two
thirds of the shares of common stock such stockholder held as of the
six-month anniversary of the closing of the acquisition.
4. Not to liquidate, dissolve or make distributions of the shares of common
stock in respect of such stockholder's equity interest unless all persons
or entities receiving the shares of common stock execute deeds of
adherence to its lock-up agreement.
10
The following charts show, according to our records as of February 29, 2000,
the number of shares of common stock and warrants beneficially owned by the
Participating Securityholders and the number of shares of common stock and
warrants being offered hereby:
SHARES OF COMMON STOCK
OWNED PRIOR TO THE
OFFERING
-------------------------
NUMBER OF PERCENTAGE SHARES BEING
PARTICIPATING SECURITYHOLDER SHARES OF CLASS (1) OFFERED
- ---------------------------- ---------- ------------ ------------
SOFI-IV SMT Holdings, L.L.C. and its direct and
indirect partners............................... 41,854,934 48.4% 41,854,934
Starwood Mezzanine Investors, L.P. and its direct
and indirect partners........................... 10,962,886 12.7% 10,962,886
Lazard Freres Real Estate Fund II, L.P.(2)........ 3,031,519 3.5% 3,031,519
Lazard Freres Real Estate Offshore Fund II,
L.P.(2)......................................... 1,916,999 2.2% 1,916,999
Starwood Financial Advisors, L.L.C. and its
transferees (3)................................. 1,689,988 2.0% 1,689,988
Barry S. Sternlicht............................... 1,536,887 1.8% 1,536,887
Jay Sugarman (4).................................. 1,284,712 1.5% 1,284,712
LF Offshore Investment L.P. (2)................... 1,164,647 1.3% 1,164,647
New York Financial Advisors, L.L.C. and its
transferees (3)................................. 764,266 * 764,265
Jonathan Eilian (5)............................... 559,598 * 559,598
B Holdings, L.L.C. and its direct and indirect
partners........................................ 545,518 * 545,518
Merrick R. Kleeman (6)............................ 484,054 * 484,054
Spencer B. Haber (7).............................. 567,288 * 567,288
Jeffrey G. Dishner (8)............................ 388,200 * 388,200
W9/Reit Holdings Two, Inc. and its direct and
indirect partners and shareholders.............. 350,746 * 350,746
Madison F. Grose (9).............................. 276,376 * 276,376
Jerome C. Silvey (10)............................. 160,079 * 160,079
Roger M. Cozzi (11)............................... 122,300 * 122,300
James Babb (12)................................... 79,726 * 79,726
Ellis Rinaldi (13)................................ 78,019 * 78,019
Jeffrey Rosenthal (14)............................ 71,225 * 71,225
Starwood Capital Group, L.L.C. and its direct and
indirect partners............................... 8,000 * 8,000
* Less than one percent.
- ------------------------
(1) Based on 86,565,672 shares of common stock outstanding on August 31, 2001
(including shares that may have been repurchased).
(2) The shares owned by these securityholders are issuable upon the exercise of
the warrants at an original exercise price of $35.00 per share, subject to
anti-dilution adjustments. The warrants expire on December 15, 2005.
(3) The shares owned by this securityholder and its transferees are issuable
upon the exercise of options at an original exercise price of $15.00 per
share, subject to antidilution adjustments. The options expire on March 13,
2008.
(4) Includes shares issuable upon the exercise of options to purchase 509,510
shares of common stock.
(5) Includes shares issuable upon the exercise of options to purchase 127,378
shares of common stock.
(6) Includes shares issuable upon the exercise of options to purchase 127,378
shares of common stock.
(7) Includes shares issuable upon the exercise of options to purchase 152,853
shares of common stock.
11
(8) Includes shares issuable upon the exercise of options to purchase 127,378
shares of common stock.
(9) Includes shares issuable upon the exercise of options to purchase 84,595
shares of common stock.
(10) Includes shares issuable upon the exercise of options to purchase 50,951
shares of common stock.
(11) Includes shares issuable upon the exercise of options to purchase 42,460
shares of common stock.
(12) Includes shares issuable upon the exercise of options to purchase 42,460
shares of common stock.
(13) Includes shares issuable upon the exercise of options to purchase 40,761
shares of common stock.
(14) Includes shares issuable upon the exercise of options to purchase 41,950
shares of common stock.
WARRANTS OWNED
PRIOR TO THE OFFERING
-----------------------
NUMBER OF PERCENTAGE WARRANTS BEING
PARTICIPATING SECURITYHOLDER WARRANTS OF CLASS OFFERED
- ---------------------------- ---------- ---------- --------------
Lazard Freres Real Estate Fund II, L.P............ 3,031,519 49.6% 3,031,519
Lazard Freres Real Estate Offshore Fund II,
L.P............................................. 1,916,999 31.4% 1,916,999
LF Offshore Investment L.P........................ 1,164,647 19.1% 1,164,647
Because each of the Participating Securityholders may offer all or some of
the securities pursuant to the offering made hereby, no estimate can be given as
to the number of the securities that will be held by the Participating
Securityholders after completion of the offering.
We have prepared this prospectus to meet our obligations under certain
agreements with the Participating Securityholders.
On December 15, 1998, SFT sold 4,400,000 Series A Preferred Shares of
beneficial interest and warrants to purchase 6,000,000 Class A Shares of
beneficial interest pursuant to a Securities Purchase Agreement, dated as of
December 15, 1998, by and among the Company, Lazard Freres Real Estate Fund II,
L.P., a Delaware limited partnership ("Fund II"), Lazard Freres Real Estate
Offshore Fund II, L.P., a Delaware limited partnership (the "Offshore Fund"),
and LF Mortgage REIT, a Maryland real estate investment trust (the "Lazard
Transaction"). Effective as of March 30, 1999, the Offshore Fund assigned
warrants to purchase 1,143,088 Class A Shares of beneficial interest to LF
Offshore Investment ("LF Offshore", and together with Fund II and the Offshore
Fund, the "Lazard Investors"). The warrants, which were assumed by the Company
in its merger with SFT, and are now exercisable for a total of 6,113,165 shares
of common stock at an aggregate price of $210 million, became exercisable on
December 15, 1999 subject to anti-dilution adjustments, and expire on
December 15, 2005.
Pursuant to an Investor Rights Agreement dated December 15, 1998 with the
Lazard Investors and other parties named therein (the "Lazard Rights
Agreement"), we are required to use our best efforts to file a registration
statement covering the warrants and the shares of common stock issuable upon
exercise of the warrants.
On May 29, 1998, TriNet entered into the Amended and Restated Limited
Liability Company Operating Agreement of W/9 TriNet Poydras, LLC with W9/Reit
Holdings Two, Inc., Stone Street W9/TriNet Corp., Stone Street Real Estate Fund
1998, L.P. and Bridge Street Real Estate Fund 1998, L.P. (the "Whitehall
Parties") in connection with a venture that owns real property in New Orleans,
Louisiana. Pursuant to the agreement, the Whitehall Parties were given the
option to exchange their interests in the venture for common stock of TriNet
upon any change of control of TriNet. This option became exercisable upon our
merger with TriNet and the Whitehall Parties delivered notice of their desire to
exchange on November 12, 1999. We issued 350,746 shares of common stock to the
Whitehall Parties pursuant to the notice.
Pursuant to a Registration Rights Agreement, dated March 16, 1998 between
TriNet and the Whitehall Parties (the "Whitehall Rights Agreement"), which we
assumed in the TriNet merger, we are required to file a registration statement
on Form S-3 with respect to the shares of common stock held by the Whitehall
Parties.
The shares of common stock held by the Starwood Affiliates were acquired in
a contribution transaction in March 1998 (the "Recapitalization"). The Starwood
Affiliates are parties to a
12
Registration Rights Agreement, dated March 13, 1998 (the "Affiliate Rights
Agreement"), pursuant to which we are required to register the shares of common
stock for resale by the Starwood Affiliates and their limited partners on a
registration statement maintained with the SEC until such time as the Starwood
Affiliates and their limited partners no longer own any shares of common stock.
The shares of common stock held by the directors and officers and Starwood
Capital were acquired: (1) through the Advisor Transaction; (2) through open
market purchases; (3) through option grants; and (4) from distributions of the
Starwood Affiliates and other affiliates. We are required to register the shares
of common stock acquired pursuant to the Advisor Transaction pursuant to an
Agreement and Plan of Merger and Interest Contribution Agreement, dated as of
June 15, 1999 (the "Advisor Agreement").
In addition, in each of the Lazard Rights Agreement, the Whitehall Rights
Agreement, the Affiliate Rights Agreement and the Advisor Agreement, we have
agreed to indemnify the Participating Securityholders and any broker or dealer
to or through whom any of the securities are sold against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments a Selling Securityholder may be required to make in respect thereof.
CERTAIN RELATIONSHIPS BETWEEN THE COMPANY AND
THE PARTICIPATING SECURITYHOLDERS
We have not had any material relationship with any of the Participating
Securityholders since January 1, 1997, other than as set forth in this Section
or under "Participating Securityholders."
Messrs. Sternlicht, Sugarman, Haber, Dishner, Eilian, Grose, Kleeman, each
of whom is a director and/or executive officer of the Company, received shares
of common stock in the Advisor Transaction in exchange for their interests in
our external advisor.
Each of Messrs. Sternlicht, Sugarman, Dishner, Eilian, Grose and Kleeman has
a direct or indirect economic interest in each of the Starwood Affiliates.
On December 15, 1998, we purchased $248.5 million in mortgage and mezzanine
loans from affiliates of the Lazard Investors. Pursuant to the Lazard Rights
Agreement, the Lazard Investors are entitled to appoint one director to our
Board of Directors as long as the Lazard Investors and certain of their
affiliates are not "Competitors" (as defined in the Lazard Rights Agreement).
On June 18, 1998, SFT granted options to purchase 2,493,842 Class A Shares
of beneficial interest to Starwood Financial Advisors, L.L.C. (the "Advisor"),
which we assumed in the merger with SFT. Pursuant to the Advisor Transaction,
the Advisor became our subsidiary. Because of certain distributions by the
Advisor and New York Financial Advisors, L.L.C. ("NYFA") and anti-dilution
adjustments resulting from the share dividend issued in November 1999, the
Advisor and its grantees currently possess options to purchase 1,689,723 shares
of common stock and NYFA and its grantees possess options to purchase 764,145
shares of common stock.
Mezzanine acquired 83,333 Class A Shares of beneficial interest of SFT for
$6.00 a share on January 22, 1997 upon exercise of its rights under a warrant
SFT had previously granted. In addition, SFT paid Mezzanine $25.5 million in
cash and issued 25,857,999 Class A Shares of beneficial interest of SFT at a
price of $15.00 per share in exchange for certain assets and issued Mezzanine
761,490 Class A Shares of beneficial interest of SFT in exchange for 4,568,944
units in APMT Limited Partnership on March 18, 1998.
On March 18, 1998, Starwood Opportunity Fund IV, L.P., the sole member of
SOFI-IV SMT was paid $324.3 million in cash and SOFI-IV SMT was issued
41,179,131 Class A Shares of beneficial interest of SFT at a price of $15.00 per
share in exchange for certain assets.
13
PLAN OF DISTRIBUTION
We are registering the securities on behalf of the Participating
Securityholders and we will bear all costs, expenses and fees in connection with
the registration of the securities. As used herein, "Participating
Securityholder" includes donees and pledgees selling securities received from a
named Participating Securityholder after the date of this prospectus. Brokerage
commissions and similar selling expenses, if any, attributable to the sale of
securities will be borne by the Participating Securityholders. Except as may be
set forth in any prospectus supplement, the Participating Securityholders have
advised us that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
securities, nor is there an underwriter or coordinating broker acting in
connection with the proposed sale of securities by the Participating
Securityholders.
The Participating Securityholders may effect such transactions by selling
securities directly to purchasers or to or through broker-dealers, which may act
as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions, or commissions from the Participating
Securityholders and/or the purchasers of securities for whom such broker-dealers
may act as agents or to whom they sell as principals, or both (which
compensation as to a particular broker-dealer might be in excess of customary
commissions).
The Participating Securityholders and any broker-dealers that act in
connection with the sale of securities might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, and any commissions
received by such broker-dealers and any profit on the resale of the securities
sold by them while acting as principals might be deemed to be underwriting
discounts or commissions under the Securities Act. We have agreed to indemnify
each Participating Securityholder against certain liabilities, including
liabilities arising under the Securities Act. The Participating Securityholders
may agree to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the securities against certain liabilities,
including liabilities arising under the Securities Act. Brokers' commissions and
dealers' discounts, taxes and other selling expenses to be borne by the
Participating Securityholders are not expected to exceed normal selling
expenses.
Because Participating Securityholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the Participating
Securityholders will be subject to the prospectus delivery requirements of the
Securities Act, which may include delivery through the facilities of the NYSE
pursuant to Rule 153 under the Securities Act. We have informed the
Participating Securityholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may apply to their sales in the
market. The registration of the securities under the Securities Act shall not be
deemed an admission by the Participating Securityholders or the Company that the
Participating Securityholders are underwriters for purposes of the Securities
Act of any securities offered pursuant to this Prospectus.
Upon the Company being notified by a Participating Securityholder that any
material arrangement has been entered into with a broker-dealer for the sale of
securities through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the Act,
disclosing: (1) the name of each such participating securityholder and of the
participating broker-dealer(s); (2) the number of securities involved; (3) the
price at which such securities were sold; (4) the commissions paid or discounts
or concessions allowed to such broker-dealer(s), where applicable; (5) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus; and (6) other facts
material to the transaction. In addition, upon the Company being notified by a
Participating Securityholder that a donee or pledgee intends to sell more than
500 shares of common stock or warrants, a supplement to this prospectus will be
filed.
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The securities may be sold or distributed in a variety of ways, including:
1. Block trades (which may involve crosses) in which the broker or dealer
so engaged will attempt to sell the securities as agent but may position
and resell a portion of the block as principal to facilitate the
transaction.
2. Purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this Prospectus.
3. Exchange distributions and/or secondary distributions in accordance with
the rules of the NYSE.
4. Ordinary brokerage transactions and transactions in which the broker
solicits purchasers.
5. Sales in the over-the-counter market.
6. Through short sales of securities.
7. Pro rata distributions in the ordinary course of business or as part of
the liquidation and winding up of the affairs of the Participating
Securityholders.
8. Privately negotiated transactions.
The Participating Securityholders may from time to time deliver all or a
portion of the securities to cover a short sale or sales or upon the exercise,
settlement or closing of a call equivalent position or a put equivalent
position.
Under the Exchange Act and the regulations thereunder, any person engaged in
a distribution of the securities offered by this Prospectus may not
simultaneously engage in market making activities with respect to the securities
during any applicable "cooling off" periods prior to the commencement of such
distribution. In addition, and without limiting the foregoing, the Participating
Securityholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder including, without limitation, Rules 101,
102, 103 and 104, which provisions may limit the timing of purchases and sales
of securities by the Participating Securityholders.
Securities that qualify for sale pursuant to Rule 144 may be sold under
Rule 144 rather than pursuant to this prospectus. In addition, a Participating
Securityholder may devise, gift or otherwise transfer the securities by means
not described herein, in which event such transfer will not be pursuant to this
prospectus.
DESCRIPTION OF SECURITIES TO BE REGISTERED
COMMON STOCK
We have 200,000,000 authorized shares of common stock, 86,568,767 of which
(including shares that may have been repurchased) were issued and outstanding on
September 30, 2001. All shares of our common stock currently outstanding are
validly issued, fully paid and non-assessable. All shares of common stock
issuable upon the exercise of warrants and options, when issued and paid for
upon such exercise, will be validly issued, fully paid and non-assessable.
VOTING RIGHTS
Each share of common stock entitles the holder thereof to one vote, either
in person or by proxy, at meetings of the stockholders. Our board of directors
consists of two classes, each of which serves for a term of two years. At each
annual meeting of the stockholders the directors in only one class will be
elected. The holders are not permitted to vote their shares of common stock
cumulatively. Accordingly, the holders of more than 50% of the outstanding
shares of common stock can elect all of the directors standing for election at a
stockholders' meeting.
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DIVIDEND POLICY
All shares of our common stock are entitled to participate ratably in
dividends when and as declared by our board of directors out of the funds
legally available therefor. Any such dividends may be paid in cash, additional
shares of our common stock or shares of another class of our stock. We have paid
dividends to our stockholders in each of the last seven quarters. See "Common
Stock Price and Dividend Performance."
MISCELLANEOUS RIGHTS AND PROVISIONS
Holders of our common stock have no preemptive or other subscription rights,
conversion rights, redemption or sinking fund provisions. In the event of the
liquidation or dissolution, whether voluntary or involuntary, each share of
common stock is entitled to share ratably in any assets available for
distribution to holders of our equity after satisfaction of all liabilities.
DESCRIPTION OF WARRANTS
The following is a brief summary of certain provisions of the warrants. This
summary is not complete and is qualified in all respects by reference to the
warrants. Copies of the warrants have been filed as exhibits to the registration
statement. We have 6,000,000 warrants issued and outstanding. The warrants
expire December 15, 2005 and are not redeemable, in whole or in part.
EXERCISE PRICE AND TERMS
The warrants entitle the registered holders thereof to purchase an aggregate
of 6,113,165 shares of common stock at an aggregate exercise price of
$210 million subject to adjustment in accordance with the anti-dilution and
other provisions referred to below. The holder of any warrant may exercise such
warrant by surrendering the certificate representing the warrant to our
Secretary, with the subscription form on the warrant properly completed and
executed, together with payment of the exercise price. The warrants may be
exercised at any time in whole or in part at the exercise price then in effect
until expiration of the warrants. The warrants expire December 15, 2005. No
fractional shares of common stock will be issued upon the exercise of the
warrants. The exercise price of the warrants bears no relationship to any
objective criteria of future value. Accordingly, such exercise price should in
no event be regarded as an indication of any future trading price.
ADJUSTMENTS
The exercise price and the number of shares of common stock purchasable upon
the exercise of the warrants are subject to adjustment upon the occurrence of
certain events, including:
1. Stock dividends.
2. Stock splits.
3. Combinations or reclassifications of the common stock.
4. Mergers or reorganizations.
Pursuant to a one million share dividend issued to our stockholders on
November 3, 1999, the warrants have been adjusted and are now exercisable for
6,113,165 shares of common stock. There have been no other events requiring an
adjustment to the warrants.
TRANSFER, EXCHANGE AND EXERCISE
The warrants are in registered form and may be presented to us for transfer,
exchange or exercise at any time on or prior to their expiration date, at which
time the warrants become wholly void and of
16
no value. If a market for the warrants develops, the holder may sell the
warrants instead of exercising them. There can be no assurance, however, that a
market for the warrants will develop or continue.
WARRANT HOLDER NOT A STOCKHOLDER
The warrants do not confer upon holders any voting, dividend or other rights
as stockholders.
FEDERAL INCOME TAX CONSIDERATIONS
We intend to operate in a manner that permits us to satisfy the requirements
for taxation as a real estate investment trust under the applicable provisions
of the Internal Revenue Code. No assurance can be given, however, that such
requirements will be met. The following is a summary of the federal income tax
consequences for the Company and our stockholders with respect to our treatment
as a real estate investment trust. The information set forth below, to the
extent that it constitutes matters of law or legal conclusions, is based on the
opinion of Mayer, Brown & Platt, our counsel.
Based upon the matters described below, including an Internal Revenue
Service closing agreement dated March 10, 1998, discussed below, in the opinion
of Mayer, Brown & Platt, our counsel, our existing legal organization and our
actual and proposed method of operation described in this Prospectus, as set
forth in our organizational documents and as represented by us to Mayer,
Brown & Platt, enable us to satisfy the requirements for qualification as a real
estate investment trust under the Internal Revenue Code in the ordinary course
of our operations. This opinion of our counsel is based on certain assumptions
relating to our organization and our operation, including that we will be
operated in the manner described in our applicable organizational documents and
in this Prospectus and that all terms and provisions of such documents will be
complied with by all parties thereto. Our counsel's opinion is also based upon,
and to that extent limited, the opinion of another law firm delivered to us last
year. That law firm's opinion stated that our proposed method of operation from
and after the earlier of the date of the merger with SFT and the TriNet merger,
taking into account the effects of the merger with SFT and the TriNet merger,
will enable us to continue to meet the requirements for qualification and
taxation as a real estate investment trust under the Internal Revenue Code. We
note that such law firm's opinion relies on, among other items, the opinion of
another law firm regarding the qualification and taxation of TriNet as a REIT
through the effective time of the TriNet merger. We have received the consent of
the law firm opining on the Company's ability, taking into account the effects
of the merger with SFT and the TriNet merger, to continue to meet the
requirements for qualification and taxation as a REIT under the Internal Revenue
Code, and have assumed that the opinion of the other law firm regarding the
qualification and taxation of TriNet as a REIT through the effective time of the
TriNet merger remains in effect as of the date such opinion was rendered. Our
counsel's opinion is also conditioned upon certain representations made by us as
to certain factual matters relating to our organization and intended or expected
manner of operation. In addition, our counsel's opinion is based on the law
existing and in effect on the date hereof and our qualification and taxation as
a real estate investment trust will depend on compliance with such law existing
and in effect on the date hereof and as the same may be hereafter amended. Our
qualification and taxation as a real estate investment trust will further depend
upon our ability to meet, on a continuing basis through actual operating
results, asset composition, distribution levels diversity of share ownership and
the various qualification tests imposed under the Internal Revenue Code
discussed below. Counsel will not review compliance with these tests on a
continuing basis, and thus, no assurance can be given that we will satisfy such
tests on a continuing basis.
In brief, a corporation that invests primarily in real estate interests,
including interests in mortgages on real property, and that otherwise would be
treated for federal income tax purposes as a corporation can, if it meets the
real estate investment trust provisions of the Internal Revenue Code described
below, claim a tax deduction for the dividends it pays to its stockholders.
Consequently, such a corporation is generally not taxed on its "real estate
investment trust taxable income" to the extent it
17
is currently distributed to stockholders, thereby substantially eliminating the
"double taxation," at both the corporate and stockholder levels, that otherwise
generally results from an investment in 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 real estate investment trust. Further,
if the entity were to fail to qualify as a real estate investment trust in any
year, it would not be able to deduct any portion of the dividends paid to its
stockholders and would be subject to full federal income taxation on its
earnings, thereby significantly reducing or eliminating the cash available for
distribution to its stockholders. See "--Taxation of the Company--General" and
"--Taxation of the Company--Failure to Qualify."
Our Board of Directors believes that we have operated in a manner that
permitted us to elect, and that we timely and effectively elected, real estate
investment trust status for our taxable year ending December 31, 1998, and in
each taxable year thereafter. As noted, there can be no assurance, however, that
this belief or expectation will be fulfilled, since qualification as a real
estate investment trust depends on our continuing ability to satisfy the
numerous asset, income and distribution tests, as described below, which in turn
will be dependent in part on our operating results.
The following summary, based on existing law, is not exhaustive of all
possible tax considerations and does not give a detailed discussion of any
state, local or foreign tax considerations, nor does it discuss all of the
aspects of federal income taxation that may be relevant to a stockholder in
light of his or her particular circumstances or to certain types of
stockholders, including insurance companies, financial institutions and
broker-dealers, foreign corporations and persons who are not the citizens or
residents of the United States, who are subject to special treatment under the
federal income taxation laws.
TAXATION OF THE COMPANY
CLOSING AGREEMENT
On March 10, 1998, we received an Internal Revenue Service closing
agreement, a written agreement from the Internal Revenue Service confirming its
agreement on a material issue, under which we were eligible to make an election
under Section 856(c)(1) of the Internal Revenue Code to be taxed as a real
estate investment trust for our taxable year ending December 31, 1998. After
determining that we may have violated certain real estate investment trust asset
requirements in the years prior to 1998, we sought the March 10, 1998 Internal
Revenue Service Closing Agreement by voluntarily disclosing to the Commissioner
of Internal Revenue that we may have violated certain real estate investment
trust asset requirements set forth in Section 856(c) of the Internal Revenue
Code for our taxable years 1993 through 1996.
While it is a condition of real estate investment trust status that prior
non-REIT corporate earnings and profits must be eliminated, the Board of
Directors believes that we did not generate significant earnings and profits in
taxable years during which we may not have qualified as a real estate investment
trust. In addition, if we had any net unrealized built-in gain with respect to
any asset held by us on January 1, 1998, and we were to recognize gain on the
disposition of such asset during the ensuing 10-year period, then the built-in
gain on January 1, 1998 will be subject to tax at the corporate tax rate.
GENERAL
In any year in which we qualify as a real estate investment trust, in
general we will not be subject to federal income tax on that portion of our real
estate investment trust taxable income or capital gain which is distributed to
stockholders. We may, however, be subject to tax at normal corporate rates on
any taxable income or capital gain that is not so distributed. To the extent
that we elect to retain and pay income tax on our net long-term capital gain,
stockholders are required to include their
18
proportionate share of our undistributed long-term capital gain in income but
will receive a credit for their share of any pro-rata taxes paid by us on such
gain.
Notwithstanding our qualification as a real estate investment trust, we may
also be subject to taxation in certain other circumstances. If we fail to
satisfy either the 75% or the 95% gross income test, each as discussed below,
and nonetheless maintain our qualification as a real estate investment trust
because certain other requirements are met, we will be subject to a 100% tax on
the greater of the amount by which we fail either the 75% or the 95% test,
multiplied by a fraction intended to reflect our profitability. We will also be
subject to a tax of 100% on net income from any "prohibited transaction," as
described below. If we have: (1) 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 (2) other non-qualifying income from foreclosure
property, we will also be subject to tax on such income from foreclosure
property at the highest corporate tax rate. In addition, if we fail to
distribute during each calendar year at least the sum of:
(1) 85% of our real estate investment trust ordinary income for such year;
(2) 95% of our real estate investment trust capital gain net income for such
year; and
(3) any undistributed taxable income from prior years,
we will be subject to a 4% excise tax on the excess of such sum over the amounts
actually distributed. To the extent that we elect to retain and pay income tax
on our long-term capital gain, such retained amounts will be treated as having
been distributed for purposes of the 4% excise tax. We also may be subject to
the corporate alternative minimum tax, as well as to tax in certain situations
not presently contemplated. We use the calendar year both for federal income tax
purposes and for financial reporting purposes.
We may also recognize other taxable income, as described below, in excess of
cash flow from REMIC residual interests or our retained interests from non-REMIC
securitization transactions. In addition, we may have income without the receipt
of cash to the extent of the market discount attributable to debt securities
held by a REMIC in which we hold a residual interest. We will be subject to tax
at the highest marginal corporate rate on the portion of any Excess Inclusion
income derived by us from a REMIC residual interest that is allocable to our
stock held by "Disqualified Organizations," as defined below. See "--Taxation of
the Stockholders--Taxation of Tax-Exempt Stockholders" below. Any such tax on
the portion of any Excess Inclusion allocable to our stock held by Disqualified
Organizations will reduce the cash available for distribution to our
stockholders.
In order to qualify as a real estate investment trust, we must meet, among
others, the following requirements:
SHARE OWNERSHIP TESTS
Our shares must be held by a minimum of 100 persons for at least 335 days in
each taxable year, or a proportional 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 our outstanding shares may be owned, directly or indirectly
and including the effects of certain constructive ownership rules, by five or
fewer individuals, which for this purpose includes certain tax-exempt entities.
However, for purposes of this test, any shares 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. These share ownership requirements need not be met until our
second taxable year for which a real estate investment trust election is made.
As we have represented to our counsel, we have satisfied and will continue to
satisfy these requirements.
19
In order to comply with the foregoing share ownership tests, we have placed
certain restrictions on the transfer of our stock to prevent additional
concentration of stock ownership. Moreover, to evidence compliance with these
requirements, Treasury regulations require that we maintain records which
disclose the actual ownership of our outstanding stock. In fulfilling our
obligations to maintain records, we must and will demand written statements each
year from the record holders of designated percentages of our stock disclosing
the actual owners of such stock, as prescribed by Treasury regulations. A list
of those persons failing or refusing to comply with such demand must be
maintained as part of our records. A stockholder failing or refusing to comply
with our written demand must submit with his tax return a similar statement
disclosing the actual ownership of our stock and certain other information. In
addition, our Amended and Restated Charter provides restrictions regarding the
ownership and transfer of our stock that are intended to assist us in continuing
to satisfy the share ownership requirements.
ASSET TESTS
At the close of each quarter of our taxable year, we must satisfy two tests
relating to the nature of our assets, with "assets" being determined in
accordance with generally accepted accounting principles. First, at least 75% of
the value of our total assets must be represented by interests in real property,
interests in mortgages on real property, shares in other real estate investment
trusts, cash, cash items, government securities, qualified temporary investments
and regular or residual interests in a REMIC, except that, if less than 95% of
the assets of a REMIC are "real estate assets" as determined under the Internal
Revenue Code, we shall be treated as holding directly our proportionate share of
the assets of the REMIC. Second, although the remaining 25% of our assets
generally may be invested without restriction, securities in this class may not
exceed: (1) in the case of securities of any one non-government issuer, 5% of
the value of our total assets; and (2) 10% of the outstanding voting securities
of any one such issuer. Based on existing facts, the Board of Directors intends
that we will meet these tests at the applicable times in the future. If,
however, we were unable to satisfy the foregoing asset tests at the applicable
time, we would be required to take preventive steps by disposing of certain
assets or otherwise risk a loss of real estate investment trust status.
Currently, we own approximately 96% of the non-voting shares of TriNet
Management Operating Company, Inc., 100% of the non-voting shares of Starwood
Operating, Inc. and Starwood Financial Preferred, Inc., and not more than 10% of
the voting shares of these corporations. Therefore, we believe that we do not
own more than 10% of the voting securities of these corporations and that any of
these corporations' shares do not represent more that 5% of the total value of
our gross assets. However, there can be no assurance that the Internal Revenue
Service will not contend that the value of the shares of any of these
corporations exceeds the 5% limitations. In rendering its opinion, our counsel
will rely on our conclusions with regard to the value of TriNet Management
Operating Company, Inc., Starwood Operating, Inc. and Starwood Financial
Preferred, Inc. In addition, for taxable years beginning after December 31,
2000, unless we and any of these corporations jointly elect to treat each of
these corporations as taxable REIT subsidiaries, such corporations' future
activities and growth may be limited. "--Possible Legislative or Other Actions
Affecting Tax Consequences."
GROSS INCOME TESTS
There are three separate percentage tests relating to the sources of our
gross income which must have been satisfied for our 1997 taxable year and two
separate percentage tests thereafter. For taxable years beginning on January 1,
1998, the 30% gross income test has been repealed. For the purposes of these
tests, where we invest in a partnership, we will be treated as receiving our
share of the income
20
and loss of the partnership, and the gross income of the partnership will retain
the same character in our hands as it has in the hands of the partnership. The
two tests are separately described below:
The 75% Test. At least 75% of our gross income for the taxable year must be
"qualifying income." Qualifying income generally includes:
1. Rents from real property, except as modified below.
2. Interest on obligations secured by mortgages on, or interests in, real
property including amounts included in gross income with respect to a
regular or residual interest in a REMIC, except that, if less than 95% of
the assets of a REMIC are "real estate assets" as determined under the
Internal Revenue Code, we will be treated as holding directly our
proportionate share of assets of such REMIC.
3. 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 our trade or business
("dealer property").
4. Dividends or other distributions on shares in other real estate
investment trusts, as well as gain from the sale of such shares.
5. Abatements and refunds of real property taxes.
6. 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").
7. Commitment fees received for agreeing to make loans secured by mortgages
on real property or to purchase or lease real property.
8. Certain qualified temporary investment income attributable to the
investment of new capital received by us in exchange for our stock or
specified debt securities during the one-year period following the
receipt of such capital.
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 we own, directly or constructively, 10% or more of the
tenant. If the portion of any 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, the portion of the rent 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, as discussed below, for the 75% and
95% gross income tests, if based, in whole or in part, on the income or profits
of any person. However, an amount received or accrued generally will not be
excluded from "rents from real property" solely by reason of being based on a
fixed percentage, or percentages, of gross receipts or gross sales. Finally, for
rents received to qualify as rents from real property for the 75% and 95% gross
income tests, we generally must not operate or manage the property, or furnish
or render services to customers other than through an "independent contractor"
from whom we derive no income, except that the "independent contractor"
requirement does not apply to the extent that the services provided by us are
"usually or customarily rendered" in connection with the rental of space for
occupancy only, or are not otherwise considered "rendered to the occupant for
his convenience," or the amounts received with respect to the services do not
exceed 1% of all amounts received or accrued, directly or indirectly, by us
during the taxable year with respect to the property.
We monitor our operations in the context of these standards so as to satisfy
the 75% and 95% gross income tests and have represented to our counsel that we
have and will satisfy these tests for the applicable periods.
The 95% Test. In addition to deriving 75% of our gross income from the
sources listed above, at least 95% of our gross income for the taxable year must
be derived from the above described qualifying
21
income, or from dividends, interests, or gains from the sale or other
disposition of stock or other securities that are not dealer property. Dividends
and interest on any obligations not collateralized by an interest in real
property, including a mortgage, are included for purposes of the 95% gross
income test, but not for the purposes of the 75% gross income test. In addition,
payments to a real estate investment trust under an interest rate swap, cap
agreement, option, futures contract, forward rate agreement or any similar
financial instrument entered into by the real estate investment trust to hedge
its indebtedness incurred or to be incurred, and any gain from the sale or other
disposition of these instruments, are treated as qualifying income for purposes
of the 95% gross income test, but not for purposes of the 75% gross income test.
We closely monitor our non-qualifying income and anticipate that non-qualifying
income from other activities will not result in our failing to satisfy either
the 75% or 95% gross income test.
For purposes of determining whether we comply 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, it does not include a sale of our investments if such
investments are held by us for at least four years and certain other
requirements, relating to the number of investments sold in a year, their tax
bases, and the cost of improvements made thereto, are satisfied. See "--Taxation
of the Company--General."
In order to comply with the 75% and 95% gross income tests described above,
the Board of Directors will monitor the investments made by us with the intent
of maintaining our status as a real estate investment trust. As a result, the
Board of Directors may limit and/or closely scrutinize certain types of
investments made by us, including, among others, loans that provide for interest
amounts that are dependent in whole or in part on the income or profits of a
borrower, loans that contain interest payment provisions relating to
appreciation of the underlying property, loans that are secured by assets other
than mortgages on real property or interests in real property, and certain
hedging transactions.
Under the real estate investment trust rules, any amount received or
accrued, directly or indirectly, with respect to any obligation is generally not
includible as qualifying "interest" for purposes of the 75% and 95% gross income
tests if the determination of the amount depends in whole or in part on the
income or profits of any person, whether or not derived from property secured by
the obligation. However, an amount received or accrued generally will not fail
to qualify as "interest" solely by reason of being based on a fixed percentage
or percentages of gross receipts or gross sales. In addition, an amount received
or accrued generally not will fail to qualify as "interest" solely by reason of
being based on the income or profits of a debtor if the debtor derives
substantially all of its gross income from the related property through the
leasing of substantially all of its interests in the property, to the extent the
amounts received from the debtor are attributable to amounts that would be
characterized as qualified rents from real property under the real estate
investment trust rules. Furthermore, to the extent interest under a loan is
based on the cash proceeds realized upon the sale of the property securing the
loan and constitutes a "shared appreciation provision," as described below,
income attributable to such participation feature will be treated as gain from
sale of the secured property, which generally is treated as qualifying income
for purposes of the 75% and 95% gross income tests, except as noted below.
In addition, at the time of loan acquisition or origination it might be
determined in certain cases that our investment in a loan may exceed at the time
of loan acquisition or origination the value of the real property securing the
loan or may not be secured by a mortgage on real property, e.g., a loan secured
by a partnership interest, which would result in part or all of the interest
income from such loan constituting qualifying income for purposes of the 95%
gross income test, but not for purposes of the 75% gross income test. It is also
possible that, in some instances, the interest income from a loan may be based
in part on the borrower's profits or net income, which generally will disqualify
the income from the loan for purposes of both the 75% and 95% gross income
tests, except as noted above.
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Certain of our investments may contain the right to receive interest based
on appreciation of the underlying real property. In addition, we may acquire or
originate loans in the future that have similar rights. Under the Internal
Revenue Code, a shared appreciation provision in a mortgage is any provision
which is in connection with an obligation held by us and secured by an interest
in real property (the "secured property"), and which entitles us to receive a
specified portion of any gain realized on the sale or exchange of such property,
or of any gain which would be realized if the property were deemed sold on a
specified date.
For purposes of determining whether we meet the 75% income test and 95%
income text and whether we derive any income from prohibited transactions, any
income derived from a shared appreciation mortgage shall be treated as gain
recognized on the sale of the secured property. For purposes of this rule:
(1) we are treated as holding the secured property for the period during which
we held the shared appreciation provision or, if shorter, for the period during
which the secured property was held by the person holding such property; and
(2) the secured property is treated as "dealer property" as defined in
Section 1221(1) of the Internal Revenue Code, if it would be treated as "dealer
property" in the hands of the person holding the secured property, or it would
be treated as "dealer property" if held by us.
For our taxable years after 1997, if the secured property is treated as
dealer property, gain from the sale of such property could give rise to the 100%
tax on gain from prohibited transactions. Since substantially all of the loans
previously contributed to us were acquired by purchase or contribution rather
than originated by us, there is no built-in safeguard in the loan documents to
protect us from the risk that the secured property may be treated as "dealer
property." Similarly, in the case of loans that are acquired in the future
rather than originated by us, the same issue arises. However, we have and intend
to include built-in safeguards in the loans we originate to minimize any risk
that any secured property will be treated as "dealer property."
We may acquire investments that do not generate qualifying income for
purposes of the 75% and 95% gross income tests because such assets, for example,
generate income dependent in whole or in part on the income or profits of the
applicable borrower. However, based on the Board of Directors' review of all of
our investments, the Board of Directors believes that, for purposes of both the
75% and 95% gross income tests, our investments will permit us to satisfy the
requirements for qualification as a real estate investment trust.
We intend to enter into various hedging transactions with respect to one or
more of our assets or liabilities. While such hedging transactions could take a
variety of forms, only those payments to a real estate investment trust under
the interest rate swap, cap agreement, option, futures contract, forward rate
agreement or any similar financial instrument entered into by the real estate
investment trust to hedge our indebtedness incurred or to be incurred, and any
gain from the sale or other disposition of these instruments are treated as
qualifying income for purposes of the 95% gross income test, but not for
purposes of the 75% gross income test. The provisions of the Internal Revenue
Code regarding our qualification as a real estate investment trust may thus
restrict our ability to enter into certain types of hedging transactions. The
Board of Directors will monitor our compliance with the various real estate
investment trust qualification tests imposed under the Internal Revenue Code
with respect to our various hedging strategies on a continuing basis. However,
no assurance can be given that hedging transactions, together with our other
operations, would permit us to satisfy these tests on an ongoing basis.
Even if we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may still qualify as a real estate investment trust for
such year if we are entitled to relief under certain provisions of the Internal
Revenue Code. These relief provisions will generally be available if:
1. Our failure to comply were due to reasonable cause and not to willful
neglect.
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2. We report the nature and amount of each item of our income included in
the tests on a schedule attached to our tax returns.
3. Any incorrect information on the schedule is not due to fraud with
intent to evade tax.
If these relief provisions apply, however, we will nonetheless be subject to a
100% tax on the greater of the amount by which we fail either the 75% or 95%
gross income test, multiplied by a fraction intended to reflect our
profitability.
The 30% Test. The 30% gross income test has been repealed and we have not
been required to comply with this test beginning January 1, 1998.
Foreclosure Property Rules. Real estate investment trusts generally are
subject to tax at the maximum corporate rate on any income from foreclosure
property, other than income that would generally be qualifying income for
purposes of the 75% gross income test, less expenses directly connected with the
production of such income. "Foreclosure property" is defined as any real
property, including interests in real property, and any personal property
incident to such real property:
1. That is acquired by a real estate investment trust as the result of such
real estate investment trust having bid on such property at foreclosure,
or having otherwise reduced such property to ownership or possession by
agreement or process of law, after there was a default, or default was
imminent, on a lease of such property or on an indebtedness owed to the
real estate investment trust that such property secured.
2. As to which the related loan was made or acquired by the real estate
investment trust at a time when default was not imminent or anticipated.
3. For which such real estate investment trust makes a proper election to
treat such property as foreclosure property.
Except as provided in the following paragraph, property shall cease to be
foreclosure property as of the close of the third taxable year following the
taxable year in which we acquired such property in foreclosure. If property is
not eligible for the election to be treated as foreclosure property ("ineligible
property") because, for example, the related loan was acquired by us at the time
when default was imminent or anticipated, income received with respect to such
ineligible property may not be qualifying income for purposes of the 75% or 95%
gross income tests.
Any foreclosure property shall cease to be foreclosure property on the first
day, occurring on or after the day on which we acquired the property in
foreclosure, on which:
1. A lease is entered into with respect to such property which, by its
terms, will not give rise to qualifying income for purposes of the 75%
gross income test or any amount is received or accrued, directly or
indirectly, pursuant to a lease entered into on or after such day which
does not generate qualifying income for purposes of the 75% gross income
test.
2. Any construction takes place on such property, other than completion of
a building, or completion of any other improvement, where more than
10 percent of the construction of such building or other improvement was
completed before default became imminent.
3. If such day is more than 90 days after the day on which such property
was acquired by us and the property is used in a trade or business which
is conducted by us, other than through an independent contractor, within
the meaning of Section 856(d)(3) of the Internal Revenue Code, from whom
we do not derive or receive any income.
For example, if we were to acquire a hotel as foreclosure property and operate
the hotel for more than 90 days, we would be required to operate the hotel
through an independent contractor after the 90th day, within the meaning of the
Internal Revenue Code, from whom we did not derive or receive any income, which
might include income from the hotel. Otherwise, after such 90th day, the
property would cease to be foreclosure property.
In the event that a foreclosure with respect to any of our mortgage
investments were to occur, or were anticipated to occur, we intend to manage the
actual or anticipated foreclosure with the intent of assuring qualification
under the real estate investment trust asset and gross income tests including,
if appropriate, the election to treat a foreclosed-upon property as foreclosure
property and to pursue the continued treatment of such property under the
foreclosure property rules.
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ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a real estate investment trust, we are required to
distribute dividends to our stockholders each year in an amount at least equal
to:
1. The sum of (a) 90% of our real estate investment trust taxable income,
computed without regard to the dividends paid deduction and our net
capital gain, and (b) 90% of the after-tax net income, if any, from
foreclosure property; minus
2. The sum of certain items of excess 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 we timely file our tax return
for such year and if paid on or before the first regular dividend payment after
the declaration. To the extent that we do not distribute all of our net capital
gain or distribute at least 90% but less than 100%, of our real estate
investment trust taxable income, as adjusted, we will be subject to tax on the
undistributed amount at regular capital gain or ordinary corporate tax rates, as
the case may be.
We intend to make timely distributions sufficient to satisfy the annual
distribution requirements described in the first sentence of the preceding
paragraph. It is possible that we may not have sufficient cash or other liquid
assets to meet the 90% distribution requirement, 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 expense in
computing our real estate investment trust taxable income on the other hand; or
for other reasons. We will closely monitor the relationship between our real
estate investment trust taxable income and cash flow and, if necessary, intend
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 we fail to meet the 90% distribution requirement as a result of an
adjustment to our tax return by the Internal Revenue Service, we may
retroactively cure the failure by paying a "deficiency dividend," plus
applicable penalties and interest, within a specified period.
FAILURE TO QUALIFY
If we fail to qualify for taxation as a real estate investment trust in any
taxable year and the relief provisions do not apply, we will be subject to tax,
including any applicable alternative minimum tax, on our taxable income at
regular corporate rates. Distributions to stockholders in any year in which we
fail to qualify as a real estate investment trust will not be deductible by us,
and generally they will not be required to be made under the Internal Revenue
Code. In such event, to the extent of current and accumulated earnings and
profits, all distributions to stockholders will be taxable as ordinary income,
and subject to certain limitations in the Internal Revenue Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, we also will be
disqualified from re-electing taxation as a real estate investment trust for the
four taxable years following the year during which qualification was lost.
TAXATION OF SECURITYHOLDERS
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS. As long as we qualify as a real
estate investment trust, distributions made to our taxable domestic stockholders
out of current or accumulated earnings and profits, and not designated as
capital gain dividends, generally will be taxed to such stockholders as ordinary
dividend income and will not be eligible for the dividends received deduction
for corporations. Distributions of net capital gain designated by us as capital
gain dividends will be taxed to such stockholders as long-term capital gain, to
the extent they do not exceed our actual net capital gain for the fiscal year,
without regard to the period in which the stockholder has held our shares.
However, corporate stockholders may be required to treat up to 20% of capital
gain dividends as ordinary
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income. To the extent that we make distributions in excess of current and
accumulated earnings and profits, such distributions will be treated first as a
tax-free return of capital to the stockholder, reducing the tax basis of a
stockholder's shares by the amount of such excess distribution, but not below
zero, with distributions in excess of the stockholder's tax basis being taxed as
capital gains, if the shares are held by the stockholder as a capital asset. In
addition, any dividend declared by us in October, November or December of any
year that is payable to a stockholder of record on a specific date in any such
month shall be treated as both paid by us and received by the stockholder on
December 31 of such year, provided that the dividend is actually paid by us
during January of the following calendar year. Stockholders may not include in
their individual income tax returns any of our net operating losses we may have.
Federal income tax rules may also require that certain minimum tax adjustments
and preferences be apportioned to our stockholders.
We are permitted under the Internal Revenue Code to elect to retain and pay
income tax on our net capital gain for any taxable year. If we so elect, a
stockholder must include in income such stockholder's proportionate share of our
undistributed capital gain for the taxable year, and will be deemed to have paid
such stockholder's proportionate share of the income tax paid by us with respect
to such undistributed capital gain. Such tax would be credited against the
stockholder's tax liability and subject to normal refund procedures. In
addition, each stockholder's basis in such stockholder's shares would be
increased by the amount of undistributed capital gain, less the tax paid by us,
included in the stockholder's income.
The Internal Revenue Service Restructuring and Reform Act of 1998 provides
that gain from the sale or exchange of some investments held by individuals for
more than one year is taxed at a maximum capital gain rate of 20%. Pursuant to
Internal Revenue Service guidance, we may classify portions of our capital gain
dividends as eligible for the 20% capital gain rule discussed above or as
unrecaptured Internal Revenue Code Section 1250 gain taxable at a maximum rate
of 25%.
In general, any loss upon a sale or exchange of shares by a stockholder who
has held such shares for six months or less, after applying certain holding
period rules, will be treated as a long-term capital loss, to the extent of
distributions from us required to be treated by such stockholders as long-term
capital gains.
BACKUP WITHHOLDING. We will report to our domestic stockholders and to the
Internal Revenue Service the amount of dividends paid for each calendar year,
and the amount of tax withheld, if any, with respect thereto. Under the backup
withholding rules, a stockholder may be subject to backup withholding at a rate
of 31% with respect to dividends paid unless such stockholder: (1) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact and, when required; (2) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder that does not provide us with a correct
taxpayer identification number may also be subject to penalties imposed by the
Internal Revenue Service. Any amount paid as backup withholding is available as
a credit against the stockholder's income tax liability. In addition, we may be
required to enforce withholding of a portion of capital gain distributions made
to any stockholders who fail to certify their non-foreign status to us. See
"--Taxation of the Stockholders--Taxation of Foreign Stockholders" below.
Effective for dividend payments made after August 6, 2001 (or as soon as
possible thereafter), the backup withholding rate will be reduced from 31% to
30.5%, and will further decrease as federal ordinary income tax rates decrease.
TAXATION OF HOLDERS OF WARRANTS. The following discussion assumes that the
form of the warrants will be respected for U.S. Federal income tax purposes.
Upon the exercise of the warrant, a holder generally will receive the underlying
shares of our common stock after payment of the exercise price. Upon exercise, a
holder generally should not recognize gain or loss as a result of such holder's
receipt of underlying shares, except with respect to any cash received in lieu
of fractional shares. Upon
26
exercise, a holder's adjusted tax basis in the underlying shares will be an
amount equal to the holder's adjusted tax basis in the warrants, described
below, plus the amount paid to us as the exercise price for the warrants.
Generally, the holding period of stock acquired upon exercise of a warrant
will not include the period during which the warrant was held. Rather, the
holding period of such stock begins the day the warrant is exercised. A holder's
initial tax basis in a warrant will equal the portion of the price allocated to
such warrant upon the issuance. A holder's tax basis in a warrant will be
increased by the amount, if any, of any constructive distribution with respect
to such warrant, as described below, and decreased by the portion of any
constructive distribution that is treated as a tax-free recovery of basis, as
described below.
Upon a sale, exchange or other disposition, but not including a repurchase
by us, of a warrant, a holder generally will recognize gain or loss for Federal
income tax purposes in an amount equal to the difference between the sum of the
amount of cash and the fair market value of any property received upon such
sale, exchange or other disposition and the holder's adjusted tax basis in the
warrant being disposed of. Gain or loss recognized upon a sale, exchange or
other disposition of a warrant generally will be capital gain or loss if the
underlying shares would be a capital asset in the hands of the holder. Such
capital gain will be taxed at a maximum rate of 20 percent for a holder who is
not a corporation and who held the warrant for more than one year.
Notwithstanding the foregoing, if we repurchase a warrant, any gain realized
by a holder may not qualify for capital gain or loss treatment because such a
repurchase might be tested under the rules generally applicable to redemptions
of stock. Holders of warrants should consult their own tax advisors regarding
the potential application of the stock redemption rules to the repurchase of a
warrant. Upon the lapse of a warrant, a holder will recognize a capital loss
equal to such holder's adjusted tax basis in the warrant. Such capital loss will
be long-term capital loss if the warrant had been held by a holder for more than
one year at the time of lapse, and short-term capital loss if held for less than
one year.
The exercise ratio of the warrants may be subject to adjustment under
certain circumstances. In that case, under Section 305 of the Internal Revenue
Code and the Treasury regulations issued thereunder, holders of the warrants may
be treated as having received a constructive distribution if, and to the extent
that, an adjustment in the exercise price (an "Adjustment"), including an
adjustment to reflect a taxable dividend to holders of our common stock,
increases the proportionate interest of a holder of a warrant in the fully
diluted common stock, whether or not the holder ever exercises the warrant. The
amount of any such constructive distribution would be the fair market value on
the date of the Adjustment of the number of shares of our common stock which, if
actually distributed to holders of warrants, would produce the same increase in
the proportionate interests of such holders in our assets or our earnings and
profits as that produced by the Adjustment.
TAXATION OF TAX-EXEMPT STOCKHOLDERS. The Internal Revenue Service has
issued a revenue ruling in which it held that amounts distributed by a real
estate investment trust to a tax-exempt employees' pension trust do not
constitute unrelated business taxable income ("UBTI"). In general, subject to
the discussion below regarding a "pension-held REIT" and subject to the
following sentence, based upon such ruling and the statutory framework of the
Internal Revenue Code, distributions by a real estate investment trust to a
stockholder that is a tax-exempt entity should not constitute UBTI, provided
that the tax-exempt entity has not financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Internal Revenue Code, that
the shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity, and that the real estate investment trust does do not hold a
residual interest in a REMIC that is an entity or arrangement that satisfies the
standards set forth in Section 860D of the Internal Revenue Code. However,
because we may invest in REMIC residual interests, any dividends received by a
stockholder that is a tax-exempt entity that are allocable to Excess Inclusion
income will be treated as UBTI.
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If any pension or other retirement trust that qualifies under
Section 401(a) of the Internal Revenue Code (a "qualified pension trust") holds
more than 10% by value of the interests in a "pension-held REIT" at any time
during a taxable year, a portion of the dividends paid to the qualified pension
trust by such real estate investment trust may constitute UBTI. For these
purposes, a "pension-held REIT" is defined as a real estate investment trust:
(1) which would not have qualified as a real estate investment trust but for the
provisions of the Internal Revenue Code which look through such a qualified
pension trust in determining ownership of shares of the real estate investment
trust; and (2) as to which at least one qualified pension trust holds more than
25% by value of the interests of such real estate investment trust or one or
more qualified pension trusts, each owning more than a 10% interest by value in
the real estate investment trust, hold in the aggregate more than 50% by value
of the interests in such real estate investment trust. The Board of Directors
believes that we currently do not constitute a "pension-held REIT." However,
because our shares are "publicly traded," no assurance can be given that we will
not become a "pension-held REIT" in the future.
Any dividends received by a stockholder that is a tax-exempt entity that are
allocable to Excess Inclusion income from a REMIC residual interest will be
treated as UBTI. Excess Inclusion income for any calendar quarter will equal the
excess of our income from REMIC residual interests over our "daily accruals"
with respect to such REMIC residual interests for the calendar quarter. Daily
accruals for a calendar quarter are computed by allocating to each day on which
we own a REMIC residual interest a ratable portion of the product of: (1) the
"adjusted issue price" of the REMIC residual interest at the beginning of the
quarter; and (2) 120% of the long-term federal interest rate, adjusted for
quarterly compounding, on the date of issuance of the REMIC residual interest.
The adjusted issue price of a REMIC residual interest at the beginning of a
calendar quarter equals the original issue price of the REMIC residual interest,
increased by the amount of daily accruals for prior quarters and decreased by
all prior distributions to us with respect to the REMIC residual interest. We
will be subject to tax at the highest marginal corporate rate on the portion of
any Excess Inclusion income derived by us from a REMIC residual interest that is
allocable to our stock held by the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing, any other tax-exempt
organization, other than a farmer's cooperative described in Section 521 of the
Internal Revenue Code, that is exempt from taxation under the UBTI provisions of
the Internal Revenue Code, or any rural, electrical or telephone cooperative
(each, a "Disqualified Organization"), unless such Disqualified Organization is
subject to the tax under Section 511 of the Internal Revenue Code. Any such tax
would be deductible by us against our income that is not Excess Inclusion
income.
If we derive Excess Inclusion income from REMIC residual interests, a tax
similar to the tax on us described in the preceding paragraph may be imposed on
stockholders who are: (1) pass-through entities, i.e., partnerships, estates,
trusts, regulated investment companies, real estate investment trusts, common
trust funds, and certain types of cooperatives, including farmers' cooperatives
described in section 521 of the Internal Revenue Code, in which a Disqualified
Organization is a record holder of shares or interests; and (2) nominees who
hold shares on behalf of Disqualified Organizations. Consequently, a brokerage
firm that holds shares in a "street name" account for a Disqualified
Organization may be subject to federal income tax on the income derived from
those shares.
A portion of our net income attributable to assets financed through our
STARs(SM) program (and, therefore, a portion of the dividends payable by us) may
be treated as Excess Inclusion income from a REMIC residual interest. These
amounts have historically been immaterial and we expect that they will be
immaterial in the future. Prospective stockholders should consult their own tax
advisors regarding the federal income tax consequences to them of incurring
Excess Inclusion income.
TAXATION OF FOREIGN STOCKHOLDERS. The rules governing United States federal
income taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign stockholders (collectively, "Foreign
Stockholders") are highly complex and the following is only a summary of such
28
rules. The following discussion assumes that you are not subject to United
States federal income taxation because, for example, you do not have a U.S.
trade or business generating effectively connected income, or in the case of an
individual, that you were not present in the United States for more than
182 days. Prospective Foreign Stockholders 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 our shares, including any reporting
requirements.
If you are a Foreign Stockholder and you sell our shares, any gain you
realize will generally be subject to federal income tax under the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA") even if you are otherwise
not subject to United States federal income taxation. Under FIRPTA, however, any
such gain your realize would not be subject to federal income tax if we were a
"domestically-controlled REIT" or if you owned less than 5% of our publicly
traded shares you disposed. We believe that currently we are a
"domestically-controlled REIT" because less than 50%, measured by value, of our
shares is held by Foreign Stockholders. Under these circumstances, any gain you
realize as a Foreign Stockholder from the sale of our shares generally should
not be subject to federal income tax. Because our shares are publicly traded no
assurance can be given that we will continue to qualify a
"domestically-controlled REIT." A 10% FIRPTA withholding tax may be imposed on
the proceeds from the disposition of our shares, unless you establish that such
withholding should not apply.
Any distributions to Foreign Stockholders that are attributable to a sale or
exchange of any United States real property interests by us, will be subject to
income and withholding taxes under FIRPTA, and may also be subject to branch
profits tax of 30% in the hands of a corporate Foreign Stockholder not entitled
to treaty relief or exemption. For purposes of the FIRPTA rules, the term
"United States real property interest" is broadly defined as any interest, other
than an interest solely as a creditor, in real property located in the United
States, including any right to share in the appreciation in the value or in the
gross or net proceeds or profits generated by the real property. In addition, a
loan to an individual or entity under the terms of which a holder of the
indebtedness has any direct or indirect right to share in the appreciation in
value of, or the gross or net proceeds or profits generated by, an interest in
real property of the debtor or of a related person is, in its entirety, an
interest in real property. As a result, certain of our real estate-related
assets, including, mezzanine loans, opportunistic loans and participations,
triple net leases, subordinated interests and any foreclosure property, may be
treated as United States real property interests for FIRPTA purposes. Under the
FIRPTA rules, we are required to withhold 35% of any distribution to a Foreign
Stockholder that could be designated by us as a capital gain dividend. This
amount is creditable against the Foreign Stockholder's federal income tax.
Distributions of cash derived from our real estate operations, not
designated by us as a capital gain dividend, that we pay to Foreign Stockholders
will be treated as ordinary dividends. Such ordinary dividends will generally be
subject to United States withholding tax at a rate of 30%, unless reduced by an
applicable tax treaty. To establish eligibility for reduced withholding rates
under an applicable income tax treaty, you must file with us an appropriate
Internal Revenue Service form.
The federal income taxation of foreign persons is a highly complex matter
that may be affected by other considerations. Accordingly, Foreign Stockholders
should consult their own tax advisor regarding the income and withholding tax
considerations with respect to their investments in the Company.
OTHER TAX CONSIDERATIONS
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX
CONSEQUENCES. Prospective securityholders should recognize that the present
federal income tax treatment of an investment in the Company may be modified by
legislative, judicial or administrative action at any time and that any such
action may affect investments and commitments previously made. The rules dealing
with federal income taxation are constantly in review by persons involved in the
legislative process and by the Internal Revenue Service
29
and the Treasury Department resulting in revisions of regulations and revised
interpretations of established concepts as well as statutory changes. No
assurance can be given as to the form or content, including with respect to
effective dates, of any tax legislation which may be enacted. Revisions in
federal tax laws and interpretations thereof can adversely affect the tax
consequences of an investment in the Company.
In this connection, Congress has recently passed and the President has
signed the Tax Relief Extension Act of 1999 (the "1999 Act") which contains
several provisions affecting real estate investment trusts. One provision under
the 1999 Act will prohibit a real estate investment trust from holding
securities representing more than 10% of the vote or value of the outstanding
securities of any corporation other than:
1. A qualified REIT subsidiary.
2. Another real estate investment trust.
3. Certain corporations known as "taxable REIT subsidiaries" (the "taxable
REIT subsidiary provision").
In addition, under the 1999 Act, not more than 20% of the value of a real
estate investment trust's total assets may be represented by shares of one or
more taxable REIT subsidiaries. Taxable REIT subsidiaries will be subject to
full corporate level taxation on their earnings, but will be permitted to engage
in certain types of activities which cannot currently be performed by real
estate investment trusts or their controlled subsidiaries without jeopardizing
real estate investment trust status. Taxable REIT subsidiaries will be subject
to certain limitations on the deductibility of certain payments made to the
associated real estate investment trust which could materially increase the
taxable income of the taxable REIT subsidiary. Similarly, to ensure that taxable
REIT subsidiaries pay market rates for rents, interest and services, a 100%
excise tax will be imposed on a REIT to the extent a taxable REIT subsidiary
pays rent, interest or services to it in excess of a market rate. Moreover,
rents paid by a taxable REIT subsidiary to the associated real estate investment
trust may be excluded from qualification as rents from real property under
certain circumstances.
Under the taxable REIT subsidiary provision, we would be allowed to jointly
elect with corporate subsidiaries to treat such subsidiaries as "taxable REIT
subsidiaries" for taxable years beginning after December 31, 2000, subject to
certain transition rules. Further, although we indirectly own more than 10% of
the value of the outstanding securities of certain subsidiaries which, absent a
taxable REIT subsidiary election, would violate the provisions of the 1999 Act,
the taxable REIT subsidiary provision contains certain "grandfather" rules which
would make the limitations on stock ownership described above inapplicable to
our indirect ownership of such subsidiaries, even in the absence of an election
to treat such subsidiaries as "taxable REIT subsidiaries." In such case,
however, the taxable REIT subsidiary provision would terminate our ability to
rely on the grandfather rule if such subsidiaries were either to engage in new
trades or businesses or acquire substantial new assets. Accordingly, in the
absence of such election, the taxable REIT subsidiary provision may limit the
future activities and growth of such subsidiaries.
We have taken appropriate steps to ensure that, since January 1, 2001 (and
will take appropriate steps to ensure that in the future), with respect to any
issuer, other than a qualified REIT subsidiary or another REIT, either: (1) we
have owned 10% or less of the value of the outstanding securities of such
issuer; (2) such issuer has qualified as a "taxable REIT subsidiary," or
(3) the securities we own of such issuer are exempted under the aforementioned
"grandfather" rules. Additionally, we believe that not more than 20% of the
total value of our gross assets was or is represented by the securities of one
or more taxable REIT subsidiaries, and we will monitor our assets to ensure that
we will continue to meet this test at all applicable times in the future.
However, there can be no assurance that the
30
Internal Revenue Service will not contend that the value of the securities of
taxable REIT subsidiaries represents more than 20% of the total value of our
gross assets.
As noted in "--Taxation of the Company--Annual Distribution Requirements,"
another provision under the 1999 Act amends certain real estate investment trust
distribution requirements by reducing the amount required to be distributed to
90%. These amendments are also effective for taxable years beginning after
December 31, 2000.
STATE AND LOCAL TAXES. We and our stockholders may be subject to state or
local taxation, and we may be subject to state or local tax withholding
requirements in various jurisdictions, including those in which we or they
transact business or reside. The state and local tax treatment of the Company
and our stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in shares in the Company.
IT IS STRONGLY ADVISED THAT EACH PROSPECTIVE PURCHASER CONSULT WITH SUCH
PURCHASER'S TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH
PURCHASER OF THE PURCHASE, OWNERSHIP AND SALE OF SHARES IN AN ENTITY ELECTING TO
BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND
ELECTION OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
LEGAL MATTERS
Ballard Spahr Andrews & Ingersoll, LLP will pass upon the validity of the
shares.
EXPERTS
The financial statements incorporated in this Registration Statement by
reference to the Annual Report on Form 10-K of iStar Financial Inc. for the year
ended December 31, 2000 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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10,000,000 SHARES
[LOGO]
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
MAY 15, 2002
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