SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) November 13, 2002
Federal Realty Investment Trust
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(Exact name of registrant as specified in its charter)
Maryland 1-07533 52-0782497
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1626 East Jefferson Street, Rockville, Maryland 20852-4041
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: 301/998-8100
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Item 5. Other Events
References to "we," "us" or "our" refer to Federal Realty Investment
Trust and its directly or indirectly owned subsidiaries, unless the context
otherwise requires. The term "you" refers to a prospective investor.
Following is a description of the material U.S. federal income tax
consequences relating to our taxation as a REIT and the ownership and
disposition of our common shares. This description replaces and supersedes prior
descriptions of the material federal income tax treatment of us and our
shareholders to the extent that they are inconsistent with the description
contained in this current report.
This description contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, Section 21E of the Exchange Act
and the Private Securities Litigation Reform Act of 1995. When we refer to
forward-looking statements or information, sometimes we use words such as "may,"
"will," "could," "should," "plans," "intends," "expects," "believes,"
"estimates," "anticipates" and "continues." The risk factors in our Annual
Report on Form 10-K filed with the SEC on March 28, 2002 describe risks that may
affect these statements but are not all-inclusive, particularly with respect to
possible future events. Many things can happen that can cause actual results to
be different from those we describe. These factors include, but are not limited
to:
o risks that our growth will be limited if we cannot obtain
additional capital;
o risks of financing, such as our ability to consummate
additional financings on terms which are acceptable to us, our
ability to meet existing financial covenants and the
possibility of increases in interest rates that would result
in increased interest expense;
o risks normally associated with the real estate industry,
including risks that our tenants will not pay rent or that we
may be unable to renew leases or relet space at favorable
rents as leases expire, that new acquisitions and our
development, construction and renovation projects, including
our Santana Row project, may fail to perform as expected, that
competition for acquisitions could result in increased prices,
environmental risks, and, because real estate is illiquid,
that we may not be able to sell properties when appropriate;
and
o risks related to our status as a real estate investment trust,
commonly referred to as a REIT, for federal income tax
purposes, such as the existence of complex regulations
relating to our status as a REIT, the effect of future changes
in REIT requirements as a result of new legislation and the
adverse consequences if we fail to qualify as a REIT.
Given these uncertainties, readers are cautioned not to place undue
reliance on these forward-looking statements. We also make no promise to update
any of the forward-looking statements, or to publicly release the results if we
revise any of them.
FEDERAL INCOME TAX CONSEQUENCES
The following sections summarize the federal income tax issues that you
may consider relevant. Because this section is a summary, it does not address
all of the tax issues that may be important to you. In addition, this section
does not address the tax issues that may be important to certain types of
shareholders that are subject to special treatment under the federal income tax
laws, such as insurance companies, tax-exempt organizations (except to the
extent discussed in "-Taxation of Tax-Exempt U.S. Shareholders" below),
financial institutions and broker-dealers, and non-U.S. individuals and foreign
corporations (except to the extent discussed in "-Taxation of Non-U.S.
Shareholders" below).
The statements in this section are based on the current federal income
tax laws governing our qualification as a REIT. We cannot assure you that new
laws, interpretations of laws or court decisions, any of which may take effect
retroactively, will not cause any statement in this section to be inaccurate.
We urge you to consult your own tax advisor regarding the specific
federal, state, local, foreign and other tax consequences to you of purchasing,
owning and disposing of our securities, our election to be taxed as a REIT and
the effect of potential changes in applicable tax laws.
Taxation of the Company
We elected to be taxed as a REIT under the federal income tax laws when
we filed our 1962 tax return. We have operated in a manner intended to qualify
as a REIT and we intend to continue to operate in that manner. This section
discusses the laws governing the federal income tax treatment of a REIT and its
shareholders. These laws are highly technical and complex.
In the opinion of our tax counsel, Shaw Pittman LLP, (i) we qualified
as a REIT under Sections 856 through 859 of the Code with respect to our taxable
years ended through December 31, 2001; and (ii) we are organized in conformity
with the requirements for qualification as a REIT under the Code and our current
method of operation will enable us to meet the requirements for qualification as
a REIT for the current taxable year and for future taxable years, provided that
we have operated and continue to operate in accordance with various assumptions
and factual representations made by us concerning our business, properties and
operations. We may not, however, have met or continue to meet such requirements.
You should be aware that opinions of counsel are not binding on the IRS or any
court. Our qualification as a REIT depends on our ability to meet, on a
continuing basis, certain qualification tests set forth in the federal tax laws.
Those qualification tests involve the percentage of income that we earn from
specified sources, the percentage of our assets that fall within certain
categories, the diversity of the ownership of our shares, and the percentage of
our earnings that we distribute. We describe the REIT qualification tests in
more detail below. Shaw Pittman LLP will not monitor our compliance with the
requirements for REIT qualification on an ongoing basis. Accordingly, no
assurance can be given that our actual operating results will satisfy the
qualification tests. For a discussion of the tax treatment of us and our
shareholders if we fail to qualify as a REIT, see "-Requirements for REIT
Qualification-Failure to Qualify."
If we qualify as a REIT, we generally will not be subject to federal
income tax on the
taxable income that we distribute to our shareholders. The benefit of that tax
treatment is that it avoids the "double taxation" (i.e., at both the corporate
and stockholder levels) that generally results from owning stock in a
corporation. However, we will be subject to federal tax in the following
circumstances:
o we will pay federal income tax on taxable income (including net
capital gain) that we do not distribute to our shareholders
during, or within a specified time period after, the calendar year
in which the income is earned;
o we may be subject to the " alternative minimum tax" on any items
of tax preference that we do not distribute or allocate to our
shareholders;
o we will pay income tax at the highest corporate rate on (i) net
income from the sale or other disposition of property acquired
through foreclosure that we hold primarily for sale to customers
in the ordinary course of business and (ii) other non-qualifying
income from foreclosure property;
o we will pay a 100% tax on net income from certain sales or other
dispositions of property (other than foreclosure property) that we
hold primarily for sale to customers in the ordinary course of
business ("prohibited transactions");
o if we fail to satisfy the 75% gross income test or the 95% gross
income test (as described below under "-Requirements for REIT
Qualification - Income Tests"), and nonetheless continue to
qualify as a REIT because we meet certain other requirements, we
will pay a 100% tax on (i) the gross income attributable to the
greater of the amount by which we fail, respectively, the 75% or
95% gross income test, multiplied by (ii) a fraction intended to
reflect our profitability;
o if we fail to distribute during a calendar year at least the sum
of (i) 85% of our REIT ordinary income for such year, (ii) 95% of
our REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, we will pay a 4%
excise tax on the excess of such required distribution over the
amount we actually distributed;
o we may elect to retain and pay income tax on our net long-term
capital gain; or
o if we acquire any asset from a C corporation (i.e., a corporation
generally subject to full corporate-level tax) in a merger or
other transaction in which we acquire a "carryover" basis in the
asset (i.e., basis determined by reference to the C corporation's
basis in the asset (or another asset)), we will pay tax at the
highest regular corporate rate applicable if we recognize gain on
the sale or disposition of such asset during the 10-year period
after we acquire such asset. The amount of gain on which we will
pay tax is the lesser of (i) the amount of gain that we recognize
at the time of the sale or disposition and (ii) the amount of gain
that we would have recognized if we had sold the asset at the time
we acquired the asset.
Requirements for REIT Qualification
In order to qualify as a REIT, we must be a corporation, trust or
association and meet the following requirements:
1. we are managed by one or more trustees or directors;
2. our beneficial ownership is evidenced by transferable shares, or
by transferable certificates of beneficial interest;
3. we would be taxable as a domestic corporation, but for Sections
856 through 860 of the Code;
4. we are neither a financial institution nor an insurance company
subject to certain provisions of the Code;
5. at least 100 persons are beneficial owners of our shares or
ownership certificates;
6. not more than 50% in value of our outstanding shares or ownership
certificates is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities)
during the last half of any taxable year (the "5/50 Rule");
7. we elect to be a REIT (or have made such election for a previous
taxable year) and satisfy all relevant filing and other
administrative requirements established by the Internal Revenue
Service that must be met to elect and maintain REIT status;
8. we use a calendar year for federal income tax purposes and comply
with the record keeping requirements of the Code and the related
Treasury regulations; and
9. we meet certain other qualification tests, described below,
regarding the nature of our income and assets.
We must meet requirements 1 through 4 during our entire taxable year
and must meet requirement 5 during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
If we comply with all the requirements for ascertaining the ownership of our
outstanding shares in a taxable year and have no reason to know that we violated
the 5/50 Rule, we will be deemed to have satisfied the 5/50 Rule for such
taxable year. For purposes of determining share ownership under the 5/50 Rule,
an "individual" generally includes a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust permanently set
aside or used exclusively for charitable purposes. An "individual," however,
generally does not include a trust that is a qualified employee pension or
profit sharing trust under Code Section 401(a), and beneficiaries of such a
trust will be treated as holding our shares in proportion to their actuarial
interests in the trust for purposes of the 5/50 Rule.
We believe we have issued sufficient common shares with sufficient
diversity of ownership to satisfy requirements 5 and 6 set forth above. In
addition, our declaration of trust restricts the ownership and transfer of the
common shares so that we should continue to satisfy
requirements 5 and 6. Our declaration of trust is filed as an exhibit to our
annual reports on Form 10-K filed with the SEC.
We currently have several direct corporate subsidiaries and may have
additional corporate subsidiaries in the future. A corporation that is a
"qualified REIT subsidiary" is not treated as a corporation separate from its
parent REIT. All assets, liabilities, and items of income, deduction, and credit
of a qualified REIT subsidiary are treated as assets, liabilities, and items of
income, deduction, and credit of the REIT. A qualified REIT subsidiary is a
corporation, all of the capital stock of which is owned by the parent REIT,
unless we and the subsidiary have jointly elected to have it treated as a
"taxable REIT subsidiary," in which case it is treated separately from us and
will be subject to federal corporate income taxation. Thus, in applying the
requirements described herein, any qualified REIT subsidiary of ours will be
ignored, and all assets, liabilities, and items of income, deduction, and credit
of such subsidiary will be treated as our assets, liabilities, and items of
income, deduction, and credit. We believe our direct corporate subsidiaries are
qualified REIT subsidiaries, except for those which are taxable REIT
subsidiaries. Accordingly, they are not subject to federal corporate income
taxation, though they may be subject to state and local taxation.
A REIT is treated as owning its proportionate share of the assets of
any partnership in which it is a partner and as earning its allocable share of
the gross income of the partnership for purposes of the applicable REIT
qualification tests. Thus, our proportionate share of the assets, liabilities
and items of income of any partnership (or limited liability company treated as
a partnership) in which we have acquired or will acquire an interest, directly
or indirectly, are treated as our assets and gross income for purposes of
applying the various REIT qualification requirements.
Income Tests. We must satisfy two gross income tests annually to
maintain our qualification as a REIT:
o At least 75% of our gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of
defined types of income that we derive, directly or indirectly,
from investments relating to real property or mortgages on real
property or temporary investment income (the "75% gross income
test"). Qualifying income for purposes of the 75% gross income
test includes "rents from real property," interest on debt secured
by mortgages on real property or on interests in real property,
and dividends or other distributions on and gain from the sale of
shares in other REITs; and
o At least 95% of our gross income (excluding gross income from
prohibited transactions) for each taxable year must consist of
income that is qualifying income for purposes of the 75% gross
income test, dividends, other types of interest, gain from the
sale or disposition of stock or securities, or any combination of
the foregoing (the "95% gross income test").
The following paragraphs discuss the specific application of these
tests to us.
Rental Income. Our primary source of income derives from leasing
properties. Rent that
we receive from real property that we own and lease to tenants will qualify as
"rents from real property" (which is qualifying income for purposes of the 75%
and 95% gross income tests) only if several conditions are met under the REIT
tax rules:
o The rent must not be based, in whole or in part, on the income or
profits of any person although, generally, rent may be based on a
fixed percentage or percentages of receipts or sales. We have not
entered into any lease based in whole or part on the net income of
any person and do not anticipate entering into such arrangements.
o Except in certain limited circumstances involving taxable REIT
subsidiaries, neither we nor someone who owns 10% or more of our
shares may own 10% or more of a tenant from whom we receive rent.
Our ownership and the ownership of a tenant is determined based on
direct, indirect and constructive ownership. The constructive
ownership rules generally provide that if 10% or more in value of
our shares are owned, directly or indirectly, by or for any
person, we are considered as owning the shares owned, directly or
indirectly, by or for such person. The applicable attribution
rules, however, are highly complex and difficult to apply, and we
may inadvertently enter into leases with tenants who, through
application of such rules, will constitute "related party
tenants." In such event, rent paid by the related party tenant
will not qualify as "rents from real property," which may
jeopardize our status as a REIT. We will use our best efforts not
to rent any property to a related party tenant (taking into
account the applicable constructive ownership rules), unless we
determine in our discretion that the rent received from such
related party tenant is not material and will not jeopardize our
status as a REIT. We believe that we have not leased property to
any related party tenant.
o In the case of rent from a taxable REIT subsidiary which would,
but for this exception, be considered rent from a related party
tenant, the space leased to the taxable REIT subsidiary must be
part of a property at least 90 percent of which is rented to
persons other than taxable REIT subsidiaries and related party
tenants, and the amounts of rent paid to us by the taxable REIT
subsidiary must be substantially comparable to the rents paid by
such other persons for comparable space. All space currently
leased to taxable REIT subsidiaries meets these conditions, and we
intend to meet them in the future, unless we determine in our
discretion that the rent received from a taxable REIT subsidiary
is not material and will not jeopardize our status as a REIT.
o The rent attributable to any personal property leased in
connection with a lease of property is no more than 15% of the
total rent received under the lease. In general, we have not
leased a significant amount of personal property under our current
leases. If any incidental personal property has been leased, we
believe that rent under each lease from the personal property
would be less than 15% of total rent from that lease. If we lease
personal property in connection with a future lease, we intend to
satisfy the 15% test described above.
o We generally must not operate or manage our property or furnish or
render services to our tenants, other than through an "independent
contractor" who is adequately
compensated and from whom we do not derive revenue, or through a
taxable REIT subsidiary. We may provide services directly, if the
services are "usually or customarily rendered" in connection with
the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant." In addition, we may render
directly a de minimis amount of "non-customary" services to the
tenants of a property without disqualifying the income as "rents
from real property," as long as our income from the services does
not exceed 1% of our income from the related property. We have not
provided services to leased properties that have caused rents to
be disqualified as rents from real property, and in the future, we
intend that any services provided will not cause rents to be
disqualified as rents from real property.
Based on the foregoing, we believe that rent from leases should qualify
as "rents from real property" for purposes of the 75% and 95% gross income
tests. However, there can be no complete assurance that the IRS will not assert
successfully a contrary position and, therefore, prevent us from qualifying as a
REIT.
On an ongoing basis, we will use our best efforts not to:
o charge rent for any property that is based in whole or in part on
the income or profits of any person (except by reason of being
based on a percentage of receipts or sales, as described above);
o rent any property to a related party tenant (taking into account
the applicable constructive ownership rules and the exception for
taxable REIT subsidiaries), unless we determine in our discretion
that the rent received from such related party tenant is not
material and will not jeopardize our status as a REIT;
o derive rental income attributable to personal property (other than
personal property leased in connection with the lease of real
property, the amount of which is less than 15% of the total rent
received under the lease); and
o perform services considered to be rendered to the occupant of the
property that generate rents exceeding 1% of all amounts received
or accrued during the taxable year with respect to such property,
other than through an independent contractor from whom we derive
no revenue, through a taxable REIT subsidiary, or if the provision
of such services will not jeopardize our status as a REIT.
Because the Code provisions applicable to REITs are complex, however,
we may fail to meet one or more of the foregoing.
Tax on Income From Property Acquired in Foreclosure. We will be subject
to tax at the maximum corporate rate on any income from foreclosure property
(other than income that would be qualifying income for purposes of the 75% gross
income test), less expenses directly connected to the production of such income.
"Foreclosure property" is any real property (including interests in real
property) and any personal property incident to such real property:
o that is acquired by a REIT at a foreclosure sale, or having
otherwise become the owner or in possession of the property by
agreement or process of law, after a default (or imminent default)
on a lease of such property or on an debt owed to the REIT secured
by the property;
o for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated; and
o for which the REIT makes a proper election to treat the property
as foreclosure property.
A REIT will not be considered to have foreclosed on a property where it
takes control of the property as a mortgagee-in-possession and cannot receive
any profit or sustain any loss except as a creditor of the mortgagor. Generally,
property acquired as described above ceases to be foreclosure property on the
earlier of:
o the last day of the third taxable year following the taxable year
in which the REIT acquired the property (or longer if an extension
is granted by the Secretary of the Treasury);
o the first day on which a lease is entered into with respect to
such property that, by its terms, will give rise to income that
does not qualify under the 75% gross income test or any amount is
received or accrued, directly or indirectly, pursuant to a lease
entered into on or after such day that will give rise to income
that does not qualify under the 75% gross income test;
o the first day on which any construction takes place on such
property (other than completion of a building, or any other
improvement, where more than 10% of the construction of such
building or other improvement was completed before default became
imminent); or
o the first day that is more than 90 days after the day on which
such property was acquired by the REIT and the property is used in
a trade or business that is conducted by the REIT (other than
through an independent contractor from whom the REIT itself does
not derive or receive any income).
Tax on Prohibited Transactions. A REIT will incur a 100% tax on net
income derived from any "prohibited transaction." A "prohibited transaction"
generally is a sale or other disposition of property (other than foreclosure
property) that the REIT holds primarily for sale to customers in the ordinary
course of a trade or business. We believe that none of our assets are held for
sale to customers and that a sale of any such asset would not be in the ordinary
course of its business. Whether a REIT holds an asset "primarily for sale
to customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those related
to a particular asset. Nevertheless, we will attempt to comply with the terms of
safe-harbor provisions in the Code prescribing when an asset sale will not be
characterized as a prohibited transaction. We may fail to comply with such
safe-harbor provisions or may own property that could be characterized as
property held "primarily for sale
to customers in the ordinary course of a trade or business."
Tax and Deduction Limits on Certain Transactions with Taxable REIT
Subsidiaries. A REIT will incur a 100% tax on certain transactions between a
REIT and a taxable REIT subsidiary to the extent the transactions are not on an
arms-length basis. In addition, under certain circumstances the interest paid by
a taxable REIT subsidiary may not be deductible by the taxable REIT subsidiary.
We believe that none of the transactions we have had with our taxable REIT
subsidiaries will give rise to the 100% tax and that none of our taxable REIT
subsidiaries will be subject to the interest deduction limits.
Relief from Consequences of Failing to Meet Income Tests. If we fail to
satisfy one or both of the 75% and 95% gross income tests for any taxable year,
we nevertheless may qualify as a REIT for such year if we qualify for relief
under certain provisions of the Code. Those relief provisions generally will be
available if our failure to meet such tests is due to reasonable cause and not
due to willful neglect, we attach a schedule of the sources of our income to our
tax return, and any incorrect information on the schedule was not due to fraud
with intent to evade tax. We may not qualify for the relief provisions in all
circumstances. In addition, as discussed above in "-Taxation of the Company,"
even if the relief provisions apply, we would incur a 100% tax on gross income
to the extent we fail the 75% or 95% gross income test (whichever amount is
greater), multiplied by a fraction intended to reflect our profitability.
Asset Tests. To maintain our qualification as a REIT, we also must
satisfy two asset tests at the close of each quarter of each taxable year:
o At least 75% of the value of our total assets must consist of cash
or cash items (including certain receivables), government
securities, "real estate assets," or qualifying temporary
investments (the "75% asset test").
o "Real estate assets" include interests in real property,
interests in mortgages on real property and stock in other
REITs. We believe that the properties qualify as real
estate assets.
o "Interests in real property" include an interest in
mortgage loans or land and improvements thereon, such as
buildings or other inherently permanent structures
(including items that are structural components of such
buildings or structures), a leasehold of real property,
and an option to acquire real property (or a leasehold of
real property).
o Qualifying temporary investments are investments in stock
or debt instruments during the one-year period following
our receipt of new capital that we raise through equity or
long-term (at least five-year) debt offerings.
o For investments not included in the 75% asset test, (A) the value
of our interest in any one issuer's securities (which does not
include our equity ownership of other REITs, any qualified REIT
subsidiary, or any taxable REIT subsidiary) may not exceed 5% of
the value of our total assets (the "5% asset test"), (B) we may
not own more than 10% of the voting power or value of any one
issuer's outstanding securities, which
does not include our equity ownership in other REITs, any
qualified REIT subsidiary, or any taxable REIT subsidiary (the
"10% asset test"), and (C) the value of our securities in one or
more taxable REIT subsidiaries may not exceed 20% of the value of
our total assets.
We intend to select future investments so as to comply with the asset
tests.
If we failed to satisfy the asset tests at the end of a calendar
quarter, we would not lose our REIT status if (i) we satisfied the asset tests
at the close of the preceding calendar quarter and (ii) the discrepancy between
the value of our assets and the asset test requirements arose from changes in
the market values of our assets and was not wholly or partly caused by the
acquisition of one or more non-qualifying assets. If we did not satisfy the
condition described in clause (ii) of the preceding sentence, we still could
avoid disqualification as a REIT by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which the discrepancy arose.
Distribution Requirements. Each taxable year, we must distribute
dividends (other than capital gain dividends and deemed distributions of
retained capital gain) to our shareholders in an aggregate amount at least equal
to (1) the sum of 90% of (A) our "REIT taxable income" (computed without regard
to the dividends paid deduction and our net capital gain) and (B) our net income
(after tax), if any, from foreclosure property, minus (2) certain items of
non-cash income.
We must pay such distributions in the taxable year to which they
relate, or in the following taxable year if we declare the distribution before
we timely file our federal income tax return for such year and pay the
distribution on or before the first regular dividend payment date after such
declaration.
We will pay federal income tax on taxable income (including net capital
gain) that we do not distribute to shareholders. Furthermore, we will incur a 4%
nondeductible excise tax if we fail to distribute during a calendar year (or, in
the case of distributions with declaration and record dates falling in the last
three months of the calendar year, by the end of January following such calendar
year) at least the sum of (1) 85% of our REIT ordinary income for such year, (2)
95% of our REIT capital gain income for such year, and (3) any undistributed
taxable income from prior periods. The excise tax is on the excess of such
required distribution over the amounts we actually distributed. We may elect to
retain and pay income tax on the net long-term capital gain we receive in a
taxable year. See "-Taxation of Taxable U.S. Shareholders." For purposes of the
4% excise tax, we will be treated as having distributed any such retained
amount. We have made, and we intend to continue to make, timely distributions
sufficient to satisfy the annual distribution requirements.
It is possible that, from time to time, we may experience timing
differences between (1) the actual receipt of income and actual payment of
deductible expenses and (2) the inclusion of that income and deduction of such
expenses in arriving at our REIT taxable income. For example, we may not deduct
recognized capital losses from our REIT taxable income. Further, it is possible
that, from time to time, 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. As a result of the foregoing, we may
have less cash than is necessary to distribute all of our
taxable income and thereby avoid corporate income tax and the excise tax imposed
on certain undistributed income. In such a situation, we may need to borrow
funds or issue preferred shares or additional common shares.
Under certain circumstances, we may be able to correct a failure to
meet the distribution requirement for a year by paying deficiency dividends to
our shareholders in a later year. We may include such deficiency dividends in
our deduction for dividends paid for the earlier year. Although we may be able
to avoid income tax on amounts distributed as deficiency dividends, we will be
required to pay interest to the IRS based upon the amount of any deduction we
take for deficiency dividends.
Record Keeping Requirements. We must maintain certain records in order
to qualify as a REIT. In addition, to avoid a monetary penalty, we must request
on an annual basis certain information from our shareholders designed to
disclose the actual ownership of our outstanding stock. We have complied, and we
intend to continue to comply, with such requirements.
Failure to Qualify. If we failed to qualify as a REIT in any taxable
year, and no relief provision applied, we would be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. In calculating our taxable income in a year in which we
failed to qualify as a REIT, we would not be able to deduct amounts paid out to
shareholders. In fact, we would not be required to distribute any amounts to
shareholders in such year. In such event, to the extent of our current and
accumulated earnings and profits, all distributions to shareholders would be
taxable as ordinary income. Subject to certain limitations of the Code,
corporate shareholders might be eligible for the dividends received deduction.
Unless we qualified for relief under specific statutory provisions, we also
would be disqualified from taxation as a REIT for the four taxable years
following the year during which we ceased to qualify as a REIT. We cannot
predict whether in all circumstances we would qualify for such statutory relief.
Taxation of Taxable U.S. Shareholders
As long as we qualify as a REIT, a taxable "U.S. shareholder" must take
into account distributions out of our current or accumulated earnings and
profits (and that we do not designate as capital gain dividends or retained
long-term capital gain) as ordinary income. A corporate U.S. shareholder will
not qualify for the dividends received deduction generally available to
corporations. As used herein, the term "U.S. shareholder" means a holder of
common shares that for U.S. federal income tax purposes is
o a citizen or resident of the United States;
o a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of a political
subdivision thereof;
o an estate whose income is subject to U.S. federal income taxation
regardless of its source; or
o any trust with respect to which (A) a U.S. court is able to
exercise primary supervision over the administration of such
trust and (B) one or more U.S. persons have the authority to
control all substantial decisions of the trust.
A U.S. shareholder will recognize distributions that we designate as
capital gain dividends as long-term capital gain (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. shareholder has held its common shares. Subject to
certain limitations, we will designate our capital gain dividends as either 20%
or 25% rate distributions. A corporate U.S. shareholder, however, may be
required to treat up to 20% of certain capital gain dividends as ordinary
income.
We may elect to retain and pay income tax on the net long-term capital
gain that we receive in a taxable year. In that case, a U.S. shareholder would
be taxed on its proportionate share of our undistributed long-term capital gain.
The U.S. shareholder would receive a credit or refund for its proportionate
share of the tax we paid. The U.S. shareholder would increase the basis in its
stock by the amount of its proportionate share of our undistributed long-term
capital gain, minus its share of the tax we paid.
A U.S. shareholder will not incur tax on a distribution to the extent
it exceeds our current and accumulated earnings and profits if such distribution
does not exceed the adjusted basis of the U.S. shareholder's common shares.
Instead, such distribution in excess of earnings and profits will reduce the
adjusted basis of such common shares. To the extent a distribution exceeds both
our current and accumulated earnings and profits and the U.S. shareholder's
adjusted basis in its common shares, the U.S. shareholder will recognize
long-term capital gain (or short-term capital gain if the common shares have
been held for one year or less), assuming the common shares are a capital asset
in the hands of the U.S. shareholder. In addition, if we declare a distribution
in October, November, or December of any year that is payable to a U.S.
shareholder of record on a specified date in any such month, such distribution
shall be treated as both paid by us and received by the U.S. shareholder on
December 31 of such year, provided that we actually pay the distribution during
January of the following calendar year. We will notify U.S. shareholders after
the close of our taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income or capital gain
dividends.
Taxation of U.S. Shareholders on the Disposition of the Common Shares.
In general, a U.S. shareholder who is not a dealer in securities must treat any
gain or loss realized upon a taxable disposition of the common shares as
long-term capital gain or loss if the U.S. shareholder has held the common stock
for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. shareholder must treat any loss upon a sale or exchange of
common shares held by such shareholder for six months or less (after applying
certain holding period rules) as a long-term capital loss to the extent of
capital gain dividends and other distributions from us that such U.S.
shareholder treats as long-term capital gain. All or a portion of any loss a
U.S. shareholder realizes upon a taxable disposition of the common shares may be
disallowed if the U.S. shareholder purchases additional common shares within 30
days before or after the disposition.
Capital Gains and Losses. A taxpayer generally must hold a capital
asset for more than one year for gain or loss derived from its sale or exchange
to be treated as long-term capital gain
or loss. The highest marginal individual income tax rate for 2002 and 2003 is
38.6%. The maximum tax rate on long-term capital gain applicable to
non-corporate taxpayers is generally 20% for sales and exchanges of assets held
for more than one year. The maximum tax rate on long-term capital gain from the
sale or exchange of "Section 1250 property" (i.e., depreciable real property) is
25% to the extent that such gain would have been treated as ordinary income if
the property were "Section 1245 property." With respect to distributions that we
designate as capital gain dividends and any retained capital gain that it is
deemed to distribute, we may designate (subject to certain limits) whether such
a distribution is taxable to our non-corporate shareholders at a 20% or 25%
rate. Thus, the tax rate differential between capital gain and ordinary income
for non-corporate taxpayers may be significant. A U.S. shareholder required to
include retained long-term capital gains in income will be deemed to have paid,
in the taxable year of the inclusion, its proportionate share of the tax paid by
us in respect of such undistributed net capital gains. U.S. shareholders subject
to these rules will be allowed a credit or a refund, as the case may be, for the
tax deemed to have been paid by such shareholders. U.S. shareholders will
increase their basis in their common shares by the difference between the amount
of such includible gains and the tax deemed paid by the U.S. shareholder in
respect of such gains. In addition, the characterization of income as capital
gain or ordinary income may affect the deductibility of capital losses. A
non-corporate taxpayer may deduct capital losses not offset by capital gains
against its ordinary income only up to a maximum annual amount of $3,000. A
non-corporate taxpayer may carry forward unused capital losses indefinitely. A
corporate taxpayer must pay tax on its net capital gain at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years.
Information Reporting Requirements and Backup Withholding. We will
report to our shareholders and to the IRS the amount of distributions we pay
during each calendar year, and the amount of tax we withhold, if any. Under the
backup withholding rules, a shareholder may be subject to backup withholding (at
the rate of 30% for 2002 and 2003) with respect to distributions unless such
holder (1) is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact or (2) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with the applicable requirements of the backup withholding
rules. A shareholder who does not provide us with its correct taxpayer
identification number also may be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the shareholder's
income tax liability. In addition, we may be required to withhold a portion of
capital gain distributions to any shareholders who fail to certify their
non-foreign status to us.
Taxation of Tax-Exempt U.S. Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts and annuities ("exempt
organizations"), generally are exempt from federal income taxation. However,
they are subject to taxation on their unrelated business taxable income
("UBTI"). While many investments in real estate generate UBTI, the IRS has
issued a published ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI, provided that the exempt employee
pension trust does not otherwise use the shares of the REIT in an unrelated
trade or business of the pension trust. Based on that ruling, amounts that we
distribute to exempt organizations generally should not constitute
UBTI. However, if an exempt organization were to finance its acquisition of
common shares with debt, a portion of the income that they receive from us would
constitute UBTI pursuant to the "debt-financed property" rules. Furthermore,
social clubs, voluntary employee benefit associations, supplemental unemployment
benefit trusts and qualified group legal services plans that are exempt from
taxation under paragraphs (7), (9), (17), and (20), respectively, of Code
Section 501(c) are subject to different UBTI rules, which generally will require
them to characterize distributions that they receive from us as UBTI. Finally,
in certain circumstances, a qualified employee pension or profit sharing trust
that owns more than 10% of our shares is required to treat a percentage of the
dividends that it receives from us as UBTI (the "UBTI Percentage"). The UBTI
Percentage is equal to the gross income we derive from an unrelated trade or
business (determined as if it were a pension trust) divided by our total gross
income for the year in which we pay the dividends. The UBTI rule applies to a
pension trust holding more than 10% of our shares only if:
o the UBTI Percentage is at least 5%;
o we qualify as a REIT by reason of the modification of the 5/50
Rule that allows the beneficiaries of the pension trust to be
treated as holding our shares in proportion to their actuarial
interests in the pension trust; and
o we are a "pension-held REIT" (i.e., either (1) one pension trust
owns more than 25% of the value of our shares or (2) a group of
pension trusts individually holding more than 10% of the value of
our shares collectively owns more than 50% of the value of our
shares).
Tax-exempt entities will be subject to the rules described above, under
the heading "--Taxation of Taxable U.S. Shareholders" concerning the inclusion
of our designated undistributed net capital gains in the income of our
shareholders. Thus, such entities will, after satisfying filing requirements, be
allowed a credit or refund of the tax deemed paid by such entities in respect of
such includible gains.
Taxation of Non-U.S. Shareholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "non-U.S. shareholders") are complex. This section
is only a summary of such rules. We urge non-U.S. shareholders to consult their
own tax advisors to determine the impact of federal, state, and local income tax
laws on ownership of common shares, including any reporting requirements.
Ordinary Dividends. A non-U.S. shareholder that receives a distribution
that is not attributable to gain from our sale or exchange of U.S. real property
interests (as defined below) and that we do not designate as a capital gain
dividend or retained capital gain will recognize ordinary income to the extent
that we pay such distribution out of our current or accumulated earnings and
profits. A withholding tax equal to 30% of the gross amount of the distribution
ordinarily will apply to such distribution unless an applicable tax treaty
reduces or eliminates the tax. However, if a distribution is treated as
effectively connected with the non-U.S. shareholder's conduct of a U.S. trade or
business, the non-U.S. shareholder generally will be subject to federal
income tax on the distribution at graduated rates, in the same manner as U.S.
shareholders are taxed with respect to such distributions (and also may be
subject to the 30% branch profits tax in the case of a non-U.S. shareholder that
is a non-U.S. corporation). We plan to withhold U.S. income tax at the rate of
30% on the gross amount of any such distribution paid to a non-U.S. shareholder
unless (i) a lower treaty rate applies and the non-U.S. shareholder files IRS
Form W-8BEN with us evidencing eligibility for that reduced rate, (ii) the
non-U.S. shareholder files an IRS Form W-8ECI with us claiming that the
distribution is effectively connected income, or (iii) the non-U.S. shareholder
holds shares through a "qualified intermediary" that has elected to perform any
necessary withholding itself.
Return of Capital. A non-U.S. shareholder will not incur tax on a
distribution to the extent it exceeds our current and accumulated earnings and
profits if such distribution does not exceed the adjusted basis of its common
shares. Instead, such distribution in excess of earnings and profits will reduce
the adjusted basis of such common shares. A non-U.S. shareholder will be subject
to tax to the extent a distribution exceeds both our current and accumulated
earnings and profits and the adjusted basis of its common shares, if the
non-U.S. shareholder otherwise would be subject to tax on gain from the sale or
disposition of its common shares, as described below. Because we generally
cannot determine at the time we make a distribution whether or not the
distribution will exceed our current and accumulated earnings and profits, we
normally will withhold tax on the entire amount of any distribution just as we
would withhold on a dividend. However, a non-U.S. shareholder may obtain a
refund of amounts that we withhold if we later determine that a distribution in
fact exceeded our current and accumulated earnings and profits.
Capital Gain Dividends. For any year in which we qualify as a REIT, a
non-U.S. shareholder will incur tax on distributions that are attributable to
gain from our sale or exchange of "U.S. real property interests" under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). The term "U.S. real property interests" includes certain interests
in real property and stock in corporations at least 50% of whose assets consists
of interests in real property, but excludes mortgage loans and mortgage-backed
securities. Under FIRPTA, a non-U.S. shareholder is taxed on distributions
attributable to gain from sales of U.S. real property interests as if such gain
were effectively connected with a U.S. business of the non-U.S. shareholder. A
non-U.S. shareholder thus would be taxed on such a distribution at the normal
capital gain rates applicable to U.S. shareholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of a
nonresident alien individual). A non- U.S. corporate shareholder not entitled to
treaty relief or exemption also may be subject to the 30% branch profits tax on
distributions subject to FIRPTA. We must withhold 35% of any distribution that
we could designate as a capital gain dividend. However, if we make a
distribution and later designate it as a capital gain dividend, then (although
such distribution may be taxable to a non-U.S. shareholder) it is not subject to
withholding under FIRPTA. Instead, we must make-up the 35% FIRPTA withholding
from distributions made after the designation, until the amount of distributions
withheld at 35% equals the amount of the distribution designated as a capital
gain dividend. A non-U.S. shareholder may receive a credit against its FIRPTA
tax liability for the amount we withhold.
Distributions to a non-U.S. shareholder that we designate at the time
of distribution as capital gain dividends which are not attributable to or
treated as attributable to our disposition of a U.S. real property interest
generally will not be subject to U.S. federal income taxation, except
as described below under "--Sale of Shares."
Sale of Shares. A non-U.S. shareholder generally will not incur tax
under FIRPTA on gain from the sale of its common shares as long as we are a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period non-U.S. persons held,
directly or indirectly, less than 50% in value of the stock. We anticipate that
we will continue to be a "domestically controlled REIT." In addition, a non-U.S.
shareholder that owns, actually or constructively, 5% or less of outstanding
common shares at all times during a specified testing period will not incur tax
under FIRPTA if the common shares are "regularly traded" on an established
securities market. If neither of these exceptions were to apply, the gain on the
sale of the common shares would be taxed under FIRPTA, in which case a non-U.S.
shareholder would be taxed in the same manner as U.S. shareholders with respect
to such gain (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals.
A non-U.S. shareholder will incur tax on gain not subject to FIRPTA if
(1) the gain is effectively connected with the non-U.S. shareholder's U.S. trade
or business, in which case the non-U.S. shareholder will be subject to the same
treatment as U.S. shareholders with respect to such gain, or (2) the non-U.S.
shareholder is a nonresident alien individual who was present in the U.S. for
183 days or more during the taxable year, in which case the non-U.S. shareholder
will incur a 30% tax on his capital gains. Capital gains dividends not subject
to FIRPTA will be subject to similar rules.
Backup Withholding. Backup withholding tax (which generally is
withholding tax, imposed at the rate of 30% in 2002 and 2003, on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions to a non-U.S. shareholder provided that the
non-U.S. shareholder certifies under penalty of perjury that the shareholder is
a non-U.S. shareholder, or otherwise establishes an exemption. As a general
matter, backup withholding and information reporting will not apply to a payment
of the proceeds of a sale of common shares effected at a foreign office of a
foreign broker. Information reporting (but not backup withholding) will apply,
however, to a payment of the proceeds of a sale of common shares by a foreign
office of a broker that:
o is a U.S. person;
o derives 50% or more of its gross income for a specified three-year
period from the conduct of a trade or business in the U.S.;
o is a "controlled foreign corporation" (generally, a foreign
corporation controlled by U.S. shareholders) for U.S. tax
purposes; or
o that is a foreign partnership, if at any time during its tax year
50% or more of its income or capital interest are held by U.S.
persons or if it is engaged in the conduct of a trade or business
in the U.S.,
unless the broker has documentary evidence in its records that the holder or
beneficial owner is a
non-U.S. shareholder and certain other conditions are met, or the shareholder
otherwise establishes an exemption. Payment of the proceeds of a sale of common
shares effected at a U.S. office of a broker is subject to both backup
withholding and information reporting unless the shareholder certifies under
penalty of perjury that the shareholder is a non-U.S. shareholder, or otherwise
establishes an exemption. Backup withholding is not an additional tax. A
non-U.S. shareholder may obtain a refund of excess amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
IRS.
Other Tax Consequences
State and Local Taxes. We and/or you may be subject to state and local
tax in various states and localities, including those states and localities in
which we or you transact business, own property or reside. The state and local
tax treatment in such jurisdictions may differ from the federal income tax
treatment described above. Consequently, you should consult your own tax advisor
regarding the effect of state and local tax laws upon an investment in our
securities.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FEDERAL REALTY INVESTMENT TRUST
Date: November 13, 2002 /s/ Larry E. Finger
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Larry E. Finger
Senior Vice President,
Chief Financial Officer and Treasurer