**Exhibit99.1**

 

**MATERIAL FEDERAL INCOME TAX CONSIDERATIONS**

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This section summarizes thecurrent material federal income tax considerations relating to the purchase,ownership and disposition of our common shares and the qualification andtaxation of the Company as a REIT.  Weuse the terms “we” and “our” and “Company” refer solely to U-Store-It Trust and not to our subsidiaries andaffiliates which have not elected to be taxed as REITs under the InternalRevenue Code of 1986, as amended (the “Code”).

 

This discussion is notexhaustive of all possible tax considerations and does not provide a detaileddiscussion of any state, local or foreign tax considerations.  Thediscussion does not address all aspects of taxation that may be relevant toparticular investors in light of their personal investment or taxcircumstances, or to certain types of investors that are subject to specialtreatment under the federal income tax laws, such as insurance companies,regulated investment companies, REITs, tax-exempt organizations (except to thelimited extent discussed below under “Taxation of Tax-Exempt Shareholders”),financial institutions or broker-dealers, non-U.S. individuals and foreigncorporations (except to the limited extent discussed below under “Taxation ofNon-U.S. Shareholders”) and other persons subject to special tax rules.   This summary deals only with ourshareholders and debt holders that hold common shares as “capital assets”within the meaning of Section 1221 of the Code. This discussion is notintended to be, and should not be construed as, tax advice.

 

The information in this summaryis based on the Code, current, temporary and proposed Treasury regulations, thelegislative history of the Code, current administrative interpretations andpractices of the Internal Revenue Service, including its practices and policiesas endorsed in private letter rulings, which are not binding on the InternalRevenue Service, and existing court decisions. Future legislation, regulations, administrative interpretations andcourt decisions could change current law or adversely affect existinginterpretations of current law.  Anychange could apply retroactively.  Wehave not obtained any rulings from the Internal Revenue Service concerning thetax treatment of the matters discussed in this summary.  Therefore, it is possible that the InternalRevenue Service could challenge the statements in this summary, which do notbind the Internal Revenue Service or the courts, and that a court could agreewith the Internal Revenue Service.

 

**We urge youto consult your own tax advisor regarding the specific tax consequences to youof ownership of our common shares and of our election to be taxed as a REIT.Specifically, you should consult your own tax advisor regarding the federal,state, local, foreign, and other tax consequences of such ownership andelection, and regarding potential changes in applicable tax laws.**

 

**Qualificationof the Company as a REIT**

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We elected to be taxed as aREIT under the federal income tax laws beginning with our short taxable yearended December 31, 2004. We believe that, beginning with such shorttaxable year, we have been organized and have operated in such a manner as toqualify for taxation as a REIT under the Code and intend to continue to operatein such a manner. However, there can be no assurance that we have qualified orwill remain qualified as a REIT

 

Our continued qualification and taxation as aREIT depend upon our ability to meet on a continuing basis, through actualannual operating results, certain qualification tests set forth in the federalincome tax laws. Those qualification tests involve the percentage of incomethat we earn from specified sources, the percentage of our assets that fallswithin specified categories, the diversity of our share ownership, and thepercentage of our earnings that we distribute. Accordingly, no assurance can be given that the actual results of ouroperations for any particular taxable year will satisfy such requirements. Fora discussion of the tax consequences of our failure to qualify as a REIT, see “Requirementsfor Qualification — Failure to Qualify” below.

 

Pursuant to our declaration oftrust, our board of trustees has the authority to make any tax elections on ourbehalf that, in its sole judgment, are in our best interest.  Thisauthority includes the ability to revoke or otherwise terminate our status as aREIT.  Our board of trustees has the authority under our declaration oftrust to make these elections without the necessity of obtaining the approvalof our shareholders.  In addition, our board of trustees has the authorityto waive any restrictions and limitations contained in our declaration of trustthat are intended to preserve our status as a REIT during any period in whichour board of trustees has determined not to pursue or preserve our status as aREIT.

 

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**Taxation ofthe Company as a REIT**

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The sections of the Coderelating to qualification and operation as a REIT, and the federal incometaxation of a REIT, are highly technical and complex. The following discussionsets forth only the material aspects of those sections. This summary isqualified in its entirety by the applicable Code provisions and the related rules andregulations.

 

If we qualify as a REIT, wegenerally will not be subject to federal income tax on the taxable income thatwe distribute to our shareholders. The benefit of that tax treatment is that itavoids the “double taxation,” or taxation at both the corporate and shareholderlevels, that generally results from owning shares in a corporation. However, wewill be subject to federal tax in the following circumstances:

 

·                  We are subjectto the corporate federal income tax on any taxable income, including netcapital gain that we do not distribute to shareholders during, or within a specifiedtime period after, the calendar year in which the income is earned.

 

·                  We may besubject to the corporate “alternative minimum tax” on any items of taxpreference, including any deductions of net operating losses.

 

·                  We are subjectto tax, at the highest corporate rate, on net income from the sale or otherdisposition of property acquired through foreclosure (“foreclosure property”)that we hold primarily for sale to customers in the ordinary course ofbusiness, and other non-qualifying income from foreclosure property..

 

·                  We are subjectto a 100% tax on net income from sales or other dispositions of property, otherthan foreclosure property, that we hold primarily for sale to customers in theordinary course of business.

 

·                  If we fail tosatisfy one or both of the 75% gross income test or the 95% gross income test,as described below under “Requirements for Qualification — Gross Income Tests,”but nonetheless continue to qualify as a REIT because we meet otherrequirements, we will be subject to a 100% tax on: the greater of  the amount by which we fail the 75% grossincome test or the 95% gross income test multiplied, in either case, by afraction intended to reflect our profitability

 

·                  If we fail todistribute during a calendar year at least the sum of: (1) 85% of our REITordinary income for the year, (2) 95% of our REIT capital gain net incomefor the year, and (3) any undistributed taxable income required to bedistributed from earlier periods, then we will be subject to a 4% nondeductibleexcise tax on the excess of the required distribution over the amount weactually distributed.

 

·                  If we fail anyof the asset tests, as described below under “Requirements for Qualification —Asset Tests,” other than certain de minimis failures, but our failure was dueto reasonable cause and not to willful neglect, and we nonetheless maintain ourREIT qualification because of specified cure provisions, , we will pay a taxequal to the greater of $50,000 or 35% of the net income from the nonqualifyingassets during the period in which we failed to satisfy the asset tests. Theamount of gain on which we will pay tax generally is the lesser of the amountof gain that we recognize at the time of the sale or disposition, and theamount of gain that we would have recognized if we had sold the asset at thetime we acquired it.

 

·                  We will pay atax equal to the greater of $50,000 or 35% of the net income from thenonqualifying assets during the period in which we failed to satisfy the assettests.

 

·                  If we fail tosatisfy one or more requirements for REIT qualification, other than the grossincome tests and the asset tests, and such failure is due to reasonable causeand not to willful neglect, we will be required to pay a penalty of $50,000 foreach such failure.

 

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·                  We may elect toretain and pay income tax on our net long-term capital gain.

 

·                  We will besubject to a 100% excise tax on transactions with a taxable REIT subsidiarythat are not conducted on an arm’s-length basis.

 

·                  If we acquireany asset from a C corporation (a corporation that generally is subject to fullcorporate-level tax) in a transaction in which the adjusted basis of the assetsin our hands is determined by reference to the adjusted tax basis of the assetin the hands of the C corporation, we will pay tax at the highest regularcorporate rate then applicable if we recognize gain on the sale or dispositionof the asset during the 10-year period after we acquire the asset, unless the Ccorporation elects to treat the assets as if they were sold for their fairmarket value at the time or our acquisition.

 

·                  We may berequired to pay monetary penalties to the Internal Revenue Service in certaincircumstances, including if we fail to meet record-keeping requirementsintended to monitor our compliance with rules relating to the compositionof a REIT’s shareholders, as described below in “Requirements for Qualification- Recordkeeping Requirements.”

 

·                  The earnings ofour lower-tier entities that are subchapter C corporations, including taxableREIT subsidiaries, are subject to federal corporate income tax.

 

In addition, we may be subjectto a variety of taxes, including payroll taxes and state, local and foreignincome, property and other taxes on our assets and operations. We could also besubject to tax in situations and on transactions not presently contemplated.

 

**Requirementsfor Qualification**

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To qualify as a REIT, we mustelect to be treated as a REIT, and we must meet various (a) organizationalrequirements, (b) gross income tests, (c) asset tests, and (d) annualdistribution requirements.

 

***Organizational Requirements.***AREIT is a corporation, trust or association that meets each of the followingrequirements:

 

(1)           It is managed by one ormore trustees or directors;

 

(2)           Its beneficialownership is evidenced by transferable shares, or by transferable certificatesof beneficial interest;

 

(3)           It would be taxable asa domestic corporation, but for Sections 856 through 860 of the Code;

 

(4)           It is neither afinancial institution nor an insurance company subject to special provisions ofthe federal income tax laws;

 

(5)           At least 100 personsare beneficial owners of its shares or ownership certificates (determinedwithout reference to any rules of attribution);

 

(6)           Not more than 50% invalue of its outstanding shares or ownership certificates is owned, directly orindirectly, by five or fewer individuals, which the federal income tax lawsdefine to include certain entities, during the last half of any taxable year;

 

(7)           It elects to be a REIT,or has made such election for a previous taxable year which has not beenrevoked or terminated, and satisfies all relevant filing and otheradministrative requirements established by the Internal Revenue Service thatmust be met to elect and maintain REIT status;

 

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(8)           It uses a calendar yearfor federal income tax purposes and complies with the recordkeepingrequirements of the federal income tax laws; and

 

(9)           It meets certain otherqualifications, tests described below, regarding the nature of its income andassets and the distribution of its income.

 

We must meet requirements 1through 4, 8 and 9 during our entire taxable year and must meet requirement 5during at least 335 days of a taxable year of 12 months, or during aproportionate part of a taxable year of less than 12 months. If we complywith all the requirements for ascertaining information concerning the ownershipof our outstanding shares in a taxable year and have no reason to know that weviolated requirement 6, we will be deemed to have satisfied requirement 6 forthat taxable year. Our declaration of trust provides for restrictions regardingthe ownership and transfer of our shares of beneficial interest that areintended to assist us in continuing to satisfy requirements 5 and 6.  However, there restrictions may not ensurethat we will, in all cases, be able to satisfy these requirements.  The provisions of the declaration of trustrestricting the ownership and transfer of our shares of beneficial interest aredescribed in “Description of Our Shares — Restrictions on Ownership andTransfer.”

 

For purposes of determiningshare ownership under requirement 6, an “individual” generally includes asupplemental unemployment compensation benefits plan, a private foundation, ora portion of a trust permanently set aside or used exclusively for charitablepurposes. An “individual,” however, generally does not include a trust that isa qualified employee pension or profit sharing trust under the federal incometax laws, and beneficiaries of such a trust will be treated as holding ourshares in proportion to their actuarial interests in the trust for purposes ofrequirement 6. We believe we have issued sufficient shares of beneficialinterest with enough diversity of ownership to satisfy requirements 5 and 6 setforth above.

 

To monitor compliance with theshare ownership requirements, we are required to maintain records regarding theactual ownership of our shares. To do so, we must demand written statementseach year from the record holders of certain percentages of our shares in whichthe record holders are to disclose the actual owners of the shares (the personsrequired to include in gross income the dividends paid by us). A list of thosepersons failing or refusing to comply with this demand must be maintained aspart of our records. Failure by us to comply with these record-keepingrequirements could subject us to monetary penalties. If we satisfy theserequirements and have no reason to know that condition (6) is notsatisfied, we will be deemed to have satisfied such condition. A shareholderthat fails or refuses to comply with the demand is required by TreasuryRegulations to submit a statement with its tax return disclosing the actualownership of the shares and other information.

 

***Qualified REIT Subsidiaries.***Acorporation that is a “qualified REIT subsidiary” is not treated as acorporation separate from its parent REIT. A “qualified REIT subsidiary” is acorporation, all of the capital stock of which is owned by the REIT and thathas not elected to be a taxable REIT subsidiary. All assets, liabilities, anditems of income, deduction, and credit of a “qualified REIT subsidiary” aretreated as assets, liabilities, and items of income, deduction, and credit ofthe REIT. Thus, in applying the requirements described herein, any “qualifiedREIT subsidiary” that we own will be ignored, and all assets, liabilities, anditems of income, deduction, and credit of such subsidiary will be treated asour assets, liabilities, and items of income, deduction, and credit.

 

***Partnership Subsidiaries.*** An unincorporated domestic entity, such as apartnership or limited liability company that has a single owner, generally isnot treated as an entity separate from its parent for federal income taxpurposes. An unincorporated domestic entity with two or more owners isgenerally treated as a partnership for federal income tax purposes. In the caseof a REIT that is a partner in a partnership, the REIT is treated as owning itsproportionate share of the assets of the partnership and as earning its allocableshare of the gross income of the partnership for purposes of the applicableREIT qualification tests. Thus, our proportionate share of the assets,liabilities and items of income of our operating partnership and any otherpartnership, joint venture, or limited liability company that is treated as apartnership for federal income tax purposes in which we acquire an interest,directly or indirectly, is treated as our assets and gross income for purposesof applying the various REIT qualification requirements.

 

***Taxable REIT Subsidiaries.***AREIT is permitted to own up to 100% of the stock of one or more “taxable REITsubsidiaries.” A taxable REIT subsidiary is a corporation subject to U.S.federal income tax, and state and local income tax where applicable, as aregular “C” corporation.  The subsidiary and the REIT must jointly electto

 

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treat thesubsidiary as a taxable REIT subsidiary. In addition, if a taxable REITsubsidiary owns, directly or indirectly, securities representing 35% or more ofthe vote or value of a subsidiary corporation, that subsidiary will also betreated as a taxable REIT subsidiary. Several provisions regarding thearrangements between a REIT and its taxable REIT subsidiaries ensure that ataxable REIT subsidiary will be subject to an appropriate level of UnitedStates federal income taxation.   Forexample, the taxable REIT subsidiary rules limit the deductibility ofinterest paid or accrued by a taxable REIT subsidiary to its parent REIT.   Further, the rules impose a 100% excisetax on transactions between a taxable REIT subsidiary and its parent REIT orthe REIT’s tenants that are not conducted on an arm’s-length basis. We mayengage in activities indirectly through a taxable REIT subsidiary that wouldjeopardize our REIT status if we engaged in the activities directly. Forexample, a taxable REIT subsidiary of ours may provide services to unrelatedparties which might produce income that does not qualify under the gross incometests described below. A taxable REIT subsidiary may also engage in otheractivities that, if conducted by us directly, could result in the receipt ofnon-qualified income or the ownership of non-qualified assets or the impositionof the 100% tax on income from prohibited transactions. See description belowunder “Prohibited Transactions.”

 

***Gross Income Tests.***Wemust satisfy two gross income tests annually to maintain our qualification as aREIT. First, at least 75% of our gross income for each taxable year mustconsist of defined types of income that we derive, directly or indirectly, frominvestments relating to real property or mortgages on real property orqualified temporary investment income. Qualifying income for purposes of that75% gross income test generally includes:

 

·                  rents from realproperty;

 

·                  interest on debtsecured by mortgages on real property or on interests in real property(including certain types of mortgage-backed securities);

 

·                  dividends orother distributions on, and gain from the sale of, shares in other REITs(excluding dividends from our taxable REIT subsidiaries);

 

·                  gain from thesale of real estate assets;

 

·                  income and gainderived from foreclosure property; and

 

·                  income derivedfrom the temporary investment of new capital that is attributable to theissuance of our shares of beneficial interest or a public offering of our debtwith a maturity date of at least five years and that we receive during the oneyear period beginning on the date on which we receive such new capital.

 

Second, in general, at least95% of our gross income for each taxable year must consist of income that isqualifying income for purposes of the 75% gross income test, other types ofinterest and dividends (including dividends from our taxable REITsubsidiaries), gain from the sale or disposition of stock or securities, or anycombination of these.  Gross income from our sale of property that we holdprimarily for sale to customers in the ordinary course of business is excludedfrom both the numerator and the denominator in both income tests.   See “Prohibited Transactions.”  In addition, certain gains from hedgingtransactions and certain foreign currency gains will be excluded from both thenumerator and the denominator for purposes of one or both of the income tests.  See Hedging Transactions,” and “ForeignCurrency Gain.”

 

***Rents from Real Property.***Rent that we receive from our real property willqualify as “rents from real property,” which is qualifying income for purposesof the 75% and 95% gross income tests, only if the following conditions aremet:

 

First, the rent must not bebased in whole or in part on the income or profits of any person. Participatingrent, however, will qualify as “rents from real property” if it is based onpercentages of receipts or sales and the percentages are fixed at the time theleases are entered into, are not renegotiated during the term of the leases ina manner that has the effect of basing percentage rent on income or profits,and conform with normal business practice.

 

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Second, we must not own,actually or constructively, 10% or more of the stock of any corporate tenant orthe assets or net profits of any tenant, referred to as a related party tenant,other than a taxable REIT subsidiary. The constructive ownership rules generallyprovide that, if 10% or more in value of our shares is owned, directly orindirectly, by or for any person, we are considered as owning the stock owned,directly or indirectly, by or for such person. We do not own any stock or anyassets or net profits of any tenant directly. ** **However, because the constructiveownership rules are broad and it is not possible to monitor continuallydirect and indirect transfers of our shares, no absolute assurance can be giventhat such transfers or other events of which we have no knowledge will notcause us to own constructively 10% or more of a tenant (or a subtenant, inwhich case only rent attributable to the subtenant is disqualified) other thana taxable REIT subsidiary at some future date.

 

Under an exception to therelated-party tenant rule described in the preceding paragraph, rent thatwe receive from a taxable REIT subsidiary will qualify as “rents from realproperty” as long as (1) at least 90% of the leased space in the propertyis leased to persons other than taxable REIT subsidiaries and related-partytenants, and (2) the amount paid by the taxable REIT subsidiary to rentspace at the property is substantially comparable to rents paid by othertenants of the property for comparable space. The “substantially comparable”requirement must be satisfied when the lease is entered into, when it isextended, and when the lease is modified, if the modification increases therent paid by the taxable REIT subsidiary. If the requirement that at least 90%of the leased space in the related property is rented to unrelated tenants ismet when a lease is entered into, extended, or modified, such requirement willcontinue to be met as long as there is no increase in the space leased to anytaxable REIT subsidiary or related party tenant. Any increased rentattributable to a modification of a lease with a taxable REIT subsidiary inwhich we own directly or indirectly more than 50% of the voting power or valueof the stock (a “controlled taxable REIT subsidiary”) will not be treated as “rentsfrom real property.”

 

Third, the rent attributable tothe personal property leased in connection with a lease of real property mustnot be greater than 15% of the total rent received under the lease. The rentattributable to personal property under a lease is the amount that bears thesame ratio to total rent under the lease for the taxable year as the average ofthe fair market values of the leased personal property at the beginning and atthe end of the taxable year bears to the average of the aggregate fair marketvalues of both the real and personal property covered by the lease at thebeginning and at the end of such taxable year (the “personal property ratio”).With respect to each of our leases, we believe that the personal property ratiogenerally is less than 15%. Where that is not, or may in the future not be, thecase, we believe that any income attributable to personal property will notjeopardize our ability to qualify as a REIT. There can be no assurance,however, that the Internal Revenue Service would not challenge our calculationof a personal property ratio, or that a court would not uphold such assertion.If such a challenge were successfully asserted, we could fail to satisfy the75% or 95% gross income test and thus lose our REIT status.

 

Fourth, we cannot furnish orrender non-customary services to the tenants of our properties, or manage oroperate our properties, other than through an independent contractor who isadequately compensated and from whom we do not derive or receive any income.However, we need not provide services through an “independent contractor,” butinstead may provide services directly to our tenants, if the services are “usuallyor customarily rendered” in connection with the rental of space for occupancyonly and are not considered to be provided for the tenants’ convenience. Inaddition, we may provide a minimal amount of “non-customary” services to thetenants of a property, other than through an independent contractor, as long asour income from the services does not exceed 1% of our income from the relatedproperty. Finally, we may own up to 100% of the stock of one or more taxableREIT subsidiaries, which may provide non-customary services to our tenantswithout tainting our rents from the related properties. We have not performed,and do not intend to perform, any services other than customary ones for ourtenants, other than services provided through independent contractors ortaxable REIT subsidiaries.

 

Tenants may be required to pay,in addition to base rent, reimbursements for certain amounts we are obligatedto pay to third parties (such as a lessee’s proportionate share of a property’soperational or capital expenses), penalties for nonpayment or late payment ofrent or additions to rent. These and other similar payments should qualify as “rentsfrom real property.” To the extent they do not, they should be treated asinterest that qualifies for the 95% gross income test.

 

If a portion of the rent wereceive from a property does not qualify as “rents from real property” becausethe rent attributable to personal property exceeds 15% of the total rent for ataxable year, the portion of the rent attributable to personal property willnot be qualifying income for purposes of either the 75% or 95% gross income

 

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test. Thus, ifrent attributable to personal property, plus any other income that isnonqualifying income for purposes of the 95% gross income test, during a taxableyear exceeds 5% of our gross income during the year, we would lose our REITstatus, unless we qualified for certain statutory relief provisions. Bycontrast, in the following circumstances, none of the rent from a lease ofproperty would qualify as “rents from real property”: (1) the rent isconsidered based on the income or profits of the tenant; (2) the lessee isa related party tenant or fails to qualify for the exception to therelated-party tenant rule for qualifying taxable REIT subsidiaries; or (3) wefurnish non-customary services to the tenants of the property, or manage oroperate the property, other than through a qualifying independent contractor ora taxable REIT subsidiary. In any of these circumstances, we could lose ourREIT status, unless we qualified for certain statutory relief provisions,because we would be unable to satisfy either the 75% or 95% gross income test.

 

***Interest.***The term “interest” generallydoes not include any amount received or accrued, directly or indirectly, if thedetermination of the amount depends in whole or in part on the income orprofits of any person. However, an amount received or accrued generally willnot be excluded from the term “interest” solely because it is based on a fixedpercentage or percentages of receipts or sales. Furthermore, to the extent thatinterest from a loan that is based on the profit or net cash proceeds from thesale of the property securing the loan constitutes a “shared appreciationprovision,” income attributable to such participation feature will be treatedas gain from the sale of the secured property.

 

***Prohibited Transactions.***A REIT will incura 100% tax on the net income derived from any sale or other disposition ofproperty, other than foreclosure property, that the REIT holds primarily forsale to customers in the ordinary course of a trade or business. Whether a REITholds an asset “primarily for sale to customers in the ordinary course of atrade or business” depends, however, on the facts and circumstances in effectfrom time to time, including those related to a particular asset. A safe harborto the characterization of the sale of property by a REIT as a prohibitedtransaction and the 100% prohibited transaction tax is available if thefollowing requirements are met:

 

·                  the REIT hasheld the property for not less than four years (or, for sales made after July 30,2008, two years);

 

·                  the aggregateexpenditures made by the REIT, or any partner of the REIT, during the four-yearperiod (or, for sales made after July 30, 2008, two-year period) precedingthe date of the sale that are includable in the basis of the property do notexceed 30% of the selling price of the property;

 

·                  either (1) duringthe year in question, the REIT did not make more than seven sales of property otherthan foreclosure property or sales to which Section 1033 of the Codeapplies, (2) the aggregate adjusted bases of all such properties sold bythe REIT during the year did not exceed 10% of the aggregate bases of all ofthe assets of the REIT at the beginning of the year or (3) for sales madeafter July 30, 2008, the aggregate fair market value of all suchproperties sold by the REIT during the year did not exceed 10% of the aggregatefair market value of all of the assets of the REIT at the beginning of theyear;

 

·                  in the case ofproperty not acquired through foreclosure or lease termination, the REIT hasheld the property for at least four years (or, for sales made after July 30,2008, two years) for the production of rental income; and

 

·                  if the REIT hasmade more than seven sales of non-foreclosure property during the taxable year,substantially all of the marketing and development expenditures with respect tothe property were made through an independent contractor from whom the REITderives no income.

 

We intend to hold propertiesfor investment with a view to long-term appreciation, to engage in the businessof acquiring, developing, owning and operating properties, and to makeoccasional sales of properties as are consistent with our investment objective.  We cannot assure you; however, that we cancomply with the safe-harbor provisions that would prevent the imposition of the100% tax or that we will avoid owning property that may be characterized asproperty held “primarily for sale to customers in the ordinary course of atrade or business.” The 100% tax does not apply to gains from the sale ofproperty that is held through a taxable REIT subsidiary or other

 

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taxablecorporation, although such income will be subject to tax in the hands of thatcorporation at regular corporate tax rates. We may, therefore, form or acquirea taxable REIT subsidiary to hold and dispose of those properties we concludemay not fall within the safe-harbor provisions.

 

***Foreclosure Property.***We will be subjectto tax at the maximum corporate rate on any net income from foreclosureproperty, other than income that otherwise would be qualifying income forpurposes of the 75% gross income test.  “Foreclosureproperty” is any real property, including interests in real property, and anypersonal property incident to such real property:

 

·                  that is acquiredby a REIT as the result of the REIT having bid on such property at foreclosure,or having otherwise reduced such property to ownership or possession byagreement or process of law, after there was a default or default was imminenton a lease of such property or on indebtedness that such property secured;

 

·                  for which therelated loan or leased property was acquired by the REIT at a time when thedefault was not imminent or anticipated; and

 

·                  for which theREIT makes a proper election to treat the property as foreclosure property.

 

A REIT will not be consideredto have foreclosed on a property where the REIT takes control of the propertyas a mortgagee-in-possession and cannot receive any profit or sustain any lossexcept as a creditor of the mortgagor. Property generally ceases to beforeclosure property at the end of the third taxable year following the taxableyear in which the REIT acquired the property (or longer if an extension isgranted by the Secretary of the Treasury). This period (as extended, ifapplicable) terminates, and foreclosure property ceases to be foreclosureproperty on the first day:

 

·                  on which a leaseis entered into for the property that, by its terms, will give rise to incomethat does not qualify for purposes of the 75% gross income test, or any amountis received or accrued, directly or indirectly, pursuant to a lease enteredinto on or after such day that will give rise to income that does not qualifyfor purposes of the 75% gross income test;

 

·                  on which anyconstruction takes place on the property, other than completion of a buildingor, any other improvement, where more than 10% of the construction wascompleted before default became imminent; or

 

·                  which is morethan 90 days after the day on which the REIT acquired the property and theproperty is used in a trade or business which is conducted by the REIT, otherthan through an independent contractor from whom the REIT itself does notderive or receive any income.

 

Any gain from the sale ofproperty for which a foreclosure property election has been made will not besubject to the 100% tax on gains from prohibited transactions described above,even if the property is held primarily for sale to customers in the ordinarycourse of a trade or business.  Incomeand gain from foreclosure property are qualifying income for the 75% and 95%gross income tests.

 

***Hedging Transactions.***From time to time,we enter into hedging transactions with respect to our assets or liabilities.Our hedging activities may include entering into interest rate swaps, caps, andfloors, options to purchase such items, and futures and forward contracts. Forhedging transactions entered into on or before July 30, 2008, income andgain from “hedging transactions” will be excluded from gross income forpurposes of the 95% gross income test, but not the 75% gross income test. Forhedging transactions entered into after July 30, 2008, income and gainfrom “hedging transactions” will be excluded from gross income for purposes ofboth the 75% and 95% gross income tests. A “hedging transaction” means either (1) anytransaction entered into in the normal course of our trade or businessprimarily to manage the risk of interest rate, price changes, or currencyfluctuations with respect to borrowings made or to be made, or ordinaryobligations incurred or to be incurred, to acquire or carry real estate assetsor (2) for transactions entered into after July 30, 2008, anytransaction entered into primarily to manage the risk of currency fluctuationswith respect to any item of income or gain that would be qualifying incomeunder the

 

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75% or 95%gross income test (or any property which generates such income or gain). Wewill be required to clearly identify any such hedging transaction before theclose of the day on which it was acquired, originated, or entered into and tosatisfy other identification requirements. No assurance can be given that ourhedging activities will not give rise to income that does not qualify forpurposes of either or both of the gross income tests, and will not adverselyaffect our ability to satisfy the REIT qualification requirements.

 

***Foreign Currency Gain.***Certain foreigncurrency gains recognized after July 30, 2008 will be excluded from grossincome for purposes of one or both of the gross income tests. “Real estateforeign exchange gain” will be excluded from gross income for purposes of the75% gross income test. Real estate foreign exchange gain generally includesforeign currency gain attributable to any item of income or gain that isqualifying income for purposes of the 75% gross income test, foreign currencygain attributable to the acquisition or ownership of (or becoming or being theobligor under) obligations secured by mortgages on real property or on interestin real property and certain foreign currency gain attributable to certain “qualifiedbusiness units” of a REIT. “Passive foreign exchange gain” will be excludedfrom gross income for purposes of the 95% gross income test. Passive foreignexchange gain generally includes real estate foreign exchange gain as describedabove, and also includes foreign currency gain attributable to any item ofincome or gain that is qualifying income for purposes of the 95% gross incometest and foreign currency gain attributable to the acquisition or ownership of(or becoming or being the obligor under) obligations secured by mortgages onreal property or on interest in real property. Because passive foreign exchangegain includes real estate foreign exchange gain, real estate foreign exchangegain is excluded from gross income for purposes of both the 75% and 95% grossincome test. These exclusions for real estate foreign exchange gain and passiveforeign exchange gain do not apply to foreign currency gain derived fromdealing, or engaging in substantial and regular trading, in securities. Suchgain is treated as nonqualifying income for purposes of both the 75% and 95%gross income tests.

 

***Failure to Satisfy Gross Income Tests.***Ifwe fail to satisfy one or both of the gross income tests for any taxable year,we nevertheless may qualify as a REIT for that year if we qualify for reliefunder certain provisions of the federal income tax laws. Those reliefprovisions will be available if:

 

·                  our failure tomeet those tests is due to reasonable cause and not to willful neglect; and

 

·                  following suchfailure for any taxable year, a schedule of the sources of our income is filedwith the Internal Revenue Service in accordance with regulations prescribed bythe Secretary of the Treasury.

 

We cannot predict, however,whether any failure to meet these tests will qualify for the relief provisions.As discussed above in “Taxation of the Company as a REIT,” even if the reliefprovisions apply, we would incur a 100% tax on the gross income attributable tothe greater of (1) the amount by which we fail the 75% gross income test,or (2) the excess of 95% of our gross income over the amount of grossincome qualifying under the 95% gross income test, multiplied, in either case,by a fraction intended to reflect our profitability.

 

***Asset Tests.***Tomaintain our qualification as a REIT, we also must satisfy the following assettests at the end of each quarter of each taxable year.

 

First, at least 75% of the valueof our total assets must consist of:

 

·                  cash or cashitems, including certain receivables;

 

·                  governmentsecurities;

 

·                  interests inreal property, including leaseholds and options to acquire real property andleaseholds;

 

·                  interests inmortgages on real property (including certain mortgage-backed securities);

 

·                  stock in otherREITs; and

 

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·                  investments instock or debt instruments during the one year period following our receipt ofnew capital that we raise through equity offerings or public offerings of debtwith at least a five year term.

 

Second, of our investments notincluded in the 75% asset class, the value of our interest in any one issuer’ssecurities may not exceed 5% of the value of our total assets, or the “5% assettest”.

 

Third, of our investments notincluded in the 75% asset class, we may not own more than 10% of the votingpower or value of any one issuer’s outstanding securities, or the “10% votetest” and “10% value test”, respectively.

 

Fourth, no more than 20% of thevalue of our total assets (or, beginning with our 2009 taxable year, 25% of thevalue of our total assets) may consist of the securities of one or more taxableREIT subsidiaries..

 

For purposes of the 5% assettest, the 10% vote test and 10% value test, the term “securities” does notinclude stock in another REIT, equity or debt securities of a qualified REITsubsidiary or taxable REIT subsidiary, mortgage loans that constitute realestate assets, or equity interests in a partnership. The term “securities,”however, generally includes debt securities issued by a partnership or anotherREIT, except that for purposes of the 10% value test, the term “securities”does not include:

 

·                  “Straight debt”securities, which is defined as a written unconditional promise to pay ondemand or on a specified date a sum certain in money if (i) the debt isnot convertible, directly or indirectly, into stock, and (ii) the interestrate and interest payment dates are not contingent on profits, the borrower’sdiscretion, or similar factors. “Straight debt” securities do not include anysecurities issued by a partnership or a corporation in which we or anycontrolled taxable REIT subsidiary hold non-”straight debt” securities thathave an aggregate value of more than 1% of the issuer’s outstanding securities.However, “straight debt” securities include debt subject to the followingcontingencies: (1) a contingency relating to the time of payment ofinterest or principal, as long as either (i) there is no change to theeffective yield of the debt obligation, other than a change to the annual yieldthat does not exceed the greater of 0.25% or 5% of the annual yield, or (ii) neitherthe aggregate issue price nor the aggregate face amount of the issuer’s debtobligations held by us exceeds $1 million and no more than 12 monthsof unaccrued interest on the debt obligations can be required to be prepaid;and (2) a contingency relating to the time or amount of payment upon adefault or prepayment of a debt obligation, as long as the contingency isconsistent with customary commercial practice.

 

·                  Any loan to anindividual or an estate.

 

·                  Any “section 467rental agreement,” other than an agreement with a related party tenant.

 

·                  Any obligationto pay “rents from real property.”

 

·                  Certainsecurities issued by governmental entities.

 

·                  Any securityissued by a REIT.

 

·                  Any debtinstrument issued by an entity treated as a partnership for federal income taxpurposes in which we are a partner to the extent of our proportionate interestin the debt and equity securities of the partnership.

 

·                  Any debt instrumentissued by an entity treated as a partnership for federal income tax purposesnot described in the preceding bullet points if at least 75% of the partnership’sgross income, excluding income from prohibited transactions, is qualifyingincome for purposes of the 75% gross income test described above in “Requirementsfor Qualification—Gross Income Tests.” For purposes of the 10% value test, ourproportionate share of the assets of a partnership is our

 

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proportionate interest in any securitiesissued by the partnership, without regard to the securities described in thelast two bullet points above.

 

***Failure to Satisfy Asset Tests.*** We will monitor the status of our assets forpurposes of the various asset tests and will manage our portfolio in order tocomply at all times with such tests. If we fail to satisfy the asset tests atthe end of a calendar quarter, we would not lose our REIT status if:

 

·                  we satisfied theasset tests at the end of the preceding calendar quarter; and

 

·                  the discrepancybetween the value of our assets and the asset test requirements arose fromchanges in the market values of our assets and was not wholly or partly causedby the acquisition of one or more non-qualifying assets.

 

If the failure to satisfy theasset tests results from an acquisition of securities or other property duringa quarter, the failure can be cured by disposition of sufficient nonqualifyingassets within 30 days after the close of that quarter.  We intend to maintain adequate records of thevalue of our assets to ensure compliance with the asset tests, and to take suchother action within 30 days after the close of any quarter as may be requiredto cure any noncompliance.  However,there can be no assurance that such other action will always besuccessful.  If we fail to cure anynoncompliance with the asset tests within such time period, our status as aREIT would be lost.

 

In the event that, at the end ofany calendar quarter, we violate the 5% asset test, the 10% vote test or the10% value test described above, we will not lose our REIT status if (i) thefailure is de minimis (up to the lesser of 1% of our assets or$10 million) and (ii) we dispose of assets or otherwise comply withthe asset tests within six months after the last day of the quarter in which weidentify such failure. In the event the failure to meet the asset test is morethan de minimis, we will not lose our REIT status if (i) the failure wasdue to reasonable cause and not to willful neglect, (ii) we file adescription of each asset causing the failure with the Internal RevenueService, (iii) we dispose of assets or otherwise comply with the assettests within six months after the last day of the quarter in which we identifythe failure, and (iv) we pay a tax equal to the greater of $50,000 or 35%of the net income from the nonqualifying assets during the period in which wefailed to satisfy the asset tests.

 

***Annual Distribution Requirements.***Eachtaxable year, we must distribute dividends, other than capital gain dividendsand deemed distributions of retained capital gain, to our shareholders in anaggregate amount not less than the sumof

 

·                  90% of our “REITtaxable income,” computed without regard to the dividends paid deduction andour net capital gain or loss, and

 

·                  90% of ourafter-tax net income, if any, from foreclosure property, minus

 

·                  the sum ofcertain items of non-cash income.

 

Generally, we must pay suchdistributions in the taxable year to which they relate, or in the followingtaxable year if either (a) we declare the distribution before we timelyfile our federal income tax return for the year and pay the distribution on orbefore the first regular dividend payment date after such declaration or (b) wedeclare the distribution in October, November, or December of the taxableyear, payable to shareholders of record on a specified day in any such month,and we actually pay the dividend before the end of January of thefollowing year. In both instances, these distributions relate to our priortaxable year for purposes of the 90% distribution requirement.

 

In order for distributions tobe counted towards our distribution requirement, and to provide a tax deductionto us, they must not be “preferential dividends.” A dividend is not apreferential dividend if it is *pro rata*amongall outstanding shares within a particular class, and is in accordance with thepreferences among our different classes of shares as set forth in our organizationaldocuments.

 

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To the extent that we distributeat least 90%, but less than 100%, of our net taxable income, we will be subjectto tax at ordinary corporate tax rates on the retained portion. In addition, wemay elect to retain, rather than distribute, our net long-term capital gainsand pay tax on such gains. In this case, we would elect to have ourshareholders include their proportionate share of such undistributed long-termcapital gains in their income and receive a corresponding credit for theirproportionate share of the tax paid by us. Our shareholders would then increasetheir adjusted basis in our shares by the difference between the amountincluded in their long-term capital gains and the tax deemed paid with respectto their shares.

 

If we fail to distribute duringa calendar year, or by the end of January of the following calendar yearin the case of distributions with declaration and record dates falling in thelast three months of the calendar year, at least the sum of:

 

·                  85% of our REITordinary income for the year,

 

·                  95% of our REITcapital gain income for the year, and

 

·                  anyundistributed taxable income from prior periods, we will incur a 4%nondeductible excise tax on the excess of such required distribution over theamounts we actually distributed. If we so elect, we will be treated as havingdistributed any such retained amount for purposes of the 4% nondeductibleexcise tax described above.

 

It is possible that, from timeto time, we may experience timing differences between the actual receipt ofincome and actual payment of deductible expenses and the inclusion of thatincome and deduction of such expenses in arriving at our REIT taxable income.For example, because we may deduct capital losses only to the extent of ourcapital gains, our REIT taxable income may exceed our economic income.   Further, it is possible that, from time totime, we may be allocated a share of net capital gain from a partnership inwhich we own an interest attributable to the sale of depreciated property thatexceeds our allocable share of cash attributable to that sale. Although severaltypes of non-cash income are excluded in determining the annual distributionrequirement, we will incur corporate income tax and the 4% nondeductible excisetax with respect to those non-cash income items if we do not distribute thoseitems on a current basis. As a result of the foregoing, we may have less cashthan is necessary to distribute all of our taxable income and thereby avoidcorporate income tax and the 4% nondeductible excise tax imposed on certainundistributed income. In such a situation, we may issue additional common orpreferred shares, we may borrow or may cause the operating partnership toarrange for short-term or possibly long-term borrowing to permit the payment ofrequired distributions, or we may pay dividends in the form of taxable in-kinddistributions of property, including potentially, our shares.

 

Under certain circumstances, wemay be able to correct a failure to meet the distribution requirement for ayear by paying “deficiency dividends” to our shareholders in a later year. Wemay include such deficiency dividends in our deduction for dividends paid forthe earlier year. Although we may be able to avoid income tax on amounts distributedas deficiency dividends, we will be required to pay interest to the InternalRevenue Service based upon the amount of any deduction we take for deficiencydividends.

 

***Recordkeeping Requirements.***Wemust maintain certain records in order to qualify as a REIT. In addition, toavoid paying a penalty, we must request on an annual basis information from ourshareholders designed to disclose the actual ownership of our outstandingcommon shares.

 

***Failure to Qualify.***Ifwe were to fail to qualify as a REIT in any taxable year and no reliefprovision applied, we would have the following consequences: We would besubject to federal income tax and any applicable alternative minimum tax atregular corporate rates applicable to regular C corporations on our taxableincome, determined without reduction for amounts distributed to shareholders.We would not be required to make any distributions to shareholders. Unless wequalified for relief under specific statutory provisions, we would not bepermitted to elect taxation as a REIT for the four taxable years following theyear during which we ceased to qualify as a REIT.

 

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If we fail to satisfy one ormore requirements for REIT qualification, other than the gross income tests andthe asset tests, we could avoid disqualification if our failure is due toreasonable cause and not to willful neglect and we pay a penalty of $50,000 foreach such failure. In addition, there are relief provisions for a failure ofthe gross income tests and asset tests, as described in “Requirements forQualification — Gross Income Tests” and “Requirements for Qualification — AssetTests.” It is not possible to state whether in all circumstances the Companywould be entitled to such statutory relief

 

***State and Local Taxes.***Wemay be subject to taxation by various states and localities, including those inwhich we transact business or own property. The state and local tax treatmentin such jurisdictions may differ from the federal income tax treatmentdescribed above.

 

**Tax Aspects ofInvestments in the Operating Partnership and Subsidiary Partnerships**

** **

***Tax Aspects of Our Investments in theOperating Partnership.***The following discussionsummarizes certain federal income tax considerations applicable to our director indirect investment in our operating partnership and any subsidiarypartnerships or limited liability companies we form or acquire that are treatedas partnerships for federal income tax purposes, each individually referred toas a “Partnership” and, collectively, as “Partnerships.” The followingdiscussion does not address state or local tax laws or any federal tax lawsother than income tax laws.

 

***Classification as Partnerships.***Weare required to include in our income our distributive share of eachPartnership’s income and to deduct our distributive share of each Partnership’slosses but only if such Partnership is classified for federal income taxpurposes as a partnership (or an entity that is disregarded for federal incometax purposes if the entity has only one owner or member), rather than as acorporation or an association taxable as a corporation.

 

An organization with at leasttwo owners or members will be classified as a partnership, rather than as acorporation, for federal income tax purposes if it:

 

·                  is treated as apartnership under the Treasury regulations relating to entity classification(the “check-the-box regulations”); and

 

·                  is not a “publiclytraded” partnership.

 

Under the check-the-boxregulations, an unincorporated entity with at least two owners or members mayelect to be classified either as an association taxable as a corporation or asa partnership. If such an entity does not make an election, it generally willbe treated as a partnership for federal income tax purposes. We intend thateach Partnership will be classified as a partnership for federal income taxpurposes (or else a disregarded entity where there are not at least twoseparate beneficial owners).

 

A publicly traded partnershipis a partnership whose interests are traded on an established securities marketor are readily tradable on a secondary market (or a substantial equivalent). Apublicly traded partnership is generally treated as a corporation for federalincome tax purposes, but will not be so treated if, for each taxable yearbeginning after December 31, 1987 in which it was classified as a publiclytraded partnership, at least 90% of the partnership’s gross income consisted ofspecified passive income, including real property rents (which includes rentsthat would be qualifying income for purposes of the 75% gross income test, withcertain modifications that make it easier for the rents to qualify for the 90%passive income exception), gains from the sale or other disposition of realproperty, interest, and dividends (the “90% passive income exception”).

 

Treasury regulations, referredto as PTP regulations, provide limited safe harbors from treatment as apublicly traded partnership. Pursuant to one of those safe harbors (the “privateplacement exclusion”), interests in a partnership will not be treated asreadily tradable on a secondary market or the substantial equivalent thereof if(1) all interests in the partnership were issued in a transaction ortransactions that were not required to be registered under the Securities Actof 1933, as amended, and (2) the partnership does not have more than 100partners at any time during the partnership’s taxable year. For thedetermination of the number of partners in a partnership, a person owning aninterest in a partnership, grantor trust, or S corporation that owns aninterest in the partnership is treated 

 

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as a partnerin the partnership only if (1) substantially all of the value of the owner’sinterest in the entity is attributable to the entity’s direct or indirectinterest in the partnership and (2) a principal purpose of the use of theentity is to permit the partnership to satisfy the 100-partner limitation. TheCompany believes that each Partnership should qualify for the private placementexclusion.

 

We have not requested, and donot intend to request, a ruling from the Internal Revenue Service that thePartnerships will be classified as partnerships (or disregarded entities, ifthe entity has only one owner or member) for federal income tax purposes. If for any reason a Partnership were taxable as a corporation, rather than as apartnership, for federal income tax purposes, we may not be able to qualify asa REIT, unless we qualify for certain relief provisions. See “Requirements forQualification — Gross Income Tests” and “Requirements for Qualification — AssetTests.” In addition, any change in a Partnership’s status for tax purposesmight be treated as a taxable event, in which case we might incur tax liabilitywithout any related cash distribution. See “Requirements for Qualification —Annual Distribution Requirements.” Further, items of income and deduction ofsuch Partnership would not pass through to its partners, and its partners wouldbe treated as shareholders for tax purposes. Consequently, such Partnershipwould be required to pay income tax at corporate rates on its net income, anddistributions to its partners would constitute dividends that would not bedeductible in computing such Partnership’s taxable income.

 

***Partners, Not the Partnerships, Subject toTax.***A partnership is not a taxable entity forfederal income tax purposes. We will therefore take into account our allocableshare of each Partnership’s income, gains, losses, deductions, and credits foreach taxable year of the Partnership ending with or within our taxable year,even if we receive no distribution from the Partnership for that year or adistribution less than our share of taxable income. Similarly, even if wereceive a distribution, it may not be taxable if the distribution does notexceed our adjusted tax basis in our interest in the Partnership.

 

***Partnership Allocations.***Althougha partnership agreement generally will determine the allocation of income andlosses among partners, allocations will be disregarded for tax purposes if theydo not comply with the provisions of the federal income tax laws governingpartnership allocations. If an allocation is not recognized for federal incometax purposes, the item subject to the allocation will be reallocated inaccordance with the partners’ interests in the partnership, which will bedetermined by taking into account all of the facts and circumstances relatingto the economic arrangement of the partners with respect to such item.

 

***Tax Allocations With Respect to ContributedProperties.***Income, gain, loss, and deductionattributable to (a) appreciated or depreciated property that iscontributed to a partnership in exchange for an interest in the partnership or (b) propertyrevalued on the books of a partnership must be allocated in a manner such thatthe contributing partner is charged with, or benefits from, respectively, theunrealized gain or unrealized loss associated with the property at the time ofthe contribution. The amount of such unrealized gain or unrealized loss,referred to as “built-in gain” or “built-in loss,” is generally equal to thedifference between the fair market value of the contributed or revaluedproperty at the time of contribution or revaluation and the adjusted tax basisof such property at that time, referred to as a book-tax difference. Suchallocations are solely for federal income tax purposes and do not affect thebook capital accounts or other economic or legal arrangements among thepartners. The U.S. Treasury Department has issued regulations requiringpartnerships to use a “reasonable method” for allocating items with respect towhich there is a book-tax difference and outlining several reasonableallocation methods. Unless we, as general partner, select a different method,our operating partnership will use the traditional method for allocating itemswith respect to which there is a book-tax difference.  Depending upon the method chosen, (1) ourtax depreciation deductions attributable to those properties may be lower thanthey would have been if the partnership had acquired those properties for cashand (2) in the event of a sale of such properties, we could be allocatedgain in excess of our corresponding economic or book gain.  These allocations may cause us to recognizetaxable income in excess of cash proceeds received by us, which might adverselyaffect our ability to comply with the REIT distribution requirements or resultin our shareholders recognizing additional dividend income without an increasein distributions.

 

***Depreciation. ***Some assets inour Partnerships include appreciated property contributed by its partners.  Assets contributed to a Partnership in atax-free transaction generally retain the same depreciation method and recoveryperiod as they had in the hands of the partner who contributed them to thepartnership.  Accordingly, the 

 

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Partnership’sdepreciation deductions for such contributed real property are based on thehistoric tax depreciation schedules for the properties prior to theircontribution to the operating partnership.

 

***Basis in Partnership Interest.***Ouradjusted tax basis in any partnership interest we own generally will be:

 

·                  the amount ofcash and the basis of any other property we contribute to the partnership;

 

·                  increased by ourallocable share of the partnership’s income (including tax-exempt income) andour allocable share of indebtedness of the partnership; and

 

·                  reduced, but notbelow zero, by our allocable share of the partnership’s loss (excluding anynon-deductible items), the amount of cash and the basis of property distributedto us, and constructive distributions resulting from a reduction in our shareof indebtedness of the partnership.

 

Loss allocated to us in excess ofour basis in a partnership interest will not be taken into account until weagain have basis sufficient to absorb the loss. A reduction of our share ofpartnership indebtedness will be treated as a constructive cash distribution tous, and will reduce our adjusted tax basis. Distributions, includingconstructive distributions, in excess of the basis of our partnership interestwill constitute taxable income to us. Such distributions and constructivedistributions normally will be characterized as long-term capital gain.

 

***Sale of a Partnership’s Property.***Generally,any gain realized by a Partnership on the sale of property held for more thanone year will be long-term capital gain, except for any portion of the gaintreated as depreciation or cost recovery recapture. Any gain or loss recognizedby a Partnership on the disposition of contributed or revalued properties willbe allocated first to the partners who contributed the properties or who werepartners at the time of revaluation, to the extent of their built-in gain orloss on those properties for federal income tax purposes. The partners’built-in gain or loss on contributed or revalued properties is the differencebetween the partners’ proportionate share of the book value of those propertiesand the partners’ tax basis allocable to those properties at the time of thecontribution or revaluation. Any remaining gain or loss recognized by thePartnership on the disposition of contributed or revalued properties, and anygain or loss recognized by the Partnership on the disposition of otherproperties, will be allocated among the partners in accordance with theirpercentage interests in the Partnership.

 

Our share of any Partnershipgain from the sale of inventory or other property held primarily for sale tocustomers in the ordinary course of the Partnership’s trade or business will betreated as income from a prohibited transaction subject to a 100% tax. Incomefrom a prohibited transaction may have an adverse effect on our ability tosatisfy the gross income tests for REIT status. See “Requirements forQualification — Gross Income Tests.” We do not presently intend to acquire orhold, or to allow any Partnership to acquire or hold, any property that islikely to be treated as inventory or property held primarily for sale tocustomers in the ordinary course of our, or the Partnership’s, trade orbusiness.

 

**Taxation ofTaxable U.S. Shareholders**

** **

The term “U.S. shareholder”means a holder of the common shares that, for U.S. federal income tax purposes,is:

 

·                  a citizen orresident of the United States;

 

·                  a corporation(including an entity treated as a corporation for federal income tax purposes)created or organized under the laws of the United States, any of its states orthe District of Columbia;

 

·                  an estate whoseincome is subject to U.S. federal income taxation regardless of its source; or

 

·                  any trust if (1) aU.S. court is able to exercise primary supervision over the administration ofsuch trust and one or more U.S. persons have the authority to control allsubstantial decisions of the trust or (2) it has a valid election in placeto be treated as a U.S. person.

 

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If a partnership, entity orarrangement treated as a partnership for federal income tax purposes holds ourcommon shares, the federal income tax treatment of a partner in the partnershipwill generally depend on the status of the partner and the activities of thepartnership. If you are a partner in a partnership holding our common shares,you should consult your tax advisor regarding the consequences of the ownershipand disposition of our common shares by the partnership

 

***Taxation of U.S. Shareholders onDistributions.  .***Aslong as we qualify as a REIT, a taxable “U.S. shareholder” will be required totake into account as ordinary income distributions made out of our current oraccumulated earnings and profits that we do not designate as capital gaindividends or retained long-term capital gain. A U.S. shareholder will notqualify for the dividends-received deduction generally available tocorporations. Dividends paid to a U.S. shareholder generally will not qualifyfor the 15% tax rate for “qualified dividend income.” Legislation enacted in2003 and 2006 reduced the maximum tax rate for qualified dividend income to 15%for tax years 2003 through 2010. Without future congressional action, in 2011the maximum tax rate on qualified dividend income will revert to the rate thenapplicable to ordinary income. Qualified dividend income generally includesdividends paid by domestic C corporations and certain qualified foreigncorporations to most noncorporate U.S. shareholders. Because a REIT is notgenerally subject to federal income tax on the portion of its REIT taxableincome distributed to its shareholders, our dividends generally will not beeligible for the 15% rate on qualified dividend income. As a result, ourordinary REIT dividends will be taxed at the higher rate applicable to ordinaryincome. Currently, the highest marginal individual income tax rate on ordinaryincome is 35%. However, the 15% tax rate for qualified dividend income willapply to our ordinary REIT dividends, if any, that are (i) attributable todividends received by us from non-REIT corporations, such as our taxable REITsubsidiaries, and (ii) attributable to income upon which we have paidcorporate income tax (e.g., to the extent that we distribute less than 100% ofour taxable income). In general, to qualify for the reduced tax rate onqualified dividend income, a U.S. shareholder must hold our common shares formore than 60 days during the 121-day period beginning on the date that is60 days before the date on which our common shares becomes ex-dividend.

 

We may distribute taxabledividends that are a payable partly in cash and partly in shares of our commonstock.  Taxable U.S. shareholdersreceiving such dividends will be required to include the full amount of thedividends as ordinary income to the extent of our current and accumulatedearnings and profits.

 

Any distribution we declare inOctober, November, or December of any year that is payable to a U.S.shareholder of record on a specified date in any of those months will betreated as paid by us and received by the U.S. shareholder on December 31of the year, provided we actually pay the distribution during January ofthe following calendar year.

 

Distributions to a U.S.shareholder which we designate as capital gain dividends will generally betreated as long-term capital gain, without regard to the period for which the U.S.shareholder has held its common shares. We generally will designate our capitalgain dividends as either 15% or 25% rate distributions. A corporate U.S.shareholder, however, may be required to treat up to 20% of certain capitalgain dividends as ordinary income.

 

We may elect to retain and payincome tax on the net long-term capital gain that we receive in a taxable year.In that case, a U.S. shareholder would be taxed on its proportionate share ofour undistributed long-term capital gain. The U.S. shareholder would receive acredit or refund for its proportionate share of the tax we paid. The U.S.shareholder would increase the basis in its common shares by the amount of itsproportionate share of our undistributed long-term capital gain, minus its shareof the tax we paid.

 

A U.S. shareholder will notincur tax on a distribution in excess of our current and accumulated earningsand profits if the distribution does not exceed the adjusted basis of the U.S.shareholder’s common shares. Instead, the distribution will reduce the adjustedbasis of the shares, and any amount in excess of both our current andaccumulated earnings and profits and the adjusted basis will be treated ascapital gain, long-term if the shares have been held for more than one year, providedthe shares are a capital asset in the hands of the U.S. shareholder.

 

Shareholders may not include intheir individual income tax returns any of our net operating losses or capitallosses. Instead, these losses are generally carried over by us for potentialoffset against our future income. Taxable distributions from us and gain fromthe disposition of common shares will not be treated as passive activityincome; and, therefore, shareholders generally will not be able to apply any “passiveactivity losses,” such as losses 

 

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from certaintypes of limited partnerships in which the shareholder is a limited partner,against such income. In addition, taxable distributions from us and gain fromthe disposition of common shares generally will be treated as investment incomefor purposes of the investment interest limitations. We will notifyshareholders after the close of our taxable year as to the portions of thedistributions attributable to that year that constitute ordinary income, returnof capital, and capital gain.

 

***Taxation of U.S. Shareholders on theDisposition of Common Shares.***In general, a U.S.shareholder who is not a dealer in securities must treat any gain or lossrealized upon a taxable disposition of our common shares as long-term capitalgain or loss if the U.S. shareholder has held the shares for more than oneyear, and otherwise as short-term capital gain or loss. In general, a U.S.shareholder will realize gain or loss in an amount equal to the differencebetween the sum of the fair market value of any property and the amount of cashreceived in such disposition and the U.S. shareholder’s adjusted tax basis. AU.S. shareholder’s adjusted tax basis generally will equal the U.S. shareholder’sacquisition cost, increased by the excess of net capital gains deemeddistributed to the U.S. shareholder less tax deemed paid by it and reduced byany returns of capital. However, a U.S. shareholder must treat any loss upon asale or exchange of common shares held by such shareholder for six months orless as a long-term capital loss to the extent of capital gain dividends andany actual or deemed distributions from us that such U.S. shareholder treats aslong-term capital gain. All or a portion of any loss that a U.S. shareholderrealizes upon a taxable disposition of common shares may be disallowed if theU.S. shareholder purchases other common shares within 30 days before orafter the disposition.

 

If a U.S. shareholderrecognizes a loss upon a subsequent disposition of our shares in an amount thatexceeds a prescribed threshold, it is possible that the provisions of TreasuryRegulations involving “reportable transactions” could apply, with a resulting requirementto separately disclose the loss generating transactions to the IRS. While theseregulations are directed towards “tax shelters,” they are written broadly, andapply to transactions that would not typically be considered tax shelters.Significant penalties apply for failure to comply with these requirements. Youshould consult your tax advisors concerning any possible disclosure obligationwith respect to the receipt or disposition of our shares, or transactions thatmight be undertaken directly or indirectly by us. Moreover, you should be awarethat we and other participants in transactions involving us (including ouradvisors) might be subject to disclosure or other requirements pursuant tothese regulations.

 

The tax-rate differentialbetween capital gain and ordinary income for non-corporate taxpayers may besignificant. A taxpayer generally must hold a capital asset for more than oneyear for gain or loss derived from its sale or exchange to be treated aslong-term capital gain or loss. The highest marginal individual income tax rateis currently 35% (which rate will apply for the period through December 31,2010). The maximum tax rate on long-term capital gain applicable to U.S.shareholders taxed at individual rates is 15% through December 31, 2010.The maximum tax rate on long-term capital gain from the sale or exchange of “section1250 property” (i.e., generally, depreciable real property) is 25% to theextent the gain would have been treated as ordinary income if the property were“section 1245 property” (i.e., generally, depreciable personal property). Wegenerally may designate whether a distribution we designate as capital gaindividends (and any retained capital gain that we are deemed to distribute) istaxable to non-corporate shareholders at a 15% or 25% rate. Thecharacterization of income as capital gain or ordinary income may affect thedeductibility of capital losses. A non-corporate taxpayer may deduct capitallosses not offset by capital gains against its ordinary income only up to amaximum of $3,000 annually. A non-corporate taxpayer may carry unused capitallosses forward indefinitely. A corporate taxpayer must pay tax on its netcapital gain at corporate ordinary-income rates. A corporate taxpayer maydeduct capital losses only to the extent of capital gains, with unused lossescarried back three years and forward five years.

 

***Information Reporting Requirements and BackupWithholding.***We will report to our shareholdersand to the Internal Revenue Service the amount of distributions we pay duringeach calendar year and the amount of tax we withhold, if any. A shareholder maybe subject to backup withholding at a rate of up to 28% with respect todistributions unless the holder:

 

·                  is a corporationor comes within certain other exempt categories and, when required,demonstrates this fact; or

 

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·                  provides ataxpayer identification number, certifies as to no loss of exemption frombackup withholding, and otherwise complies with the applicable requirements ofthe backup withholding rules.

 

A shareholder who does notprovide us with its correct taxpayer identification number also may be subjectto penalties imposed by the Internal Revenue Service.  In addition, we may be required to withhold aportion of capital gain distributions to any shareholders who fail to certifytheir non-foreign status to us. Backup withholding is not an additionaltax.  Any amounts withheld under thebackup withholding rules may be allowed as a refund or a credit againstthe shareholder’s income tax liability, provided the required information isfurnished to the Internal Revenue Service.

 

**Taxation ofTax-Exempt Shareholders**

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Tax-exempt entities, includingqualified employee pension and profit sharing trusts and individual retirementaccounts and annuities, generally are exempt from federal income taxation.However, they are subject to taxation on their “unrelated business taxableincome.” While many investments in real estate generate unrelated businesstaxable income, the Internal Revenue Service has issued a ruling that dividenddistributions from a REIT to an exempt employee pension trust do not constituteunrelated business taxable income so long as the exempt employee pension trustdoes not otherwise use the shares of the REIT in an unrelated trade or businessof the pension trust. Based on that ruling, amounts we distribute to tax-exemptshareholders generally should not constitute unrelated business taxable income.However, if a tax-exempt shareholder were to finance its acquisition of commonshares with debt, a portion of the income it received from us would constituteunrelated business taxable income pursuant to the “debt-financed property”rules. Furthermore, social clubs, voluntary employee benefit associations,supplemental unemployment benefit trusts, and qualified group legal servicesplans that are exempt from taxation under special provisions of the federalincome tax laws are subject to different unrelated business taxable incomerules, which generally will require them to characterize distributions theyreceive from us as unrelated business taxable income.

 

In certain circumstances, aqualified employee pension or profit-sharing trust that owns more than 10% ofour shares of beneficial interest (by value) must treat a percentage of thedividends it receives from us as unrelated business taxable income. Suchpercentage is equal to the gross income we derive from an unrelated trade orbusiness, determined as if we were a pension trust, divided by our total grossincome for the year in which we pay the dividends. This rule applies to apension trust holding more than 10% of our shares only if:

 

·                  the percentageof our dividends which the tax-exempt trust must treat as unrelated businesstaxable income is at least 5%;

 

·                  we are a “pension-heldREIT,, that is, we qualify as a REIT by reason of the modification of the rule requiringthat no more than 50% of our shares of beneficial interest be owned by five orfewer individuals that allows the beneficiaries of the pension trust to betreated as holding our shares in proportion to their actuarial interests in thepension trust; and either: (i) one pension trust owns more than 25% of thevalue of our shares of beneficial interest; or (ii)  one or more pensiontrusts each individually holding more than 10% of the value of our shares ofbeneficial interest collectively owns more than 50% of the value of our sharesof beneficial interest.

 

Certain restrictions onownership and transfer of our shares should generally prevent a tax-exempt entityfrom owning more than 10% of the value of our shares, or us from becoming apension-held REIT.

 

**Tax-exemptU.S. shareholders are urged to consult their tax advisor regarding the U.S.federal, state, local and foreign tax consequences of the acquisition,ownership and disposition of our shares.**

 

**Taxation ofNon-U.S. Shareholders**

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The term “non-U.S. shareholder”means a holder of our common shares that is not a U.S. shareholder or apartnership (or an entity treated as a partnership for federal income taxpurposes). The rules governing U.S. federal 

 

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incometaxation of non-U.S. shareholders are complex. This section is only a summaryof such rules. **We urge non-U.S. shareholdersto consult their own tax advisors to determine the impact of federal, state,local and foreign income tax laws on ownership of common shares, including anyreporting requirements.**

 

***Taxation of Distributions***.  A non-U.S. shareholder that receives adistribution which is not attributable to gain from our sale or exchange of a “UnitedStates real property interest” (“USRPI”) (discussed below) and that we do notdesignate a capital gain dividend or retained capital gain will recognizeordinary income to the extent that we pay such distribution out of our currentor accumulated earnings and profits. A withholding tax equal to 30% of thegross amount of the distribution ordinarily will apply unless an applicable taxtreaty reduces or eliminates the tax. However, a non-U.S. shareholder generallywill be subject to federal income tax at graduated rates on any distributiontreated as effectively connected with the non-U.S. shareholder’s conduct of aU.S. trade or business, in the same manner as U.S. shareholders are taxed ondistributions. A corporate non-U.S. shareholder may, in addition, be subject tothe 30% branch profits tax with respect to that distribution. We plan towithhold U.S. income tax at the rate of 30% on the gross amount of anydistribution paid to a non-U.S. shareholder unless either:

 

·                  a lower treatyrate applies and the non-U.S. shareholder files an IRS Form W-8BENevidencing eligibility for that reduced rate with us; or

 

·                  the non-U.S.shareholder files an IRS Form W-8ECI with us claiming that thedistribution is effectively connected income.

 

A non-U.S. shareholder will notincur tax on a distribution in excess of our current and accumulated earningsand profits if the excess portion of such distribution does not exceed theadjusted basis of its common shares. Instead, the excess portion of the distributionwill reduce the adjusted basis of such shares. A non-U.S. shareholder will besubject to tax on a distribution that exceeds both our current and accumulatedearnings and profits and the adjusted basis of its shares, if the non-U.S.shareholder otherwise would be subject to tax on gain from the sale ordisposition of common shares, as described below. Because we generally cannotdetermine at the time we make a distribution whether the distribution willexceed our current and accumulated earnings and profits, we normally willwithhold tax on the entire amount of any distribution at the same rate as wewould withhold on a dividend. However, a non-U.S. shareholder may obtain arefund of amounts we withhold if we later determine that a distribution in factexceeded our current and accumulated earnings and profits.

 

We may be required to withhold10% of any distribution that exceeds our current and accumulated earnings andprofits. Consequently, although we intend to withhold at a rate of 30% on theentire amount of any distribution, to the extent we do not do so, we maywithhold at a rate of 10% on any portion of a distribution not subject towithholding at a rate of 30%.

 

For any year in which wequalify as a REIT, except as discussed below with respect to 5% or less holdersof regularly traded classes of shares, a non-U.S. shareholder will incur tax ondistributions attributable to gain from our sale or exchange of a USRPI underthe Foreign Investment in Real Property Tax Act of 1980, or “FIRPTA”. A USRPIincludes certain interests in real property and shares in corporations at least50% of whose assets consist of interests in real property. Under FIRPTA, anon-U.S. shareholder is taxed on distributions attributable to gain from salesof USRPIs as if the gain were effectively connected with the conduct of a U.S.business of the non-U.S. shareholder. A non-U.S. shareholder would be taxed onsuch a distribution at the normal capital gain rates applicable to U.S.shareholders, subject to applicable alternative minimum tax and a specialalternative minimum tax in the case of a nonresident alien individual. Anon-U.S. corporate shareholder not entitled to treaty relief or exemption alsomay be subject to the 30% branch profits tax on such a distribution. We mustwithhold 35% of any distribution that we could designate as a capital gaindividend. A non-U.S. shareholder may receive a credit against our tax liabilityfor the amount we withhold.

 

Capital gain distributions tothe holders of our common shares that are attributable to our sale of realproperty will be treated as ordinary dividends rather than as gain from thesale of a USRPI, as long as (i) our common shares continue to be “regularlytraded” on an established securities market in the United States and (ii) thenon-U.S. shareholder did not own more than 5% of our common shares any timeduring the one-year period prior to the distribution. As a result, non-U.S.shareholders owning 5% or less of our common shares generally would be 

 

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subject towithholding tax on such capital gain distributions in the same manner as theyare subject to withholding tax on ordinary dividends. If our common sharescease to be regularly traded on an established securities market in the UnitedStates or the non-U.S. shareholder owned more than 5% of our common shares anytime during the one-year period prior to the distribution, capital gaindistributions that are attributable to our sale of real property would besubject to tax under FIRPTA, as described in the preceding paragraph.

 

***Taxation of Disposition ofShares.***  Anon-U.S. shareholder generally will not incur tax under FIRPTA with respect togain on a sale of common shares as long as we are a “domestically-controlledREIT,” which means that at all times non-U.S. persons hold, directly orindirectly, less than 50% in value of the outstanding common shares. We cannotassure you that this test will be met. Further, even if we are a domesticallycontrolled REIT, pursuant to “wash sale” rules under FIRPTA, a non-U.S.shareholder may incur tax under FIRPTA. The “wash sale” rule applies to the extent such non-U.S.shareholder disposes of our shares during the 30-day period preceding adividend payment, and such non-U.S. shareholder (or a person related to suchnon-U.S. shareholder) acquires or enters into a contract or option to acquireour common shares within 61 days of the 1st day of the 30 day period described above, and anyportion of such dividend payment would, but for the disposition, be treated asa USRPI capital gain to such non-U.S. shareholder, then such non-U.S.shareholder shall be treated as having USRPI capital gain in an amount that,but for the disposition, would have been treated as USRPI capital gain.

 

In addition, a non-U.S.shareholder that owned, actually or constructively, 5% or less of theoutstanding common shares at all times during a specified testing period willnot incur tax under FIRPTA on gain from a sale of common shares if the sharesare “regularly traded” on an established securities market. Because our commonshares are “regularly traded” on an established securities market, we expectthat a non-U.S. shareholder generally will not incur tax under FIRPTA on gainfrom a sale of common shares unless it owns or has owned more than 5% of thecommon shares at any time during the five year period to such sale. Any gainsubject to tax under FIRPTA will be treated in the same manner as it would bein the hands of U.S. shareholders, subject to alternative minimum tax, butunder a special alternative minimum tax in the case of nonresident alienindividuals, and the purchaser of the shares could be required to withhold 10%of the purchase price and remit such amount to the Internal Revenue Service.

 

A non-U.S. shareholdergenerally will incur tax on gain not subject to FIRPTA if:

 

·                  the gain iseffectively connected with the conduct of the non-U.S. shareholder’s U.S. tradeor business, in which case the non-U.S. shareholder will be subject to the sametreatment as U.S. shareholders with respect to the gain; or

 

·                  the non-U.S.shareholder is a nonresident alien individual who was present in the U.S. for183 days or more during the taxable year and has a “tax home” in theUnited States, in which case the non-U.S. shareholder will incur a 30% tax oncapital gains.

 

***Information Reporting andBackup Withholding Applicable to non-U.S. Shareholders.***  We must report annually to the IRS and toeach non-U.S. shareholder the amount of dividends paid to such holder and thetax withheld with respect to such dividends, regardless of whether withholdingwas required. Copies of the information returns reporting such dividends andwithholding may also be made available to the tax authorities in the country inwhich the non-U.S. shareholder resides under the provisions of an applicableincome tax treaty.

 

Payments of dividends or ofproceeds from the disposition of stock made to a non-U.S. shareholder may besubject to information reporting and backup withholding unless such holderestablishes an exemption, for example, by properly certifying its non-UnitedStates status on an IRS Form W-8 BEN or another appropriate version of IRSForm W-8. Notwithstanding the foregoing, backup withholding may apply ifeither we or our paying agent has actual knowledge, or reason to know, that anon-U.S. shareholder is a United States person.

 

Backup withholding is not anadditional tax.  Any amounts withheldunder the backup withholding rules may be allowed as a refund or a creditagainst the shareholder’s income tax liability, provided the requiredinformation is furnished to the Internal Revenue Service.

 

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**Legislative orOther Actions Affecting REITs**

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The rules dealing withU.S. federal income taxation are constantly under review by persons involved inthe legislative process and by the Internal Revenue Service and the U.S.Treasury Department. No assurance can be given as to whether, when, or in whatform, the U.S. federal income tax laws applicable to us and our shareholdersmay be enacted. Changes to the U.S. federal tax laws and interpretations ofU.S. federal tax laws could adversely affect an investment in our shares.

 

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