COLE CREDIT PROPERTY TRUST II, INC.
As
filed with the Securities and Exchange Commission on April 27,
2007
Registration No. 333-121094
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 9 TO
FORM S-11
FOR REGISTRATION UNDER
THE SECURITIES ACT OF 1933
OF CERTAIN REAL ESTATE COMPANIES
COLE CREDIT PROPERTY TRUST II, INC.
(Exact Name of Registrant as Specified in Its Governing Instruments)
2555 East Camelback Road, Suite 400
Phoenix, Arizona 85016
(602) 778-8700
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrants Principal Executive Offices)
Blair D. Koblenz
Executive Vice President and Chief Financial Officer
Cole Credit Property Trust II, Inc.
2555 East Camelback Road, Suite 400
Phoenix, Arizona 85016
(602) 778-8700
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)
Copies to:
Lauren Burnham Prevost, Esq.
David M. Calhoun, Esq.
Heath D. Linsky, Esq.
Morris, Manning & Martin, LLP
1600 Atlanta Financial Center
3343 Peachtree Road, N.E.
Atlanta, Georgia 30326-1044
(404) 233-7000
Approximate date of commencement of proposed sale to the public: As soon as practicable
following effectiveness of this Registration Statement.
If this form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for
the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following
box. o
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This
Post-Effective Amendment No. 9 consists of the following: |
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1. The Registrants final form of Prospectus dated June 27, 2005, previously filed pursuant to Rule
424(b)(3) on June 29, 2005 and refiled herewith. |
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2.
Supplement No. 19 dated April 27, 2007, Supplement No. 18 dated April 18, 2007, Supplement No. 17 dated March 29,
2007, Supplement No. 16 dated March 20, 2007, Supplement
No. 15 dated January 24, 2007, Supplement No. 14
dated January 11, 2007 and Supplement No. 13 dated December 20, 2006 to the Registrants Prospectus
dated June 27, 2005, included herewith, each of which will be delivered as an
unattached document along with the Prospectus dated June 27,
2005. Supplement No. 13 supercedes and replaces all prior
supplements. |
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3. Part II, included herewith. |
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4. Signatures, included herewith. |
Cole Credit Property Trust II, Inc.
Maximum Offering of 50,000,000 Shares of Common Stock
Minimum Offering of 250,000 Shares of Common Stock
Cole Credit Property Trust II, Inc. is a newly organized
Maryland corporation that intends to qualify as a real estate
investment trust beginning with the taxable year ending
December 31, 2005.
We are offering up to a maximum of 45,000,000 shares of our
common stock in our primary offering for $10.00 per share,
with discounts available for certain categories of purchasers.
We also are offering up to 5,000,000 shares pursuant to our
distribution reinvestment plan at a purchase price during this
offering of $9.15 per share. We will offer these shares
until June 27, 2007, which is two years after the effective
date of this offering, unless the offering is extended.
The dealer manager of this offering, Cole Capital Corporation, a
member firm of the National Association of Securities Dealers,
Inc., is our affiliate and will offer the shares on a best
efforts basis. The minimum permitted purchase is generally
$2,500. We will not sell any shares unless we sell a minimum of
250,000 shares to the public by June 27, 2006, which
is one year from the effective date of this offering. Pending
satisfaction of this condition, all subscription payments will
be placed in an account held by the escrow agent, Wells Fargo
Bank, N.A., in trust for subscribers benefit, pending
release to us. You will not receive interest on such payments
unless they are held for more than 35 days unless we do not
sell at least 250,000 shares by June 27, 2006, which
is one year from the effective date of this offering, in which
case we will promptly return all funds in the escrow account
(including interest), and we will stop offering shares.
See Risk Factors beginning on page 18 to
read about risks you should consider before buying shares of our
common stock. These risks include the following:
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We have no operating history nor do we currently own any
properties. We are a blind pool because we do not
own any investments and have not identified any investments we
will make with proceeds from this offering. You will be unable
to evaluate the economic merit of our investments or how the
proceeds from this offering are invested and there may be a
substantial delay in receiving a return, if any, on your
investment. |
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There are substantial conflicts among us and our sponsor,
advisor, dealer manager and property manager, such as the fact
that our chairman and chief executive officer owns 100% of our
advisor, our dealer-manager and our property manager, and our
advisor and other affiliated entities may compete with us and
acquire properties suitable to our investment objectives. |
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No public market currently exists, and one may never exist, for
shares of our common stock. If you are able to sell your shares,
you would likely have to sell them at a substantial discount. |
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Until we generate operating cash flow sufficient to pay
distributions to our stockholders, we may make distributions
from the proceeds of this offering or from borrowings in
anticipation of future cash flow, which may constitute a return
of capital, reduce the amount of capital we ultimately invest in
properties and negatively impact the value of your investment. |
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We may fail to qualify as a real estate investment trust, also
known as a REIT. If we fail to qualify as a REIT, or if we
qualify and subsequently lose our REIT status, our operations
and our ability to make distributions would be adversely
affected. |
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You may not own more than 9.8% in value of the outstanding
shares of our stock or more than 9.8% of the number or value of
any class or series of our outstanding shares of stock. |
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We may incur substantial debt, which could hinder our ability to
pay distributions to our stockholders or could decrease the
value of your investment in the event that income on, or the
value of, the property securing the debt falls. |
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We are dependent on our advisor to select investments and
conduct our operations. Adverse changes in the financial
condition of our advisor or our relationship with our advisor
could adversely affect us. |
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We will pay substantial fees and expenses to our advisor, its
affiliates and participating broker-dealers, which payments
increase the risk that you will not earn a profit on your
investment. |
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This is a best efforts offering and some or all of
our shares may not be sold. |
Neither the Securities and Exchange Commission, the Attorney
General of the State of New York nor any other state securities
regulator has approved or disapproved of our common stock,
determined if this prospectus is truthful or complete or passed
on or endorsed the merits of this offering. Any representation
to the contrary is a criminal offense.
This investment involves a high degree of risk. You should
purchase these securities only if you can afford a complete loss
of your investment.
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Price | |
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Selling | |
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Dealer | |
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Net Proceeds | |
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to Public | |
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Commissions | |
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Manager Fee | |
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(Before Expenses) | |
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Primary Offering
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Per Share
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$ |
10.00 |
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$ |
0.70 |
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$ |
0.15 |
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$ |
9.15 |
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Total Minimum
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$ |
2,500,000 |
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$ |
175,000 |
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$ |
37,500 |
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$ |
2,287,500 |
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Total Maximum
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$ |
450,000,000 |
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$ |
31,500,000 |
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$ |
6,750,000 |
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$ |
411,750,000 |
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Distribution Reinvestment Plan
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Per Share
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$ |
9.15 |
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$ |
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$ |
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$ |
9.15 |
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Total Maximum
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$ |
45,750,000 |
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$ |
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$ |
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$ |
45,750,000 |
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June 27, 2005
SUITABILITY STANDARDS
An investment in our common stock involves a significant risk
and is only suitable for persons who have adequate financial
means, desire a relatively long-term investment and who will not
need immediate liquidity from their investment. Initially, we
will not have a public market for the common stock and we cannot
assure you that one will develop, which means that it may be
difficult for you to sell your shares. This investment is not
suitable for persons who require immediate liquidity or
guaranteed income, or who seek a short-term investment.
In consideration of these factors, we have established
suitability standards for initial stockholders and subsequent
purchasers of shares from our stockholders. These suitability
standards require that a purchaser of shares have, excluding the
value of a purchasers home, furnishings and automobiles,
either:
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a net worth of at least $150,000; or |
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a gross annual income of at least $45,000 and a net worth of at
least $45,000. |
The minimum purchase is 250 shares ($2,500). You may not
transfer less shares than the minimum purchase requirement. In
addition, you may not transfer or subdivide your shares so as to
retain less than the number of shares required for the minimum
purchase. In order to satisfy the minimum purchase requirements
for retirement plans, unless otherwise prohibited by state law,
a husband and wife may jointly contribute funds from their
separate IRAs, provided that each such contribution is made in
increments of $1,000. You should note that an investment in
shares of our common stock will not, in itself, create a
retirement plan and that, in order to create a retirement plan,
you must comply with all applicable provisions of the Internal
Revenue Code.
After you have purchased the minimum investment, any additional
purchase must be at least 100 shares ($1,000), except for
purchases of shares pursuant to our distribution reinvestment
plan, which may be in lesser amounts.
Several states have established suitability requirements that
are more stringent than the standards that we have established
and described above. Shares will be sold only to investors in
these states who meet the special suitability standards set
forth below:
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Arizona, California, Iowa, Michigan and Tennessee
Investors must have either (a) a net worth of at least
$225,000 or (2) gross annual income of at least $60,000 and
a net worth of at least $60,000. |
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Maine Investors must have either (1) a net
worth of at least $200,000 or (2) gross annual income of at
least $50,000 and a net worth of at least $50,000. |
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Kansas In addition to our standard suitability
requirements, it is recommended that investors should invest no
more than ten percent of their liquid net worth in our shares
and securities of other real estate investment trusts. |
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Ohio, Massachusetts and Pennsylvania Investors must
have either (a) a minimum annual gross income of $70,000
and a minimum net worth of $70,000 or (b) a minimum net worth of
$250,000. The investors maximum investment in the issuer
and affiliates cannot exceed 10% of the Ohio, Massachusetts or
Pennsylvania residents net worth. |
In all states listed above, net worth is to be determined
excluding the value of a purchasers home, furnishings and
automobiles.
Because the minimum offering of our common stock is less than
$25,000,000, Pennsylvania investors are cautioned to evaluate
carefully our ability to accomplish fully our stated objectives
and to inquire as to the current dollar volume of our
subscription proceeds.
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Each participating broker-dealer, authorized representative or
any other person selling shares on our behalf is required to:
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make every reasonable effort to determine that the purchase of
shares is a suitable and appropriate investment for each
investor based on information provided by such investor to the
broker-dealer, including such investors age, investment
objectives, income, net worth, financial situation and other
investments held by such investor; and |
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maintain records for at least six years of the information used
to determine that an investment in the shares is suitable and
appropriate for each investor. |
In making this determination, your participating broker-dealer,
authorized representative or other person selling shares on our
behalf will, based on a review of the information provided by
you, consider whether you:
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meet the minimum income and net worth standards established in
your state; |
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can reasonably benefit from an investment in our common stock
based on your overall investment objectives and portfolio
structure; |
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are able to bear the economic risk of the investment based on
your overall financial situation; and |
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have an apparent understanding of: |
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the fundamental risks of an investment in our common stock; |
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the risk that you may lose your entire investment; |
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the lack of liquidity of our common stock; |
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the restrictions on transferability of our common stock; |
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the background and qualifications of our advisor; and |
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the tax consequences of an investment in our common stock. |
In the case of sales to fiduciary accounts, the suitability
standards must be met by the fiduciary account, by the person
who directly or indirectly supplied the funds for the purchase
of the shares or by the beneficiary of the account. Given the
long-term nature of an investment in our shares, our investment
objectives and the relative illiquidity of our shares, our
suitability standards are intended to help ensure that shares of
our common stock are an appropriate investment for those of you
who become investors.
ii
TABLE OF CONTENTS
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vi
QUESTIONS AND ANSWERS ABOUT THIS OFFERING
Below we have provided some of the more frequently asked
questions and answers relating to an offering of this type.
Please see Prospectus Summary and the remainder of
this prospectus for more detailed information about this
offering.
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Q: |
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What is a REIT? |
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In general, a real estate investment trust (REIT) is a company
that: |
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pays distributions to investors of at least 90.0% of
its taxable income; |
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avoids the double taxation treatment of
income that generally results from investments in a corporation
because a REIT generally is not subject to federal corporate
income taxes on its net income, provided certain income tax
requirements are satisfied; and |
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combines the capital of many investors to acquire a
large-scale diversified real estate portfolio under professional
management. |
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How are you different from your competitors who offer
unlisted finite-life public REIT shares or real estate limited
partnership units? |
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We will focus our investments on the acquisition of
freestanding, single-tenant commercial properties net leased to
investment grade and other creditworthy tenants. Unlike funds
that invest in a limited number of multi-tenant properties, we
plan to acquire a diversified portfolio with a larger number of
single-tenant properties. Therefore, lower than expected results
of operations from one or a few investments will not necessarily
preclude our ability to realize our investment objectives of
current income to our investors and preservation of capital from
our overall portfolio. Our management believes that freestanding
retail properties, as compared to shopping centers, malls or
other retail complexes as a whole, offer a distinct investment
advantage since these properties generally offer superior
locations that are less dependent on the financial stability of
adjoining tenants. In addition, since we intend to acquire
properties that are geographically diverse, we expect to
minimize the potential adverse impact of economic downturns in
local markets. Also, when we acquire a property, we focus on
properties with a long term lease with investment grade or other
creditworthy tenants. |
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What is the experience of your officers and directors? |
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Christopher H. Cole, our chairman, chief executive officer and
president, has been active in the acquisition, financing,
management and structuring of commercial real estate
transactions for over 25 years and has been engaged as a
general partner in the structuring and management of real estate
limited partnerships since February 1979. He also is the chief
executive officer of Cole REIT Advisors II LLC, (Cole
Advisors II), which is our advisor. Through Mr. Coles
affiliated entities, as of December 31, 2004, Mr. Cole
has sponsored 47 private real estate programs with an aggregate
of over 5,000 investors since January 1, 1995. |
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Blair D. Koblenz, our executive vice president and chief
financial officer, has been active in the structuring and
financial management of commercial real estate investments for
over 20 years. He also is executive vice president and
chief financial officer of Cole Advisors II. Prior to
joining the Cole entities in 1994, he practiced in public
accounting from 1979 to 1982 with an emphasis in taxation and
business planning. He then served in a financial officer
capacity for real estate investment companies and operators in
Arizona from 1982 to 1994. |
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John M. Pons, our secretary, also is vice president, secretary
and counsel of Cole Advisors II. Prior to joining the Cole
entities in September 2003, Mr. Pons was an associate
general counsel and assistant secretary with GE Capital
Franchise Finance Corporation since December 2001. Prior to
December 2001, Mr. Pons was engaged in a private legal
practice. Mr. Pons has over nine years experience in all
aspects of real estate law, including the acquisition, sale,
leasing, development and financing of real property. |
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Marcus E. Bromley is a member of our board of directors,
chairman of its audit committee and a member of its compensation
committee. Since December 1993, Mr. Bromley has served
as a member of the board of trustees of Gables Residential
Trust, a multi-family residential REIT listed on the New York
Stock Exchange. From December 1993 until June 2000, Mr. Bromley
also served as the chief executive officer of Gables Residential
Trust. Prior to joining Gables Residential Trust, Mr. Bromley
was a division partner of Trammell Crow Residential. |
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Elizabeth L. Watson is a member of our board of directors,
chairperson of its audit committee and a member of its
compensation committee. Since September 2003, Ms. Watson
has been a partner in and has served as the chief operating
officer for NGP Capital Partners III, LLC (NGP Capital). In
addition to other positions in the real estate capital market
industry, from 1992 until 1994, Ms. Watson served as senior
vice president, chief financial officer and treasurer of Prime
Retail, Inc., a publicly traded REIT that developed and owned
factory outlet centers, and its predecessor company, The Prime
Group. |
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Will you acquire properties in joint ventures? |
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Possibly. We may want to acquire properties through one or more
joint ventures in order to diversify our portfolio of properties
in terms of geographic region, property type and tenant industry
group. Increased portfolio diversification will reduce the risk
to investors as compared to a program with a smaller number of
investments. Our joint ventures may be with our affiliates or
with third parties. Generally, we will only enter into a joint
venture in which we will control the decisions of the joint
venture. If we do enter into joint ventures, we may assume
liabilities related to the joint venture that exceed the
percentage of our investment in the joint venture. |
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What steps do you take to make sure you invest in
environmentally compliant property? |
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Generally, we will obtain a Phase I environmental
assessment of each property purchased. These assessments,
however, may not reveal all environmental hazards. In certain
instances, we will rely upon the experience of our advisor and
we expect that in most cases we will obtain a representation
from the seller that, to its knowledge, the property is not
contaminated with hazardous materials. |
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What will be the terms of your leases? |
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We will seek to secure leases from investment grade and other
creditworthy tenants before or at the time we acquire a
property. We expect that our leases generally will be net
leases, which means that the tenant would be responsible for the
cost of repairs, maintenance, property taxes, utilities,
insurance and other operating costs. In certain of these leases,
we will be responsible for the replacement of specific
structural components of a property, such as the roof of the
building or the parking lot. We expect that our leases generally
will have terms of ten or more years, some of which may have
renewal options. We may, however, enter into leases that have a
shorter term. |
|
Q: |
|
How will you determine whether tenants have the appropriate
creditworthiness for each building lease? |
|
A: |
|
We will determine creditworthiness pursuant to various methods,
including reviewing financial data and other information about
the tenant. In addition, we may use an industry credit rating
service to determine the creditworthiness of potential tenants
and any personal guarantor or corporate guarantor of each
potential tenant. We will compare the reports produced by these
services to the relevant financial and other data collected from
these parties before consummating a lease transaction. Such
relevant data from potential tenants and guarantors include
income statements and balance sheets for current and prior
periods, net worth or cash flow of guarantors, and business
plans and other data we deem relevant. |
|
Q: |
|
What is an UPREIT? |
|
A: |
|
UPREIT stands for Umbrella Partnership Real Estate
Investment Trust. We use an UPREIT structure because a
sale of property directly to a REIT generally is a taxable
transaction to the |
2
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selling property owner. In an UPREIT structure, a seller of a
property that desires to defer taxable gain on the sale of its
property may transfer the property to the UPREIT in exchange for
limited partnership units in the UPREIT and defer taxation of
gain until the seller later exchanges its UPREIT units on a
one-for-one basis for REIT shares. If the REIT shares are
publicly traded, at the time of the exchange of units for
shares, the former property owner will achieve liquidity for its
investment. Using an UPREIT structure may give us an advantage
in acquiring desired properties from persons who may not
otherwise sell their properties because of unfavorable tax
results. |
|
Q: |
|
Will the distributions I receive be taxable as ordinary
income? |
|
A: |
|
Yes and no. Generally, distributions that you receive, including
distributions that are reinvested pursuant to our distribution
reinvestment plan, will be taxed as ordinary income to the
extent they are from current or accumulated earnings and
profits. We expect that some portion of your distributions may
not be subject to tax in the year received because depreciation
expense reduces taxable income but does not reduce cash
available for distribution. The portion of your distribution
that is not subject to tax immediately is considered a return of
capital for tax purposes and will reduce the tax basis of your
investment. This, in effect, defers a portion of your tax until
your investment is sold or we are liquidated, at which time you
will be taxed at capital gains rates. However, because each
investors tax considerations are different, we suggest
that you consult with your tax advisor. You also should review
the section of this prospectus entitled Federal Income Tax
Considerations. |
|
Q: |
|
What will you do with the money raised in this offering
before you invest the proceeds in real estate? |
|
A: |
|
|
|
|
Until we invest the proceeds of this offering in real estate, we
may invest in short-term, highly liquid or other authorized
investments. Such short-term investments will not earn as high
of a return as we expect to earn on our real estate investments,
and we may be not be able to invest the proceeds in real estate
promptly. |
|
Q: |
|
How does a best efforts offering work? |
|
A: |
|
When shares are offered to the public on a best
efforts basis, the brokers participating in the offering
are only required to use their best efforts to sell the shares
and have no firm commitment or obligation to purchase any of the
shares. Therefore, we may not sell all or any of the shares that
we are offering. |
|
Q: |
|
Who can buy shares? |
|
A: |
|
Generally, you may buy shares pursuant to this prospectus
provided that you have either (1) a net worth of at least
$45,000 and a gross annual income of at least $45,000, or
(2) a net worth of at least $150,000. For this purpose, net
worth does not include your home, home furnishings and
automobiles. You should carefully read the more detailed
description under Suitability Standards immediately
following the cover page of this prospectus. |
|
Q: |
|
For whom is an investment in our shares recommended? |
|
A: |
|
An investment in our shares may be appropriate for you if you
meet the minimum suitability standards mentioned above, seek to
diversify your personal portfolio with a finite-life, real
estate-based investment, seek to receive current income, seek to
preserve capital, wish to obtain the benefits of potential
long-term capital appreciation and are able to hold your
investment for a time period consistent with our liquidity
plans. On the other hand, we caution persons who require
immediate liquidity or guaranteed income, or who seek a
short-term investment, that an investment in our shares will not
meet those needs. |
|
Q: |
|
May I make an investment through my IRA, SEP or other
tax-deferred account? |
|
A: |
|
Yes. You may make an investment through your individual
retirement account (IRA), a simplified employee pension
(SEP) plan or other tax-deferred account. In making these
investment decisions, |
3
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you should consider, at a minimum, (1) whether the
investment is in accordance with the documents and instruments
governing your IRA, plan or other account, (2) whether the
investment satisfies the fiduciary requirements associated with
your IRA, plan or other account, (3) whether the investment
will generate unrelated business taxable income (UBTI) to
your IRA, plan or other account, (4) whether there is
sufficient liquidity for such investment under your IRA, plan or
other account, (5) the need to value the assets of your
IRA, plan or other account annually or more frequently, and
(6) whether the investment would constitute a prohibited
transaction under applicable law. |
|
Q: |
|
Have you arranged for a custodian for investments made
through IRA, SEP or other tax-deferred accounts? |
|
A: |
|
Yes. Sterling Trust Company has agreed to serve as custodian for
investments made through IRA, SEP and certain other tax-deferred
accounts. Sterling Trust Company has agreed to provide this
service to our stockholders with annual maintenance fees charged
at a discounted rate. |
|
Q: |
|
Is there any minimum investment required? |
|
A: |
|
Yes. Generally, you must invest at least $2,500. Investors who
already own our shares can make additional purchases for less
than the minimum investment. You should carefully read the more
detailed description of the minimum investment requirements
appearing under Suitability Standards immediately
following the cover page of this prospectus. |
|
Q: |
|
How do I subscribe for shares? |
|
A: |
|
If you choose to purchase shares in this offering, you will need
to complete and sign a subscription agreement, like the one
contained in this prospectus as Appendix B, for a specific
number of shares and pay for the shares at the time you
subscribe. |
|
Q: |
|
Who is the transfer agent? |
|
A: |
|
The name, address and telephone number of our transfer agent is
as follows: |
|
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Phoenix Transfer, Inc.
2401 Kerner Boulevard
San Rafael, California 94901
(866) 341-2653 |
|
|
|
To ensure that any account changes are made promptly and
accurately, all changes including your address, ownership type
and distribution mailing address should be directed to the
transfer agent. |
|
Q: |
|
Will I be notified of how my investment is doing? |
|
A: |
|
Yes. We will provide you with periodic updates on the
performance of your investment with us, including: |
|
|
|
following our commencement of distributions to
stockholders, four quarterly or 12 monthly distribution
reports; |
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three quarterly financial reports; |
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an annual report; |
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an annual Form 1099; and |
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supplements to the prospectus during the offering
period. |
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We will provide this information to you via one or more of the
following methods, in our discretion and with your consent, if
necessary: |
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U.S. mail or other courier; |
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|
facsimile; |
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electronic delivery; and |
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posting on our affiliated website, which is
www.colecapital.com. |
4
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|
Q: |
|
When will I get my detailed tax information? |
|
A: |
|
Your Form 1099 tax information will be placed in the mail
by January 31 of each year. |
|
Q: |
|
Who can help answer my questions? |
|
A: |
|
If you have more questions about the offering or if you would
like additional copies of this prospectus, you should contact
your registered representative or contact: |
Cole Capital Corporation
2555 East Camelback Road, Suite 400
Phoenix, Arizona 85016
(866) 341-2653
Attn: Investor Services
www.colecapital.com
5
PROSPECTUS SUMMARY
This prospectus summary highlights material information
contained elsewhere in this prospectus. Because it is a summary,
it may not contain all of the information that is important to
you. To understand this offering fully, you should read the
entire prospectus carefully, including the Risk
Factors section and the financial statements, before
making a decision to invest in our common stock.
Cole Credit Property Trust II, Inc.
Cole Credit Property Trust II, Inc. is a newly organized
Maryland corporation incorporated on September 29, 2004,
that intends to qualify as a REIT beginning with the taxable
year that will end December 31, 2005. We expect to use
substantially all of the net proceeds from this offering to
acquire and operate commercial real estate primarily consisting
of high quality, freestanding, single-tenant commercial
properties net leased to investment grade and other creditworthy
tenants located throughout the United States. Because we have
not yet identified any specific properties to purchase, we are
considered to be a blind pool.
Our office is located at 2555 East Camelback Road,
Suite 400, Phoenix, Arizona 85016. Our telephone number
outside the State of Arizona is 866-341-2653. Our fax number is
602-778-8780, and the e-mail address of our investor relations
department is investorservices@colecapital.com.
Additional information about us and our affiliates may be
obtained at www.colecapital.com, but the contents of that
site are not incorporated by reference in or otherwise a part of
this prospectus.
Our Advisor
Cole Advisors II, a Delaware limited liability company,
will be our advisor and will be responsible for managing our
affairs on a day-to-day basis and for identifying and making
acquisitions on our behalf.
Our Management
We operate under the direction of our board of directors, the
members of which are accountable to us and our stockholders as
fiduciaries. Currently, we have three directors, Christopher H.
Cole, Marcus E. Bromley and Elizabeth L. Watson.
Mr. Bromley and Ms. Watson each will be independent of Cole
Advisors II. Our executive officers and one of our directors are
affiliated with Cole Advisors II. Our charter, which
requires that a majority of our directors be independent of Cole
Advisors II, requires that our independent directors will be
responsible for reviewing the performance of Cole
Advisors II and must approve other matters set forth in our
charter. See the Conflicts of Interest Certain
Conflict Resolution Procedures section of this prospectus.
Our directors will be elected annually by the stockholders.
Our REIT Status
If we qualify as a REIT, we generally will not be subject to
federal income tax on income that we distribute to our
stockholders. Under the Internal Revenue Code, a REIT is subject
to numerous organizational and operational requirements,
including a requirement that it distribute at least 90.0% of its
annual taxable income to its stockholders. If we fail to qualify
for taxation as a REIT in any year, our income will be taxed at
regular corporate rates, and we may be precluded from qualifying
for treatment as a REIT for the four-year period following our
failure to qualify. Even if we qualify as a REIT for federal
income tax purposes, we may still be subject to state and local
taxes on our income and property and to federal income and
excise taxes on our undistributed income.
6
Summary Risk Factors
Following are the most significant risks relating to your
investment:
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|
|
Our advisor and its affiliates will face conflicts of interest,
including significant conflicts among us and our advisor, since
(i) our chairman, chief executive officer and president
owns 100% of our advisor, our dealer manager and our property
manager, (ii) our advisor and other affiliated entities may
compete with us and acquire properties suitable to our
investment objectives, and (iii) our advisors
compensation arrangements with us and other Cole-sponsored
programs may provide incentives that are not aligned with the
interests of our stockholders. |
|
|
|
We have no operating history, nor do we currently own any
properties. This is considered a blind pool offering since we
have not identified any properties to acquire with the proceeds
of this offering. As a result, you will be unable to evaluate
the economic merit of our investments or how the proceeds of
this offering are invested and there may be a substantial delay
in receiving a return, if any, on your investment. |
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|
You may not own more than 9.8% in value of the outstanding
shares of our common stock or more than 9.8% of the number or
value of any class or series of our outstanding shares of stock.
Therefore, your ability to control the direction of our company
will be limited. |
|
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|
No public market currently exists for our shares of common stock
and one may never exist. If you are able to sell your shares,
you would likely have to sell them at a substantial discount
from their public offering price. |
|
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|
This is a best efforts offering and some or all of our shares
may not be sold. |
|
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|
If we raise substantially less than the maximum offering, we may
not be able to invest in a diverse portfolio of properties, and
the value of your investment may vary more widely with the
performance of specific properties. |
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|
We may incur substantial debt, which could hinder our ability to
pay distributions to our stockholders or could decrease the
value of your investment in the event that income on, or the
value of, the property securing the debt falls. |
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|
Until the proceeds from this offering are invested and
generating operating cash flow sufficient to make distributions
to our stockholders, we intend to pay all or a substantial
portion of our distributions from the proceeds of this offering
or from borrowings in anticipation of future cash flow, which
may constitute a return of your capital, reduce the amount of
capital we ultimately invest in properties, and negatively
impact the value of your investment. |
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We may fail to qualify as a REIT. If we fail to qualify as a
REIT, or if we qualify and subsequently lose our REIT status,
our operations and our ability to make distributions would be
adversely affected. |
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We are dependent on our advisor to select investments and
conduct our operations; thus, we would be adversely affected by
adverse changes in the financial condition of our advisor or our
relationship with our advisor. |
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|
We will pay substantial fees and expenses to our advisor and its
affiliates, which payments are not dependent on the quality of
the property acquired or the services provided to us. |
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|
Our board of directors has the authority to designate and issue
one or more classes or series of preferred stock without
stockholder approval, with rights and preferences senior to the
rights of holders of common stock, including rights to payment
of distributions. If we issue any preferred shares, the amount
of funds available for the payment of distributions on the
common stock could be reduced or eliminated. |
Before you invest in us, you should carefully read and consider
the more detailed Risk Factors section of this
prospectus.
7
Description of Real Estate Investments
We expect to use substantially all of the net proceeds from this
offering to acquire and operate commercial real estate primarily
consisting of high quality, freestanding, single-tenant
commercial properties net leased to investment grade tenants,
which generally are companies that have a debt rating by
Moodys of Baa3 or better or a credit rating by Standard
& Poors of BBB- or better, or are guaranteed by a
company with such rating, and other creditworthy tenants located
throughout the United States. We intend to hold each property
for eight to ten years. We also may invest in entities that make
similar investments. In addition, if our advisor determines
that, due to the state of the real estate market or in order to
diversify our investment portfolio, it would be advantageous to
us, we also may invest in mortgage loans secured by commercial
properties.
Our advisor, Cole Advisors II, will make recommendations to our
board of directors for our investments. All acquisitions of
commercial properties will be evaluated for tenant
creditworthiness and the reliability and stability of their
future income and capital appreciation potential. We will
consider the risk profile, credit quality and reputation of
tenants and the impact of each particular acquisition as it
relates to the portfolio as a whole. Our board of directors will
exercise its fiduciary duties to our stockholders in determining
to approve or reject each of these investment recommendations.
Because we have not yet identified any specific properties to
purchase, we are considered to be a blind pool. As we acquire
properties, we will supplement this prospectus to describe
material changes to our portfolio.
Estimated Use of Proceeds of This Offering
Depending primarily on the number of shares we sell in this
offering and assuming all shares sold under our distribution
reinvestment plan are sold at $9.15 per share, we estimate
for each share sold in this offering that approximately $8.86
will be available for the purchase of real estate. We will use
the remainder of the offering proceeds to pay the costs of the
offering, including selling commissions and the dealer manager
fee, and to pay a fee to our advisor for its services in
connection with the selection and acquisition of properties. We
will not pay selling commissions or a dealer manager fee on
shares sold under our distribution reinvestment plan. The table
below sets forth our estimated use of proceeds from this
offering:
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|
Minimum Offering | |
|
Maximum Offering | |
|
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| |
|
| |
|
|
Amount | |
|
Percent | |
|
Amount | |
|
Percent | |
|
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| |
|
| |
|
| |
|
| |
Gross Offering Proceeds
|
|
$ |
2,500,000 |
|
|
|
100.0 |
% |
|
$ |
495,750,000 |
|
|
|
100.0 |
% |
Less Public Offering Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Commissions and Dealer Manager Fee
|
|
|
212,500 |
|
|
|
8.5 |
% |
|
|
38,250,000 |
|
|
|
7.7 |
% |
|
Organization and Offering Expenses
|
|
|
37,500 |
|
|
|
1.5 |
% |
|
|
7,436,250 |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Available for Investment
|
|
$ |
2,250,000 |
|
|
|
90.0 |
% |
|
$ |
450,063,750 |
|
|
|
90.8 |
% |
Acquisition and Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Acquisition and Advisory Fees
|
|
|
43,902 |
|
|
|
1.8 |
% |
|
|
8,781,732 |
|
|
|
1.8 |
% |
|
Acquisition Expenses
|
|
|
10,976 |
|
|
|
0.4 |
% |
|
|
2,195,433 |
|
|
|
0.4 |
% |
|
Initial Working Capital Reserve
|
|
|
0 |
|
|
|
0 |
% |
|
|
0 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Invested in Properties
|
|
$ |
2,195,122 |
|
|
|
87.8 |
% |
|
$ |
439,086,585 |
|
|
|
88.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Objectives
Our primary investment objectives are:
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|
to provide current income for you through the payment of cash
distributions; and |
|
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|
to preserve, protect and return your invested capital. |
8
We also seek capital gain from our investments. See the
Investment Objectives and Policies section of this
prospectus for a more complete description of our investment
policies and investment restrictions.
Conflicts of Interest
Cole Advisors II, as our advisor, will experience conflicts
of interest in connection with the management of our business
affairs, including the following:
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|
The management personnel of Cole Advisors II, each of whom
also makes investment decisions for other Cole-sponsored
programs, must determine which investment opportunities to
recommend to us or another Cole-sponsored program or joint
venture and must determine how to allocate resources among us
and the other Cole-sponsored programs; |
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|
Cole Advisors II may structure the terms of joint ventures
between us and other Cole-sponsored programs; |
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|
We have retained Fund Realty Advisors, Inc. (Fund Realty
Advisors), an affiliate of Cole Advisors II, to manage and
lease some or all of our properties; |
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Cole Advisors II and its affiliates will have to allocate
their time between us and other real estate programs and
activities in which they are involved; and |
|
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Cole Advisors II and its affiliates will receive fees in
connection with transactions involving the purchase, management
and sale of our properties regardless of the quality of the
property acquired or the services provided to us. |
Our officers and one of our directors also will face these
conflicts because of their affiliation with Cole
Advisors II. In addition, three persons who are officers
and/or a director of our company also serve as officers and/or
directors of Cole Credit Property Trust, Inc. (Cole
REIT I), an affiliated, private real estate program, and
Cole REIT Advisors, LLC (Cole Advisors), the advisor to Cole
REIT I. These conflicts of interest could result in decisions
that are not in our best interests. See the Conflicts of
Interest section of this prospectus for a detailed
discussion of the various conflicts of interest relating to your
investment, as well as the procedures that we have established
to mitigate a number of these potential conflicts.
9
The following chart shows the ownership structure of the various
Cole entities that are affiliated with Cole Advisors II.
|
|
(1) |
Christopher H. Cole, our chairman, chief executive officer and
president, owns 99% of the membership interests, and Cole
Holdings Corporation owns 1% of the membership interests, of
Cole Capital Partners. |
|
(2) |
The investors will own registered shares of common stock in Cole
Credit Property Trust II, Inc. |
|
(3) |
Cole Holdings Corporation currently owns 20,000 shares of our
common stock. The amount shown is prior to this offering. After
the offering, Cole Holdings Corporation will own between 7.4% of
our common stock, assuming a minimum offering, and 0.04% of our
common stock, assuming a maximum offering, including the sale of
5,000,000 shares under our distribution reinvestment plan. |
10
Prior Offering Summary
Since January 1, 1995 our chairman, chief executive officer
and president, Christopher H. Cole, through entities he directly
or indirectly controls, has previously sponsored 48 privately
offered real estate programs, including 24 limited partnerships,
four debt offerings and 19 tenant-in-common programs, and is
currently sponsoring Cole REIT I, a privately offered REIT.
As of March 31, 2005, such programs have raised an
aggregate of approximately $287.2 million from over 5,400
investors, and have owned and operated a total of
118 commercial real estate properties. Neither
Mr. Cole, nor any of our other affiliates, has previously
sponsored or organized a publicly offered REIT. The Prior
Performance Summary section of this prospectus contains a
discussion of the programs sponsored by Mr. Cole since
January 1, 1995. Certain financial results and information
relating to such programs with investment objectives similar to
ours is also provided in the Prior Performance
Tables included as Appendix A to this prospectus. The
prior performance of the programs previously sponsored by
Mr. Cole is not necessarily indicative of the results that
we will achieve. Therefore, you should not assume that you will
experience returns, if any, comparable to those experienced by
investors in such prior real estate programs.
The Offering
We are offering an aggregate of 45,000,000 shares of common
stock in our primary offering on a best-efforts basis at
$10.00 per share. Discounts are available for certain
categories of purchasers as described in the Plan of
Distribution section of this prospectus. We are also
offering 5,000,000 shares of common stock under our
distribution reinvestment plan at $9.15 per share, subject to
certain limitations, as described in the Distribution
Reinvestment Plan section of this prospectus. We will
offer shares of common stock in our primary offering until the
earlier of June 27, 2007, which is two years from the
effective date of this offering, unless the offering is
extended, or the date we sell 45,000,000 shares. We may
sell shares under the distribution reinvestment plan beyond the
termination of our primary offering until we have sold
5,000,000 shares through the reinvestment of distributions,
but only if there is an effective registration statement with
respect to the shares. Under the Securities Act of 1933, as
amended (Securities Act), and in some states, we may not be able
to continue the offering for these periods without filing a new
registration statement, or in the case of shares sold under the
distribution reinvestment plan, renew or extend the registration
statement in such state. We may terminate this offering at any
time prior to the stated termination date.
We will not sell any shares unless we sell a minimum of
250,000 shares of our common stock by June 27, 2006,
which is one year from the effective date of this offering. Our
directors, officers, advisor and their respective affiliates may
purchase for investment shares of our common stock in this
offering. However, purchases by our directors, officers, advisor
or their affiliates will not count toward meeting this minimum
threshold. Pending satisfaction of this condition, all
subscription payments will be placed in an account held by the
escrow agent, Well Fargo Bank, N.A., in trust for
subscribers benefit, pending release to us. If we do not
sell 250,000 shares of our common stock to the public by
June 27, 2006, which is one year from the effective date of
this offering, we will terminate this offering and return all
subscribers funds, plus interest, without deduction for
any expenses within ten days thereafter. Funds in escrow
will be invested in short-term investments that mature on or
before June 27, 2006, which is one year from the effective
date of this offering, or that can be readily sold or otherwise
disposed of for cash by such date without any dissipation of the
offering proceeds invested. See Plan of
Distribution Special Notice to Pennsylvania
Investors regarding the sale of shares to Pennsylvania
investors.
Compensation to Cole Advisors II and its Affiliates
Cole Advisors II and its affiliates will receive
compensation and reimbursement for services relating to this
offering and the investment and management of our assets. The
most significant items of compensation are included in the table
below. The selling commissions and dealer manager fee may vary
for different categories of purchasers. See the Plan of
Distribution section of this prospectus. The table below
assumes the shares are sold through distribution channels
associated with the highest possible selling
11
commissions and dealer manager fees and accounts for the fact
that shares are sold through our distribution reinvestment plan
at $9.15 per share with no selling commissions and no dealer
manager fee.
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|
Estimated Amount for | |
|
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|
|
Minimum Offering | |
|
|
|
|
(250,000 shares)/Maximum | |
|
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|
|
Offering | |
Type of Compensation |
|
Determination of Amount |
|
(50,000,000 shares) | |
|
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|
| |
Offering
Stage |
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Selling Commissions
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We will pay to Cole Capital Corporation 7.0% of gross proceeds
of our primary offering; we will not pay any selling commissions
on sales of shares under our distribution reinvestment plan;
Cole Capital Corporation will reallow all selling commissions to
participating broker-dealers. |
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$175,000/$31,500,000 |
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Dealer Manager Fee
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We will pay to Cole Capital Corporation 1.5% of gross proceeds
of our primary offering; we will not pay a dealer manager fee
with respect to sales under our distribution reinvestment plan. |
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$37,500/$6,750,000 |
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Other Organization and Offering Expenses
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We will reimburse Cole Advisors II up to 1.5% of gross
offering proceeds for organization and offering expenses. |
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$37,500/$7,436,250 |
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Operational
Stage |
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Acquisition and Advisory Fees
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We will pay Cole Advisors II 2.0% of the contract purchase
price of each property acquired. |
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$43,902/$8,781,732 |
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Acquisition Expenses
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We will reimburse Cole Advisors II for acquisition expenses
incurred in acquiring property. We expect these fees to be
approximately 0.5% of the purchase price of each property. In no
event will the total of all acquisition and advisory fees and
acquisition expenses payable with respect to a particular
investment exceed 6% of the contract purchase price. |
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Actual amounts are dependent upon the actual expenses incurred in acquiring a property or asset, and therefore cannot be determined at this time. |
Asset Management Fees
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We will pay Cole Advisors II a monthly fee equal to
0.02083%, which is one-twelfth of 0.25%, of the aggregate assets
value plus costs and expenses incurred by the advisor in
providing asset management services. |
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Not determinable at this time. Because the fee is based on a fixed percentage of aggregate asset value there is no maximum dollar amount of this fee. |
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Estimated Amount for | |
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Minimum Offering | |
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(250,000 shares)/Maximum | |
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Offering | |
Type of Compensation |
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Determination of Amount |
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(50,000,000 shares) | |
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Property Management and Leasing Fees
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For the management and leasing of our properties, we will pay
Fund Realty Advisors, an affiliate of our advisor, a property
management fee equal to 2.0% of gross revenues plus market-based
leasing commissions applicable to the geographic location of the
property. We also will reimburse Fund Realty Advisors
costs of managing the properties. Fund Realty Advisors or its
affiliates may also receive a fee for the initial leasing of
newly constructed properties, which would generally equal one
months rent. The aggregate of all property management and
leasing fees paid to our affiliates plus all payments to third
parties for such fees will not exceed the amount that other
nonaffiliated management and leasing companies generally charge
for similar services in the same geographic location as
determined by a survey of brokers and agents in such area. |
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Not determinable at this time. Because the fee is based on a fixed percentage of gross revenue and/or market rates, there is no maximum dollar amount of this fee. |
Operating Expenses
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We will reimburse our advisors costs of providing
administrative services, subject to the limitation that we will
not reimburse our advisor for any amount by which our operating
expenses (including the asset management fee) at the end of the
four preceding fiscal quarters exceeds the greater of(i) 2%
of average invested assets, or (ii) 25% of net income other
than any additions to reserves for depreciation, bad debt or
other similar non-cash reserves and excluding any gain from the
sale of assets for that period. Additionally, we will not
reimburse our advisor for personnel costs in connection with
services for which the advisor receives acquisition fees or real
estate commissions. |
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Not determinable at this time. |
Financing Coordination Fee
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If our advisor provides services in connection the origination
or refinancing of any debt that we obtain and use to acquire
properties or to make other permitted investments, we will pay
the advisor a financing coordination fee equal to 1% of the
amount available under such financing, subject to certain
limitations. |
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Not determinable at this time. Because the fee is based on a fixed percentage of any debt financing, there is no maximum dollar amount of this fee. |
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Estimated Amount for | |
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Minimum Offering | |
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(250,000 shares)/Maximum | |
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Offering | |
Type of Compensation |
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Determination of Amount |
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(50,000,000 shares) | |
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Liquidation/ Listing Stage |
Real Estate Commissions
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Up to one-half of the brokerage commission paid on the sale of
property, not to exceed 2.0% of the contract price for property
sold, in each case, payable to our advisor if our advisor or its
affiliates, as determined by a majority of the independent
directors, provided a substantial amount of services in
connection with the sale. |
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Not determinable at this time. Because the commission is based on a fixed percentage of the contract price for a sold property, there is no maximum dollar amount of these commissions. |
Subordinated Participation in Net Sale Proceeds (payable only if
we are not listed on an exchange)
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10.0% of remaining net sale proceeds after return of capital
plus payment to investors of an 8.0% cumulative, non-compounded
return on the capital contributed by investors. We cannot assure
you that we will provide this 8.0% return, which we have
disclosed solely as a measure for our advisors incentive
compensation. |
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Not determinable at this time. There is no maximum amount of these payments. |
Subordinated Incentive Listing Fee (payable only if we are
listed on an exchange, which we have no intent to do at this
time)
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10.0% of the amount by which our adjusted market value plus
distributions exceeds the aggregate capital contributed by
investors plus an amount equal to an 8.0% cumulative,
non-compounded annual return to investors. We cannot assure you
that we will provide this 8.0% return, which we have disclosed
solely as a measure for our advisors incentive
compensation. |
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Not determinable at this time. There is no maximum amount of this fee. |
Distribution Policy
To maintain our qualification as a REIT, we are required to make
aggregate annual distributions to our stockholders of at least
90.0% of our annual taxable income (which does not necessarily
equal net income as calculated in accordance with generally
accepted accounting principles in the United States (GAAP)). Our
board of directors may authorize distributions in excess of
those required for us to maintain REIT status depending on our
financial condition and such other factors as our board of
directors deems relevant. We have not established a minimum
distribution level. We expect to calculate our quarterly or
monthly distributions based upon daily record and distribution
declaration dates so investors may be entitled to distributions
immediately upon purchasing our shares. We expect that such
distributions will begin no later than the third quarter after
the commencement of this offering. However, because we have not
identified any probable investments, there can be no assurance
as to when, or if, we will begin to generate sufficient cash
flow for distribution to our stockholders. In the event we do
not have enough cash to make distributions, we may borrow, issue
additional securities or sell assets in order to fund
distributions. Until we are generating operating cash flow
sufficient to make distributions to our
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stockholders, we intend to pay all or a substantial portion of
our distributions from the proceeds of this offering or from
borrowings, including possible borrowings from our advisor or
its affiliates, in anticipation of future cash flow, which may
reduce the amount of capital we ultimately invest in properties,
and negatively impact the value of your investment.
Listing
We will seek to list our shares of common stock for trading on a
national securities exchange or for quotation on The Nasdaq
National Market when and if our independent directors believe
listing would be in the best interest of our stockholders.
However, at this time, we have no intent to list our shares. We
do not anticipate that there will be any market for our common
stock unless and until our shares are listed. If we do not list
our shares of common stock on a national securities exchange or
on The Nasdaq National Market by the tenth anniversary of the
commencement of this offering, our charter requires that we
either:
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seek stockholder approval of an extension or amendment of this
listing deadline; or |
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seek stockholder approval of the liquidation of our corporation. |
If we seek and do not obtain stockholder approval of an
extension or amendment to the listing deadline, we would then be
required to seek stockholder approval of our liquidation. If we
seek and fail to obtain stockholder approval of our liquidation,
our charter would not require us to list or liquidate and we
could continue to operate as before. In such event, there would
be no public market for shares of our common stock and you could
be required to hold the shares indefinitely. If we seek and
obtain stockholder approval of our liquidation, we would begin
an orderly sale of our properties and distribute, subject to our
advisors subordinated participation our net proceeds to
you.
Distribution Reinvestment Plan
Under our distribution reinvestment plan, you may have the
distributions you receive reinvested in additional shares of our
common stock. The purchase price per share under our
distribution reinvestment plan will be the higher of 91.5% of
the fair market value per share as determined by our board of
directors and $9.15 per share. No sales commissions or dealer
manager fees will be paid on shares sold under the distribution
reinvestment plan. If you participate in the distribution
reinvestment plan, you will not receive the cash from your
distributions, other than special distributions that are
designated by our board of directors. As a result, you may have
a tax liability with respect to your share of our taxable
income, but you will not receive cash distributions to pay such
liability. We may terminate the distribution reinvestment plan
at our discretion at any time upon ten days prior written
notice to you. Additionally, we will be required to discontinue
sales of shares under the distribution reinvestment plan on the
earlier of June 27, 2007, which is two years from the
effective date of this offering, unless the offering is
extended, or the date we sell 5,000,000 shares under the plan,
unless we file a new registration statement with the Securities
and Exchange Commission and applicable states.
Share Redemption Program
Our board of directors has adopted a share redemption program
that enables our stockholders to sell their shares to us in
limited circumstances. Our share redemption program permits you
to sell your shares back to us after you have held them for at
least one year, subject to the significant conditions and
limitations described below.
There are several restrictions on your ability to sell your
shares to us under the program. You generally have to hold your
shares for one year before selling your shares to us under the
plan; however, we may waive the one-year holding period in the
event of the death or bankruptcy of a stockholder. In addition,
we will limit the number of shares redeemed pursuant to our
share redemption program as follows: (1) during any
calendar year, we will not redeem in excess of 3.0% of the
weighted average number of shares outstanding during the prior
calendar year; and (2) funding for the redemption of shares
15
will be limited to the amount of net proceeds we receive from
the sale of shares under our distribution reinvestment plan.
These limits may prevent us from accommodating all requests made
in any year. During the term of this offering, and subject to
certain provisions described in Description of
Shares Share Redemption Program, the
redemption price per share will depend on the length of time you
have held such shares as follows: after one year from the
purchase date 92.5% of the amount you paid for each
share; after two years from the purchase date 95.0%
of the amount you paid for each share; after three years from
the purchase date 97.5% of the amount you paid for
each share; and after four years from the purchase
date 100.0% of the amount you paid for each share.
Upon receipt of a request for redemption, we will conduct a
Uniform Commercial Code search to ensure that no liens are held
against the shares. We will charge an administrative fee of $250
to the stockholder for the search and other costs, which will be
deducted from the proceeds of the redemption or, if a lien
exists, will be charged to the stockholder. Repurchases will be
made quarterly. If funds are not available to redeem all
requested redemptions at the end of each quarter, the shares
will be purchased on a pro rata basis and the unfulfilled
requests will be held until the next quarter, unless withdrawn.
Our board of directors may amend, suspend or terminate the share
redemption program at any time upon 30 days prior written notice
to our stockholders.
Cole Operating Partnership II, LP
We expect to own substantially all of our real estate properties
through Cole Operating Partnership II, LP (Cole
OP II), our operating partnership. We may, however, own
properties directly, through subsidiaries of Cole OP II or
through other entities. We are the sole general partner of Cole
OP II and Cole Advisors II is the initial limited
partner of Cole OP II. Our ownership of properties in Cole
OP II is referred to as an UPREIT. This UPREIT
structure may enable sellers of properties to transfer their
properties to Cole OP II in exchange for limited
partnership interests of Cole OP II and defer gain
recognition for tax purposes with respect to such transfers of
properties. The holders of units in Cole OP II may have their
units redeemed for cash or, at our option, shares of our common
stock. At present, we have no plans to acquire any specific
properties in exchange for units of Cole OP II.
ERISA Considerations
The section of this prospectus entitled ERISA
Considerations describes the effect the purchase of shares
will have on individual retirement accounts and retirement plans
subject to the Employee Retirement Income Security Act of 1974,
as amended (ERISA), and/or the Internal Revenue Code. ERISA is a
federal law that regulates the operation of certain
tax-advantaged retirement plans. Any retirement plan trustee or
individual considering purchasing shares for a retirement plan
or an individual retirement account should read the
Investment by Tax-Exempt Entities and ERISA
Considerations section of this prospectus very carefully.
Description of Shares
Our board of directors has authorized the issuance of shares of
our stock without certificates. We expect that, unless and until
our shares are listed on a national securities exchange or The
Nasdaq National Market, we will not issue shares in certificated
form. Our transfer agent maintains a stock ledger that contains
the name and address of each stockholder and the number of
shares that the stockholder holds. With respect to
uncertificated stock, we will continue to treat the stockholder
registered on our stock ledger as the owner of the shares until
the record owner and the new owner delivers a properly executed
stock transfer form to us, along with a fee to cover reasonable
transfer costs, in an amount determined by our board of
directors. We will provide the required form to you upon request.
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Stockholder Voting Rights and Limitations |
We intend to hold annual meetings of our stockholders for the
purpose of electing our directors and/or conducting other
business matters that may be presented at such meetings. We may
also call special meetings of stockholders from time to time.
You are entitled to one vote for each share of common stock you
own at any of these meetings.
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Restriction on Share Ownership |
Our charter contains restrictions on ownership of the shares
that prevent any one person from owning more than 9.8% in value
of our outstanding shares and more than 9.8% in value or number,
whichever is more restrictive, of any class or series of our
outstanding shares of stock unless exempted by our board of
directors. These restrictions are designed to enable us to
comply with ownership restrictions imposed on REITs by the
Internal Revenue Code. For a more complete description of the
shares, including restrictions on the ownership of shares,
please see the Description of Shares section of this
prospectus. Our charter also limits your ability to transfer
your shares to prospective stockholders unless (i) they
meet the minimum suitability standards regarding income or net
worth, which are described in the Suitability
Standards section immediately following the cover page of
this prospectus, and (ii) the transfer complies with
minimum purchase requirements, which are described below in the
section entitled How to Subscribe.
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RISK FACTORS
An investment in our common stock involves various risks and
uncertainties. You should carefully consider the following risk
factors in conjunction with the other information contained in
this prospectus before purchasing our common stock. The risks
discussed in this prospectus can adversely affect our business,
operating results, prospects and financial condition. These
risks could cause the value of our common stock to decline and
could cause you to lose all or part of your investment. The
risks and uncertainties described below are not the only ones we
face but do represent those risks and uncertainties that we
believe are material to our business, operating results,
prospects and financial condition. Additional risks and
uncertainties not presently known to us or that we currently
deem immaterial may also harm our business.
Risks Related to an Investment in Cole Credit Property
Trust II, Inc.
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We have no prior operating history or established
financing sources, and the prior performance of real estate
investment programs sponsored by affiliates of our advisor may
not be an indication of our future results. |
We have no operating history and you should not rely upon the
past performance of other real estate investment programs
sponsored by affiliates of our advisor to predict our future
results. We were incorporated in September 2004. As of the date
of this prospectus, we have not made any investments in real
estate or otherwise and do not own any properties or have any
operations or independent financing. Although Mr. Cole and
other members of our advisors management have significant
experience in the acquisition, finance, management and
development of commercial real estate, this is the first
publicly offered REIT sponsored by Mr. Cole or his
affiliates. Accordingly, the prior performance of real estate
investment programs sponsored by affiliates of Mr. Cole and
our advisor may not be indicative of our future results.
Moreover, neither our advisor nor we have any established
financing sources. Presently, both we and our advisor are funded
by capital contributions from Cole Holdings Corporation, a
company wholly owned by Mr. Cole. If our capital resources,
or those of our advisor, are insufficient to support our
operations, we will not be successful.
You should consider our prospects in light of the risks,
uncertainties and difficulties frequently encountered by
companies that are, like us, in their early stage of
development. To be successful in this market, we must, among
other things:
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identify and acquire investments that further our investment
strategies; |
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increase awareness of the Cole Credit Property Trust II,
Inc. name within the investment products market; |
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expand and maintain our network of licensed securities brokers
and other agents; |
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attract, integrate, motivate and retain qualified personnel to
manage our day-to-day operations; |
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respond to competition for our targeted real estate properties
and other investments as well as for potential investors; and |
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continue to build and expand our operations structure to support
our business. |
We cannot guarantee that we will succeed in achieving these
goals, and our failure to do so could cause you to lose all or a
portion of your investment.
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Because this is a blind pool offering, you will not have
the opportunity to evaluate our investments before we make them,
which makes an investment in us more speculative. |
We have not yet acquired or identified any investments that we
may make, and we do not currently own any properties.
Additionally, we will not provide you with information to
evaluate our investments
18
prior to our acquisition of properties. We will seek to invest
substantially all of the offering proceeds available for
investment, after the payment of fees and expenses, in the
acquisition of freestanding, single-tenant commercial properties
net leased to investment grade or other creditworthy tenants. We
may also, in the discretion of our advisor, invest in other
types of real estate or in entities that invest in real estate.
In addition, our advisor may make or invest in mortgage loans or
participations therein on our behalf if our board of directors
determines, due to the state of the real estate market or in
order to diversify our investment portfolio or otherwise, that
such investments are advantageous to us. We have established
policies relating to the creditworthiness of tenants of our
properties, but our board of directors will have wide discretion
in implementing these policies, and you will not have the
opportunity to evaluate potential tenants. For a more detailed
discussion of our investment policies, see the Investment
Objectives and Policies Acquisition and Investment
Policies section of this prospectus.
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There is no public trading market for our shares and there
may never be one; therefore, it will be difficult for you to
sell your shares. |
There is currently no public market for our shares and there may
never be one. You may not sell your shares unless the buyer
meets applicable suitability and minimum purchase standards. Our
charter also prohibits the ownership of more than 9.8% of our
stock, unless exempted by our board of directors, which may
inhibit large investors from desiring to purchase your shares.
Moreover, our share redemption program includes numerous
restrictions that would limit your ability to sell your shares
to us. Our board of directors could choose to amend, suspend or
terminate our share redemption program upon 30 days
notice. We describe these restrictions in more detail under the
Description of Shares Share Redemption
Program section of this prospectus. Therefore, it may be
difficult for you to sell your shares promptly or at all. If you
are able to sell your shares, you will likely have to sell them
at a substantial discount to the price you paid for the shares.
It also is likely that your shares would not be accepted as the
primary collateral for a loan. You should purchase the shares
only as a long-term investment because of the illiquid nature of
the shares.
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If we, through Cole Advisors II, are unable to find
suitable investments, then we may not be able to achieve our
investment objectives or pay distributions. |
Our ability to achieve our investment objectives and to pay
distributions is dependent upon the performance of Cole
Advisors II, our advisor, in acquiring of our investments,
selecting tenants for our properties and securing independent
financing arrangements. We currently do not own any properties
or have any operations, financing or investments. Except for
investors who purchase shares in this offering after such time
as this prospectus is supplemented to describe one or more
identified investments, you will have no opportunity to evaluate
the terms of transactions or other economic or financial data
concerning our investments. You must rely entirely on the
management ability of Cole Advisors II and the oversight of
our board of directors. We cannot be sure that Cole
Advisors II will be successful in obtaining suitable
investments on financially attractive terms or that, if it makes
investments on our behalf, our objectives will be achieved. If
we, through Cole Advisors II, are unable to find suitable
investments, we will hold the proceeds of this offering in an
interest-bearing account, invest the proceeds in short-term,
investment-grade investments or, if we cannot find at least one
suitable investment within one year after we reach our minimum
offering, or if our board of directors determines it is in the
best interests of our stockholders, liquidate. In such an event,
our ability to pay distributions to our stockholders would be
adversely affected.
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We may suffer from delays in locating suitable
investments, which could adversely affect our ability to make
distributions and the value of your investment. |
We could suffer from delays in locating suitable investments,
particularly as a result of our reliance on our advisor at times
when management of our advisor is simultaneously seeking to
locate suitable investments for other affiliated programs.
Delays we encounter in the selection, acquisition and, in the
event we develop properties, development of income-producing
properties, likely would adversely affect our ability to make
distributions and the value of your overall returns. In such
event, we my pay all or a
19
substantial portion of our distributions from the proceeds of
this offering or from borrowings in anticipation of future cash
flow, which may constitute a return of your capital.
Distributions from the proceeds of this offering or from
borrowings also could reduce the amount of capital we ultimately
invest in properties. This, in turn, would reduce the value of
your investment. In particular, where we acquire properties
prior to the start of construction or during the early stages of
construction, it will typically take several months to complete
construction and rent available space. Therefore, you could
suffer delays in the receipt of cash distributions attributable
to those particular properties. You should expect to wait
several months after the closing of a property acquisition
before we are in a position to pay cash distributions
attributable to such property.
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If we are unable to raise substantial funds, we will be
limited in the number and type of investments we may make, the
value of your investment in us will fluctuate with the
performance of the specific properties we acquire. |
This offering is being made on a best efforts basis, whereby the
brokers participating in the offering are only required to use
their best efforts to sell our shares and have no firm
commitment or obligation to purchase any of the shares. As a
result, the amount of proceeds we raise in this offering may be
substantially less than the amount we would need to achieve a
broadly diversified property portfolio. We may be unable to
raise even the minimum offering amount. If we are unable to
raise substantially more than the minimum offering amount, we
will make fewer investments resulting in less diversification in
terms of the number of investments owned, the geographic regions
in which our investments are located and the types of
investments that we make. In such event, the likelihood of our
profitability being affected by the performance of any one of
our investments will increase. For example, in the event we only
sell 250,000 shares, we may be able to make only one
investment. If we only are able to make one investment, we would
not achieve any asset diversification. Additionally, we are not
limited in the number or size of our investments or the
percentage of net proceeds we may dedicate to a single
investment. Your investment in our shares will be subject to
greater risk to the extent that we lack a diversified portfolio
of investments. In addition, our inability to raise substantial
funds would increase our fixed operating expenses as a
percentage of gross income, and our financial condition and
ability to pay distributions could be adversely affected.
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If our advisor loses or is unable to obtain key personnel,
our ability to implement our investment strategies could be
delayed or hindered, which could adversely affect our ability to
make distributions and the value of your investment. |
Our success depends to a significant degree upon the
contributions of certain of our executive officers and other key
personnel of our advisor, including Christopher H. Cole, Blair
D. Koblenz, Richard M. Arnitz, Jonathan T. Albro, John H. Lotka,
John M. Pons, Sean D. Leahy, D. Kirk McAllaster, Jr.
and Christopher P. Robertson, each of whom would be difficult to
replace. Our advisor does not have an employment agreement with
any of these key personnel and we cannot guarantee that all, or
any particular one, will remain affiliated with us and/or
advisor. If any of our key personnel were to cease their
affiliation with our advisor, our operating results could
suffer. Further, we do not intend to separately maintain key
person life insurance on Mr. Cole or any other person. We
believe that our future success depends, in large part, upon our
advisors ability to hire and retain highly skilled
managerial, operational and marketing personnel. Competition for
such personnel is intense, and we cannot assure you that our
advisor will be successful in attracting and retaining such
skilled personnel. If our advisor loses or is unable to obtain
the services of key personnel or does not establish or maintain
appropriate strategic relationships, our ability to implement
our investment strategies could be delayed or hindered, and the
value of your investment may decline.
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Our rights and the rights of our stockholders to recover
claims against our officers, directors and our advisor are
limited, which could reduce your and our recovery against them
if they cause us to incur losses. |
Maryland law provides that a director has no liability in that
capacity if he or she performs his or her duties in good faith,
in a manner he or she reasonably believes to be in the
corporations best interests and with the care that an
ordinarily prudent person in a like position would use under
similar circumstances. Our charter, in the case of our
directors, officers, employees and agents, and the advisory
agreement, in the case of our advisor, require us to indemnify
our directors, officers, employees and agents and our advisor
and its affiliates for actions taken by them in good faith and
without negligence or misconduct. Additionally, our charter
limits the liability of our directors and officers for monetary
damages to the maximum extent permitted under Maryland law. As a
result, we and our stockholders may have more limited rights
against our directors, officers, employees and agents, and our
advisor and its affiliates, than might otherwise exist under
common law, which could reduce your and our recovery against
them. In addition, we may be obligated to fund the defense costs
incurred by our directors, officers, employees and agents or our
advisor in some cases which would decrease the cash otherwise
available for distribution to you. See the section captioned
Management Limited Liability and
Indemnification of Directors, Officers, Employees and Other
Agents elsewhere herein.
Risks Related to Conflicts of Interest
We will be subject to conflicts of interest arising out of our
relationships with our advisor and its affiliates, including the
material conflicts discussed below. The Conflicts of
Interest section of this prospectus provides a more
detailed discussion of the conflicts of interest between us and
our advisor and its affiliates, and our policies to reduce or
eliminate certain potential conflicts.
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Cole Advisors II will face conflicts of interest
relating to the purchase and leasing of properties, and such
conflicts may not be resolved in our favor, which could
adversely affect our investment opportunities. |
Since January 1, 1995, affiliates of our advisor have
sponsored 47 privately offered real estate investment programs,
including 24 limited partnerships, a real estate investment
trust, three debt offerings and 19 tenant-in-common
programs, 18 of which currently are operating. Affiliates of our
advisor may sponsor other real estate investment programs in the
future. We may be buying properties at the same time as one or
more of the other Cole-sponsored programs managed by officers
and key personnel of Cole Advisors II. There is a risk that
Cole Advisors II will choose a property that provides lower
returns to us than a property purchased by another
Cole-sponsored program. We cannot be sure that officers and key
personnel acting on behalf of Cole Advisors II and on
behalf of managers of other Cole-sponsored programs will act in
our best interests when deciding whether to allocate any
particular property to us. In addition, we may acquire
properties in geographic areas where other Cole-sponsored
programs own properties. Also, we may acquire properties from,
or sell properties to, other Cole-sponsored programs. If one of
the other Cole-sponsored programs attracts a tenant that we are
competing for, we could suffer a loss of revenue due to delays
in locating another suitable tenant. You will not have the
opportunity to evaluate the manner in which these conflicts of
interest are resolved before or after making your investment.
Similar conflicts of interest may apply if our advisor
determines to make or purchase mortgage loans or participations
in mortgage loans on our behalf, since other Cole-sponsored
programs may be competing with us for these investments.
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Cole Advisors II will face conflicts of interest
relating to joint ventures, which could result in a
disproportionate benefit to the other venture partners at our
expense. |
We may enter into joint ventures with other Cole-sponsored
programs for the acquisition, development or improvement of
properties. Cole Advisors II may have conflicts of interest
in determining which Cole-sponsored program should enter into
any particular joint venture agreement. The co-venturer may have
economic or business interests or goals that are or may become
inconsistent with our business interests or goals. In addition,
Cole Advisors II may face a conflict in structuring the
terms of the
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relationship between our interests and the interest of the
affiliated co-venturer and in managing the joint venture. Since
Cole Advisors II and its affiliates will control both the
affiliated co-venturer and, to a certain extent, us, agreements
and transactions between the co-venturers with respect to any
such joint venture will not have the benefit of
arms-length negotiation of the type normally conducted
between unrelated co-venturers, which may result in the
co-venturer receiving benefits greater than the benefits that we
receive. In addition, we may assume liabilities related to the
joint venture that exceed the percentage of our investment in
the joint venture.
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We may participate in Tenant-in-Common Programs with
affiliates of our advisor that will not be the result of
arms-length negotiations and will result in conflicts of
interest. |
Cole Capital Partners, LLC (Cole Capital Partners), an affiliate
of our advisor, has developed a program to facilitate the
acquisition of real estate properties to be owned in co-tenancy
arrangements with persons who are looking to invest proceeds
from a sale of real estate to qualify for like-kind exchange
treatment under Section 1031 of the Internal Revenue Code
(a Tenant-in-Common Program). Tenant-in-Common Programs are
structured as the acquisition of real estate owned in co-tenancy
arrangements with other investors in the property
(Tenant-in-Common Participants) who are seeking to defer taxes
under Section 1031 of the Internal Revenue Code. When Cole
Capital Partners develops such a program, it generally organizes
a new entity (a Cole Exchange Entity) to acquire all or part of
a property. We may participate in the program by either
co-investing in the property with the Cole Exchange Entity or
purchasing a co-tenancy interest from the Cole Exchange Entity,
generally at the Cole Exchange Entitys cost. In that
event, as an owner of tenant-in-common interests in properties,
we will be subject to the risks inherent in the ownership of
co-tenancy interests with unrelated third parties. Our purchase
of co-tenancy interests will present conflicts of interest
between us and affiliates of our advisor. The business interests
of Cole Capital Partners and the Cole Exchange Entity may be
adverse to, or to the detriment of, our interests. Further, any
agreement that we enter into with a Cole Exchange Entity will
not be negotiated in an arms-length transaction and, as a
result of the affiliation between our advisor, Cole Capital
Partners and the Cole Exchange Entity, our advisor may be
reluctant to enforce the agreements against such entities.
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Cole Advisors II and its officers and employees and
certain of our key personnel will face competing demands
relating to their time, and this may cause our operating results
to suffer. |
Cole Advisors II and its officers and employees and certain
of our key personnel and their respective affiliates are key
personnel, general partners and sponsors of other real estate
programs having investment objectives and legal and financial
obligations similar to ours and may have other business
interests as well. Because these persons have competing demands
on their time and resources, they may have conflicts of interest
in allocating their time between our business and these other
activities. During times of intense activity in other programs
and ventures, they may devote less time and fewer resources to
our business than is necessary or appropriate. If this occurs,
the returns on our investments may suffer.
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Our officers and some of our directors face conflicts of
interest related to the positions they hold with affiliated
entities, which could hinder our ability to successfully
implement our business strategy and to generate returns to
you. |
Our executive officers and some of our directors are also
officers and directors of our advisor, our property manager, our
dealer manager and other affiliated entities. As a result, these
individuals owe fiduciary duties to these other entities and
their stockholders and limited partners, which fiduciary duties
may conflict with the duties that they owe to our stockholders
and us. Their loyalties to these other entities could result in
actions or inactions that are detrimental to our business, which
could harm the implementation of our business strategy and our
investment and leasing opportunities. Conflicts with our
business and interests are most likely to arise from involvement
in activities related to (i) allocation of new investments
and management time and services between us and the other
entities, (ii) our purchase of properties from, or sale of
properties, to affiliated entities, (iii) the timing and
terms of the investment in
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or sale of an asset, (iv) development of our properties by
affiliates, (v) investments with affiliates of our advisor,
(vi) compensation to our advisor, and (vii) our
relationship with our dealer manager and property manager. If we
do not successfully implement our business strategy, we may be
unable to generate cash needed to make distributions to you and
to maintain or increase the value of our assets.
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Cole Advisors II will face conflicts of interest
relating to the incentive fee structure under our advisory
agreement, which could result in actions that are not
necessarily in the long-term best interests of our
stockholders. |
Under our advisory agreement, Cole Advisors II will be
entitled to fees that are structured in a manner intended to
provide incentives to our advisor to perform in our best
interests and in the best interests of our stockholders.
However, because our advisor does not maintain a significant
equity interest in us and is entitled to receive substantial
minimum compensation regardless of performance, our
advisors interests will not be wholly aligned with those
of our stockholders. In that regard, our advisor could be
motivated to recommend riskier or more speculative investments
in order for us to generate the specified levels of performance
or sales proceeds that would entitle our advisor to fees. In
addition, our advisors entitlement to fees upon the sale
of our assets and to participate in sale proceeds could result
in our advisor recommending sales of our investments at the
earliest possible time at which sales of investments would
produce the level of return that would entitle the advisor to
compensation relating to such sales, even if continued ownership
of those investments might be in our best long-term interest.
Our advisory agreement will require us to pay a
performance-based termination fee to our advisor in the event
that we terminate the advisor prior to the listing of our shares
for trading on an exchange or, absent such listing, in respect
of its participation in net sales proceeds. To avoid paying this
fee, our independent directors may decide against terminating
the advisory agreement prior to our listing of our shares or
disposition of our investments even if, but for the termination
fee, termination of the advisory agreement would be in our best
interest. In addition, the requirement to pay the fee to the
advisor at termination could cause us to make different
investment or disposition decisions than we would otherwise
make, in order to satisfy our obligation to pay the fee to the
terminated advisor. Moreover, our advisor will have the right to
terminate the advisory agreement upon a change of control and
thereby trigger the payment of the performance fee, which could
have the effect of delaying, deferring or preventing the change
of control.
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There is no separate counsel for us and our affiliates,
which could result in conflicts of interest. |
Morris, Manning & Martin, LLP acts as legal counsel to
us and also represents our advisor and some of its affiliates.
There is a possibility in the future that the interests of the
various parties may become adverse and, under the Code of
Professional Responsibility of the legal profession, Morris,
Manning & Martin, LLP may be precluded from
representing any one or all of such parties. If any situation
arises in which our interests appear to be in conflict with
those of our advisor or its affiliates, additional counsel may
be retained by one or more of the parties to assure that their
interests are adequately protected. Moreover, should a conflict
of interest not be readily apparent, Morris, Manning &
Martin, LLP may inadvertently act in derogation of the interest
of the parties which could affect our ability to meet our
investment objectives.
Risks Related to This Offering and Our Corporate Structure
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The limit on the number of shares a person may own may
discourage a takeover that could otherwise result in a premium
price to our stockholders. |
Our charter, with certain exceptions, authorizes our directors
to take such actions as are necessary and desirable to preserve
our qualification as a REIT. Unless exempted by our board of
directors, no person may own more than 9.8% in value of our
outstanding stock and more than 9.8% in value or number,
whichever is more restrictive, of any class of our outstanding
stock. This restriction may have the effect of delaying,
deferring or preventing a change in control of us, including an
extraordinary transaction (such as a merger, tender offer or
sale of all or substantially all of our assets) that might
provide a premium price
23
for holders of our common stock. See the Description of
Shares Restriction on Ownership and Transfer
section of this prospectus.
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Our charter permits our board of directors to issue stock
with terms that may subordinate the rights of common
stockholders or discourage a third party from acquiring us in a
manner that might result in a premium price to our
stockholders. |
Our charter permits our board of directors to issue up to
100,000,000 shares of stock. In addition, our board of
directors, without any action by our stockholders, may amend our
charter from time to time to increase or decrease the aggregate
number of shares or the number of shares of any class or series
of stock that we have authority to issue. Our board of directors
may classify or reclassify any unissued common stock or
preferred stock and establish the preferences, conversion or
other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms or conditions of
redemption of any such stock. Thus, our board of directors could
authorize the issuance of preferred stock with terms and
conditions that could have a priority as to distributions and
amounts payable upon liquidation over the rights of the holders
of our common stock. Preferred stock could also have the effect
of delaying, deferring or preventing a change in control of us,
including an extraordinary transaction (such as a merger, tender
offer or sale of all or substantially all of our assets) that
might provide a premium price for holders of our common stock.
See the Description of Shares Preferred
Stock section of this prospectus.
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Maryland law prohibits certain business combinations,
which may make it more difficult for us to be acquired. |
Under Maryland law, business combinations between a
Maryland corporation and an interested stockholder or an
affiliate of an interested stockholder are prohibited for five
years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange,
or, in circumstances specified in the statute, an asset transfer
or issuance or reclassification of equity securities. An
interested stockholder is defined as:
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any person who beneficially owns 10.0% or more of the voting
power of the corporations shares; or |
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an affiliate or associate of the corporation who, at any time
within the two-year period prior to the date in question, was
the beneficial owner of 10.0% or more of the voting power of the
then outstanding voting stock of the corporation. |
A person is not an interested stockholder under the statute if
the board of directors approved in advance the transaction by
which he or she otherwise would have become an interested
stockholder. However, in approving a transaction, the board of
directors may provide that its approval is subject to
compliance, at or after the time of approval, with any terms and
conditions determined by the board.
After the five-year prohibition, any business combination
between the Maryland corporation and an interested stockholder
generally must be recommended by the board of directors of the
corporation and approved by the affirmative vote of at least:
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80.0% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and |
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two-thirds of the votes entitled to be cast by holders of voting
stock of the corporation other than shares held by the
interested stockholder with whom or with whose affiliate the
business combination is to be effected or held by an affiliate
or associate of the interested stockholder. |
These super-majority vote requirements do not apply if the
corporations stockholders receive a minimum price, as
defined under Maryland law, for their shares in the form of cash
or other consideration in the same form as previously paid by
the interested stockholder for its shares. The business
combination statute permits various exemptions from its
provisions, including business combinations that are exempted by
the board of directors prior to the time that the interested
stockholder becomes an interested stockholder. Pursuant to the
statute, our board of directors has exempted any business
combination
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involving Cole Advisors II or any affiliate of Cole
Advisors II. Consequently, the five-year prohibition and
the super-majority vote requirements will not apply to business
combinations between us and Cole Advisors II or any
affiliate of Cole Advisors II. As a result, Cole
Advisors II and any affiliate of Cole Advisors II may
be able to enter into business combinations with us that may not
be in the best interest of our stockholders, without compliance
with the super-majority vote requirements and the other
provisions of the statute. The business combination statute may
discourage others from trying to acquire control of us and
increase the difficulty of consummating any offer. For a more
detailed discussion of the Maryland laws governing us and the
ownership of our shares of common stock, see the section of this
prospectus captioned Description of Shares.
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If we are required to register as an investment company
under the Investment Company Act, we could not continue our
business, which may significantly reduce the value of your
investment. |
We are not registered as an investment company under the
Investment Company Act of 1940, as amended (Investment Company
Act), pursuant to an exemption in Section 3(c)(5)(C) of the
Investment Company Act and certain No-Action Letters from the
Securities and Exchange Commission. Pursuant to this exemption,
(1) at least 55% of our assets must consist of real estate
fee interests or loans secured exclusively by real estate or
both, (2) at least 25% of our assets must consist of loans
secured primarily by real estate (this percentage will be
reduced by the amount by which the percentage in (1) above
is increased); and (3) up to 20% of our assets may consist
of miscellaneous investments. We intend to monitor compliance
with these requirements on an ongoing basis. If we were
obligated to register as an investment company, we would have to
comply with a variety of substantive requirements under the
Investment Company Act imposing, among other things:
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limitations on capital structure; |
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restrictions on specified investments; |
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prohibitions on transactions with affiliates; and |
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compliance with reporting, record keeping, voting, proxy
disclosure and other rules and regulations that would
significantly change our operations. |
In order to maintain our exemption from regulation under the
Investment Company Act, we must engage primarily in the business
of buying real estate, and these investments must be made within
a year after the offering ends. If we are unable to invest a
significant portion of the proceeds of this offering in
properties within one year of the termination of the offering,
we may avoid being required to register as an investment company
by temporarily investing any unused proceeds in government
securities with low returns. This would reduce the cash
available for distribution to investors and possibly lower your
returns.
To maintain compliance with the Investment Company Act
exemption, we may be unable to sell assets we would otherwise
want to sell and may need to sell assets we would otherwise wish
to retain. In addition, we may have to acquire additional income
or loss generating assets that we might not otherwise have
acquired or may have to forgo opportunities to acquire interests
in companies that we would otherwise want to acquire and would
be important to our investment strategy. If we were required to
register as an investment company but failed to do so, we would
be prohibited from engaging in our business, and criminal and
civil actions could be brought against us. In addition, our
contracts would be unenforceable unless a court were to require
enforcement, and a court could appoint a receiver to take
control of us and liquidate our business.
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You are bound by the majority vote on matters on which you
are entitled to vote, and therefore, your vote on a particular
matter may be superceded by the vote of others. |
You may vote on certain matters at any annual or special meeting
of stockholders, including the election of directors. However,
you will be bound by the majority vote on matters requiring
approval of a majority of the stockholders even if you do not
vote with the majority on any such matter.
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If you do not agree with the decisions of our board of
directors, you only have limited control over changes in our
policies and operations and may not be able to change such
policies and operations. |
Our board of directors determines our major policies, including
our policies regarding financing, growth, debt capitalization,
REIT qualification and distributions. Our board of directors may
amend or revise these and other policies without a vote of the
stockholders. Under the Maryland General Corporation Law and our
charter, our stockholders have a right to vote only on the
following:
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the election or removal of directors; |
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any amendment of our charter (including a change in our
investment objectives), except that our board of directors may
amend our charter without stockholder approval, to increase or
decrease the aggregate number of our shares, to increase or
decrease the number of our shares of any class or series that we
have the authority to issue, or to classify or reclassify any
unissued shares by setting or changing the preferences,
conversion or other rights, restrictions, limitations as to
distributions, qualifications or terms and conditions of
redemption of such shares, provided however, that any such
amendment does not adversely affect the rights, preferences and
privileges of the stockholders; |
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our liquidation or dissolution; and |
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any merger, consolidation or sale or other disposition of
substantially all of our assets. |
All other matters are subject to the discretion of our board of
directors.
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You are limited in your ability to sell your shares
pursuant to our share redemption program and may have to hold
your shares for an indefinite period of time. |
Our board of directors could choose to amend the terms of our
share redemption program without stockholder approval. Our board
is also free to terminate the program upon 30 days notice.
In addition, the share redemption program includes numerous
restrictions that would limit your ability to sell your shares.
Generally, you must have held your shares for at least one year
in order to participate in our share redemption program. Subject
to funds being available, we will limit the number of shares
redeemed pursuant to our share redemption program as follows:
(1) during any calendar year, we will not redeem in excess
of 3.0% of the weighted average number of shares outstanding
during the prior calendar year; and (2) funding for the
redemption of shares will be limited to the net proceeds we
receive from the sale of shares under our distribution
reinvestment plan. These limits might prevent us from
accommodating all redemption requests made in any year. See the
Description of Shares Share Redemption
Program section of this prospectus for more information
about the share redemption program. These restrictions severely
limit your ability to sell your shares should you require
liquidity and limit your ability to recover the value you
invested or the fair amount value of your shares.
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We established the offering price on an arbitrary basis;
as a result, the actual value of your investment may be
substantially less than what you pay. |
Our board of directors has arbitrarily determined the selling
price of the shares and such price bears no relationship to our
book or asset values, or to any other established criteria for
valuing issued or outstanding shares. Because the offering price
is not based upon any independent valuation, the offering price
may not be indicative of the proceeds that you would receive
upon liquidation.
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Because the dealer manager is one of our affiliates, you
will not have the benefit of an independent review of the
prospectus or us customarily performed in underwritten
offerings. |
The dealer manager, Cole Capital Corporation, is one of our
affiliates and will not make an independent review of us or the
offering. Accordingly, you will have to rely on your own broker
or dealer to make an independent review of the terms of this
offering. If your broker-dealer does not conduct such a review,
you will not have the benefit of an independent review of the
terms of this offering. Further, the
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due diligence investigation of us by the dealer manager cannot
be considered to be an independent review and, therefore, may
not be as meaningful as a review conducted by an unaffiliated
broker-dealer or investment banker.
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Your interest in Cole REIT II will be diluted if we
issue additional shares. |
Existing stockholders and potential investors in this offering
do not have preemptive rights to any shares issued by us in the
future. Our charter currently has authorized
100,000,000 shares of stock, of which
90,000,000 shares are designated as common stock and
10,000,000 are designated as preferred stock. Subject to any
limitations set forth under Maryland law, our board of directors
may increase the number of authorized shares of stock, increase
or decrease the number of shares of any class or series of stock
designated, or reclassify any unissued shares without the
necessity of obtaining stockholder approval. All of such shares
may be issued in the discretion of our board of directors.
Therefore, in the event that we (1) sell shares in this
offering or sell additional shares in the future, including
those issued pursuant to our distribution reinvestment plan,
(2) sell securities that are convertible into shares of our
common stock, (3) issue shares of our common stock in a
private offering of securities to institutional investors,
(4) issue shares of our common stock upon the exercise of
the options granted to our independent directors, (5) issue
shares to our advisor, its successors or assigns, in payment of
an outstanding fee obligation as set forth under our advisory
agreement, or (6) issue shares of our common stock to
sellers of properties acquired by us in connection with an
exchange of limited partnership interests of Cole OP II,
existing stockholders and investors purchasing shares in this
offering will likely experience dilution of their equity
investment in us. In addition, the partnership agreement for
Cole OP II contains provisions that would allow, under
certain circumstances, other entities, including other
Cole-sponsored programs, to merge into or cause the exchange or
conversion of their interest for interests of Cole OP II.
Because the limited partnership interests of Cole OP II
may, in the discretion of our board of directors, be exchanged
for shares of our common stock, any merger, exchange or
conversion between Cole OP II and another entity ultimately
could result in the issuance of a substantial number of shares
of our common stock, thereby diluting the percentage ownership
interest of other stockholders. Because of these and other
reasons described in this Risk Factors section, you
should not expect to be able to own a significant percentage of
our shares.
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Payment of fees to Cole Advisors II and its
affiliates will reduce cash available for investment and
distribution. |
Cole Advisors II and its affiliates will perform services
for us in connection with the offer and sale of the shares, the
selection and acquisition of our investments, and the management
and leasing of our properties, the servicing our mortgage loans,
if any, and the administration of our other investments. They
will be paid substantial fees for these services, which will
reduce the amount of cash available for investment in properties
or distribution to stockholders. For a more detailed discussion
of these fees, see the Management Compensation
section of this prospectus.
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We may be unable to pay or maintain cash distributions or
increase distributions over time. |
There are many factors that can affect the availability and
timing of cash distributions to stockholders. Distributions will
be based principally on cash available from our operations. The
amount of cash available for distributions will be affected by
many factors, such as our ability to buy properties as offering
proceeds become available, the yields on securities of other
real estate programs that we invest in, and our operating
expense levels, as well as many other variables. Actual cash
available for distributions may vary substantially from
estimates. With no prior operating history, we cannot assure you
that we will be able to pay or maintain distributions or that
distributions will increase over time. Nor can we give any
assurance that rents from the properties will increase, that the
securities we buy will increase in value or provide constant or
increased distributions over time, or that future acquisitions
of real properties, mortgage loans or our investments in
securities will increase our cash available for distributions to
stockholders. Our actual results may differ significantly from
the assumptions used by our board of directors in establishing
the
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distribution rate to stockholders. For a description of the
factors that can affect the availability and timing of cash
distributions to stockholders, see the section of this
prospectus captioned Description of Shares
Distributions Policy.
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If we are unable to obtain funding for future capital
needs, cash distributions to our stockholders and the value of
our investments could decline. |
When tenants do not renew their leases or otherwise vacate their
space, we will often need to expend substantial funds for tenant
improvements to the vacated space in order to attract
replacement tenants. In addition, although we expect that our
leases with tenants will require tenants to pay routine property
maintenance costs, we will likely be responsible for any major
structural repairs, such as repairs to the foundation, exterior
walls and rooftops.
We will use substantially all of this offerings gross
proceeds to buy real estate and pay various fees and expenses.
We do not intend to reserve any proceeds from this offering for
future capital needs. Accordingly, if we need additional capital
in the future to improve or maintain our properties or for any
other reason, we will have to obtain financing from other
sources, such as cash flow from operations, borrowings, property
sales or future equity offerings. These sources of funding may
not be available on attractive terms or at all. If we cannot
procure additional funding for capital improvements, our
investments may generate lower cash flows or decline in value,
or both.
General Risks Related to Investments in Real Estate
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Our operating results will be affected by economic and
regulatory changes that have an adverse impact on the real
estate market in general, and we cannot assure you that we will
be profitable or that we will realize growth in the value of our
real estate properties. |
Our operating results will be subject to risks generally
incident to the ownership of real estate, including:
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changes in general economic or local conditions; |
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changes in supply of or demand for similar or competing
properties in an area; |
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changes in interest rates and availability of permanent mortgage
funds that may render the sale of a property difficult or
unattractive; |
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changes in tax, real estate, environmental and zoning
laws; and |
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periods of high interest rates and tight money supply. |
These and other reasons may prevent us from being profitable or
from realizing growth or maintaining the value of our real
estate properties.
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Most of our retail properties will depend upon a single
tenant for all of their rental income, and our financial
condition and ability to make distributions may be adversely
affected by the bankruptcy or insolvency, a downturn in the
business, or a lease termination of a single tenant. |
We expect that most of our properties will be occupied by only
one tenant and, therefore, the success of those properties will
be materially dependent on the financial stability of such
tenants. Lease payment defaults by tenants could cause us to
reduce the amount of distributions we pay. A default of a tenant
on its lease payments to us would cause us to lose the revenue
from the property and force us to find an alternative source of
revenue to meet any mortgage payment and prevent a foreclosure
if the property is subject to a mortgage. In the event of a
default, we may experience delays in enforcing our rights as
landlord and may incur substantial costs in protecting our
investment and re-letting the property. If a lease is
terminated, there is no assurance that we will be able to lease
the property for the rent previously received or sell the
property without incurring a loss. A default by a tenant, the
failure of a guarantor to fulfill its obligations or other
premature termination of a lease, or a tenants election
not to extend a lease
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upon its expiration, could have an adverse effect on our
financial condition and our ability to pay distributions.
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If a tenant declares bankruptcy, we may be unable to
collect balances due under relevant leases. |
Any or all of the tenants, or a guarantor of a tenants
lease obligations, could be subject to a bankruptcy proceeding
pursuant to Title 11 of the bankruptcy laws of the United
States. Such a bankruptcy filing would bar all efforts by us to
collect pre-bankruptcy debts from these entities or their
properties, unless we receive an enabling order from the
bankruptcy court. Post-bankruptcy debts would be paid currently.
If a lease is assumed, all pre-bankruptcy balances owing under
it must be paid in full. If a lease is rejected by a tenant in
bankruptcy, we would have a general unsecured claim for damages.
If a lease is rejected, it is unlikely we would receive any
payments from the tenant because our claim is capped at the rent
reserved under the lease, without acceleration, for the greater
of one year or 15% of the remaining term of the lease, but not
greater than three years, plus rent already due but unpaid. This
claim could be paid only in the event funds were available, and
then only in the same percentage as that realized on other
unsecured claims.
A tenant or lease guarantor bankruptcy could delay efforts to
collect past due balances under the relevant leases, and could
ultimately preclude full collection of these sums. Such an event
could cause a decrease or cessation of rental payments that
would mean a reduction in our cash flow and the amount available
for distributions to you. In the event of a bankruptcy, we
cannot assure you that the tenant or its trustee will assume our
lease. If a given lease, or guaranty of a lease, is not assumed,
our cash flow and the amounts available for distributions to you
may be adversely affected.
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If a sale-leaseback transaction is re-characterized, our
financial condition could be adversely affected. |
We may enter into sale-leaseback transactions, whereby we would
purchase a property and then lease the same property back to the
person from whom we purchased it. In the event of the bankruptcy
of a tenant, a transaction structured as a sale-leaseback may be
re-characterized as either a financing or a joint venture,
either of which outcomes could adversely affect our business.
If the sale-leaseback were re-characterized as a financing, we
might not be considered the owner of the property, and as a
result would have the status of a creditor in relation to the
tenant. In that event, we would no longer have the right to sell
or encumber our ownership interest in the property. Instead, we
would have a claim against the tenant for the amounts owed under
the lease, with the claim arguably secured by the property. The
tenant/debtor might have the ability to propose a plan
restructuring the term, interest rate and amortization schedule
of its outstanding balance. If confirmed by the bankruptcy
court, we could be bound by the new terms, and prevented from
foreclosing our lien on the property. These outcomes could
adversely affect our cash flow and the amount available for
distributions to you.
If the sale-leaseback were re-characterized as a joint venture,
our lessee and we could be treated as co-venturers with regard
to the property. As a result, we could be held liable, under
some circumstances, for debts incurred by the lessee relating to
the property. The imposition of liability on us could adversely
affect our cash flow and the amount available for distributions
to our stockholders.
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Properties that have vacancies for a significant period of
time could be difficult to sell, which could diminish the return
on your investment. |
A property may incur vacancies either by the continued default
of tenants under their leases or the expiration of tenant
leases. If vacancies continue for a long period of time, we may
suffer reduced revenues resulting in less cash to be distributed
to stockholders. In addition, because properties market
values depend principally upon the value of the properties
leases, the resale value of properties with prolonged vacancies
could suffer, which could further reduce your return.
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We may obtain only limited warranties when we purchase a
property. |
The seller of a property will often sell such property in its
as is condition on a where is basis and
with all faults, without any warranties of
merchantability or fitness for a particular use or purpose. In
addition, purchase agreements may contain only limited
warranties, representations and indemnifications that will only
survive for a limited period after the closing. The purchase of
properties with limited warranties increases the risk that we
may lose some or all of our invested capital in the property as
well as the loss of rental income from that property.
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We may be unable to secure funds for future tenant
improvements, which could adversely impact our ability to pay
cash distributions to our stockholders. |
When tenants do not renew their leases or otherwise vacate their
space, it is usual that, in order to attract replacement
tenants, we will be required to expend substantial funds for
tenant improvements and tenant refurbishments to the vacated
space. We will use substantially all of this offerings
gross proceeds to buy real estate and pay various fees and
expenses. We do not intend to reserve any proceeds from this
offering for future capital needs. Accordingly, if we need
additional capital in the future to improve or maintain our
properties or for any other reason, we will have to obtain
financing from other sources, such as cash flow from operations,
borrowings, property sales or future equity offerings. These
sources of funding may not be available on attractive terms or
at all. If we cannot procure additional funding for capital
improvements, our investments may generate lower cash flows or
decline in value, or both.
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Our inability to sell a property when we desire to do so
could adversely impact our ability to pay cash distributions to
you. |
The real estate market is affected by many factors, such as
general economic conditions, availability of financing, interest
rates and other factors, including supply and demand, that are
beyond our control. We cannot predict whether we will be able to
sell any property for the price or on the terms set by us, or
whether any price or other terms offered by a prospective
purchaser would be acceptable to us. We cannot predict the
length of time needed to find a willing purchaser and to close
the sale of a property.
We may be required to expend funds to correct defects or to make
improvements before a property can be sold. We cannot assure you
that we will have funds available to correct such defects or to
make such improvements.
In acquiring a property, we may agree to restrictions that
prohibit the sale of that property for a period of time or
impose other restrictions, such as a limitation on the amount of
debt that can be placed or repaid on that property. These
provisions would restrict our ability to sell a property.
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We may not be able to sell our properties at a price equal
to, or greater than, the price for which we purchased such
property, which may lead to a decrease in the value of our
assets. |
Many of our leases will not contain rental increases over time.
Therefore, the value of the property to a potential purchaser
may not increase over time, which may restrict our ability to
sell a property, or in the event we are able to sell such
property, may lead to a sale price less than the price that we
paid to purchase the property.
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We may acquire or finance properties with lock-out
provisions, which may prohibit us from selling a property, or
may require us to maintain specified debt levels for a period of
years on some properties. |
Lock-out provisions could materially restrict us from selling or
otherwise disposing of or refinancing properties. These
provisions would affect our ability to turn our investments into
cash and thus affect cash available for distributions to you.
Lock out provisions may prohibit us from reducing the
outstanding indebtedness with respect to any properties,
refinancing such indebtedness on a non-recourse basis at
maturity, or increasing the amount of indebtedness with respect
to such properties.
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Lock-out provisions could impair our ability to take actions
during the lock-out period that would otherwise be in the best
interests of our stockholders and, therefore, may have an
adverse impact on the value of the shares, relative to the value
that would result if the lock-out provisions did not exist. In
particular, lock-out provisions could preclude us from
participating in major transactions that could result in a
disposition of our assets or a change in control even though
that disposition or change in control might be in the best
interests of our stockholders.
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Rising expenses could reduce cash flow and funds available
for future acquisitions. |
Any properties that we buy in the future, will be subject to
operating risks common to real estate in general, any or all of
which may negatively affect us. If any property is not fully
occupied or if rents are being paid in an amount that is
insufficient to cover operating expenses, we could be required
to expend funds with respect to that property for operating
expenses. The properties will be subject to increases in tax
rates, utility costs, operating expenses, insurance costs,
repairs and maintenance and administrative expenses.
While some of our properties may be leased on a triple-net-lease
basis or require the tenants to pay a portion of such expenses,
renewals of leases or future leases may not be negotiated on
that basis, in which event we will have to pay those costs. If
we are unable to lease properties on a triple-net-lease basis or
on a basis requiring the tenants to pay all or some of such
expenses, or if tenants fail to pay required tax, utility and
other impositions, we could be required to pay those costs which
could adversely affect funds available for future acquisitions
or cash available for distributions.
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Adverse economic conditions will negatively affect our
returns and profitability. |
Recent geopolitical events have exacerbated the general economic
slowdown that has affected the nation as a whole and the local
economies where our properties may be located. The following
market and economic challenges may adversely affect our
operating results:
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poor economic times may result in tenant defaults under leases; |
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re-leasing may require concessions or reduced rental rates under
the new leases; and |
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increased insurance premiums, resulting in part from the
increased risk of terrorism, may reduce funds available for
distribution or, to the extent such increases are passed through
to tenants, may lead to tenant defaults. Increased insurance
premiums may make it difficult to increase rents to tenants on
turnover, which may adversely affect our ability to increase our
returns. |
Our operations could be negatively affected to the extent that
an economic downturn is prolonged or becomes more severe.
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If we suffer losses that are not covered by insurance or
that are in excess of insurance coverage, we could lose invested
capital and anticipated profits. |
Each tenant is responsible for insuring its goods and premises
and, in some circumstances, may be required to reimburse us for
a share of the cost of acquiring comprehensive insurance for the
property, including casualty, liability, fire and extended
coverage customarily obtained for similar properties in amounts
that our advisor determines are sufficient to cover reasonably
foreseeable losses. Tenants of single-user properties leased on
a triple-net-lease basis typically are required to pay all
insurance costs associated with those properties. Material
losses may occur in excess of insurance proceeds with respect to
any property, as insurance may not be sufficient to fund the
losses. However, there are types of losses, generally of a
catastrophic nature, such as losses due to wars, acts of
terrorism, earthquakes, floods, hurricanes, pollution or
environmental matters, which are either uninsurable or not
economically insurable, or may be insured subject to
limitations, such as large deductibles or co-payments. Insurance
risks associated with potential terrorism acts could sharply
increase the premiums we pay for coverage against property and
casualty claims. Additionally, mortgage lenders in some cases
have begun to insist that commercial property owners purchase
specific coverage against terrorism as a condition for providing
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mortgage loans. It is uncertain whether such insurance policies
will be available, or available at reasonable cost, which could
inhibit our ability to finance or refinance our potential
properties. In these instances, we may be required to provide
other financial support, either through financial assurances or
self-insurance, to cover potential losses. We cannot assure you
that will have adequate coverage for such losses. The Terrorism
Risk Insurance Act of 2002 is designed for a sharing of
terrorism losses between insurance companies and the federal
government. We cannot be certain how this act will impact us or
what additional cost to us, if any, could result. If such an
event damaged or destroyed one or more of our properties, we
could lose both our invested capital and anticipated profits
from such property.
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Terrorist attacks, such as the attacks that occurred in
New York and Washington, D.C. on September 11, 2001,
and other acts of violence or war may affect the markets in
which we operate, our operations and our profitability. |
Terrorist attacks may negatively affect our operations and your
investment in our common shares. We cannot assure you that there
will not be further terrorist attacks against the United States
or United States businesses. Properties we may acquire may be
located in areas that may be susceptible to attack, which may
make these properties more likely to be viewed as terrorist
targets than similar, less recognizable properties. These
attacks or armed conflicts may directly impact the value of our
properties through damage, destruction, loss or increased
security costs. We may obtain terrorism insurance as required by
our lenders. The terrorism insurance that we obtain may not be
sufficient to cover loss for damages to our properties as a
result of terrorist attacks. In addition, certain losses
resulting from these types of events are uninsurable and others
would not be covered by our current terrorism insurance.
Additional terrorism insurance may not be available at a
reasonable price or at all.
The United States armed conflict in Iraq and other parts
of the world could have a further impact on our tenants. The
consequences of any armed conflict are unpredictable, and we may
not be able to foresee events that could have an adverse effect
on our business or your investment.
More generally, any of these events could result in increased
volatility in or damage to the United States and worldwide
financial markets and economy. They also could result in a
continuation of the current economic uncertainty in the United
States or abroad. Our revenues will be dependent upon payment of
rent by retailers, which may be particularly vulnerable to
uncertainty in the local economy. Adverse economic conditions
could affect the ability of our tenants to pay rent, which could
have a material adverse effect on our operating results and
financial condition, as well as our ability to pay distributions
to stockholders.
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Real estate related taxes may increase and if these
increases are not passed on to tenants, our income will be
reduced. |
Some local real property tax assessors may seek to reassess some
of our properties as a result of our acquisition of the
property. Generally, from time to time our property taxes
increase as property values or assessment rates change or for
other reasons deemed relevant by the assessors. An increase in
the assessed valuation of a property for real estate tax
purposes will result in an increase in the related real estate
taxes on that property. Although some tenant leases may permit
us to pass through such tax increases to the tenants for
payment, there is no assurance that renewal leases or future
leases will be negotiated on the same basis. Increases not
passed through to tenants will adversely affect our income, cash
available for distributions, and the amount of distributions to
you.
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Revenue from our properties depends on the amount of our
tenants retail revenue, making us vulnerable to general
economic downturns and other conditions affecting the retail
industry. |
Some of our leases may provide for base rent plus contractual
base rent increases. Some of our leases may also include a
percentage rent clause for additional rent above the base amount
based upon a specified percentage of the sales our tenants
generate.
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Under those leases that contain percentage rent clauses, our
revenue from tenants may decrease as the sales of our tenants
decrease. Generally, retailers face declining revenues during
downturns in the economy. As a result, the portion of our
revenue that we derive from percentage rent leases could decline
upon a general economic downturn.
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CC&Rs may restrict our ability to operate a
property. |
Some of our properties will most likely be contiguous to other
parcels of real property, comprising part of the same shopping
center development. In connection therewith, there will likely
exist significant covenants, conditions and restrictions, known
as CC&Rs, restricting the operation of such
property and any improvements on that property, and related to
granting easements on that property. Moreover, the operation and
management of the contiguous properties may impact such
property. Compliance with CC&Rs may adversely affect our
operating costs and reduce the amount of funds that we have
available to pay distributions.
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Our operating results may be negatively affected by
potential development and construction delays and resultant
increased costs and risks. |
While we do not currently intend to do so, we may use proceeds
from this offering to acquire and develop properties upon which
we will construct improvements. We will be subject to
uncertainties associated with re-zoning for development,
environmental concerns of governmental entities and/or community
groups, and our builders ability to build in conformity
with plans, specifications, budgeted costs, and timetables. If a
builder fails to perform, we may resort to legal action to
rescind the purchase or the construction contract or to compel
performance. A builders performance may also be affected
or delayed by conditions beyond the builders control.
Delays in completion of construction could also give tenants the
right to terminate preconstruction leases. We may incur
additional risks when we make periodic progress payments or
other advances to builders before they complete construction.
These and other such factors can result in increased costs of a
project or loss of our investment. In addition, we will be
subject to normal lease-up risks relating to newly constructed
projects. We also must rely on rental income and expense
projections and estimates of the fair market value of property
upon completion of construction when agreeing upon a price at
the time we acquire the property. If our projections are
inaccurate, we may pay too much for a property, and our return
on our investment could suffer.
While we do not currently intend to do so, we may invest in
unimproved real property. Returns from development of unimproved
properties are also subject to risks associated with re-zoning
the land for development and environmental concerns of
governmental entities and/or community groups. Although we
intend to limit any investment in unimproved property to
property we intend to develop, your investment nevertheless is
subject to the risks associated with investments in unimproved
real property.
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If we contract with an affiliated development company for
newly developed property, we cannot guarantee that our earnest
money deposit made to the development company will be fully
refunded. |
While we currently do not have an affiliated development
company, our sponsor and/or its affiliates may form a
development company. In such an event, we may enter into one or
more contracts, either directly or indirectly through joint
ventures with affiliates or others, to acquire real property
from an affiliate of Cole Advisors II that is engaged in
construction and development of commercial real properties.
Properties acquired from an affiliated development company may
be either existing income-producing properties, properties to be
developed or properties under development. We anticipate that we
will be obligated to pay a substantial earnest money deposit at
the time of contracting to acquire such properties. In the case
of properties to be developed by an affiliated development
company, we anticipate that we will be required to close the
purchase of the property upon completion of the development of
the property by our affiliate. At the time of contracting and
the payment of the earnest money deposit by us, our development
company affiliate typically will not have acquired title to any
real property. Typically, our development company affiliate will
only have a contract to acquire land, a development agreement to
develop a building on the land and an agreement with one or more
tenants to lease all or part of the
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property upon its completion. We may enter into such a contract
with our development company affiliate even if at the time of
contracting we have not yet raised sufficient proceeds in our
offering to enable us to close the purchase of such property.
However, we will not be required to close a purchase from our
development company affiliate, and will be entitled to a refund
of our earnest money, in the following circumstances:
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our development company affiliate fails to develop the property; |
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all or a specified portion of the pre-leased tenants fail to
take possession under their leases for any reason; or |
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we are unable to raise sufficient proceeds from our offering to
pay the purchase price at closing. |
The obligation of our development company affiliate to refund
our earnest money will be unsecured, and no assurance can be
made that we would be able to obtain a refund of such earnest
money deposit from it under these circumstances since our
development company affiliate may be an entity without
substantial assets or operations. However, our development
company affiliates obligation to refund our earnest money
deposit may be guaranteed by Fund Realty Advisors, our property
manager, which will enter into contracts to provide property
management and leasing services to various Cole-sponsored
programs, including us, for substantial monthly fees. As of the
time Fund Realty Advisors may be required to perform under any
guaranty, we cannot assure that Fund Realty Advisors will have
sufficient assets to refund all of our earnest money deposit in
a lump sum payment. If we were forced to collect our earnest
money deposit by enforcing the guaranty of Fund Realty Advisors,
we will likely be required to accept installment payments over
time payable out of the revenues of Fund Realty Advisors
operations. We cannot assure you that we would be able to
collect the entire amount of our earnest money deposit under
such circumstances. See Investment Objectives and
Policies Acquisition and Investment Policies.
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Competition with third parties in acquiring properties and
other investments may reduce our profitability and the return on
your investment. |
We compete with many other entities engaged in real estate
investment activities, including individuals, corporations, bank
and insurance company investment accounts, other REITs, real
estate limited partnerships, and other entities engaged in real
estate investment activities, many of which have greater
resources than we do. Larger REITs may enjoy significant
competitive advantages that result from, among other things, a
lower cost of capital and enhanced operating efficiencies. In
addition, the number of entities and the amount of funds
competing for suitable investments may increase. Any such
increase would result in increased demand for these assets and
therefore increased prices paid for them. If we pay higher
prices for properties and other investments, our profitability
will be reduced and you may experience a lower return on your
investment.
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Our properties will face competition that may affect
tenants ability to pay rent and the amount of rent paid to
us may affect the cash available for distributions and the
amount of distributions. |
We intend to locate our properties in developed areas.
Therefore, there are and will be numerous other retail
properties within the market area of each of our properties that
will compete with us for tenants. The number of competitive
properties could have a material effect on our ability to rent
space at our properties and the amount of rents charged. We
could be adversely affected if additional competitive properties
are built in locations competitive with our properties, causing
increased competition for customer traffic and creditworthy
tenants. This could result in decreased cash flow from tenants
and may require us to make capital improvements to properties
that we would not have otherwise made, thus affecting cash
available for distributions, and the amount available for
distributions to you.
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Delays in acquisitions of properties may an have adverse
effect on your investment. |
There may be a substantial period of time before the proceeds of
this offering are invested. Delays we encounter in the
selection, acquisition and/or development of properties could
adversely affect your
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returns. Where properties are acquired prior to the start of
construction or during the early stages of construction, it will
typically take several months to complete construction and rent
available space. Therefore, you could suffer delays in the
payment of cash distributions attributable to those particular
properties.
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Costs of complying with governmental laws and regulations,
including those relating to environmental matters, may adversely
affect our income and the cash available for any
distributions. |
All real property and the operations conducted on real property
are subject to federal, state and local laws and regulations
relating to environmental protection and human health and
safety. These laws and regulations generally govern wastewater
discharges, air emissions, the operation and removal of
underground and above-ground storage tanks, the use, storage,
treatment, transportation and disposal of solid and hazardous
materials, and the remediation of contamination associated with
disposals. Some of these laws and regulations may impose joint
and several liability on tenants, owners or operators for the
costs to investigate or remediate contaminated properties,
regardless of fault or whether the acts causing the
contamination were legal. This liability could be substantial.
In addition, the presence of hazardous substances, or the
failure to properly remediate these substances, may adversely
affect our ability to sell, rent or pledge such property as
collateral for future borrowings.
Some of these laws and regulations have been amended so as to
require compliance with new or more stringent standards as of
future dates. Compliance with new or more stringent laws or
regulations or stricter interpretation of existing laws may
require us to incur material expenditures. Future laws,
ordinances or regulations may impose material environmental
liability. Additionally, our tenants operations, the
existing condition of land when we buy it, operations in the
vicinity of our properties, such as the presence of underground
storage tanks, or activities of unrelated third parties may
affect our properties. In addition, there are various local,
state and federal fire, health, life-safety and similar
regulations with which we may be required to comply, and that
may subject us to liability in the form of fines or damages for
noncompliance. Any material expenditures, fines, or damages we
must pay will reduce our ability to make distributions and may
reduce the value of your investment.
State and federal laws in this area are constantly evolving, and
we intend to monitor these laws and take commercially reasonable
steps to protect ourselves from the impact of these laws,
including obtaining environmental assessments of most properties
that we acquire; however, we will not obtain an independent
third-party environmental assessment for every property we
acquire. In addition, we cannot assure you that any such
assessment that we do obtain will reveal all environmental
liabilities or that a prior owner of a property did not create a
material environmental condition not known to us. We cannot
predict what other environmental legislation or regulations will
be enacted in the future, how existing or future laws or
regulations will be administered or interpreted, or what
environmental conditions may be found to exist in the future. We
cannot assure you that our business, assets, results of
operations, liquidity or financial condition will not be
adversely affected by these laws, which may adversely affect
cash available for distributions, and the amount of
distributions to you.
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If we sell properties by providing financing to
purchasers, defaults by the purchasers would adversely affect
our cash flows. |
If we decide to sell any of our properties, we intend to use our
best efforts to sell them for cash. However, in some instances
we may sell our properties by providing financing to purchasers.
When we provide financing to purchasers, we will bear the risk
that the purchaser may default, which could negatively impact
our cash distributions to stockholders. Even in the absence of a
purchaser default, the distribution of the proceeds of sales to
our stockholders, or their reinvestment in other assets, will be
delayed until the promissory notes or other property we may
accept upon the sale are actually paid, sold, refinanced or
otherwise disposed of. In some cases, we may receive initial
down payments in cash and other property in the year of sale in
an amount less than the selling price and subsequent payments
will be spread over a number of years. If any purchaser defaults
under a financing arrangement with us, it could negatively
impact our ability to pay cash distributions to our stockholders.
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Our recovery of an investment in a mortgage that has
defaulted may be limited. |
There is no guarantee that the mortgage, loan or deed of trust
securing an investment will, following a default, permit us to
recover the original investment and interest that would have
been received absent a default. The security provided by a
mortgage, deed of trust or loan is directly related to the
difference between the amount owed and the appraised market
value of the property. Although we intend to rely on a current
real estate appraisal when we make the investment, the value of
the property is affected by factors outside our control,
including general fluctuations in the real estate market,
rezoning, neighborhood changes, highway relocations and failure
by the borrower to maintain the property.
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Our costs associated with complying with the Americans
with Disabilities Act may affect cash available for
distributions. |
Our properties will be subject to the Americans with
Disabilities Act of 1990 (Disabilities Act). Under the
Disabilities Act, all places of public accommodation are
required to comply with federal requirements related to access
and use by disabled persons. The Disabilities Act has separate
compliance requirements for public accommodations
and commercial facilities that generally requires
that buildings and services, including restaurants and retail
stores, be made accessible and available to people with
disabilities. The Disabilities Acts requirements could
require removal of access barriers and could result in the
imposition of injunctive relief, monetary penalties, or, in some
cases, an award of damages. We will attempt to acquire
properties that comply with the Disabilities Act or place the
burden on the seller or other third party, such as a tenant, to
ensure compliance with the Disabilities Act. However, we cannot
assure you that we will be able to acquire properties or
allocate responsibilities in this manner. If we cannot, our
funds used for Disabilities Act compliance may affect cash
available for distributions and the amount of distributions to
you.
Risks Associated with Debt Financing
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We may incur mortgage indebtedness and other borrowings,
which may increase our business risks. |
We expect that in most instances, we will acquire real
properties by using either existing financing or borrowing new
funds. In addition, we may incur mortgage debt and pledge all or
some of our real properties as security for that debt to obtain
funds to acquire additional real properties. We may borrow if we
need funds to satisfy the REIT tax qualification requirement
that we distribute at least 90.0% of our annual REIT taxable
income to our stockholders. We may also borrow if we otherwise
deem it necessary or advisable to assure that we maintain our
qualification as a REIT for federal income tax purposes.
If there is a shortfall between the cash flow from a property
and the cash flow needed to service mortgage debt on a property,
then the amount available for distributions to stockholders may
be reduced. In addition, incurring mortgage debt increases the
risk of loss since defaults on indebtedness secured by a
property may result in lenders initiating foreclosure actions.
In that case, we could lose the property securing the loan that
is in default, thus reducing the value of your investment. For
tax purposes, a foreclosure of any of our properties would be
treated as a sale of the property for a purchase price equal to
the outstanding balance of the debt secured by the mortgage. If
the outstanding balance of the debt secured by the mortgage
exceeds our tax basis in the property, we would recognize
taxable income on foreclosure, but would not receive any cash
proceeds. We may give full or partial guarantees to lenders of
mortgage debt to the entities that own our properties. When we
provide a guaranty on behalf of an entity that owns one of our
properties, we will be responsible to the lender for
satisfaction of the debt if it is not paid by such entity. If
any mortgages contain cross-collateralization or cross-default
provisions, a default on a single property could affect multiple
properties. If any of our properties are foreclosed upon due to
a default, our ability to pay cash distributions to our
stockholders will be adversely affected.
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High mortgage rates may make it difficult for us to
finance or refinance properties, which could reduce the number
of properties we can acquire and the amount of cash
distributions we can make. |
If we place mortgage debt on properties, we run the risk of
being unable to refinance the properties when the loans come
due, or of being unable to refinance on favorable terms. If
interest rates are higher when the properties are refinanced, we
may not be able to finance the properties and our income could
be reduced. If any of these events occur, our cash flow would be
reduced. This, in turn, would reduce cash available for
distribution to you and may hinder our ability to raise more
capital by issuing more stock or by borrowing more money.
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Lenders may require us to enter into restrictive covenants
relating to our operations, which could limit our ability to
make distributions to our stockholders. |
When providing financing, a lender could impose restrictions on
us that affect our distribution and operating policies and our
ability to incur additional debt. Loan documents we enter into
may contain covenants that limit our ability to further mortgage
the property, discontinue insurance coverage or replace Cole
Advisors II as our advisor. These or other limitations may
adversely affect our flexibility and our ability to achieve our
operating plans.
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Increases in interest rates could increase the amount of
our debt payments and adversely affect our ability to pay
distributions to our stockholders. |
We expect that we will incur indebtedness in the future.
Interest we pay will reduce cash available for distributions.
Additionally, if we incur variable rate debt, increases in
interest rates would increase our interest costs, which could
reduce our cash flows and our ability to pay distributions to
you. In addition, if we need to repay existing debt during
periods of rising interest rates, we could be required to
liquidate one or more of our investments in properties at times
that may not permit realization of the maximum return on such
investments.
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We have broad authority to incur debt, and high debt
levels could hinder our ability to make distributions and could
decrease the value of your investment. |
Our charter generally limits us to incurring debt no greater
than 60% of the greater of cost (before deducting depreciation
or other non-cash reserves) or fair market value of all of our
assets, unless any excess borrowing is approved by a majority of
our independent directors and disclosed to our stockholders in
our next quarterly report, along with a justification for such
excess borrowing. High debt levels would cause us to incur
higher interest charges, would result in higher debt service
payments, and could be accompanied by restrictive covenants.
These factors could limit the amount of cash we have available
to distribute and could result in a decline in the value of your
investment.
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We anticipate that during the term of this offering we
will request that our independent directors approve our ability
to incur debt greater than the debt limit discussed
above. |
During the term of this offering, we may want to conserve our
cash resources. Therefore, we anticipate that we will, upon the
approval of a majority of our independent directors, incur debt
that is in excess of 60% of the greater of cost (before
deducting depreciation or other non-cash reserves) or fair
market value of all of our assets. We anticipate that we will
receive, from time to time, such authority. This will result in
our having a greater than normal debt servicing payments, which
may restrict our ability to purchase additional properties or
the availability of cash to make distributions to our
stockholders.
Risks Associated with Section 1031 Exchange Transactions
and Tenant-in-Common Investments
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We may have increased exposure to liabilities from
litigation as a result of our participation in a
Tenant-in-Common Program. |
Cole Capital Partners, an affiliate of our advisor, has
developed Tenant-in-Common Programs to facilitate the
acquisition of real estate properties to be owned in co-tenancy
arrangements with persons who
37
are looking to invest proceeds from a sale of real estate to
qualify for like-kind exchange treatment under Section 1031
of the Internal Revenue Code. We may participate in the
Tenant-in-Common program by either co-investing in the property
with the Cole Exchange Entity or purchasing a tenant-in common
interest from the Cole Exchange Entity, generally at the Cole
Exchange Entitys cost. Changes in tax laws may result in
Tenant-in-Common Programs no longer being available, which may
adversely affect such programs or cause them not to achieve
their intended value. The Cole Exchange Entities are affiliates
of our advisor, and, as such, even though we do not sponsor
these Tenant-in-Common Programs, we may be named in or otherwise
required to defend against any lawsuits brought by
Tenant-in-Common Participants because of our affiliation with
sponsors of such transactions. Furthermore, in the event that
the Internal Revenue Service conducts an audit of the purchasers
of co-tenancy interests and successfully challenges the
qualification of the transaction as a like-kind exchange,
purchasers of co-tenancy interests may file a lawsuit against
the entity offering the co-tenancy interests, its sponsors,
and/or us. In such event we may be involved in one or more such
offerings and could therefore be named in or otherwise required
to defend against lawsuits brought by other Tenant-in-Common
Participants. Any amounts we are required to expend defending
any such claims will reduce the amount of funds available for
investment by us in properties or other investments and may
reduce the amount of funds available for distribution to our
stockholders. In addition, disclosure of any such litigation may
adversely affect our ability to raise additional capital in the
future through the sale of stock.
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We may be subject to risks associated with
Tenant-in-Common Programs inherent in ownership of co-tenancy
interests with non-affiliated third parties. |
In connection with some of our property acquisitions, we
currently or subsequently may become tenant-in-common owners of
properties in which Cole Exchange Entities sell tenant-in-common
interests to Tenant-in-Common Participants. As an owner of
tenant-in-common interests in properties, we will be subject to
the risks interest to the ownership of co-tenancy interests with
unrelated third parties. In a substantial majority of these
transactions, the underlying property serves as collateral for
the mortgage loan to finance the purchase of the property. To
the extent the loan is not repaid in full as part of the
Tenant-in-Common Program, the loan remains outstanding after the
sale of the co-tenancy interests to the Tenant-in-Common
Participants. Each co-tenant is a borrower under the loan
agreements. However, these loans generally are non-recourse
against the Tenant-in-Common Participants interests and are
secured by the real property. However, the Tenant-in-Common
Participants are required to indemnify, and become liable to,
the lender for customary carve-outs under the applicable
financing documents, including but not limited to fraud or
intentional misrepresentation by a co-tenant or a guarantor of
the loan, physical waste of the property, misapplication or
misappropriation of insurance proceeds, and failure to pay taxes.
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We will be subject to risks associated with the co-tenants
in our co-tenancy arrangements that otherwise may not be present
in other real estate investments. |
We may enter in tenant-in-common or other co-tenancy
arrangements with respect to a portion of the properties we
acquire. Ownership of co-tenancy interests involves risks
generally not otherwise present with an investment in real
estate such as the following:
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the risk that a co-tenant may at any time have economic or
business interests or goals that are or become inconsistent with
our business interests or goals; |
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the risk that a co-tenant may be in a position to take action
contrary to our instructions or requests or contrary to our
policies or objectives; |
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the possibility that an individual co-tenant might become
insolvent or bankrupt, or otherwise default under the applicable
mortgage loan financing documents, which may constitute an event
of default under all of the applicable mortgage loan financing
documents or allow the bankruptcy court to reject the
tenants-in-common agreement or management agreement entered into
by the co-tenants owning interests in the property; |
38
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the possibility that a co-tenant might not have adequate liquid
assets to make cash advances that may be required in order to
fund operations, maintenance and other expenses related to the
property, which could result in the loss of current or
prospective tenants and may otherwise adversely affect the
operation and maintenance of the property, and could cause a
default under the mortgage loan financing documents applicable
to the property and may result in late charges, penalties and
interest, and may lead to the exercise of foreclosure and other
remedies by the lender; |
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|
the risk that a co-tenant could breach agreements related to the
property, which may cause a default under, or result in personal
liability for, the applicable mortgage loan financing documents,
violate applicable securities law and otherwise adversely affect
the property and the co-tenancy arrangement; or |
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|
the risk that a default by any co-tenant would constitute a
default under the applicable mortgage loan financing documents
that could result in a foreclosure and the loss of all or a
substantial portion of the investment made by the co-tenants. |
Any of the above might subject a property to liabilities in
excess of those contemplated and thus reduce the amount
available for distribution to our stockholders.
In the event that our interests become adverse to those of the
other co-tenants, we will not have the contractual right to
purchase the co-tenancy interests from the other co-tenants.
Even if we are given the opportunity to purchase such co-tenancy
interests in the future, we cannot guarantee that we will have
sufficient funds available at the time to purchase co-tenancy
interests from the Tenant-in-Common Participants.
We might want to sell our co-tenancy interests in a given
property at a time when the other co-tenants in such property do
not desire to sell their interests. Therefore, we may not be
able to sell our interest in a property at the time we would
like to sell. In addition, we anticipate that it will be much
more difficult to find a willing buyer for our co-tenancy
interests in a property than it would be to find a buyer for a
property we owned outright.
Federal Income Tax Risks
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Failure to qualify as a REIT would adversely affect our
operations and our ability to make distributions. |
Morris, Manning & Martin, LLP, our legal counsel, has
rendered its opinion that we will qualify as a REIT, based upon
our representations as to the manner in which we are and will be
owned, invest in assets and operate, among other things.
However, our qualification as a REIT will depend upon our
ability to meet, through investments, actual operating results,
distributions and satisfaction of specific stockholder rules,
the various tests imposed by the Internal Revenue Code. Morris,
Manning & Martin, LLP will not review these operating
results or compliance with the qualification standards on an
ongoing basis. This means that we may fail to satisfy the REIT
requirements in the future. Also, this opinion represents
Morris, Manning & Martin, LLPs legal judgment
based on the law in effect as of the date of this prospectus.
Morris, Manning & Martin, LLPs opinion is not
binding on the Internal Revenue Service or the courts and we
will not apply for a ruling from the Internal Revenue Service
regarding our status as a REIT. Future legislative, judicial or
administrative changes to the federal income tax laws could be
applied retroactively, which could result in our
disqualification as a REIT.
If we fail to qualify as a REIT for any taxable year, we will be
subject to federal income tax on our taxable income at corporate
rates. In addition, we would generally be disqualified from
treatment as a REIT for the four taxable years following the
year of losing our REIT status. Losing our REIT status would
reduce our net earnings available for investment or distribution
to stockholders because of the additional tax liability. In
addition, distributions to stockholders would no longer qualify
for the distributions paid deduction, and we would no longer be
required to make distributions. If this occurs, we might be
required to borrow funds or liquidate some investments in order
to pay the applicable tax.
39
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Recharacterization of the Tenant-in-Common Programs may
result in a 100% tax on income from a prohibited transaction,
which would diminish our cash distributions to you. |
The Internal Revenue Service could recharacterize transactions
under the Tenant in Common Program such that Cole OP II,
rather than the Tenant-in-Common Participant, is treated as the
bona fide owner, for tax purposes, of properties acquired and
resold by a Tenant-in-Common Participant in connection with the
Tenant-in-Common Programs. Such characterization could result in
the fees paid to Cole OP II by a Tenant-in-Common
Participant as being deemed income from a prohibited
transaction, in which event the fee income paid to us in
connection with the Tenant-in-Common Programs would be subject
to a 100% penalty tax. If this occurs, our ability to pay cash
distributions to you will be adversely affected. We anticipate
that the Cole Exchange Entity will obtain a legal opinion in
connection with each Tenant-in-Common Program to the effect that
the program will qualify as a like-kind exchange under
Section 1031 of the Internal Revenue Code. However, no
assurance can be given that the Internal Revenue Service will
not take a position contrary to such an opinion.
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Recharacterization of sale-leaseback transactions may
cause us to lose our REIT status. |
We may purchase properties and lease them back to the sellers of
such properties. While we will use our best efforts to structure
any such sale-leaseback transaction so that the lease will be
characterized as a true lease, thereby allowing us
to be treated as the owner of the property for federal income
tax purposes, we cannot assure you that the IRS will not
challenge such characterization. In the event that any
sale-leaseback transaction is challenged and recharacterized as
a financing transaction or loan for federal income tax purposes,
deductions for depreciation and cost recovery relating to such
property would be disallowed. If a sale-leaseback transaction
were so recharacterized, we might fail to satisfy the REIT
qualification asset tests or the income
tests and, consequently, lose our REIT status effective
with the year of recharacterization. Alternatively, the amount
of our REIT taxable income could be recalculated which might
also cause us to fail to meet the distribution requirement for a
taxable year.
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You may have tax liability on distributions you elect to
reinvest in our common stock. |
If you participate in our distribution reinvestment plan, you
will be deemed to have received, and for income tax purposes
will be taxed on, the amount reinvested in common stock to the
extent the amount reinvested was not a tax-free return of
capital. As a result, unless you are a tax-exempt entity, you
may have to use funds from other sources to pay your tax
liability on the value of the common stock received.
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In certain circumstances, we may be subject to federal and
state income taxes as a REIT, which would reduce our cash
available for distribution to you. |
Even if we qualify and maintain our status as a REIT, we may be
subject to federal income taxes or state taxes. For example, net
income from a prohibited transaction will be subject
to a 100% tax. We may not be able to make sufficient
distributions to avoid excise taxes applicable to REITs. We may
also decide to retain income we earn from the sale or other
disposition of our property and pay income tax directly on such
income. In that event, our stockholders would be treated as if
they earned that income and paid the tax on it directly.
However, stockholders that are tax-exempt, such as charities or
qualified pension plans, would have no benefit from their deemed
payment of such tax liability. We may also be subject to state
and local taxes on our income or property, either directly or at
the level of Cole OP II or at the level of the other
companies through which we indirectly own our assets. Any
federal or state taxes we pay will reduce our cash available for
distribution to you.
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Legislative or regulatory action could adversely affect
investors. |
Under recently enacted tax legislation, the tax rate applicable
to qualifying corporate distributions received by individuals
prior to 2009 has been reduced to a maximum rate of 15.0%. This
special tax rate is generally not applicable to distributions
paid by a REIT, unless such distributions represent earnings on
which the REIT itself has been taxed. As a result, distributions
(other than capital gain distributions) we pay to individual
investors generally will be subject to the tax rates that are
otherwise applicable to
40
ordinary income, which currently are as high as 35.0%. This
change in law may make an investment in our shares comparatively
less attractive to individual investors than an investment in
the shares of non-REIT corporations, and could have an adverse
effect on the value of our common stock. You are urged to
consult with your own tax advisor with respect to the impact of
recent legislation on your investment in our common stock and
the status of legislative, regulatory or administrative
developments and proposals and their potential effect on an
investment in our common stock. You should also note that our
counsels tax opinion assumes that no legislation will be
enacted after the date of this prospectus that will be
applicable to an investment in our shares.
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Foreign purchasers of our common stock may be subject to
FIRPTA tax upon the sale of their shares. |
A foreign person disposing of a U.S. real property
interest, including shares of a U.S. corporation whose
assets consist principally of U.S. real property interests,
is generally subject to a tax, known as FIRPTA tax, on the gain
recognized on the disposition. Such FIRPTA tax does not apply,
however, to the disposition of stock in a REIT if the REIT is
domestically controlled. A REIT is
domestically controlled if less than 50.0% of the
REITs stock, by value, has been owned directly or
indirectly by persons who are not qualifying U.S. persons
during a continuous five-year period ending on the date of
disposition or, if shorter, during the entire period of the
REITs existence.
We cannot assure you that we will qualify as a
domestically controlled REIT. If we were to fail to
so qualify, gain realized by foreign investors on a sale of our
shares would be subject to FIRPTA tax, unless our shares were
traded on an established securities market and the foreign
investor did not at any time during a specified testing period
directly or indirectly own more than 5.0% of the value of our
outstanding common stock. See Federal Income Tax
Considerations Special Tax Considerations for
Non-U.S. Stockholders Sale of our Shares by a
Non-U.S. Stockholder.
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There are special considerations that apply to pension or
profit-sharing trusts or IRAs investing in |
our shares.
If you are investing the assets of a pension, profit-sharing,
401(k), Keogh or other qualified retirement plan or the assets
of an IRA in our common stock, you should satisfy yourself that,
among other things:
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your investment is consistent with your fiduciary obligations
under ERISA and the Internal Revenue Code; |
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your investment is made in accordance with the documents and
instruments governing your plan or IRA, including your
plans investment policy; |
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your investment satisfies the prudence and diversification
requirements of ERISA; |
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your investment will not impair the liquidity of the plan or IRA; |
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your investment will not produce UBTI for the plan or IRA; |
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you will be able to value the assets of the plan annually in
accordance with ERISA requirements; and |
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your investment will not constitute a prohibited transaction
under Section 406 of ERISA or Section 4975 of the
Internal Revenue Code. |
For a more complete discussion of the foregoing issues and other
risks associated with an investment in shares by retirement
plans, please see the Investment by Tax-Exempt Entities
and ERISA Considerations section of this prospectus.
41
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Such
statements can be identified by the use of forward-looking
terminology such as anticipates,
expects, intends, plans,
believes, seeks, estimates,
would, could, should and
variations of these words and similar expressions. Although we
believe that our expectations reflected in the forward-looking
statements are based on reasonable assumptions, these
expectations may not prove to be correct. Important factors that
could cause our actual results to differ materially from the
expectations reflected in these forward-looking statements
include those set forth above, as well as general economic,
business and market conditions, changes in federal and local
laws and regulations and increased competitive pressures.
42
ESTIMATED USE OF PROCEEDS
The following table sets forth information about how we intend
to use the proceeds raised in this offering, assuming that we
sell either the minimum offering of 250,000 shares, or the
maximum offering of $495,750,000 of shares, respectively, of
common stock pursuant to this offering. Many of the figures set
forth below represent managements best estimate since they
cannot be precisely calculated at this time. Assuming a maximum
offering we expect that approximately 88.6% of the money that
stockholders invest will be used to buy real estate or make
other investments, while the remaining approximately 11.4% will
be used for working capital, including reserves for working
capital, and to pay expenses and fees including the payment of
fees to Cole Advisors II, our advisor, and Cole Capital
Corporation, our dealer manager.
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Minimum Offering | |
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Maximum Offering | |
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Amount(1) | |
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Percent | |
|
Amount(2) | |
|
Percent | |
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| |
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Gross Offering Proceeds
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$ |
2,500,000 |
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100.0 |
% |
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$ |
495,750,000 |
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100.0 |
% |
Less Public Offering Expenses:
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Selling Commissions and Dealer Manager Fee(3)
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212,500 |
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8.5 |
% |
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38,250,000 |
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7.7 |
% |
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Organization and Offering Expenses(4)
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37,500 |
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1.5 |
% |
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7,436,250 |
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1.5 |
% |
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Amount Available for Investment(5)
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$ |
2,250,000 |
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90.0 |
% |
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$ |
450,063,750 |
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90.8 |
% |
Acquisition and Development:
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Acquisition and Advisory Fees(6)
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43,902 |
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1.8 |
% |
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8,781,732 |
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1.8 |
% |
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Acquisition Expenses(7)
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10,976 |
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0.4 |
% |
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2,195,433 |
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0.4 |
% |
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Initial Working Capital Reserve(8)
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0 |
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0 |
% |
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0 |
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0 |
% |
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Amount Invested in Properties(9)
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$ |
2,195,122 |
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87.8 |
% |
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$ |
439,086,585 |
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88.6 |
% |
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(1) |
Assumes the minimum offering of 250,000 shares are sold in
this offering. |
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(2) |
Assumes the maximum offering is sold, which includes
45,000,000 shares offered to the public at $10.00 per
share and 5,000,000 shares offered pursuant to our
distribution reinvestment plan at $9.15 per share. |
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(3) |
Includes selling commissions equal to 7.0% of aggregate gross
offering proceeds, which commissions may be reduced under
certain circumstances, and a dealer manager fee equal to 1.5% of
aggregate gross offering proceeds, both of which are payable to
the dealer manager, an affiliate of our advisor. The dealer
manager, in its sole discretion, may reallow selling commissions
of up to 7.0% of gross offering proceeds to other broker-dealers
participating in this offering attributable to the units sold by
them and may reallow its dealer manager fee up to 1.5% of gross
offering proceeds in marketing fees and due diligence expenses
to broker-dealers participating in this offering based on such
factors including the participating broker-dealers level
of marketing support, level of due diligence review and success
of its sales efforts, each as compared to those of the other
participating broker-dealers. Additionally, we will not pay a
selling commission or a dealer manager fee on shares purchased
pursuant to our distribution reinvestment plan. The amount of
selling commissions may be reduced under certain circumstances
for volume discounts. See the Plan of Distribution
section of this prospectus for a description of such provisions. |
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(4) |
Organization and offering expenses consist of reimbursement of
actual legal, accounting, printing and other accountable
offering expenses, including amounts to reimburse Cole
Advisors II, our advisor, for marketing, salaries and
direct expenses of its employees while engaged in registering
and marketing the shares and other marketing and organization
costs, other than selling commissions and the dealer manager
fee. Cole Advisors II and its affiliates will be
responsible for the payment of organization and offering
expenses, other than selling commissions and the dealer manager
fee, to the extent they exceed 1.5% of gross offering proceeds
without recourse against or reimbursement by us. We currently
estimate that approximately $7,436,250 of organization and
offering costs will be incurred if the maximum offering of
50,000,000 (approximately $495,750,000) shares is sold. |
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(5) |
Until required in connection with the acquisition and
development of properties, substantially all of the net proceeds
of the offering and, thereafter, any working capital reserves we
may have may be invested in short-term, highly-liquid
investments including government obligations, bank certificates
of deposit, short-term debt obligations and interest-bearing
accounts. |
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(6) |
Acquisition and advisory fees are defined generally as fees and
commissions paid by any party to any person in connection with
identifying, reviewing, evaluating, investing in and the
purchase, development or construction of |
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properties. We will pay our
advisor, acquisition and advisory fees up to a maximum amount of
2.0% of the contract purchase price of each property acquired,
which for purposes of this table we have assumed is an aggregate
amount equal to our estimated amount invested in properties.
Acquisition and advisory fees do not include acquisition
expenses. For purposes of this table, we have assumed that no
financing is used to acquire properties or other real estate
assets.
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(7) |
Acquisition expenses include legal fees and expenses, travel
expenses, costs of appraisals, nonrefundable option payments on
property not acquired, accounting fees and expenses, title
insurance premiums and other closing costs and miscellaneous
expenses relating to the selection, acquisition and development
of real estate properties. For purposes of this table, we have
assumed expenses of 0.5% of average invested assets, which for
purposes of this table we have assumed is our estimated amount
invested in properties; however, expenses on a particular
acquisition may be higher. Notwithstanding the foregoing,
pursuant to our charter, the total of all acquisition expenses
and acquisition fees payable with respect to a particular
property or investment shall be reasonable, and shall not exceed
an amount equal to 6% of the contract price of the property, or
in the case of a mortgage loan 6% of the funds allowed. |
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(8) |
Working capital reserves typically are utilized for
extraordinary expenses that are not covered by revenue
generation of the property, such as tenant improvements, leasing
commissions and major capital expenditures. Alternatively, a
lender may require its own formula for escrow of working capital
reserves. We do not expect to maintain working capital reserves. |
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(9) |
Includes amounts anticipated to be invested in properties net of
fees and expenses. |
44
MANAGEMENT
General
We operate under the direction of our board of directors, the
members of which are accountable to us and our stockholders as
fiduciaries. The board is responsible for the management and
control of our affairs. The board has retained Cole
Advisors II to manage our day-to-day affairs and the
acquisition and disposition of our investments, subject to the
boards supervision. Our charter has been reviewed and
ratified by at least a majority of our board of directors,
including the independent directors. This ratification by our
board of directors is required by the Statement of Policy
Regarding Real Estate Investment Trusts published by the North
American Securities Administrators Association, also known as
the NASAA REIT Guidelines.
Our charter and bylaws provide that the number of our directors
may be established by a majority of the entire board of
directors but may not be fewer than three nor more than 15,
provided, however, that there may be fewer than three directors
at any time that we have only one stockholder of record. We have
a total of three directors, including two independent directors.
Our charter provides that, from and after the commencement of
this offering, a majority of the directors must be independent
directors. An independent director is a person who
is not one of our officers or employees or an officer or
employee of Cole Advisors II or its affiliates or any other
real estate investment trust organized by our sponsor or advised
by Cole Advisors II, has not otherwise been affiliated with
such entities for the previous two years and does not serve as a
director of more than three REITs organized by
Christopher H. Cole or advised by Cole Advisors II. Of
our three directors, two will be considered independent
directors. There are no family relationships among any of our
directors or officers, or officers of our advisor. Each director
who is not an independent director must have at least three
years of relevant experience demonstrating the knowledge and
experience required to successfully acquire and manage the type
of assets being acquired by us. At least one of the independent
directors must have at least three years of relevant real estate
experience. Currently, each of our directors has substantially
in excess of three years of relevant real estate experience.
During the discussion of a proposed transaction, independent
directors may offer ideas for ways in which transactions may be
structured to offer the greatest value to us, and our management
will take these suggestions into consideration when structuring
transactions. Each director will serve until the next annual
meeting of stockholders or until his or her successor has been
duly elected and qualifies. Although the number of directors may
be increased or decreased, a decrease will not have the effect
of shortening the term of any incumbent director.
Any director may resign at any time and may be removed with or
without cause by the stockholders upon the affirmative vote of
at least a majority of all the votes entitled to be cast at a
meeting properly called for the purpose of the proposed removal.
The notice of the meeting will indicate that the purpose, or one
of the purposes, of the meeting is to determine if the director
shall be removed. Neither our advisor, any member of our board
of directors nor any of their affiliates may vote or consent on
matters submitted to the stockholders regarding the removal of
our advisor or any director after we accept any subscriptions
for the purchase of shares in this offering. In determining the
requisite percentage in interest required to approve such a
matter after we accept any subscriptions for the purchase of
shares in this offering, any shares owned by such persons will
not be included.
Any vacancy created by an increase in the number of directors or
the death, resignation, removal, adjudicated incompetence or
other incapacity of a director may be filled only by a vote of a
majority of the remaining directors. Independent directors shall
nominate replacements for vacancies in the independent director
positions. If at any time there are no directors in office,
successor directors shall be elected by the stockholders. Each
director will be bound by the charter and the bylaws.
The directors are not required to devote all of their time to
our business and are only required to devote the time to our
affairs as their duties require. The directors will meet
quarterly or more frequently if necessary. We do not expect that
the directors will be required to devote a substantial portion
of their
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time to discharge their duties as our directors. Consequently,
in the exercise of their responsibilities, the directors will be
relying heavily on our advisor. Our directors shall have a
fiduciary duty to our stockholders to supervise the relationship
between us and our advisor. The board is empowered to fix the
compensation of all officers that it selects and approve the
payment of compensation to directors for services rendered to us
in any other capacity.
Our board of directors will have written policies on investments
and borrowing, the expected terms of which are set forth in this
prospectus. The directors may establish further written policies
on investments and borrowings and shall monitor our
administrative procedures, investment operations and performance
to ensure that the policies are fulfilled and are in the best
interest of the stockholders.
The board also will be responsible for reviewing our fees and
expenses on at least an annual basis and with sufficient
frequency to determine that the expenses incurred are in the
best interest of the stockholders. In addition, a majority of
the directors, including a majority of the independent directors
who are not otherwise interested in the transaction, must
approve all transactions with Cole Advisors II or its
affiliates. The independent directors will also be responsible
for reviewing the performance of Cole Advisors II and
determining that the compensation to be paid to Cole
Advisors II is reasonable in relation to the nature and
quality of services to be performed and that the provisions of
the advisory agreement are being carried out. Specifically, the
independent directors will consider factors such as:
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the amount of the fees paid to Cole Advisors II in relation
to the size, composition and performance of our investments; |
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the success of Cole Advisors II in generating appropriate
investment opportunities; |
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rates charged to other REITs, especially REITs of similar
structure, and other investors by advisors performing similar
services; |
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additional revenues realized by Cole Advisors II and its
affiliates through their relationship with us, whether we pay
them or they are paid by others with whom we do business; |
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the quality and extent of service and advice furnished by Cole
Advisors II and the performance of our investment
portfolio; and |
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the quality of our portfolio relative to the investments
generated by Cole Advisors II or its affiliates for its
other clients. |
Neither our advisor nor any of its affiliates will vote or
consent to the voting of shares of our common stock they now own
or hereafter acquire on matters submitted to the stockholders
regarding either (1) the removal of Cole Advisors II,
any non-independent director or any of their respective
affiliates, or (2) any transaction between us and Cole
Advisors II, any non-independent director or any of their
respective affiliates.
Committees of the Board of Directors
Our entire board of directors considers all major decisions
concerning our business, including any property acquisitions.
However, our bylaws provide that our board may establish such
committees as the board believes appropriate. The board will
appoint the members of the committee in the boards
discretion. Our bylaws require that a majority of the members of
each committee of our board is to be comprised of independent
directors.
Audit Committee
Our board of directors has established an audit committee, which
consists of our two independent directors. The audit committee,
by approval of at least a majority of the members, selects the
independent registered public accounting firm to audit our
annual financial statements, reviews with the independent
registered public accounting firm the plans and results of the
audit engagement, approves the audit and non-audit services
provided by the independent registered public accounting firm,
reviews the independence
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of the independent registered public accounting firm, considers
the range of audit and non-audit fees and reviews the adequacy
of our internal accounting controls. Our board of directors has
adopted a charter for the audit committee that sets forth its
specific functions and responsibilities.
Compensation Committee
Our board of directors has established a compensation committee
which consists of our two independent directors. The primary
purpose of the compensation committee will be to oversee our
compensation programs. Our board of directors has adopted a
charter for the compensation committee that sets forth its
specific functions and responsibilities.
Executive Officers and Directors
We have provided below certain information about our executive
officers and directors.
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Christopher H. Cole
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Chairman of the Board of Directors, Chief Executive Officer and
President |
Blair D. Koblenz
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Executive Vice President and Chief Financial Officer |
John M. Pons
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Secretary |
Marcus E. Bromley
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Director |
Elizabeth L. Watson
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Director |
Christopher H. Cole has served as the chairman, chief
executive officer and president of our company since our
formation. He also has been the chief executive officer and
president of Cole Advisors II since its formation.
Mr. Cole also has served as the president and chief
executive officer of Cole Capital Partners since 2003 and has
been engaged as a general partner in the structuring and
management of real estate limited partnerships since February
1979. He also is the chief executive officer and president of
Cole Capital Advisors, Inc. (Cole Capital Advisors), Equity Fund
Advisors, Inc. (Equity Fund Advisors), and Cole Advisors.
Mr. Cole is the chief executive officer, president and
treasurer of Fund Realty Advisors, Inc. (Fund Realty Advisors).
He is the president of CHC Partners, which has served as the
general partner in prior real estate programs, since 1985.
Mr. Cole has been the president and chief executive officer
of Cole Equities since 1980. He currently serves as executive
vice president of Cole Capital Corporation. He has served as the
chairman, chief executive officer and president of Cole REIT I
since its formation. Mr. Cole served as the president of
Cole Partnerships, Inc. from its formation to August 1995 and
currently serves as chief executive officer.
Blair D. Koblenz has served as executive vice president
and chief financial officer of our company since its formation.
He has been active in the structuring and financial management
of commercial real estate investments for over 20 years. He
is also executive vice president and chief financial officer of
Cole Capital Partners, Cole Capital Advisors, Equity Fund
Advisors, Cole Advisors and Cole Advisors II.
Mr. Koblenz is the executive vice president, chief
financial officer and secretary of Fund Realty Advisors. He has
served as president of Cole Capital Corporation since December
2002 and previously served as vice president. He also serves as
vice president and chief financial officer of Cole Partnerships,
Partnership Advisors, Cole Real Estate Services, Inc., and CHC
Partners. He serves as secretary of Cole Equities, a consulting
company. Mr. Koblenz has served as a director and executive
vice president/ chief financial officer of Cole REIT I since its
formation in March 2004. Prior to joining Cole in 1994, he
practiced in public accounting at Toback & Company, CPA
from 1979 to 1982 with an emphasis in taxation and business
planning. He then served in a financial officer capacity for
real estate investment companies and operators in Arizona from
1982 to 1994. Mr. Koblenz received his B.S. degree in
Accounting from Arizona State University and is a Certified
Public Accountant, licensed in the State of Arizona. He holds
the designation of Certified Financial Planner as authorized by
the CFP Board of Standards and holds
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securities licenses. He is a member of the American Institute of
CPAs, the Arizona Society of CPAs, the Financial Planning
Association and the National Association of Real Estate
Investment Trusts (NAREIT).
John M. Pons has served as secretary of our company since
its formation. He also is vice president and counsel of Cole
Capital Partners, Cole Capital Advisors and Equity Fund
Advisors, and is vice president, secretary and counsel of Cole
Advisors and Cole Advisors II. From December 2001 until
joining Cole in September 2003, Mr. Pons was associate
general counsel and assistant secretary of GE Capital Franchise
Finance Corporation. Prior to December 2001, Mr. Pons was
engaged in a private legal practice. Mr. Pons has over nine
years experience in all aspects of real estate law, including
the acquisition, sale, leasing, development and financing of
real property. Before attending law school, Mr. Pons was a
Captain in the United States Air Force where he served from 1988
until 1992. Mr. Pons received a B.S. degree in Mathematics
from Colorado State University and a M.S. degree in
Administration from Central Michigan University before attending
the University of Denver where he earned his J.D. (Order of St.
Ives) in 1995.
Marcus E. Bromley has been a member of our board of
directors, chairman of our boards audit committee and a
member of our boards compensation committee since May
2005. Mr. Bromley has served as a member of the board of
trustees of Gables Residential Trust (GBP), a $2 billion
multi-family residential REIT with operations in Texas, Atlanta,
South Florida, Washington, D.C. and Southern California that is
listed on the New York Stock Exchange, since December 1993. From
December 1993 until June 2000, Mr. Bromley also served as
the chief executive officer of Gables Residential Trust. Prior
to joining Gables Residential Trust, Mr. Bromley was a
division partner of Trammell Crow Residential from 1982 until
1993. Mr. Bromley holds a B.S. in Economics from Washington
& Lee University and a M.B.A. from the University of North
Carolina.
Elizabeth L. Watson has been a member of our board of
directors, the chairperson of our boards audit committee
and a member of our boards compensation committee since
May 2005. Since September 2003, Ms. Watson has been a
partner in and has served as the chief operating officer for NGP
Capital Partner III, LLC (NGP Capital). Prior to joining
NGP Capital, she was a retail research analyst for Legg Mason
Wood Walker from June 2002 until September 2003. From November
1997 until June 2002, Ms. Watson was a partner in and
served as executive vice president and chief financial officer
of National Government Properties (NGP). Before joining NGP,
Ms. Watson served as the senior vice president, chief
financial officer and treasurer of Government Properties
Investors, Inc. (GPI) from June 1994 until March 1997. From 1992
until 1994, Ms. Watson served as senior vice president,
chief financial officer and treasurer of Prime Retail, Inc., a
publicly traded REIT that developed and owned factory outlet
centers, and its predecessor company, The Prime Group.
Ms. Watson received her B.S. Accounting and M.B.A. from the
University of Maryland. She holds a Masters of Real Estate from
John Hopkins University and an International Executive M.B.A.
from Georgetown University. For the past ten years, she has been
a lecturer for Johns Hopkins Universitys Real Estate
Master Program and has taught real estate accounting and
taxation, real estate finance and real estate investments. She
is a licensed certified public accountant and is a member of the
Maryland Association of CPAs, NAREIT and the National
Association of Real Estate Companies.
Compensation of Directors
We pay each of our independent directors a retainer of
$25,000 per year plus $2,000 for each board or board
committee meeting the director attends in person ($2,500 for
attendance by the chairperson of the audit committee at each
meeting of the audit committee) and $250 for each meeting the
director attends by telephone. In the event there are multiple
meetings of the board and one or more committees in a single
day, the fees will be limited to $2,500 per day ($3,000 for
the chairperson of the audit committee if there is a meeting of
such committee.) In addition, we have reserved
1,000,000 shares of common stock for future issuance upon
the exercise of stock options that may be granted to our
independent directors pursuant to our stock option plan
(described below). We granted to each of our independent
directors an option to purchase 5,000 shares of common
stock at an exercise price equal to $9.15 per share (or
greater, if such higher price is necessary so that such option
shall not be considered a nonqualified deferred
compensation plan under Section 409A of the Internal
Revenue Code) as of the date each independent
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director was elected as a director. We expect that the
independent directors will receive an additional 5,000-share
option grant on the date of each annual meeting of stockholders,
each with an exercise price equal to $9.15 per share during such
time as we are offering shares to the public at $10.00 per share
and thereafter at 100.0% of the then-current fair market value
per share. All directors receive reimbursement of reasonable
out-of-pocket expenses incurred in connection with attendance at
meetings of our board of directors. If a director is also an
employee of Cole REIT II or Cole Advisors II or their
affiliates, we do not pay compensation for services rendered as
a director. As of May 9, 2005, we had not paid compensation
to any of our directors in their capacity as a member of our
board of directors, other than granting options.
2004 Independent Directors Stock Option Plan
We have adopted an independent directors stock option
plan that is designed to attract and retain independent
directors by providing them with the opportunity to purchase our
shares in order to attract and retain these directors. Options
granted to our independent directors under the plan provide
these directors with an incentive to increase the value of our
shares and a stake in our future that corresponds to the stake
of each of our stockholders. A total of 1,000,000 shares
have been authorized and reserved for issuance under the plan.
The plan is administered by our board of directors. All of our
independent directors will be eligible to participate in the
plan. The plan authorizes the grant of non-qualified stock
options to our independent directors, subject to the absolute
discretion of the board and the applicable limitations of the
plan. We intend to grant options under our stock option plan to
each qualifying director annually. The initial option grant
generally will be made on the date the qualifying director first
becomes a director, unless the grant would cause the director to
exceed our 9.8% ownership limit, in which case the grant will be
delayed. Annual grants are expected to be made on the date of
each annual stockholder meeting in which the respective
independent director is re-elected. The exercise price for the
options granted under our independent director stock option plan
initially would be $9.15 per share (or greater, if such
higher price is necessary so that such options shall not be
considered a nonqualified deferred compensation plan
under Section 409A of the Internal Revenue Code). It is
intended that the exercise price for future options granted
under our independent director stock option plan will be at
least 100.0% of the fair market value of our common stock as of
the date that the option is granted.
Options granted to independent directors under the plan will
become exercisable on the first anniversary of the date of
grant. Options granted under our stock option plan will lapse
and no longer be exercisable on the first to occur of
(1) the tenth anniversary of the date they are granted or
(2) immediately following the date the director ceases to
be a director for cause. Options granted under the plan may be
exercised by payment of cash or through the delivery of shares
of our common stock with a fair market value equal to the
exercise price to be paid. No options issued under our stock
option plan may be exercised if such exercise would jeopardize
our status as a REIT under the Internal Revenue Code.
The term of the plan is ten years. Upon the earlier of our
dissolution or liquidation, upon our reorganization, merger or
consolidation with one or more corporations as a result of which
we are not the surviving corporation, or upon the sale of all or
substantially all of our properties, the plan will terminate,
and any outstanding options will be forfeited. Alternatively,
the board of directors may provide in writing in connection with
any such transaction for any or all of the following
alternatives:
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the assumption by the successor corporation of the options
granted or the replacement of the options with options
exercisable into the stock of the successor corporation, or a
parent or subsidiary of such corporation, with appropriate
adjustments as to the number and kind of shares and exercise
prices; |
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the continuance of the plan and the options by such successor
corporation under the original terms; and/or |
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the payment in cash or shares of our common stock in lieu of and
in complete satisfaction of such options. |
Provisions Applicable to Our Stock Option Plan
In no event shall an option be granted under our stock option
plan to an independent director if the shares available for
purchase subject to such grant, when added to all other shares
available for purchase and all other shares purchased pursuant
to other issued and outstanding options, would exceed 9.8% of
the issued and outstanding shares of common stock determined as
of the date of grant of such option. Except as otherwise
provided in an option agreement, if a change of control occurs
and the agreements effectuating the change of control do not
provide for the assumption or substitution of all options
granted under the plan, the board in its sole and absolute
discretion, may, with respect to any or all of such options,
take any or all of the following actions to be effective as of
the date of the change of control (or as of any other date fixed
by the board occurring within the 30-day period immediately
preceding the date of the change of control, but only if such
action remains contingent upon the change of control), such date
being referred to herein as the Action Effective
Date:
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accelerate the vesting and/or exercisability of the non-assumed
option; |
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unilaterally cancel any such non-assumed option that has not
vested and/or that has not become exercisable; |
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unilaterally cancel such non-assumed option in exchange for: |
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whole and/or fractional shares (or for whole shares and cash in
lieu of any fractional share) that, in the aggregate, are equal
in value to the gain that could be realized by the award
recipient upon the exercise of such option (taking into account
vesting and/or exercisability of such option); or |
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cash or other property equal in value to the gain that could be
realized upon the exercise of such option (taking into account
vesting and/or exercisability of such option); |
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unilaterally cancel such non-assumed option after providing the
holder of such option with (1) an opportunity to exercise
such non-assumed option to the extent vested within a specified
period prior to the date of the change of control, and
(2) notice of such opportunity to exercise prior to the
commencement of such specified period; and/or |
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unilaterally cancel such non-assumed option if there would be no
gain realized upon the immediate exercise price of such option
(taking into account vesting). |
If the number of our outstanding shares is changed into a
different number or kind of shares or securities through a
reorganization or merger in which we are the surviving entity,
or through a combination, recapitalization or otherwise, an
appropriate adjustment will be made in the number and kind of
shares that may be issued pursuant to the exercise of options
granted under the plan. A corresponding adjustment to the
exercise price of such options granted prior to any change will
also be made. Any such adjustment, however, will not change the
total payment, if any, applicable to the portion of the options
not exercised, but will change only the exercise price for each
share.
Compliance with the American Jobs Creation Act
As part of our strategy for compensating our independent
directors, we intend to issue options to purchase our common
stock in our independent directors stock option plan,
which is described above. This method of compensating
individuals may possibly be considered to be a
nonqualified deferred compensation plan under
Section 409A of the Internal Revenue Code (including
amendment by the American Jobs Creation Act of 2004).
Section 409A of the Internal Revenue Code is a recently
enacted section that affects plans, agreements and arrangements
that meet the definition of nonqualified deferred
compensation plans under such provision. Under
Section 409A, nonqualified deferred compensation
plans must meet certain
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requirements regarding the timing of distributions or payments
and the timing of agreements or elections to defer, and must
also prohibit any possibility of acceleration of distributions
or payments, as well as certain other requirements. Currently,
based on the statutory language and the committee reports
accompanying the statute, it is possible that some stock options
(those with an exercise price that is less than the fair market
value of the underlying stock as of the date of grant) could be
considered as nonqualified deferred compensation
plans.
If Section 409A applies to any of the awards issued under
the plan, or if Section 409A applies to any other
arrangement or agreement that we may make, and if such award,
arrangement or agreement does not meet the timing and
prohibition requirements of Section 409A, then (i) all
amounts deferred for all taxable years under the award,
arrangement or agreement would be currently includible in gross
income to the extent not subject to a substantial risk of
forfeiture and not previously included in the gross income of
the affected individual, (ii) interest at the underpayment
rate plus one percentage point would be imposed on the
underpayments that would have occurred had the compensation been
includible in income when first deferred (or, if later, when not
subject to a substantial risk of forfeiture), and (iii) a
20% additional tax is imposed on the amounts required to be
included in income. Furthermore, if the affected individual is
our employee, we would be required to withhold federal income
taxes on this amount, although there may be no funds being paid
to the individual from which we could withhold taxes. We will
also be required to report on an appropriate form (W-2 or 1099)
amounts which are deferred, whether or not they meet the
requirements of new Section 409A, and if we fail to do so,
penalties could apply.
We do not intend to issue any award, or enter into any agreement
or arrangement that would be considered a nonqualified
deferred compensation plan under Section 409A, unless
such award, agreement or arrangement complies with the timing
and prohibition requirements of Section 409A. It is our
current belief, based upon the statute and legislative history,
that the awards, agreements and arrangements that we currently
intend to implement will not be subject to taxation under
Section 409A either because the award, agreement or
arrangement will not be considered a nonqualified deferred
compensation plan, or our expectation that the Internal
Revenue Service will provide guidance or regulations clarifying
that Section 409A would not apply to such award, agreement
or arrangement. Furthermore, if this belief is not correct, we
intend to either terminate or modify such award, agreement or
arrangement (during a transitional period that the Internal
Revenue Service is required to provide by Section 885(f) of
the American Jobs Creation Act of 2004, which enacted
Section 409A) so that Section 409A would not apply to
such award, agreement or arrangement, or so that such award,
agreement or arrangement complies with Section 409As
timing and prohibition requirements. Nonetheless, there can be
no assurances that any award, agreement or arrangement which we
have entered into will not be affected by Section 409A, or
that any such award, agreement or arrangement will not be
subject to income taxation under Section 409A.
Limited Liability and Indemnification of Directors, Officers,
Employees and Other Agents
We are permitted to limit the liability of our directors,
officers and other agents, and to indemnify them, only to the
extent permitted by Maryland law and the NASAA REIT Guidelines.
Maryland law permits us to include in our charter a provision
limiting the liability of our directors and officers to our
stockholders and us for money damages, except for liability
resulting from (i) actual receipt of an improper benefit or
profit in money, property or services or (ii) active and
deliberate dishonesty established by a final judgment and that
is material to the cause of action.
The Maryland General Corporation Law requires us (unless our
charter provides otherwise, which our charter does not) to
indemnify a director or officer who has been successful in the
defense of any proceeding to which he is made a party by reason
of his service in that capacity. The Maryland General
Corporation Law allows directors and officers to be indemnified
against judgments, penalties, fines, settlements and expenses
actually incurred in a proceeding unless the following can be
established:
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an act or omission of the director or officer was material to
the cause of action adjudicated in the proceeding and was
committed in bad faith or was the result of active and
deliberate dishonesty; |
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the director or officer actually received an improper personal
benefit in money, property or services; |
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with respect to any criminal proceeding, the director or officer
had reasonable cause to believe his act or omission was
unlawful; or |
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in a proceeding by us or on our behalf, the director or officer
was adjudged to be liable to us (although a court may order
indemnification for expenses relating to an adverse judgment in
a suit by or in the right of the corporation or a judgment of
liability on the basis that personal benefit was improperly
received). |
Our charter provides that we will indemnify and hold harmless a
director, an officer, an employee, an agent, Cole
Advisors II or an affiliate against any and all losses or
liabilities reasonably incurred by such party in connection with
or by reason of any act or omission performed or omitted to be
performed on our behalf in such capacity. This provision does
not reduce the exposure of directors and officers to liability
under federal or state securities laws, nor does it limit the
stockholders ability to obtain injunctive relief or other
equitable remedies for a violation of a directors or an
officers duties to us, although the equitable remedies may
not be an effective remedy in some circumstances.
In addition to the above provisions of the Maryland General
Corporation Law, and as set forth in the NASAA REIT Guidelines,
our charter further limits our ability to indemnify and hold
harmless our directors, our officers, our employees, our agents,
Cole Advisors II and our affiliates for losses arising from
our operation by requiring that the following additional
conditions are met:
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the directors, the officers, the employees, the agents, Cole
Advisors II or our affiliates have determined, in good
faith, that the course of conduct that caused the loss or
liability was in our best interests; |
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the directors, the officers, the employees, the agents, Cole
Advisors II or our affiliates were acting on our behalf or
performing services for us; |
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in the case of non-independent directors, Cole Advisors II
or our affiliates, the liability or loss was not the result of
negligence or misconduct by the party seeking indemnification; |
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in the case of independent directors, the liability or loss was
not the result of gross negligence or willful misconduct by the
party seeking indemnification; and |
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the indemnification or agreement to hold harmless is recoverable
only out of our net assets and not from the stockholders. |
We have agreed to indemnify and hold harmless Cole
Advisors II and its affiliates performing services for us
from specific claims and liabilities arising out of the
performance of their obligations under the advisory agreement.
As a result, our stockholders and we may be entitled to a more
limited right of action than they and we would otherwise have if
these indemnification rights were not included in the advisory
agreement.
The general effect to investors of any arrangement under which
any of our controlling persons, directors or officers are
insured or indemnified against liability is a potential
reduction in distributions resulting from our payment of
premiums associated with insurance. In addition, indemnification
could reduce the legal remedies available to our stockholders
and us against the officers and directors.
The Securities and Exchange Commission takes the position that
indemnification against liabilities arising under the Securities
Act of 1933, as amended (Securities Act), is against public
policy and unenforceable. Indemnification of our directors, our
officers, our employees, our agents, Cole Advisors II or
our affiliates and any persons acting as a broker-dealer will
not be allowed for liabilities arising from or out of a
violation of state or federal securities laws, unless one or
more of the following conditions are met:
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there has been a successful adjudication on the merits of each
count involving alleged securities law violations; |
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such claims have been dismissed with prejudice on the merits by
a court of competent jurisdiction; or |
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a court of competent jurisdiction approves a settlement of the
claims against the indemnitee and finds that indemnification of
the settlement and the related costs should be made, and the
court considering the request for indemnification has been
advised of the position of the Securities and Exchange
Commission and of the published position of any state securities
regulatory authority in which our securities were offered as to
indemnification for violations of securities laws. |
Our charter provides that the advancement of our funds to our
directors, officers, employees, agents, advisor or affiliates
for legal expenses and other costs incurred as a result of any
legal action for which indemnification is being sought is
permissible only if all of the following conditions are
satisfied: (i) the legal action relates to acts or
omissions with respect to the performance of duties or services
on behalf of us; (ii) our directors, officers, employees,
agents, advisor or affiliates provide us with written
affirmation of their good faith belief that they have met the
standard of conduct necessary for indemnification;
(iii) the legal action is initiated by a third party who is
not a stockholder or, if the legal action is initiated by a
stockholder acting in his or her capacity as such, a court of
competent jurisdiction specifically approves such advancement;
and (iv) our directors, officers, employees, agents,
advisor or affiliates agree in writing to repay the advanced
funds to us together with the applicable legal rate of interest
thereon, in cases in which such persons are found not to be
entitled to indemnification.
Indemnification will be allowed for settlements and related
expenses of lawsuits alleging securities laws violations and for
expenses incurred in successfully defending any lawsuits,
provided that a court either:
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approves the settlement and finds that indemnification of the
settlement and related costs should be made; or |
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dismisses the lawsuit with prejudice or there is a successful
adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee and a
court approves the indemnification. |
The Advisor
Our advisor is Cole Advisors II. Some of our officers and
directors also are officers, key personnel and/or directors of
Cole Advisors II. Cole Advisors II has contractual
responsibility to us and our stockholders pursuant to the
advisory agreement.
The officers and key personnel of our advisor are as follows:
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Name |
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Position(s) |
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Christopher H. Cole
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52 |
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Chief Executive Officer and President |
Blair D. Koblenz
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47 |
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Executive Vice President and Chief Financial Officer |
Christopher P. Robertson
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38 |
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Vice President, Acquisitions |
John M. Pons
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41 |
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Vice President, Secretary and Counsel |
D. Kirk McAllaster, Jr.
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38 |
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Director of Finance and Compliance |
Sean D. Leahy
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34 |
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Director of Portfolio Management |
John H. Lotka
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55 |
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Director of Marketing |
The backgrounds of Messrs. Cole, Koblenz and Pons are
described in the Management Executive Officers
and Directors section of this prospectus. Below is a brief
description of the other officers and key employees of Cole
Advisors II.
Christopher P. Robertson is vice president, acquisitions
for Cole Capital Partners, Cole Advisors and Cole
Advisors II. Prior to joining Cole in October 2003,
Mr. Robertson worked for Shell Capital, Inc., an investment
banking division of Shell Oil Company, as vice president of
business development. From 1998
53
until joining Shell Capital in 2000, he was employed at
Franchise Finance Corporation of America as its vice president
of corporate finance. While at Franchise Finance Corporation he
structured numerous sale-leaseback and senior debt transactions
in the restaurant, convenience store/gas, and automotive
aftermarket industries. Mr. Robertson received a B.B.A.
degree from Baylor University with majors in both Finance and
Real Estate in 1988. In 1993, Mr. Robertson received a
M.B.A. degree in Finance from Pepperdine University.
D. Kirk McAllaster, Jr. is director of
finance and compliance of Cole Capital Partners, Cole
Advisors and Cole Advisors II. Prior to joining Cole in May
2003, Mr. McAllaster worked for six years with
Deloitte & Touche LLP, most recently as audit senior
manager. He has over 14 years of accounting and finance
experience in public accounting and private industry.
Mr. McAllaster received a B.S. degree from California State
Polytechnic University Pomona with a major in
Accounting. He is a Certified Public Accountant and is a member
of the American Institute of CPAs and the Arizona Society
of CPAs.
Sean D. Leahy is director of portfolio management of Cole
Capital Partners, Cole Capital Advisors, Cole Advisors and Cole
Advisors II. Prior to joining Cole in September 2003,
Mr. Leahy spent four years as assistant vice president with
the Phoenix office of Lowe Enterprises, Inc., a national pension
fund advisor, where he was involved with acquisitions and
dispositions, and leasing and asset management for the
companys Arizona portfolio of commercial properties. Prior
to joining Lowe Enterprises, Mr. Leahy spent five years
with the Phoenix office of Ernst & Young, LLP, most
recently as a Real Estate Consulting Manager. Mr. Leahy is
a licensed real estate broker and Certified Public Accountant.
Mr. Leahy received a B.S. degree with majors in Finance and
Accounting from the University of Arizona.
John H. Lotka is chief marketing officer of Cole
Capital Markets, Inc. and director of marketing for Cole
Advisors II. Prior to joining Cole in March 2005, he was
founder and chief executive officer of Maximum Impact Partners,
LLC, a sales and marketing consulting firm working exclusively
with investment management companies. From 1988 until 1997 he
served as vice president of marketing at Nuveen Investments, a
mutual fund company. From 1983 until 1988, he served as a
partner at Frankel & Co., formerly the nations
largest independent marketing services agency, now part of the
Publicis Advertising Group. From 1979 until 1980, he served as
chief operating officer and chief financial officer of United of
America Bank, a community bank. Mr. Lotka also formerly
served as a member of the ICI Sales Force Marketing Committee
and was a founding member of the Forum for Investor Advice, a
mutual fund industry trade group. Mr. Lotka received his
B.S. in business administration from the University of Arizona.
He also holds a certificate from the Graduate Institute of Bank
Marketing, a joint program from University of Southern
California and Louisiana State University.
In addition to the directors and executive officers listed
above, Cole Advisors II employs personnel who have extensive
experience in selecting and managing commercial properties
similar to the properties sought to be acquired by us.
The Advisory Agreement
Many of the services to be performed by Cole Advisors II in
managing our day-to-day activities are summarized below. This
summary is provided to illustrate the material functions that we
expect Cole Advisors II will perform for us as our advisor,
and it is not intended to include all of the services that may
be provided to us by third parties. Under the terms of the
advisory agreement, Cole Advisors II will undertake to use
its commercially reasonable best efforts to present to us
investment opportunities consistent with our investment policies
and objectives as adopted by our board of directors. In its
performance of this undertaking, Cole Advisors II, either
directly or indirectly by engaging an affiliate, shall, among
other duties and subject to the authority of our board of
directors:
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find, evaluate, present and recommend to us investment
opportunities consistent with our investment policies and
objectives; |
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serve as our investment and financial advisor and provide
research and economic and statistical data in connection with
our assets and our investment policies; |
54
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provide the daily management and perform and supervise the
various administrative functions reasonably necessary for our
management and operations; |
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investigate, select, and, on our behalf, engage and conduct
business with such third parties as the advisor deems necessary
to the proper performance of its obligations under the advisory
agreement; |
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consult with our officers and board of directors and assist the
board of directors in the formulating and implementing of our
financial policies; |
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structure and negotiate the terms and conditions of our real
estate acquisitions, sales or joint ventures; |
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review and analyze each propertys operating and capital
budget; |
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acquire properties and make investments on our behalf in
compliance with our investment objectives and policies; |
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arrange, structure and negotiate financing and refinancing of
properties; |
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enter into leases of property and service contracts for assets
and, to the extent necessary, perform all other operational
functions for the maintenance and administration of such assets,
including the servicing of mortgages; and |
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prepare and review on our behalf, with the participation of one
designated principal executive officer and principal financial
officer, all reports and returns required by the Securities and
Exchange Commission, Internal Revenue Service and other state or
federal governmental agencies. |
The term of the advisory agreement will end on its first
anniversary and may be renewed for an unlimited number of
successive one-year periods. Additionally, either party may
terminate the advisory agreement without penalty immediately
upon a change of control of us, or upon 60 days
written notice. If we elect to terminate the agreement, we will
be required to obtain the approval of a majority of our
independent directors. In the event of the termination of our
advisory agreement, our advisor will be required to cooperate
with us and take all reasonable steps requested by us to assist
our board of directors in making an orderly transition of the
advisory function.
Cole Advisors II and its officers, employees and affiliates
expect to engage in other business ventures and, as a result,
their resources will not be dedicated exclusively to our
business. However, pursuant to the advisory agreement, Cole
Advisors II will be required to devote sufficient resources
to our administration to discharge its obligations. Cole
Advisors II currently has no paid employees; however, as of
March 31, 2005, its affiliates had approximately
61 full-time employees each of whom may dedicate a portion
of his or her time providing services to our advisor. Our
advisor will be responsible for a pro rata portion of each
employees compensation based upon the approximate
percentage of time the employee dedicates to our advisor. Cole
Advisors II may assign the advisory agreement to an
affiliate upon approval of a majority of our independent
directors. We may assign or transfer the advisory agreement to a
successor entity; provided that at least a majority of our
independent directors determines that any such successor advisor
possesses sufficient qualifications to perform the advisory
function and to justify the compensation payable to the advisor.
Our independent directors will base their determination on the
general facts and circumstances that they deem applicable,
including the overall experience and specific industry
experience of the successor advisor and its management. Other
factors that will be considered are the compensation to be paid
to the successor advisor and any potential conflicts of interest
that may occur.
The fees payable to Cole Advisors II under the advisory
agreement are described in detail at Management
Compensation below. We also describe in that section our
obligation to reimburse Cole Advisors II for organization
and offering expenses, administrative and management services
and payments made by Cole Advisors II to third parties in
connection with potential acquisitions.
55
Affiliated Companies
Our properties will be managed and leased initially by Fund
Realty Advisors, our property manager. Cole Capital Advisors is
the sole shareholder of Fund Realty Advisors, and Cole Holdings
Corporation is the sole owner of Cole Capital Advisors.
Christopher H. Cole is the sole owner of Cole Holdings
Corporation. Mr. Cole serves as chief executive officer,
president and treasurer of Fund Realty Advisors, and Blair D.
Koblenz serves as its executive vice president, chief financial
officer and secretary. See Conflicts of Interest.
The property manager was organized in 2002 to lease and manage
properties that we or affiliated entities acquire. We will pay
the property manager property management fees equal to 2.0% of
gross revenues from our properties. In addition, we will pay
leasing commissions to the property manager based upon the
customary leasing commission applicable to the geographic
location of the property; provided however, that the
aggregate of all property management and leasing fees paid to
the property manager plus all payments to third parties will not
exceed the amount that other nonaffiliated management and
leasing companies generally charge for similar services in the
same geographic location. The property manager will derive
substantially all of its income from the property management and
leasing services it performs for us and other Cole-sponsored
programs.
In the event that the property manager assists a tenant with
tenant improvements, a separate fee may be charged to, and
payable by, us. This fee will not exceed 5.0% of the cost of the
tenant improvements. The property manager will only provide
these services if it does not cause any of our income from the
applicable property to be treated as other than rents from real
property for purposes of the applicable REIT requirements
described under Federal Income Tax Considerations
below.
The property manager will hire, direct and establish policies
for employees who will have direct responsibility for the
operations of each property we acquire, which may include but
not be limited to on-site managers and building and maintenance
personnel. Certain employees of the property manager may be
employed on a part-time basis and also may be employed by our
advisor or certain companies affiliated with it.
The property manager also will direct the purchase of equipment
and supplies and will supervise all maintenance activity. The
management fees to be paid to the property manager will cover,
without additional expense to us, all of the property
managers general overhead costs. The principal office of
the property manager is located at 2555 East Camelback Road,
Suite 400, Phoenix, Arizona 85016.
Cole Capital Corporation, our dealer manager, is a member firm
of the National Association of Securities Dealers, Inc. (NASD).
Cole Capital Corporation was organized in December 1992 for the
purpose of participating in and facilitating the distribution of
securities of real estate programs sponsored by Cole Capital
Partners, its affiliates and its predecessors.
Cole Capital Corporation will provide certain wholesaling,
sales, promotional and marketing assistance services to us in
connection with the distribution of the shares offered pursuant
to this prospectus. It may also sell a limited number of shares
at the retail level.
Cole Capital Corporation is wholly owned by Cole Capital
Advisors which, in turn, is wholly owned by Cole Holdings
Corporation, which is wholly owned by Christopher H. Cole. Cole
Capital Corporation is an affiliate of both our advisor and the
property manager. See Conflicts of Interest.
56
The current officers of Cole Capital Corporation are:
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Name |
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Age | |
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Position(s) |
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Blair D. Koblenz
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47 |
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President and Secretary |
Christopher H. Cole
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52 |
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Executive Vice President and Treasurer |
Richard M. Arnitz
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40 |
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Senior Vice President |
Jonathan T. Albro
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42 |
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Senior Vice President |
The backgrounds of Messrs. Koblenz and Cole are described
in the Management Executive Officers and
Directors section of this prospectus.
Richard M. Arnitz is president of Cole Capital Markets,
Inc., and senior vice president of Cole Capital Corporation.
Prior to joining Cole in March 2005, Mr. Arnitz was vice
president of AIG SunAmerica Retirement Markets since 2000, where
he was responsible for all internal sales operations and the
distribution of variable annuity products. From 1987 to 2000 he
served as a due diligence analyst and head of the due diligence
department at Sentra Securities, WS Griffith, and
Spelman & Co., rising to director of marketing at
Sentra Securities and Spelman & Co. He holds a General
Securities Principal license. Mr. Arnitz received a B.S.
from Arizona State University in Corporate Finance with
specialized courses in accounting, real estate and capital
management.
Jonathan T. Albro is executive vice president, national
sales manager of Cole Capital Markets, Inc. and senior vice
president of Cole Capital Corporation. Mr. Albro has
20 years experience in the financial services industry.
Prior to joining Cole in March 2005, he served as senior vice
president, national sales manager, of MetLife Investors from
November 2001 to March 2005. He served as senior vice president,
national sales manager from November 1998 to January 2001 with
Villanova Capital, which became Gartmore Global Investments, a
global asset manager. Mr. Albro held various senior
executive positions with Hartford Life from 1992 to 1998. He
holds a general securities principal license.
Investment Decisions
The primary responsibility for the investment decisions of Cole
Advisors II and its affiliates, the negotiation for these
investments, and the property management and leasing of these
investment properties will reside with Christopher H. Cole,
Blair D. Koblenz, Sean D. Leahy and Christopher P. Robertson.
Cole Advisors II will seek to invest in commercial
properties that satisfy our investment objectives. Our board of
directors, including a majority of our independent directors,
must approve all acquisitions of real estate properties.
Certain Relationships and Related Transactions
Advisory Agreement We will enter into an Advisory
Agreement with Cole Advisors II, whereby Cole
Advisors II will manage our day-to-day operations. In
return, we will pay to Cole Advisors II a monthly asset
management fee equal to 0.02083% of the aggregate asset value of
our assets. We also will pay to Cole Advisors II up to 2.0%
of the contract purchase price of each property or asset that we
acquire, along with reimbursement of acquisition expenses. We
also will pay to Cole Advisors II a financing coordination
fee equal to 1.0% of the amount available under any debt
financing that we obtain and use for the acquisition of
properties and other investments. Additionally, we will be
required to pay to Cole Advisors II fees based on a
percentage of proceeds or stock value upon our sale of assets or
the listing of our common stock on a national securities
exchange or for quotation on The Nasdaq National Market, but
only if, in the case of our sale of assets, our investors have
received a return of their net capital invested and an 8.0%
annual cumulative, non-compounded return or, in the case of the
listing or quotation of our common stock, the market value of
our common stock plus the distributions paid to our investors
exceeds the sum of the total amount of capital raised from
investors plus the amount of cash flow necessary to generate an
8.0% annual cumulative, non-compounded return to investors. Upon
termination of the Advisory Agreement, we may be required to pay
to Cole Advisors II a similar performance fee if Cole
57
Advisors II would have been entitled to a subordinated
participation in net sale proceeds had the portfolio been
liquidated (based on an independent appraised value of the
portfolio) on the date of termination.
Christopher H. Cole, our chief executive officer, president and
a member of our board of directors, indirectly owns 100% of the
ownership and voting interests of Cole Advisors II.
Mr. Cole also is the chief executive officer and president
of Cole Advisors II. Blair D. Koblenz, our executive vice
president and chief financial officer is the executive vice
president and chief financial officer of Cole Advisors II.
John M. Pons, our vice president, secretary and counsel is the
vice president, secretary and counsel of Cole Advisors II.
For a further description of this agreement, see
Management The Advisory Agreement and
Management Compensation. See also Conflicts of
Interest.
Property Management and Leasing Agreement We will enter
into a Property Management and Leasing Agreement with Fund
Realty Advisors. We will pay to Fund Realty Advisors fees equal
to 2.0% of gross revenues from our properties. In addition, we
will pay leasing commissions to Fund Realty Advisors based upon
the customary leasing commissions applicable to the geographic
location of the property, subject to certain limits and a
monthly asset management fee equal to 0.02083% of the aggregate
asset value of our assets. Christopher H. Cole, our chief
executive officer, president and a member of our board of
directors, indirectly owns 100% of the ownership and voting
interests of Fund Realty Advisors. Mr. Cole also is the
chief executive officer, president and treasurer of Fund Realty
Advisors. Blair D. Koblenz, our executive vice president and
chief financial officer, is the executive vice president, chief
financial officer and secretary of Fund Realty Advisors. For a
further description of this agreement, see
Management Affiliated Companies
Property Manager and Management Compensation.
See also Conflicts of Interest.
Dealer Manager Agreement. We will enter into a Dealer
Manager Agreement with Cole Capital Corporation, our dealer
manager. We will pay to Cole Capital Corporation 7.0% of the
gross offering proceeds from this offering, except that no
selling commissions will be paid on shares sold under our
distribution reinvestment plan. Cole Capital Corporation may
reallow all or part of the selling commission to participating
broker-dealers. Cole Capital Corporation also will waive the
selling commission with respect to shares sold by an investment
advisory representative. Additionally, we will pay to Cole
Capital Corporation a dealer manager fee equal to 1.5% of the
gross offering proceeds sold through broker-dealers. Cole
Capital Corporation may reallow all or part of the dealer
manager fee to participating broker-dealers. We will not pay a
dealer manager fee for shares purchased through our distribution
reinvestment plan. Christopher H. Cole, our chief executive
officer, president and a member of our board of directors,
indirectly owns 100% of the ownership and voting interests of
Cole Capital Corporation. Mr. Cole also is the executive
vice president and treasurer of Cole Capital Corporation. Blair
D. Koblenz, our executive vice president and chief financial
officer, is the president and secretary of Cole Capital
Corporation. For a further description of this agreement, see
Management Affiliated Companies
Dealer Manager, Management Compensation and
Plan of Distribution. See also Conflicts of
Interest.
58
MANAGEMENT COMPENSATION
We have no paid employees. Cole Advisors II, our advisor,
and its affiliates will manage our day-to-day affairs. The
following table summarizes all of the compensation and fees we
will pay to Cole Advisors II and its affiliates, including
amounts to reimburse their costs in providing services. The
selling commissions may vary for different categories of
purchasers. See Plan of Distribution. This table
assumes the shares are sold through distribution channels
associated with the highest possible selling commissions and
dealer manager fee.
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Estimated Amount for | |
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Minimum Offering/ | |
Type of Compensation(1) |
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Determination of Amount |
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Maximum Offering(2) | |
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Offering Stage |
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Selling Commissions Cole Capital Corporation(3)
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We will pay to Cole Capital Corporation 7.0% of the gross
offering proceeds before reallowance of commissions earned by
participating broker-dealers, except that no selling commission
is payable on shares sold under our distribution reinvestment
plan. Cole Capital Corporation, our dealer manager, will reallow
100.0% of commissions earned to participating broker-dealers. |
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$175,000/$31,500,000 |
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Dealer Manager Fee Cole Capital Corporation(3)
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We will pay to Cole Capital Corporation 1.5% of the gross
offering proceeds before reallowance to participating
broker-dealers, except that no dealer manager fee is payable on
shares sold under our distribution reinvestment plan. Cole
Capital Corporation will reallow a portion of its dealer manager
fee to participating broker-dealers. See Plan of
Distribution. |
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$37,500/$6,750,000 |
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Reimbursement of Other Organization and Offering
Expenses Cole Advisors II(4)
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We will reimburse Cole Advisors II up to 1.5% of our gross
offering proceeds. Cole Advisors II will incur or pay our
organization and offering expenses (excluding selling
commissions and the dealer manager fee). We will then reimburse
Cole Advisors II for these amounts up to 1.5% of aggregate
gross offering proceeds. |
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$37,500/$7,436,250 |
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Acquisition and Operational Stage |
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Acquisition and Advisory Fees
Cole Advisors II(5)(6)
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We will pay to Cole Advisors II a 2.0% of the contract
purchase price of each property or asset. |
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$43,902/$8,781,732 |
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Acquisition Expenses Cole Advisors II
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We will reimburse our advisor for acquisition expenses incurred
in the process of acquiring property. We expect these expenses
to be approximately 0.5% of the purchase price of each property.
In no event will the total of all fees and acquisition expenses
payable with respect to a particular property or investment
exceed 6% of the contract purchase price. |
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Actual amounts are dependent upon the expenses incurred in acquiring a property or asset, and therefore, cannot be determined at this time. |
59
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Estimated Amount for | |
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Minimum Offering/ | |
Type of Compensation(1) |
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Determination of Amount |
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Maximum Offering(2) | |
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Asset Management Fee Cole Advisors II(7)(8)
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We will pay to Cole Advisors II a monthly fee equal to
0.02083%, which is one-twelfth of 0.25%, of the aggregate asset
value. |
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Actual amounts are dependent upon the aggregate asset value of our properties and, therefore, cannot be determined at the present time. Because the fee is based on a fixed percentage of aggregate asset value there is no limit on the aggregate amount of these fees. |
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Property Management Fees Fund Realty Advisors(8)
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We will pay to Fund Realty Advisors up to 2.0% of the gross
revenues from the properties plus reimbursement of Fund Realty
Advisors costs of managing the properties. |
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Actual amounts are dependent upon the gross revenues from properties and, therefore, cannot be determined at the present time. Because the fee is based on a fixed percentage of the gross revenue and/or market rates, there is no limit on the aggregate amount of these fees. |
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Leasing Commissions Fund Realty Advisors(8)
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We will pay to Fund Realty Advisors prevailing market rates.
Fund Realty Advisors may also receive a fee for the initial
listing of newly constructed properties, which generally would
equal one months rent. |
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Actual amounts are dependent upon prevailing market rates in the geographic regions in which we acquire property and, therefore, cannot be determined at the present time. There is no limit on the aggregate amount of these commissions. |
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Financing Coordination Fee Cole Advisors II(6)
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For services in connection with the origination or refinancing
of any debt financing obtained that we use to acquire properties
or to make other permitted investments, we will pay our advisor
a financing coordination fee equal to 1.0% of the amount
available under such financing; provided, however, that
our advisor will not be entitled to a financing coordination fee
in connection with the refinancing of any loan secured by any
particular property that was previously subject to a refinancing
in which our advisor received such a fee. Financing coordination
fees payable from loan proceeds from permanent financing will be
paid to our advisor as we acquire such permanent financing.
However, no acquisition fees will be paid on the investments of
loan proceeds from any line of credit until such time as we have
invested all net offering proceeds. |
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Actual amounts are dependent on the amount of any debt financing or refinancing and, therefore, cannot be determined at the present time. Because the fee is based on a fixed percentage of any debt financing, there is no limit on the aggregate amount of these fees. |
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Estimated Amount for | |
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Minimum Offering/ | |
Type of Compensation(1) |
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Determination of Amount |
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Maximum Offering(2) | |
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Operating Expenses Cole Advisors II(9)
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We will reimburse the expenses incurred by Cole Advisors II in
connection with its provision of administrative services,
including related personnel costs, subject to the limitation
that we will not reimburse our advisor for any amount by which
the operating expenses (including the asset management fee) at
the end of the four preceding fiscal quarters exceeds the
greater of (i) 2% of average invested assets, or
(ii) 25% of net income other than any additions to reserves
for depreciation, bad debt or other similar non-cash reserves
and excluding any gain from the sale of assets for that period. |
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Actual amounts are dependent upon the expenses incurred and, therefore, cannot be determined at the present time. |
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Liquidation/ Listing Stage |
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Real Estate Commissions Cole Advisors II or its
Affiliates(10)
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For substantial assistance in connection with the sale of
properties, we will pay our advisor or its affiliates an amount
equal to up to one-half of the brokerage commission paid on the
sale of property, not to exceed 2.0% of the contract price of
each property sold; provided, however, in no event may the real
estate commissions paid to our advisor, its affiliates and
unaffiliated third parties exceed 6.0% of the contract sales
price. |
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Actual amounts are dependent upon the contract price of properties sold and, therefore, cannot be determined at the present time. Because the commission is based on a fixed percentage of the contract price for a sold property, there is no limit on the aggregate amount of these commissions. |
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Subordinated Participation in Net Sale Proceeds Cole
Advisors II(11)
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After investors have received a return of their net capital
invested and an 8.0% annual cumulative, non- compounded return,
then Cole Advisors II is entitled to receive 10.0% of remaining
net sale proceeds. We cannot assure you that we will provide
this 8.0% return, which we have disclosed solely as a measure
for our advisors incentive compensation. |
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Actual amounts are dependent upon results of operations and, therefore, cannot be determined at the present time. There is no limit on the aggregate amount of these payments. |
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Subordinated Incentive Listing Fee Cole
Advisors II(11)(12)
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Upon listing our common stock on a national securities exchange
or for quotation on The Nasdaq National Market, our advisor is
entitled to a fee equal to 10.0% of the amount, if any, by which
(1) the market value of our outstanding stock plus
distributions paid by us prior to listing, exceeds (2) the
sum of the total amount of capital raised from investors and the
amount of cash flow necessary to generate an 8.0% annual
cumulative, non- compounded return to investors. We have no
intent to list our shares at this time. We cannot assure you
that we will provide this 8.0% return, which we have disclosed
solely as a measure for our advisors incentive
compensation. |
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Actual amounts are dependent upon total equity and debt capital we raise and results of operations and, therefore, cannot be determined at the present time. There is no limit on the aggregate amount of this fee. |
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(1) |
We will pay all fees, commissions and expenses in cash, other
than the subordinated participation in net sales proceeds and
incentive listing fees with respect to which we may pay to Cole
Advisors II in cash, common stock, a promissory note or any
combination of the foregoing, as we may determine in our
discretion. |
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(2) |
The estimated maximum dollar amounts are based on the sale of a
maximum of 45,000,000 shares to the public at
$10.00 per share and the sale of 5,000,000 shares at
$9.15 per share pursuant to our distribution reinvestment
plan. |
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(3) |
Selling commissions and, in some cases, the dealer manager fee,
will not be charged with regard to shares sold to or for the
account of certain categories of purchasers. See Plan of
Distribution. Selling commissions and the dealer manager
fee will not be charged with regard to shares purchased pursuant
to our distribution reinvestment plan. |
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(4) |
These organization and offering expenses include all expenses
(other than selling commissions and the dealer manager fee) to
be paid by us in connection with the offering, including our
legal, accounting, printing, mailing and filing fees, charges of
our escrow holder, due diligence expense reimbursements to
participating broker-dealers and amounts to reimburse Cole
Advisors II for its portion of the salaries of the
employees of its affiliates who provide services to our advisor
and other costs in connection with preparing supplemental sales
materials, holding educational conferences and attending retail
seminars conducted by broker-dealers. Our advisor will be
responsible for the payment of all such organization and
offering expenses to the extent such expenses exceed 1.5% of the
aggregate gross proceeds of this offering. |
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(5) |
This estimate assumes the amount of proceeds available for
investment is equal to the gross offering proceeds less the
public offering expenses, and we have assumed that no financing
is used to acquire properties or other real estate assets. Our
charter limits our ability to purchase property if the total of
all acquisition fees and expenses relating to the purchase
exceeds 6.0% of the contract purchase price unless a majority of
our directors (including a majority of our independent
directors) not otherwise interested in the transaction approve
fees and expenses in excess of this limit and determine the
transaction to be commercially competitive, fair and reasonable
to us. |
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(6) |
Included in the computation of such fees will be any real estate
commission, acquisition and advisory fee, development fee,
construction fee, non-recurring management fee, loan fees,
financing coordination fees or points or any fee of a similar
nature. |
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(7) |
Aggregate asset value will be equal to the aggregate value of
our assets (other than investments in bank accounts, money
markets funds or other current assets) at cost before deducting
depreciation, bad debts or other similar non-cash reserves and
without reduction for any debt relating to such assets at the
date of measurement, except that during such periods in which
our board of directors is determining on a regular basis the
current value of our net assets for purposes of enabling
fiduciaries of employee benefit plans stockholders to comply
with applicable Department of Labor reporting requirements,
aggregate asset value is the greater of (i) the amount
determined pursuant to the foregoing or (ii) our
assets aggregate valuation most recently established by
our board without reduction for depreciation, bad debts or other
similar non-cash reserves and without reduction for any debt
secured by or relating to such assets. |
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(8) |
The property management and leasing fees payable to Fund Realty
Advisors are subject to the limitation that the aggregate of all
property management and leasing fees paid to Fund Realty
Advisors and its affiliates plus all payments to third parties
for property management and leasing services may not exceed the
amount that other non-affiliated property management and leasing
companies generally charge for similar services in the same
geographic location. Additionally, all property management and
leasing fees, including both those paid to Fund Realty Advisors
and third parties, are subject to the limit on total operating
expenses as described in footnote (5). Fund Realty Advisors
may subcontract its duties for a fee that may be less than the
fee provided for in our property management agreement with Fund
Realty Advisors. |
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(9) |
We may reimburse our advisor in excess of that limit in the
event that a majority of our independent directors determine,
based on unusual and non-recurring factors, that a higher level
of expense is justified. In such an event, we will send notice
to each of our stockholders within 60 days after the end of
the fiscal quarter for which such determination was made, along
with an explanation of the factors our independent directors
considered in making such determination. We will not reimburse
our advisor for personnel costs in connection with services for
which the advisor receives acquisition fees or real estate
commissions. |
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We lease our office space from an affiliate of our advisor and
share the space with other Cole-related entities. The amount we
will pay under the lease will be determined on a monthly basis
based upon on the allocation of the overall lease cost to the
approximate percentage of time, size of the area that we utilize
and other resources allocated to us. |
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(10) |
Although we are most likely to pay real estate commissions to
Cole Advisors II or an affiliate in the event of our
liquidation, these fees may also be earned during our
operational stage. |
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(11) |
Upon termination of the advisory agreement, Cole
Advisors II may be entitled to a similar performance fee if
Cole Advisors II would have been entitled to a subordinated
participation in net sale proceeds had the portfolio been
liquidated (based on an independent appraised value of the
portfolio) on the date of termination. Under our charter, we
could not increase these success-based fees without the approval
of a majority of our independent directors, and any increase in
the subordinated participation in net sale proceeds would have
to be reasonable. Our charter provides that such incentive fee
is presumptively reasonable if it does not exceed
10.0% of the balance of such net proceeds remaining after
investors have received a return of their net capital
contributions and an 8.0% per year cumulative,
non-compounded return. |
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Cole Advisors II cannot earn both the subordinated
participation in net sale proceeds and the subordinated
incentive listing fee either of which may be, at our discretion,
paid in the form of cash, shares of our common stock, a
promissory note, or any combination of the foregoing. If shares
are used for payment, we do not anticipate that they will be
registered under the Securities Act and therefore, will be
subject to restrictions on transferability. Any portion of the
subordinated participation in net sale proceeds that Cole
Advisors II receives prior to our listing will offset the
amount otherwise due pursuant to the subordinated incentive
listing fee. |
62
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(12) |
If at any time the shares become listed on a national securities
exchange or included for quotation on The Nasdaq National
Market, we will negotiate in good faith with Cole
Advisors II a fee structure appropriate for an entity with
a perpetual life. Our independent directors must approve the new
fee structure negotiated with Cole Advisors II. The market
value of our outstanding stock will be calculated based on the
average market value of the shares issued and outstanding at
listing over the 30 trading days beginning 180 days after
the shares are first listed or included for quotation. We have
the option to pay the subordinated incentive listing fee in the
form of stock, cash, a promissory note or any combination
thereof. In the event the subordinated incentive listing fee is
earned by Cole Advisors II as a result of the listing of
the shares, any previous payments of the subordinated
participation in net sale proceeds will offset the amounts due
pursuant to the subordinated incentive listing fee, and we will
not be required to pay Cole Advisors II any further
subordinated participation in net sale proceeds. |
At least a majority of our independent directors must determine,
from time to time but at least annually, that our total fees and
expenses are reasonable in light of our investment performance,
net assets, net income and the fees and expenses of other
comparable unaffiliated REITs. Each such determination will be
reflected in the minutes of our board of directors. Our
independent directors shall also supervise the performance of
our advisor and the compensation that we pay to it to determine
that the provisions of our advisory agreement are being carried
out.
Each such determination will be recorded in the minutes of our
board of directors and based on the factors set forth below and
other factors that the independent directors deem relevant:
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the size of the advisory fee in relation to the size,
composition and profitability of our portfolio; |
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the success of Cole Advisors II in generating opportunities
that meet our investment objectives; |
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the rates charged to other REITs, especially similarly
structured REITs, and to investors other than REITs by advisors
performing similar services; |
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additional revenues realized by Cole Advisors II through
its relationship with us; |
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the quality and extent of service and advice furnished by Cole
Advisors II; |
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the performance of our investment portfolio, including income,
conservation or appreciation of capital, frequency of problem
investments and competence in dealing with distress
situations; and |
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the quality of our portfolio in relationship to the investments
generated by Cole Advisors II for the account of other
clients. |
Since Cole Advisors II and its affiliates are entitled to
differing levels of compensation for undertaking different
transactions on our behalf, such as the property management fees
for operating our properties and the subordinated participation
in net sale proceeds, our advisor has the ability to affect the
nature of the compensation it receives by undertaking different
transactions. However, Cole Advisors II is obligated to
exercise good faith and integrity in all its dealings with
respect to our affairs pursuant to the advisory agreement. See
Management The Advisory Agreement.
63
STOCK OWNERSHIP
The following table shows, as of the date of this prospectus,
the amount of our common stock beneficially owned by
(1) any person who is known by us to be the beneficial
owner of more than 5.0% of our outstanding shares,
(2) members of our board of directors and proposed
directors, (3) our executive officers, and (4) all of
our directors and executive officers as a group.
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Common Stock | |
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Beneficially Owned(2) | |
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Number of Shares | |
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Percentage | |
Name of Beneficial Owner(1) |
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of Common Stock | |
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of Class | |
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Cole Holdings Corporation
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20,000 |
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100.0% |
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Christopher H. Cole, Chairman of the Board of Directors, Chief
Executive Officer and President(3)
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20,000 |
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100.0% |
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Blair D. Koblenz, Executive Vice President and Chief
Financial Officer
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John M. Pons, Vice President, Secretary and Counsel
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Marcus E. Bromley, Director
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Elizabeth L. Watson, Director
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All directors and executive officers as a group (five persons)(3)
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20,000 |
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100.0% |
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(1) |
Address of each beneficial owner listed is 2555 East Camelback
Road, Suite 400, Phoenix, Arizona 85016. |
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(2) |
For purposes of calculating the percentage beneficially owned,
the number of shares of common stock deemed outstanding includes
(a) 20,000 shares outstanding as of the date of this
prospectus, and (b) shares issuable pursuant to options
held by the respective person or group that may be exercised
within 60 days following the date of this prospectus.
Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission that deem shares to be
beneficially owned by any person or group who has or shares
voting and investment power with respect to such shares. |
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(3) |
Includes 20,000 shares owned by Cole Holdings Corporation.
Mr. Cole is the sole stockholder of Cole Holdings
Corporation and controls the voting and disposition decisions of
Cole Holdings Corporation. |
64
CONFLICTS OF INTEREST
We are subject to various conflicts of interest arising out of
our relationship with Cole Advisors II, our advisor, and
its affiliates, including conflicts related to the arrangements
pursuant to which Cole Advisors II and its affiliates will
be compensated by us. The agreements and compensation
arrangements between us and our advisor and its affiliates were
not determined by arms-length negotiations. See the
Management Compensation section of this prospectus.
Some of the conflicts of interest in our transactions with our
advisor and its affiliates, and the limitations on our advisor
adopted to address these conflicts, are described below.
Our advisor and its affiliates will try to balance our interests
with their duties to other Cole-sponsored programs. However, to
the extent that our advisor or its affiliates take actions that
are more favorable to other entities than to us, these actions
could have a negative impact on our financial performance and,
consequently, on distributions to you and the value of our
stock. In addition, our directors, officers and certain of our
stockholders may engage for their own account in business
activities of the types conducted or to be conducted by us and
our subsidiaries. For a description of some of the risks related
to these conflicts of interest, see the section of this
prospectus captioned Risk Factors Risks
Related to Conflicts of Interest.
Our independent directors have an obligation to function on our
behalf in all situations in which a conflict of interest may
arise, and all of our directors have a fiduciary obligation to
act on behalf of our stockholders.
Interests in Other Real Estate Programs
An affiliate of our advisor acts as an advisor to, and our
officers and certain of our directors act as officers and
directors of Cole REIT I, which is a currently operating,
privately offered, real estate investment trust that has similar
investment objectives to us. In addition, as of March 31,
2005, an affiliate of our advisor has issued approximately
$63.3 million of debt pursuant to three private offerings,
the proceeds of which were used to acquire single-tenant
properties in 31 states. Cole Capital Partners, an
affiliate of our advisor, has sponsored 16 currently operating
tenant-in-common real estate programs. Affiliates of our advisor
and of our officers also act as officers and directors of
general partners of seven other currently operating limited
partnerships that have invested in unimproved and improved real
properties located in 19 different states, including Cole Credit
Property Fund Limited Partnership (Cole Credit LP I) and Cole
Credit Property Fund II Limited Partnership (Cole Credit
LP II). See Prior Performance Summary.
Affiliates of our officers and entities owned or managed by such
affiliates also may acquire or develop real estate for their own
accounts, and have done so in the past. Furthermore, affiliates
of our officers and entities owned or managed by such affiliates
intend to form additional real estate investment entities in the
future, whether public or private, which can be expected to have
the same investment objectives and policies as we do and which
may be involved in the same geographic area, and such persons
may be engaged in sponsoring one or more of such entities at
approximately the same time as our shares of common stock are
being offered. Our advisor, its affiliates and affiliates of our
officers are not obligated to present to us any particular
investment opportunity that comes to their attention, even if
such opportunity is of a character that might be suitable for
investment by us. Our advisor and its affiliates likely will
experience conflicts of interest as they simultaneously perform
services for us and other affiliated real estate programs.
Any affiliated entity, whether or not currently existing, could
compete with us in the sale or operation of the properties. We
will seek to achieve any operating efficiency or similar savings
that may result from affiliated management of competitive
properties. However, to the extent that affiliates own or
acquire property that is adjacent, or in close proximity, to a
property we own, our property may compete with the
affiliates property for tenants or purchasers.
Every transaction that we enter into with our advisor or its
affiliates is subject to an inherent conflict of interest. Our
board of directors may encounter conflicts of interest in
enforcing our rights against any
65
affiliate in the event of a default by or disagreement with an
affiliate or in invoking powers, rights or options pursuant to
any agreement between us and our advisor or any of its
affiliates.
Other Activities of Cole Advisors II and its
Affiliates
We will rely on Cole Advisors II for the day-to-day
operation of our business pursuant to an advisory agreement. As
a result of the interests of members of its management in other
Cole-sponsored programs and the fact that they have also engaged
and will continue to engage in other business activities, Cole
Advisors II and its affiliates will have conflicts of
interest in allocating their time between us and other
Cole-sponsored programs and other activities in which they are
involved. However, Cole Advisors II believes that it and
its affiliates have sufficient personnel to discharge fully
their responsibilities to all of the Cole-sponsored programs and
other ventures in which they are involved.
In addition, each of our executive officers, including
Christopher H. Cole, who also serves as the chairman of our
board of directors, also serves as an officer of our advisor,
our property manager, our dealer manager and/or other affiliated
entities. As a result, these individuals owe fiduciary duties to
these other entities, which may conflict with the fiduciary
duties that they owe to us and our stockholders.
We may purchase properties or interests in properties from
affiliates of Cole Advisors II. The prices we pay to
affiliates of our advisor for these properties will not be the
subject of arms-length negotiations, which could mean that
the acquisitions may be on terms less favorable to us than those
negotiated with unaffiliated parties. However, our charter
provides that the purchase price of any property acquired from
an affiliate may not exceed its fair market value as determined
by a competent independent appraiser. In addition, the price
must be approved by a majority of our directors who have no
financial interest in the transaction, including a majority of
our independent directors. If the price to us exceeds the cost
paid by our affiliate, our board of directors must determine
that there is substantial justification for the excess cost.
Competition in Acquiring, Leasing and Operating of
Properties
Conflicts of interest will exist to the extent that we may
acquire properties in the same geographic areas where properties
owned by other Cole-sponsored programs are located. In such a
case, a conflict could arise in the leasing of properties in the
event that we and another Cole-sponsored program were to compete
for the same tenants in negotiating leases, or a conflict could
arise in connection with the resale of properties in the event
that we and another Cole-sponsored program were to attempt to
sell similar properties at the same time. Conflicts of interest
may also exist at such time as we or our affiliates managing
property on our behalf seek to employ developers, contractors or
building managers, as well as under other circumstances. Cole
Advisors II will seek to reduce conflicts relating to the
employment of developers, contractors or building managers by
making prospective employees aware of all such properties
seeking to employ such persons. In addition, Cole
Advisors II will seek to reduce conflicts that may arise
with respect to properties available for sale or rent by making
prospective purchasers or tenants aware of all such properties.
However, these conflicts cannot be fully avoided in that there
may be established differing compensation arrangements for
employees at different properties or differing terms for resales
or leasing of the various properties.
Affiliated Dealer Manager
Since Cole Capital Corporation, our dealer manager, is an
affiliate of Cole Advisors II, we will not have the benefit
of an independent due diligence review and investigation of the
type normally performed by an unaffiliated, independent
underwriter in connection with the offering of securities. See
the Plan of Distribution section of this prospectus.
Affiliated Property Manager
We anticipate that properties we acquire will be managed and
leased by our affiliated property manager, Fund Realty Advisors,
pursuant to a property management and leasing agreement. Our
agreement with Fund Realty Advisors has a one-year term, which
may be renewed for an unlimited number of successive one-year
terms upon the mutual consent of the parties. Each such renewal
shall be for a term of no more than one year. It is the duty of
our Board of Directors to evaluate the performance
66
of the property manager annually before renewing the agreement.
We may also terminate the agreement in the event of gross
negligence or willful misconduct on the part of Fund Realty
Advisors. We expect Fund Realty Advisors to also serve as
property manager for properties owned by affiliated real estate
programs, some of which may be in competition with our
properties. Management fees to be paid to our property manager
are based on a percentage of the rental income received by the
managed properties. For a more detailed discussion of the
anticipated fees to be paid for property management services,
see the Management Affiliated Companies
section of this prospectus.
Lack of Separate Representation
Morris, Manning & Martin, LLP acts, and may in the
future act, as counsel to us, Cole Advisors II, Cole
Capital Corporation and their affiliates in connection with this
offering or otherwise. There is a possibility that in the future
the interests of the various parties may become adverse, and
under the Code of Professional Responsibility of the legal
profession, Morris, Manning & Martin, LLP may be
precluded from representing any one or all of such parties. In
the event that a dispute were to arise between us, Cole
Advisors II, Cole Capital Corporation or any of their
affiliates, separate counsel for such matters will be retained
as and when appropriate.
Joint Ventures with Affiliates of Cole Advisors II
We expect to enter into joint ventures with other Cole-sponsored
programs (as well as other parties) for the acquisition,
development or improvement of properties. See Investment
Objectives and Policies Acquisition and Investment
Policies Joint Venture Investments. Cole
Advisors II and its affiliates may have conflicts of
interest in determining that Cole-sponsored program should enter
into any particular joint venture agreement. The co-venturer may
have economic or business interests or goals which are or which
may become inconsistent with our business interests or goals. In
addition, should any such joint venture be consummated, Cole
Advisors II may face a conflict in structuring the terms of
the relationship between our interests and the interest of the
co-venturer and in managing the joint venture. Since Cole
Advisors II and its affiliates will control both us and any
affiliated co-venturer, agreements and transactions between the
co-venturers with respect to any such joint venture will not
have the benefit of arms-length negotiation of the type
normally conducted between unrelated co-venturers.
Receipt of Fees and Other Compensation by Cole
Advisors II and Its Affiliates
A transaction involving the purchase and sale of properties may
result in the receipt of commissions, fees and other
compensation by Cole Advisors II and its affiliates,
including acquisition and advisory fees, the dealer manager fee,
property management and leasing fees, real estate brokerage
commissions and participation in nonliquidating net sale
proceeds. However, the fees and compensation payable to Cole
Advisors II and its affiliates relating to the sale of
properties will only payable after the return to the
stockholders of their capital contributions plus cumulative
returns on such capital. Subject to oversight by our board of
directors, Cole Advisors II will have considerable
discretion with respect to all decisions relating to the terms
and timing of all transactions. Therefore, Cole Advisors II
may have conflicts of interest concerning certain actions taken
on our behalf, particularly due to the fact that such fees will
generally be payable to Cole Advisors II and its affiliates
regardless of the quality of the properties acquired or the
services provided to us. See the Management
Compensation section of this prospectus.
Certain Conflict Resolution Procedures
Every transaction that we enter into with Cole Advisors II
or its affiliates will be subject to an inherent conflict of
interest. Our board of directors may encounter conflicts of
interest in enforcing our rights against any affiliate in the
event of a default by or disagreement with an affiliate or in
invoking powers, rights or options pursuant to any agreement
between us and Cole Advisors II or any of its affiliates.
In order to reduce or eliminate certain potential conflicts of
interest, our charter contains a number of restrictions relating
to (1) transactions we enter into with Cole
Advisors II and its affiliates, (2) certain
67
future offerings, and (3) allocation of investment
opportunities among affiliated entities. These restrictions
include, among others, the following:
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We will not purchase or lease properties in which Cole
Advisors II, any of our directors or any of their
respective affiliates has an interest without a determination by
a majority of the directors, including a majority of the
independent directors, not otherwise interested in such
transaction that such transaction is fair and reasonable to us
and at a price to us no greater than the cost of the property to
the seller or lessor unless there is substantial justification
for any amount that exceeds such cost and such excess amount is
determined to be reasonable. In no event will we acquire any
such property at an amount in excess of its appraised value. We
will not sell or lease properties to Cole Advisors II, any
of our directors or any of their respective affiliates unless a
majority of the directors, including a majority of the
independent directors not otherwise interested in the
transaction, determines that the transaction is fair and
reasonable to us. |
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We will not make any loans to Cole Advisors II, any of our
directors or any of their respective affiliates, except that we
may make or invest in mortgage loans involving Cole Advisors II,
our directors or their respective affiliates, provided that an
appraisal of the underlying property is obtained from an
independent appraiser and the transaction is approved as fair
and reasonable to us and on terms no less favorable to us than
those available from third parties. In addition, Cole
Advisors II, any of our directors and any of their
respective affiliates will not make loans to us or to joint
ventures in which we are a joint venture partner unless approved
by a majority of the directors, including a majority of the
independent directors not otherwise interested in the
transaction as fair, competitive and commercially reasonable,
and no less favorable to us than comparable loans between
unaffiliated parties. |
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Cole Advisors II and its affiliates will be entitled to
reimbursement, at cost, for actual expenses incurred by them on
behalf of us or joint ventures in which we are a joint venture
partner; provided, however, Cole Advisors II must reimburse
us for the amount, if any, by which our total operating
expenses, including the advisor asset management fee, paid
during the previous fiscal year exceeded the greater of:
(i) 2.0% of our average invested assets for that fiscal
year, or (ii) 25.0% of our net income, before any additions
to reserves for depreciation, bad debts or other similar
non-cash reserves and before any gain from the sale of our
assets, for that fiscal year. |
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In the event that an investment opportunity becomes available
that is suitable, under all of the factors considered by Cole
Advisors II, for both us and one or more other entities
affiliated with Cole Advisors II, and for which more than
one of such entities has sufficient uninvested funds, then the
entity that has had the longest period of time elapse since it
was offered an investment opportunity will first be offered such
investment opportunity. It will be the duty of our board of
directors, including the independent directors, to insure that
this method is applied fairly to us. In determining whether or
not an investment opportunity is suitable for more than one
program, Cole Advisors II, subject to approval by our board
of directors, shall examine, among others, the following factors: |
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the anticipated cash flow of the property to be acquired and the
cash requirements of each program; |
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the effect of the acquisition both on diversification of each
programs investments by type of property, geographic area
and tenant concentration; |
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the policy of each program relating to leverage of properties; |
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the income tax effects of the purchase to each program; |
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the size of the investment; and |
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the amount of funds available to each program and the length of
time such funds have been available for investment. |
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If a subsequent development, such as a delay in the closing of a
property or a delay in the construction of a property, causes
any such investment, in the opinion of Cole Advisors II, to
be |
68
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more appropriate for a program other than the program that
committed to make the investment, Cole Advisors II may
determine that another program affiliated with Cole
Advisors II or its affiliates will make the investment. Our
board of directors has a duty to ensure that the method used by
Cole Advisors II for the allocation of the acquisition of
properties by two or more affiliated programs seeking to acquire
similar types of properties is applied fairly to us. |
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We will not accept goods or services from Cole Advisors II
or its affiliates or enter into any other transaction with Cole
Advisors II or its affiliates unless a majority of our
directors, including a majority of the independent directors,
not otherwise interested in the transaction approve such
transaction as fair and reasonable to us and on terms and
conditions not less favorable to us than those available from
unaffiliated third parties. |
The following chart shows the ownership structure of the various
Cole entities that are affiliated with Cole Advisors II.
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(1) |
Christopher H. Cole, our chairman, chief executive officer and
president, owns 99% of the membership interests, and Cole
Holdings Corporation owns 1% of the membership interests, of
Cole Capital Partners. |
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(2) |
The investors will own registered shares of common stock in Cole
Credit Property Trust II, Inc. |
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(3) |
Cole Holdings Corporation currently owns 20,000 shares of our
common stock. The amount shown is prior to this offering. After
the offering, Cole Holdings Corporation will own between 7.4% of
our common stock, assuming a minimum offering, and 0.04% of our
common stock, assuming a maximum offering, including the sale of
5,000,000 shares under our distribution reinvestment plan. |
69
INVESTMENT OBJECTIVES AND POLICIES
General
We intend to invest in commercial real estate properties. Our
primary investment objectives are:
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to provide current income for you through the payment of cash
distributions; and |
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to preserve and return your capital contributions. |
We also seek capital gain from our investments. You may be able
to obtain a return on all or a portion of your capital
contribution in connection with the sale of your shares if we
list our shares on an exchange. We cannot assure you that we
will attain any of these objectives. See Risk
Factors.
We will seek to list our shares of common stock for trading on a
national securities exchange or for quotation on The Nasdaq
National Market only if a majority of our independent directors
believe listing would be in the best interest of our
stockholders. We do not intend to list our shares at this time.
We do not anticipate that there will be any market for our
common stock until our shares are listed or quoted. In making
the decision to apply for listing of our shares or provide other
forms of liquidity, such as selling our properties and other
assets either on a portfolio basis or individually or engaging
in a business combination transaction, our board of directors
will evaluate whether listing the shares, liquidating or another
transaction would result in greater value for our stockholders.
It cannot be determined at this time the circumstances, if any,
under which the board of directors would determine to list the
shares. If we do not list our shares of common stock on a
national securities exchange or include them for quotation on
The Nasdaq National Market by the tenth anniversary of the
termination or completion of this offering, our charter requires
that we either:
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seek stockholder approval of an extension or amendment of this
listing deadline; or |
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seek stockholder approval to adopt a plan of liquidation of the
corporation. |
If we sought and did not obtain stockholder approval of an
extension or amendment to the listing deadline, we would then be
required to seek stockholder approval of our plan of
liquidation. If we sought and failed to obtain stockholder
approval of our plan of liquidation, our charter would not
require us to list or liquidate, and we would continue to
operate as before. In such event, there will be no public market
for shares of our common stock and you may be required to hold
the shares indefinitely. If we sought and obtained stockholder
approval of our plan of liquidation, we would begin an orderly
sale of our properties and distribute our net proceeds to our
investors.
Our board of directors may revise our investment policies, which
we describe in more detail below, without the concurrence of our
stockholders. Our independent directors will review our
investment policies, which we discuss in detail below, at least
annually to determine that our policies are in the best interest
of our stockholders.
Acquisition and Investment Policies
We intend to invest primarily in high quality, income-generating
retail properties, net leased to investment grade and other
creditworthy tenants. Our investments may be direct investments
in such properties or in other entities that own or invest in,
directly or indirectly, interests in such properties. We will
seek to acquire a portfolio of real estate that is diversified
by geographical location and by type and size of property. We
anticipate that our properties will consist of real estate
primarily improved for use as retail establishments, principally
freestanding, single-tenant retail properties.
Many of our properties will be leased to tenants in the chain or
franchise retail industry, including but not limited to
convenience stores, drug stores and restaurant properties. Our
advisor intends to monitor industry trends and invest in
properties that serve to provide the most favorable return
balanced with risk. Our management will target primarily retail
businesses with established track records. Because this
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industry is highly property dependent, our advisor believes it
offers highly competitive sale-leaseback investment
opportunities.
We believe that our focus on the acquisition of freestanding,
retail properties net leased to investment grade and other
creditworthy tenants presents lower investment risks and greater
stability than other sectors of todays commercial real
estate market. Unlike funds that invest in a limited number of
multi-tenant properties, we plan to acquire a diversified
portfolio with a large number of single-tenant properties. As a
result, lower than expected results of operations from one or a
few investments will not necessarily preclude our ability to
realize our investment objectives of cash flow and preservation
of capital from our overall portfolio. Our management believes
that freestanding retail properties, as opposed to investments
in shopping centers, malls or other large retail complexes as a
whole, offer a distinct investment advantage since these
properties generally offer superior locations that are less
dependent on the financial stability of adjoining tenants. In
addition, since we intend to acquire properties that are
geographically diverse, we expect to minimize the potential
adverse impact of economic downturns in local markets. Our
management believes that a portfolio consisting primarily of
freestanding, single-tenant retail properties, net leased to
creditworthy tenants diversified geographically and by brand and
number of tenants will enhance our liquidity opportunities for
investors by making the sale of individual properties, multiple
properties or our investment portfolio as a whole attractive to
institutional investors and by making a possible listing of our
shares attractive to the public investment community.
To the extent feasible, we will seek to achieve a well-balanced
portfolio diversified by geographic location, age of the
property and lease maturity. We will pursue properties whose
tenants represent a variety of industries so as to avoid
concentration in any one industry. We expect these industries to
include all types of retail establishments, convenience stores,
drug stores and restaurant properties. We expect that tenants of
our properties will also be diversified between national,
regional and local brands. We will generally target properties
with lease terms in excess of ten years. We may acquire
properties with shorter terms if the property is in an
attractive location, if the property is difficult to replace, or
if the property has other significant favorable attributes. We
expect that these investments will provide long-term value by
virtue of their size, location, quality and condition and lease
characteristics. We currently expect all of our acquisitions
will be in the United States.
Many retail companies today are entering into sale-leaseback
arrangements as a strategy for applying more capital that would
otherwise be applied to their real estate holdings to their core
operating businesses. We believe that our investment strategy
will enable us to take advantage of the increased emphasis on
retailers core business operations in todays
competitive corporate environment as retailers attempt to divest
from real estate assets.
There is no limitation in the number, size or type of properties
that we may acquire or on the percentage of net proceeds of this
offering that may be invested in a single property. The number
and mix of properties will depend upon real estate market
conditions and other circumstances existing at the time of
acquisition of properties and the amount of proceeds raised in
this offering. For a further description, see the section titled
- Other Possible Investments below.
We intend to incur debt to acquire properties where our board
determines that incurring such debt is in our best interest. In
addition, from time to time, we may acquire some properties
without financing and later incur mortgage debt secured by
selected or all of such properties if favorable financing terms
are available. We will use the proceeds from such loans to
acquire additional properties. See - Borrowing
Policies under this section for a more detailed
explanation of our borrowing intentions and limitations.
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Investment Grade and Other Creditworthy Tenants |
In evaluating potential property acquisitions consistent with
our investment objectives, we will apply credit underwriting
criteria to the tenants of existing properties and when
re-leasing properties in our portfolio. Tenants of our
properties will typically be large national or super-regional
retail chains that are creditworthy entities having significant
net worth and operating income. Generally these tenants must be
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experienced multi-unit operators with a proven track record in
order to meet the credit tests applied by our advisor.
A tenant will be considered investment grade when
the tenant has a debt rating by Moodys of Baa3 or better
or a credit rating by Standard & Poors of BBB- or
better, or its payments are guaranteed by a company with such
rating.
Moodys ratings are opinions of future relative
creditworthiness based on an evaluation of franchise value,
financial statement analysis and management quality. The rating
given to a debt obligation describes the level of risk
associated with receiving full and timely payment of principal
and interest on that specific debt obligation and how that risk
compares with that of all other debt obligations. The rating,
therefore, measures the ability of a company to generate cash in
the future.
A Moodys debt rating of Baa3, which is the lowest
investment grade rating given by Moodys, is assigned to
companies with adequate financial security. However, certain
protective elements may be lacking or may be unreliable over any
given period of time. A Moodys debt rating of Aaa, which
is the highest investment grade rating given by Moodys, is
assigned to companies with exceptional financial security. Thus,
investment grade tenants will be judged by Moodys to have
at least adequate financial security, and will in some cases
have exceptional financial security.
Standard & Poors assigns a credit rating to both
companies as a whole and to each issuance or class of a
companys debt. A Standard & Poors credit
rating of BBB-, which is the lowest investment grade rating
given by Standard & Poors, is assigned to
companies that exhibit adequate protection parameters. However,
adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the company to meet its
financial commitments. A Standard & Poors credit
rating of AAA+, which is the highest investment grade rating
given by Standard & Poors, is assigned to
companies or issuances with extremely strong capacities to meet
their financial commitments. Thus, investment grade tenants will
be judged by Standard & Poors to have at least
adequate protection parameters, and will in some cases have
extremely strong financial positions.
Other creditworthy tenants are tenants with financial profiles
that our advisor believes meet our investment objectives. In
making such determination, our advisor will look to factors that
may include the financial condition of the tenant and/or
guarantor, the operating history of the property with such
tenant, the tenants market share and track record within
its industry segment, the general health and outlook of the
tenants industry segment, and the lease length and terms
at the time of the acquisition.
We typically purchase properties with existing leases, and when
spaces become vacant or existing leases expire we anticipate
entering into net leases. Net leases
means leases that typically require that tenants pay all or a
majority of the operating expenses, including real estate taxes,
special assessments and sales and use taxes, utilities,
insurance and building repairs related to the property, in
addition to the lease payments. There are various forms of net
leases, typically classified as triple net, double net and
bondable. Triple net and bondable leases typically require the
tenant to pay typically all costs associated with a property in
addition to the base rent and percentage rent, if any. Double
net leases typically have the landlord responsible for the roof
and structure of the building while the tenant is responsible
for all remaining expenses associated with the real estate.
Since each lease is an individually negotiated contract between
two or more parties, each contract will have different
obligations of both the landlord and tenant. Many large national
tenants have standard lease forms that generally do not vary
from property to property, and we will have limited ability to
revise the terms of leases to those tenants. At this time, the
various obligations of the landlord and tenant under the leases
to be associated with our properties have not been determined.
We anticipate that the leases will have terms in excess of ten
years. We may acquire properties under which the lease term has
partially run. We may acquire properties with shorter terms if
the property is in an attractive location, if the property is
difficult to replace, or if the property has other significant
favorable
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real estate attributes. Under the leases, tenants will pay a
predetermined annual base rent. Some of the leases also will
contain provisions that increase the amount of base rent payable
at points during the lease term and/or percentage rent that can
be calculated by a number of factors. Under net leases, the
tenants generally will be required to pay the real estate taxes,
insurance, utilities and common area maintenance charges
associated with the properties. In addition, we will generally
require that each tenant pay the cost of the liability insurance
covering the property or provide such coverage. The third party
liability coverage will insure, among others, our company, our
operating partnership, and any entity formed by us to hold the
property. Each tenant will also obtain, at its own expense,
property insurance naming the above parties as the insured party
for fire and other casualty losses in an amount that will
generally be equal to the full replacement value of such
property. Our tenants will be required to obtain our
advisors approval of all such insurance.
In general, leases may not be assigned or subleased without our
prior written consent. The original tenant generally will remain
fully liable under the lease unless we release that tenant.
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Other Possible Investments |
Although we expect that most of our property acquisitions will
be of the type described above, we may make other investments.
For example, we are not limited to investments in single-tenant
retail properties or properties leased to investment grade
tenants. We may invest in other commercial properties, such as
shopping centers, business and industrial parks, manufacturing
facilities, office buildings and warehouse and distribution
facilities, or in other entities that make such investments or
own such properties, in order to reduce overall portfolio risks
or enhance overall portfolio returns if our advisor determines
that it would be advantageous to do so. Further, to the extent
that our advisor determines it is in our best interest, due to
the state of the real estate market, in order to diversify our
investment portfolio or otherwise, we will make or invest in
mortgage loans secured by the same types of commercial
properties that we intend to acquire. It is the policy of our
board of directors to limit our investments in properties other
than freestanding, single-tenant retail properties to 20% of our
investment portfolio.
Our criteria for investing in mortgage loans will be
substantially the same as those involved in our investment in
properties.
We do not intend to make loans to other persons (other than
mortgage loans), to underwrite securities of other issuers or to
engage in the purchase and sale of any types of investments
other than interests in real estate.
Cole Advisors II will have substantial discretion with
respect to the selection of specific investments and the
purchase and sale of our properties, subject to the approval of
our board of directors. In pursuing our investment objectives
and making investment decisions for us, Cole Advisors II
will evaluate the proposed terms of the purchase against all
aspects of the transaction, including the condition and
financial performance of the property, the terms of existing
leases and the creditworthiness of the tenant, terms of the
lease and property and location characteristics. Because the
factors considered, including the specific weight we place on
each factor, will vary for each potential investment, we do not,
and are not able to, assign a specific weight or level of
importance to any particular factor.
In addition to procuring and reviewing an independent valuation
estimate and property condition report, our advisor will also
consider the following:
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unit level store performance |
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property location, visibility and access |
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age of the property, physical condition and curb appeal |
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neighboring property uses |
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local market conditions including vacancy rates |
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area demographics, including trade area population and average
household income |
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neighborhood growth patterns and economic conditions |
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presence of demand generators |
Our advisor will consider whether properties leased and/or
guaranteed by companies that maintain an investment grade rating
by either Standard and Poors or Moodys Investor
Services. Our advisor will also consider non-rated and
non-investment grade rated tenants that we consider
creditworthy, as described in Investment Grade and Other
Creditworthy Tenants above.
Our advisor will carefully review the terms of each existing
lease by considering various factors, including:
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rent escalations; |
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remaining lease term |
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renewal option terms |
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tenant purchase options |
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termination options |
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scope of the landlords maintenance, repair and replacement
requirements |
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projected net cash flow yield |
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projected internal rates of return |
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Conditions to Closing Our Acquisitions |
Generally, we will condition our obligation to close the
purchase of any investment on the delivery and verification of
certain documents from the seller or developer, including, where
appropriate:
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plans and specifications |
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surveys |
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evidence of marketable title, subject to such liens and
encumbrances as are acceptable to Cole Advisors II |
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financial statements covering recent operations of properties
having operating histories |
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title and liability insurance policies |
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tenant estoppel certificates |
We generally will not purchase any property unless and until we
also obtain what is generally referred to as a
Phase I environmental site assessment and are
generally satisfied with the environmental status of the
property. However, we may purchase a property without obtaining
such assessment if our advisor determines it is not warranted. A
Phase I environmental site assessment basically consists of
a visual survey of the building and the property in an attempt
to identify areas of potential environmental concerns, visually
observing neighboring properties to asses surface conditions or
activities that may have an adverse environmental impact on the
property, and contacting local governmental agency personnel who
perform a regulatory agency file search in an attempt to
determine any known environmental concerns in the immediate
identity of the property. A Phase I environmental site
assessment does not generally include any sampling or testing of
soil, ground water or building materials from the property and
may not reveal all environmental hazards on a property.
We may enter into arrangements with the seller or developer of a
suitable property being developed or constructed. In such cases,
we will be obligated to purchase the property at the completion
of construction, provided that the construction conforms to
definitive plans, specifications, and costs approved by us in
advance. We would receive a certificate of an architect,
engineer or other appropriate party, stating that the property
complies with all plans and specifications. If renovation or
remodeling is required prior to the purchase of a property, we
expect to pay a negotiated maximum amount upon completion. We do
not currently intend to construct or develop properties or to
render any services in connection with such development or
construction.
In determining whether to purchase a particular property, we
may, in accordance with customary practices, obtain an option on
such property. The amount paid for an option, if any, is normally
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surrendered if the property is not purchased and is normally
credited against the purchase price if the property is purchased.
Our investment in real estate generally will take the form of
holding fee title or a long-term leasehold estate. We will
acquire such interests either directly through our operating
partnership, or indirectly through limited liability companies
or through investments in joint ventures, partnerships,
co-tenancies or other co-ownership arrangements with the
developers of the properties, affiliates of Cole
Advisors II or other persons. See Our Operating
Partnership Agreement and Joint Venture
Investments sections below. In addition, we may purchase
properties and lease them back to the sellers of such
properties. While we will use our best efforts to structure any
such sale-leaseback transaction so that the lease will be
characterized as a true lease and that we will be
treated as the owner of the property for federal income tax
purposes, we cannot assure you that the Internal Revenue Service
will not challenge this characterization. In the event that any
sale-leaseback transaction is re-characterized as a financing
transaction for federal income tax purposes, deductions for
depreciation and cost recovery relating to such property would
be disallowed. See Federal Income Tax
Considerations Sale-Leaseback Transactions.
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Joint Venture Investments |
We may enter into joint ventures, partnerships, co-tenancies and
other co-ownership arrangements for the acquisition, development
or improvement of properties with affiliates of our advisor,
including other real estate programs sponsored by affiliates of
our advisor. We may also enter into such arrangements with real
estate developers, owners and other unaffiliated third parties.
In determining whether to invest in a particular arrangement of
this type, Cole Advisors II will evaluate the real property
that such joint venture or other entity owns or is being formed
to own under the same criteria described above in
Investment Decisions for the selection
of our real estate property investments.
Our policy is to invest in joint ventures only when we will have
a right of first refusal to purchase the co-venturers
interest in the joint venture if the co-venturer elects to sell
such interest. In the event that the co-venturer elects to sell
property held in any such joint venture, however, we may not
have sufficient funds to exercise our right of first refusal to
buy the other co-venturers interest in the property held
by the joint venture. In the event that any joint venture with
an affiliated entity holds interests in more than one property,
the interest in each such property may be specially allocated
based upon the respective proportion of funds invested by each
co-venturer in each such property.
Cole Advisors II may have conflicts of interest in
determining which Cole-sponsored program should enter into any
particular joint venture agreement. The co-venturer may have
economic or business interests or goals that are or may become
inconsistent with our business interests or goals. In addition,
Cole Advisors II may face a conflict in structuring the
terms of the relationship between our interests and the interest
of the affiliated co-venturer and in managing the joint venture.
Since Cole Advisors II and its affiliates will control both
the affiliated co-venturer and, to a certain extent, us,
agreements and transactions between the co-venturers with
respect to any such joint venture will not have the benefit of
arms-length negotiation of the type normally conducted
between unrelated co-venturers, which may result in the
co-venturer receiving benefits greater than the benefits that we
receive. In addition, we may have liabilities that exceed the
percentage of our investment in the joint venture.
We may enter into joint ventures with other Cole real estate
programs only if a majority of our directors not otherwise
interested in the transaction and a majority of our independent
directors approve the transaction as being fair and reasonable
to us. In addition, the investment by each joint venture partner
must be substantially on the same terms and conditions as those
received by other joint venturers.
Our advisor believes that utilizing borrowing is consistent with
our investment objective of maximizing the return to investors.
By operating on a leveraged basis, we will have more funds
available for investment
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in properties. This will allow us to make more investments than
would otherwise be possible, resulting in a more diversified
portfolio. Our use of leverage increases the risk of default on
the mortgage payments and a resulting foreclosure of a
particular property, as described in the Risk
Factors General Risks Related to Investments in Real
Estate section of this prospectus. The number of
properties that we can acquire will be affected by the amount of
funds available to us. Accordingly, borrowing funds will allow
us to increase our diversification. There is no limitation on
the amount we may borrow against any single improved property.
However, under our charter, we are required to limit our
borrowings to 60% of the greater of cost (before deducting
depreciation or other non-cash reserves) or fair market value of
our gross assets, unless excess borrowing is approved by a
majority of the independent directors and will be disclosed to
our stockholders in our next quarterly report, along with a
justification for such excess borrowing. We expect that during
the period of this offering we will request that our independent
directors approve borrowings in excess of this limitation since
we will then be in the process of raising our equity capital to
acquire our portfolio. However, we anticipate that our overall
leverage following our offering stage will be within our charter
limit. To the extent that we do not obtain mortgage loans on our
properties, our ability to acquire additional properties will be
restricted.
Our advisor will use its best efforts to obtain financing on the
most favorable terms available to us. All of our financing
arrangements must be approved by a majority of our board members
including a majority of our independent directors. Lenders may
have recourse to assets not securing the repayment of the
indebtedness. Our advisor may refinance properties during the
term of a loan only in limited circumstances, such as when a
decline in interest rates makes it beneficial to prepay an
existing mortgage, when an existing mortgage matures or if an
attractive investment becomes available and the proceeds from
the refinancing can be used to purchase such investment. The
benefits of the refinancing may include increased cash flow
resulting from reduced debt service requirements, an increase in
dividend distributions from proceeds of the refinancing, if any,
and an increase in property ownership is some refinancing
proceeds are reinvested in real estate.
Our ability to increase our diversification through borrowing
may be adversely impacted if banks and other lending
institutions reduce the amount of funds available for loans
secured by real estate. When interest rates on mortgage loans
are high or financing is otherwise unavailable on a timely
basis, we may purchase certain properties for cash with the
intention of obtaining a mortgage loan for a portion of the
purchase price at a later time. To the extent that we do not
obtain mortgage loans on our properties, our ability to acquire
additional properties will be restricted.
We may not borrow money from any of our directors or from our
advisor or its affiliates unless such loan is approved by a
majority of the directors not otherwise interested in the
transaction (including a majority of the independent directors)
as fair, competitive and commercially reasonable and no less
favorable to us than comparable loans between unaffiliated
parties.
Making Loans and Investments in Mortgages
Our criteria for investing in mortgage loans will be
substantially the same as those involved in our investment in
properties. We are not limited as to the amount of gross
offering proceeds that we may apply to mortgage loan investments.
We will not make loans to other entities or other persons unless
secured by mortgages. We will not make or invest in mortgage
loans on any one property if the aggregate amount of all
mortgage loans outstanding on the property, including our
borrowings, would exceed an amount equal to 85.0% of the
appraised value of the property as determined by an independent
third party appraiser, unless we find substantial justification
due to the presence of other underwriting criteria. We may find
such justification in connection with the purchase of mortgage
loans in cases in which we believe there is a high probability
of our foreclosure upon the property in order to acquire the
underlying assets and in which the cost of the mortgage loan
investment does not exceed the fair market value of the
underlying property. We will not invest in or make mortgage
loans unless an appraisal is obtained concerning the underlying
property, except for those loans insured or guaranteed by a
government or government agency. In cases in which a
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majority of our independent directors so determine and in the
event the transaction is with our advisor, any of our directors
or their respective affiliates, the appraisal will be obtained
from a certified independent appraiser to support its
determination of fair market value.
We may invest in first, second and third mortgage loans,
wraparound mortgage loans, construction mortgage loans on real
property, and loans on leasehold interest mortgages. However, we
will not make or invest in any mortgage loans that are
subordinate to any mortgage or equity interest of our advisor or
any of its or our, affiliates. We also may invest in
participations in mortgage loans. Second and wraparound mortgage
loans are secured by second or wraparound deeds of trust on real
property that is already subject to prior mortgage indebtedness.
A wraparound loan is one or more junior mortgage loans having a
principal amount equal to the outstanding balance under the
existing mortgage loan, plus the amount actually to be advanced
under the wraparound mortgage loan. Under a wraparound loan, we
would generally make principal and interest payments on behalf
of the borrower to the holders of the prior mortgage loans.
Third mortgage loans are secured by third deeds of trust on real
property that is already subject to prior first and second
mortgage indebtedness. Construction loans are loans made for
either original development or renovation of property.
Construction loans in which we would generally consider an
investment would be secured by first deeds of trust on real
property for terms of six months to two years. Loans on
leasehold interests are secured by an assignment of the
borrowers leasehold interest in the particular real
property. These loans are generally for terms of from six months
to 15 years. The leasehold interest loans are either
amortized over a period that is shorter than the lease term or
have a maturity date prior to the date the lease terminates.
These loans would generally permit us to cure any default under
the lease. Mortgage participation investments are investments in
partial interests of mortgages of the type described above that
are made and administered by third-party mortgage lenders.
Generally, we will not invest in any mortgage loans, including
those described above, on any one property if the aggregate
amount of mortgage loans outstanding on the property, including
our loans, would exceed an amount equal to 85% of the appraised
value of the property.
In evaluating prospective mortgage loan investments, our advisor
will consider factors such as the following:
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ratio of the investment amount to the underlying propertys
value |
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propertys potential for capital appreciation |
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expected levels of rental and occupancy rates |
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current and projected cash flow of the property |
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potential for rent increases |
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degree of liquidity of the investment |
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propertys income-producing capacity |
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quality, experience and creditworthiness of the borrower |
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general economic conditions in the area where the property is
located |
In addition, we will seek to obtain a customary lenders
title insurance policy or commitment as to the priority of the
mortgage or condition of the title. Because the factors
considered, including the specific weight we place on each
factor, will vary for each prospective mortgage loan investment,
we do not, and are not able to, assign a specific weight or
level of importance to any particular factor.
We may originate loans from mortgage brokers or personal
solicitations of suitable borrowers, or may purchase existing
loans that were originated by other lenders. We may purchase
existing mortgage loans from affiliates, and we may make or
invest in mortgage loans in which the borrower is an affiliate.
See Conflicts of Interest. Our advisor will evaluate
all potential mortgage loan investments to determine if the
security for the loan and the loan-to-value ratio meets our
investment criteria and objectives. An officer, director, agent
or employee of our advisor will inspect the property during the
loan approval process. We do not expect to make or invest in
mortgage loans with a maturity of more than ten years from the
date of our investment, and we anticipate that most loans will
have a term of five years. Most loans that we will consider for
investment would provide for monthly payments of interest and
some may also provide for principal amortization, although many
loans of the nature that we will consider provide for
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payments of interest only and a payment of principal in full at
the end of the loan term. We will not originate loans with
negative amortization provisions.
We do not have any policies directing the portion of our assets
that may be invested in construction loans, loans secured by
leasehold interests and second, third and wraparound mortgage
loans. However, we recognize that these types of loans are
riskier than first deeds of trust or first priority mortgages on
income-producing, fee-simple properties, and we expect to
minimize the amount of these types of loans in our portfolio, to
the extent that that we make or invest in mortgage loans. Our
advisor will evaluate the fact that these types of loans are
riskier in determining the rate of interest on the loans. We do
not have any policy that limits the amount that we may invest in
any single mortgage loan or the amount we may invest in mortgage
loans to any one borrower.
Our mortgage loan investments may be subject to regulation by
federal, state and local authorities and subject to various laws
and judicial and administrative decisions imposing various
requirements and restrictions, including among other things,
regulating credit granting activities, establishing maximum
interest rates and finance charges, requiring disclosures to
customers, governing secured transactions and setting
collection, repossession and claims handling procedures and
other trade practices. In addition, certain states have enacted
legislation requiring the licensing of mortgage bankers or other
lenders and these requirements may affect our ability to
effectuate our proposed investments in mortgage loans.
Commencement of operations in these or other jurisdictions may
be dependent upon a finding of our financial responsibility,
character and fitness. We may determine not to make mortgage
loans in any jurisdiction in which the regulatory authority
determines that we have not complied in all material respects
with applicable requirements.
Acquisition of Properties from Affiliates
We may acquire properties or interests in properties from or in
co-ownership arrangements with affiliated entities, including
properties acquired from affiliates engaged in construction and
development of commercial real properties. We will not acquire
any property from an affiliate unless a majority of our
directors not otherwise interested in the transaction and a
majority of our independent directors determine that the
transaction is fair and reasonable to us. The purchase price
that we will pay for any property we acquire from our
affiliates, including property developed by an affiliate as well
as property held by an affiliate that has already been
developed, will not exceed the current appraised value of the
property. In addition, the price of the property we acquire from
an affiliate may not exceed the cost of the property to our
affiliate, unless a majority of our directors and a majority of
our independent directors determine that substantial
justification for the excess exists and the excess is reasonable.
In the case of properties we acquire from an affiliate that have
not been constructed at the time of contracting, our affiliate
will generally be required to obtain an independent as
built appraisal for the property prior to our contracting
for the property, in which case the purchase price we will pay
under the purchase contract will not exceed the anticipated fair
market value of the developed property as determined by the
appraisal. Our contract with any affiliate engaged in
development of properties for sale to us will require it to
deliver to us at closing title to the property, as well as an
assignment of leases.
In the case of properties to be developed by any of our
affiliates and sold to us, if any of our affiliates develop
properties, we anticipate that our development company affiliate
will:
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acquire a parcel of land; |
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enter into contracts for the construction and development of a
commercial building thereon; |
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enter into an agreement with one or more tenants to lease all or
a majority of the property upon its completion; |
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secure an earnest money deposit from us, which may be used for
acquisition and development expenses; |
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secure a financing commitment from a commercial bank or other
institutional lender to finance the remaining
acquisition and development expenses; |
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complete the development and allow the tenant or tenants to take
possession of the property; and |
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provide for the acquisition of the property by us. |
We will be required to pay a substantial sum to our development
company affiliate at the time of entering into the contract as a
refundable earnest money deposit to be credited against the
purchase price at closing, which will be applied to the cost of
acquiring the land and initial development costs. We expect that
the earnest money deposit will represent approximately 20.0% to
30.0% of the purchase price of the developed property set forth
in the purchase contract.
We may enter into a contract to acquire property from an
affiliate engaged in property development even if we have not
yet raised sufficient proceeds to enable us to pay the full
amount of the purchase price at closing. We may also elect to
close a purchase before the development of the property has been
completed, in which case we would obtain an assignment of the
construction and development contracts from our affiliate and
would complete the construction either directly or through a
joint venture with an affiliate. Any contract between us,
directly or indirectly through a joint venture with an
affiliate, and an affiliated development company for the
purchase of property to be developed will provide that we will
be obligated to purchase the property only if:
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the affiliated development company completes the improvements,
which generally will include the completion of the development,
in accordance with the specifications of the contract; |
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one or more approved tenants takes possession of the building
under a lease satisfactory to our advisor; and |
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we have sufficient proceeds available for investment at closing
to pay the balance of the purchase price remaining after payment
of the earnest money deposit. |
Our advisor will not cause us to enter into a contract to
acquire property from an affiliated development company if it
does not reasonably anticipate that funds will be available to
purchase the property at the time of closing. If we enter into a
contract to acquire property from an affiliated development
company and, at the time for closing, are unable to purchase the
property because we do not have sufficient proceeds available
for investment, we will not be required to close the purchase of
the property and will be entitled to a refund of our earnest
money deposit from the affiliated development company. Because
the affiliated development company may be an entity without
substantial assets or operations, our board of directors may
require that the affiliated development companys
obligation to refund our earnest money deposit be guaranteed by
another entity, such as Fund Realty Advisors, our affiliated
property manager, which provides property management and leasing
services to various Cole programs, including us, for substantial
monthly fees. As of the time Fund Realty Advisors or any other
guarantor may be required to perform under any guaranty, we
cannot assure you that such guarantor will have sufficient
assets to refund all of our earnest money deposit in a lump sum
payment. In such a case, we would be required to accept
installment payments over time payable out of the revenues of
the guarantors operations. We cannot assure you that we
would be able to collect the entire amount of our earnest money
deposit under such circumstances. See Risk
Factors General Risks Related to Investments in Real
Estate.
Tenant-in-Common Program
Persons selling real estate held for investment often seek to
reinvest the proceeds of that sale in another real estate
investment in an effort to obtain favorable tax treatment under
Section 1031 of the Internal Revenue Code. Cole Capital
Partners, an affiliate of our advisor, has developed a
Tenant-in-Common Program to facilitate these transactions,
referred to as like-kind exchanges. For each Tenant-in-Common
Program, Cole Capital Partners or another Cole affiliate will
create a single member limited liability company (each of which
we refer to as a Cole Exchange Entity). A Cole Exchange Entity
will acquire all or part of a real estate property to be owned
in co-tenancy arrangements with persons wishing to engage in
like-kind exchanges (Tenant-in-Common Participants). Generally,
a Cole Exchange Entity will acquire the subject property and
prepare and, through a registered broker-dealer, market a
private placement memorandum for the sale of co-tenancy
interests in that property. In many instances, affiliates
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of our advisor will sell or contribute a property to a Cole
Exchange Entity for the purpose of selling off the property.
Properties acquired in connection with the Tenant-in-Common
Program, if any, initially may be partially or entirely financed
with debt. When a Section 1031 Tenant-in-Common Participant
wishes to acquire a co-tenancy interest, the Cole Exchange
Entity will deed an undivided co-tenancy interest in the subject
property to a newly formed single-member limited liability
company that is owned by the Tenant-in-Common Participant.
Typically, multiple investors will acquire co-tenancy interests
in a single property. In a substantial majority of these
transactions, the underlying property serves as collateral for
the mortgage loan used to finance the purchase of the property.
To the extent the loan is not repaid in full as part of the
Tenant-in-Common Program, the loan remains outstanding after the
sale of the co-tenancy interests to the Tenant-in-Common
Participants. Each co-tenant is a borrower under the loan
financing documents. However, these loans generally are
non-recourse against the Tenant-in-Common Participants and are
secured by the real property. However, the Tenant-in-Common
Participants are required to indemnify and become liable to the
lender for customer/carve-outs under the loan financing
documents, including but not limited to fraud or intentional
misrepresentation by a co-tenant or a guarantor of the loan,
physical waste of the property, misapplication or
misappropriation of insurance proceeds and failure to pay taxes.
Although we do not presently intend to participate in a
Tenant-in-Common Program, we may do so if our board of
directors, including a majority of our independent directors,
determines that our participation is in the best interest of our
stockholders. In the event that our board of directors
determines that it is in our best interest to participate in the
Tenant-in-Common Program, we may co-invest in the property with
the Cole Exchange Entity by purchasing an interest in the
property directly from the original seller or purchasing a
tenant-in-common interest from the Cole Exchange Entity. In that
event, as an owner of tenant-in-common interests in properties,
we will be subject to the risks that ownership of co-tenancy
interests with unrelated third parties entails. Furthermore, to
the extent we guarantee any loans associated with the properties
that are subject to the Tenant-in-Common Programs, we, as well
as the co-tenants, will become liable for the lenders
customary carve-outs under the applicable mortgage loan
financing documents, including but not limited to fraud or
intentional misrepresentation by a co-tenant or a guarantor of
the loan, physical waste of the property, misapplication or
misappropriation of insurance proceeds, and failure to pay taxes.
We may co-invest with or purchase tenant-in-common interests
from a Cole Exchange Entity only if a majority of our directors
not otherwise interested in the transaction and a majority of
our independent directors approves of the transaction as being
fair, competitive and commercially reasonable to us. We
anticipate that in the event we purchase a tenant-in-common
interest from a Cole Exchange Entity, generally we will purchase
the interest at the Cole Exchange Entitys cost (before
offering expenses and fees). However, if the price to us is in
excess of the cost of the asset paid by our affiliate, a
majority of our directors not otherwise interested in the
transaction and a majority of our independent directors must
determine that substantial justification for such excess exists
and that such excess is reasonable. In no event shall the cost
of such asset to us exceed the greater of the Cole Exchange
Entitys cost or the current appraised value for the
property interest performed by an independent appraiser.
Although the Cole Exchange Entity will charge fees and expenses
to Tenant-in-Common Participants and/or will sell the
tenant-in-common interests at a price above the price it paid
for the property, we will not pay any fees or expenses to the
Cole Exchange Entity. We will, however, pay our advisor the
acquisition and advisory fees and reimburse the advisor for its
expenses as described under Management Compensation
to the same extent as with other types of property acquisitions.
All purchasers of co-tenancy interests, including our operating
partnership if it purchases co-tenancy interests, will be
required to execute a tenants-in-common agreement with the other
purchasers of co-tenancy interests in that particular property.
They will also be required to execute an asset management
agreement with Equity Fund Advisors, our affiliate, which would
provide for the payment of asset management and leasing fees to
Equity Fund Advisors. If we purchase co-tenancy interests, we
will be subject to various risks associated with co-tenancy
arrangements which are not otherwise present in real
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estate investments, such as the risk that the interests of the
non-affiliated Tenant-in-Common Participants will become adverse
to our interests.
In any Tenant-in-Common Program, Cole Capital Partners, the Cole
Exchange Entity, or the other Tenant-in-Common Participants may
have economic or business interests or goals that are or may
become inconsistent with our business interests or goals. For
instance, Cole Capital Partners will receive substantial fees in
connection with its sponsoring of a Tenant-in-Common Program
(although we will be required to pay such fees) and our
participation in such a transaction likely would facilitate its
consummation of the transactions. For these reasons, our advisor
may face a conflict in structuring the terms of the relationship
between our interests and the interest of Cole Capital Partners
or the Cole Exchange Entity. As a result, agreements and
transactions between the parties with respect to the property
will not have the benefit of arms-length negotiation of
the type normally conducted between unrelated parties.
Disposition Policies
We intend to hold each property we acquire for an extended
period, generally eight to ten years. However, circumstances
might arise that could result in the early sale of some
properties. We may sell a property before the end of the
expected holding period if we believe the sale of the property
would be in the best interests of our stockholders.
The determination of whether a particular property should be
sold or otherwise disposed of will be made after consideration
of relevant factors, including prevailing economic conditions
and current tenant creditworthiness, with a view to achieving
maximum capital appreciation. We cannot assure you that this
objective will be realized. The selling price of a property that
is net leased will be determined in large part by the amount of
rent payable under the lease. If a tenant has a repurchase
option at a formula price, we may be limited in realizing any
appreciation. In connection with our sales of properties we may
lend the purchaser all or a portion of the purchase price. In
these instances, our taxable income may exceed the cash received
in the sale. The terms of payment will be affected by custom in
the area in which the property being sold is located and the
then-prevailing economic conditions.
Investment Limitations
Our charter places numerous limitations on us with respect to
the manner in which we may invest our funds or issue securities.
These limitations cannot be changed unless our charter is
amended, which requires approval of our stockholders. Unless our
charter is amended, we will not:
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borrow in excess of 60% of the greater of the aggregate cost
(before deducting depreciation or other non-cash reserves) or
fair market value of all assets owned by us, unless approved by
a majority of our independent directors and disclosed to our
stockholders in our next quarterly report, along with a
justification for such excess borrowing; |
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make investments in unimproved property or mortgage loans on
unimproved property in excess of 10.0% of our total assets; |
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make investments in non-freestanding, non-single tenant property
in excess of 20.0% of our total assets; |
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make or invest in mortgage loans unless an appraisal is obtained
concerning the underlying property, except for those mortgage
loans insured or guaranteed by a government or government agency; |
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make or invest in mortgage loans, including construction loans,
on any one property if the aggregate amount of all mortgage
loans on such property would exceed an amount equal to 85.0% of
the appraised value of such property unless substantial
justification exists for exceeding such limit because of the
presence of other underwriting criteria; |
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make an investment in a property or mortgage loan if the related
acquisition fees and acquisition expenses are unreasonable or
exceed 6.0% of the purchase price of the property or, in the
case of a |
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mortgage loan, 6.0% of the funds advanced; provided that the
investment may be made if a majority of our independent
directors determines that the transaction is commercially
competitive, fair and reasonable to us; |
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invest in equity securities unless a majority of our independent
directors approves such investment as being fair, competitive
and commercially reasonable; |
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invest in real estate contracts of sale, otherwise known as land
sale contracts, unless the contract is in recordable form and is
appropriately recorded in the chain of title; |
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invest in commodities or commodity futures contracts, except for
futures contracts when used solely for the purpose of hedging in
connection with our ordinary business of investing in real
estate assets and mortgages; |
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issue equity securities on a deferred payment basis or other
similar arrangement; |
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issue debt securities in the absence of adequate cash flow to
cover debt service; |
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issue equity securities that are assessable after we have
received the consideration for which our board of directors
authorized their issuance; or |
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issue equity securities redeemable solely at the option of the
holder, which restriction has no effect on our share redemption
program or the ability of our operating partnership to issue
redeemable partnership interests. |
In addition, our charter includes many other investment
limitations in connection with conflict-of-interest
transactions, which limitations are described above under
Conflicts of Interest. Our charter also includes
restrictions on roll-up transactions, which are described under
Description of Shares below.
Change in Investment Objectives and Limitations
Our charter requires that our independent directors review our
investment policies at least annually to determine that the
policies we follow are in the best interest of our stockholders.
Each determination and the basis therefor shall be set forth in
the minutes of the meetings of our board of directors. The
methods of implementing our investment policies also may vary as
new investment techniques are developed. The methods of
implementing our investment objectives and policies, except as
otherwise provided in the organizational documents, may be
altered by a majority of our directors, including a majority of
the independent directors, without the approval of our
stockholders.
Real Property Investments
As of the date of this prospectus, we have not acquired or
contracted to acquire any specific real properties or mortgage
loans. Cole Advisors II, our advisor, is continually
evaluating various potential property investments and engaging
in discussions and negotiations with sellers, developers and
potential tenants regarding the purchase and development of
properties for us and other Cole-sponsored programs. At such
time while this offering is pending, if we believe that a
reasonable probability exists that we will acquire a specific
property, this prospectus will be supplemented to disclose the
negotiations and pending acquisition of such property. We expect
that this will normally occur upon the signing of a purchase
agreement for the acquisition of a specific property, but may
occur before or after such signing or upon the satisfaction or
expiration of major contingencies in any such purchase
agreement, depending on the particular circumstances surrounding
each potential investment. A supplement to this prospectus will
describe any improvements proposed to be constructed thereon and
other information that we consider appropriate for an
understanding of the transaction. Further data will be made
available after any pending acquisition is consummated, also by
means of a supplement to this prospectus, if appropriate. YOU
SHOULD UNDERSTAND THAT THE DISCLOSURE OF ANY PROPOSED
ACQUISITION CANNOT BE RELIED UPON AS AN ASSURANCE THAT WE WILL
ULTIMATELY CONSUMMATE SUCH ACQUISITION OR THAT THE INFORMATION
PROVIDED CON-
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CERNING THE PROPOSED ACQUISITION WILL NOT CHANGE BETWEEN THE
DATE OF THE SUPPLEMENT AND ANY ACTUAL PURCHASE.
We intend to obtain adequate insurance coverage for all
properties in which we invest.
Other Policies
Subject to applicable law, our board of directors has the
authority, without further stockholder approval, to issue
additional authorized common stock and/or preferred stock or
otherwise raise capital in any manner and on the terms and for
the consideration it deems appropriate, including in exchange
for property and/or as consideration for acquisitions. Existing
stockholders will have no preemptive right to additional shares
issued in any future offering or other issuance of our capital
stock, and any offering or issuance may cause a dilution of your
investment. In addition, preferred shares could have
distribution, voting, liquidation and other rights and
preferences that are senior to those of our common shares. See
Description of Shares. We may in the future issue
common stock or preferred stock in connection with acquisitions,
including issuing common stock or preferred stock in exchange
for property. We also may issue units of partnership interest in
our operating partnership in connection with acquisitions of
property or other assets or entities.
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PLAN OF OPERATION
Certain statements contained in this Plan of
Operation and elsewhere in this prospectus constitute
forward-looking statements. Such statements include,
in particular, statements about our plans, strategies and
prospects, as well as information about our business and
industry. These forward-looking statements are not historical
facts but our current intent, belief or expectations of our
business and industry. You can generally identify
forward-looking statements by our use of forward-looking
terminology, such as may, will,
anticipate, expect, intend,
plan, believe, seek,
estimate, would, could,
should and variations of these words and similar
expressions. You should not rely on our forward-looking
statements because the matters they describe are subject to
known and unknown risks, uncertainties and other unpredictable
factors, many of which are beyond our control.
These forward-looking statements are subject to various risks
and uncertainties, including those discussed above under
Risk Factors, which could cause our actual results
to differ materially from those projected in any forward-looking
statement we make. We do not undertake to publicly update or
revise any forward-looking statements, whether as a result of
new information, future events or otherwise. You should read the
following discussion along with our financial statements and the
related notes included in this prospectus.
General
As of the date of this prospectus, we have not commenced
operations. After the minimum subscription of
250,000 shares is achieved, subscription proceeds will be
released to us (except for subscriptions from Pennsylvania
investors see Plan of Distribution
Special Notice to Pennsylvania Investors) and applied to
investments in properties and other assets and the payment or
reimbursement of selling commissions and other organization and
offering expenses. See Estimated Use of Proceeds. We
will experience a relative increase in liquidity as additional
subscriptions for shares are received and a relative decrease in
liquidity as net offering proceeds are expended in connection
with the acquisition, development and operation of properties.
We have not entered into any arrangements to acquire any
specific properties with the net proceeds from this offering.
The number of properties we may acquire will depend upon the
number of shares sold and the resulting amount of the net
proceeds available for investment in properties.
Our advisor also may, but will not be required to, establish
reserves from gross offering proceeds, out of cash flow
generated by operating properties or out of non-liquidating net
sale proceeds from the sale of our properties. Working capital
reserves are typically utilized for non-operating expenses such
as tenant improvements, leasing commissions and major capital
expenditures. Alternatively, a lender may require its own
formula for escrow of working capital reserves.
The net proceeds of this offering will provide funds to enable
us to purchase properties. We may acquire properties free and
clear of permanent mortgage indebtedness by paying the entire
purchase price of each property in cash or for equity
securities, or a combination thereof, or we may selectively
encumber all or certain properties, if favorable financing terms
are available, following acquisition. The proceeds from such
loans will be used to acquire additional properties or increase
cash flow. In addition, we intend to borrow funds to purchase
properties. In the event that this offering is not fully sold,
our ability to diversify our investments may be diminished.
We intend to make an election under Section 856(c) of the
Internal Revenue Code to be taxed as a REIT under the Internal
Revenue Code, beginning with the taxable year ended
December 31, 2005. If we qualify as a REIT for federal
income tax purposes, we generally will not be subject to federal
income tax on income that we distribute to our stockholders. If
we fail to qualify as a REIT in any taxable year, we will be
subject to federal income tax on our taxable income at regular
corporate rates and will not be permitted to qualify for
treatment as a REIT for federal income tax purposes for four
years following the year in which our qualification is denied.
Such an event could materially and adversely affect our net
income. However, we believe that we are organized and operate in
a manner that will enable us to qualify
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for treatment as a REIT for federal income tax purposes during
the year ended December 31, 2005, and we intend to continue
to operate so as to remain qualified as a REIT for federal
income tax purposes.
We will monitor the various qualification tests that we must
meet to maintain our status as a REIT. Ownership of our shares
will be monitored to ensure that no more than 50.0% in value of
our outstanding shares is owned, directly or indirectly, by five
or fewer individuals at any time after the first taxable year
for which we make an election to be taxed as a REIT. We will
also determine, on a quarterly basis, that the gross income,
asset and distribution tests as described in the section of this
prospectus entitled Federal Income Tax
Considerations Requirements for Qualification
are met.
Liquidity and Capital Resources
We expect to meet our short-term operating liquidity
requirements initially through advances from our advisor or its
affiliates, from time to time, as we need to fund our operating
expenses incurred before we have raised the minimum offering of
250,000 shares. After we break escrow, we expect we will
meet our short-term operating liquidity requirements from the
proceeds of this offering and that any advances from our advisor
will be repaid, without interest, as funds are available after
meeting our current liquidity requirements, subject to the
limitations on reimbursement set forth in the Management
Compensation section of this prospectus. We do not expect
our operating costs to be significant until we make our initial
investments. As of March 31, 2005, we have not received any
advances from our advisor. We expect that any advances will be
made under a revolving advance arrangement, which will not be
written, with our advisor. We expect that this arrangement will
allow for repayments to be made as funds are available from the
offering proceeds or from operating cash flows, but no later
than two years from the date of the advance. The terms of the
arrangement will be finalized upon the initial advance, if any.
The offering and organizational costs associated with this
offering will initially be paid by our advisor, which may be
reimbursed for such costs up to 1.5% of the capital raised by us
in this offering. As of March 31, 2005, our advisor has
paid approximately $595,000 of such costs. After we make our
initial investments from the proceeds of this offering, we
expect our short-term operating liquidity requirements to be met
through net cash provided by property operations. Operating cash
flows are expected to increase as properties are added to our
portfolio.
On a long-term basis, our principal demands for funds will be
for property acquisitions, either directly or through investment
interests, for the payment of operating expenses and
distributions, and for the payment of interest on our
outstanding indebtedness and other investments. Generally, cash
needs for items other than property acquisitions will be met
from operations and property acquisitions from funding by public
offerings of our shares. However, there may be a delay between
the sale of our shares and our purchase of properties that could
result in a delay in the benefits to our stockholders, if any,
of returns generated from our investment operations. Our advisor
will evaluate potential additional property acquisitions and
engage in negotiations with sellers on our behalf. Investors
should be aware that after a purchase contract is executed that
contains specific terms, the property will not be purchased
until the successful completion of due diligence, which includes
review of the title insurance commitment, an appraisal and an
environmental analysis. In some instances, the proposed
acquisition will require the negotiation of final binding
agreements, which may include financing documents. During this
period, we may decide to temporarily invest any unused proceeds
from the offering in certain investments that could yield lower
returns than the properties. These lower returns may affect our
ability to make distributions.
Our board of directors will determine the amount and timing of
distributions to our stockholders and will base such
determination on a number of factors, including funds available
for payment of distributions, financial condition, capital
expenditure requirements and annual distribution requirements
needed to maintain our status as a REIT under the Internal
Revenue Code.
Potential future sources of capital include proceeds from this
offering, proceeds from secured or unsecured financings from
banks or other lenders, proceeds from the sale of properties and
undistributed funds from operations. If necessary, we may use
financings or other sources of capital in the event of
unforeseen significant capital expenditures. Currently, we do
not have a credit facility or other third party
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source of liquidity. To the extent we do not secure a credit
facility or other third party source of liquidity, we will be
dependent upon the proceeds of this offering and income from
operations in order to meet our long term liquidity requirements
and to fund our distributions.
Results of Operations
As of the initial date of this prospectus, no significant
operations had commenced because we were in our development
stage. No operations will commence until we have sold
250,000 shares of our common stock in this offering. Our
management is not aware of any material trends or uncertainties,
other than national economic conditions affecting real estate
generally (such as lower capitalization rates, which lead to
lower rents), that may reasonably be expected to have a material
impact, favorable or unfavorable, on revenues or income from the
acquisition and operations of real properties and mortgage
loans, other than those referred to in this prospectus.
Inflation
The real estate market has not been affected significantly by
inflation in the past several years due to the relatively low
inflation rate. However, in the event inflation does become a
factor, our leases typically do not include provisions that
would protect us from the impact of inflation.
Critical Accounting Policies
As of March 31, 2005 and December 31, 2004, the only
asset we held was cash and cash equivalents of $200,000. The
valuation of this amount does not require estimates or judgment
by management.
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PRIOR PERFORMANCE SUMMARY
Prior Investment Programs
The information presented in this section represents the
historical experience of certain real estate programs managed
over the last ten years by Cole Capital Advisors, Cole Capital
Partners and other affiliates of our advisor, including certain
officers and directors of our advisor. Investors should not
assume that they will experience returns, if any, comparable to
those experienced by investors in such prior real estate
programs.
During the period from January 1, 1995 to March 31,
2005, affiliates of our advisor have sponsored 48 privately
offered prior programs including 24 limited partnerships, a real
estate investment trust (Cole REIT I), four debt offerings and
nineteen tenant-in-common programs. As of March 31, 2005,
such prior programs have raised approximately
$287.2 million from 5,400 investors. Each of the 24 limited
partnerships, the real estate investment trust, three of the
debt offerings and the 19 tenant-in-common programs have
investment objectives and policies similar to that of this
program. See Tables I and II of the Prior Performance Tables for
more detailed information about the experience of our affiliates
in raising and investing funds for offerings initiated over the
last four years and compensation paid to the sponsors of these
programs.
We intend to conduct this offering in conjunction with future
offerings by one or more public and private real estate entities
sponsored by Cole Capital Advisors, Cole Capital Partners and
their affiliates. To the extent that such entities have the same
or similar objectives as ours or involve similar or nearby
properties, such entities may be in competition with the
properties acquired by us. See the Conflicts of
Interest section of this prospectus for additional
information.
The information in this section and in the Prior Performance
Tables attached to this prospectus as Appendix A provides
relevant summary information concerning real estate programs
sponsored by our affiliates. The Prior Performance Tables set
forth information as of the dates indicated regarding certain of
these prior programs as to (1) experience in raising and
investing funds (Table I); (2) compensation to the sponsor
and its affiliates (Table II); (3) annual operating
results of prior real estate programs (Table III);
(4) results of completed programs (Table IV); and
(5) results of sales or disposals of properties (Table V).
Additionally, Table VI, which is contained in Part II of
the registration statement for this offering and which is not
part of the prospectus, contains certain additional information
relating to properties acquired by the prior real estate
programs. We will furnish copies of such table to any
prospective investor upon request and without charge. The
purpose of this prior performance information is to enable you
to evaluate accurately the experience of our advisor and its
affiliates in sponsoring like programs. The following discussion
is intended to summarize briefly the objectives and performance
of the prior real estate programs and to disclose any material
adverse business developments sustained by them.
Summary Information
During the period from January 1, 1995 to March 31,
2005, affiliates of our advisor have been general partners in 24
limited partnerships with similar objectives to our program,
involving the sale of limited partnership interests to 3,400
investors, raising approximately $138.0 million of capital.
The foregoing partnerships have purchased in the aggregate 47
properties for an approximate acquisition cost of
$254.6 million, of which 51.1% is attributable to 20
shopping centers, 46.0% is attributable to 23 single-tenant
commercial properties, 0.8% is attributable to one office
building, 1.1% is attributable to one data center and 1.0% is
attributable to two unimproved or partially-improved land
parcels intended for high-rise/data center development. 21 of
the properties are located in the Phoenix metropolitan area, one
is located in northern Arizona and 25 are located in the
following states: three in Tennessee; three in Oklahoma; two in
California; two in Florida; two in Ohio; and one each in
Alabama, Indiana, Iowa, Kentucky, Michigan, Mississippi, Nevada,
New Mexico, New York, South Carolina, Texas, Virginia and
Washington. The properties have been purchased on terms varying
from all cash to market rate financing. To date, 21 of the
properties have been sold.
87
Of the above, three real estate investment programs that
acquired retail shopping centers, one real estate investment
program that developed a data center and two limited
partnerships that acquired single-tenant commercial properties,
have been sponsored since March 31, 2002. Cole Capital
Partners, through wholly owned subsidiaries, serves as the
general partner of Cole Credit Property Fund Limited Partnership
(CCPF) and Cole Credit Property Fund II Limited Partnership
(CCPF II). As of March 31, 2005, CCPF had raised
$25.0 million and acquired 14 properties or an interest
therein in 12 states across the U.S. for an aggregate
acquisition cost of approximately $55.8 million. All of
such properties are single-tenant commercial properties that
were net leased to investment grade tenants, which are companies
that have a debt rating by Moodys of Baa3 or better or a
credit rating by Standard & Poors of BBB- or
better, or are guaranteed by a company with such rating, as of
the date of acquisition. Subsequent to the acquisition by CCPF,
the tenants at two properties representing less than 7.5% of the
funds invested equity have been downgraded below
investment grade, one of which has filed for Chapter 11
bankruptcy protection. As of March 31, 2005, CCPF II
had raised approximately $24.5 million and had acquired ten
properties or an interest therein (including one property
co-owned with CCPF) in seven states for an aggregate acquisition
cost of approximately $61.3 million.
In addition to the partnerships described above, as of
March 31, 2005, Cole Collateralized Senior Notes, LLC
(CCSN), a subsidiary of Cole Capital Advisors had issued
approximately $28.0 million in Series A Notes, and had
acquired 25 restaurants and 15 single-tenant retail properties
located in 18 states for an aggregate acquisition cost of
approximately $123.7 million. As of March 31, 2005,
CCSN had sold 24 properties, of which three were sold as part of
Cole Capital Partners tenant-in-common program and three
were sold to Cole REIT I.
In addition to the partnerships described above, as of
March 31, 2005, Cole Collateralized Senior Notes II,
LLC (CCSN II), a subsidiary of Cole Capital Advisors had
issued approximately $28.7 million in Series B Notes
and had acquired 23 single-tenant retail properties in 13 states
for an aggregate acquisition cost of approximately
$138.0 million. As of March 31, 2005, CCSN II had
sold ten properties, of which seven were sold as part of Cole
Capital Partners tenant-in-common program and three were
sold to Cole REIT I.
In addition to the partnerships described above, as of
March 31, 2005, Cole Collateralized Senior Notes III,
LLC (CCSN III), a subsidiary of Cole Capital Advisors, had
issued approximately $6.6 million in Series C Notes
and had not acquired any properties.
In addition, as of March 31, 2005, Cole REIT I, had raised
approximately $46.1 million, and had acquired 13
single-tenant retail properties in ten states for an aggregate
acquisition cost of approximately $79.8 million.
In addition, the Cole Exchange Entities, offer properties to
Code Section 1031 exchange investors in the form of the
sale of tenant-in-common ownership interests in such properties.
As of March 31, 2005, aggregate ownership interests of
$39.8 million had been sold in 16 private offerings of
properties located in 12 states. In addition, as of
March 31, 2005, three other Tenant-in-Common Programs were
ongoing with an aggregate offering amount of approximately
$17.4 million for which no amounts had been raised as of
such date. See the Prior Performance Tables attached to this
memorandum as Appendix A for additional information
regarding the foregoing programs.
The following table shows a breakdown of the aggregate amount of
the acquisition and development costs of the properties
purchased by the prior real estate programs of our affiliates as
of March 31, 2005:
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Type of Property |
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New | |
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Used | |
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Construction | |
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| |
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| |
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| |
Retail
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1.0 |
% |
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99.0 |
% |
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Office buildings
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100 |
% |
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Land
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100 |
% |
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Data Center
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100 |
% |
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These programs have sold 49 of the total of 118 properties, or
41.5% of such properties. The original purchase price of the
properties that were sold was $166.4 million, and the
aggregate sales price of such properties was
$213.3 million. See Tables III, IV and V of the Prior
Performance Tables for more detailed information as to the
operating results of such programs whose offerings closed in the
last five years, results of such programs that have completed
their operations over the last five years and the sales or other
disposals of properties with investment objectives similar to
ours over the last three years.
An entity affiliated with the officers of Cole Partnerships,
Inc. has raised $5 million in a debt offering for general
corporate purposes, including investments in joint ventures with
affiliates, which has been repaid.
The prior programs sponsored by our affiliates have occasionally
been adversely affected by the cyclical nature of the real
estate market. They have experienced, and may in the future
experience, decreases in net income when economic conditions
decline. For example, one of these programs, Cole Santa Fe
Investors, LP owns an approximately 262,000 square foot
shopping center property. One of the tenants of the property,
which leases approximately 50,000 square feet (approximately 19%
of the leasable space), has filed for bankruptcy and
discontinued making rent payments. Distributions to investors in
that program have been suspended indefinitely beginning with the
quarter ended December 31, 2003. In addition, Cole
Southwest Opportunity Fund, LP completed development of a
Phoenix, Arizona facility in August 2001 through a joint venture
and was unable to lease the facility as a result of the severe
downturn in the telecommunications industry. On April 6,
2005, the Phoenix facility was sold for $16.3 million.
Vacant land parcels in Las Vegas, Nevada, formerly owned by a
wholly owned subsidiary of Cole Southwest Opportunity Fund, LP
were previously sold. As a result of these sale transactions,
the sponsor estimates that investors will receive approximately
81% of their original investment upon liquidation of the limited
partnership. A continued vacancy in the property owned by Santa
Fe Investors, LP could adversely affect the ultimate performance
of this prior program. See Prior Performance
Tables Table III.
89
FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of material federal income tax
considerations associated with an investment in shares of our
common stock. This summary does not address all possible tax
considerations that may be material to an investor and does not
constitute tax advice. Moreover, this summary does not deal with
all tax aspects that might be relevant to you, as a prospective
stockholder, in light of your personal circumstances, nor does
it deal with particular types of stockholders that are subject
to special treatment under the Internal Revenue Code, such as
insurance companies, tax-exempt organizations or financial
institutions or broker-dealers.
The Internal Revenue Code provisions governing the federal
income tax treatment of REITs are highly technical and complex,
and this summary is qualified in its entirety by the express
language of applicable Internal Revenue Code provisions,
treasury regulations promulgated thereunder (Treasury
Regulations) and administrative and judicial interpretations
thereof.
We urge you, as a prospective investor, to consult your own tax
advisor regarding the specific tax consequences to you of a
purchase of shares, ownership and sale of the shares and of our
election to be taxed as a REIT. These consequences include the
federal, state, local, foreign and other tax consequences of
such purchase, ownership, sale and election.
Opinion of Counsel
Morris, Manning & Martin, LLP has acted as our counsel,
has reviewed this summary and is of the opinion that it fairly
summarizes the federal income tax considerations addressed that
are material to our stockholders. It is also the opinion of our
counsel that we will qualify to be taxed as a REIT under the
Internal Revenue Code for our taxable year ended
December 31, 2005, provided that we have operated and will
continue to operate in accordance with various assumptions and
the factual representations we made to counsel concerning our
business, properties and operations. We must emphasize that all
opinions issued by Morris, Manning & Martin, LLP are
based on various assumptions and are conditioned upon the
assumptions and representations we made concerning certain
factual matters related to our business and properties.
Moreover, our qualification for taxation as a REIT depends on
our ability to meet the various qualification tests imposed
under the Internal Revenue Code discussed below, the results of
which will not be reviewed by Morris, Manning & Martin,
LLP. Accordingly, we cannot assure you that the actual results
of our operations for any one taxable year will satisfy these
requirements. See Risk Factors Federal Income
Tax Risks. The statements made in this section of the
prospectus and in the opinion of Morris, Manning &
Martin, LLP are based upon existing law and Treasury
Regulations, as currently applicable, currently published
administrative positions of the Internal Revenue Service and
judicial decisions, all of which are subject to change, either
prospectively or retroactively. We cannot assure you that any
changes will not modify the conclusions expressed in
counsels opinion. Moreover, an opinion of counsel is not
binding on the Internal Revenue Service, and we cannot assure
you that the Internal Revenue Service will not successfully
challenge our status as a REIT.
Taxation of the Company
We plan to make an election to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code,
effective for our taxable year ending December 31, 2005. We
believe that, commencing with such taxable year, we will be
organized and will operate in such a manner as to qualify for
taxation as a REIT under the Internal Revenue Code. We intend to
continue to operate in such a manner, but no assurance can be
given that we will operate in a manner so as to qualify or
remain qualified as a REIT. Pursuant to our charter, our board
of directors has the authority to make any tax elections on our
behalf that, in their sole judgment, are in our best interest.
This authority includes the ability to elect not to qualify as a
REIT for federal income tax purposes or, after qualifying as a
REIT to revoke or otherwise terminate our status as a REIT. Our
board of directors has the authority under our charter to make
these
90
elections without the necessity of obtaining the approval of our
stockholders. In addition, our board of directors has the
authority to waive any restrictions and limitations contained in
our charter that are intended to preserve our status as a REIT
during any period in which our board of directors has determined
not to pursue or preserve our status as a REIT.
Although we currently intend to operate so as to be taxed as a
REIT, changes in the law could affect that decision. For
example, in 2003, Congress passed major federal tax legislation
that illustrates the changes in tax law that could affect that
decision. One of the changes reduced the tax rate on recipients
of distributions paid by corporations to individuals to a
maximum of 15.0%. REIT distributions generally do not qualify
for this reduced rate. The tax changes did not, however, reduce
the corporate tax rates. Therefore, the maximum corporate tax
rate of 35.0% has not been affected. Even with the reduction of
the rate of tax on distributions received by individuals, the
combined maximum corporate and individual federal income tax
rate is 44.75% and with the effect of state income taxes, the
combined tax rate can exceed 50.0%. If we qualify for taxation
as a REIT, we generally will not be subject to federal corporate
income taxes on that portion of our ordinary income or capital
gain that we distribute currently to our stockholders. Thus,
REIT status generally continues to result in substantially
reduced tax rates when compared to the taxation of corporations.
Although REITs continue to receive substantially better tax
treatment than entities taxed as corporations, it is possible
that future legislation would cause a REIT to be a less
advantageous tax status for companies that invest in real
estate, and it could become more advantageous for such companies
to elect to be taxed for federal income tax purposes as a
corporation. As a result, our charter provides our board of
directors with the ability, under certain circumstances, to
elect not to qualify us as a REIT or, after we have qualified as
a REIT, to revoke or otherwise terminate our REIT election and
cause us to be taxed as a corporation, without the vote of our
stockholders. Our board of directors has fiduciary duties to us
and to all investors and could only cause such changes in our
tax treatment if it determines in good faith that such changes
are in the best interest of our stockholders.
If we qualify for taxation as a REIT, we generally will not be
subject to federal corporate income taxes on that portion of our
ordinary income or capital gain that we distribute currently to
our stockholders, because the REIT provisions of the Internal
Revenue Code generally allow a REIT to deduct distributions paid
to its stockholders. This substantially eliminates the federal
double taxation on earnings (taxation at both the
corporate level and stockholder level) that usually results from
an investment in a corporation.
Even if we qualify for taxation as a REIT, however, we will be
subject to federal income taxation as follows:
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we will be taxed at regular corporate rates on our undistributed
REIT taxable income, including undistributed net capital gains; |
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under some circumstances, we will be subject to alternative
minimum tax; |
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if we have net income from the sale or other disposition of
foreclosure property that is held primarily for sale
to customers in the ordinary course of business or other
non-qualifying income from foreclosure property, we will be
subject to tax at the highest corporate rate on that income; |
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if we have net income from prohibited transactions (which are,
in general, sales or other dispositions of property other than
foreclosure property held primarily for sale to customers in the
ordinary course of business), our income will be subject to a
100.0% tax; |
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if we fail to satisfy either of the 75.0% or 95.0% gross income
tests (discussed below) but have nonetheless maintained our
qualification as a REIT because applicable conditions have been
met, we will be subject to a 100.0% tax on an amount equal to
the greater of the amount by which we fail the 75.0% or 95.0%
test multiplied by a fraction calculated to reflect our
profitability; |
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if we fail to distribute during each year at least the sum of
(i) 85.0% of our REIT ordinary income for the year,
(ii) 95.0% of our REIT capital gain net income for such
year and (iii) any |
91
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undistributed taxable income from prior periods, we will be
subject to a 4.0% excise tax on the excess of the required
distribution over the amounts actually distributed; and |
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if we acquire any asset from a C corporation (i.e., a
corporation generally subject to corporate-level tax) in a
carryover-basis transaction and we subsequently recognize gain
on the disposition of the asset during the ten-year period
beginning on the date on which we acquired the asset, then a
portion of the gains may be subject to tax at the highest
regular corporate rate, pursuant to guidelines issued by the
Internal Revenue Service. |
Requirements for Qualification as a REIT
In order for us to qualify, and continue to qualify, as a REIT,
we must meet, and we must continue to meet, the requirements
discussed below relating to our organization, sources of income,
nature of assets, distributions of income to our stockholders
and recordkeeping.
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Organizational Requirements |
In order to qualify for taxation as a REIT under the Internal
Revenue Code, we must:
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be a domestic corporation; |
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elect to be taxed as a REIT and satisfy relevant filing and
other administrative requirements; |
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be managed by one or more trustees or directors; |
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have transferable shares; |
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not be a financial institution or an insurance company; |
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use a calendar year for federal income tax purposes; |
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have at least 100 stockholders for at least 335 days of
each taxable year of twelve months; and |
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not be closely held. |
As a Maryland corporation, we satisfy the first requirement, and
we intend to file an election to be taxed as a REIT with the
Internal Revenue Service. In addition, we are managed by a board
of directors, we have transferable shares and we do not intend
to operate as a financial institution or insurance company. We
utilize the calendar year for federal income tax purposes. We
would be treated as closely held only if five or fewer
individuals or certain tax-exempt entities own, directly or
indirectly, more than 50.0% (by value) of our shares at any time
during the last half of our taxable year. For purposes of the
closely held test, the Internal Revenue Code generally permits a
look-through for pension funds and certain other tax-exempt
entities to the beneficiaries of the entity to determine if the
REIT is closely held. We do not currently meet the requirement
of having more than 100 stockholders, and we are closely held.
However, these requirements do not apply until after the first
taxable year for which an election is made to be taxed as a
REIT. We anticipate issuing sufficient shares with sufficient
diversity of ownership pursuant to this offering to allow us to
satisfy these requirements after our 2004 taxable year. In
addition, our charter provides for restrictions regarding
transfer of shares that are intended to assist us in continuing
to satisfy these share ownership requirements. Such transfer
restrictions are described in Description of
Shares Restrictions on Ownership and Transfer.
These provisions permit us to refuse to recognize certain
transfers of shares that would tend to violate these REIT
provisions. We can offer no assurance that our refusal to
recognize a transfer will be effective. However, based on the
foregoing, we should currently satisfy the organizational
requirements, including the share ownership requirements,
required for qualifying as a REIT under the Internal Revenue
Code. Notwithstanding compliance with the share ownership
requirements outlined above, tax-exempt stockholders may be
required to treat all or a portion of their distributions from
us as unrelated business taxable income (UBTI) if tax-exempt
stockholders, in the aggregate, exceed certain ownership
thresholds set forth in the Internal Revenue Code. See
Treatment of Tax-Exempt Stockholders
below.
92
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Ownership of Interests in Partnerships and Qualified REIT
Subsidiaries |
In the case of a REIT that is a partner in a partnership,
Treasury Regulations provide that the REIT is deemed to own its
proportionate share, based on its interest in partnership
capital, of the assets of the partnership and is deemed to have
earned its allocable share of partnership income. Also, if a
REIT owns a qualified REIT subsidiary, which is defined as a
corporation wholly owned by a REIT that does not elect to be
taxed as a taxable REIT subsidiary under the Internal Revenue
Code, the REIT will be deemed to own all of the
subsidiarys assets and liabilities and it will be deemed
to be entitled to treat the income of that subsidiary as its
own. In addition, the character of the assets and gross income
of the partnership or qualified REIT subsidiary shall retain the
same character in the hands of the REIT for purposes of
satisfying the gross income tests and asset tests set forth in
the Internal Revenue Code.
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Operational Requirements Gross Income
Tests |
To maintain our qualification as a REIT, we must, on an annual
basis, satisfy the following gross income requirements:
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At least 75.0% of our gross income, excluding gross income from
prohibited transactions, for each taxable year must be derived
directly or indirectly from investments relating to real
property or mortgages on real property. Gross income includes
rents from real property and, in some circumstances,
interest, but excludes gross income from dispositions of
property held primarily for sale to customers in the ordinary
course of a trade or business. Such dispositions are referred to
as prohibited transactions. This is known as the
75.0% Income Test. |
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At least 95.0% of our gross income, excluding gross income from
prohibited transactions, for each taxable year must be derived
from the real property investments described above and from
distributions, interest and gains from the sale or disposition
of stock or securities or from any combination of the foregoing.
This is known as the 95.0% Income Test. |
The rents we receive, or that we are deemed to receive, qualify
as rents from real property for purposes of
satisfying the gross income requirements for a REIT only if the
following conditions are met:
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the amount of rent received from a tenant generally must not be
based in whole or in part on the income or profits of any
person; however, an amount received or accrued generally will
not be excluded from the term rents from real
property solely by reason of being based on a fixed
percentage or percentages of gross receipts or sales; |
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rents received from a tenant will not qualify as rents
from real property if an owner of 10.0% or more of the
REIT directly or constructively owns 10.0% or more of the tenant
or a subtenant of the tenant (in which case only rent
attributable to the subtenant is disqualified); |
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if rent attributable to personal property leased in connection
with a lease of real property is greater than 15.0% of the total
rent received under the lease, then the portion of rent
attributable to the personal property will not qualify as
rents from real property; and |
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the REIT must not operate or manage the property or furnish or
render services to tenants, other than through an
independent contractor who is adequately compensated
and from whom the REIT does not derive any income. However, a
REIT may provide services with respect to its properties, and
the income derived therefrom will qualify as rents from
real property, if the services are usually or
customarily rendered in connection with the rental of
space only and are not otherwise considered rendered to
the occupant. Even if the services with respect to a
property are impermissible tenant services, the income derived
therefrom will qualify as rents from real property
if such income does not exceed 1.0% of all amounts received or
accrued with respect to that property. |
We will be paid interest on the mortgage loans that we make or
acquire. All interest qualifies under the 95.0% gross income
test. If a mortgage loan is secured exclusively by real
property, all of such interest will also qualify for the 75.0%
income test. If both real property and other property secure the
mortgage
93
loan, all of the interest on such mortgage loan will also
qualify for the 75.0% gross income test if the amount of the
loan did not exceed the fair market value of the real property
at the time of the loan commitment.
If we acquire ownership of property by reason of the default of
a borrower on a loan or possession of property by reason of a
tenant default, if the property qualifies and we elect to treat
it as foreclosure property, the income from the property will
qualify under the 75.0% Income Test and the 95.0% Income Test
notwithstanding its failure to satisfy these requirements for
three years, or if extended for good cause, up to a total of six
years. In that event, we must satisfy a number of complex rules,
one of which is a requirement that we operate the property
through an independent contractor. We will be subject to tax on
that portion of our net income from foreclosure property that
does not otherwise qualify under the 75.0% Income Test.
Prior to the making of investments in properties, we may satisfy
the 75.0% Income Test and the 95.0% Income Test by investing in
liquid assets such as government securities or certificates of
deposit, but earnings from those types of assets are qualifying
income under the 75.0% Income Test only for one year from the
receipt of proceeds. Accordingly, to the extent that offering
proceeds have not been invested in properties prior to the
expiration of this one-year period, in order to satisfy the
75.0% Income Test, we may invest the offering proceeds in less
liquid investments such as mortgage-backed securities, maturing
mortgage loans purchased from mortgage lenders or shares in
other REITs. We expect to receive proceeds from the offering in
a series of closings and to trace those proceeds for purposes of
determining the one-year period for new capital
investments. No rulings or regulations have been issued
under the provisions of the Internal Revenue Code governing
new capital investments, however, so there can be no
assurance that the Internal Revenue Service will agree with this
method of calculation.
Except for amounts received with respect to certain investments
of cash reserves, we anticipate that substantially all of our
gross income will be derived from sources that will allow us to
satisfy the income tests described above. We can give no
assurance in this regard, however. Notwithstanding our failure
to satisfy one or both of the 75.0% Income and the 95.0% Income
Tests for any taxable year, we may still qualify as a REIT for
that year if we are eligible for relief under specific
provisions of the Internal Revenue Code. These relief provisions
generally will be available if:
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our failure to meet these tests was due to reasonable cause and
not due to willful neglect; |
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we attach a schedule of our income sources to our federal income
tax return; and |
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any incorrect information on the schedule is not due to fraud
with intent to evade tax. |
It is not possible, however, to state whether, in all
circumstances, we would be entitled to the benefit of these
relief provisions. For example, if we fail to satisfy the gross
income tests because nonqualifying income that we intentionally
earn exceeds the limits on this income, the Internal Revenue
Service could conclude that our failure to satisfy the tests was
not due to reasonable cause. As discussed above in
Taxation of the Company, even if these
relief provisions apply, a tax would be imposed with respect to
the excess net income.
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Operational Requirements Asset Tests |
At the close of each quarter of our taxable year, we also must
satisfy the following three tests relating to the nature and
diversification of our assets:
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First, at least 75.0% of the value of our total assets must be
represented by real estate assets, cash, cash items and
government securities. The term real estate assets
includes real property, mortgages on real property, shares in
other qualified REITs and a proportionate share of any real
estate assets owned by a partnership in which we are a partner
or of any qualified REIT subsidiary of ours. |
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Second, no more than 25.0% of our total assets may be
represented by securities other than those in the 75.0% asset
class. |
94
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Third, of the investments included in the 25.0% asset class, the
value of any one issuers securities that we own may not
exceed 5.0% of the value of our total assets. Additionally, we
may not own more than 10.0% of any one issuers outstanding
voting securities. |
The 5.0% test must generally be met for any quarter in which we
acquire securities. Further, if we meet the asset tests at the
close of any quarter, we will not lose our REIT status for a
failure to satisfy the asset tests at the end of a later quarter
if such failure occurs solely because of changes in asset
values. If our failure to satisfy the asset tests results from
an acquisition of securities or other property during a quarter,
we can cure the failure by disposing of a sufficient amount of
nonqualifying assets within 30 days after the close of that
quarter. We maintain, and will continue to maintain, adequate
records of the value of our assets to ensure compliance with the
asset tests and will take other action within 30 days after
the close of any quarter as may be required to cure any
noncompliance.
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Operational Requirements Annual Distribution
Requirement |
In order to be taxed as a REIT, we are required to make
distributions, other than capital gain distributions, to our
stockholders each year in the amount of at least 90.0% of our
REIT taxable income, which is computed without regard to the
distributions paid deduction and our capital gain and subject to
certain other potential adjustments.
While we must generally make distributions in the taxable year
to which they relate, we may also pay distributions in the
following taxable year if (1) they are declared before we
timely file our federal income tax return for the taxable year
in question, and if (2) they are made on or before the
first regular distribution payment date after the declaration.
Even if we satisfy the foregoing distribution requirement and,
accordingly, continue to qualify as a REIT for tax purposes, we
will still be subject to tax on the excess of our net capital
gain and our REIT taxable income, as adjusted, over the amount
of distributions made to stockholders.
In addition, if we fail to distribute during each calendar year
at least the sum of:
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85.0% of our ordinary income for that year; |
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95.0% of our capital gain net income other than the capital gain
net income that we elect to retain and pay tax on for that
year; and |
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any undistributed taxable income from prior periods, |
we will be subject to a 4.0% excise tax on the excess of the
amount of such required distributions over amounts actually
distributed during such year.
We intend to make timely distributions sufficient to satisfy
this requirement; however, it is possible that we may experience
timing differences between (1) the actual receipt of income
and payment of deductible expenses, and (2) the inclusion
of that income. It is also possible that we may be allocated a
share of net capital gain attributable to the sale of
depreciated property that exceeds our allocable share of cash
attributable to that sale.
In such circumstances, we may have less cash than is necessary
to meet our annual distribution requirement or to avoid income
or excise taxation on certain undistributed income. We may find
it necessary in such circumstances to arrange for financing or
raise funds through the issuance of additional shares in order
to meet our distribution requirements, or we may pay taxable
stock distributions to meet the distribution requirement.
If we fail to satisfy the distribution requirement for any
taxable year by reason of a later adjustment to our taxable
income made by the Internal Revenue Service, we may be able to
pay deficiency distributions in a later year and
include such distributions in our deductions for distributions
paid for the earlier year. In such event, we may be able to
avoid being taxed on amounts distributed as deficiency
distributions, but we would be required in such circumstances to
pay interest to the Internal Revenue Service based upon the
amount of any deduction taken for deficiency distributions for
the earlier year.
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As noted above, we may also elect to retain, rather than
distribute, our net long-term capital gains. The effect of such
an election would be as follows:
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we would be required to pay the tax on these gains; |
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our stockholders, while required to include their proportionate
share of the undistributed long-term capital gains in income,
would receive a credit or refund for their share of the tax paid
by us; and |
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the basis of a stockholders shares would be increased by
the difference between the designated amount included in the
stockholders long-term capital gains and the tax deemed
paid with respect to such shares. |
In computing our REIT taxable income, we will use the accrual
method of accounting and depreciate depreciable property under
the alternative depreciation system. We are required to file an
annual federal income tax return, which, like other corporate
returns, is subject to examination by the Internal Revenue
Service. Because the tax law requires us to make many judgments
regarding the proper treatment of a transaction or an item of
income or deduction, it is possible that the Internal Revenue
Service will challenge positions we take in computing our REIT
taxable income and our distributions. Issues could arise, for
example, with respect to the allocation of the purchase price of
properties between depreciable or amortizable assets and
non-depreciable or non-amortizable assets such as land and the
current deductibility of fees paid to Cole Advisors or its
affiliates. Were the Internal Revenue Service successfully to
challenge our characterization of a transaction or determination
of our REIT taxable income, we could be found to have failed to
satisfy a requirement for qualification as a REIT. If, as a
result of a challenge, we are determined to have failed to
satisfy the distribution requirements for a taxable year, we
would be disqualified as a REIT unless we were permitted to pay
a deficiency distribution to our stockholders and pay interest
thereon to the Internal Revenue Service, as provided by the
Internal Revenue Code. A deficiency distribution cannot be used
to satisfy the distribution requirement, however, if the failure
to meet the requirement is not due to a later adjustment to our
income by the Internal Revenue Service.
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Operational Requirements Recordkeeping |
In order to continue to qualify as a REIT, we must maintain
records as specified in applicable Treasury Regulations.
Further, we must request, on an annual basis, information
designed to disclose the ownership of our outstanding shares. We
intend to comply with such requirements.
Failure to Qualify as a REIT
If we fail to qualify as a REIT for any reason in a taxable year
and applicable 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. We will
not be able to deduct distributions paid to our stockholders in
any year in which we fail to qualify as a REIT. We also will be
disqualified for the four taxable years following the year
during which qualification was lost unless we are entitled to
relief under specific statutory provisions. See Risk
Factors Federal Income Tax Risks.
Sale-Leaseback Transactions
Some of our investments may be in the form of sale-leaseback
transactions. In most instances, depending on the economic terms
of the transaction, we will be treated for federal income tax
purposes as either the owner of the property or the holder of a
debt secured by the property. We do not expect to request an
opinion of counsel concerning the status of any leases of
properties as true leases for federal income tax purposes.
The Internal Revenue Service may take the position that a
specific sale-leaseback transaction that we treat as a true
lease is not a true lease for federal income tax purposes but
is, instead, a financing arrangement or loan. We may also
structure some sale-leaseback transactions as loans. In this
event, for purposes of the asset tests and the 75.0% Income
Test, each such loan likely would be viewed as secured by real
property to the extent of the fair market value of the
underlying property. We expect that, for this
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purpose, the fair market value of the underlying property would
be determined without taking into account our lease. If a
sale-leaseback transaction were so recharacterized, we might
fail to satisfy the asset tests or the income tests and,
consequently, lose our REIT status effective with the year of
recharacterization. Alternatively, the amount of our REIT
taxable income could be recalculated, which might also cause us
to fail to meet the distribution requirement for a taxable year.
Taxation of U.S. Stockholders
In this section, the phrase U.S. stockholder
means a holder of shares that for federal income tax purposes:
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is a citizen or resident of the United States; |
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is a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any
political subdivision thereof; |
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is an estate or trust, the income of which is subject to
U.S. federal income taxation regardless of its
source; or |
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a trust, if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more
U.S. persons have the authority to control all substantial
decisions of the trust. |
For any taxable year for which we qualify for taxation as a
REIT, amounts distributed to taxable U.S. stockholders will
be taxed as described below.
Distributions to U.S. stockholders, other than capital gain
distributions discussed below, will constitute distributions up
to the amount of our current or accumulated earnings and profits
and will be taxable to the stockholders as ordinary income.
Individuals receiving qualified dividends,
distributions from domestic and certain qualifying foreign
subchapter C corporations, may be entitled to the new lower
rates on distributions (at rates applicable to long-term capital
gains, currently at a maximum rate of 15%) provided certain
holding period requirements are met. However, individuals
receiving distributions from us, a REIT, will generally not be
eligible for the new lower rates on distributions except with
respect to the portion of any distribution which
(a) represents distributions being passed through to us
from a corporation in which we own shares (but only if such
distributions would be eligible for the new lower rates on
distributions if paid by the corporation to its individual
stockholders), (b) is equal to our REIT taxable income
(taking into account the distributions paid deduction available
to us) less any taxes paid by us on these items during our
previous taxable year, or (c) are attributable to built-in
gains realized and recognized by us from disposition of
properties acquired by us in non-recognition transaction, less
any taxes paid by us on these items during our previous taxable
year. These distributions are not eligible for the distributions
received deduction generally available to corporations. To the
extent that we make a distribution in excess of our current or
accumulated earnings and profits, the distribution will be
treated first as a tax-free return of capital, reducing the tax
basis in each U.S. stockholders shares, and the
amount of each distribution in excess of a
U.S. stockholders tax basis in its shares will be
taxable as gain realized from the sale of its shares.
Distributions that we declare in October, November or December
of any year payable to a stockholder of record on a specified
date in any of these months will be treated as both paid by us
and received by the stockholder on December 31 of the year,
provided that we actually pay the distribution during January of
the following calendar year. U.S. stockholders may not
include any of our losses on their own federal income tax
returns.
We will be treated as having sufficient earnings and profits to
treat as a distribution any distribution by us up to the amount
required to be distributed in order to avoid imposition of the
4.0% excise tax discussed above. Moreover, any deficiency
dividend will be treated as an ordinary or capital gain
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distribution, as the case may be, regardless of our earnings and
profits. As a result, stockholders may be required to treat as
taxable some distributions that would otherwise result in a
tax-free return of capital.
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Capital Gain Distributions |
Distributions to U.S. stockholders that we properly
designate as capital gain distributions will be treated as
long-term capital gains, to the extent they do not exceed our
actual net capital gain, for the taxable year without regard to
the period for which the U.S. stockholder has held his or
her shares.
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Passive Activity Loss and Investment Interest
Limitations |
Our distributions and any gain you realize from a disposition of
shares will not be treated as passive activity income, and
stockholders may not be able to utilize any of their
passive losses to offset this income on their
personal tax returns. Our distributions (to the extent they do
not constitute a return of capital) will generally be treated as
investment income for purposes of the limitations on the
deduction of investment interest. Net capital gain from a
disposition of shares and capital gain distributions generally
will be included in investment income for purposes of the
investment interest deduction limitations only if, and to the
extent, you so elect, in which case any such capital gains will
be taxed as ordinary income.
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Certain Dispositions of the Shares |
In general, any gain or loss realized upon a taxable disposition
of shares by a U.S. stockholder who is not a dealer in
securities, including any disposition pursuant to our proposed
share redemption program, will be treated as long-term capital
gain or loss if the shares have been held for more than twelve
months and as short-term capital gain or loss if the shares have
been held for twelve months or less. If, however, a
U.S. stockholder has received any capital gains
distributions with respect to his shares, any loss realized upon
a taxable disposition of shares held for six months or less, to
the extent of the capital gains distributions received with
respect to his shares, will be treated as long-term capital
loss. Also, the Internal Revenue Service is authorized to issue
Treasury Regulations that would subject a portion of the capital
gain a U.S. stockholder recognizes from selling his shares
or from a capital gain distribution to a tax at a 25.0% rate, to
the extent the capital gain is attributable to depreciation
previously deducted.
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Information Reporting Requirements and Backup Withholding
for U.S. Stockholders |
Under some circumstances, U.S. stockholders may be subject
to backup withholding at a rate of 30.0% on payments made with
respect to, or cash proceeds of a sale or exchange of, our
shares. Backup withholding will apply only if the stockholder:
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fails to furnish his or her taxpayer identification number,
which, for an individual, would be his or her Social Security
Number; |
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furnishes an incorrect tax identification number; |
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is notified by the Internal Revenue Service that he or she has
failed properly to report payments of interest and distributions
or is otherwise subject to backup withholding; or |
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under some circumstances, fails to certify, under penalties of
perjury, that he or she has furnished a correct tax
identification number and that (a) he or she has not been
notified by the Internal Revenue Service that he or she is
subject to backup withholding for failure to report interest and
distribution payments or (b) he or she has been notified by
the Internal Revenue Service that he or she is no longer subject
to backup withholding. |
Backup withholding will not apply with respect to payments made
to some stockholders, such as corporations and tax-exempt
organizations. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a
payment to a U.S. stockholder will be allowed as a credit
against the U.S. stockholders U.S. federal
income tax liability and may entitle the U.S. stockholder
to a refund, provided that the required information is furnished
to the Internal Revenue Service.
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U.S. stockholders should consult their own tax advisors
regarding their qualifications for exemption from backup
withholding and the procedure for obtaining an exemption.
Treatment of Tax-Exempt Stockholders
Tax-exempt entities such as employee pension benefit trusts,
individual retirement accounts and charitable remainder trusts
generally are exempt from federal income taxation. Such entities
are subject to taxation, however, on any UBTI, as defined in the
Internal Revenue Code. Our payment of distributions to a
tax-exempt employee pension benefit trust or other domestic
tax-exempt stockholder generally will not constitute UBTI to
such stockholder unless such stockholder has borrowed to acquire
or carry its shares.
In the event that we were deemed to be predominately
held by qualified employee pension benefit trusts that
each hold more than 10.0% (in value) of our shares, such trusts
would be required to treat a certain percentage of the
distributions paid to them as UBTI. We would be deemed to be
predominately held by such trusts if either
(i) one employee pension benefit trust owns more than 25.0%
in value of our shares, or (ii) any group of such trusts,
each owning more than 10.0% in value of our shares, holds in the
aggregate more than 50.0% in value of our shares. If either of
these ownership thresholds were ever exceeded, any qualified
employee pension benefit trust holding more than 10.0% in value
of our shares would be subject to tax on that portion of our
distributions made to it which is equal to the percentage of our
income that would be UBTI if we were a qualified trust, rather
than a REIT. We will attempt to monitor the concentration of
ownership of employee pension benefit trusts in our shares, and
we do not expect our shares to be deemed to be
predominately held by qualified employee pension
benefit trusts, as defined in the Internal Revenue Code, to the
extent required to trigger the treatment of our income as to
such trusts.
For social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts and qualified group
legal services plans exempt from federal income taxation under
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the
Internal Revenue Code, respectively, income from an investment
in our shares will constitute UBTI unless the stockholder in
question is able to deduct amounts set aside or
placed in reserve for certain purposes so as to offset the UBTI
generated. Any such organization that is a prospective
stockholder should consult its own tax advisor concerning these
set aside and reserve requirements.
Special Tax Considerations for Non-U.S. Stockholders
The rules governing U.S. income taxation of non-resident
alien individuals, foreign corporations, foreign partnerships
and foreign trusts and estates (non-U.S. stockholders) are
complex. The following discussion is intended only as a summary
of these rules. Non-U.S. stockholders should consult with
their own tax advisors to determine the impact of federal, state
and local income tax laws on an investment in our shares,
including any reporting requirements.
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Income Effectively Connected with a U.S. Trade or
Business |
In general, non-U.S. stockholders will be subject to
regular U.S. federal income taxation with respect to their
investment in our shares if the income derived therefrom is
effectively connected with the
non-U.S. stockholders conduct of a trade or business
in the United States. A corporate non-U.S. stockholder that
receives income that is (or is treated as) effectively connected
with a U.S. trade or business also may be subject to a
branch profits tax under Section 884 of the Internal
Revenue Code, which is payable in addition to the regular
U.S. federal corporate income tax.
The following discussion will apply to
non-U.S. stockholders whose income derived from ownership
of our shares is deemed to be not effectively
connected with a U.S. trade or business.
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Distributions Not Attributable to Gain from the Sale or
Exchange of a United States Real Property Interest |
A distribution to a non-U.S. stockholder that is not
attributable to gain realized by us from the sale or exchange of
a United States real property interest within the
meaning of the Foreign Investment in Real Property Tax Act of
1980, as amended (FIRPTA), and that we do not designate as a
capital gain distribution will be treated as an ordinary income
distribution to the extent that it is made out of current or
accumulated earnings and profits. Generally, any ordinary income
distribution will be subject to a U.S. federal income tax
equal to 30.0% of the gross amount of the distribution unless
this tax is reduced by the provisions of an applicable tax
treaty. Any such distribution in excess of our earnings and
profits will be treated first as a return of capital that will
reduce each non-U.S. stockholders basis in its shares
(but not below zero) and then as gain from the disposition of
those shares, the tax treatment of which is described under the
rules discussed below with respect to dispositions of shares.
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Distributions Attributable to Gain from the Sale or
Exchange of a United States Real Property Interest |
Distributions to a non-U.S. stockholder that are
attributable to gain from the sale or exchange of a United
States real property interest will be taxed to a
non-U.S. stockholder under Internal Revenue Code provisions
enacted by FIRPTA. Under FIRPTA, such distributions are taxed to
a non-U.S. stockholder as if the distributions were gains
effectively connected with a U.S. trade or
business. Accordingly, a non-U.S. stockholder will be taxed
at the normal capital gain rates applicable to a
U.S. stockholder (subject to any applicable alternative
minimum tax and a special alternative minimum tax in the case of
non-resident alien individuals). Distributions subject to FIRPTA
also may be subject to a 30.0% branch profits tax when made to a
corporate non-U.S. stockholder that is not entitled to a
treaty exemption.
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Withholding Obligations With Respect to Distributions to
Non-U.S. Stockholders |
Although tax treaties may reduce our withholding obligations,
based on current law, we will generally be required to withhold
from distributions to non-U.S. stockholders, and remit to
the Internal Revenue Service:
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35.0% of designated capital gain distributions or, if greater,
35.0% of the amount of any distributions that could be
designated as capital gain distributions; and |
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30.0% of ordinary income distributions (i.e.,
distributions paid out of our earnings and profits). |
In addition, if we designate prior distributions as capital gain
distributions, subsequent distributions, up to the amount of the
prior distributions, will be treated as capital gain
distributions for purposes of withholding. A distribution in
excess of our earnings and profits will be subject to 30.0%
withholding if at the time of the distribution it cannot be
determined whether the distribution will be in an amount in
excess of our current or accumulated earnings and profits. If
the amount of tax we withhold with respect to a distribution to
a non-U.S. stockholder exceeds the stockholders
U.S. tax liability with respect to that distribution, the
non-U.S. stockholder may file a claim with the Internal
Revenue Service for a refund of the excess.
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Sale of Our Shares by a Non-U.S. Stockholder |
A sale of our shares by a non-U.S. stockholder will
generally not be subject to U.S. federal income taxation
unless our shares constitute a United States real property
interest. Our shares will not constitute a United States real
property interest if we are a domestically controlled
REIT. A domestically controlled REIT is a REIT
that at all times during a specified testing period has less
than 50.0% in value of its shares held directly or indirectly by
non-U.S. stockholders. We currently anticipate that we will
be a domestically controlled REIT. Therefore, sales of our
shares should not be subject to taxation under FIRPTA. However,
we do expect to sell our shares to non-U.S. stockholders
and we cannot assure you that we will continue to be a
domestically controlled REIT. If we were not a domestically
controlled REIT, whether a non-U.S. stockholders sale
of our shares would be subject to tax under FIRPTA as a
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sale of a United States real property interest would depend on
whether our shares were regularly traded on an
established securities market and on the size of the selling
stockholders interest in us. Our shares currently are not
regularly traded on an established securities market.
If the gain on the sale of shares were subject to taxation under
FIRPTA, a non-U.S. stockholder would be subject to the same
treatment as a U.S. stockholder with respect to the gain,
subject to any applicable alternative minimum tax and a special
alternative minimum tax in the case of non-resident alien
individuals. In addition, distributions that are treated as gain
from the disposition of shares and are subject to tax under
FIRPTA also may be subject to a 30.0% branch profits tax when
made to a corporate non-U.S. stockholder that is not
entitled to a treaty exemption. Under FIRPTA, the purchaser of
our shares may be required to withhold 10.0% of the purchase
price and remit this amount to the Internal Revenue Service.
Even if not subject to FIRPTA, capital gains will be taxable to
a non-U.S. stockholder if the non-U.S. stockholder is
a non-resident alien individual who is present in the United
States for 183 days or more during the taxable year and
some other conditions apply, in which case the non-resident
alien individual will be subject to a 30.0% tax on his or her
U.S. source capital gains.
Recently promulgated Treasury Regulations may alter the
procedures for claiming the benefits of an income tax treaty.
Our non-U.S. stockholders should consult their tax advisors
concerning the effect, if any, of these Treasury Regulations on
an investment in our shares.
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Information Reporting Requirements and Backup Withholding
for Non-U.S. Stockholders |
Additional issues may arise for information reporting and backup
withholding for non-U.S. stockholders.
Non-U.S. stockholders should consult their tax advisors
with regard to U.S. information reporting and backup
withholding requirements under the Internal Revenue Code.
Statement of Stock Ownership
We are required to demand annual written statements from the
record holders of designated percentages of our shares
disclosing the actual owners of the shares. Any record
stockholder who, upon our request, does not provide us with
required information concerning actual ownership of the shares
is required to include specified information relating to his or
her shares in his or her federal income tax return. We also must
maintain, within the Internal Revenue District in which we are
required to file, our federal income tax return, permanent
records showing the information we have received about the
actual ownership of shares and a list of those persons failing
or refusing to comply with our demand.
State and Local Taxation
We and any operating subsidiaries that we may form may be
subject to state and local tax in states and localities in which
they or we do business or own property. The tax treatment of us,
Cole OP II, any operating subsidiaries we may form and the
holders of our shares in local jurisdictions may differ from the
federal income tax treatment described above.
Tax Aspects of Our Operating Partnership
The following discussion summarizes certain federal income tax
considerations applicable to our investment in Cole OP II,
our operating partnership. The discussion does not cover state
or local tax laws or any federal tax laws other than income tax
laws.
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Classification as a Partnership |
We will be entitled to include in our income a distributive
share of Cole OP IIs income and to deduct our
distributive share of Cole OP IIs losses only if Cole
OP II is classified for federal income tax purposes as a
partnership, rather than as an association taxable as a
corporation. Under applicable Treasury Regulations known as
Check-the-Box-Regulations, an unincorporated entity with at
least two members
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may elect to be classified either as an association taxable as a
corporation or as a partnership. If such an entity fails to make
an election, it generally will be treated as a partnership for
federal income tax purposes. Cole OP II intends to be
classified as a partnership for federal income tax purposes and
will not elect to be treated as an association taxable as a
corporation under the Check-the-Box-Regulations.
Even though Cole OP II will be treated as a partnership for
federal income tax purposes, it may be taxed as a corporation if
it is deemed to be a publicly traded partnership. A
publicly traded partnership is a partnership whose interests are
traded on an established securities market or are readily
tradable on a secondary market, or the substantial equivalent
thereof. However, even if the foregoing requirements are met, a
publicly traded partnership will not be treated as a corporation
for federal income tax purposes if at least 90.0% of such
partnerships gross income for a taxable year consists of
qualifying income under Section 7704(d) of the
Internal Revenue Code. Qualifying income generally includes any
income that is qualifying income for purposes of the 95.0%
Income Test applicable to REITs (90.0% Passive-Type Income
Exception). See Requirements for Qualification
as a REIT Operational Requirements Gross
Income Tests above.
Under applicable Treasury Regulations known as the PTP
Regulations, limited safe harbors from the definition of a
publicly traded partnership are provided. Pursuant to one of
those safe harbors (the Private Placement Exclusion), interests
in a partnership will not be treated as readily tradable on a
secondary market or the substantial equivalent thereof if
(i) all interests in the partnership were issued in a
transaction (or transactions) that was not required to be
registered under the Securities Act, and (ii) the
partnership does not have more than 100 partners at any time
during the partnerships taxable year. In determining the
number of partners in a partnership, a person owning an interest
in a flow-through entity, such as a partnership, grantor trust
or S corporation, that owns an interest in the partnership
is treated as a partner in such partnership only if
(a) substantially all of the value of the owners
interest in the flow-through is attributable to the flow-through
entitys interest, direct or indirect, in the partnership
and (b) a principal purpose of the use of the flow-through
entity is to permit the partnership to satisfy the 100 partner
limitation. Cole OP II qualifies for the Private Placement
Exclusion. Moreover, even if Cole OP II were considered a
publicly traded partnership under the PTP Regulations because it
is deemed to have more than 100 partners, we believe Cole
OP II should not be treated as a corporation because it is
eligible for the 90.0% Passive-Type Income Exception described
above.
We have not requested, and do not intend to request, a ruling
from the Internal Revenue Service that Cole OP II will be
classified as a partnership for federal income tax purposes.
Morris, Manning & Martin, LLP is of the opinion,
however, that based on certain factual assumptions and
representations, Cole OP II will be treated for federal
income tax purposes as a partnership and not as an association
taxable as a corporation, or as a publicly traded partnership.
Unlike a tax ruling, however, an opinion of counsel is not
binding upon the Internal Revenue Service, and we can offer no
assurance that the Internal Revenue Service will not challenge
the status of Cole OP II as a partnership for federal
income tax purposes. If such challenge were sustained by a
court, Cole OP II would be treated as a corporation for
federal income tax purposes, as described below. In addition,
the opinion of Morris, Manning & Martin, LLP is based
on existing law, which is to a great extent the result of
administrative and judicial interpretation. No assurance can be
given that administrative or judicial changes would not modify
the conclusions expressed in the opinion.
If for any reason Cole OP II were taxable as a corporation,
rather than a partnership, for federal income tax purposes, we
would not be able to qualify as a REIT. See
Requirements for Qualification as a
REIT Operational Requirements Gross
Income Tests and Operational
Requirements Asset Tests above. In addition,
any change in Cole OP IIs status for tax purposes
might be treated as a taxable event, in which case we might
incur a tax liability without any related cash distribution.
Further, items of income and deduction of Cole OP II would
not pass through to its partners, and its partners would be
treated as stockholders for tax purposes. Consequently, Cole
OP II would be required to pay income tax at corporate tax
rates on its net income, and distributions to its partners would
not be deductible in computing Cole OP IIs taxable
income.
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Income Taxation of the Operating Partnership and Its
Partners |
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Partners, Not a Partnership, Subject to Tax |
A partnership is not a taxable entity for federal income tax
purposes. As a partner in Cole OP II, we will be required
to take into account our allocable share of Cole
OP IIs income, gains, losses, deductions and credits
for any taxable year of Cole OP II ending within or with
our taxable year, without regard to whether we have received or
will receive any distribution from Cole OP II.
Although a partnership agreement generally determines the
allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under Section 704(b)
of the Internal Revenue Code if they do not comply with the
provisions of Section 704(b) of the Internal Revenue Code
and the Treasury Regulations promulgated thereunder. If an
allocation is not recognized for federal income tax purposes,
the item subject to the allocation will be reallocated in
accordance with the partners interests in the partnership,
which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the
partners with respect to such item. Cole OP IIs
allocations of taxable income and loss are intended to comply
with the requirements of Section 704(b) of the Internal
Revenue Code and the Treasury Regulations promulgated thereunder.
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Tax Allocations With Respect to Contributed Properties |
Pursuant to Section 704(c) of the Internal Revenue Code,
income, gain, loss and deductions attributable to appreciated or
depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated
for federal income tax purposes in a manner such that the
contributor is charged with, or benefits from, the unrealized
gain or unrealized loss associated with the property at the time
of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the
fair market value of the contributed property at the time of
contribution and the adjusted tax basis of such property at the
time of contribution. Under applicable Treasury Regulations,
partnerships are required to use a reasonable method
for allocating items subject to Section 704(c) of the
Internal Revenue Code, and several reasonable allocation methods
are described therein.
Under the partnership agreement for Cole OP II,
depreciation or amortization deductions of Cole OP II
generally will be allocated among the partners in accordance
with their respective interests in Cole OP II, except to
the extent that Cole OP II is required under
Section 704(c) of the Internal Revenue Code to use a method
for allocating depreciation deductions attributable to its
properties that results in us receiving a disproportionately
large share of such deductions. We may possibly (1) be
allocated lower amounts of depreciation deductions for tax
purposes with respect to contributed properties than would be
allocated to us if each such property were to have a tax basis
equal to its fair market value at the time of contribution, and
(2) be allocated taxable gain in the event of a sale of
such contributed properties in excess of the economic profit
allocated to us as a result of such sale. These allocations may
cause us to recognize taxable income in excess of cash proceeds
received by us, which might adversely affect our ability to
comply with the REIT distribution requirements, although we do
not anticipate that this event will occur. The foregoing
principles also will affect the calculation of our earnings and
profits for purposes of determining which portion of our
distributions is taxable as a distribution. The allocations
described in this paragraph may result in a higher portion of
our distributions being taxed as a distribution if we acquire
properties in exchange for units of the Cole OP II than
would have occurred had we purchased such properties for cash.
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Basis in Operating Partnership Interest |
The adjusted tax basis of our partnership interest in Cole
OP II generally is equal to (1) the amount of cash and
the basis of any other property contributed to Cole OP II
by us, (2) increased by (a) our allocable share of
Cole OP IIs income and (b) our allocable share
of indebtedness of Cole OP II, and
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(3) reduced, but not below zero, by (a) our allocable
share of Cole OP IIs loss and (b) the amount of
cash distributed to us, including constructive cash
distributions resulting from a reduction in our share of
indebtedness of Cole OP II.
If the allocation of our distributive share of Cole
OP IIs loss would reduce the adjusted tax basis of
our partnership interest in Cole OP II below zero, the
recognition of such loss will be deferred until such time as the
recognition of such loss would not reduce our adjusted tax basis
below zero. If a distribution from Cole OP II or a
reduction in our share of Cole OP IIs liabilities
(which is treated as a constructive distribution for tax
purposes) would reduce our adjusted tax basis below zero, any
such distribution, including a constructive distribution, would
constitute taxable income to us. The gain realized by us upon
the receipt of any such distribution or constructive
distribution would normally be characterized as capital gain,
and if our partnership interest in Cole OP II has been held
for longer than the long-term capital gain holding period
(currently one year), the distribution would constitute
long-term capital gain.
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Depreciation Deductions Available to the Operating
Partnership |
Cole OP II will use a portion of contributions made by us
from offering proceeds to acquire interests in properties. To
the extent that Cole OP II acquires properties for cash,
Cole OP IIs initial basis in such properties for
federal income tax purposes generally will be equal to the
purchase price paid by Cole OP II. Cole OP II plans to
depreciate each such depreciable property for federal income tax
purposes under the alternative depreciation system of
depreciation. Under this system, Cole OP II generally will
depreciate such buildings and improvements over a 40-year
recovery period using a straight-line method and a mid-month
convention and will depreciate furnishings and equipment over a
twelve-year recovery period. To the extent that Cole OP II
acquires properties in exchange for units of Cole OP II,
Cole OP IIs initial basis in each such property for
federal income tax purposes should be the same as the
transferors basis in that property on the date of
acquisition by Cole OP II. Although the law is not entirely
clear, Cole OP II generally intends to depreciate such
depreciable property for federal income tax purposes over the
same remaining useful lives and under the same methods used by
the transferors.
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Sale of the Operating Partnerships Property |
Generally, any gain realized by Cole OP II on the sale of
property held for more than one year will be long-term capital
gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture. Any gain recognized by
Cole OP II upon the disposition of a property acquired by
Cole OP II for cash will be allocated among the partners in
accordance with their respective percentage interests in Cole
OP II.
Our share of any gain realized by Cole OP II on the sale of
any property held by Cole OP II as inventory or other
property held primarily for sale to customers in the ordinary
course of Cole OP IIs trade or business will be
treated as income from a prohibited transaction that is subject
to a 100.0% penalty tax. Such prohibited transaction income also
may have an adverse effect upon our ability to satisfy the
income tests for maintaining our REIT status. See
Requirements for Qualification as a
REIT Operational Requirements Gross
Income Tests above. We, however, do not currently intend
to acquire or hold or allow Cole OP II to acquire or hold
any property that represents inventory or other property held
primarily for sale to customers in the ordinary course of our or
Cole OP IIs trade or business.
Each of the properties (Tenant-in-Common Program Properties)
that are the subject of the Tenant-in-Common Program will
initially be purchased by a single member limited liability
company or similar entity, referred to in this prospectus as a
Cole Exchange Entity. Each Cole Exchange Entity will initially
be owned by our affiliate, Cole Capital Partners or its
affiliate. Cole Capital Partners will then market co-tenancy
interests in these properties to those persons who wish to
re-invest proceeds arising from dispositions of real estate
assets owned by the Tenant-in-Common Participants. The
Tenant-in-Common Participants will be able to defer the
recognition of taxable gain arising from the sale of their
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real estate assets by investing proceeds into the co-tenancy
interests that qualify for purposes of Section 1031 of the
Internal Revenue Code as replacement real estate assets. We
anticipate that the Cole Exchange Entity will obtain a legal
opinion in connection with each Tenant-in-Common Program to the
effect that the program will qualify as a like-kind exchange
under Section 1031 of the Internal Revenue Code. However,
no assurance can be given that the Internal Revenue Service will
not take a position contrary to such an opinion.
As Cole Capital Partners successfully markets co-tenancy
interests in the properties, these will be sold to the
Tenant-in-Common Participants. Cole Capital Partners will
recognize gain or loss arising from such sales measured by the
difference between the sum of its cost basis and costs of
closing and the price at which it sells such interests to the
Tenant-in-Common Participants. Cole Capital Partners will be
responsible for reporting such income to the extent of any net
gains and will be liable for any resulting tax. This will have
no impact on our tax liability.
If Cole OP II purchases interests in the Tenant-in-Common
Program Properties, the tax treatment will be the same as it
would with respect to other acquisitions of real property. Cole
OP II will become the owner of an interest in real estate,
it will have a basis in the real estate equal to its cost, and
its holding period for such real estate will begin on the day of
the acquisition. Upon subsequent sale of such interest, it will
recognize gain or loss in the same fashion it would with any
other real estate investments. Any fees that a Cole Exchange
Entity pays to Cole OP II for participating in a
Tenant-in-Common Program will be taxable as ordinary income to
Cole OP II.
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INVESTMENT BY TAX-EXEMPT ENTITIES AND ERISA CONSIDERATIONS
General
The following is a summary of some non-tax considerations
associated with an investment in our shares by tax-qualified
pension, stock bonus or profit-sharing plans, employee benefit
plans described in Section 3(3) of ERISA, annuities
described in Section 403(a) or (b) of the Internal
Revenue Code, an individual retirement account or annuity
described in Sections 408 or 408A of the Internal Revenue
Code, an Archer MSA described in Section 220(d) of the
Internal Revenue Code, a health savings account described in
Section 223(d) of the Internal Revenue Code, or a Coverdell
education savings account described in Section 530 of the
Internal Revenue Code, which are referred to as Plans and IRAs,
as applicable. This summary is based on provisions of ERISA and
the Internal Revenue Code, including amendments thereto through
the date of this prospectus, and relevant regulations and
opinions issued by the Department of Labor and the Internal
Revenue Service through the date of this prospectus. We cannot
assure you that adverse tax decisions or legislative, regulatory
or administrative changes that would significantly modify the
statements expressed herein will not occur. Any such changes may
or may not apply to transactions entered into prior to the date
of their enactment.
Our management has attempted to structure us in such a manner
that we will be an attractive investment vehicle for Plans and
IRAs. However, in considering an investment in our shares, those
involved with making such an investment decision should consider
applicable provisions of the Internal Revenue Code and ERISA.
While each of the ERISA and Internal Revenue Code issues
discussed below may not apply to all Plans and IRAs, individuals
involved with making investment decisions with respect to Plans
and IRAs should carefully review the rules and exceptions
described below, and determine their applicability to their
situation.
In general, individuals making investment decisions with respect
to Plans and IRAs should, at a minimum, consider:
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whether the investment is in accordance with the documents and
instruments governing such Plan or IRA; |
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whether the investment satisfies the prudence and
diversification and other fiduciary requirements of ERISA, if
applicable; |
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whether the investment will result in UBTI to the Plan or IRA,
see Federal Income Tax Considerations
Treatment of Tax-Exempt Stockholders; |
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whether there is sufficient liquidity for the Plan or IRA,
considering the minimum distribution requirements under the
Internal Revenue Code and the liquidity needs of such Plan or
IRA, after taking this investment into account; |
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the need to value the assets of the Plan or IRA
annually; and |
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whether the investment would constitute or give rise to a
prohibited transaction under ERISA or the Internal Revenue Code,
if applicable. |
Additionally, individuals making investment decisions with
respect to Plans and IRAs must remember that ERISA requires that
the assets of an employee benefit plan must generally be held in
trust, and that the trustee, or a duly authorized named
fiduciary or investment manager, must have authority and
discretion to manage and control the assets of an employee
benefit plan.
Minimum Distribution Requirements Plan
Liquidity
Potential Plan or IRA investors who intend to purchase our
shares should consider the limited liquidity of an investment in
our shares as it relates to the minimum distribution
requirements under the Internal Revenue Code, if applicable. If
the shares are held in an IRA or Plan and, before we sell our
properties, mandatory distributions are required to be made to
the participant or beneficiary of such IRA
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or Plan, pursuant to the Internal Revenue Code, then this would
require that a distribution of the shares be made in kind to
such participant or beneficiary, which may not be permissible
under the terms and provisions of such IRA or Plan. Even if
permissible, a distribution of shares in kind must be included
in the taxable income of the recipient for the year in which the
shares are received at the then current fair market value of the
shares, even though there would be no corresponding cash
distribution with which to pay the income tax liability arising
because of the distribution of shares. See Risk
Factors Federal Income Tax Risks. The fair
market value of any such distribution-in-kind can be only an
estimated value per share because no public market for our
shares exists or is likely to develop. See Annual
Valuation Requirement below. Further, there can be no
assurance that such estimated value could actually be realized
by a stockholder because estimates do not necessarily indicate
the price at which our shares could be sold. Also, for
distributions subject to mandatory income tax withholding under
Section 3405 or other tax withholding provisions of the
Internal Revenue Code, the trustee of a Plan may have an
obligation, even in situations involving in-kind distributions
of shares, to liquidate a portion of the in-kind shares
distributed in order to satisfy such withholding obligations,
although there might be no market for such shares. There may
also be similar state and/or local tax withholding or other tax
obligations that should be considered.
Annual Valuation Requirement
Fiduciaries of Plans are required to determine the fair market
value of the assets of such Plans on at least an annual basis.
If the fair market value of any particular asset is not readily
available, the fiduciary is required to make a good faith
determination of that assets value. Also, a trustee or
custodian of an IRA must provide an IRA participant and the
Internal Revenue Service with a statement of the value of the
IRA each year. However, currently, neither the Internal Revenue
Service nor the Department of Labor has promulgated regulations
specifying how fair market value should be
determined.
Unless and until our shares are listed on a national securities
exchange or are included for quotation on The Nasdaq National
Market, it is not expected that a public market for our shares
will develop. To assist fiduciaries of Plans subject to the
annual reporting requirements of ERISA and IRA trustees or
custodians to prepare reports relating to an investment in our
shares, we intend to provide reports of our quarterly and annual
determinations of the current value of our net assets per
outstanding share to those fiduciaries (including IRA trustees
and custodians) who identify themselves to us and request the
reports. Until two years after any subsequent offering of our
shares, we intend to use the offering price of shares in our
most recent offering as the per share net asset value (unless we
have made a special distribution to stockholders of net sales
proceeds from the sale of one or more properties prior to the
date of determination of net asset value, in which case we will
use the offering price less the per share amount of the special
distribution). Beginning two years after the last offering of
our shares, our board of directors will determine the value of
the properties and our other assets based on such information as
our board determines appropriate, which may include independent
valuations of our properties or of our enterprise as a whole.
We anticipate that we will provide annual reports of our
determination of value (1) to IRA trustees and custodians
not later than January 15 of each year, and (2) to
other Plan fiduciaries within 75 days after the end of each
calendar year. Each determination may be based upon valuation
information available as of October 31 of the preceding
year, updated, however, for any material changes occurring
between October 31 and December 31.
There can be no assurance, however, with respect to any estimate
of value that we prepare, that:
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the estimated value per share would actually be realized by our
stockholders upon liquidation, because these estimates do not
necessarily indicate the price at which properties can be sold; |
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our stockholders would be able to realize estimated net asset
values if they were to attempt to sell their shares, because no
public market for our shares exists or is likely to
develop; or |
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that the value, or method used to establish value, would comply
with ERISA or Internal Revenue Code requirements described above. |
Fiduciary Obligations Prohibited Transactions
Any person identified as a fiduciary with respect to
a Plan incurs duties and obligations under ERISA as discussed
herein. For purposes of ERISA, any person who exercises any
authority or control with respect to the management or
disposition of the assets of a Plan is considered to be a
fiduciary of such Plan. Further, many transactions between Plans
or IRAs and parties-in-interest or
disqualified persons are prohibited by ERISA and/or
the Internal Revenue Code. ERISA also requires generally that
the assets of Plans be held in trust and that the trustee, or a
duly authorized investment manager, have exclusive authority and
discretion to manage and control the assets of the Plan.
In the event that our properties and other assets were deemed to
be assets of a Plan or IRA, referred to herein as Plan
Assets, our directors would, and employees of our
affiliates might be deemed fiduciaries of any Plans or IRAs
investing as stockholders. If this were to occur, certain
contemplated transactions between us and our directors and
employees of our affiliates could be deemed to be
prohibited transactions. Additionally, ERISAs
fiduciary standards applicable to investments by Plans would
extend to our directors and possibly employees of our affiliates
as Plan fiduciaries with respect to investments made by us, and
the requirement that Plan Assets be held in trust could be
deemed to be violated.
Plan Assets Definition
Neither ERISA nor the Internal Revenue Code contains a
definition of Plan Assets. A Department of Labor regulation,
referred to in this discussion as the Plan Asset Regulation,
provides guidelines as to whether, and under what circumstances,
the underlying assets of an entity will be deemed to constitute
Plan Assets. Under the Plan Asset Regulation, the assets of an
entity in which a Plan or IRA makes an equity investment will
generally be deemed to be assets of such Plan or IRA unless the
entity satisfies one of the exceptions to this general rule.
Generally, the exceptions require that the investment in the
entity be one of the following:
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in securities issued by an investment company registered under
the Investment Company Act; |
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in publicly offered securities, defined generally as
interests that are freely transferable, widely
held and registered with the Securities and Exchange
Commission; |
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in an operating company, which includes
venture capital operating companies and real
estate operating companies; or |
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in which equity participation by benefit plan
investors is not significant. |
Plan Assets Registered Investment Company
Exception
The shares we are offering will not be issued by a registered
investment company. Therefore we do not anticipate that we will
qualify for the exception for investments issued by a registered
investment company.
Publicly Offered Securities Exemption
As noted above, if a Plan acquires publicly offered
securities, the assets of the issuer of the securities
will not be deemed to be Plan Assets under the Plan Asset
Regulation. The definition of publicly offered securities
requires that such securities be widely held,
freely transferable and satisfy registration
requirements under federal securities laws.
Under the Plan Asset Regulation, a class of securities will meet
the registration requirements under federal securities laws if
they are (i) part of a class of securities registered under
section 12(b) or 12(g) of the Exchange Act, or
(ii) part of an offering of securities to the public
pursuant to an effective
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registration statement under the Securities Act and the class of
securities of which such security is a part is registered under
the Exchange Act within 120 days (or such later time as may
be allowed by the Securities and Exchange Commission) after the
end of the fiscal year of the issuer during which the offering
of such securities to the public occurred. We anticipate that we
will meet the registration requirements under the Plan Asset
Regulation. Also under the Plan Asset Regulation, a class of
securities will be widely held if it is held by 100
or more persons independent of the issuer. We anticipate that
this requirement will be easily met. Although our shares are
intended to satisfy the registration requirements under this
definition, and we expect that our securities will be
widely-held, the freely transferable
requirement must also be satisfied in order for us to qualify
for the publicly offered securities exception.
The Plan Asset Regulation provides that whether a security
is freely transferable is a factual question to be
determined on the basis of all relevant facts and
circumstances. Our shares are subject to certain
restrictions on transferability typically found in REITs, and
are intended to ensure that we continue to qualify for federal
income tax treatment as a REIT. The Plan Asset Regulation
provides, however, that where the minimum investment in a public
offering of securities is $10,000 or less, the presence of a
restriction on transferability intended to prohibit transfers
that would result in a termination or reclassification of the
entity for state or federal tax purposes will not ordinarily
affect a determination that such securities are freely
transferable. The minimum investment in our shares is less
than $10,000. Thus, the restrictions imposed in order to
maintain our status as a REIT should not prevent the shares from
being deemed freely transferable. Therefore, we
anticipate that we will meet the publicly offered
securities exception, although there are no assurances
that we will qualify for this exception.
Plan Assets Operating Company Exception
If we are deemed not to qualify for the publicly offered
securities exemption, the Plan Asset Regulation also
provides an exception with respect to securities issued by an
operating company, which includes venture
capital operating companies and real estate
operating companies. To constitute a venture capital
operating company, 50.0% of more of the assets of the entity
must be invested in venture capital investments. A
venture capital investment is an investment in an operating
company (other than a venture capital operating company) as to
which the entity has or obtains direct management rights. To
constitute a real estate operating company, 50.0% or more of the
assets of an entity must be invested in real estate which is
managed or developed and with respect to which such entity has
the right to substantially participate directly in the
management or development activities.
While the Plan Asset Regulation and relevant opinions issued by
the Department of Labor regarding real estate operating
companies are not entirely clear as to whether an investment in
real estate must be direct, it is common practice to
insure that an investment is made either
(i) directly into real estate,
(ii) through wholly owned subsidiaries, or
(iii) through entities in which all but a de minimis
interest is separately held by an affiliate solely to comply
with the minimum safe harbor requirements established by the
Internal Revenue Service for classification as a partnership for
federal tax purposes. We have structured ourselves, and our
operating partnership, in this manner in order to enable us to
meet the real estate operating company exception. To the extent
interests in our operating partnership are obtained by
third-party investors, it is possible that the real estate
operating company exception will cease to apply to us. However,
in such an event we believe that we are structured in a manner
which would allow us to meet the venture capital operating
company exception because our investment in our operating
partnership, an entity investing directly in real estate over
which we maintain substantially all of the control over the
management and development activities, would constitute a
venture capital investment.
Notwithstanding the foregoing, 50.0% of our, or our operating
partnerships investment, as the case may be, must be in
real estate over which we maintain the right to substantially
participate in the management and development activities. An
example in the Plan Asset Regulation indicates that if 50.0% or
more of an entitys properties are subject to long-term
leases under which substantially all management and maintenance
activities with respect to the properties are the responsibility
of the lessee, such that the entity merely assumes the risk of
ownership of income-producing real property, then the entity may
not be
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eligible for the real estate operating company
exception. By contrast, a second example in the Plan Asset
Regulation indicates that if 50.0% or more of an entitys
investments are in shopping centers in which individual stores
are leased for relatively short periods to various merchants, as
opposed to long-term leases where substantially all management
and maintenance activities are the responsibility of the lessee,
then the entity will likely qualify as a real estate operating
company. The second example further provides that the entity may
retain contractors, including affiliates, to conduct the
management of the properties so long as the entity has the
responsibility to supervise and the authority to terminate the
contractors. We intend to use contractors over which we have the
right to supervise and the authority to terminate. Due to the
uncertainty of the application of the standards set forth in the
Plan Asset Regulation, there can be no assurance as to our
ability to structure our operations, or the operations of our
operating partnership, as the case may be, to qualify for the
real estate operating company exception.
Plan Assets Not Significant Investment
Exception
The Plan Asset Regulation provides that equity participation in
an entity by benefit plan investors is significant
if at any time 25.0% or more of the value of any class of equity
interests is held by benefit plan investors. In the event we
determine that we fail to meet the publicly offered
securities exception, as a result of a failure to sell an
adequate number of shares or otherwise, and we cannot ultimately
establish that we are an operating company, we intend to
restrict ownership of each class of equity interests held by
benefit plan investors to an aggregate value of less than 25.0%
and thus qualify for the exception for investments in which
equity participation by benefit plan investors is not
significant.
Consequences of Holding Plan Assets
In the event that our underlying assets were treated by the
Department of Labor as Plan Assets, our management would be
treated as fiduciaries with respect to each Plan or IRA
stockholder, and an investment in our shares might expose the
fiduciaries of the Plan or IRA to co-fiduciary liability under
ERISA for any breach by our management of the fiduciary duties
mandated under ERISA. Further, if our assets are deemed to be
Plan Assets, an investment by a Plan or IRA in our shares might
be deemed to result in an impermissible commingling of Plan
Assets with other property.
If our management or affiliates were treated as fiduciaries with
respect to Plan or IRA stockholders, the prohibited transaction
restrictions of ERISA would apply to any transaction involving
our assets. These restrictions could, for example, require that
we avoid transactions with entities that are affiliated with our
affiliates or us or restructure our activities in order to
obtain an administrative exemption from the prohibited
transaction restrictions. Alternatively, we might have to
provide Plan or IRA stockholders with the opportunity to sell
their shares to us or we might dissolve or terminate.
Prohibited Transactions
Generally, both ERISA and the Internal Revenue Code prohibit
Plans and IRAs from engaging in certain transactions involving
Plan Assets with specified parties, such as sales or exchanges
or leasing of property, loans or other extensions of credit,
furnishing goods or services, or transfers to, or use of, Plan
Assets. The specified parties are referred to as
parties-in-interest under ERISA and as
disqualified persons under the Internal Revenue
Code. These definitions generally include both parties owning
threshold percentage interests in an investment entity and
persons providing services to the Plan or IRA, as
well as employer sponsors of the Plan or IRA, fiduciaries and
other individuals or entities affiliated with the foregoing.
A person generally is a fiduciary with respect to a Plan or IRA
for these purposes if, among other things, the person has
discretionary authority or control with respect to Plan Assets
or provides investment advice for a fee with respect to Plan
Assets. Under Department of Labor regulations, a person will be
deemed to be providing investment advice if that person renders
advice as to the advisability of investing in our shares, and
that person regularly provides investment advice to the Plan or
IRA pursuant to a mutual agreement or understanding that such
advice will serve as the primary basis for investment
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decisions, and that the advice will be individualized for the
Plan or IRA based on its particular needs. Thus, if we are
deemed to hold Plan Assets, our management could be
characterized as fiduciaries with respect to such assets, and
each would be deemed to be a party-in-interest under ERISA and a
disqualified person under the Internal Revenue Code with respect
to investing Plans and IRAs. Whether or not we are deemed to
hold Plan Assets, if we or our affiliates are affiliated with a
Plan or IRA investor, we might be a disqualified person or
party-in-interest with respect to such Plan or IRA investor,
resulting in a prohibited transaction merely upon investment by
such Plan or IRA in our shares.
Prohibited Transactions Consequences
ERISA forbids Plans from engaging in prohibited transactions.
Fiduciaries of a Plan that allow a prohibited transaction to
occur will breach their fiduciary responsibilities under ERISA,
and may be liable for any damage sustained by the Plan, as well
as civil (and criminal, if the violation was willful) penalties.
If it is determined by the Department of Labor or the Internal
Revenue Service that a prohibited transaction has occurred, any
disqualified person or party-in-interest involved with the
prohibited transaction would be required to reverse or unwind
the transaction and, for a Plan, compensate the Plan for any
loss resulting therefrom. Additionally, the Internal Revenue
Code requires that a disqualified person involved with a
prohibited transaction must pay an excise tax equal to a
percentage of the amount involved in the transaction
for each year in which the transaction remains uncorrected. The
percentage is generally 15.0%, but is increased to 100.0% if the
prohibited transaction is not corrected promptly. For IRAs, if
an IRA engages in a prohibited transaction, the tax-exempt
status of the IRA may be lost.
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DESCRIPTION OF SHARES
We were formed under the laws of the state of Maryland. The
rights of our stockholders are governed by Maryland law as well
as our charter and bylaws. The following summary of the terms of
our common stock is only a summary, and you should refer to the
Maryland General Corporation Law and our charter and bylaws for
a full description. The following summary is qualified in its
entirety by the more detailed information contained in our
charter and bylaws. Copies of our charter and bylaws are
available upon request.
Our charter authorizes us to issue up to 100,000,000 shares
of stock, of which 90,000,000 shares are designated as
common stock at $0.01 par value per share and
10,000,000 shares are designated as preferred stock at
$0.01 par value per share. As of the date of this
prospectus, 20,000 shares of our common stock are issued
and outstanding and no shares of preferred stock were issued and
outstanding. Our board of directors may amend our charter to
increase or decrease the aggregate number of our authorized
shares or the number of shares of any class or series that we
have authority to issue without any action by our stockholders.
Our charter also contains a provision permitting our board of
directors, including at least a majority of the independent
directors who do not have an interest in the transaction and
without any action by our stockholders, to classify or
reclassify any unissued common stock or preferred stock into one
or more classes or series by setting or changing the
preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions or other
distributions, qualifications, or terms or conditions of
redemption of any new class or series of stock, subject to
certain restrictions, including the express terms of any class
or series of stock outstanding at the time. We believe that the
power to classify or reclassify unissued shares of stock and
thereafter issue the classified or reclassified shares provides
us with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs that
might arise.
Our charter and bylaws contain certain provisions that could
make it more difficult to acquire control of our company by
means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of our company to negotiate
first with our board of directors. We believe that these
provisions increase the likelihood that proposals initially will
be on more attractive terms than would be the case in their
absence and facilitate negotiations that may result in
improvement of the terms of an initial offer that might involve
a premium price for our common stock or otherwise be in the best
interest of our stockholders. See Risk Factors
Risks Related to an Investment in Cole REIT II.
Common Stock
Subject to any preferential rights of any other class or series
of stock and to the provisions of our charter regarding the
restriction on the transfer of common stock, the holders of
common stock are entitled to such distributions as may be
authorized from time to time by our board of directors out of
legally available funds and declared by us and, upon our
liquidation, are entitled to receive all assets available for
distribution to our stockholders. Upon issuance for full payment
in accordance with the terms of this offering, all common stock
issued in the offering will be fully paid and non-assessable.
Holders of common stock will not have preemptive rights, which
means that they will not have an automatic option to purchase
any new shares that we issue, or preference, conversion,
exchange, sinking fund, redemption or appraisal rights. Shares
of our common stock have equal distribution, liquidation and
other rights.
Preferred Stock
Our charter authorizes our board of directors to designate and
issue one or more classes or series of preferred stock without
stockholder approval and to fix the voting rights, liquidation
preferences, distribution rates, conversion rights, redemption
rights and terms, including sinking fund provisions, and certain
other rights and preferences with respect to such preferred
stock. Because our board of directors has the power to establish
the preferences and rights of each class or series of preferred
stock, it may
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afford the holders of any series or class of preferred stock
preferences, powers, and rights senior to the rights of holders
of common stock. If we ever created and issued preferred stock
with a distribution preference over common stock, payment of any
distribution preferences of outstanding preferred stock would
reduce the amount of funds available for the payment of
distributions on the common stock. Further, holders of preferred
stock are normally entitled to receive a preference payment in
the event we liquidate, dissolve, or wind up before any payment
is made to the common stockholders, likely reducing the amount
common stockholders would otherwise receive upon such an
occurrence. In addition, under certain circumstances, the
issuance of preferred stock may delay, prevent, render more
difficult or tend to discourage the following:
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a merger, offer, or proxy contest; |
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the assumption of control by a holder of a large block of our
securities; or |
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the removal of incumbent management. |
Also, our board of directors, without stockholder approval, may
issue preferred stock with voting and conversion rights that
could adversely affect the holders of common stock.
We currently have no preferred stock issued or outstanding. Our
board of directors has no present plans to issue shares of
preferred stock, but it may do so at any time in the future
without stockholder approval.
Meetings and Special Voting Requirements
Subject to our charter restrictions on transfer of our stock,
each holder of common stock is entitled at each meeting of
stockholders to one vote per share owned by such stockholder on
all matters submitted to a vote of stockholders, including the
election of directors. There is no cumulative voting in the
election of our board of directors, which means that the holders
of a majority of shares of our outstanding common stock can
elect all of the directors then standing for election and the
holders of the remaining shares of common stock will not be able
to elect any directors.
Under Maryland law, a Maryland corporation generally cannot
dissolve, amend its charter, merge, sell all or substantially
all of its assets, engage in a share exchange or engage in
similar transactions outside the ordinary course of business,
unless approved by the affirmative vote of stockholders holding
at least two-thirds of the shares entitled to vote on the
matter. However, a Maryland corporation may provide in its
charter for approval of these matters by a lesser percentage,
but not less than a majority of all of the votes entitled to be
cast on the matter. Our charter provides for approval of these
matters by the affirmative vote of a majority of the votes
entitled to be cast.
However, under the Maryland General Corporation Law and our
charter, the following events do not require stockholder
approval:
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stock exchanges in which we are the successor; |
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mergers with or into a 90.0% or more owned subsidiary, provided
that the charter of the successor is not amended and that the
contract rights of any stock issued in the merger are identical
to those of the stock that was exchanged; |
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mergers in which we do not: |
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reclassify or change the terms of any of shares that are
outstanding immediately before the effective time of the merger; |
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amend our charter; and |
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result in the issuance of more than 20.0% of the number of
shares of any class or series of shares outstanding immediately
before the merger; and |
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transfers of less than substantially all of our assets. |
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Also, because our operating assets are held by our subsidiaries,
these subsidiaries may be able to merge or sell all or
substantially all of their assets without the approval of our
stockholders.
An annual meeting of our stockholders will be held each year, at
least 30 days after delivery of our annual report to our
stockholders. Special meetings of stockholders may be called
only upon the request of a majority of our directors, a majority
of the independent directors, the president, the chief executive
officer or upon the written request of stockholders holding at
least ten percent of our outstanding shares. Upon receipt of a
written request of stockholders holding at least ten percent of
our outstanding shares stating the purpose of the special
meeting, our secretary will provide all of our stockholders
written notice of the meeting and the purpose of such meeting.
The meeting must be held not less than 15 nor more than
60 days after the distribution of the notice of meeting.
The presence of holders of a majority of our outstanding shares,
either in person or by proxy, will constitute a quorum.
Our stockholders are entitled to receive a copy of our
stockholder list upon request. The list provided by us will
include each stockholders name, address and telephone
number, if available, and the number of shares owned by each
stockholder and will be sent within ten days of the receipt by
us of the request. A stockholder requesting a list will be
required to pay reasonable costs of postage and duplication.
Stockholders and their representatives shall also be given
access to our corporate records at reasonable times. We have the
right to request that a requesting stockholder represent to us
that the list and records will not be used to pursue commercial
interests.
If we do not list our shares of common stock on a national
securities exchange or on The Nasdaq National Market by the
tenth anniversary of the completion or termination of this
offering, our charter requires that we either (i) seek
stockholder approval of an extension or amendment of this
listing deadline, or (ii) seek stockholder approval of the
liquidation of the corporation. If we sought and did not obtain
stockholder approval of an extension or amendment to the listing
deadline, we would then be required to seek stockholder approval
of our liquidation. If we sought and failed to obtain
stockholder approval of our liquidation, our charter would not
require us to list or liquidate and we could continue to operate
as before. In such event, there will be no public market for
shares of our common stock and you may be required to hold the
shares indefinitely. If we sought and obtained stockholder
approval of our liquidation, we would begin an orderly sale of
our properties and distribute our net proceeds to you. In the
event that the listing of our stock on a national securities
exchange or on The Nasdaq National Market occurs on or before
the tenth anniversary of the commencement of this public
offering, the corporation shall continue perpetually unless
dissolved pursuant to any applicable provision of the Maryland
General Corporation Law.
Restrictions on Ownership and Transfer
In order for us to qualify as a REIT under the Internal Revenue
Code, we must meet the following criteria regarding our
stockholders ownership of our shares:
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five or fewer individuals (as defined in the Internal Revenue
Code to include certain tax exempt organizations and trusts) may
not own, directly or indirectly, more than 50.0% in value of our
outstanding shares during the last half of a taxable
year; and |
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100 or more persons must beneficially own our shares during at
least 335 days of a taxable year of twelve months or during
a proportionate part of a shorter taxable year. |
See Federal Income Tax Considerations for further
discussion of this topic. We may prohibit certain acquisitions
and transfers of shares so as to ensure our initial and
continued qualification as a REIT under the Internal Revenue
Code. However, there can be no assurance that this prohibition
will be effective. Because we believe it is essential for us to
qualify as a REIT, and, once qualified, to continue to qualify,
our charter provides (subject to certain exceptions) that no
stockholder may own, or be deemed to own by virtue of the
attribution provisions of the Internal Revenue Code, more than
9.8% in value of our outstanding shares of stock or more than
9.8% of the number or value (in either case as determined in
good faith by our board of directors) of any class or series of
our outstanding shares of common stock. The 9.8% ownership limit
must be measured in terms of the more restrictive of value or
number of shares.
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Our board of directors, in its sole discretion, may waive this
ownership limit if evidence satisfactory to our directors is
presented that such ownership will not then or in the future
jeopardize our status as a REIT. Also, these restrictions on
transferability and ownership will not apply if our directors
determine that it is no longer in our best interests to continue
to qualify as a REIT.
Additionally, our charter further prohibits the transfer or
issuance of our stock if such transfer or issuance:
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with respect to transfers only, results in our common stock
being owned by fewer than 100 persons; |
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results in our being closely held within the meaning
of Section 856(h) of the Internal Revenue Code; |
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results in our owning, directly or indirectly, more than 9.8% of
the ownership interests in any tenant or subtenant; or |
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otherwise results in our disqualification as a REIT. |
Any attempted transfer of our stock which, if effective, would
result in our stock being owned by fewer than 100 persons will
be null and void. In the event of any attempted transfer of our
stock which, if effective, would result in (i) violation of
the ownership limit discussed above, (ii) in our being
closely held under Section 856(h) of the
Internal Revenue Code, (iii) our owning (directly or
indirectly) more than 9.8% of the ownership interests in any
tenant or subtenant or (iv) our otherwise failing to
qualify as a REIT, then the number of shares causing the
violation (rounded to the nearest whole share) will be
automatically transferred to a trust for the exclusive benefit
of one or more charitable beneficiaries, and the proposed
transferee will not acquire any rights in the shares. To avoid
confusion, these shares so transferred to a beneficial trust
will be referred to in this prospectus as Excess
Securities. Excess Securities will remain issued and
outstanding shares and will be entitled to the same rights and
privileges as all other shares of the same class or series. The
trustee of the beneficial trust, as holder of the Excess
Securities, will be entitled to receive all distributions
authorized by the board of directors on such securities for the
benefit of the charitable beneficiary. Our charter further
entitles the trustee of the beneficial trust to vote all Excess
Securities.
The trustee of the beneficial trust may select a transferee to
whom the Excess Securities may be sold as long as such sale does
not violate the 9.8% ownership limit or the other restrictions
on transfer. Upon sale of the Excess Securities, the intended
transferee (the transferee of the Excess Securities whose
ownership would violate the 9.8% ownership limit or the other
restrictions on transfer) will receive from the trustee of the
beneficial trust the lesser of such sale proceeds, or the price
per share the intended transferee paid for the Excess Securities
(or, in the case of a gift or devise to the intended transferee,
the price per share equal to the market value per share on the
date of the transfer to the intended transferee). The trustee of
the beneficial trust will distribute to the charitable
beneficiary any amount the trustee receives in excess of the
amount to be paid to the intended transferee.
In addition, we have the right to purchase any Excess Securities
at the lesser of (i) the price per share paid in the
transfer that created the Excess Securities, or (ii) the
current market price, until the Excess Securities are sold by
the trustee of the beneficial trust. An intended transferee must
pay, upon demand, to the trustee of the beneficial trust (for
the benefit of the beneficial trust) the amount of any
distribution we pay to an intended transferee on Excess
Securities prior to our discovery that such Excess Securities
have been transferred in violation of the provisions of the
charter. If any legal decision, statute, rule, or regulation
deems or declares the transfer restrictions included in our
charter to be void or invalid, then we may, at our option, deem
the intended transferee of any Excess Securities to have acted
as an agent on our behalf in acquiring such Excess Securities
and to hold such Excess Securities on our behalf.
Any person who (i) acquires or attempts to acquire shares
in violation of the foregoing ownership restriction, transfers
or receives shares subject to such limitations, or would have
owned shares that resulted in a transfer to a charitable trust,
or (ii) proposes or attempts any of the transactions in
clause (i), is required to give us 15 days
written notice prior to such transaction. In both cases, such
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persons must provide to us such other information as we may
request in order to determine the effect, if any, of such
transfer on our status as a REIT. The foregoing restrictions
will continue to apply until our board of directors determines
it is no longer in our best interest to continue to qualify as a
REIT.
The ownership restriction does not apply to the underwriter in a
public offering of shares or to a person or persons so exempted
from the ownership limit by our board of directors based upon
appropriate assurances that our qualification as a REIT is not
jeopardized. Any person who owns 5.0% or more of the outstanding
shares during any taxable year will be asked to deliver a
statement or affidavit setting forth the number of shares
beneficially owned, directly or indirectly.
Distribution Policy
When we have sufficient cash flow available to pay
distributions, we intend to pay regular distributions to our
stockholders. As of the date of this prospectus, we have no real
estate investments. We currently have not identified any
probable real estate investments. We will not make real estate
investments until we identify investment opportunities and raise
sufficient capital pursuant to this offering to do so. We cannot
predict when we will begin to generate sufficient cash flow from
these investments to pay distributions as a result of such
investments; however, we expect that these will begin no later
than the third quarter after the commencement of this offering.
Because all of our operations will be performed indirectly
through Cole OP II, our operating partnership, our ability
to pay distributions depends on Cole OP IIs ability
to pay distributions to its partners, including to us. In the
event we do not have enough cash from operations to fund the
distribution, we may borrow, issue additional securities or sell
assets in order to fund the distributions or make the
distributions out of net proceeds from this offering.
Distributions will be paid to our stockholders as of the record
date selected by our board of directors. We expect to declare
and pay distributions at least quarterly. Once we have
sufficient cash flow, we may pay distributions monthly or more
frequently. We expect to regularly pay distributions unless our
results of operations, our general financial condition, general
economic conditions, or other factors inhibit us from doing so.
Distributions will be authorized at the discretion of our board
of directors, which will be directed, in substantial part, by
its obligation to cause us to comply with the REIT requirements
of the Internal Revenue Code. The funds we receive from
operations that are available for distribution may be affected
by a number of factors, including the following:
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the amount of time required for us to invest the funds received
in the offering; |
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our operating and interest expenses; |
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the ability of tenants to meet their obligations under the
leases associated with our properties; |
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the amount of distributions or dividends received by us from our
indirect real estate investments; |
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our ability to keep our properties occupied; |
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our ability to maintain or increase rental rates when renewing
or replacing current leases; |
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capital expenditures and reserves for such expenditures; |
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the issuance of additional shares; and |
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financings and refinancings. |
We must distribute to our stockholders at least 90.0% of our
taxable income each year in order to meet the requirements for
being treated as a REIT under the Internal Revenue Code. This
requirement is described in greater detail in the Federal
Income Tax Considerations Requirements For
Qualification as a REIT Operational
Requirements Annual Distribution Requirements
section of this prospectus. Our directors may authorize
distributions in excess of this percentage as they deem
appropriate. Because we may receive income from interest or
rents at various times during our fiscal year, distributions may
not reflect our income earned in that particular distribution
period, but may be made in anticipation of cash flow that we
expect to receive during a later period and may be made in
advance of actual receipt of funds
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in an attempt to make distributions relatively uniform. To allow
for such differences in timing between the receipt of income and
the payment of expenses, and the effect of required debt
payments, among other things, could require us to borrow funds
from third parties on a short-term basis, issue new securities,
or sell assets to meet the distribution requirements that are
necessary to achieve the tax benefits associated with qualifying
as a REIT. These methods of obtaining funding could affect
future distributions by increasing operating costs and
decreasing available cash. In addition, such distributions may
constitute a return of capital. See Federal Income Tax
Considerations Requirements for Qualification as a
REIT.
Stockholder Liability
The Maryland General Corporation Law provides that our
stockholders:
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are not liable personally or individually in any manner
whatsoever for any debt, act, omission or obligation incurred by
us or our board of directors; and |
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are under no obligation to us or our creditors with respect to
their shares other than the obligation to pay to us the full
amount of the consideration for which their shares were issued. |
Business Combinations
Under Maryland law, business combinations between a
Maryland corporation and an interested stockholder or an
affiliate of an interested stockholder are prohibited for five
years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business
combinations include a merger, consolidation, share exchange,
or, in circumstances specified in the statute, an asset transfer
or issuance or reclassification of equity securities. An
interested stockholder is defined as:
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any person who beneficially owns ten percent or more of the
voting power of the corporations shares; or |
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an affiliate or associate of the corporation who, at any time
within the two-year period prior to the date in question, was
the beneficial owner of ten percent or more of the voting power
of the then outstanding voting stock of the corporation. |
A person is not an interested stockholder under the statute if
the board of directors approved in advance the transaction by
which he otherwise would have become an interested stockholder.
However, in approving a transaction, the board of directors may
provide that its approval is subject to compliance, at or after
the time of approval, with any terms and conditions determined
by the board.
After the five-year prohibition, any business combination
between the Maryland corporation and an interested stockholder
generally must be recommended by the board of directors of the
corporation and approved by the affirmative vote of at least:
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80.0% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and |
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two-thirds of the votes entitled to be cast by holders of voting
stock of the corporation other than shares held by the
interested stockholder with whom or with whose affiliate the
business combination is to be effected or held by an affiliate
or associate of the interested stockholder. |
These super-majority vote requirements do not apply if the
corporations stockholders receive a minimum price, as
defined under Maryland law, for their shares in the form of cash
or other consideration in the same form as previously paid by
the interested stockholder for its shares.
The statute permits various exemptions from its provisions,
including business combinations that are exempted by the board
of directors before the time that the interested stockholder
becomes an interested stockholder. Pursuant to the statute, our
board of directors has exempted any business combination with
Cole Advisors II or any affiliate of Cole Advisors II.
Consequently, the five-year prohibition and the super-majority
vote requirements will not apply to business combinations
between us and Cole Advisors II or any
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affiliate of Cole Advisors II. As a result, Cole
Advisors II or any affiliate of Cole Advisors II may
be able to enter into business combinations with us that may not
be in the best interest of our stockholders, without compliance
with the super-majority vote requirements and the other
provisions of the statute.
The business combination statute may discourage others from
trying to acquire control of us and increase the difficulty of
consummating any offer.
Control Share Acquisitions
With some exceptions, Maryland law provides that control shares
of a Maryland corporation acquired in a control share
acquisition have no voting rights except to the extent approved
by a vote of stockholders holding two-thirds of the votes
entitled to be cast on the matter, excluding control
shares:
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owned by the acquiring person; |
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owned by our officers; and |
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owned by our employees who are also directors. |
Control shares mean voting shares which, if
aggregated with all other voting shares owned by an acquiring
person or shares for which the acquiring person can exercise or
direct the exercise of voting power, would entitle the acquiring
person to exercise voting power in electing directors within one
of the following ranges of voting power:
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one-tenth or more but less than one-third; |
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one-third or more but less than a majority; or |
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a majority or more of all voting power. |
Control shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained
stockholder approval. A control share acquisition occurs when,
subject to some exceptions, a person directly or indirectly
acquires ownership or the power to direct the exercise of voting
power (except solely by virtue of a revocable proxy) of issued
and outstanding control shares. A person who has made or
proposes to make a control share acquisition, upon satisfaction
of some specific conditions, including an undertaking to pay
expenses, may compel our board of directors to call a special
meeting of our stockholders to be held within 50 days of a
demand to consider the voting rights of the control shares. If
no request for a meeting is made, we may present the question at
any stockholders meeting.
If voting rights are not approved at the meeting or if the
acquiring person does not deliver an acquiring person statement
as required by the statute, then, subject to some conditions and
limitations, we may redeem any or all of the control shares
(except those for which voting rights have been previously
approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date
of the last control share acquisition by the acquiror or of any
meeting of stockholders at which the voting rights of such
shares are considered and not approved. If voting rights for
control shares are approved at a stockholders meeting and the
acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the shares as determined for purposes
of such appraisal rights may not be less than the highest price
per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply to shares
acquired in a merger, consolidation, or share exchange if we are
a party to the transaction or to acquisitions approved or
exempted by our charter or bylaws.
As permitted by Maryland General Corporation Law, our bylaws
contain a provision exempting from the control share acquisition
statute any and all acquisitions of our common stock by Cole
Advisors II or any affiliate of Cole Advisors II.
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Subtitle 8
Subtitle 8 of Title 3 of the Maryland General
Corporation Law permits a Maryland corporation with a class of
equity securities registered under the Exchange Act and at least
three independent directors to elect to be subject, by provision
in its charter or bylaws or a resolution of its board of
directors and notwithstanding any contrary provision in the
charter or bylaws, to any or all of five provisions:
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a classified board, |
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a two-thirds vote requirement for removing a director, |
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a requirement that the number of directors be fixed only by vote
of the directors, |
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a requirement that a vacancy on the board be filled only by the
remaining directors and for the remainder of the full term of
the class of directors in which the vacancy occurred, and |
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a majority requirement for the calling of a special meeting of
stockholders. |
Pursuant to Subtitle 8, we have elected to provide that
vacancies on our board of directors may be filled only by the
remaining directors and for the remainder of the full term of
the directorship in which the vacancy occurred. Through
provisions in our charter and bylaws unrelated to
Subtitle 8, we already vest in the board the exclusive
power to fix the number of directorships.
Advance Notice of Director Nominations and New Business
Our bylaws provide that with respect to an annual meeting of
stockholders, nominations of individuals for election to the
board of directors and the proposal of business to be considered
by stockholders may be made only (i) pursuant to our notice
of the meeting, (ii) by the board of directors or
(iii) by a stockholder who is entitled to vote at the
meeting and who has complied with the advance notice procedures
of the bylaws. With respect to special meetings of stockholders,
only the business specified in our notice of the meeting may be
brought before the meeting. Nominations of individuals for
election to the board of directors at a special meeting may be
made only (i) pursuant to our notice of the meeting,
(ii) by the board of directors, or (iii) provided that
the board of directors has determined that directors will be
elected at the meeting, by a stockholder who is entitled to vote
at the meeting and who has complied with the advance notice
provisions of the bylaws.
Share Redemption Program
Our board of directors has adopted a share redemption program
that enables our stockholders to sell their shares to us in
limited circumstances. Our share redemption program permits you
to sell your shares back to us after you have held them for at
least one year, subject to the significant conditions and
limitations described below.
Our common stock is currently not listed on a national
securities exchange, or included for quotation on a national
securities market, and we will not seek to list our stock until
such time as our independent directors believe that the listing
of our stock would be in the best interest of our stockholders.
In order to provide stockholders with the benefit of interim
liquidity, stockholders who have held their shares for at least
one year may present all or a portion consisting of at least
25%, of the holders shares to us for redemption at any
time in accordance with the procedures outlined below. At that
time, we may, subject to the conditions and limitations
described below, redeem the shares presented for redemption for
cash to the extent that we have sufficient funds available to us
to fund such redemption. We will not pay to our board of
directors, advisor or its affiliates any fees to complete any
transactions under our share redemption program.
During the term of this offering, the redemption price per share
will depend on the length of time you have held such shares as
follows: after one year from the purchase date 92.5%
of the amount you paid
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for each share; after two years from the purchase
date 95.0% of the amount you paid for each share,
after three years from the purchase date 97.5% of
the amount you paid for each share; and after four years from
the purchase date 100.0% of the amount you paid for
each share (in each case, as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with
respect to our common stock). At any time we are engaged in an
offering of shares, the per share price for shares purchased
under our redemption plan will always be equal to or lower than
the applicable per share offering price. Thereafter the per
share redemption price will be based on the then-current net
asset value of the shares (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with
respect to our common stock). Our board of directors will
announce any redemption price adjustment and the time period of
its effectiveness as a part of its regular communications with
our stockholders. At any time the redemption price is determined
by any method other than the net asset value of the shares, if
we have sold property and have made one or more special
distributions to our stockholders of all or a portion of the net
proceeds from such sales, the per share redemption price will be
reduced by the net sale proceeds per share distributed to
investors prior to the redemption date as a result of the sale
of such property in the special distribution. Our board of
directors will, in its sole discretion, determine which
distributions, if any, constitute a special distribution. While
our board of directors does not have specific criteria for
determining a special distribution, we expect that a special
distribution will only occur upon the sale of a property and the
subsequent distribution of the net sale proceeds. Upon receipt
of a request for redemption, we will conduct a Uniform
Commercial Code search to ensure that no liens are held against
the shares. We will charge an administrative fee of $250 to the
stockholder for the search and other costs, which will be
deducted from the proceeds of the redemption or, if a lien
exists, will be charged to the stockholder. Subject to our
waiver of the one-year holding period requirement, shares
required to be redeemed in connection with the death of a
stockholder may be repurchased without the one-year activity
period requirement, at a purchase price equal to the price
actually paid for the shares.
During any calendar year, we will not redeem in excess of 3.0%
of the weighted average number of shares outstanding during the
prior calendar year. The cash available for redemption will be
limited to the proceeds from the sale of shares pursuant to our
distribution reinvestment plan.
We will redeem our shares on the last business day of the month
following the end of each quarter. Requests for redemption would
have to be received on or prior to the end of the quarter in
order for us to repurchase the shares as of the end of the next
month. You may withdraw your request to have your shares
redeemed at any time prior to the last day of the applicable
quarter.
If we could not purchase all shares presented for redemption in
any quarter, based upon insufficient cash available and the
limit on the number of shares we may redeem during any calendar
year, we would attempt to honor redemption requests on a pro
rata basis. We would treat the unsatisfied portion of the
redemption request as a request for redemption the following
quarter. At such time, you may then (1) withdraw your
request for redemption at any time prior to the last day of the
new quarter or (2) ask that we honor your request at such
time, if, any, when sufficient funds become available. Such
pending requests will generally be honored on a pro rata basis.
We will determine whether we have sufficient funds available as
soon as practicable after the end of each quarter, but in any
event prior to the applicable payment date.
Our board of directors may choose to amend, suspend or terminate
our share redemption program upon 30 days notice at any
time. Additionally we will be required to discontinue sales of
shares under the distribution reinvestment plan on the earlier
of June 27, 2007, which is two years from the effective
date of this offering, unless the offering is extended, or the
date we sell 5,000,000 shares under the plan, unless we file a
new registration statement with the Securities and Exchange
Commission and applicable states. Because the redemption of
shares will be funded with the net proceeds we receive from the
sale of shares under the distribution reinvestment plan, the
discontinuance or termination of the distribution reinvestment
plan will adversely affect our ability to redeem shares under
the share redemption program. We would notify you of such
developments (i) in the annual or quarterly reports
mentioned above or (ii) by means of a separate mailing to
you, accompanied by disclosure in a current or periodic report
under the Exchange
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Act. During this offering, we would also include this
information in a prospectus supplement or post-effective
amendment to the registration statement, as then required under
federal securities laws.
Our share redemption program is only intended to provide interim
liquidity for stockholders until a liquidity event occurs, such
as the listing of the shares on a national securities exchange,
inclusion of the shares for on a national market system, or our
merger with a listed company. The share redemption program will
be terminated if the shares become listed on a national
securities exchange or included for quotation on a national
market system. We cannot guarantee that a liquidity event will
occur.
The shares we redeem under our share redemption program will be
cancelled and return to the status of unauthorized but unissued
shares. We do not intend to resell such shares to the public
unless they are first registered with the Securities and
Exchange Commission under the Securities Act and under
appropriate state securities laws or otherwise sold in
compliance with such laws.
Restrictions on Roll-up Transactions
A Roll-up Transaction is a transaction involving the
acquisition, merger, conversion or consolidation, directly or
indirectly, of us and the issuance of securities of an entity
(Roll-up Entity) that is created or would survive after the
successful completion of a Roll-up Transaction. This term does
not include:
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a transaction involving our securities that have been listed on
a national securities exchange or included for quotation on The
Nasdaq National Market for at least 12 months; or |
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a transaction involving our conversion to trust, or association
form if, as a consequence of the transaction, there will be no
significant adverse change in stockholder voting rights, the
term of our existence, compensation to Cole Advisors II or
our investment objectives. |
In connection with any Roll-up Transaction involving the
issuance of securities of a Roll-up Entity, an appraisal of all
of our assets shall be obtained from a competent independent
appraiser. The assets shall be appraised on a consistent basis,
and the appraisal will be based on the evaluation of all
relevant information and will indicate the value of the assets
as of a date immediately prior to the announcement of the
proposed Roll-up Transaction. The appraisal shall assume an
orderly liquidation of assets over a 12-month period. The terms
of the engagement of the independent appraiser shall clearly
state that the engagement is for the benefit of us and our
stockholders. A summary of the appraisal, indicating all
material assumptions underlying the appraisal, shall be included
in a report to stockholders in connection with any proposed
Roll-up Transaction.
In connection with a proposed Roll-up Transaction, the sponsor
of the Roll-up Transaction must offer to stockholders who vote
no on the proposal the choice of:
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(1) accepting the securities of the Roll-up Entity offered
in the proposed Roll-up Transaction; or |
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(2) one of the following: |
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(a) remaining as holders of our common stock and preserving
their interests therein on the same terms and conditions as
existed previously, or |
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(b) receiving cash in an amount equal to the
stockholders pro rata share of the appraised value of our
net assets. |
We are prohibited from participating in any Roll-up Transaction:
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that would result in the stockholders having voting rights in a
Roll-up Entity that are less than those provided in our charter
and described elsewhere in this prospectus, including rights
with respect to the election and removal of directors, annual
reports, annual and special meetings, amendment of our charter,
and our dissolution; |
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that includes provisions that would materially impede or
frustrate the accumulation of shares by any purchaser of the
securities of the Roll-up Entity, except to the minimum extent
necessary to preserve the tax status of the Roll-up Entity, or
which would limit the ability of an investor to exercise the
voting rights of its securities of the Roll-up Entity on the
basis of the number of shares held by that investor; |
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in which our investors rights to access of records of the
Roll-up Entity will be less than those provided in the section
of this prospectus entitled Meetings and
Special Voting Requirements above; or |
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in which any of the costs of the Roll-up Transaction would be
borne by us if the Roll-up Transaction is not approved by the
stockholders. |
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SUMMARY OF DISTRIBUTION REINVESTMENT PLAN
The following is a summary of our distribution reinvestment
plan. A complete copy of our form of distribution reinvestment
plan is included in this prospectus as Appendix C.
Investment of Distributions
We have adopted a distribution reinvestment plan pursuant to
which, our stockholders and, subject to certain conditions set
forth in our distribution reinvestment plan, any stockholder or
partner of any other publicly offered limited partnership, real
estate investment trust or other real estate program sponsored
by our advisor or its affiliates, may participate in our
distribution reinvestment plan and elect to purchase shares of
our common stock with our distributions or distributions from
such other programs. We are offering 5,000,000 shares for
sale pursuant to our distribution reinvestment plan. We intend
to offer shares at the higher of 91.5% of the estimated value of
a share of our common stock, as estimated by our board of
directors or $9.15 per share. We have the discretion to extend
the offering period for the shares being offered pursuant to
this prospectus under our distribution reinvestment plan beyond
the termination of this offering until we have sold
5,000,000 shares through the reinvestment of distributions.
We may also offer shares pursuant to a new registration
statement.
No dealer manager fees or sales commissions will be paid with
respect to shares purchased pursuant to the distribution
reinvestment plan, therefore, we will retain all of the proceeds
from the reinvestment of distributions. Accordingly,
substantially all the economic benefits resulting from
distribution reinvestment purchases by stockholders from the
elimination of the dealer manager fee and selling commissions
will inure to the benefit of the participant through the reduced
purchase price.
Pursuant to the terms of our distribution reinvestment plan the
reinvestment agent, which currently is us, will act on behalf of
participants to reinvest the cash distributions they receive
from us. Stockholders participating in the distribution
reinvestment plan may purchase fractional shares. If sufficient
shares are not available for issuance under our distribution
reinvestment plan, the reinvestment agent will remit excess cash
distributions to the participants. Participants purchasing
shares pursuant to our distribution reinvestment plan will have
the same rights as stockholders with respect to shares purchased
under the plan and will be treated in the same manner as if such
shares were issued pursuant to our offering.
After the termination of the offering of our shares registered
for sale pursuant to the distribution reinvestment plan under
the this prospectus and any subsequent offering, we may
determine to allow participants to reinvest cash distributions
from us in shares issued by another Cole-sponsored program only
if all of the following conditions are satisfied:
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prior to the time of such reinvestment, the participant has
received the final prospectus and any supplements thereto
offering interests in the subsequent Cole-sponsored program and
such prospectus allows investments pursuant to a distribution
reinvestment plan; |
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a registration statement covering the interests in the
subsequent Cole-sponsored program has been declared effective
under the Securities Act; |
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the offer and sale of such interests are qualified for sale
under applicable state securities laws; |
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the participant executes the subscription agreement included
with the prospectus for the subsequent Cole-sponsored
program; and |
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the participant qualifies under applicable investor suitability
standards as contained in the prospectus for the subsequent
Cole-sponsored program. |
Stockholders who invest in subsequent Cole-sponsored programs
pursuant to our distribution reinvestment plan will become
investors in such subsequent Cole-sponsored program and, as
such, will receive the same reports as other investors in the
subsequent Cole-sponsored program.
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Election to Participate or Terminate Participation
A stockholder may become a participant in our distribution
reinvestment plan by making a written election to participate on
his or her subscription agreement at the time he or she
subscribes for shares. Any stockholder who has not previously
elected to participate in the distribution reinvestment plan may
so elect at any time by delivering to the reinvestment agent a
completed enrollment form or other written authorization
required by the reinvestment agent. Participation in our
distribution reinvestment plan will commence with the next
distribution payable after receipt of the participants
notice, provided it is received at least ten days prior to the
last day of the fiscal quarter, month or other period to which
the distribution relates.
Some brokers may determine not to offer their clients the
opportunity to participate in our distribution reinvestment
plan. Any prospective investor who wishes to participate in our
distribution reinvestment plan should consult with his or her
broker as to the brokers position regarding participation
in the distribution reinvestment plan.
We reserve the right to prohibit qualified retirement plans from
participating in our distribution reinvestment plan if such
participation would cause our underlying assets to constitute
plan assets of qualified retirement plans. See
Investment by Tax-Exempt Entities and ERISA
Considerations.
Each stockholder electing to participate in our distribution
reinvestment plan agrees that, if at any time he or she fails to
meet the applicable investor suitability standards or cannot
make the other investor representations or warranties set forth
in the then current prospectus or subscription agreement
relating to such investment, he or she will promptly notify the
reinvestment agent in writing of that fact.
Subscribers should note that affirmative action in the form of
written notice to the reinvestment agent must be taken to
withdraw from participation in our distribution reinvestment
plan. A withdrawal from participation in our distribution
reinvestment plan will be effective with respect to
distributions for a quarterly or monthly distribution period, as
applicable, only if written notice of termination is received at
least ten days prior to the end of such distribution period. In
addition, a transfer of shares prior to the date our shares are
listed for trading on a national securities exchange or included
for quotation on The Nasdaq National Market, which we have no
intent to do at this time and which may never occur will
terminate participation in the distribution reinvestment plan
with respect to such transferred shares as of the first day of
the distribution period in which the transfer is effective,
unless the transferee demonstrates to the reinvestment agent
that the transferee meets the requirements for participation in
the plan and affirmatively elects to participate in the plan by
providing to the reinvestment agent an executed enrollment form
or other written authorization required by the reinvestment
agent.
Offers and sales of shares pursuant to the distribution
reinvestment plan must be registered in every state in which
such offers and sales are made. Generally, such registrations
are for a period of one year. Thus, we may have to stop selling
shares pursuant to the distribution reinvestment plan in any
states in which our registration is not renewed or extended.
Reports to Participants
Within 90 days after the end of each calendar year, the
reinvestment agent will mail to each participant a statement of
account describing, as to such participant, the distributions
received, the number of shares purchased, the purchase price for
such shares and the total shares purchased on behalf of the
participant during the prior year pursuant to our distribution
reinvestment plan.
Excluded Distributions
Our board of directors may designate that certain cash or other
distributions attributable to net sales proceeds will be
excluded from distributions that may be reinvested in shares
under our distribution reinvestment plan (Excluded
Distributions). Accordingly, in the event that proceeds
attributable to the potential sale transaction described above
are distributed to stockholders as an Excluded Distribution,
such amounts may not be reinvested in our shares pursuant to our
distribution reinvestment plan. The
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determination of whether all or part of a distribution will be
deemed to be an Excluded Distribution is separate and unrelated
to our requirement to distribute 90% of our taxable REIT income.
In its initial determination of whether to make a distribution
and the amount of the distribution, our board of directors will
consider, among other factors, our cash position and our
distribution requirements as a REIT. Once our board of directors
determines to make the distribution, it will then consider
whether all or part of the distribution will be deemed to be an
Excluded Distribution. In most instances, we expect that our
board of directors would not deem any of the distribution to be
an Excluded Distribution. In that event, the amount distributed
to participants in our distribution reinvestment plan will be
reinvested in additional shares of our common stock. If all or a
portion of the distribution is deemed to be an Excluded
Distribution, the distribution will be made to all stockholders,
however, the excluded portion will not be reinvested. As a
result, we would not be able to use any of the Excluded
Distribution to assist in meeting future distributions and the
stockholders would not be able to use the distribution to
purchase additional shares of our common stock through our
distribution reinvestment plan. We currently do not have any
planned Excluded Distributions, which will only be made, if at
all, in addition to, not in lieu of, regular distributions.
Federal Income Tax Considerations
Taxable participants will incur tax liability for partnership
income allocated to them even though they have elected not to
receive their distributions in cash but rather to have their
distributions reinvested under our distributions reinvestment
plan. See Risk Factors Federal Income Tax
Risks. Tax information regarding each participants
participation in the plan will be provided to each participant
at least annually.
Amendment and Termination
We reserve the right to amend any aspect of our distribution
reinvestment plan with ten days notice to participants.
The reinvestment agent also reserves the right to terminate a
participants individual participation in the plan, and we
reserve the right to terminate our distribution reinvestment
plan itself in our sole discretion at any time, by sending ten
days prior written notice of termination to the terminated
participant or, upon termination of the plan, to all
participants.
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OUR OPERATING PARTNERSHIP AGREEMENT
General
Cole OP II was formed in September, 2004 to acquire, own
and operate properties on our behalf. It will be an Umbrella
Partnership Real Estate Investment Trust, or UPREIT, which
structure is utilized generally to provide for the acquisition
of real property from owners who desire to defer taxable gain
that would otherwise be recognized by them upon the disposition
of their property. These owners may also desire to achieve
diversity in their investment and other benefits afforded to
owners of stock in a REIT. For purposes of satisfying the asset
and income tests for qualification as a REIT for tax purposes,
the REITs proportionate share of the assets and income of
an UPREIT, such as Cole OP II, will be deemed to be assets
and income of the REIT.
A property owner may contribute property to an UPREIT in
exchange for limited partnership units on a tax-free basis. In
addition, Cole OP II is structured to make distributions
with respect to limited partnership units that will be
equivalent to the distributions made to holders of our common
stock. Finally, a limited partner in Cole OP II may later
exchange his or her limited partnership units in Cole OP II
for shares of our common stock in a taxable transaction.
The partnership agreement for Cole OP II contains
provisions that would allow, under certain circumstances, other
entities, including other Cole-sponsored programs, to merge into
or cause the exchange or conversion of their interests for
interests of Cole OP II. In the event of such a merger,
exchange or conversion, Cole OP II would issue additional
limited partnership interests, which would be entitled to the
same exchange rights as other limited partnership interests of
Cole OP II. As a result, any such merger, exchange or
conversion ultimately could result in the issuance of a
substantial number of shares of our common stock, thereby
diluting the percentage ownership interest of other stockholders.
We intend to hold substantially all of our assets through Cole
OP II. We are the sole general partner of Cole OP II,
and our advisor, Cole Advisors II, is the only limited
partner of Cole OP II. As the sole general partner of Cole
OP II, we have the exclusive power to manage and conduct
the business of Cole OP II.
The following is a summary of certain provisions of the
partnership agreement of Cole OP II. This summary is not
complete and is qualified by the specific language in the
partnership agreement. You should refer to the partnership
agreement, itself, which we have filed as an exhibit to the
registration statement, for more detail.
Capital Contributions
As we accept subscriptions for shares, we will transfer
substantially all of the net proceeds of the offering to Cole
OP II as a capital contribution. However, we will be deemed
to have made capital contributions in the amount of the gross
offering proceeds received from investors. Cole OP II will
be deemed to have simultaneously paid the selling commissions
and other costs associated with the offering. If Cole OP II
requires additional funds at any time in excess of capital
contributions made by our advisor and us (which are minimal in
amount), or from borrowings, we may borrow funds from a
financial institution or other lender and lend such funds to
Cole OP II on the same terms and conditions as are
applicable to our borrowing of such funds. In addition, we are
authorized to cause Cole OP II to issue partnership
interests for less than fair market value if we conclude in good
faith that such issuance is in the best interests of Cole
OP II and us.
Operations
The partnership agreement requires that Cole OP II be
operated in a manner that will enable us to (1) satisfy the
requirements for being classified as a REIT for tax purposes,
(2) avoid any federal income or excise tax liability, and
(3) ensure that Cole OP II will not be classified as a
publicly traded partnership for purposes of
Section 7704 of the Internal Revenue Code, which
classification could result
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in Cole OP II being taxed as a corporation, rather than as
a partnership. See Federal Income Tax
Considerations Tax Aspects of Our Operating
Partnership Classification as a Partnership.
The partnership agreement provides that Cole OP II will
distribute cash flow from operations as follows:
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first, to us until we have received aggregate distributions with
respect to the current fiscal year equal to the minimum amount
necessary for us to distribute to our stockholders to enable us
to maintain our status as a REIT under the Internal Revenue Code
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next, to the limited partners until our limited partners have
received aggregate distributions equal to the amount that would
have been distributed to them with respect to all prior fiscal
years had all Cole OP II income for all such prior fiscal
years been allocated to us, each limited partner held a number
of our common shares equal to the number of Cole OP II
units that it holds and the REIT had distributed all such
amounts to our stockholders (including the limited partners); |
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next, to us and to the limited partners until each partner has
received aggregate distributions with respect to the current
fiscal year and all fiscal years had all Cole OP II income
for the current fiscal year and all such prior fiscal years been
allocated to us, our income with respect to the current fiscal
year and each such prior fiscal year equaled the minimum amount
necessary to maintain our status as a REIT under the Internal
Revenue Code, each limited partner held a number of common
shares equal to the number of Cole OP II units that we hold
and we had distributed all such amounts to its stockholders
(including the limited partners); and |
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finally, to us and the limited partners in accordance with the
partners percentage interests in Cole OP II. |
Similarly, the partnership agreement of Cole OP II provides
that taxable income is allocated to the limited partners of Cole
OP II in accordance with their relative percentage
interests such that a holder of one unit of limited partnership
interest in Cole OP II will be allocated taxable income for
each taxable year in an amount equal to the amount of taxable
income to be recognized by a holder of one of our shares,
subject to compliance with the provisions of
Sections 704(b) and 704(c) of the Internal Revenue Code and
corresponding Treasury Regulations. Losses, if any, generally
will be allocated among the partners in accordance with their
respective percentage interests in Cole OP II.
Upon the liquidation of Cole OP II, after payment of debts
and obligations, any remaining assets of Cole OP II will be
distributed to partners with positive capital accounts in
accordance with their respective positive capital account
balances. If we were to have a negative balance in our capital
account following a liquidation, we would be obligated to
contribute cash to Cole OP II equal to such negative
balance for distribution to other partners, if any, having
positive balances in such capital accounts.
In addition to the administrative and operating costs and
expenses incurred by Cole OP II in acquiring and operating
real properties, Cole OP II will pay all of our
administrative costs and expenses, and such expenses will be
treated as expenses of Cole OP II. Such expenses will
include:
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all expenses relating to the formation and continuity of our
existence; |
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all expenses relating to the public offering and registration of
securities by us; |
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all expenses associated with the preparation and filing of any
periodic reports by us under federal, state or local laws or
regulations; |
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all expenses associated with compliance by us with applicable
laws, rules and regulations; |
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all costs and expenses relating to any issuance or redemption of
partnership interests or shares of our common stock; and |
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all our other operating or administrative costs incurred in the
ordinary course of our business on behalf of Cole OP II. |
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All claims between the partners of Cole OP II arising out
of the partnership agreement are subject to binding arbitration.
Exchange Rights
The limited partners of Cole OP II, including Cole
Advisors II, have the right to cause their limited
partnership units to be redeemed by Cole OP II or purchased
by us for cash. In either event, the cash amount to be paid will
be equal to the cash value of the number of our shares that
would be issuable if the limited partnership units were
exchanged for our shares on a one-for-one basis. Alternatively,
we may elect to purchase the limited partnership units by
issuing one share of our common stock for each limited
partnership unit exchanged. As of March 31, 2005, there are
9,009 partnership units outstanding. These exchange rights may
not be exercised, however, if and to the extent that the
delivery of shares upon exercise would (1) result in any
person owning shares in excess of our ownership limits,
(2) result in shares being owned by fewer than 100 persons,
(3) cause us to be closely held within the
meaning of Section 856(h) of the Internal Revenue Code,
(4) cause us to own 10.0% or more of the ownership
interests in a tenant within the meaning of
Section 856(d)(2)(B) of the Internal Revenue Code, or
(5) cause the acquisition of shares by a redeemed limited
partner to be integrated with any other distribution
of our shares for purposes of complying with the Securities Act.
Subject to the foregoing, limited partners of Cole OP II
may exercise their exchange rights at any time after one year
following the date of issuance of their limited partnership
units. However, a limited partner may not deliver more than two
exchange notices each calendar year and may not exercise an
exchange right for less than 1,000 limited partnership units,
unless such limited partner holds less than 1,000 units, in
which case, it must exercise his exchange right for all of his
units. We do not expect to issue any of the shares of common
stock offered hereby to limited partners of Cole OP II in
exchange for their limited partnership units. Rather, in the
event a limited partner of Cole OP II exercises its
exchange rights, and we elect to purchase the limited
partnership units with shares of our common stock, we expect to
issue unregistered shares of common stock, or subsequently
registered shares of common stock, in connection with such
transaction.
Amendments to the Partnership Agreement
Our consent, as the general partner of Cole OP II, is
required for any amendment to the partnership agreement. We, as
the general partner of Cole OP II, and without the consent of
any limited partner, may amend the partnership agreement in any
manner, provided, however, that the consent of limited partners
holding more than 50% of the interests of the limited partners
is required for the following:
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any amendment affecting the conversion factor or the exchange
right in a manner adverse to the limited partners; |
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any amendment that would adversely affect the rights of the
limited partners to receive the distributions payable to them
pursuant to the partnership agreement (other than the issuance
of additional limited partnership interests); |
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any amendment that would alter the allocations of Cole OP
IIs profit and loss to the limited partners (other than
the issuance of additional limited partnership interests); |
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any amendment that would impose on the limited partners any
obligation to make additional capital contributions to Cole
OP II; and |
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any amendment pursuant to a plan of merger, plan of exchange or
plan of conversion, unless the partnership agreement of the
surviving limited partnership does not materially differ from
the partnership agreement of Cole OP II immediately before
the transaction. |
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Termination of the Partnership
Cole OP II will have perpetual duration, unless it is
dissolved earlier upon the first to occur of the following:
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we declare for bankruptcy or withdraw from the partnership,
provided, however, that the remaining partners may decide
to continue the business; |
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ninety days after the sale or other disposition of all or
substantially all of the assets of the partnership; |
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the exchange of all limited partnership interests (other than
such interests we, or are affiliates, hold); or |
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we elect, as the general partner, to dissolve the partnership. |
Transferability of Interests
We may not (1) voluntarily withdraw as the general partner
of Cole OP II, (2) engage in any merger, consolidation
or other business combination, or (3) transfer our general
partnership interest in Cole OP II (except to a wholly
owned subsidiary), unless the transaction in which such
withdrawal, business combination or transfer occurs results in
the limited partners receiving or having the right to receive an
amount of cash, securities or other property equal in value to
the amount they would have received if they had exercised their
exchange rights immediately prior to such transaction or unless,
in the case of a merger or other business combination, the
successor entity contributes substantially all of its assets to
Cole OP II in return for an interest in Cole OP II and
agrees to assume all obligations of the general partner of Cole
OP II. We may also enter into a business combination or
transfer our general partnership interest upon the receipt of
the consent of a majority-in-interest of the limited partners of
Cole OP II, other than Cole Advisors II and other
affiliates of Christopher H. Cole. With certain exceptions, a
limited partner may not transfer its interests in Cole
OP II, in whole or in part, without our written consent as
general partner.
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PLAN OF DISTRIBUTION
The Offering
We are offering a maximum of 50,000,000 shares of our
common stock to the public through Cole Capital Corporation, our
dealer manager, a registered broker-dealer affiliated with our
advisor. Of this amount, we are offering 45,000,000 shares
in our primary offering at a price of $10.00 per share,
except as provided below. The shares are being offered on a
best efforts basis, which means generally that the
dealer manager will be required to use only its best efforts to
sell the shares and it has no firm commitment or obligation to
purchase any of the shares. We are also offering
5,000,000 shares for sale pursuant to our distribution
reinvestment plan. The purchase price for shares sold under our
distribution reinvestment plan will be equal to the higher of
91.5% of the estimated value of a share of common stock, as
estimated by our board of directors and $9.15 per share. The
reduced purchase price for shares purchased pursuant to our
distribution reinvestment plan reflects that there will be no
fees, commissions or expenses paid with respect to these shares.
The offering of shares of our common stock will terminate on or
before June 27, 2007, which is two years after the
effective date of this offering, unless the offering is
extended. At the discretion of our board of directors, we may
elect to extend the termination date of our offering of shares
reserved for issuance pursuant to our distribution reinvestment
plan until we have sold 5,000,000 shares through the
reinvestment of distributions, in which case participants in the
plan will be notified. This offering must be registered in every
state in which we offer or sell shares. Generally, such
registrations are for a period of one year. Thus, we may have to
stop selling shares in any state in which our registration is
not renewed or otherwise extended annually. We reserve the right
to terminate this offering at any time prior to the stated
termination date.
Cole Capital Corporation
Cole Capital Corporation, our dealer manager, was organized in
1992 for the purpose of participating in and facilitating the
distribution of securities in programs sponsored by Cole Capital
Partners, its affiliates and its predecessors. For additional
information about Cole Capital Corporation, including
information relating to Cole Capital Corporations
affiliation with us, please refer to the section of this
prospectus captioned Management Affiliated
Companies Dealer Manager.
Compensation We Will Pay for the Sale of Our Shares
Except as provided below, we will pay our dealer manager selling
commissions of 7.0% of the gross offering proceeds. We also will
pay the dealer manager a fee in the amount of 1.5% of the gross
offering proceeds as compensation for acting as the dealer
manager and for expenses incurred in connection with marketing
and due diligence expense reimbursement. No sales commissions or
dealer manager fees will be paid with respect to shares
purchased pursuant to the distribution reinvestment plan. We
will not pay referral or similar fees to any accountants,
attorneys or other persons in connection with the distribution
of the shares. See the Summary of Distribution
Reinvestment Plan Investment of Distributions
section of this prospectus.
We expect our dealer manager to utilize two distribution
channels to sell our shares, which have different selling
commissions, and consequently, a different purchase price for
the shares. In the event of the sale of shares in our primary
offering by other broker-dealers that are members of the NASD,
the purchase price will be $10.00 per share, reflecting the
7.0% commission payable to our dealer manager, which it may
reallow to such participating broker-dealers. In the event of
the sale of shares in our primary offering to an investment
advisory representative, the purchase price for such shares will
be $9.30 per share, reflecting the fact that our dealer manager
will waive the 7.0% selling commission on such shares. We will
not pay selling commissions or a dealer manager fee in
connection with the sale of shares under our distribution
reinvestment plan. The dealer manager may reallow to each of the
participating broker dealers a portion of its dealer manager fee
earned on the proceeds raised by the participating
broker-dealer. This reallowance would be in the form of a
non-accountable marketing allowance and due diligence expense
reimbursement. The amount of the reallowance will be determined
by the dealer manager based
130
upon factors including the participating broker-dealers
level of marketing support, level of due diligence review and
success of its sales efforts, each as compared to those of the
other participating broker-dealers.
The table below sets forth the nature and amount of compensation
we will pay to our dealer manager and the participating
broker-dealers in this offering. The amounts shown assume that
all shares are sold in our primary offering through
participating broker-dealers, which is the distribution channel
with the highest possible selling commissions and dealer manager
fees.
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Per Share | |
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Total Minimum | |
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Total Maximum | |
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Primary Offering
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Price to Public
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$ |
10.00 |
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$ |
2,500,000 |
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|
$ |
450,000,000 |
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Selling Commissions
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0.70 |
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|
|
175,000 |
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|
|
31,500,000 |
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Dealer Manager fees
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0.15 |
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37,500 |
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|
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6,750,000 |
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Proceeds to Cole REIT II
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|
$ |
9.15 |
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|
$ |
2,287,500 |
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|
$ |
411,750,000 |
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Reinvestment Plan
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Price to Public
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$ |
9.15 |
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|
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$ |
45,750,000 |
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Distribution Selling Commissions
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Dealer Manager Fees
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Proceeds to Cole REIT II
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$ |
9.15 |
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|
|
|
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|
$ |
45,750,000 |
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|
We may sell shares in our primary offering to retirement plans
of broker-dealers participating in the offering, to
broker-dealers in their individual capacities, to IRAs and
qualified plans of their registered representatives or to any
one of their registered representatives in their individual
capacities at a discount. The purchase price for such shares
shall be $9.30 per share (unless a higher price is required
pursuant to Section 409A of the Internal Revenue Code),
reflecting the fact that selling commissions in the amount of
$0.70 per share will not be payable in connection with such
sales. The net proceeds to us from such sales will not be
affected by such sales of shares at a discount.
We or our affiliates also may provide non-cash incentive items
for registered representatives of our dealer manager and the
participating broker-dealers, which in no event shall exceed an
aggregate of $100 per annum per participating salesperson. The
value of such items will be considered underwriting compensation
in connection with this offering.
The total amount of underwriting compensation, including
commissions and reimbursement of expenses paid in connection
with the offering will not exceed 10% of the gross proceeds of
this offering, plus an additional 0.5% of gross proceeds for
reimbursement of bona fide due diligence expenses. Underwriting
compensation includes selling commissions, dealer manager fees
(including due diligence and other expense reimbursements),
wholesaling compensation and expense reimbursement relating to
sales seminars and sales incentives.
We have agreed to indemnify the participating broker-dealers,
including our dealer manager and selected registered investment
advisors, against certain liabilities arising under the
Securities Act. However, the Securities and Exchange Commission
takes the position that indemnification against liabilities
arising under the Securities Act is against public policy and is
unenforceable.
Shares Purchased by Affiliates
Our executive officers and directors, as well as officers and
employees of Cole Advisors II and their family members
(including spouses, parents, grandparents, children and
siblings) or other affiliates, may purchase shares offered in
this offering at a discount. The purchase price for such shares
shall be $9.15 per share (unless a higher price is required
pursuant to Section 409A of the Internal Revenue Code),
reflecting the fact that selling commissions in the amount of
$0.70 per share and a dealer manager fee in the amount of
$0.15 per share will not be payable in connection with such
sales. The net offering proceeds
131
we receive will not be affected by such sales of shares at a
discount. Our executive officers, directors and other affiliates
will be expected to hold their shares purchased as stockholders
for investment and not with a view towards resale. In addition,
shares purchased by Cole Advisors II or its affiliates will
not be entitled to vote on any matter presented to the
stockholders for a vote. Any shares of our common stock
purchased by an affiliate will not count toward the minimum
offering of 250,000 shares. With the exception of the
20,000 shares initially sold to Cole Holdings Corporation in
connection with our organization, no director, officer, advisor
or any affiliate may own more than 9.8% in value or number of
our outstanding common stock.
Volume Discounts
Volume discounts based on reduced sales commissions are
available for purchasers of certain minimum numbers
of shares, as defined below, volume discounts resulting in
reductions in selling commissions payable with respect to such
sales are available. In such event, any such reduction will be
credited to the investor by reducing the purchase price per
share. The following table illustrates the various discount
levels available;
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Purchase Price Per | |
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Sales | |
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Incremental Share | |
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Dealer | |
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Dollar Volume |
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Commission | |
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in Volume | |
|
Manager Fees | |
|
Net Proceeds | |
Shares Purchased |
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Percent | |
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Per Share | |
|
Discount Range | |
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Per Share | |
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Per Share | |
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| |
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| |
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| |
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| |
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| |
$250,000 or less
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|
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7.0 |
% |
|
$ |
0.70 |
|
|
$ |
10.00 |
|
|
$ |
0.15 |
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|
$ |
9.15 |
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$250,001-$500,000
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|
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6.0 |
% |
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0.60 |
|
|
$ |
9.90 |
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|
|
0.15 |
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|
|
9.15 |
|
$500,001-$1,000,000
|
|
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5.0 |
% |
|
|
0.50 |
|
|
$ |
9.80 |
|
|
|
0.15 |
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|
|
9.15 |
|
$1,000,001-$2,000,000
|
|
|
4.0 |
% |
|
|
0.40 |
|
|
$ |
9.70 |
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|
|
0.15 |
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|
9.15 |
|
$2,000,001-$5,000,000
|
|
|
3.0 |
% |
|
|
0.30 |
|
|
$ |
9.60 |
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|
|
0.15 |
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|
|
9.15 |
|
$5,000,001-$10,000,000
|
|
|
2.0 |
% |
|
|
0.20 |
|
|
$ |
9.50 |
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|
|
0.15 |
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|
|
9.15 |
|
Over $10,000,001
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|
|
1.0 |
% |
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|
0.10 |
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|
$ |
9.40 |
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|
|
0.15 |
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|
|
9.15 |
|
For example, if an investor purchases 60,000 shares, the
investor would pay (1) $250,000 for the first
25,000 shares, (2) $247,500 for the next
25,000 shares ($9.90 per share), and (3) $98,000 for
the next 10,000 shares ($9.80 per share), for a total
purchase price of $595,500 (approximately $9.925 per share)
rather than $600,000 for the shares. After the payment of sales
commissions of $37,500 (approximately $0.625 per share) and
payment of the dealer manager fee, we would receive net proceeds
of $549,000 ($9.15 per share). The net proceeds to us will not
be affected by volume discounts. All investors will be deemed to
have contributed the same amount per share to us for purposes of
declaring and paying distributions. Therefore, an investor who
has received a volume discount will realize a better return on
his or her investment in our shares than investors who do not
qualify for a discount.
Subscriptions may be combined for the purpose of determining the
volume discounts in the case of subscriptions made by any
purchaser, as that term is defined below, provided
all such shares are purchased through the same broker-dealer.
The volume discount is prorated among the separate subscribers
considered to be a single purchaser. Any request to
combine more than one subscription must be made in writing,
submitted simultaneously with the subscription for shares, and
must set forth the basis for such request. Any request for
volume discounts will be subject to our verification that all of
the combined subscriptions were made by a single
purchaser.
For the purposes of such volume discounts, the term
purchaser includes:
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an individual, his or her spouse and their children under the
age of 21 who purchase the shares for his, her or their own
account; |
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a corporation, partnership, association, joint-stock company,
trust fund or any organized group of persons, whether
incorporated or not; |
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|
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an employees trust, pension, profit-sharing or other
employee benefit plan qualified under Section 401(a) of the
Internal Revenue Code; and |
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|
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all commingled trust funds maintained by a given bank. |
132
In addition, investors may request in writing to aggregate
subscriptions as part of a combined order for purposes of
determining the number of shares purchased, provided that any
aggregate group of subscriptions must be received from the same
broker-dealer, including our dealer manager.
In order to encourage purchases of 1,000,000 or more shares, a
potential purchaser who proposes to purchase at least 1,000,000
shares may agree with Cole Advisors II and Cole Capital
Corporation to have the dealer manager fee with respect to the
sale of such shares reduced to as little as 1.0%, and, with the
agreement of the participating broker, to have the selling
commission payable with respect to the sale of such shares
reduced to as little as 0.5%. The aggregate fees payable with
respect to the sale of such shares would be reduced by
$0.70 per share, resulting in a purchase price of
$9.30 per share, rather than $10.00 per share.
Because all investors will be deemed to have contributed the
same amount per share to us for purposes of declaring and paying
distributions, investors who pay a reduced or no commission will
receive a higher return on their investment than investors who
do not qualify for such discount.
Subscription Process
To purchase shares in this offering, you must complete and sign
a subscription agreement, like the one contained in this
prospectus as Appendix B. You should pay for your shares by
delivering a check for the full purchase price of the shares,
payable to Wells Fargo Bank, N.A., Escrow Agent for Cole
Credit Property Trust II, Inc. You should exercise
care to ensure that the subscription agreement is filled out
correctly and completely. By executing the subscription
agreement, you will attest that you meet the suitability
standards described in this prospectus and agree to be bound by
all of the terms of the subscription agreement.
Subscriptions will be effective only upon our acceptance, and we
reserve the right to reject any subscription in whole or in
part. We may not accept a subscription for shares until at least
five business days after the date you receive this prospectus.
Subject to compliance with Rule 15c2-4 of the Exchange Act,
our dealer manager and/or the broker-dealers participating in
the offering will promptly submit a subscribers check to
the escrow agent on the business day following receipt of the
subscribers subscription documents and check. In certain
circumstances where the suitability review procedures are more
lengthy than customary, a subscribers check will be
promptly deposited with the escrow agent in compliance with
Exchange Act Rule 15c2-4. The proceeds from your
subscription will be deposited in a segregated escrow account
with our escrow agent, and will be held in trust for your
benefit, pending release to us.
After we have received subscriptions for at least
250,000 shares of our common stock, we will accept or
reject subscriptions within 35 days after we receive them.
If your subscription agreement is rejected, your funds, without
interest, or reductions for offering expenses, commissions or
fees will be returned to you within ten business days after the
date of such rejection. If your subscription is accepted, we
will send you a confirmation of your purchase after you have
been admitted as an investor. After we have sold at least
250,000 shares of our common stock, we expect to admit new
investors at least monthly and we may admit new investors more
frequently. The escrow agent will not release your funds to us
until we admit you as a stockholder.
Minimum Offering
Subscription proceeds will be placed in escrow until such time
as subscriptions aggregating at least the minimum offering of
250,000 shares of our common stock have been received and
accepted by us. Any shares purchased by our advisor or its
affiliates will not be counted in calculating the minimum
offering. Funds in escrow will be invested in short-term
investments, which may include obligations of, or obligations
guaranteed by, the U.S. government or bank money-market
accounts or certificates of deposit of national or state banks
that have deposits insured by the Federal Deposit Insurance
Corporation (including certificates of deposit of any bank
acting as a depository or custodian for any such funds) that can
be readily sold, with appropriate safety of principal.
Subscribers may not withdraw funds from the escrow account.
133
If subscriptions for at least the minimum offering have not been
received and accepted by June 27, 2006, which is one year
after the effective date of this offering, our escrow agent will
promptly so notify us, this offering will be terminated and your
funds and subscription agreement will be returned to you within
ten days after the date of such termination. Interest will
accrue on funds in the escrow account as applicable to the
short-term investments in which such funds are invested. During
any period in which subscription proceeds are held in escrow for
more than 35 days, interest earned thereon will be
allocated among subscribers on the basis of the respective
amounts of their subscriptions and the number of days that such
amounts were on deposit. Such interest will be paid to
subscribers upon the termination of the escrow period, subject
to withholding for taxes pursuant to applicable Treasury
Regulations. We will bear all expenses of the escrow and, as
such, any interest to be paid to any subscriber will not be
reduced for such expense.
Special Notice to Pennsylvania Investors
Subscription proceeds received from residents of Pennsylvania
will be placed in a separate interest-bearing escrow account
with the escrow agent until subscriptions for shares aggregating
at least $25,000,000, have been received and accepted by us. If
we have not raised a minimum of $25,000,000 in gross offering
proceeds (including sales made to residents of other
jurisdictions) by the end of each 120-day escrow period (with
the initial 120-day escrow period commencing upon the
effectiveness of this offering), we will notify Pennsylvania
investors in writing by certified mail within ten calendar days
after the end of each 120-day escrow period that they have a
right to have their investment returned to them. If a
Pennsylvania investor requests the return of his or her
subscription funds within ten calendar days after receipt of the
notification, we must return those funds, together with any
interest earned on the funds for the time those funds remain in
escrow subsequent to the initial 120-day escrow period, to the
investor within ten calendar days after receipt of the
investors request.
Investments by IRAs and Qualified Plans
Sterling Trust Company has agreed to act as an IRA custodian for
purchasers of our common stock who desire to establish an IRA,
SEP or certain other tax-deferred accounts or transfer or
rollover existing accounts. Sterling Trust Company has agreed to
provide this service to our stockholders with annual maintenance
fees charged at a discounted rate. Further information as to
custodial services is available through your broker or may be
requested from us.
HOW TO SUBSCRIBE
Investors who meet the applicable suitability standards and
minimum purchase requirements described in the Suitability
Standards section of this prospectus may purchase shares
of common stock. If you want to purchase shares, you must
proceed as follows:
|
|
|
(1) Read the entire prospectus and the current
supplement(s), if any, accompanying this prospectus. |
|
|
(2) Complete the execution copy of the subscription
agreement. A specimen copy of the subscription agreement,
including instructions for completing it, is included in this
prospectus as Appendix B. |
|
|
(3) Deliver a check to Cole Capital Corporation for the
full purchase price of the shares being subscribed for, payable
to Wells Fargo Bank, N.A., Escrow Agent for Cole Credit
Property Trust II, Inc. along with the completed
subscription agreement. Certain dealers who have net
capital, as defined in the applicable federal securities
regulations, of $250,000 or more may instruct their customers to
make their checks payable directly to the dealer. In such case,
the dealer will issue a check made payable to the escrow agent
for the purchase price of your subscription. The name of the
dealer appears on the subscription agreement. |
134
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|
|
(4) By executing the subscription agreement and paying the
full purchase price for the shares subscribed for, you will
attest that you meet the suitability standards as provided in
the Suitability Standards section of this prospectus
and as stated in the subscription agreement and agree to be
bound by the terms of the subscription agreement. |
An approved trustee must process through us and forward us
subscriptions made through IRAs, Keogh plans, 401(k) plans and
other tax-deferred plans. If you want to purchase shares through
an IRA, SEP or other tax-deferred account, Sterling Trust
Company has agreed to serve as IRA custodian for such purpose.
Sterling Trust Company has agreed to provide this service to our
stockholders with annual maintenance fees charged at a
discounted rate.
SUPPLEMENTAL SALES MATERIAL
In addition to this prospectus, we may utilize certain sales
material in connection with the offering of the shares, although
only when accompanied by or preceded by the delivery of this
prospectus. The sales materials may include information relating
to this offering, the past performance of Cole Advisors II,
our advisor, and its affiliates, property brochures and articles
and publications concerning real estate. In certain
jurisdictions, some or all of our sales material may not be
permitted and will not be used in those jurisdictions.
The offering of shares is made only by means of this prospectus.
Although the information contained in our supplemental sales
material will not conflict with any of the information contained
in this prospectus, the supplemental materials do not purport to
be complete, and should not be considered a part of this
prospectus or the registration statement of which this
prospectus is a part.
LEGAL MATTERS
Venable LLP, Baltimore, Maryland, will pass upon the legality of
the common stock and Morris, Manning & Martin, LLP,
Atlanta, Georgia, will pass upon legal matters in connection
with our status as a REIT for federal income tax purposes.
Morris, Manning & Martin, LLP will rely on the opinion
of Venable LLP as to all matters of Maryland law. Neither
Venable LLP nor Morris, Manning & Martin, LLP purport
to represent our stockholders or potential investors, who should
consult their own counsel. Morris, Manning & Martin,
LLP also provides legal services to Cole Advisors II, our
advisor, as well as affiliates of Cole Advisors II, and may
continue to do so in the future.
EXPERTS
The financial statements as of March 31, 2005 and
December 31, 2004, and for the three month period ended
March 31, 2005 and the period September 29, 2004 (date
of inception) to December 31, 2004, included in this
prospectus have been audited by Deloitte & Touche LLP,
an independent registered public accounting firm, as stated in
their report appearing herein, and have been included in
reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-11 with
the Securities and Exchange Commission in connection with our
initial public offering. We are required to file annual,
quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission.
135
You may request and obtain a copy of these filings, at no cost
to you, by writing or telephoning us at the following address:
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Cole Credit Property Trust II, Inc. |
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Attn: Investor Relations |
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2555 East Camelback Road |
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Suite 400 |
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Phoenix, Arizona 85016 |
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(866) 341-2653 |
One of our affiliates maintains an Internet site at
http://www.colecapital.com, at which there is additional
information about us. The contents of that site are not
incorporated by reference in, or otherwise a part of, this
prospectus.
This prospectus does not contain all of the information set
forth in the registration statement and the exhibits related
thereto as filed with the Securities and Exchange Commission,
reference to which is hereby made.
You can read our registration statement and the exhibits thereto
and our future Securities and Exchange Commission filings over
the Internet at www.sec.gov. You may also read and copy
any document we file with the Securities and Exchange Commission
at its Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference
Section of the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the Securities and Exchange Commission at 1-800-SEC-0330 or
e-mail at publicinfo@sec.gov for further information on
the operation of the public reference facilities.
136
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Page | |
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Report of Independent Registered Public Accounting Firm
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F-2 |
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Consolidated Balance Sheets
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F-3 |
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Consolidated Statements of Stockholders Equity
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F-4 |
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Consolidated Statements of Cash Flows
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F-5 |
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Notes to Consolidated Financial Statements
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F-6 |
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of
Cole Credit Property Trust II, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of
Cole Credit Property Trust II, Inc. (a development stage
company) and its subsidiary (the Company) as of
March 31, 2005 and December 31, 2004, and the related
consolidated statements of stockholders equity for the
period September 29, 2004 (date of inception) to
March 31, 2005, and cash flows for the three months ended
March 31, 2005 and for the period September 29, 2004
(date of inception) to December 31, 2004. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Cole
Credit Property Trust II, Inc. (a development stage
company) and its subsidiary, as of March 31, 2005 and
December 31, 2004, and the results of their cash flows for
the three months ended March 31, 2005 and for the period
September 29, 2004 (date of inception) to December 31,
2004, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Phoenix, Arizona
June 1, 2005
F-2
COLE CREDIT PROPERTY TRUST II, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
As of March 31, 2005 and December 31, 2004
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March 31, 2005 | |
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December 31, 2004 | |
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ASSETS |
Cash and cash equivalents
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$ |
200,000 |
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$ |
200,000 |
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Total Assets
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|
$ |
200,000 |
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$ |
200,000 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Stockholders equity:
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Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued and outstanding
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$ |
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$ |
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|
Common stock, $.01 par value; 90,000,000 shares
authorized, 20,000 shares issued and outstanding
|
|
|
200 |
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|
200 |
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Capital in excess of par value
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|
199,800 |
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|
199,800 |
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Total Liabilities and Stockholders Equity
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|
$ |
200,000 |
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|
$ |
200,000 |
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See accompanying notes to consolidated financial statements.
F-3
COLE CREDIT PROPERTY TRUST II, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Three Months Ended March 31, 2005
and for the Period September 29, 2004 (Date of
Inception) to December 31, 2004
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Common Stock | |
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