AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 2003.
REGISTRATION STATEMENT NO. 333-103755
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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AVALONBAY COMMUNITIES, INC.
(Exact Name of Registrant as specified in its charter)
MARYLAND 77-0404318
(State of Incorporation) (I.R.S. Employer Identification No.)
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2900 EISENHOWER AVENUE, SUITE 300
ALEXANDRIA, VIRGINIA 22314
(703) 329-6300
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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BRYCE BLAIR
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
AVALONBAY COMMUNITIES, INC.
2900 EISENHOWER AVENUE, SUITE 300
ALEXANDRIA, VIRGINIA 22314
(703) 329-6300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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WITH COPIES TO:
GILBERT G. MENNA, P.C.
ERIC G. KEVORKIAN, ESQ.
GOODWIN PROCTER LLP
EXCHANGE PLACE
BOSTON, MASSACHUSETTS 02109-2881
(617) 570-1000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is used to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement number of the earlier
effective registration statement for the same offering. / /
If this 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. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED JUNE 20, 2003
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
AVALONBAY COMMUNITIES, INC.
$750,000,000
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
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This prospectus provides you with a general description of debt and equity
securities that AvalonBay Communities, Inc. may offer and sell from time to
time. Each time we sell securities we will provide a prospectus supplement that
will contain specific information about the terms of that sale and may add to or
update the information in this prospectus. You should read this prospectus and
any applicable prospectus supplement carefully before you invest in our
securities.
Our common stock is listed on the New York Stock Exchange and the Pacific
Exchange under the symbol "AVB."
INVESTING IN OUR SECURITIES INVOLVES VARIOUS RISKS. BEGINNING ON PAGE 1, WE
HAVE DISCUSSED SEVERAL "RISK FACTORS" THAT YOU SHOULD CONSIDER BEFORE INVESTING
IN OUR SECURITIES.
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JUNE , 2003
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
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Risk Factors................................................ 1
Forward-looking Statements.................................. 8
About this Prospectus....................................... 10
Where You Can Find More Information......................... 10
About AvalonBay Communities, Inc............................ 11
Policies With Respect to Certain Activities................. 12
Ratios of Earnings to Combined Fixed Charges and Preferred
Stock Dividends........................................... 13
Ratios of Earnings to Fixed Charges......................... 14
How We Intend to Use the Proceeds........................... 15
Description of the Debt Securities.......................... 15
Description of Preferred Stock.............................. 31
Description of Common Stock................................. 36
Limits on Ownership of Stock................................ 38
Federal Income Tax Considerations and Consequences of Your
Investment................................................ 40
How We Plan to Sell the Securities.......................... 56
Experts..................................................... 58
Legal Opinions.............................................. 58
i
Unless the context otherwise requires, all references to "we," "us," "our,"
"our company," "AvalonBay," or similar expressions in this prospectus refer
collectively to AvalonBay Communities, Inc., a Maryland corporation, and its
subsidiaries, and their respective predecessor entities for the applicable
periods, considered as a single enterprise.
RISK FACTORS
BEFORE YOU INVEST IN OUR SECURITIES, YOU SHOULD BE AWARE THAT THERE ARE
RISKS IN MAKING THE INVESTMENT, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD
CONSIDER CAREFULLY THESE RISK FACTORS TOGETHER WITH ALL OF THE INFORMATION
INCLUDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS BEFORE YOU DECIDE TO
PURCHASE OUR SECURITIES. THIS SECTION INCLUDES OR REFERS TO FORWARD-LOOKING
STATEMENTS. YOU SHOULD REFER TO THE EXPLANATION OF THE QUALIFICATIONS AND
LIMITATIONS ON FORWARD-LOOKING STATEMENTS DISCUSSED ON PAGE 8.
DEVELOPMENT AND CONSTRUCTION RISKS COULD AFFECT OUR PROFITABILITY.
We intend to continue to develop and redevelop apartment home communities.
Our development and redevelopment activities may be exposed to the following
risks:
- we may be unable to obtain, or experience delays in obtaining, necessary
zoning, land-use, building, occupancy, and other required governmental
permits and authorizations or other necessary third party consents, which
could result in increased costs or the delay or abandonment of development
or redevelopment opportunities;
- we may abandon development and redevelopment opportunities that we have
already begun to explore for a number of reasons, including changes in
local market conditions which make development or redevelopment less
desirable, increases in costs of development or redevelopment and
increases in the cost of capital, and, as a result, we may fail to recover
expenses already incurred in exploring those opportunities;
- we may incur construction, reconstruction, development or redevelopment
costs for a community that exceed our original estimates due to increased
material, labor or other costs, and we may not be able to increase rents
to compensate for the increase in those costs;
- occupancy rates and rents at a newly completed or redeveloped community
may fluctuate depending on a number of factors, including market and
economic conditions which are beyond our control and the development by
competitors of competing communities, and this may result in the community
not being profitable;
- we may be unable to complete construction and lease-up of a community on
schedule, resulting in increased debt service expense and construction or
reconstruction costs and a decrease in our expected rental revenues; and
- we may be unable to obtain financing with favorable terms, or at all, for
the proposed development of a community, which may cause us to be unable
to proceed with its development and could limit our pursuit of
opportunities.
Construction costs have been increasing in our markets, and the cost to
develop communities or redevelop acquired communities has, in some cases,
exceeded our original estimates. We may experience similar cost increases in the
future. If we are not able to charge rents that will be sufficient to offset the
effects of any increases in construction costs, our profitability could be less
than anticipated.
UNFAVORABLE CHANGES IN MARKET AND ECONOMIC CONDITIONS COULD HURT OCCUPANCY
OR RENTAL RATES.
The market and economic conditions in Northern and Southern California and
selected states in the Mid-Atlantic, Northeast, Midwest and Pacific Northwest
regions of the United States may
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significantly affect occupancy or rental rates at our communities in those
regions. For example, the current economic contraction resulting from job losses
in a number of these regions, particularly in the technology, telecommunications
and financial services sectors, has adversely affected our occupancy and rental
rates at our communities in these regions. We do not expect these conditions to
improve during 2003. The market and economic conditions in these regions, in
turn, may significantly affect our profitability and our ability to satisfy our
financial obligations. The risks that may affect conditions in those markets
include the following:
- plant closings, industry slowdowns and other factors that adversely affect
the local economy;
- an oversupply of, or a reduced demand for, apartment homes;
- a decline in household formation or employment or lack of employment
growth that adversely affects occupancy or rental rates;
- the inability or unwillingness of residents to pay rent increases; and
- rent control or rent stabilization laws, or other laws regulating housing,
that could prevent us from raising rents to offset increases in operating
costs.
SHORT-TERM LEASES EXPOSE US TO THE EFFECTS OF DECLINING MARKET RENTS.
Substantially all of our apartment leases are for a term of one year or
less. Because these leases generally permit the residents to leave at the end of
the lease term without penalty, our rental revenues are impacted by declines in
market rents more quickly than if our leases were for longer terms. In a
deflationary rent environment like we are presently experiencing, declining
market rents could have a material adverse effect on our results of operations
and financial condition.
COMPETITION COULD LIMIT OUR ABILITY TO LEASE APARTMENT HOMES OR INCREASE OR
MAINTAIN RENTS.
Our apartment communities compete with other housing alternatives to attract
residents, including other rental apartments, condominiums and single-family
homes that are available for rent, as well as new and existing condominiums and
single-family homes for sale. Competitive residential housing in a particular
area could adversely affect our ability to lease apartment homes and to increase
or maintain rents.
COMPETITION COULD LIMIT AVAILABLE INVESTMENT OPPORTUNITIES, WHICH COULD
ADVERSELY AFFECT OUR PROFITABILITY.
We expect that other real estate investors, including insurance companies,
pension and investment funds, partnerships, investment companies and other
apartment REITs, will compete with us to acquire existing properties and to
develop new properties. This competition could increase prices for properties of
the type we would likely pursue. As a result, we may not be able, or have the
opportunity, to make suitable investments on favorable terms in the future. This
could adversely affect our profitability.
INSUFFICIENT CASH FLOW COULD AFFECT OUR DEBT FINANCING AND CREATE
REFINANCING RISK.
We are subject to the risks normally associated with debt financing,
including the risk that our cash flow will be insufficient to meet required
payments of principal and interest. In this regard, we note that we are required
to annually distribute dividends generally equal to at least 90% of our REIT
taxable income, computed without regard to the dividends paid deduction and our
net capital gain, in order for us to continue to qualify as a REIT, and this
requirement limits the amount of our cash flow available to meet required
principal and interest payments. The principal outstanding balance on a portion
of our debt will not be fully amortized prior to its maturity. Although we may
be able to repay our debt by using our cash flows, we cannot assure you that we
will have sufficient cash flows available to make all required principal
payments. Therefore, we may need to refinance at least a portion of our
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outstanding debt as it matures. There is a risk that we may not be able to
refinance existing debt or that the terms of any refinancing will not be as
favorable as the terms of the existing debt, either of which could have a
material adverse effect on our financial condition and results of operations.
RISING INTEREST RATES COULD INCREASE INTEREST COSTS AND COULD AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.
We currently have, and may in the future incur, variable interest rate debt
under credit facilities as we acquire, construct and reconstruct apartment
communities, as well as for other purposes. Accordingly, if interest rates
increase, our interest costs will also rise, unless we have made arrangements
that hedge the risk of rising interest rates. In addition, an increase in market
interest rates may lead purchasers of our common stock to demand a greater
annual dividend yield, which could adversely affect the market price of our
outstanding shares of common stock.
BOND FINANCING COMPLIANCE REQUIREMENTS COULD LIMIT OUR INCOME, RESTRICT THE
USE OF COMMUNITIES AND CAUSE FAVORABLE FINANCING TO BECOME UNAVAILABLE.
We have financed some of our apartment communities with obligations issued
by local government agencies or instrumentalities because the interest paid to
the holders of this debt is generally exempt from federal income taxes and,
therefore, the interest rate is generally more favorable to us. These
obligations are commonly referred to as "tax-exempt bonds" and generally must be
secured by communities.
The compliance requirements for our current tax-exempt bonds limit, and the
requirements of any future tax-exempt bond financings may limit, the potential
income from communities that are subject to this financing. This is because
under the terms of our current tax-exempt bonds, we must comply with
restrictions on the use of the communities that we financed with these bonds,
including a requirement that we make some of the apartments available to low and
middle income households.
In addition, some of our tax-exempt bond financing documents require us to
obtain a guarantee from a financial institution of payment of the principal of,
and interest on, the bonds. The guarantee may take the form of a letter of
credit, surety bond, guarantee agreement or other additional collateral. If the
financial institution defaults in its guarantee obligations, or if we are unable
to renew the applicable guarantee or otherwise post satisfactory collateral, a
default will occur under the applicable tax-exempt bonds and the community could
be foreclosed upon.
FAILURE TO GENERATE SUFFICIENT REVENUE COULD LIMIT CASH FLOW AVAILABLE FOR
DISTRIBUTIONS TO STOCKHOLDERS.
If our communities do not generate revenues sufficient to meet our operating
expenses, including debt service and capital expenditures, our cash flow would
decrease. Our cash flow from operations is dependent primarily on revenues and
net operating income generated by our communities, which is subject to variation
depending on market conditions. For example, our net operating income from
established communities decreased significantly in 2002 due primarily to a weak
demand environment, which caused a decline in rental rates and occupancies. In
addition, in 2002, our net income available to common stockholders declined by
$60,778,000 (28.1%) as a result of decreased revenues due primarily to fewer
gains on sales of communities, increases in interest and depreciation expense
and a decline in net operating income due to deteriorating market conditions in
many of our submarkets. We presently expect continued weak demand during most of
2003. A decrease in cash flow could have an adverse effect on our ability to pay
distributions to our stockholders and our ability to maintain our status as a
real estate investment trust (REIT). Significant expenditures associated with
each community such as debt service payments, if any, real estate taxes,
insurance and maintenance costs are generally not reduced when circumstances
cause a reduction in income from a community.
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DIFFICULTY OF SELLING APARTMENT COMMUNITIES COULD LIMIT FLEXIBILITY.
Real estate in our markets can be hard to sell, especially if market
conditions are poor. These potential difficulties in selling real estate in our
markets may limit our ability to change or reduce the apartment communities in
our portfolio promptly in response to changes in economic or other conditions.
In addition, federal tax laws may limit our ability to earn a gain on the sale
of a community if we have owned it for too short a period of time or we are
otherwise found to have acquired or developed the community primarily with a
view to reselling the community, and this limitation may affect our ability to
sell communities without adversely affecting returns to our stockholders. We
presently expect to increase our disposition activity in 2003 as compared to
2002, which means that these potential difficulties and limitations may
adversely affect our ability to fully implement our business plan for 2003.
ACQUISITIONS MAY NOT YIELD ANTICIPATED RESULTS.
We may, in the future, acquire apartment communities on a select basis. Our
acquisition activities and their success may be exposed to the following risks:
- an acquired property may fail to perform as we expected in analyzing our
investment; and
- our estimate of the costs of repositioning or redeveloping an acquired
property may prove inaccurate.
RISK OF EARTHQUAKE DAMAGE.
Many of our West Coast communities are located in the general vicinity of
active earthquake faults. A large concentration of our communities lie near, and
thus are susceptible to, the major fault lines in the San Francisco Bay Area,
including the San Andreas fault and Hayward fault. We cannot assure you that an
earthquake would not cause damage or losses greater than insured levels. In
November 2002, we renewed our earthquake insurance. We have in place with
respect to communities located in California, for any single occurrence and in
the aggregate, $75,000,000 of coverage with a deductible per building equal to
five percent of the insured value of that building. The five percent deductible
is subject to a minimum of $100,000 per occurrence. Earthquake coverage outside
of California is subject to a $100,000,000 limit, except with respect to the
state of Washington, for which the limit is $65,000,000. Our earthquake
insurance outside of California provides for a $100,000 deductible per
occurrence. In addition, up to an annual aggregate of $2,000,000, the next
$400,000 of loss per occurrence outside California will be treated as an
additional deductible. In the event of an uninsured disaster or a loss in excess
of insured limits, we could lose our capital invested in the affected community,
as well as anticipated future revenue from that community. We would also
continue to be obligated to repay any mortgage indebtedness or other obligations
related to the community. Any such loss could materially and adversely affect
our business and our financial condition and results of operations.
A SIGNIFICANT UNINSURED PROPERTY OR LIABILITY LOSS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In addition to the earthquake insurance discussed above, we carry commercial
general liability insurance, property insurance and terrorism insurance with
respect to all of our communities on terms we consider commercially reasonable.
There are, however, certain types of losses (such as losses arising from acts of
war) that are not insured, in full or in part, because they are either
uninsurable or the cost of insurance makes it, in management's view,
economically impractical. If an uninsured property loss or a property loss in
excess of insured limits were to occur, we could lose our capital invested in a
community, as well as the anticipated future revenues from such community. We
would also continue to be obligated to repay any mortgage indebtedness or other
obligations related to the community. If an
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uninsured liability to a third party were to occur, we would incur the cost of
defense and settlement with, or court ordered damages to, that third party. A
significant uninsured property or liability loss could materially and adversely
affect our business and our financial condition and results of operations.
CONTINUED INCREASES IN DEDUCTIBLES AND PREMIUMS FOR INSURANCE COVERAGE COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The insurance and reinsurance markets have worsened since 2001, and we
believe this has resulted in higher insurance costs for the entire real estate
sector. Within the last twelve months, we renewed our annual general liability
policy, workman's compensation coverage, our property insurance (which includes
the earthquake coverage and builder's risk), and our directors and officers
insurance, and we purchased insurance for property damage due to terrorism of up
to $200,000,000 (with the first $15,000,000 of damage costs payable by us). In
all cases, our insurance policies are subject to deductibles and limits on and
conditions to coverage. The costs of the renewals were significantly greater
than in prior years. Although we will continue to maintain commercially
reasonable insurance coverage, we believe that the cost of this coverage will
continue to increase at a faster rate than other operating expenses. Continued
increases in these costs could have a material adverse effect on our financial
condition and results of operations.
WE MAY INCUR COSTS AND INCREASED EXPENSES TO REPAIR PROPERTY DAMAGE
RESULTING FROM INCLEMENT WEATHER.
Our communities in the Northeast and Midwest expose us to risks associated
with inclement winter weather, including increased costs for the removal of snow
and ice as well as from delays in the construction, reconstruction, development
or redevelopment of apartment communities. In addition, inclement weather could
increase the need for maintenance and repair of our communities. Similarly,
unusually high rainfall or other inclement weather could result in increased
costs due to delays in the construction, reconstruction, development or
redevelopment of apartment communities. These costs and delays could adversely
affect our results of operations.
WE MAY INCUR COSTS DUE TO ENVIRONMENTAL CONTAMINATION.
Under various federal, state and local environmental laws, regulations and
ordinances, a current or previous owner or operator of real estate may be
required, regardless of knowledge or responsibility, to investigate and
remediate the effects of hazardous or toxic substances or petroleum product
releases at the property and may be held liable to a governmental entity or to
third parties for property or personal injury damages and for investigation and
remediation costs incurred by these parties as a result of the contamination.
These damages and costs may be substantial. The presence of such substances, or
the failure to properly remediate the contamination, may adversely affect the
owner's ability to borrow against, sell or rent the affected property. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs as a result of the
contamination.
Certain federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos containing materials ("ACMs")
when such materials are in poor condition or in the event of reconstruction,
remodeling, renovation, or demolition of a building. These laws may impose
liability for release of ACMs and may provide for third parties to seek recovery
from owners or operators of real properties for personal injury associated with
exposure to ACMs. We are not aware that any ACMs were used in the construction
of the communities we developed. ACMs were, however, used in the construction of
several of the communities that we acquired. We implement an operations and
maintenance program at each of the communities at which ACMs are detected. We do
not anticipate that we will incur any material liabilities as a result of the
presence of ACMs at our communities.
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We are aware that some of our communities have lead paint and have
implemented an operations and maintenance program at each of those communities.
We do not anticipate that we will incur any material liabilities as a result of
the presence of lead paint at our communities.
All of our stabilized operating communities, and all of the communities that
we are currently developing or redeveloping, have been subjected to at least a
Phase I or similar environmental assessment, which generally does not involve
invasive techniques such as soil or ground water sampling. These assessments,
together with subsurface assessments conducted on some properties, have not
revealed, and we are not otherwise aware of, any environmental conditions that
we believe would have a material adverse effect on our business, assets,
financial condition or results of operation. In connection with our ownership,
operation and development of communities, from time to time we undertake
remedial action in response to the presence of subsurface or other contaminants.
In some cases, an indemnity exists upon which we may be able to rely if
environmental liability arises from the contamination. There can be no
assurance, however, that all necessary remediation actions have been or will be
undertaken at our properties or that we will be indemnified, in full or at all,
in the event that environmental liability arises.
Mold growth may occur when excessive moisture accumulates in buildings or on
building materials, particularly if the moisture problem remains undiscovered or
is not addressed over a period of time. Although the occurrence of mold at
multifamily and other structures, and the need to remediate such mold, is not a
new phenomenon, there has been increased awareness in recent years that certain
molds may in some instances lead to adverse health effects, including allergic
or other reactions. To help limit mold growth, we educate residents about the
importance of adequate ventilation and request or require that they notify us
when they see mold or excessive moisture. We have established procedures for
promptly addressing and remediating mold or excessive moisture from apartment
homes when we become aware of its presence regardless of whether we or the
resident believe a health risk is presented. However, we cannot assure that mold
or excessive moisture will be detected and remediated in a timely manner. If a
significant mold problem arises at one of our communities, we could be required
to undertake a costly remediation program to contain or remove the mold from the
affected community and could be exposed to other liabilities.
Additionally, we have occasionally been involved in developing, managing,
leasing and operating various properties for third parties. Consequently, we may
be considered to have been an operator of such properties and, therefore,
potentially liable for removal or remediation costs or other potential costs
which could relate to hazardous or toxic substances. We are not aware of any
material environmental liabilities with respect to properties managed or
developed by us or our predecessors for such third parties.
We cannot assure you that:
- the environmental assessments described above have identified all
potential environmental liabilities;
- no prior owner created any material environmental condition not known to
us or the consultants who prepared the assessments;
- no environmental liabilities have developed since the environmental
assessments were prepared;
- the condition of land or operations in the vicinity of our communities,
such as the presence of underground storage tanks, will not affect the
environmental condition of our communities;
- future uses or conditions, including, without limitation, changes in
applicable environmental laws and regulations, will not result in the
imposition of environmental liability; and
- no environmental liabilities will arise at communities that we have sold
for which we may have liability.
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COMPANIES IN WHICH WE HAVE INVESTED THAT DEVELOP SOFTWARE APPLICATIONS AND
ANCILLARY SERVICES MAY BE UNSUCCESSFUL IN ACHIEVING THEIR BUSINESS PLANS.
We currently have investments in three technology companies. These
investments were made with the belief that they would promote the development
and application of technology and services which would improve the operating
performance of our real estate holdings. Historically, our most significant
technology investment has been Realeum, Inc. ("Realeum"), an entity engaged in
the development and deployment of an on-site property management and leasing
automation system that enables management to capture, review and analyze data.
After consideration of our share of Realeum's losses, the carrying value of our
investment in Realeum was reduced to zero as of December 31, 2002. We are also a
member of Constellation Real Technologies LLC ("Constellation"), an entity
formed by a number of real estate investment trusts and real estate operating
companies for the purpose of investing in multi-sector real estate technology
opportunities. Our original commitment to Constellation was $4,000,000 but, as a
result of an agreement among the members reducing the commitment due from each
member, our commitment is currently $2,600,000, of which we have contributed
$1,002,000 to date. The remaining unfunded commitment of $1,598,000 is expected
to be funded over the next five years. Our third investment is in Rent.com, an
internet-based rental housing information provider. The aggregate carrying value
of our technology investments at May 1, 2003 was $1,447,000. If these entities
are unsuccessful in developing their software applications or ancillary services
or are otherwise unsuccessful in executing their business plans, we could be
required to write-off all or part of the remaining carrying value of our
investments in these entities.
FAILURE TO QUALIFY AS A REIT WOULD CAUSE US TO BE TAXED AS A CORPORATION,
WHICH WOULD SIGNIFICANTLY REDUCE FUNDS AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS.
If we fail to qualify as a REIT for federal income tax purposes, we will be
subject to federal income tax on our taxable income at regular corporate rates,
plus any applicable alternative minimum tax. In addition, unless we are entitled
to relief under applicable statutory provisions, we would be disqualified from
treatment as a REIT for the four taxable years following the year in which we
lose our qualification. The additional tax liability resulting from the failure
to qualify as a REIT would significantly reduce or eliminate the amount of funds
available for distribution to our stockholders. Furthermore, we would no longer
be required to make distributions to our stockholders.
We believe that we are organized and qualified as a REIT, and we intend to
operate in a manner that will allow us to continue to qualify as a REIT.
However, we cannot assure you that we are qualified as a REIT, or that we will
remain qualified in the future. This is because qualification as a REIT involves
the application of highly technical and complex provisions of the Internal
Revenue Code for which there are only limited judicial and administrative
interpretations and involves the determination of a variety of factual matters
and circumstances not entirely within our control. In addition, future
legislation, new regulations, administrative interpretations or court decisions
may significantly change the tax laws or the application of the tax laws with
respect to qualification as a REIT for federal income tax purposes or the
federal income tax consequences of this qualification.
THE ABILITY OF OUR STOCKHOLDERS TO CONTROL OUR POLICIES AND EFFECT A CHANGE
OF CONTROL OF OUR COMPANY IS LIMITED, WHICH MAY NOT BE IN OUR STOCKHOLDERS' BEST
INTERESTS.
CHARTER AND BYLAW PROVISIONS
There are provisions in our charter and bylaws that may discourage a third
party from making a proposal to acquire us, even if some of our stockholders
might consider the proposal to be in their best interests. These provisions
include the following:
- Our charter authorizes our board of directors to issue up to 50,000,000
shares of preferred stock without stockholder approval and to establish
the preferences and rights, including voting rights,
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of any series of preferred stock issued. The board of directors may issue
preferred stock without stockholder approval, which could allow the board
to issue one or more classes or series of preferred stock that could
discourage or delay a tender offer or a change in control.
- To maintain our qualification as a REIT for federal income tax purposes,
not more than 50% in value of our outstanding stock may be owned, directly
or indirectly, by five or fewer individuals at any time during the last
half of any year. To maintain this qualification, and to otherwise address
concerns about concentrations of ownership of our stock, our charter
generally prohibits ownership (directly, indirectly by virtue of the
attribution provisions of the Internal Revenue Code, or beneficially as
defined in Section 13 of the Securities Exchange Act) by any single
stockholder of more than 9.8% of the issued and outstanding shares of any
class or series of our stock. In general, under our charter, pension plans
and mutual funds may directly and beneficially own up to 15% of the
outstanding shares of any class or series of stock. Under our charter, our
board of directors may in its sole discretion waive or modify the
ownership limit for one or more persons. These ownership limits may
prevent or delay a change in control and, as a result, could adversely
affect our stockholders' ability to realize a premium for their shares of
common stock.
- Our bylaws provide that the affirmative vote of holders of a majority of
all of the shares entitled to be cast in the election of directors is
required to elect a director. In a contested election, if no nominee
receives the vote of holders of a majority of all of the shares entitled
to be cast, the incumbent directors would remain in office. This
requirement may prevent or delay a change in control and, as a result,
could adversely affect our stockholders' ability to realize a premium for
their shares of common stock.
MARYLAND LAW
As a Maryland corporation, we are subject to the provisions of the Maryland
General Corporation Law. Maryland law imposes restrictions on some business
combinations and requires compliance with statutory procedures before some
mergers and acquisitions may occur, which may delay or prevent offers to acquire
us or increase the difficulty of completing any offers, even if they are in our
stockholders' best interests. In addition, other provisions of the Maryland
General Corporation Law permit the Board of Directors to make elections and to
take actions without stockholder approval that, if made or taken, could have the
effect of discouraging or delaying a change in control.
FORWARD-LOOKING STATEMENTS
This prospectus, including the information incorporated by reference into
this prospectus, contains statements that are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. You can identify forward-looking statements by
the use of the words "believe," "expect," "anticipate," "intend," "estimate,"
"assume," "plan," "project," "may," "shall," "will" and other similar
expressions which predict or indicate future events and trends and which do not
relate to historical matters. These statements include, among other things,
statements regarding our intent, belief or expectations with respect to:
- our potential development, redevelopment, acquisition or disposition of
communities;
- the timing and cost of completion of apartment communities under
construction, reconstruction, development or redevelopment;
- the timing of lease-up, occupancy and stabilization of apartment
communities;
- the pursuit of land on which we are considering future development;
- the anticipated operating performance of our communities;
8
- cost, yield and earnings estimates;
- our declaration or payment of distributions;
- our policies regarding investments, indebtedness, acquisitions,
dispositions, financings and other matters;
- our qualification as a REIT under the Internal Revenue Code;
- the real estate markets in Northern and Southern California and markets in
selected states in the Mid-Atlantic, Northeast, Midwest and Pacific
Northwest regions of the United States and in general;
- the availability of debt and equity financing;
- interest rates;
- general economic conditions; and
- trends affecting our financial condition or results of operations.
We cannot assure the future results or outcome of the matters described in
any of these statements; rather, these statements merely reflect our current
expectations and estimates of the approximate outcomes of the matters discussed.
You should not rely on forward-looking statements because they involve known and
unknown risks, uncertainties and other factors, some of which are beyond our
control. These risks, uncertainties and other factors, which we describe above
under "Risk Factors," may cause our actual results, performance or achievements
to differ materially from the anticipated future results, performance or
achievements expressed or implied by these forward-looking statements.
YOU SHOULD CAREFULLY REVIEW THIS PROSPECTUS, AND IN PARTICULAR THE SECTION
ENTITLED "RISK FACTORS," WHICH TOGETHER WITH ANY APPLICABLE PROSPECTUS
SUPPLEMENT AND ADDITIONAL INFORMATION DESCRIBED BELOW UNDER THE HEADING "WHERE
YOU CAN FIND MORE INFORMATION" WILL CONTAIN ALL INFORMATION OF WHICH WE ARE
AWARE THAT IS MATERIAL TO YOUR DECISION WHETHER TO INVEST IN OUR SECURITIES.
We caution you that these forward-looking statements reflect our estimates
and beliefs only as of the date of this report and are not guarantees of future
performance. We do not promise to update any forward-looking statements to
reflect changes in underlying assumptions or factors, new information, future
events or other changes and you should not rely upon these forward-looking
statements after the date of this prospectus.
9
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC utilizing a shelf registration process. Under this shelf process, we may
sell any combination of the securities described in this prospectus in one or
more offerings up to a total dollar amount of $750,000,000. This prospectus
provides you with a general description of the securities we may offer. Each
time we sell securities, we will provide a prospectus supplement that will
contain specific information about the terms of that offering. The prospectus
supplement may also add, update or change information contained in this
prospectus. You should read both this prospectus and any applicable prospectus
supplement together with additional information described below under the
heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may call the SEC at 1-800-SEC-0330 for further information on the operation
of the Public Reference Room. Our SEC filings are also available to the public
from the SEC's Web site at http://www.sec.gov. In addition, you may read our SEC
filings at the offices of the New York Stock Exchange (NYSE), which is located
at 20 Broad Street, New York, New York 10005, and at the offices of the Pacific
Exchange (PCX), which is located at 301 Pine Street, San Francisco, California
94104. Our SEC filings are available at the NYSE and the PCX because our common
stock and outstanding series of preferred stock are listed on the NYSE and the
PCX.
In accordance with Section 2-210 of the Maryland General Corporation Law,
our board of directors has authorized the issuance of some or all of the shares
of any or all of our classes or series of stock without certificates. In
addition, we have the authority to designate and issue more than one class or
series of stock having various preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption. See "Description of Preferred Stock" and "Description
of Common Stock." Our charter imposes limitations on the ownership and transfer
of our stock. See "Limits on Ownership of Stock." We will furnish a full
statement of the relative rights and preferences of each class or series of our
stock which has been so designated and any restrictions on the ownership or
transfer of our stock to any stockholder upon request and without charge.
Written requests for such copies should be directed to: AvalonBay
Communities, Inc., 2900 Eisenhower Avenue, Suite 300, Alexandria, Virginia
22314, Attention: Chief Financial Officer.
The SEC allows us to incorporate by reference the information we file with
it, which means that we can disclose important information to you by referring
you to these documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
SEC will automatically update and supersede the information already incorporated
by reference. We are incorporating by reference the documents listed below,
which we have already filed with the SEC, and any future filings we make with
the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934 until we sell all of the securities.
AVALONBAY SEC FILINGS (FILE NO. 001-12672) PERIOD OR DATE FILED
-------------------------------------------------------- --------------------------------------------------------
Annual Report on Form 10-K.............................. Year ended December 31, 2002
Quarterly Report on Form 10-Q........................... Quarter ended March 31, 2003
In addition, we are incorporating by reference the description of our common
stock from our Registration Statement on Form 8-B filed June 8, 1995.
YOU MAY REQUEST A COPY OF THESE FILINGS, AND ANY EXHIBITS WE HAVE
SPECIFICALLY INCORPORATED BY REFERENCE AS AN EXHIBIT IN THIS PROSPECTUS, AT NO
COST BY WRITING OR TELEPHONING US AT THE FOLLOWING: AVALONBAY
COMMUNITIES, INC., 2900 EISENHOWER AVENUE, SUITE 300, ALEXANDRIA, VIRGINIA
22314, ATTENTION: CHIEF FINANCIAL OFFICER. OUR TELEPHONE NUMBER IS 703-329-6300.
10
This prospectus is part of a registration statement we filed with the SEC.
We have incorporated exhibits into this registration statement. You should read
the exhibits carefully for provisions that may be important to you.
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone to provide you with different information. We are not making an offer of
these securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus or in the documents incorporated
by reference is accurate as of any date other than the date on the front of this
prospectus or those documents.
ABOUT AVALONBAY COMMUNITIES, INC.
- AvalonBay Communities, Inc. focuses on the ownership and operation of
upscale apartment communities (which generally command among the highest
rents in their submarkets) in high barrier-to-entry markets of the United
States. This is because we believe that, long term, the limited new supply
of upscale apartment homes and lower housing affordability in these
markets will result in larger increases in cash flows relative to other
markets over an entire business cycle. These barriers-to-entry generally
include a difficult and lengthy entitlement process with local
jurisdictions and dense urban or suburban areas where zoned and entitled
land ("in-fill locations") is in limited supply. Our markets are located
in the Northeast, Mid-Atlantic, Midwest, Pacific Northwest, and Northern
and Southern California regions of the United States. We believe that we
have penetrated substantially all of the high barrier-to-entry markets of
the country.
- Our principal operating objectives are to develop, own and operate, in our
selected markets, high-quality, upscale communities that contain features
and amenities desired by prospective residents, and to provide our
residents with efficient and effective service. At May 1, 2003, we owned
or held a direct or indirect ownership interest in 136 operating apartment
communities containing 40,019 apartment homes in eleven states and the
District of Columbia, of which two communities containing 1,089 apartment
homes were under reconstruction. In addition, we owned or held a direct or
indirect ownership interest in ten communities under construction that are
expected to contain an aggregate of 2,826 apartment homes when completed.
We also owned a direct or indirect ownership interest in rights to develop
an additional 39 communities that, if developed in the manner expected,
will contain an estimated 10,133 apartment homes. We generally obtain
ownership in an apartment community by developing a new community on
vacant land or by acquiring and either repositioning or redeveloping an
existing community. In selecting sites for development, redevelopment or
acquisition, we favor locations that are near expanding employment centers
and convenient to recreation areas, entertainment, shopping and dining.
- AvalonBay is a Maryland corporation that is the surviving entity from the
merger of Avalon Properties, Inc. with and into Bay Apartment
Communities, Inc. on June 4, 1998. In October 1998, we changed our name to
AvalonBay Communities, Inc. Our common stock is listed on the NYSE and the
PCX under the symbol "AVB."
- AvalonBay elected to qualify as a REIT for federal income tax purposes for
the taxable year ended December 31, 1994. As long as we qualify for
taxation as a REIT, we generally will not be subject to federal income tax
on that portion of our ordinary income and capital gains that is currently
distributed to our stockholders. Even if we qualify for taxation as a
REIT, we may be subject to state and local taxes on our income and
property, to federal income and excise taxes on our undistributed income,
and to federal and state income taxes on the income earned by subsidiaries
that are taxed as regular corporations.
11
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and other
policies of AvalonBay. These policies may be changed from time to time without a
vote of our stockholders.
INVESTMENT POLICIES
Our principal financial goal is to increase long-term stockholder value by
successfully and cost-effectively developing, owning and operating high-quality
communities in our selected markets that contain features and amenities desired
by residents. To help fulfill this goal, our investment policy is (1) to
selectively develop, redevelop and acquire apartment communities in high
barrier-to-entry markets and (2) to selectively sell apartment communities that
no longer meet our long-term strategy due to product type, location or relative
potential for future value creation and redeploy the proceeds from those sales
to develop and redevelop apartment communities. During the three years ended
December 31, 2002, we acquired 11 apartment communities, disposed of 16
apartment communities, and completed the development of 22 apartment communities
and the redevelopment of seven apartment communities. We presently expect to
decrease acquisition and development during 2003 as compared to prior years and
to increase disposition activity during 2003 in response to current and
anticipated real estate and capital market conditions. The level of disposition,
acquisition or development activity, however, is heavily influenced by capital
market conditions, including prevailing interest rates. As a result, we cannot
assure you that assets can be sold on terms that we consider satisfactory.
We may, from time to time, enter into joint ventures (including limited
liability companies) or partnerships through which we would own an indirect
economic interest in less than 100% of the property or properties held by such
joint venture or partnership. As of May 1, 2003, we had an interest in 14 joint
ventures or partnerships (including the six "DownREIT" partnerships referred to
below) through which we have an indirect economic interest in 27 of our
communities. Our decision whether to hold an apartment community in fee simple
or to have an indirect interest in the community through a joint venture or
partnership is based on a variety of facts and considerations, including:
(1) the economic and tax terms required by a seller of land or of a community,
who may prefer that (or who may require less payment if) the land or community
is contributed to a joint venture or partnership; (2) our desire to diversify
our portfolio of communities by market, submarket and product type; (3) our
desire at times to preserve our capital resources to maintain liquidity or
balance sheet strength; and (4) our projection, in some circumstances, that we
will achieve higher returns on our invested capital or reduce our risk if a
joint venture or partnership vehicle is used. Any future investments in joint
ventures or partnerships will not be limited to a specified percentage of our
assets. Each joint venture or partnership agreement is individually negotiated,
and our ability to operate and/or dispose of a community in our sole discretion
may be limited to varying degrees depending on the terms of the joint venture or
partnership agreement.
While we emphasize equity real estate investments in apartment communities,
we have the ability, which would be exercised in the discretion of our Board of
Directors, to invest in other types of real estate, mortgages (including
participating or convertible mortgages), securities of other REITs or real
estate operating companies, or securities of technology companies that relate to
our real estate operations or of companies that provide services to us or our
residents, in each case consistent with our qualification as a REIT. On
occasion, we own and operate retail space at our communities when either
(1) the highest and best use of the space is for retail (e.g., street level in
an urban area) or (2) we believe the retail space will enhance the
attractiveness of the community to residents. As of December 31, 2002, we had a
total of 176,253 square feet of rentable retail space that produced gross rental
revenue in 2002 of $2,255,960 (0.4% of total revenue). Any investment in
securities of other entities is subject to the percentage of ownership
limitations and gross income tests necessary for REIT qualification. See
"Federal Income Tax Considerations and Consequences of Your Investment." We have
not, and under our current policy we do not intend to, invest in the securities
of any other issuer
12
(other than a joint venture or partnership or an entity that provides services
to us or our residents, each as described above) for the purpose of exercising
control. Our current policy also does not contemplate future investments in
mortgages or deeds of trust.
FINANCING POLICIES
Our Board of Directors may, from time to time, depending upon general market
and economic conditions, including interest rates, our short and long term
liquidity needs, the adequacy of our expected liquidity sources, the relative
costs of debt and equity capital, growth opportunities and other factors,
determine to raise additional capital. We may raise additional capital through
additional equity or debt offerings or both (including offerings of senior
securities). In the past three years, we have issued two series of preferred
stock: (1) we issued 592,000 shares of Series I Cumulative Redeemable Preferred
Stock on July 11, 2002 for an aggregate purchase price of $14,800,000, and we
subsequently redeemed those shares on August 29, 2002 and (2) we issued
3,336,611 shares of Series J Cumulative Redeemable Preferred Stock on March 18,
2003 for an aggregate purchase price of $83,415,275, and we subsequently
redeemed those shares on May 9, 2003. During the three years ended December 31,
2002, we also issued an aggregate of approximately $1,100,000,000 principal
amount of senior debt securities (including the issuance of medium-term notes),
and we repaid an aggregate of $100,000,000 in principal of senior debt
securities. In addition, we repaid an aggregate of $50,000,000 in prinicipal of
senior debt securities in January 2003.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
We may, from time to time, offer shares of our equity securities, debt
securities or options to purchase stock in exchange for property. We currently
have six limited partnerships structured as "DownREITs" in which either us or
one of our wholly-owned subsidiaries is the general partner. The DownREIT
acquires properties or communities in exchange for units of limited partnership
interest. After a period of time, the holders of units of limited partnership
interest have the right to present each unit of limited partnership interest for
redemption for an amount of cash equal to the fair market value of a share of
our common stock on the date of redemption. In lieu of a cash redemption of a
limited partner's unit, we may elect to acquire any unit presented for
redemption for one share of common stock. We entered into these DownREITs as a
way of acquiring an indirect interest in land or communities while permitting
the prior owner to also retain an interest and defer the recognition of the
taxable gain that would have occurred if we had acquired the property directly
for cash. During the three years ended December 31, 2002, we issued an aggregate
of 361,835 units of limited partnership interest in DownREITs in connection with
the acquisition of properties or communities.
We have not engaged in trading, underwriting or agency distribution or sale
of securities of other issuers and do not intend to do so. At all times we
intend to make investments in a manner as to qualify as a REIT unless, because
of circumstances or changes to the Internal Revenue Code (or the Treasury
Regulations), the Board of Directors determines that it is no longer in our best
interest to qualify as a REIT.
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
Our ratio of earnings to combined fixed charges and preferred stock
dividends for each of the periods indicated is as follows:
QUARTER ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001 2000 1999 1998
------------- ------------ ------------ ------------ ------------ ------------
Ratios............... 1.25x 1.49x 1.75x 1.78x 1.46x 1.56x
The ratios of earnings to combined fixed charges and preferred stock
dividends were computed by dividing earnings by combined fixed charges and
preferred stock dividends. For this purpose, earnings
13
consist of pre-tax income from continuing operations before adjustment for
minority interests in consolidated subsidiaries plus fixed charges less
capitalized interest. Fixed charges consist of interest expense (including the
amortization of debt issuance costs) and capitalized interest.
Since its formation, AvalonBay has issued the following series of preferred
stock:
- 2,308,800 shares of Series A Preferred Stock were issued in October 1995,
of which 1,358,736 shares were converted into 1,358,736 shares of Common
Stock in April 1998 and 950,064 shares were converted into 950,064 shares
of Common Stock in June 1998;
- 405,022 shares of Series B Preferred Stock were issued in May 1996, all of
which were converted into 405,022 shares of Common Stock in June 1998;
- 2,300,000 shares of 8.50% Series C Cumulative Redeemable Preferred Stock
were issued in June 1997, all of which were redeemed in July 2002;
- 3,267,700 shares of 8.00% Series D Cumulative Redeemable Preferred Stock
were issued in December 1997, all of which were redeemed in March 2003;
- 4,455,000 shares of 9.00% Series F Cumulative Redeemable Preferred Stock
were issued in June 1998, all of which were redeemed in June 2001;
- 4,300,000 shares of 8.96% Series G Cumulative Redeemable Preferred Stock
were issued in June 1998, all of which were redeemed in October 2001;
- 4,000,000 shares of 8.70% Series H Cumulative Redeemable Preferred Stock
were issued in October 1998, all of which are currently outstanding;
- 592,000 shares of Series I Cumulative Redeemable Preferred Stock were
issued in June 2002, all of which were redeemed in August 2002; and
- 3,336,611 shares of Series J Cumulative Redeemable Preferred Stock were
issued in March 2003, all of which were redeemed on May 9, 2003.
In addition, AvalonBay designated 1,000,000 shares of Series E Junior
Participating Cumulative Preferred Stock in March 1998 in connection with our
shareholder rights agreement. Our shareholder rights agreement was subsequently
terminated on March 31, 2002.
RATIOS OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for each of the periods indicated is
as follows:
QUARTER ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001 2000 1999 1998
------------- ------------ ------------ ------------ ------------ ------------
Ratios............... 1.36x 1.66x 2.18x 2.47x 2.05x 2.19x
The ratios of earnings to fixed charges were computed by dividing earnings
by fixed charges. For this purpose, earnings consist of pre-tax income from
continuing operations before adjustment for minority interests in consolidated
subsidiaries plus fixed charges less capitalized interest. Fixed charges consist
of interest expense (including the amortization of debt issuance costs) and
capitalized interest.
14
HOW WE INTEND TO USE THE PROCEEDS
Unless we provide otherwise in a supplement to this prospectus, we intend to
use the net proceeds from the sale of the securities for one or more of the
following:
- working capital;
- capital expenditures, including for the development and redevelopment of
apartment communities;
- repayment and refinancing of debt or redemption of prior issuances of
preferred stock;
- potential acquisitions; and
- other general corporate purposes.
DESCRIPTION OF THE DEBT SECURITIES
This prospectus describes the general terms and provisions of the debt
securities. When we offer to sell a particular series of debt securities, we
will describe the specific terms of the securities in a supplement to this
prospectus. The prospectus supplement will also indicate whether the general
terms and provisions described in this prospectus apply to a particular series
of debt securities. You should read the indentures referenced below for a more
complete understanding of the general terms and provisions described in this
prospectus.
The senior debt securities will be issued under an indenture, dated as of a
date prior to such issuance, between us and State Street Bank and Trust Company,
as trustee, as amended or supplemented from time to time. We will refer to any
such indenture throughout this prospectus as the "senior indenture." The
subordinated debt securities will be issued under a separate indenture, dated as
of a date prior to such issuance, between us and the trustee. We will refer to
any such indenture throughout this prospectus as the "subordinated indenture"
and to a trustee under any senior or subordinated indenture as the "trustee."
The senior indenture and the subordinated indenture are sometimes collectively
referred to in this prospectus as the "indentures." The indentures will be
subject to and governed by the Trust Indenture Act of 1939. We included copies
of the indentures as exhibits to our registration statement and they are
incorporated into this prospectus by reference. The following summarizes the
material provisions of the indentures but may not contain all of the information
that is important to you. Except as otherwise indicated, the terms of the
indentures are identical. As used under this caption, the term "debt securities"
includes the debt securities being offered by this prospectus and all other debt
securities issued by us under the indentures.
GENERAL
The indentures:
- do not limit the amount of debt securities that we may issue;
- allow us to issue debt securities in one or more series;
- do not require us to issue all of the debt securities of a series at the
same time;
- allow us to reopen a series to issue additional debt securities without
the consent of the debt securityholders of such series; and
- provide that the debt securities will be unsecured.
Unless we give you different information in the prospectus supplement, the
senior debt securities will be our unsubordinated obligations and will rank
equally with all of our other unsecured and unsubordinated indebtedness.
Payments on the subordinated debt securities will be subordinated to the
15
prior payment in full of all of our senior indebtedness, as described under
"--Subordination" and in the applicable prospectus supplement.
Each indenture provides that we may, but need not, designate more than one
trustee under an indenture. Any trustee under an indenture may resign or be
removed and a successor trustee may be appointed to act with respect to the
series of debt securities administered by the resigning or removed trustee. If
two or more persons are acting as trustee with respect to different series of
debt securities, each trustee shall be a trustee of a trust under the applicable
indenture separate and apart from the trust administered by any other trustee.
Except as otherwise indicated in this prospectus, any action described in this
prospectus to be taken by each trustee may be taken by each trustee with respect
to, and only with respect to, the one or more series of debt securities for
which it is trustee under the applicable indenture.
The prospectus supplement for each offering will provide the following
terms, where applicable:
- the title of the debt securities and whether they are senior or
subordinated;
- the aggregate principal amount of the debt securities being offered, the
aggregate principal amount of the debt securities outstanding as of the
most recent practicable date and any limit on their aggregate principal
amount, including the aggregate principal amount of debt securities
authorized;
- the price at which the debt securities will be issued, expressed as a
percentage of the principal;
- the portion of the principal payable upon declaration of acceleration of
the maturity, if other than the principal amount;
- the date or dates, or the method for determining the date or dates, on
which the principal of the debt securities will be payable;
- the fixed or variable interest rate or rates of the debt securities, or
the method by which the interest rate or rates is determined;
- the date or dates, or the method for determining the date or dates, from
which interest will accrue;
- the dates on which interest will be payable;
- the record dates for interest payment dates, or the method by which we
will determine those dates;
- the persons to whom interest will be payable;
- the basis upon which interest will be calculated if other than that of a
360-day year of twelve 30-day months;
- any make-whole amount, which is the amount in addition to principal and
interest that is required to be paid to the holder of a debt security as a
result of any optional redemption or accelerated payment of such debt
security, or the method for determining the make-whole amount;
- the place or places where the principal of, and any premium (or make-whole
amount) and interest on, the debt securities will be payable;
- where the debt securities may be surrendered for registration of transfer
or exchange;
- where notices or demands to or upon us in respect of the debt securities
and the applicable indenture may be served;
- the times, prices and other terms and conditions upon which we may redeem
the debt securities;
16
- any obligation we have to redeem, repay or purchase the debt securities
under any sinking fund or analogous provision or at the option of holders
of the debt securities, and the times and prices at which we must redeem,
repay or purchase the debt securities as a result of such an obligation;
- the currency or currencies in which the debt securities are denominated
and payable if other than United States dollars, which may be a foreign
currency or units of two or more foreign currencies or a composite
currency or currencies and the terms and conditions relating thereto, and
the manner of determining the equivalent of such foreign currency in
United States dollars;
- whether the principal of, and any premium (or make-whole amount) or
interest on, the debt securities of the series are to be payable, at our
election or at the election of a holder, in a currency or currencies other
than that in which the debt securities are denominated or stated to be
payable, and other related terms and conditions;
- whether the amount of payments of principal of, and any premium (or
make-whole amount) or interest on, the debt securities may be determined
according to an index, formula or other method and how such amounts will
be determined;
- whether the debt securities will be in registered form, bearer form or
both and (1) if in registered form, the person to whom any interest shall
be payable, if other than the person in whose name the security is
registered at the close of business on the regular record date for such
interest, or (2) if in bearer form, the manner in which, or the person to
whom, any interest on the security shall be payable if otherwise than upon
presentation and surrender upon maturity;
- any restrictions applicable to the offer, sale or delivery of securities
in bearer form and the terms upon which securities in bearer form of the
series may be exchanged for securities in registered form of the series
and vice versa if permitted by applicable laws and regulations;
- whether any debt securities of the series are to be issuable initially in
temporary global form and whether any debt securities of the series are to
be issuable in permanent global form with or without coupons and, if so,
whether beneficial owners of interests in any such permanent global
security may or shall be required to exchange their interests for other
debt securities of the series, and the manner in which interest shall be
paid;
- the identity of the depository for securities in registered form, if such
series are to be issuable as a global security;
- the date as of which any debt securities in bearer form or in temporary
global form shall be dated if other than the original issuance date of the
first security of the series to be issued;
- the applicability, if any, of the defeasance and covenant defeasance
provisions described in this prospectus or in the applicable indenture;
- whether and under what circumstances we will pay any additional amounts on
the debt securities in respect of any tax, assessment or governmental
charge and, if so, whether we will have the option to redeem the debt
securities in lieu of making such a payment;
- the circumstances, if any, in the applicable prospectus supplement, under
which beneficial owners of interests in the global security may obtain
definitive debt securities and the manner in which payments on a permanent
global debt security will be made if any debt securities are issuable in
temporary or permanent global form;
- any provisions granting special rights to holders of securities upon the
occurrence of such events as specified in the applicable prospectus
supplement;
17
- the name of the applicable trustee and the nature of any material
relationship with AvalonBay or with any of its affiliates, and the
percentage of debt securities of the class necessary to require the
trustee to take action;
- any deletions from, modifications of, or additions to the events of
default or covenants of AvalonBay, and any change in the right of any
trustee or any of the holders to declare the principal amount of any of
such debt securities due and payable; and
- any other terms of such debt securities not inconsistent with the
provisions of the applicable indenture.
We may issue debt securities at a discount below their principal amount and
provide for less than the entire principal amount thereof to be payable upon
declaration of acceleration of the maturity thereof. We will refer to any such
debt securities throughout this prospectus as "original issue discount
securities." The applicable prospectus supplement will describe the federal
income tax consequences and other relevant considerations applicable to original
issue discount securities.
Except as described under "--Merger, consolidation or sale of assets" or as
may be set forth in any prospectus supplement, the debt securities will not
contain any provisions that (1) would limit our ability to incur indebtedness or
(2) would afford holders of debt securities protection in the event of (a) a
highly leveraged or similar transaction involving us or any of our respective
affiliates or (b) a change of control or reorganization, restructuring, merger
or similar transaction involving us that may adversely affect the holders of the
debt securities. In the future, we may enter into transactions, such as the sale
of all or substantially all of our assets or a merger or consolidation, that may
have an adverse effect on our ability to service our indebtedness, including the
debt securities, by, among other things, substantially reducing or eliminating
our assets.
Neither the Maryland General Corporation Law nor the governing instruments
of AvalonBay define the term "substantially all" as it relates to the sale of
assets. Additionally, Maryland cases interpreting the term "substantially all"
rely upon the facts and circumstances of each particular case. Consequently, to
determine whether a sale of "substantially all" of our assets has occurred, a
holder of debt securities must review the financial and other information that
we disclosed to the public. AvalonBay's charter contains restrictions on
ownership and transfers of its stock that are designed to preserve its status as
a REIT and to otherwise address concerns about concentration of ownership of our
stock, and, therefore, it may prevent or hinder a change of control. See "Limits
on Ownership of Stock" beginning on page 38.
We will provide you with more information in the applicable prospectus
supplement regarding any deletions, modifications, or additions to the events of
default or covenants that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.
PAYMENT
Unless we give you different information in the applicable prospectus
supplement, the principal of, and any premium (or make-whole amount) and
interest on, any series of the debt securities will be payable at the corporate
trust office of the trustee. We will provide you with the address of the trustee
in the applicable prospectus supplement. We may also pay interest by mailing a
check to the address of the person entitled to it as it appears in the
applicable register for the debt securities or by wire transfer of funds to that
person at an account maintained within the United States.
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All monies that we pay to a paying agent or a trustee for the payment of the
principal of, and any premium (or make-whole amount) or interest on, any debt
security will be repaid to us if unclaimed at the end of two years after the
obligation underlying payment becomes due and payable. After funds have been
returned to us, the holder of the debt security may look only to us for payment,
without payment of interest for the period which we hold the funds.
DENOMINATION, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the applicable prospectus supplement, the debt
securities of any series will be issuable in denominations of $1,000 and
integral multiples of $1,000.
Subject to the limitations imposed upon debt securities that are evidenced
by a computerized entry in the records of a depository company rather than by
physical delivery of a note, a holder of debt securities of any series may:
- exchange them for any authorized denomination of other debt securities of
the same series and of a like aggregate principal amount and kind upon
surrender of such debt securities at the corporate trust office of the
applicable trustee or at the office of any transfer agent that we
designate for such purpose; and
- surrender them for registration of transfer or exchange at the corporate
trust office of the applicable trustee or at the office of any transfer
agent that we designate for such purpose.
Every debt security surrendered for registration of transfer or exchange
must be duly endorsed or accompanied by a written instrument of transfer, and
the person requesting such action must provide evidence of title and identity
satisfactory to the applicable trustee or transfer agent. Payment of a service
charge will not be required for any registration of transfer or exchange of any
debt securities, but we or the trustee may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
If in addition to the applicable trustee, the applicable prospectus supplement
refers to any transfer agent initially designated by us for any series of debt
securities, we may at any time rescind the designation of any such transfer
agent or approve a change in the location through which any such transfer agent
acts, except that we will be required to maintain a transfer agent in each place
of payment for such series. We may at any time designate additional transfer
agents for any series of debt securities.
Neither we nor any trustee shall be required to:
- issue, register the transfer of or exchange debt securities of any series
during a period beginning at the opening of business 15 days before the
day that the notice of redemption of any debt securities selected for
redemption is mailed and ending at the close of business on the day of
such mailing;
- register the transfer of or exchange any debt security, or portion
thereof, so selected for redemption, in whole or in part, except the
unredeemed portion of any debt security being redeemed in part; and
- issue, register the transfer of or exchange any debt security that has
been surrendered for repayment at the option of the holder, except the
portion, if any, of such debt security not to be so repaid.
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MERGER, CONSOLIDATION OR SALE OF ASSETS
The indentures provide that we may, without the consent of the holders of
any outstanding debt securities, (1) consolidate with, (2) sell, lease or convey
all or substantially all of our assets to, or (3) merge with or into, any other
entity provided that:
- either we are the continuing entity, or the successor entity, if other
than us, assumes our obligations (A) to pay the principal of, and any
premium and interest on, all of the debt securities and (B) to duly
perform and observe all of our covenants and conditions contained in each
indenture;
- immediately after giving effect to the transaction and treating any
indebtedness that becomes our obligation or the obligation of any of our
subsidiaries as having been incurred by us or by such subsidiary at the
time of the transaction, no event of default under the indentures, and no
event which, after notice or the lapse of time, or both, would become such
an event of default, occurs and continues; and
- an officers' certificate and legal opinion covering such conditions are
delivered to each trustee.
COVENANTS
EXISTENCE. Except as permitted under "--Merger, consolidation or sale of
assets," the indentures require us to do or cause to be done all things
necessary to preserve and keep in full force and effect our existence, rights
and franchises. However, the indentures do not require us to preserve any right
or franchise if we determine that any right or franchise is no longer desirable
in the conduct of our business.
MAINTENANCE OF PROPERTIES. If we determine that it is necessary in order to
properly and advantageously carry on our business, the indentures require us to:
- cause all of our material properties used or useful in the conduct of our
business or the business of any of our subsidiaries to be maintained and
kept in good condition, repair and working order and supplied with all
necessary equipment; and
- cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof.
However, the indentures do not prohibit us or our subsidiaries from selling
or otherwise disposing of our respective properties for value in the ordinary
course of business.
INSURANCE. The indentures require our insurable properties to be insured
against loss or damage in an amount deemed reasonable by our board of directors
with insurers of recognized responsibility.
PAYMENT OF TAXES AND OTHER CLAIMS. The indentures require us to pay,
discharge or cause to be paid or discharged, before they become delinquent:
- all taxes, assessments and governmental charges levied or imposed on us,
our subsidiaries or our subsidiaries' income, profits or property; and
- all lawful claims for labor, materials and supplies which, if unpaid,
might by law become a lien upon our or our subsidiaries' property.
However, we will not be required to pay, discharge or cause to be paid or
discharged any such tax, assessment, charge or claim whose amount, applicability
or validity is being contested in good faith by appropriate proceedings.
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PROVISION OF FINANCIAL INFORMATION. The indentures require us, within
15 days of each of the respective dates by which we are required to file annual
reports, quarterly reports and other documents with the SEC to:
- mail to all holders of debt securities, as their names and addresses
appear in the applicable register for such debt securities, without cost
to such holders, copies of the annual reports, quarterly reports and other
documents that we file with the SEC under Section 13 or Section 15(d) of
the Exchange Act; and
- supply, promptly upon written request and payment of the reasonable cost
of duplication and delivery, copies of such documents to any prospective
holder.
ADDITIONAL COVENANTS. The applicable prospectus supplement will set forth
any additional covenants of AvalonBay relating to any series of debt securities.
EVENTS OF DEFAULT, NOTICE AND WAIVER
Unless the applicable prospectus supplement states otherwise, when we refer
to "events of default" as defined in the indentures with respect to any series
of debt securities, we mean:
- default in the payment of any installment of interest on any debt security
of such series continuing for 30 days;
- default in the payment of principal of, or any premium (or make-whole
amount) on, any debt security of such series at its maturity;
- default in making any sinking fund payment as required for any debt
security of such series;
- default in the performance or breach of any other covenant or warranty of
AvalonBay contained in the indenture continuing for 60 days after written
notice to AvalonBay as provided in the applicable indenture;
- (1) a default under any bond, debenture or note having an aggregate
principal amount of at least $25,000,000; or
(2) a default under any indenture or instrument under which there may be
issued, secured or evidenced any existing or later created indebtedness
for money borrowed by us or our subsidiaries in an aggregate principal
amount of at least $25,000,000,
if the default results in the indebtedness becoming or being declared due
and payable prior to the date it otherwise would have, without such
indebtedness having been discharged, or such acceleration having been
rescinded or annulled, within 10 days after notice to the Company
specifying such default;
- bankruptcy, insolvency or reorganization, or court appointment of a
receiver, liquidator or trustee of AvalonBay or any significant subsidiary
of AvalonBay; and
- any other event of default provided with respect to a particular series of
debt securities.
When we use the term "significant subsidiary," we refer to the meaning
ascribed to such term in Rule 1-02 of Regulation S-X promulgated under the
Securities Act.
If an event of default occurs and is continuing with respect to debt
securities of any series outstanding, then the applicable trustee or the holders
of 25% or more in principal amount of the debt securities of that series will
have the right to declare the principal amount of all the debt securities of
that series to be due and payable. If the debt securities of that series are
original issue discount securities or indexed securities, then the applicable
trustee or the holders of 25% or more in principal amount of the debt securities
of that series will have the right to declare the portion of the principal
21
amount as may be specified in the terms thereof to be due and payable. However,
at any time after such a declaration of acceleration has been made, but before a
judgment or decree for payment of the money due has been obtained by the
applicable trustee, the holders of at least a majority in principal amount of
outstanding debt securities of such series or of all debt securities then
outstanding under the applicable indenture may rescind and annul such
declaration and its consequences if:
- we have deposited with the applicable trustee all required payments of the
principal, any premium (or make-whole amount), and interest, plus
applicable fees, expenses, disbursements and advances of the applicable
trustee; and
- all events of default, other than the non-payment of accelerated
principal, or a specified portion thereof, and any premium (or make-whole
amount), have been cured or waived.
The indentures also provide that the holders of at least a majority in
principal amount of the outstanding debt securities of any series or of all debt
securities then outstanding under the applicable indenture may on behalf of all
holders waive any past default with respect to such series and its consequences,
except a default:
- in the payment of the principal, any premium (or make-whole amount) or
interest;
- in respect of a covenant or provision contained in the applicable
indenture that cannot be modified or amended without the consent of the
holder of the outstanding debt security that is affected by the default;
or
- in respect of a covenant or provision for the benefit or protection of the
trustee, without its express written consent.
The indentures require each trustee to give notice to the holders of debt
securities within 90 days of a default unless such default has been cured or
waived. However, the trustee may withhold notice if specified responsible
officers of such trustee consider such withholding to be in the interest of the
holders of debt securities. The trustee may not withhold notice of a default in
the payment of principal, any premium or interest on any debt security of such
series or in the payment of any sinking fund installment in respect of any debt
security of such series.
The indentures provide that holders of debt securities of any series may not
institute any proceedings, judicial or otherwise, with respect to such indenture
or for any remedy under the indenture, unless the trustee fails to act for a
period of 60 days after the trustee has received a written request to institute
proceedings in respect of an event of default from the holders of 25% or more in
principal amount of the outstanding debt securities of such series, as well as
an offer of indemnity reasonably satisfactory to the trustee. However, this
provision will not prevent any holder of debt securities from instituting suit
for the enforcement of payment of the principal of, and any premium (or
make-whole amount) and interest on, such debt securities at the respective due
dates thereof.
The indentures provide that, subject to provisions in each indenture
relating to its duties in the case of a default, a trustee has no obligation to
exercise any of its rights or powers at the request or direction of any holders
of any series of debt securities then outstanding under the indenture, unless
the holders have offered to the trustee reasonable security or indemnity. The
holders of at least a majority in principal amount of the outstanding debt
securities of any series or of all debt securities then outstanding under an
indenture shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the applicable trustee, or
of exercising any trust or power conferred upon such trustee. However, a trustee
may refuse to follow any direction which:
- is in conflict with any law or the applicable indenture;
- may involve the trustee in personal liability; or
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- may be unduly prejudicial to the holders of debt securities of the series
not joining the proceeding.
Within 120 days after the close of each fiscal year, we will be required to
deliver to each trustee a certificate, signed by one of several specified
officers of AvalonBay stating whether or not that officer has knowledge of any
default under the applicable indenture. If the officer has knowledge of any
default, the notice must specify the nature and status of the default.
MODIFICATION OF THE INDENTURES
The indentures provide that modifications and amendments may be made only
with the consent of the affected holders of at least a majority in principal
amount of all outstanding debt securities issued under that indenture. However,
no such modification or amendment may, without the consent of the holders of the
debt securities affected by the modification or amendment:
- change the stated maturity of the principal of, or any premium (or
make-whole amount) on, or any installment of principal of or interest on,
any such debt security;
- reduce the principal amount of, the rate or amount of interest on or any
premium (or make-whole amount) payable on redemption of any such debt
security;
- reduce the amount of principal of an original issue discount security that
would be due and payable upon declaration of acceleration of the maturity
thereof or would be provable in bankruptcy, or adversely affect any right
of repayment of the holder of any such debt security;
- change the place of payment or the coin or currency for payment of
principal of, or any premium (or make-whole amount) or interest on, any
such debt security;
- impair the right to institute suit for the enforcement of any payment on
or with respect to any such debt security;
- reduce the percentage in principal amount of any outstanding debt
securities necessary to modify or amend the applicable indenture with
respect to such debt securities, to waive compliance with particular
provisions thereof or defaults and consequences thereunder or to reduce
the quorum or voting requirements set forth in the applicable indenture;
and
- modify any of the foregoing provisions or any of the provisions relating
to the waiver of particular past defaults or covenants, except to increase
the required percentage to effect such action or to provide that some of
the other provisions may not be modified or waived without the consent of
the holder of such debt security.
The holders of a majority in aggregate principal amount of the outstanding
debt securities of each series may, on behalf of all holders of debt securities
of that series, waive, insofar as that series is concerned, our compliance with
material restrictive covenants of the applicable indenture.
AvalonBay and the respective trustee may make modifications and amendments
of an indenture without the consent of any holder of debt securities for any of
the following purposes:
- to evidence the succession of another person to us as obligor under such
indenture;
- to add to the covenants of AvalonBay for the benefit of the holders of all
or any series of debt securities or to surrender any right or power
conferred upon us in such indenture;
- to add events of default for the benefit of the holders of all or any
series of debt securities;
- to add or change any provisions of an indenture (1) to facilitate the
issuance of, or to change or eliminate restrictions on the payment of
principal of, or premium (or make-whole amount) or interest on, debt
securities in bearer form, or (2) to permit or facilitate the issuance of
debt
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securities in uncertificated form, provided that such action shall not
adversely affect the interests of the holders of the debt securities of
any series in any material respect;
- to change or eliminate any provisions of an indenture, provided that any
such change or elimination shall become effective only when there are no
debt securities outstanding of any series created prior thereto which are
entitled to the benefit of such provision;
- to secure the debt securities;
- to establish the form or terms of debt securities of any series;
- to provide for the acceptance of appointment by a successor trustee or
facilitate the administration of the trusts under an indenture by more
than one trustee;
- to cure any ambiguity, defect or inconsistency in an indenture, provided
that such action shall not adversely affect the interests of holders of
debt securities of any series issued under such indenture; or
- to supplement any of the provisions of an indenture to the extent
necessary to permit or facilitate defeasance and discharge of any series
of such debt securities, provided that such action shall not adversely
affect the interests of the holders of the outstanding debt securities of
any series.
VOTING
The indentures provide that in determining whether the holders of the
requisite principal amount of outstanding debt securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver under
the indentures or whether a quorum is present at a meeting of holders of debt
securities:
- the principal amount of an original issue discount security that shall be
deemed to be outstanding shall be the amount of the principal thereof that
would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof;
- the principal amount of any debt security denominated in a foreign
currency that shall be deemed outstanding shall be the United States
dollar equivalent, determined on the issue date for such debt security, of
the principal amount or, in the case of an original issue discount
security, the United States dollar equivalent on the issue date of such
debt security of the amount determined as provided in the preceding bullet
point;
- the principal amount of an indexed security that shall be deemed
outstanding shall be the principal face amount of such indexed security at
original issuance, unless otherwise provided for such indexed security
under such indenture; and
- debt securities owned by us or any other obligor upon the debt securities
or by any affiliate of ours or of such other obligor shall be disregarded.
The indentures contain provisions for convening meetings of the holders of
debt securities of a series. A meeting will be permitted to be called at any
time by the applicable trustee, and also, upon request, by us or the holders of
at least 25% in principal amount of the outstanding debt securities of such
series, in any such case upon notice given as provided in such indenture. Except
for any consent that must be given by the holder of each debt security affected
by the modifications and amendments of an indenture described above, any
resolution presented at a meeting or adjourned meeting duly reconvened at which
a quorum is present may be adopted by the affirmative vote of the holders of a
majority of the aggregate principal amount of the outstanding debt securities of
that series represented at such meeting.
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Notwithstanding the preceding paragraph, except as referred to above, any
resolution relating to a request, demand, authorization, direction, notice,
consent, waiver or other action that may be made, given or taken by the holders
of a specified percentage, which is less than a majority, of the aggregate
principal amount of the outstanding debt securities of a series may be adopted
at a meeting or adjourned meeting duly reconvened at which a quorum is present
by the affirmative vote of such specified percentage.
Any resolution passed or decision taken at any properly held meeting of
holders of debt securities of any series will be binding on all holders of such
series. The quorum at any meeting called to adopt a resolution, and at any
reconvened meeting, will be persons holding or representing a majority in
principal amount of the outstanding debt securities of a series. However, if any
action is to be taken relating to a consent or waiver which may be given by the
holders of at least a specified percentage in principal amount of the
outstanding debt securities of a series, the persons holding such percentage
will constitute a quorum.
Notwithstanding the foregoing provisions, the indentures provide that if any
action is to be taken at a meeting with respect to any request, demand,
authorization, direction, notice, consent, waiver and other action that such
indenture expressly provides may be made, given or taken by the holders of a
specified percentage in principal amount of all outstanding debt securities
affected by such action, or of the holders of such series and one or more
additional series:
- there shall be no minimum quorum requirement for such meeting; and
- the principal amount of the outstanding debt securities of such series
that vote in favor of such request, demand, authorization, direction,
notice, consent, waiver or other action shall be taken into account in
determining whether such request, demand, authorization, direction,
notice, consent, waiver or other action has been made, given or taken
under such indenture.
SUBORDINATION
Unless otherwise provided in the applicable prospectus supplement,
subordinated securities will be subject to the following subordination
provisions.
Upon any distribution to our creditors in a liquidation, dissolution or
reorganization, the payment of the principal of and interest on any subordinated
securities will be subordinated to the extent provided in the applicable
indenture in right of payment to the prior payment in full of all senior debt.
However, our obligation to make payments of the principal of and interest on
such subordinated securities otherwise will not be affected. No payment of
principal or interest will be permitted to be made on subordinated securities at
any time if a default on senior debt exists that permits the holders of such
senior debt to accelerate its maturity and the default is the subject of
judicial proceedings or we receive notice of the default. After all senior debt
is paid in full and until the subordinated securities are paid in full, holders
of subordinated securities will be subrogated to the rights of holders of senior
debt to the extent that distributions otherwise payable to holders of
subordinated securities have been applied to the payment of senior debt. The
subordinated indenture will not restrict the amount of senior debt or other
indebtedness of AvalonBay and its subsidiaries. As a result of these
subordination provisions, in the event of a distribution of assets upon
insolvency, holders of subordinated securities may recover less, ratably, than
our general creditors.
"Senior Debt" will be defined in the applicable indenture as the principal
of and interest on, or substantially similar payments to be made by us in
respect of, the following, whether outstanding at the date of execution of the
applicable indenture or subsequently incurred, created or assumed:
- indebtedness incurred by us for money borrowed or represented by
purchase-money obligations;
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- indebtedness incurred by us evidenced by notes, debentures, bonds, or
other securities issued under the provisions of an indenture, fiscal
agency agreement or other agreement;
- our obligations as lessee under leases of property either made as part of
any sale and leaseback transaction to which we are a party or otherwise;
- indebtedness of partnerships and joint ventures which is included in our
consolidated financial statements;
- indebtedness, obligations and liabilities of others in respect of which we
are liable contingently or otherwise to pay or advance money or property
or as guarantor, endorser or otherwise or which we have agreed to purchase
or otherwise acquire; and
- any binding commitment we have to fund any real estate investment or to
fund any investment in any entity making such real estate investment.
In each case, the following will not be Senior Debt:
- any such indebtedness, obligation or liability referred to in the
preceding clauses (1) that is outstanding and (2) the instrument creating
or evidencing such indebtedness, obligation or liability provides that the
same is not superior to or ranks on an equal basis with the subordinated
securities with respect to right of payment;
- any such indebtedness, obligation or liability that is subordinated to
indebtedness incurred by us to substantially the same extent as or to a
greater extent than the subordinated securities are subordinated; and
- the subordinated securities.
No restrictions will be included in any indenture relating to subordinated
securities upon the creation of additional senior debt.
If this prospectus is being delivered in connection with the offering of a
series of subordinated securities, the accompanying prospectus supplement or the
information incorporated in this prospectus by reference will set forth the
approximate amount of senior debt outstanding as of the end of our most recent
fiscal quarter.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
Unless otherwise indicated in the applicable prospectus supplement, the
indentures allow us to discharge our obligations to holders of any series of
debt securities issued under any indenture when:
- either (1) all securities of such series have already been delivered to
the applicable trustee for cancellation; or (2) all securities of such
series have not already been delivered to the applicable trustee for
cancellation but (a) have become due and payable, (b) will become due and
payable within one year, or (c) if redeemable at our option, are to be
redeemed within one year, and we have irrevocably deposited with the
applicable trustee, in trust, funds in such currency or currencies,
currency unit or units or composite currency or currencies in which such
debt securities are payable, an amount sufficient to pay the entire
indebtedness on such debt securities in respect of principal (and any
premium or make-whole amount) and interest to the date of such deposit if
such debt securities have become due and payable or, if they have not, to
the stated maturity or redemption date;
- we have paid or caused to be paid all other sums payable; and
- we have delivered to the trustee an officers' certificate and an opinion
of counsel stating the conditions to discharging the debt securities have
been satisfied.
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Unless otherwise indicated in the applicable prospectus supplement, the
indentures provide that, upon our irrevocable deposit with the applicable
trustee, in trust, of an amount, in such currency or currencies, currency unit
or units or composite currency or currencies in which such debt securities are
payable at stated maturity, or government obligations, or both, applicable to
such debt securities, which through the scheduled payment of principal and
interest in accordance with their terms will provide money in an amount
sufficient to pay the principal of, and any premium (or make-whole amount) and
interest on, such debt securities, and any mandatory sinking fund or analogous
payments thereon, on the scheduled due dates therefor, we may elect either:
- to defease and be discharged from any and all obligations with respect to
such debt securities; or
- to be released from our obligations with respect to such debt securities
under the applicable indenture or, if provided in the applicable
prospectus supplement, our obligations with respect to any other covenant,
and any omission to comply with such obligations shall not constitute an
event of default with respect to such debt securities.
Notwithstanding the above, we may not elect to defease and be discharged
from the obligation to pay any additional amounts upon the occurrence of
particular events of tax, assessment or governmental charge with respect to
payments on such debt securities and the obligations to register the transfer or
exchange of such debt securities, to replace temporary or mutilated, destroyed,
lost or stolen debt securities, to maintain an office or agency in respect of
such debt securities, or to hold monies for payment in trust.
The indentures only permit us to establish the trust described in the
paragraph above if, among other things, we have delivered to the applicable
trustee an opinion of counsel to the effect that the holders of such debt
securities will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance or covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such defeasance or covenant defeasance
had not occurred. Such opinion of counsel, in the case of defeasance, will be
required to refer to and be based upon a ruling received from or published by
the Internal Revenue Service or a change in applicable federal income tax law
occurring after the date of the indenture. In the event of such defeasance, the
holders of such debt securities would be able to look only to such trust fund
for payment of principal, any premium (or make-whole amount), and interest.
When we use the term "government obligations," we mean securities that are:
- direct obligations of the United States or the government that issued the
foreign currency in which the debt securities of a particular series are
payable, for the payment of which its full faith and credit is pledged; or
- obligations of a person controlled or supervised by and acting as an
agency or instrumentality of the United States or other government that
issued the foreign currency in which the debt securities of such series
are payable, the payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States or such other government,
which are not callable or redeemable at the option of the issuer thereof
and shall also include a depository receipt issued by a bank or trust
company as custodian with respect to any such government obligation or a
specific payment of interest on or principal of any such government
obligation held by such custodian for the account of the holder of a
depository receipt. However, except as required by law, such custodian is
not authorized to make any deduction from the amount payable to the holder
of such depository receipt from any amount received by the custodian in
respect of the government obligation or the specific payment of interest
on or principal of the government obligation evidenced by such depository
receipt.
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Unless otherwise provided in the applicable prospectus supplement, if after
we have deposited funds and/or government obligations to effect defeasance or
covenant defeasance with respect to debt securities of any series, (a) the
holder of a debt security of such series is entitled to, and does, elect under
the terms of the applicable indenture or the terms of such debt security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such debt security, or
(b) a conversion event occurs in respect of the currency, currency unit or
composite currency in which such deposit has been made, the indebtedness
represented by such debt security will be deemed to have been, and will be,
fully discharged and satisfied through the payment of the principal of, and
premium (or make-whole amount) and interest on, such debt security as they
become due out of the proceeds yielded by converting the amount so deposited in
respect of such debt security into the currency, currency unit or composite
currency in which such debt security becomes payable as a result of such
election or such cessation of usage based on the applicable market exchange
rate.
When we use the term "conversion event," we mean the cessation of use of:
- a currency, currency unit or composite currency both by the government of
the country that issued such currency and for the settlement of
transactions by a central bank or other public institutions of or within
the international banking community;
- the European Currency Unit both within the European Monetary System and
for the settlement of transactions by public institutions of or within the
European Communities; or
- any currency unit or composite currency other than the European Currency
Unit for the purposes for which it was established.
Unless otherwise provided in the applicable prospectus supplement, all
payments of principal of, and premium, if any, and interest on, any debt
security that is payable in a foreign currency that ceases to be used by its
government of issuance shall be made in United States dollars.
In the event that (a) we effect covenant defeasance with respect to any debt
securities and (b) such debt securities are declared due and payable because of
the occurrence of any event of default, the amount in such currency, currency
unit or composite currency in which such debt securities are payable, and
government obligations on deposit with the applicable trustee, will be
sufficient to pay amounts due on such debt securities at the time of their
stated maturity but may not be sufficient to pay amounts due on such debt
securities at the time of the acceleration resulting from such event of default.
However, we would remain liable to make payments of such amounts due at the time
of acceleration. Notwithstanding the first sentence of this paragraph, events of
default in (b) above shall not include the event of default described in
(1) the fourth bullet point under "--Events of default, notice and waiver" with
respect to specified sections of an indenture or (2) the seventh bullet point
under "--Events of default, notice and waiver" with respect to any other
covenant as to which there has been covenant defeasance.
The applicable prospectus supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the debt
securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the debt securities are
convertible into common stock or preferred stock will be set forth in the
applicable prospectus supplement. The terms will include whether the debt
securities are convertible into shares of common stock or preferred stock, the
conversion price (or manner of calculation thereof), the conversion period,
provisions as to whether conversion will be at our option or the option of the
holders, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of the debt
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securities and any restrictions on conversion, including restrictions directed
at maintaining our status as a REIT. If we issue debt securities that are
convertible into shares of common stock or convertible into shares of preferred
stock, in either case having rights, preferences or privileges with respect to
voting, dividends, rights upon liquidation or otherwise that are on par with or
senior to any class or series of common stock or preferred stock, then the
rights of holders of such junior or parity classes or series of common stock or
preferred stock may be materially adversely affected. In addition, the
conversion of any such debt securities into common stock or preferred stock,
could result in the dilution of the holders of the then-existing shares of
common or preferred stock.
GLOBAL SECURITIES
The debt securities of a series may be issued in whole or in part in the
form of one or more global securities that will be deposited with, or on behalf
of, a depository identified in the applicable prospectus supplement relating to
such series. Global securities, if any, issued in the United States are expected
to be deposited with The Depository Trust Company (DTC), as depository. We may
issue global securities in either registered or bearer form and in either
temporary or permanent form. We will describe the specific terms of the
depository arrangement with respect to a series of debt securities in the
applicable prospectus supplement relating to such series. We expect that unless
the applicable prospectus supplement provides otherwise, the following
provisions will apply to depository arrangements.
Once a global security is issued, the depository for such global security or
its nominee will credit on its book-entry registration and transfer system the
respective principal amounts of the individual debt securities represented by
such global security to the accounts of participants that have accounts with
such depository. Such accounts shall be designated by the underwriters, dealers
or agents with respect to such debt securities or by us if we offer such debt
securities directly. Ownership of beneficial interests in such global security
will be limited to participants with the depository or persons that may hold
interests through those participants.
We expect that, under procedures established by DTC, ownership of beneficial
interests in any global security for which DTC is the depository will be shown
on, and the transfer of that ownership will be effected only through, records
maintained by DTC or its nominee (with respect to beneficial interests of
participants with the depository) and records of participants (with respect to
beneficial interests of persons who hold through participants with the
depository). Neither we nor the trustee will have any responsibility or
liability for any aspect of the records of DTC or for maintaining, supervising
or reviewing any records of DTC or any of its participants relating to
beneficial ownership interests in the debt securities. The laws of some states
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and laws may impair the ability to
own, pledge or transfer beneficial interest in a global security.
So long as the depository for a global security or its nominee is the
registered owner of such global security, such depository or such nominee, as
the case may be, will be considered the sole owner or holder of the debt
securities represented by the global security for all purposes under the
applicable indenture. Except as described below or in the applicable prospectus
supplement, owners of beneficial interest in a global security will not be
entitled to have any of the individual debt securities represented by such
global security registered in their names, will not receive or be entitled to
receive physical delivery of any such debt securities in definitive form and
will not be considered the owners or holders thereof under the applicable
indenture. Beneficial owners of debt securities evidenced by a global security
will not be considered the owners or holders thereof under the applicable
indenture for any purpose, including with respect to the giving of any
direction, instructions or approvals to the trustee under the indenture.
Accordingly, each person owning a beneficial interest in a global security with
respect to which DTC is the depository must rely on the procedures of DTC and,
if such person is not a participant with the depository, on the procedures of
the participant through which such person owns
29
its interests, to exercise any rights of a holder under the applicable
indenture. We understand that, under existing industry practice, if DTC requests
any action of holders or if an owner of a beneficial interest in a global
security desires to give or take any action which a holder is entitled to give
or take under the applicable indenture, DTC would authorize the participants
holding the relevant beneficial interest to give or take such action, and such
participants would authorize beneficial owners through such participants to give
or take such actions or would otherwise act upon the instructions of beneficial
owners holding through them.
Payments of principal of, and any premium (or make-whole amount) and
interest on, individual debt securities represented by a global security
registered in the name of a depository or its nominee will be made to or at the
direction of the depository or its nominee, as the case may be, as the
registered owner of the global security under the applicable indenture. Under
the terms of the applicable indenture, we and the trustee may treat the persons
in whose name debt securities, including a global security, are registered as
the owners thereof for the purpose of receiving such payments. Consequently,
neither we nor the trustee have or will have any responsibility or liability for
the payment of such amounts to beneficial owners of debt securities including
principal, any premium (or make-whole amount) or interest. We believe, however,
that it is currently the policy of DTC to immediately credit the accounts of
relevant participants with such payments, in amounts proportionate to their
respective holdings of beneficial interests in the relevant global security as
shown on the records of DTC or its nominee. We also expect that payments by
participants to owners of beneficial interests in such global security held
through such participants will be governed by standing instructions and
customary practices, as is the case with securities held for the account of
customers in bearer form or registered in street name, and will be the
responsibility of such participants. Redemption notices with respect to any debt
securities represented by a global security will be sent to the depository or
its nominee. If less than all of the debt securities of any series are to be
redeemed, we expect the depository to determine the amount of the interest of
each participant in such debt securities to be redeemed to be determined by lot.
Neither we, the trustee, any paying agent nor the security registrar for such
debt securities will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the global security for such debt securities or for maintaining any
records with respect thereto.
Neither we nor the trustee will be liable for any delay by the holders of a
global security or the depository in identifying the beneficial owners of debt
securities, and we and the trustee may conclusively rely on, and will be
protected in relying on, instructions from the holder of a global security or
the depository for all purposes. The rules applicable to DTC and its
participants are on file with the SEC.
If a depository for any debt securities is at any time unwilling, unable or
ineligible to continue as depository and we do not appoint a successor
depository within 90 days, we will issue individual debt securities in exchange
for the global security representing such debt securities. In addition, we may
at any time and in our sole discretion, subject to any limitations described in
the prospectus supplement relating to such debt securities, determine not to
have any of such debt securities represented by one or more global securities
and in such event will issue individual debt securities in exchange for the
global security or securities representing such debt securities. Individual debt
securities so issued will be issued in denominations of $1,000 and integral
multiples of $1,000.
The debt securities of a series may also be issued in whole or in part in
the form of one or more bearer global securities that will be deposited with a
depository, or with a nominee for such depository, identified in the applicable
prospectus supplement. Any such bearer global securities may be issued in
temporary or permanent form. The specific terms and procedures, including the
specific terms of the depository arrangement, with respect to any portion of a
series of debt securities to be represented by one or more bearer global
securities will be described in the applicable prospectus supplement.
30
NO RECOURSE
There is no recourse under any obligation, covenant or agreement in the
applicable indenture or with respect to any security against any of our or our
successor's past, present or future stockholders, employees, officers or
directors.
DESCRIPTION OF PREFERRED STOCK
The following is a description of the material terms and provisions of our
preferred stock. It may not contain all of the information that is important to
you. Therefore, you should read our charter and bylaws before you purchase any
shares of our preferred stock.
GENERAL
Under our charter, AvalonBay is authorized to issue 50,000,000 shares of
preferred stock, of which 4,600,000 shares have been designated 8.70% Series H
Cumulative Redeemable Preferred Stock and 4,000,000 of which are currently
outstanding. The Series H Preferred Stock is listed on the NYSE and PCX under
the symbol "AVB PrH."
Shares of preferred stock may be issued from time to time, in one or more
series, as authorized by our board of directors. Prior to the issuance of shares
of each series, the board of directors is required by the Maryland General
Corporation Law and our charter to fix for each series, subject to the
provisions of the charter regarding excess stock, the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption, as are permitted by Maryland law. The preferred stock will, when
issued following the receipt of full consideration therefor, be fully paid and
nonassessable and will have no preemptive rights. Our board of directors could
authorize the issuance of shares of preferred stock with terms and conditions
that could have the effect of discouraging a takeover or other transactions that
holders of common stock might believe to be in their best interests or in which
holders of some, or a majority, of the shares of common stock might receive a
premium for their shares over the then market price of such shares of common
stock.
TERMS
You should refer to the prospectus supplement relating to the offering of a
series of preferred stock for the specific terms of that series, including:
- its title and stated value;
- the number of shares of preferred stock offered, the liquidation
preference per share, if applicable, and the offering price;
- the applicable dividend rate(s) or amount(s), period(s) and payment
date(s) or method(s) of calculation thereof;
- the date from which dividends on the preferred stock shall accumulate, if
applicable;
- any procedures for auction and remarketing;
- any provision for a sinking fund;
- any applicable provision for redemption;
- any securities exchange listing;
- the terms and conditions of conversion into common stock, including the
conversion price or rate or manner of calculation thereof;
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- any other specific terms, preferences, rights, limitations or
restrictions;
- a discussion of applicable federal income tax considerations;
- the relative ranking and preference as to dividend rights and rights upon
our liquidation, dissolution or the winding up of our affairs;
- any limitations on issuance of any series of preferred stock ranking
senior to or on a parity with such series of preferred stock as to
dividend rights and rights upon our liquidation, dissolution or the
winding up of our affairs; and
- any limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to preserve our status as a
REIT.
RANK
Unless otherwise specified in the applicable prospectus supplement, the
preferred stock will, with respect to dividend rights and rights upon a
liquidation, dissolution or winding up of our affairs, rank:
- senior to all classes and series of our common stock, and to all equity
securities ranking junior to such preferred stock with respect to dividend
rights or rights upon liquidation, dissolution or winding up of our
affairs;
- on a parity with all equity securities issued by us, the terms of which
specifically provide that such equity securities rank on a parity with the
preferred stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of our affairs; and
- junior to all equity securities issued by us, the terms of which
specifically provide that such equity securities rank senior to the
preferred stock with respect to dividend rights or rights upon
liquidation, dissolution or winding up of our affairs.
The term "equity securities" does not include convertible debt securities.
DIVIDENDS
Holders of the preferred stock of each series will be entitled to receive
cash dividends when, as and if declared by our board of directors. We will pay
dividends out of assets that are legally available for payment of dividends. We
will specify the rate(s) or amount(s) of dividends and the dates that we will
pay dividends in the applicable prospectus supplement. Dividends will be payable
to holders of record as they appear on our stock transfer books on such record
dates as fixed by our board of directors.
Dividends on any series of the preferred stock may be cumulative or
non-cumulative, as provided in the applicable prospectus supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable prospectus supplement. If our board of directors fails to declare a
dividend payable on a dividend payment date on any series of the preferred stock
for which dividends are non-cumulative, then the holders of that series of the
preferred stock will have no right to receive a dividend in respect of the
dividend period ending on that dividend payment date. Accordingly, we will have
no obligation to pay the dividend accrued for that period, whether or not
dividends on that series are declared payable on any future dividend payment
date.
If preferred stock of any series is outstanding, we will not declare, pay or
set aside funds to pay dividends on any other series of our stock ranking, as to
dividends, on a parity with or junior to the preferred stock of such series for
any period unless:
- if that series of preferred stock has a cumulative dividend, we have
declared and paid or contemporaneously declare and pay or set aside funds
to pay full cumulative dividends on the
32
preferred stock of such series for all past dividend periods and the then
current dividend period; or
- if that series of preferred stock does not have a cumulative dividend, we
have declared and paid or contemporaneously declare and pay or set aside
funds to pay full dividends on the preferred stock of such series for the
then current dividend period.
We must declare all dividends pro rata on all series of preferred stock that
rank on a parity with the series of preferred stock upon which we paid dividends
if we did not pay or set aside funds to pay dividends on the series of preferred
stock in full. We must declare dividends pro rata to ensure that the amount of
dividends declared per share of preferred stock bears in all cases the same
ratio that accrued dividends per share of preferred stock bears to each other.
We will not accumulate unpaid dividends for prior dividend periods with respect
to accrued dividends on preferred stock that does not have cumulative dividends.
No interest, or sum of money in lieu of interest, will be payable in respect of
any payments that may be in arrears.
Except as provided in the immediately preceding paragraph, unless:
- if such series of preferred stock has a cumulative dividend, we have
declared and paid or contemporaneously declare and pay or set aside funds
to pay full cumulative dividends for all past dividend periods and the
then current dividend period; or
- if such series of preferred stock does not have a cumulative dividend, we
have declared and paid or contemporaneously declare and pay or set aside
funds to pay full dividends for the then current dividend period,
we will not: (1) declare, pay or set aside funds to pay dividends or declare or
make any other distribution upon the common stock or any other shares of our
stock ranking junior to or on a parity with the preferred stock of such series
as to dividends or upon liquidation; (2) redeem, purchase or otherwise acquire
for any consideration any common stock, or any other shares of our stock ranking
junior to or on a parity with the preferred stock of such series as to
dividends; nor (3) pay any monies to or make any monies available for a sinking
fund to redeem any such shares, except by conversion into or exchange for other
shares of our capital stock ranking junior to the preferred stock of such series
as to dividends or liquidation. Notwithstanding the preceding sentence, we may
declare or set aside dividends in common stock or other shares of stock ranking
junior to the preferred stock of such series as to dividends and upon
liquidation.
Any dividend payment we make on a series of preferred stock shall first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of such series which remains payable.
REDEMPTION
If so provided in the applicable prospectus supplement, the preferred stock
will be subject to mandatory redemption or redemption at our option, in whole or
in part, upon the terms, at the times and at the redemption prices set forth in
the prospectus supplement.
The prospectus supplement relating to a series of preferred stock that is
subject to mandatory redemption will specify the number of shares that will be
redeemed in each year commencing after a specified date at a specified
redemption price per share, together with an amount equal to all accrued and
unpaid dividends thereon to the date of redemption. Unless the shares have a
cumulative dividend, such accrued dividends will not include any accumulation in
respect of unpaid dividends for prior dividend periods. We may pay the
redemption price in cash or other property, as specified in the applicable
prospectus supplement. If the redemption price for preferred stock of any series
is payable only from the net proceeds of the issuance of shares of our stock,
the terms of such preferred stock may provide that, if no such shares of our
stock have been issued or to the extent the net proceeds
33
from any issuance are insufficient to pay in full the aggregate redemption price
then due, such preferred stock will automatically and mandatorily convert into
the applicable shares of our stock under the conversion provisions specified in
the applicable prospectus supplement.
Notwithstanding the foregoing, we will not redeem any preferred stock of a
series unless:
- if that series of preferred stock has a cumulative dividend, we have
declared and paid or contemporaneously declare and pay or set aside funds
to pay full cumulative dividends on the preferred stock for the past and
current dividend periods; or
- if that series of preferred stock does not have a cumulative dividend, we
have declared and paid or contemporaneously declare and pay or set aside
funds to pay full dividends on the preferred stock for the current
dividend period.
However, in no case will we redeem any preferred stock of a series unless we
redeem all outstanding preferred stock of the series simultaneously.
In addition, except as described below, we will not acquire any preferred
stock of a series unless:
- if that series of preferred stock has a cumulative dividend, we have
declared and paid or contemporaneously declare and pay or set aside funds
to pay full cumulative dividends on all outstanding shares of such series
of preferred stock for all past dividend periods and the then current
dividend period; or
- if that series of preferred stock does not have a cumulative dividend, we
have declared and paid or contemporaneously declare and pay or set aside
funds to pay full dividends on the preferred stock of such series for the
then current dividend period.
However, at any time we may purchase or acquire preferred stock of that
series (1) to preserve our status as a REIT, (2) in accordance with a purchase
or exchange offer made on the same terms to holders of all outstanding preferred
stock of such series or (3) by conversion into or exchange for shares of our
capital stock ranking junior to the preferred stock of such series as to
dividends and upon liquidation.
If fewer than all of the outstanding shares of preferred stock of any series
are to be redeemed, we will determine the number of shares that may be redeemed
pro rata from the holders of record of such shares in proportion to the number
of such shares held or for which redemption is requested by such holder or by
any other equitable manner that we determine. Such determination will reflect
adjustments to avoid redemption of fractional shares.
We will mail notice of redemption at least 30 days but not more than
60 days before the redemption date to each holder of record of preferred stock
to be redeemed at the address shown on our stock transfer books. Each notice
shall state:
- the redemption date;
- the number of shares and series to be redeemed;
- the redemption price;
- the place or places where certificates are to be surrendered for payment
of the redemption price;
- that dividends on the shares to be redeemed will cease to accrue from and
after the redemption date;
- the date upon which the holder's conversion rights, if any, as to the
shares shall terminate; and
- the specific number of shares to be redeemed from each the holder if fewer
than all the shares of any series are to be redeemed.
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If notice of redemption has been given and we have set aside the funds
necessary for the redemption in trust for the benefit of the holders of any
shares so called for redemption, then from and after the redemption date,
dividends will cease to accrue on those shares, and all rights of the holders of
such shares will terminate, except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
our affairs, then, before we make any distribution or payment to the holders of
any common stock or any other class or series of our capital stock ranking
junior to the preferred stock in the distribution of assets upon any
liquidation, dissolution or winding up of our affairs, the holders of each
series of preferred stock will be entitled to receive, out of assets legally
available for distribution to stockholders, liquidating distributions in the
amount of the liquidation preference per share set forth in the applicable
prospectus supplement, plus any accrued and unpaid dividends thereon. Such
dividends will not include any accumulation in respect of unpaid noncumulative
dividends for prior dividend periods. After full payment of their liquidating
distributions, holders will have no right or claim to any of our remaining
assets. Upon any such voluntary or involuntary liquidation, dissolution or
winding up, if our available assets are insufficient to pay the amount of the
liquidating distributions on all outstanding preferred stock and the
corresponding amounts payable on all other classes or series of our capital
stock ranking on a parity with the preferred stock in the distribution of
assets, then the holders of the preferred stock and all other such classes or
series of capital stock will share ratably in any such distribution of assets in
proportion to the full liquidating distributions to which they would otherwise
be entitled.
Upon liquidation, dissolution or winding up and if we have made liquidating
distributions in full to all holders of preferred stock, we will distribute our
remaining assets among the holders of any other classes or series of capital
stock ranking junior to the preferred stock according to their respective rights
and preferences and, in each case, according to their respective number of
shares. For such purposes, our consolidation or merger with or into any other
corporation, trust or entity, or the sale, lease or conveyance of all or
substantially all of our assets or business will not be deemed to constitute a
liquidation, dissolution or winding up of our affairs.
VOTING RIGHTS
Holders of preferred stock will have no voting rights, except as described
in the next paragraph, as otherwise from time to time required by law or as
indicated in the applicable prospectus supplement.
Unless otherwise provided for any series of preferred stock, so long as any
preferred stock of a series remains outstanding, we will not, without the
affirmative vote or consent of the holders of at least two-thirds of the
preferred stock of such series outstanding at the time, given in person or by
proxy, either in writing or at a meeting with each of such series voting
separately as a class:
- authorize or create, or increase the authorized or issued amount of, any
class or series of shares of capital stock ranking senior to such series
of preferred stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up, or
reclassify any of our authorized shares of capital stock into such shares,
or create, authorize or issue any obligation or security convertible into
or evidencing the right to purchase any such shares; or
- amend, alter or repeal the provisions of our charter or the amendment to
our charter designating the terms for such series of preferred stock,
whether by merger, consolidation or otherwise, so as to materially and
adversely affect any right, preference, privilege or voting power of such
series of preferred stock or the holders thereof.
The occurrence of any of the events described above in the immediately preceding
bullet shall not be deemed to materially and adversely affect the rights,
preferences, privileges or voting power of holders
35
of preferred stock, provided that, the preferred stock remains outstanding with
the terms thereof materially unchanged, or, if we are not the surviving entity
in such transaction, the preferred stock is exchanged for a security of a
surviving entity with terms that are materially the same as the preferred stock.
In addition, any increase in the amount of (1) authorized preferred stock or the
creation or issuance of any other series of preferred stock, or (2) authorized
shares of such series or any other series of preferred stock, in each case
ranking on a parity with or junior to the preferred stock of such series with
respect to payment of dividends or the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to materially and adversely
affect such rights, preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required will be
effected, we have redeemed or called for redemption all outstanding shares of
such series of preferred stock and, if called for redemption, have deposited
sufficient funds in trust to effect such redemption.
CONVERSION RIGHTS
The terms and conditions upon which any series of preferred stock may be
convertible into common stock will be set forth in the applicable prospectus
supplement relating to the offering of the series of preferred stock. Such terms
will include the number of shares of common stock into which the shares of
preferred stock are convertible, the conversion price, rate or manner of
calculation thereof, the conversion period, provisions as to whether conversion
will be at our option or at the holders' option, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption.
RESTRICTIONS ON OWNERSHIP
For us to qualify as a REIT under the Internal Revenue Code, no more than
50% in value of our outstanding capital stock may be owned, directly or
indirectly, by five or fewer individuals during the last half of a taxable year.
To assist us in meeting this requirement, we may take actions to limit the
beneficial ownership, directly or indirectly, by a single person of our
outstanding equity securities, including any of our preferred stock. Therefore,
the amendment to our charter designating each series of preferred stock may
contain provisions restricting the ownership and transfer of the preferred
stock. The applicable prospectus supplement will specify any additional
ownership limitation relating to a series of preferred stock. See "Limits on
Ownership of Stock" beginning on page 38.
TRANSFER AGENT
The transfer agent and registrar for the preferred stock will be set forth
in the applicable prospectus supplement.
DESCRIPTION OF COMMON STOCK
The following is a description of the material terms and provisions of our
common stock. You should read our charter and bylaws in their entirety before
you purchase any shares of our common stock.
GENERAL
Under our charter, we have authority to issue 140,000,000 shares of common
stock, par value $.01 per share. Under Maryland law, stockholders generally are
not responsible for our debts or obligations. As of May 1, 2003, we had
67,424,283 shares of common stock issued and outstanding. Our common stock is
listed on the NYSE and the PCX under the symbol "AVB."
36
DIVIDENDS
Subject to the preferential rights of any other class or series of stock and
to the provisions of our charter regarding excess stock, which are described
below, holders of shares of our common stock will be entitled to receive
dividends on shares of common stock out of assets that we may legally use to pay
dividends, if and when they are authorized and declared by our board of
directors.
VOTING RIGHTS
Except as otherwise required by law and except as provided by the terms of
any other class or series of stock, holders of common stock have the exclusive
power to vote on all matters presented to our stockholders, including the
election of directors. Holders of common stock are entitled to one vote per
share. There is no cumulative voting in the election of our directors, and,
subject to any rights to elect directors that are granted to the holders of any
class or series of preferred stock, the affirmative vote of the holders of a
majority of all outstanding shares of common stock is required to elect a
director.
LIQUIDATION/DISSOLUTION RIGHTS
Subject to the preferential rights of any other class or series of stock and
to the provisions of our charter regarding excess stock, holders of shares of
our common stock share in the same proportion as our other stockholders in the
assets that we may legally use to pay distributions in the event we are
liquidated, dissolved or our affairs are wound up after we pay or make adequate
provision for all of our known debts and liabilities.
OTHER RIGHTS
Subject to the preferential rights of any other class or series of stock and
to provisions of our charter regarding excess stock, all shares of our common
stock have equal dividend, distribution, liquidation and other rights, and have
no preference, appraisal or exchange rights. Furthermore, holders of shares of
our common stock have no conversion, sinking fund or redemption rights, or
preemptive rights to subscribe for any of our securities.
Under Maryland law, a 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, unless a
different percentage is set forth in the corporation's charter, which percentage
shall not in any event be less than a majority of all of the shares entitled to
vote on such matter. Our charter provides that whenever any vote of the holders
of voting stock is required to amend or repeal any provision of the charter,
then in addition to any other vote of the holders of voting stock that is
required by the charter, (1) the affirmative vote of the holders of a majority
of our outstanding shares of stock entitled to vote on such amendment or repeal,
voting together as a single class, and (2) the affirmative vote of the holders
of a majority of the outstanding shares of each class entitled to vote thereon
as a class are required. However, with respect to the amendment or repeal of any
of the provisions of our charter relating to the resignation or removal of
directors, vacancies on the board of directors, independent directors, the
rights and powers of our company, the board of directors and officers, and the
limitation of liability of directors and officers, the affirmative vote of the
holders of at least two-thirds of the outstanding shares entitled to vote on
such amendment or repeal, voting together as a single class, and the affirmative
vote of the holders of not less than two-thirds of the outstanding shares of
each class entitled to vote thereon as a class, shall be required.
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RESTRICTIONS ON OWNERSHIP
For us to qualify as a REIT under the Internal Revenue Code, no more than
50% in value of our outstanding capital stock may be owned, directly or
indirectly, by five or fewer individuals during the last half of a taxable year.
To assist us in meeting this requirement, we may take actions such as the
automatic conversion of shares in excess of this ownership restriction into
shares of excess stock to limit the beneficial ownership of our outstanding
equity securities, directly or indirectly, by one individual. See "Limits on
Ownership of Stock" beginning on page 38.
TRANSFER AGENT
The transfer agent and registrar for the common stock is Wachovia
Bank, N.A., Charlotte, North Carolina.
LIMITS ON OWNERSHIP OF STOCK
OWNERSHIP LIMITS
For us to qualify as a REIT under the Internal Revenue Code, among other
things, no more than 50% in value of our outstanding capital stock may be owned,
directly or indirectly, by five or fewer individuals during the last half of a
taxable year. Additionally, the shares of stock must be beneficially owned by
100 or more persons during at least 335 days of a taxable year of twelve months
or during a proportionate part of a shorter taxable year. To protect us against
the risk of losing our status as a REIT due to a concentration of ownership
among our stockholders, and to otherwise address concerns related to
concentrated ownership of capital stock, our charter provides that no person may
own (directly, indirectly by virtue of the attribution provisions of the
Internal Revenue Code, or beneficially under Rule 13d-3 of the Securities
Exchange Act) more than 9.8% of any class or series of our stock (15% for some
entities as described below). Notwithstanding the preceding sentence, the board
of directors at its option and in its sole discretion may approve ownership
greater than the applicable ownership limitation by selected persons or
entities. Our board of directors does not expect that it would waive the
applicable ownership limit unless the board of directors receives evidence to
its satisfaction that the waiver of the limit will not jeopardize our status as
a REIT, and the board of directors also decides that the waiver is in our
stockholders' best interests. Any transfer of shares of stock, including any
security convertible into shares of stock, shall be void and have no effect if
it: (1) would create a direct or indirect ownership of shares of stock in excess
of the applicable ownership limit, absent a valid waiver of this ownership limit
or (2) would result in our disqualification as a REIT, including any transfer
that would (a) result in the shares of stock being owned by fewer than 100
persons, (b) result in us being "closely held" within the meaning of
Section 856(h) of the Internal Revenue Code or (c) result in us constructively
owning 10% or more of the ownership interests in a tenant within the meaning of
Section 856(d)(2)(B) of the Internal Revenue Code. In addition, if any purported
transfer of stock or any other event would otherwise result in any person
violating the applicable ownership limit, then the purported transfer will be
void and of no force or effect with respect to the intended transferee as to
that number of shares in excess of the ownership limit. The intended transferee
will acquire no right or interest in the excess shares; or, in the case of any
event other than a purported transfer, the person holding record title to any
shares in excess of the ownership limit shall cease to own any right or interest
in the excess shares. In both cases, neither the intended transferee nor the
person holding record title to any shares in excess of the ownership limit shall
have any right to: (1) transfer or otherwise dispose of the excess stock,
(2) vote the excess stock or (3) receive any dividend or distribution paid with
respect to the excess stock, as further explained below.
Under the Internal Revenue Code, some types of entities, which includes
pension plans described in Section 401(a) of the Internal Revenue Code and
mutual funds registered under the Investment
38
Company Act of 1940, will be looked through for purposes of the five or fewer
test described above. Our charter limits these pension plans and mutual funds to
owning no more than 15% of any class or series of our stock.
SHARES OWNED IN EXCESS OF THE OWNERSHIP LIMIT
Stock owned, or deemed to be owned, or proposed to be transferred to a
stockholder in excess of the ownership limit will be converted automatically
into shares of excess stock and will be transferred, by operation of law, to a
trust, the beneficiary of which shall be a qualified charitable organization
selected by us. As soon as practicable after the transfer of shares to the
trust, the trustee of the trust will be required to sell the shares of excess
stock to a person who could own the shares without violating the ownership limit
and distribute to the proposed transferee an amount equal to the lesser of
(1) the price paid by the proposed transferee for the shares of excess stock or
(2) the sales proceeds received by the trust for the shares of excess stock. In
the case of any excess stock resulting from any event other than a transfer, or
from a transfer for no consideration (such as a gift), the trustee will be
required to sell the excess stock to a qualified person or entity and distribute
to the person holding record title to the shares in excess of the ownership
limit an amount equal to the lesser of (A) the fair market value of the excess
stock as of the date of the event or (B) the sales proceeds received by the
trust for the excess stock. In either case, any proceeds in excess of the amount
distributable to the proposed transferee or person holding record title to the
shares in excess of the ownership limit, as applicable, will be distributed to
the beneficiary of the trust.
Upon the transfer of shares of excess stock by the trustee, the shares shall
be converted automatically into an equal number of shares of the same class and
series that were converted into the excess stock, and the shares of excess stock
will be automatically retired and canceled and will thereupon be restored to the
status of authorized but unissued shares of excess stock. Prior to a sale of any
excess stock by the trustee, the trustee will be entitled to receive in trust
for the beneficiary, all dividends and other distributions paid with respect to
the excess stock. In addition, while the shares of excess stock are held in
trust, the holder of shares will not be entitled to vote such shares, except
when Maryland law mandates class voting rights. In the event voting rights are
mandated by Maryland law, the trustee shall be entitled to vote the shares of
excess stock.
Neither the proposed transferee nor any person holding record title to any
excess stock shall have any right to receive any dividend or distribution paid
with respect to the excess stock. Any dividend or distribution paid on excess
stock prior to discovery by us of the violation of the applicable ownership
limit shall be repaid to us. In addition, neither the proposed transferee nor
any person holding record title to any excess stock shall have any voting rights
with respect to the excess stock. Any vote of any excess stock prior to
discovery by us of the violation of the applicable ownership limit shall,
subject to applicable law, be rescinded and deemed void and shall be recast by
the trustee acting for the benefit of the beneficiary; provided, however, that
such vote shall not be rescinded and recast if we have already taken
irreversible corporate action. Shares of excess stock are not treasury stock,
but rather constitute a separate class of issued and outstanding stock.
RIGHT TO PURCHASE EXCESS STOCK
In addition to the foregoing transfer restrictions, we have the right for a
period of 90 days to purchase all or any portion of the excess stock from the
proposed transferee or any person holding record title to any excess stock for a
price per share equal to the lesser of:
(1) the price per share initially paid for the stock by the proposed
transferee or, in the case of excess stock resulting from any event other
than a transfer or from a transfer for no consideration (such as a gift),
the average of the closing price per share for the class of shares
39
from which the shares of excess stock were converted for the five
consecutive trading days ending on the date of such event or transfer, as
applicable; or
(2) the average closing price per share for the class or series of shares
from which the shares of excess stock were converted for the five
consecutive trading days ending on the date we elect to purchase the
shares.
The 90-day period begins on the date of the purported transfer or non-transfer
event that violated the applicable ownership limit if the proposed transferee or
person holding record title to any excess stock gives notice to us of the
transfer or non-transfer event, as applicable, or, if no notice is given, the
date our board of directors determines that such a transfer or non-transfer
event has been made.
GENERAL
The foregoing restrictions on transferability and ownership will not apply
if our board of directors determines that it is no longer in our best interest
to continue to qualify as a REIT. The board may, in its sole discretion, waive
the ownership limits if evidence is presented that such ownership of shares in
excess of the ownership limit will not jeopardize our qualification as a REIT
and the board otherwise decides that such action is in our stockholders' best
interest.
Our stockholders are required to disclose to us in writing any information
with respect to their ownership of our stock that we may request in order to
determine our status as a REIT and to ensure compliance with the ownership
limits.
The ownership limits may have the effect of delaying, deferring or
preventing a change of control of our company.
FEDERAL INCOME TAX CONSIDERATIONS AND CONSEQUENCES OF YOUR INVESTMENT
The following discussion describes the material U.S. federal income tax
consequences relating to our qualification as a REIT and the ownership and
disposition of shares of our common stock and, to a lesser extent, our debt
securities.
The federal income tax consequences of the ownership and disposition of
shares of our preferred stock and of our debt securities depend to a high degree
on the specific rights and terms of the preferred stock or debt securities
issued. If we offer one or more additional series of preferred stock or debt
securities, information about any income tax consequences to holders of those
particular shares of preferred stock or debt securities will be included in the
documents pursuant to which they are offered to the extent required by
applicable law.
Because this is a summary that is intended to address only material federal
income tax consequences relating to the ownership and disposition of our common
stock and, to a lesser extent, our debt securities that will apply to all
holders, it may not contain all the information that may be important to you. As
you review this discussion, you should keep in mind that:
- the tax consequences to you may vary depending on your particular tax
situation;
- special rules that are not discussed below may apply to you if, for
example, you are a tax-exempt organization, a broker-dealer, a non-U.S.
person, a trust, an estate, a regulated investment company, a financial
institution, an insurance company, or otherwise subject to special tax
treatment under the Internal Revenue Code;
- this summary does not address state, local or non-U.S. tax considerations;
- this summary deals only with common stockholders and holders of debt
securities that hold common stock or debt securities, as applicable, as
"capital assets" within the meaning of Section 1221 of the Internal
Revenue Code; and
40
- this discussion is not intended to be, and should not be construed as, tax
advice.
You are urged both to review the following discussion and to consult with
your own tax advisor to determine the effect of ownership and disposition of our
securities on your individual tax situation, including any state, local or
non-U.S. tax consequences.
The information in this section is based on the current Internal Revenue
Code, current, temporary and proposed Treasury regulations, the legislative
history of the Internal Revenue Code, current administrative interpretations and
practices of the Internal Revenue Service, including its practices and policies
as endorsed in private letter rulings, which are not binding on the Internal
Revenue Service except in the case of the taxpayer to whom a private letter
ruling is addressed, and existing court decisions. Future legislation,
regulations, administrative interpretations and court decisions could change
current law or adversely affect existing interpretations of current law. Any
change could apply retroactively. We have not obtained any rulings from the
Internal Revenue Service concerning the tax treatment of the matters discussed
below. Thus, it is possible that the Internal Revenue Service could challenge
the statements in this discussion, which do not bind the Internal Revenue
Service or the courts, and that a court could agree with the Internal Revenue
Service.
TAXATION OF AVALONBAY AS A REIT
We have elected to be taxed as a REIT under the Internal Revenue Code. A
REIT generally is not subject to federal income tax on the income that it
distributes to stockholders if it meets the applicable REIT distribution
requirements and other requirements for qualification.
We believe that we are organized and have operated, and we intend to
continue to operate, in a manner to qualify as a REIT, but there can be no
assurance that we have qualified or will remain qualified as a REIT. Goodwin
Procter LLP, our tax counsel, has provided us an opinion, dated March 11, 2003,
that, based upon and subject to the assumptions and other matters stated in the
opinion, commencing with the taxable year ending December 31, 1994, our form of
organization and operations are such as to enable us to qualify as a "real
estate investment trust" under the applicable provisions of the Internal Revenue
Code. Qualification and taxation as a REIT depend upon our ability to meet,
through actual annual (or in some cases quarterly) operating results,
requirements relating to income, asset ownership, distribution levels and
diversity of share ownership, and the various other REIT qualification
requirements imposed under the Internal Revenue Code. Goodwin Procter LLP has
not and will not independently review these results on an independent basis.
Given the complex nature of the REIT qualification requirements, the ongoing
importance of factual determinations and the possibility of future changes in
our circumstances, we cannot provide any assurance that our actual operating
results will satisfy the requirements for taxation as a REIT under the Internal
Revenue Code for any particular taxable year.
So long as we qualify for taxation as a REIT, we generally will not be
subject to federal corporate income tax on our net income that is distributed
currently to our stockholders. This treatment substantially eliminates "double
taxation" (that is, taxation at both the corporate and stockholder levels) that
generally results from an investment in a regular corporation. However, we will
be subject to federal income tax as follows:
- We will be taxed at regular corporate rates on any undistributed "REIT
taxable income." REIT taxable income is the taxable income of the REIT
subject to specified adjustments, including a deduction for dividends
paid;
- Under some circumstances, we may be subject to the "alternative minimum
tax" on our items of tax preference;
41
- If we have net income from the sale or other disposition of "foreclosure
property" that is held primarily for sale to customers in the ordinary
course of business, or other nonqualifying income from foreclosure
property, we will be subject to tax at the highest corporate rate on this
income;
- Our net income from "prohibited transactions" will be subject to a 100%
tax. In general, prohibited transactions are sales or other dispositions
of property held primarily for sale to customers in the ordinary course of
business other than foreclosure property;
- If we fail to satisfy either the 75% gross income test or the 95% gross
income test discussed below, but nonetheless maintain our qualification as
a REIT because other requirements are met, we will be subject to a tax
equal to the gross income attributable to the greater of either (1) the
amount by which 75% of our gross income exceeds the amount of our income
qualifying under the 75% test for the taxable year or (2) the amount by
which 90% of our gross income exceeds the amount of our income qualifying
for the 95% income test for the taxable year, multiplied by a fraction
intended to reflect our profitability;
- We will be subject to a 4% excise tax on the excess of the required
distribution over the sum of amounts actually distributed and amounts
retained for which federal income tax was paid, if we fail to distribute
during each calendar year at least the sum of:
(1) 85% of our REIT ordinary income for the year;
(2) 95% of our REIT capital gain net income for the year; and
(3) any undistributed taxable income from prior taxable years;
- We will be subject to a 100% penalty tax on some payments we receive (or
on certain expenses deducted by a taxable REIT subsidiary) if arrangements
among us, our tenants and our taxable REIT subsidiaries are not comparable
to similar arrangements among unrelated parties; and
- If we should acquire any asset from a "C" corporation in a carry-over
basis transaction and we subsequently recognize gain on the disposition of
such asset during the ten-year period beginning on the date on which we
acquired the asset, then, to the extent of any built-in gain, such gain
will be subject to tax at the highest regular corporate rate. Built-in
gain means the excess of (a) the fair market value of the asset as of the
beginning of the applicable recognition period over (b) the adjusted basis
in such asset as of the beginning of such recognition period.
REQUIREMENTS FOR QUALIFICATION AS A REIT
We elected to be taxable as a REIT for federal income tax purposes for our
taxable year ended December 31, 1994. In order to have so qualified, we must
have met and continue to meet the requirements discussed below, relating to our
organization, sources of income, nature of assets and distributions of income to
stockholders.
The Internal Revenue Code defines a REIT as a corporation, trust or
association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares,
or by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation, but for Sections 856
through 859 of the Internal Revenue Code;
(4) that is neither a financial institution nor an insurance company subject
to applicable provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in value of
the outstanding shares of which is owned directly or indirectly by five
or fewer individuals, as defined in the Internal Revenue Code to include
specified entities;
42
(7) that makes an election to be taxable as a REIT, or has made this
election for a previous taxable year which has not been revoked or
terminated, and satisfies all relevant filing and other administrative
requirements established by the Internal Revenue Service that must be met
to elect and maintain REIT status;
(8) that uses a calendar year for federal income tax purposes and complies
with the recordkeeping requirements of the Internal Revenue Code and
regulations promulgated thereunder; and
(9) that meets other applicable tests, described below, regarding the nature
of its income and assets and the amount of its distributions.
Conditions (1), (2), (3) and (4) above must be met during the entire taxable
year and condition (5) above must be met 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. For purposes of determining stock ownership under condition
(6) above, a supplemental unemployment compensation benefits plan, a private
foundation and a portion of a trust permanently set aside or used exclusively
for charitable purposes generally are each considered an individual. A trust
that is a qualified trust under Internal Revenue Code Section 401(a) generally
is not considered an individual, and beneficiaries of a qualified trust are
treated as holding shares of a REIT in proportion to their actuarial interests
in the trust for purposes of condition (6) above.
We believe that we have issued sufficient shares of common stock with
sufficient diversity of ownership to allow us to satisfy conditions (5) and
(6) above. In addition, our charter contains restrictions regarding the transfer
of shares of common stock and preferred stock that are intended to assist us in
continuing to satisfy the share ownership requirements described in conditions
(5) and (6) above. These restrictions, however, may not ensure that we will be
able to satisfy these share ownership requirements. If we fail to satisfy these
share ownership requirements, we will fail to qualify as a REIT.
To monitor its compliance with condition (6) above, a REIT is required to
send annual letters to its stockholders requesting information regarding the
actual ownership of its shares. If we comply with the annual letters requirement
and we do not know or, exercising reasonable diligence, would not have known of
our failure to meet condition (6) above, then we will be treated as having met
condition (6) above.
To qualify as a REIT, we cannot have at the end of any taxable year any
undistributed earnings and profits that are attributable to a non-REIT taxable
year. We do not believe that we have any non-REIT earnings and profits and
believe that we therefore satisfy this requirement.
QUALIFIED REIT SUBSIDIARIES. If a REIT owns a corporate subsidiary that is
a "qualified REIT subsidiary," the separate existence of that subsidiary will be
disregarded for federal income tax purposes. Generally, a qualified REIT
subsidiary is a corporation, other than a taxable REIT subsidiary (discussed
below), all of the stock of which is owned by the REIT. All assets, liabilities
and items of income, deduction and credit of the qualified REIT subsidiary will
be treated as assets, liabilities and items of income, deduction and credit of
the REIT itself. A qualified REIT subsidiary of AvalonBay will not be subject to
federal corporate income taxation, although it may be subject to state and local
taxation in some states.
TAXABLE REIT SUBSIDIARIES. A "taxable REIT subsidiary" of AvalonBay is a
corporation in which we directly or indirectly own stock and that elects,
together with us, to be treated as a taxable REIT subsidiary under
Section 856(l) of the Internal Revenue Code. In addition, if one of our taxable
REIT subsidiaries owns, directly or indirectly, securities representing 35% or
more of the vote or value of a subsidiary corporation, that subsidiary will also
be treated as a taxable REIT subsidiary of ours. A taxable REIT subsidiary is a
corporation subject to federal income tax, and state and local income tax where
applicable, as a regular "C" corporation.
43
Generally, a taxable REIT subsidiary can perform some impermissible tenant
services without causing us to receive impermissible tenant services income
under the REIT income tests. However, several provisions regarding the
arrangements between a REIT and its taxable REIT subsidiaries ensure that a
taxable REIT subsidiary will be subject to an appropriate level of federal
income taxation. For example, a taxable REIT subsidiary is limited in its
ability to deduct interest payments in excess of a certain amount made to us. In
addition, we will be obligated to pay a 100% penalty tax on some payments that
we receive or on certain expenses deducted by the taxable REIT subsidiary if the
economic arrangements between us, our tenants and the taxable REIT subsidiary
are not comparable to similar arrangements among unrelated parties.
OWNERSHIP OF PARTNERSHIP INTERESTS BY A REIT. A REIT that is a partner in a
partnership will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to earn its proportionate share of the
partnership's income. The assets and gross income of the partnership retain the
same character in the hands of the REIT for purposes of the gross income and
asset tests applicable to REITs as described below. Thus, our proportionate
share of the assets and items of income of any entity taxable as a partnership
for federal income tax purposes in which we hold an interest will be treated as
our assets and liabilities and our items of income for purposes of applying the
requirements described in this prospectus. The assets, liabilities and items of
income of any partnership in which we own an interest include such entity's
share of the assets and liabilities and items of income with respect to any
partnership in which it holds an interest.
INCOME TESTS APPLICABLE TO REITS. To qualify as a REIT, we must satisfy two
gross income tests. First, at least 75% 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, including "rents from real property," gains on the disposition
of real estate, dividends paid by another REIT and interest on obligations
secured by mortgages on real property or on interests in real property, or from
some types of temporary investments. Second, at least 95% of our gross income,
excluding gross income from prohibited transactions, for each taxable year must
be derived from any combination of income qualifying under the 75% test and
dividends, interest, some payments under hedging instruments and gain from the
sale or disposition of stock or securities and some hedging instruments.
Rents received by us will qualify as rents from real property in satisfying
the gross income requirements for a REIT described above only if several
conditions are met. First, the amount of rent 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 receipts
or sales. Second, rents received from a "related party tenant" will not qualify
as rents from real property in satisfying the gross income tests unless the
tenant is a taxable REIT subsidiary and at least 90% of the property is leased
to unrelated tenants and the rent paid by the taxable REIT subsidiary is
substantially comparable to the rent paid by the unrelated tenants for
comparable space. A tenant is a related party tenant if the REIT, or an actual
or constructive owner of 10% or more of the REIT, actually or constructively
owns 10% or more of the tenant. Third, if rent attributable to personal
property, leased in connection with a lease of real property, is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to the personal property will not qualify as rents from real
property.
Generally, for rents to qualify as rents from real property for the purpose
of satisfying the gross income tests, we may provide directly only an
insignificant amount of services, unless those services are "usually or
customarily rendered" in connection with the rental of real property and not
otherwise considered "rendered to the occupant." Accordingly, we may not provide
"impermissible services" to tenants (except through an independent contractor
from whom we derive no revenue and that meets other requirements or through a
taxable REIT subsidiary) without giving rise to "impermissible tenant service
income." Impermissible tenant service income is deemed to be at least 150% of
our direct cost
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of providing the service. If the impermissible tenant service income exceeds 1%
of our total income from a property, then all of the income from that property
will fail to qualify as rents from real property. If the total amount of
impermissible tenant service income from a property does not exceed 1% of our
total income from the property, the services will not "taint" the other income
from the property (that is, it will not cause the rent paid by tenants of that
property to fail to qualify as rents from real property), but the impermissible
tenant service income will not qualify as rents from real property.
We have not charged, and do not anticipate charging, rent that is based in
whole or in part on the income or profits of any person. We have not derived,
and do not anticipate deriving, rent attributable to personal property leased in
connection with real property that exceeds 15% of the total rents.
We have provided and will provide services with respect to the multifamily
apartment communities. We believe that the services with respect to our
communities that have been and will be provided by us are usually or customarily
rendered in connection with the rental of space for occupancy only and are not
otherwise rendered to particular tenants; or, if considered impermissible
services, income from the provision of such services with respect to a given
property has not and will not exceed 1% of all amounts received by us from such
property. Therefore, we believe that the provision of such services has not and
will not cause rents received with respect to our communities to fail to qualify
as rents from real property. We believe that services with respect to our
communities that may not be provided by us directly without jeopardizing the
qualification of rent as rents from real property have been and will be
performed by independent contractors or taxable REIT subsidiaries.
We currently own an equity stake in three technology-related corporations,
and may in the future acquire equity stakes in additional corporations, which do
not constitute real estate assets. Gain from a sale or other taxable disposition
of these interests will constitute income satisfying the 95% income test, but
not the 75% income test. The need to satisfy the 75% income test may adversely
affect the time at which we chose to sell or dispose of one or more of these
investments, depending on the appreciation of these equity interests, if any.
We have earned and continue to earn a small amount of nonqualifying income
relative to total gross income in any relevant taxable year. For example, we
earn fees related to the management of properties that are not wholly-owned by
us. We believe that the amount of nonqualifying income generated from these
activities has not affected and will not affect our ability to meet the 95%
gross income test.
Any gain realized by us on the sale of any property held as inventory or
other property held primarily for sale to customers in the ordinary course of
business will be treated as income from a prohibited transaction that is subject
to a 100% penalty tax. Under existing law, whether property is held as inventory
or primarily for sale to customers in the ordinary course of a trade or business
is a question of fact that depends on all the facts and circumstances of a
particular transaction. We intend to hold our properties for investment with a
view to long-term appreciation, to engage in the business of acquiring,
developing, owning and operating properties, and to make occasional sales of
properties as are consistent with our investment objectives. We cannot provide
any assurance, however, that the Internal Revenue Service might not contend that
one or more of these sales are subject to the 100% penalty tax.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless qualify as a REIT for that year if we are
entitled to relief under the Internal Revenue Code. These relief provisions
generally will be available if our failure to meet the tests is due to
reasonable cause and not due to willful neglect, we attached a schedule of the
sources of our income to our federal income tax return and 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
45
because nonqualifying income that we intentionally incur exceeds the limits on
nonqualifying income, the Internal Revenue Service could conclude that the
failure to satisfy the tests was not due to reasonable cause. If these relief
provisions are inapplicable to a particular set of circumstances involving us,
we will fail to qualify as a REIT. As discussed under "--Taxation of AvalonBay
as a REIT" even if these relief provisions apply, a tax would be imposed based
on the amount of nonqualifying income.
ASSET TESTS APPLICABLE TO REITS. At the close of each quarter of our
taxable year, we must satisfy four tests relating to the nature of our assets:
(1) at least 75% of the value of our total assets must be represented by
real estate assets, cash, cash items and government securities. Our real
estate assets include, for this purpose, stock or debt instruments held
for less than one year purchased with the proceeds of an offering of our
shares or long-term debt;
(2) not more than 25% of our total assets may be represented by securities
other than those in the 75% asset class;
(3) except for equity investments in REITS, qualified REIT subsidiaries, or
taxable REIT subsidiaries or other securities that qualify as "real
estate assets" for purposes of the test described in clause (1):
- the value of any one issuer's securities owned by us may not exceed
5% of the value of our total assets;
- we may not own more than 10% of the voting power of the outstanding
securities of any one issuer; and
- we may not own more than 10% of the value of the outstanding
securities of any one issuer; and
(4) not more than 20% of our total assets may be represented by securities
of one or more taxable REIT subsidiaries.
Securities for purposes of the asset tests may include debt securities.
However, debt of an issuer will not count as a security for purposes of the 10%
value test if the debt securities are "straight debt" as defined in
Section 1361 of the Internal Revenue Code and (1) the issuer is an individual,
(2) the only securities of the issuer that the REIT holds are straight debt or
(3) if the issuer is a partnership, the REIT holds at least a 20% profits
interest in the partnership.
We currently own more than 10% of the total value of the outstanding
securities of several subsidiaries. Each of these subsidiaries has elected to be
a taxable REIT subsidiary. We believe that the aggregate value of our taxable
REIT subsidiaries does not exceed 20% of the aggregate value of our gross
assets.
With respect to each issuer in which we currently own an interest that does
not qualify as a REIT, a qualified REIT subsidiary or a taxable REIT subsidiary,
we believe that our pro rata share of the value of the securities, including
debt, of any such issuer does not exceed 5% of the total value of our assets and
that we comply with the 10% voting power limitation and 10% value limitation
with respect to each such issuer. In this regard, however, we cannot provide any
assurance that the Internal Revenue Service might not disagree with our
determinations.
After initially meeting the asset tests at the close of any quarter, we will
not lose our status as a REIT if we fail to satisfy the 25%, 20% and 5% asset
tests and the 10% value limitation at the end of a later quarter solely by
reason of changes in the relative values of our assets. If the failure to
satisfy the 25%, 20% or 5% asset tests or the 10% value limitation results from
an acquisition of securities or other property during a quarter, the failure can
be cured by disposition of sufficient non-qualifying
46
assets within 30 days after the close of that quarter. We intend to maintain
adequate records of the value of our assets to ensure compliance with the asset
tests and to take any available actions within 30 days after the close of any
quarter as may be required to cure any noncompliance with the 25%, 20% or 5%
asset tests or 10% value limitation. If we were to fail to cure noncompliance
with the asset tests within this time period, we would cease to qualify as a
REIT.
ANNUAL DISTRIBUTION REQUIREMENTS APPLICABLE TO REITS. To qualify as a REIT,
we are required to distribute dividends, other than capital gain dividends, to
our stockholders each year in an amount at least equal to (1) the sum of
(a) 90% of our REIT taxable income, computed without regard to the dividends
paid deduction and our net capital gain, and (b) 90% of the net income, after
tax, from foreclosure property, minus (2) the sum of certain specified items of
noncash income. In addition, if we recognize any built-in gain, we will be
required, under Treasury regulations, to distribute at least 90% of the built-in
gain, after tax, recognized on the disposition of the applicable asset. See
"--Taxation of AvalonBay as a REIT" for a discussion of the possible recognition
of built-in gain. These distributions must be paid either in the taxable year to
which they relate, or in the following taxable year if declared before we timely
file our tax return for the prior year and if paid with or before the first
regular dividend payment date after the declaration is made.
We believe that we have made and intend to continue to make timely
distributions sufficient to satisfy the annual distribution requirements.
It is expected that our REIT taxable income has been and will be less than
our cash flow due to the allowance of depreciation and other noncash charges in
computing REIT taxable income. Accordingly, we anticipate that we will generally
have sufficient cash or liquid assets to enable us to satisfy the 90%
distribution requirement. It is possible, however, that we, from time to time,
may not have sufficient cash or other liquid assets to meet this distribution
requirement or to distribute such greater amount as may be necessary to avoid
income and excise taxation, due to timing differences between (a) the actual
receipt of income and the actual payment of deductible expenses and (b) the
inclusion of such income and the deduction of such expenses in arriving at our
taxable income, or as a result of nondeductible expenses such as principal
amortization or capital expenditures in excess of noncash deductions. In the
event that such timing differences occur, we may find it necessary to arrange
for borrowings or, if possible, pay taxable stock dividends in order to meet the
dividend requirement.
Under some circumstances, we may be able to rectify a failure to meet the
distribution requirement for a year by paying dividends to stockholders in a
later year, which may be included in our deduction for dividends paid for the
earlier year. We will refer to such dividends as "deficiency dividends." Thus,
we may be able to avoid being taxed on amounts distributed as deficiency
dividends. We will, however, be required to pay interest based upon the amount
of any deduction taken for deficiency dividends.
To the extent that we do not distribute all of our net capital gain or
distribute at least 90%, but less than 100%, of our REIT taxable income, as
adjusted, we are subject to tax on these amounts at regular corporate tax rates.
We will be subject to a 4% excise tax on the excess of the required
distribution over the sum of amounts actually distributed and amounts retained
for which federal income tax was paid, if we fail to distribute during each
calendar year at least the sum of:
(1) 85% of our REIT ordinary income for the year;
(2) 95% of our REIT capital gain net income for the year; and
(3) any undistributed taxable income from prior taxable years.
47
A REIT may elect to retain rather than distribute all or a portion of its
net capital gains and pay the tax on the gains. In that case, a REIT may elect
to have its stockholders include their proportionate share of the undistributed
net capital gains in income as long-term capital gains and receive a credit for
their share of the tax paid by the REIT. For purposes of the 4% excise tax
described above, any retained amounts would be treated as having been
distributed.
RECORD-KEEPING REQUIREMENTS. We are required to comply with applicable
record-keeping requirements. Failure to comply could result in monetary fines.
FAILURE OF AVALONBAY TO QUALIFY AS A REIT. If we fail to qualify for
taxation as a REIT in any taxable year and the relief provisions do not apply,
we will be subject to tax on our taxable income at regular corporate rates,
including any applicable alternative minimum tax. Distributions to stockholders
in any year in which we fail to qualify will not be deductible by us nor will
they be required to be made. In such event, to the extent of current or
accumulated earnings and profits, all distributions to stockholders will be
dividends, and subject to limitations of the Internal Revenue Code, corporate
distributees may be eligible for the dividends-received deduction and individual
distributees may be able to treat the dividends as qualified dividend income
taxable at long-term capital gain rates. Unless we are entitled to relief under
specific statutory provisions, we also will be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances we would be
entitled to such statutory relief. For example, if we fail to satisfy the gross
income tests because nonqualifying income that we intentionally incur exceeds
the limit on such income, the Internal Revenue Service could conclude that our
failure to satisfy the tests was not due to reasonable cause.
TAXATION OF U.S. STOCKHOLDERS
When we refer to a United States stockholder, we mean a beneficial owner of
a share of our common stock that is, for United States federal income tax
purposes:
(1) a citizen or resident, as defined in Section 7701(b) of the Internal
Revenue Code, of the United States;
(2) a corporation or partnership, or other entity treated as a corporation
or partnership for federal income tax purposes, created or organized
under the laws of the United States, any state or the District of
Columbia;
(3) an estate the income of which is subject to federal income taxation
regardless of its source; or
(4) in general, a trust subject to the primary supervision of a United
States court and the control of one or more United States persons.
Generally, in the case of a partnership that holds our common stock, any
partner that would be a U.S. stockholder if it held the common stock directly is
also a U.S. stockholder. A "non-U.S. stockholder" is a holder, including any
partner in a partnership that holds our common stock, that is not a U.S.
stockholder.
RECENT LEGISLATION. On May 28, 2003, the President signed into law the Jobs
and Growth Tax Relief Reconciliation Act of 2003, referred to herein as the Jobs
and Growth Tax Act. The Jobs and Growth Tax Act reduces the maximum individual
tax rate for long-term capital gains generally from 20% to 15% (for sales
occurring after May 6, 2003 through December 31, 2008). The Jobs and Growth Tax
Act also taxes "qualified dividend income" of individuals as net capital gain,
thus reducing the maximum individual tax rate for such dividends from 35% to 15%
(for tax years from 2003 through 2008). "Qualified dividend income" generally
includes dividends received from regular domestic corporations and from certain
"qualified foreign corporations," provided that certain required stock holding
periods are met.
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Under the Jobs and Growth Tax Act, REIT dividends, other than capital gain
dividends, generally are not qualified dividend income and continue to be taxed
at ordinary rates. Dividends received by an individual from a REIT will be
treated as qualified dividend income, however, to the extent the REIT itself has
qualified dividend income for the taxable year in which the dividend was paid,
such as dividends from taxable REIT subsidiaries, and designates such dividends
as qualifying for such capital gains rate tax treatment. Qualified dividend
income of a REIT for this purpose also includes the sum of (i) the excess of the
REIT's "real estate investment trust taxable income" for the preceding year,
which would typically include any income that the REIT did not distribute to
stockholders, over the tax payable by the REIT on such income in the preceding
year, and (ii) the excess of the income of the REIT for the preceding year
subject to the built-in gain tax on certain assets acquired from C corporations
over the tax payable by the REIT on any such income in the preceding year.
Without future congressional action, the maximum individual tax rate on
long-term capital gains will return to 20% in 2009, and the maximum individual
tax rate on dividends will move to 35% in 2009 and 39.6% in 2011.
DISTRIBUTIONS BY AVALONBAY. So long as we qualify as a REIT, distributions
to U.S. stockholders out of our current or accumulated earnings and profits that
are not designated as capital gain dividends will be taxable as ordinary income
and will not be eligible for the dividends received deduction generally
available for corporations. However, dividends, other than capital gain
dividends, that are (i) attributable to income on which we were subject to tax
in the previous taxable year at the corporate level, either because we did not
distribute such income or such income consists of gains from certain assets
acquired from C Corporations, or (ii) attributable to dividends received by us
from non-REIT corporations, such as taxable REIT subsidiaries, during the
current taxable year will be taxable, to the extent designated by us, to
individual stockholders as net capital gain at the current maximum rate of 15%.
Distributions in excess of our current and accumulated earnings and profits will
not be taxable to a U.S. stockholder to the extent that the distributions do not
exceed the adjusted tax basis of the stockholder's shares. Rather, such
distributions will reduce the adjusted basis of such shares. Distributions in
excess of current and accumulated earnings and profits that exceed the U.S.
stockholder's adjusted basis in its shares will be taxable as capital gains in
the amount of such excess if the shares are held as a capital asset. If we
declare a dividend in October, November or December of any year with a record
date in one of these months and pay the dividend on or before January 31 of the
following year, we will be treated as having paid the dividend, and the
stockholder will be treated as having received the dividend, on December 31 of
the year in which the dividend was declared. The above applies regardless of
whether the distributions of AvalonBay are reinvested pursuant to the Dividend
Reinvestment and Stock Purchase Plan.
We may elect to designate distributions of our net capital gain as "capital
gain dividends." Capital gain dividends are taxed to stockholders as gain from
the sale or exchange of a capital asset held for more than one year, without
regard to how long the U.S. stockholder has held its shares. Designations made
by us only will be effective to the extent that they comply with the principles
of Revenue Ruling 89-81, which require that distributions made to different
classes of shares be composed proportionately of dividends of a particular type.
If we designate any portion of a dividend as a capital gain dividend, a U.S.
stockholder will receive an Internal Revenue Service Form 1099-DIV indicating
the amount that will be taxable to the stockholder as capital gain. Corporate
stockholders, however, may be required to treat up to 20% of capital gain
dividends as ordinary income.
Instead of paying capital gain dividends, we may designate all or part of
our net capital gain as "undistributed capital gain." We will be subject to tax
at regular corporate rates on any undistributed capital gain.
49
A U.S. stockholder:
(1) will include in its income as long-term capital gains its proportionate
share of such undistributed capital gains; and
(2) will be deemed to have paid its proportionate share of the tax paid by
us on such undistributed capital gains and receive a credit or a refund
to the extent that the tax paid by us exceeds the U.S. stockholder's tax
liability on the undistributed capital gain.
A U.S. stockholder will increase the basis in its common stock by the difference
between the amount of capital gain included in its income and the amount of tax
it is deemed to have paid. Our earnings and profits will be adjusted
appropriately.
We will classify portions of any designated capital gain dividend or
undistributed capital gain based on the source of such capital gain as either:
(1) an adjusted net capital rate gain distribution, which would be taxable
to non-corporate U.S. stockholders at a current maximum rate of 15%; or
(2) an "unrecaptured Section 1250 gain" distribution, which would be taxable
to non-corporate U.S. stockholders at a current maximum rate of 25%.
Distributions made by our company and gain arising from the sale or exchange
by a U.S. stockholder of shares will not be treated as passive activity income,
and as a result, U.S. stockholders generally will not be able to apply any
"passive losses" against this income or gain. In addition, taxable distributions
from our company, other than qualified dividend income, capital gain dividends
and capital gains from the disposition of shares, generally will be treated as
investment income for purposes of the investment interest limitations. A U.S.
stockholder may elect to treat qualified dividend income, capital gain dividends
and capital gains from the disposition of shares as investment income for
purposes of the investment interest limitation, in which case the applicable
qualified dividend income and capital gains will be taxed at ordinary income
rates. We will notify stockholders regarding the portions of distributions for
each year that constitute ordinary income, qualified dividend income, return of
capital and capital gain. U.S. stockholders may not include in their individual
income tax returns any net operating losses or capital losses of our company.
Our operating or capital losses would be carried over for potential offset
against our future income, subject to applicable limitations.
SALES OF SHARES. Upon any taxable sale or other disposition of shares, a
U.S. stockholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between:
(1) the amount of cash and the fair market value of any property received on
the sale or other disposition; and
(2) the holder's adjusted basis in the shares for tax purposes.
This gain or loss will be a capital gain or loss if the shares have been
held by the U.S. stockholder as a capital asset. The applicable tax rate will
depend on the stockholder's holding period in the asset (generally, if an asset
has been held for more than one year it will produce long-term capital gain) and
the stockholder's tax bracket. The Internal Revenue Service has the authority to
prescribe, but has not yet prescribed, regulations that would apply a capital
gain tax rate of 25% (which is generally higher than the long-term capital gain
tax rates for noncorporate stockholders) to a portion of capital gain realized
by a noncorporate stockholder on the sale of REIT shares that would correspond
to the REIT's "unrecaptured Section 1250 gain." Stockholders are urged to
consult with their own tax advisors with respect to their capital gain tax
liability. A corporate U.S. stockholder will be subject to tax at a maximum rate
of 35% on capital gain from the sale of our company's shares held for more than
12 months. In general, any loss recognized by a U.S. stockholder upon the sale
or other disposition of shares that have been held for six months or less, after
applying the holding period rules, will be treated as a long-term capital loss,
to the extent of distributions received by the U.S. stockholder from us that
were required to be treated as long-term capital gains.
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TAXATION OF TAX-EXEMPT STOCKHOLDERS
Provided that a tax-exempt stockholder has not held its common stock as
"debt financed property" within the meaning of the Internal Revenue Code, the
dividend income from our company will not be unrelated business taxable income,
referred to as UBTI, to a tax-exempt stockholder. Similarly, income from the
sale of shares will not constitute UBTI unless the tax-exempt stockholder has
held its shares as debt financed property within the meaning of the Internal
Revenue Code or has used the shares in a trade or business.
However, for tax-exempt stockholders that are 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 company will constitute UBTI
unless the organization properly sets aside or reserves such amounts for
purposes specified in the Internal Revenue Code. These tax-exempt stockholders
should consult their own tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" are treated as UBTI if received by any trust which is
described in Section 401(a) of the Internal Revenue Code, is tax-exempt under
Section 501(a) of the Internal Revenue Code and holds more than 10%, by value,
of the interests in the REIT.
Tax-exempt pension funds that are described in Section 401(a) of the
Internal Revenue Code are referred to below as "pension trusts."
A REIT is a pension held REIT if it meets the following two tests:
(1) it qualified as a REIT only by reason of Section 856(h)(3) of the
Internal Revenue Code, which provides that stock owned by pension trusts
will be treated, for purposes of determining if the REIT is closely held,
as owned by the beneficiaries of the trust rather than by the trust
itself; and
(2) either (a) at least one pension trust holds more than 25% of the value
of the REIT's stock, or (b) a group of pension trusts each individually
holding more than 10% of the value of the REIT's shares, collectively
owns more than 50% of the value of the REIT's shares.
The percentage of any REIT dividend treated as UBTI is equal to the ratio of
the UBTI earned by the REIT, treating the REIT as if it were a pension trust and
therefore subject to tax on UBTI, to the total gross income of the REIT. An
exception applies where the percentage is less than 5% for any year. The
provisions requiring pension trusts to treat a portion of REIT distributions as
UBTI will not apply if the REIT is able to satisfy the "not closely held
requirement" without relying upon the "look-through" exception with respect to
pension trusts. Based on both our current share ownership and the limitations on
transfer and ownership of shares contained in our charter, we do not expect to
be classified as a pension held REIT.
TAXATION OF HOLDERS OF DEBT SECURITIES AND POTENTIAL TAX CONSEQUENCES OF
THEIR INVESTMENT IN THE DEBT SECURITIES
STATED INTEREST AND MARKET DISCOUNT. Holders of debt securities will be
required to include stated interest on the debt securities in gross income for
federal income tax purposes in accordance with their methods of accounting for
tax purposes. Purchasers of debt securities should be aware that the holding and
disposition of debt securities may be affected by the market discount provisions
of the Internal Revenue Code. These rules generally provide that if a holder of
a debt instrument purchases it at a market discount and subsequently recognizes
gain on a disposition of the debt instrument, including a gift or payment on
maturity, the lesser of such gain or appreciation, in the case of a gift, and
the portion of the market discount that accrued while the debt instrument was
held by such holder will be
51
treated as ordinary interest income at the time of the disposition. For this
purpose, a purchase at a market discount includes a purchase after original
issuance at a price below the debt instrument's stated principal amount. The
market discount rules also provide that a holder who acquires a debt instrument
at a market discount and who does not elect to include such market discount in
income on a current basis may be required to defer a portion of any interest
expense that may otherwise be deductible on any indebtedness incurred or
maintained to purchase or carry such debt instrument until the holder disposes
of the debt instrument in a taxable transaction.
A holder of a debt instrument acquired at a market discount may elect to
include the market discount in income as the discount thereon accrues, either on
a straight line basis or, if elected, on a constant interest rate basis. The
current inclusion election, once made, applies to all market discount
obligations acquired by such holder on or after the first day of the first
taxable year to which the election applies and may not be revoked without the
consent of the Internal Revenue Service. If a holder of a debt security elects
to include market discount in income in accordance with the preceding sentence,
the foregoing rules with respect to the recognition of ordinary income on a sale
or particular other dispositions of such debt security and the deferral of
interest deductions on indebtedness related to such debt security would not
apply.
AMORTIZABLE BOND PREMIUM. Generally, if the tax basis of an obligation held
as a capital asset exceeds the amount payable at maturity of the obligation,
such excess may constitute amortizable bond premium that the holder may elect to
amortize under the constant interest rate method and deduct the amortized
premium over the period from the holder's acquisition date to the obligation's
maturity date. A holder who elects to amortize bond premium must reduce the tax
basis in the related obligation by the amount of the aggregate deductions
allowable for amortizable bond premium.
The amortizable bond premium deduction is treated as an offset to interest
income on the related security for federal income tax purposes. Each prospective
purchaser is urged to consult his tax advisor as to the consequences of the
treatment of such premium as an offset to interest income for federal income tax
purposes.
DISPOSITION. In general, a holder of a debt security will recognize gain or
loss upon the sale, exchange, redemption, payment upon maturity or other taxable
disposition of the debt security. The gain or loss is measured by the difference
between (a) the amount of cash and the fair market value of property received
and (b) the holder's tax basis in the debt security as increased by any market
discount previously included in income by the holder and decreased by any
amortizable bond premium deducted over the term of the debt security. However,
the amount of cash and the fair market value received excludes cash or other
property attributable to the payment of accrued interest not previously included
in income, which amount will be taxable as ordinary income. Subject to the
market discount and amortizable bond premium rules above, any such gain or loss
will generally be long-term capital gain or loss, provided the debt security was
a capital asset in the hands of the holder and had been held for more than one
year.
U.S. TAXATION OF NON-U.S. STOCKHOLDERS
DISTRIBUTIONS BY AVALONBAY. Distributions by AvalonBay to a non-U.S.
stockholder that are neither attributable to gain from sales or exchanges by us
of "U.S. real property interests" nor designated by us as capital gains
dividends will be treated as dividends of ordinary income to the extent that
they are made out of our current or accumulated earnings and profits. These
distributions ordinarily will be subject to withholding of U.S. federal income
tax on a gross basis at a rate of 30%, or a lower rate as permitted under an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the non-U.S. stockholder of a U.S. trade or
business. Under some treaties, however, lower withholding rates generally
applicable to dividends do not apply to dividends from REITs. Applicable
certification and disclosure requirements must be satisfied to be exempt from
52
withholding under the effectively connected income exemption. Dividends that are
effectively connected with a trade or business will be subject to tax on a net
basis, that is, after allowance for deductions, at graduated rates, in the same
manner as U.S. stockholders are taxed with respect to these dividends, and are
generally not subject to withholding. Any dividends received by a corporate
non-U.S. stockholder that is engaged in a U.S. trade or business also may be
subject to an additional branch profits tax at a 30% rate, or lower applicable
treaty rate.
Distributions in excess of our current and accumulated earnings and profits
that exceed the non-U.S. stockholder's basis in its common stock will be taxable
to a non-U.S. stockholder as gain from the sale of common stock, which is
discussed below. Distributions in excess of our current or accumulated earnings
and profits that do not exceed the adjusted basis of the non-U.S. stockholder in
its common stock will reduce the non-U.S. stockholder's adjusted basis in its
common stock and will not be subject to U.S. federal income tax, but will be
subject to U.S. withholding tax as described below.
We expect to withhold U.S. income tax at the rate of 30% on any dividend
distributions (including distributions that later may be determined to have been
in excess of current and accumulated earnings and profits) made to a non-U.S.
stockholder unless:
(1) a lower treaty rate applies and the non-U.S. stockholder files an
Internal Revenue Service Form W-8BEN evidencing eligibility for that
reduced treaty rate with us; or
(2) the non-U.S. stockholder files an Internal Revenue Service Form W-8ECI
with us claiming that the distribution is income effectively connected
with non-U.S. stockholder's trade or business.
We may be required to withhold at least 10% of any distribution in excess of
our current and accumulated earnings and profits, even if a lower treaty rate
applies and the non-U.S. stockholder is not liable for tax on the receipt of
that distribution. However, a non-U.S. stockholder may seek a refund of these
amounts from the Internal Revenue Service if the non-U.S. stockholder's U.S. tax
liability with respect to the distribution is less than the amount withheld.
Distributions to a non-U.S. stockholder that are designated by us at the
time of the distribution as capital gain dividends, other than those arising
from the disposition of a U.S. real property interest, generally should not be
subject to U.S. federal income taxation unless:
(1) the investment in the common stock is effectively connected with the
non-U.S. stockholder's U.S. trade or business, in which case the non-U.S.
stockholder will be subject to the same treatment as U.S. stockholders
with respect to any gain, except that a stockholder that is a foreign
corporation also may be subject to the 30% branch profits tax, as
discussed above, or
(2) the non-U.S. stockholder is a nonresident alien individual who is
present in the U.S. for 183 days or more during the taxable year and has
a "tax home" in the U.S., in which case the nonresident alien individual
will be subject to a 30% tax on the individual's capital gains.
Under the Foreign Investment in Real Property Tax Act, which is referred to
as "FIRPTA," distributions to a non-U.S. stockholder that are attributable to
gain from sales or exchanges by us of U.S. real property interests, whether or
not designated as a capital gain dividend, will cause the non-U.S. stockholder
to be treated as recognizing gain that is income effectively connected with a
U.S. trade or business. Non-U.S. stockholders will be taxed on this gain at the
same rates applicable to U.S. stockholders, subject to a special alternative
minimum tax in the case of nonresident alien individuals. Also, this gain may be
subject to a 30% branch profits tax in the hands of a non-U.S. stockholder that
is a corporation.
We will be required to withhold and remit to the Internal Revenue Service
35% of any distributions to foreign stockholders that are designated as capital
gain dividends, or, if greater, 35% of
53
a distribution that could have been designated as a capital gain dividend.
Distributions can be designated as capital gains to the extent of our net
capital gain for the taxable year of the distribution. The amount withheld is
creditable against the non-U.S. stockholder's United States federal income tax
liability. A non-U.S. stockholder whose U.S. federal income tax liability under
FIRPTA exceeds amounts withheld by us will be required to file a U.S. federal
income tax return for the taxable year.
Although the law is not clear on the matter, it appears that amounts
designated by us as undistributed capital gains in respect of the common stock
held by U.S. stockholders generally should be treated with respect to non-U.S.
stockholders in the same manner as actual distributions by us of capital gain
dividends. Under that approach, the non-U.S. stockholders would be able to
offset as a credit against their United States federal income tax liability
resulting therefrom an amount equal to their proportionate share of the tax paid
by us on the undistributed capital gains, and to receive from the Internal
Revenue Service a refund to the extent their proportionate share of this tax
paid by our company exceeds their actual United States federal income tax
liability.
SALE OF COMMON STOCK. Gain recognized by a non-U.S. stockholder upon the
sale or exchange of AvalonBay common stock generally would not be subject to
United States taxation unless:
(1) the investment in our company's common stock is effectively connected
with the non-U.S. stockholder's U.S. trade or business, in which case the
non-U.S. stockholder will be subject to the same treatment as domestic
stockholders with respect to any gain;
(2) the non-U.S. stockholder is a nonresident alien individual who is
present in the United States for 183 days or more during the taxable year
and has a tax home in the United States, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's net
capital gains for the taxable year; or
(3) our common stock constitutes a U.S. real property interest within the
meaning of FIRPTA, as described below.
Our common stock will not constitute a U.S. real property interest if we are
a domestically controlled REIT. We will be a domestically controlled REIT if, at
all times during a specified testing period, less than 50% in value of our stock
is held directly or indirectly by non-U.S. stockholders.
We believe that, currently, we are a domestically controlled REIT and,
therefore, that the sale of our common stock would not be subject to taxation
under FIRPTA. Because our company's common stock is publicly traded, however, we
cannot guarantee that we are or will continue to be a domestically controlled
REIT.
Even if we do not qualify as a domestically controlled REIT at the time a
non-U.S. stockholder sells its common stock, gain arising from the sale still
would not be subject to FIRPTA tax if:
(1) the class or series of stock sold is considered regularly traded under
applicable Treasury regulations on an established securities market, such
as the NYSE; and
(2) the selling non-U.S. stockholder owned, actually or constructively, 5%
or less in value of the outstanding class or series of stock being sold
throughout the five-year period ending on the date of the sale or
exchange.
If gain on the sale or exchange of our common stock were subject to taxation
under FIRPTA, the non-U.S. stockholder would be subject to regular U.S. income
tax with respect to any gain in the same manner as a taxable U.S. stockholder,
subject to any applicable alternative minimum tax and special alternative
minimum tax in the case of nonresident alien individuals.
54
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX APPLICABLE TO STOCKHOLDERS
U.S. STOCKHOLDERS. In general, information reporting requirements will
apply to payments of distributions on AvalonBay common stock and payments of the
proceeds of the sale of AvalonBay common stock to some stockholders, unless an
exception applies. Further, the payer will be required to withhold backup
withholding tax at the current rate of 28% if:
(1) the payee fails to furnish a taxpayer identification number, or TIN, to
the payer or to establish an exemption from backup withholding;
(2) the Internal Revenue Service notifies the payer that the TIN furnished
by the payee is incorrect;
(3) there has been a notified payee under-reporting with respect to
interest, dividends or original issue discount described in
Section 3406(c) of the Internal Revenue Code; or
(4) there has been a failure of the payee to certify under the penalty of
perjury that the payee is not subject to backup withholding under the
Internal Revenue Code.
Some stockholders, including corporations, will be exempt from backup
withholding. Any amounts withheld under the backup withholding rules from a
payment to a stockholder will be allowed as a credit against the stockholder's
United States federal income tax and may entitle the stockholder to a refund,
provided that the required information is furnished to the Internal Revenue
Service.
NON-U.S. STOCKHOLDERS. Generally, information reporting will apply to
payments of distributions on AvalonBay common stock, and backup withholding at a
current rate of 28% may apply, unless the payee certifies that it is not a U.S.
person or otherwise establishes an exemption.
The payment of the proceeds from the disposition of AvalonBay common stock
to or through the U.S. office of a U.S. or foreign broker will be subject to
information reporting and, possibly, backup withholding unless the non-U.S.
stockholder certifies as to its non-U.S. status or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
stockholder is a U.S. person or that the conditions of any other exemption are
not, in fact, satisfied. The proceeds of the disposition by a non-U.S.
stockholder of AvalonBay common stock to or through a foreign office of a broker
generally will not be subject to information reporting or backup withholding.
However, if the broker is a U.S. person, a controlled foreign corporation for
U.S. tax purposes or a foreign person 50% or more of whose gross income from all
sources for specified periods is from activities that are effectively connected
with a U.S. trade or business, information reporting generally will apply unless
the broker has documentary evidence as to the non-U.S. stockholder's foreign
status and has no actual knowledge to the contrary.
Applicable Treasury regulations provide presumptions regarding the status of
stockholders when payments to the stockholders cannot be reliably associated
with appropriate documentation provided to the payer. Under these Treasury
regulations, some stockholders are required to have provided new certifications
with respect to payments made after December 31, 2000. Because the application
of the these Treasury regulations varies depending on the stockholder's
particular circumstances, you are urged to consult your tax advisor regarding
the information reporting requirements applicable to you.
OTHER TAX CONSEQUENCES FOR AVALONBAY AND ITS STOCKHOLDERS
Our company and its stockholders may be subject to state and local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of our company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective investors should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in our securities.
55
A portion of our income is earned through several taxable REIT subsidiaries.
The taxable REIT subsidiaries are subject to federal and state income tax at the
full applicable corporate rates. In addition, a taxable REIT subsidiary will be
limited in its ability to deduct interest payments made to us.
To the extent that we and the taxable REIT subsidiaries are required to pay
federal, state or local taxes, we will have less cash available for distribution
to stockholders.
HOW WE PLAN TO SELL THE SECURITIES
We may sell the securities in any one or more of the following ways:
- directly to investors;
- to investors through agents;
- to dealers;
- through underwriting syndicates led by one or more managing underwriters;
and
- through one or more underwriters acting alone.
Any underwritten offering may be on a best efforts or a firm commitment basis.
We may also make direct sales through subscription rights distributed to our
stockholders on a pro rata basis, which may or may not be transferable. In any
distribution of subscription rights to stockholders, if all of the underlying
securities are not subscribed for, we may then sell the unsubscribed securities
directly to third parties or may engage the services of one or more
underwriters, dealers or agents, including standby underwriters, to sell the
unsubscribed securities to third parties.
The distribution of the securities may be effected from time to time in one
or more transactions:
- at a fixed price or prices, which may be changed;
- at market prices prevailing at the time of sale;
- at prices related to such prevailing market prices; or
- at negotiated prices.
Any of the prices may represent a discount from the then prevailing market
prices.
In the sale of the securities, underwriters or agents may receive
compensation from us or from purchasers of the securities, for whom they may act
as agents, in the form of discounts, concessions or commissions. Underwriters
may sell the securities to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers and agents that participate in the distribution of
the securities may be deemed to be underwriters under the Securities Act of
1933, and any discounts or commissions they receive from us and any profit on
the resale of securities they realize may be deemed to be underwriting discounts
and commissions under the Securities Act. The applicable prospectus supplement
will, where applicable:
- identify any such underwriter or agent;
- describe any compensation in the form of discounts, concessions,
commissions or otherwise received from us by each such underwriter or
agent and in the aggregate to all underwriters and agents;
- identify the amounts underwritten; and
- identify the nature of the underwriter's obligation to take the
securities.
56
Unless otherwise specified in the related prospectus supplement, each series
of securities will be a new issue with no established trading market, other than
the common stock and the Series H Preferred Stock, which are listed on the NYSE
and PCX. Any common stock sold pursuant to a prospectus supplement will be
listed on the NYSE and PCX, subject to official notice of issuance. We may elect
to list any series of debt securities or preferred stock, respectively, on an
exchange, but we are not obligated to do so. It is possible that one or more
underwriters may make a market in a series of securities, but such underwriters
will not be obligated to do so and may discontinue any market making at any time
without notice. Therefore, no assurance can be given as to the liquidity of, or
the trading market for, any series of debt securities or preferred stock.
Until the distribution of the securities is completed, rules of the SEC may
limit the ability of any underwriters and selling group members to bid for and
purchase the securities. As an exception to these rules, underwriters are
permitted to engage in some transactions that stabilize the price of the
securities. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the securities.
If any underwriters create a short position in the securities in an offering
in which they sell more securities than are set forth on the cover page of the
applicable prospectus supplement, the underwriters may reduce that short
position by purchasing the securities in the open market.
The lead underwriters may also impose a penalty bid on other underwriters
and selling group members participating in an offering. This means that if the
lead underwriters purchase securities in the open market to reduce the
underwriters' short position or to stabilize the price of the securities, they
may reclaim the amount of any selling concession from the underwriters and
selling group members who sold those securities as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security before the distribution is completed.
We do not make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above might have on the
price of the securities. In addition, we do not make any representation that
underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Under agreements into which we may enter, underwriters, dealers and agents
who participate in the distribution of the securities may be entitled to
indemnification by us against some liabilities, including liabilities under the
Securities Act.
Underwriters, dealers and agents may engage in transactions with us, perform
services for us or be our tenants in the ordinary course of business.
If indicated in the applicable prospectus supplement, we will authorize
underwriters or other persons acting as our agents to solicit offers by
particular institutions to purchase securities from us at the public offering
price set forth in such prospectus supplement pursuant to delayed delivery
contracts providing for payment and delivery on the date or dates stated in such
prospectus supplement. Each delayed delivery contract will be for an amount no
less than, and the aggregate principal amounts of securities sold under delayed
delivery contracts shall be not less nor more than, the respective amounts
stated in the applicable prospectus supplement. Institutions with which such
contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but will in all cases be subject to our
approval. The obligations of any purchaser under any such contract will be
subject to the conditions that (a) the purchase of the securities shall not at
the time of delivery be prohibited under the laws of any jurisdiction in the
United States to which the purchaser is subject, and (b) if the securities are
57
being sold to underwriters, we shall have sold to the underwriters the total
principal amount of the securities less the principal amount thereof covered by
the contracts. The underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such contracts.
To comply with applicable state securities laws, the securities offered by
this prospectus will be sold, if necessary, in such jurisdictions only through
registered or licensed brokers or dealers. In addition, securities may not be
sold in some states unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 2002 and 2001, and for each of
the three years in the period ended December 31, 2002, as set forth in their
report. Our consolidated financial statements and schedule have been
incorporated by reference in the prospectus and the registration statement in
reliance on Ernst & Young LLP's report, given on their authority as experts in
accounting and auditing.
LEGAL OPINIONS
The validity of the securities we are offering and our qualification as a
"real estate investment trust" under the Internal Revenue Code will be passed
upon for us by Goodwin Procter LLP, Boston, Massachusetts.
58
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YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS, ANY
PROSPECTUS SUPPLEMENT OR ANY DOCUMENT INCORPORATED BY REFERENCE. WE HAVE NOT
AUTHORIZED ANYONE ELSE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION.
WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS
NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE
FRONT OF THOSE DOCUMENTS.
------------------------
TABLE OF CONTENTS
PAGE
--------
Risk Factors.......................... 1
Forward-Looking Statements............ 8
About This Prospectus................. 10
Where You Can Find More Information... 10
About AvalonBay Communities, Inc...... 11
Policies With Respect to Certain
Activities.......................... 12
Ratios of Earnings to Combined Fixed
Charges and Preferred Stock
Dividends........................... 13
Ratios of Earnings to Fixed Charges... 14
How We Intend to Use the Proceeds..... 15
Description of Debt Securities........ 15
Description of Preferred Stock........ 31
Description of Common Stock........... 36
Limits on Ownership of Stock.......... 38
Federal Income Tax Considerations and
Consequences of Your Investment..... 40
How We Plan to Sell the Securities.... 56
Experts............................... 58
Legal Opinions........................ 58
$750,000,000
[MAP]
AVALONBAY
COMMUNITIES, INC.
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
---------------------
PROSPECTUS
---------------------
JUNE , 2003
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the
securities being registered will be borne by AvalonBay Communities, Inc. and are
set forth in the following table (all amounts except the registration fee are
estimates):
Registration fee............................................ $ 60,675
Legal fees and expenses..................................... 450,000
Trustee and transfer agent expenses......................... 50,000
Accounting fees and expenses................................ 200,000
Printing fees and expenses.................................. 200,000
Miscellaneous............................................... 239,325
----------
TOTAL..................................................... $1,200,000
==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subject to certain limited exceptions, AvalonBay's charter and bylaws, each
as amended, limit the liability of AvalonBay's directors and officers to
AvalonBay and its stockholders for money damages for any breach of any duty owed
by such director or officer of AvalonBay to the fullest extent permitted by
Maryland law. The Maryland General Corporation Law ("MGCL") generally permits
the liability of directors and officers to a corporation or its stockholders for
money damages to be limited, unless it is established that (A) the director or
officer actually received an improper personal benefit in money, property or
services; (B) in the case of a criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful; or (C) the
director's or officer's act or omission was material to the matter giving rise
to the proceeding and either was committed in bad faith or was the result of
active and deliberate dishonesty. However, if the proceeding was one by or in
the right of AvalonBay, indemnification may not be made in respect of any
proceeding in which the director or officer shall have been adjudged to be
liable to AvalonBay. These provisions do not limit the ability of AvalonBay or
its stockholders to obtain other relief, such as an injunction or rescission.
Pursuant to the authority granted in AvalonBay's charter and bylaws,
AvalonBay has also entered into indemnification agreements with certain of its
executive officers and members of the board of directors who are not officers of
AvalonBay, pursuant to which AvalonBay has agreed to indemnify them against
certain liabilities incurred in connection with their service as executive
officers and/or directors and has agreed to advance expenses incurred by them in
certain circumstances. These provisions and contracts could reduce the legal
remedies available to AvalonBay and its stockholders against these individuals.
In addition, AvalonBay maintains a directors' and officers' liability insurance
policy.
II-1
ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
4.1 Indenture for Senior Debt Securities, dated as of
January 16, 1998, between the Company and State Street
Bank and Trust Company, as Trustee (Incorporated by
reference to Exhibit 4.5 to the Company's Form 10-K for
the year ended December 31, 2002).
4.2 First Supplemental Indenture, dated as of January 20, 1998,
between the Company and State Street Bank and Trust
Company, as Trustee (Incorporated by reference to
Exhibit 4.6 to the Company's Form 10-K for the year ended
December 31, 2002).
4.3 Second Supplemental Indenture, dated as of July 7, 1998,
between the Company and State Street Bank and Trust
Company, as Trustee (Incorporated by reference to
Exhibit 4.2 to the Company's Form 8-K filed on July 9,
1998).
4.4 Amended and Restated Third Supplemental Indenture, dated as
of July 10, 2000, between the Company and State Street
Bank and Trust Company, as Trustee (Incorporated by
reference to Exhibit 4.4 to the Company's Form 8-K filed
on July 11, 2000).
4.5 Form of Senior Debt Security (Incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on
Form S-3 (File No. 333-41511)).
4.6 Form of Indenture for Subordinated Debt Securities
(Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-3 (File No. 333-41511)).
4.7 Form of Subordinated Debt Security (Incorporated by
reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-3 (File No. 333-41511)).
**5.1 Opinion of Goodwin Procter LLP as to the legality of the
Securities being registered.
**8.1 Opinion of Goodwin Procter LLP as to certain tax matters.
12.1 Calculation of Ratios of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratios of Earnings to
Fixed Charges (Incorporated by reference to Exhibit 12.1
to the Company's Form 10-Q for the quarter ended
March 31, 2003).
*23.1 Consent of Ernst & Young LLP, Independent Accountants.
23.2 Consent of Goodwin Procter LLP (included in Exhibit 5.1
hereto).
**24.1 Powers of Attorney.
**25.1 Statement of Eligibility of Trustee.
------------------------
* To be filed by amendment
** Previously filed
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price
II-2
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial BONA FIDE offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with
the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Trust Indenture Act.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, AvalonBay
Communities, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Pre-effective Amendment No. 2 to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Alexandria,
Virginia, on this 19th day of June, 2003.
AVALONBAY COMMUNITIES, INC.
By: /s/ THOMAS J. SARGEANT
------------------------------------
Thomas J. Sargeant
CHIEF FINANCIAL OFFICER AND TREASURER
Pursuant to the requirements of the Securities Act of 1933, this
Pre-effective Amendment No. 2 to the registration statement has been signed by
the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
* Chairman, Chief Executive Officer
------------------------------------ and President (Principal June 19, 2003
Bryce Blair Executive Officer), Director
*
------------------------------------ Director June 19, 2003
Bruce A. Choate
*
------------------------------------ Director June 19, 2003
John J. Healy, Jr.
*
------------------------------------ Director June 19, 2003
Gilbert M. Meyer
*
------------------------------------ Director June 19, 2003
Charles D. Peebler, Jr.
*
------------------------------------ Director June 19, 2003
Lance R. Primis
*
------------------------------------ Director June 19, 2003
Allan D. Schuster
II-4
SIGNATURE CAPACITY DATE
--------- -------- ----
*
------------------------------------ Director June 19, 2003
Amy P. Williams
/s/ THOMAS J. SARGEANT Chief Financial Officer and
------------------------------------ Treasurer (Principal Financial June 19, 2003
Thomas J. Sargeant and Accounting Officer)
*By: /s/ THOMAS J. SARGEANT
--------------------------------------
Thomas J. Sargeant
ATTORNEY-IN-FACT
II-5
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
4.1 Indenture for Senior Debt Securities, dated as of
January 16, 1998, between the Company and State Street
Bank and Trust Company, as Trustee (Incorporated by
reference to Exhibit 4.5 to the Company's Form 10-K for
the year ended December 31, 2002).
4.2 First Supplemental Indenture, dated as of January 20, 1998,
between the Company and State Street Bank and Trust
Company, as Trustee (Incorporated by reference to
Exhibit 4.6 to the Company's Form 10-K for the year ended
December 31, 2002).
4.3 Second Supplemental Indenture, dated as of July 7, 1998,
between the Company and State Street Bank and Trust
Company, as Trustee (Incorporated by reference to
Exhibit 4.2 to the Company's Form 8-K filed on July 9,
1998).
4.4 Amended and Restated Third Supplemental Indenture, dated as
of July 10, 2000, between the Company and State Street
Bank and Trust Company, as Trustee (Incorporated by
reference to Exhibit 4.4 to the Company's Form 8-K filed
on July 11, 2000).
4.5 Form of Senior Debt Security (Incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on
Form S-3 (File No. 333-41511)).
4.6 Form of Indenture for Subordinated Debt Securities
(Incorporated by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-3 (File No. 333-41511)).
4.7 Form of Subordinated Debt Security (Incorporated by
reference to Exhibit 4.4 to the Company's Registration
Statement on Form S-3 (File No. 333-41511)).
**5.1 Opinion of Goodwin Procter LLP as to the legality of the
Securities being registered.
**8.1 Opinion of Goodwin Procter LLP as to certain tax matters.
12.1 Calculation of Ratios of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratios of Earnings to
Fixed Charges (Incorporated by reference to Exhibit 12.1
to the Company's Form 10-Q for the quarter ended
March 31, 2003).
*23.1 Consent of Ernst & Young LLP, Independent Accountants.
23.2 Consent of Goodwin Procter LLP (included in Exhibit 5.1
hereto).
**24.1 Powers of Attorney.
**25.1 Statement of Eligibility of Trustee.
------------------------
* To be filed by amendment
** Previously filed