**Exhibit 99.1**

 

**MATERIAL FEDERAL INCOME TAXCONSIDERATIONS**

 

Thissection summarizes the current material federal income tax considerationsrelating to the purchase, ownership and disposition of our common shares andthe qualification and taxation of the Company as a REIT.  We use the terms “we” and “our” and “Company”  refer solely to U-Store-It Trust and not toour subsidiaries and affiliates which have not elected to be taxed as REITsunder the Internal Revenue Code of 1986, as amended (the “Code”).

 

Thisdiscussion is not exhaustive of all possible tax considerations and does notprovide a detailed discussion of any state, local or foreign taxconsiderations.  The discussion does not address all aspects of taxationthat may be relevant to particular investors in light of their personalinvestment or tax circumstances, or to certain types of investors that aresubject to special treatment under the federal income tax laws, such asinsurance companies, regulated investment companies, REITs, tax-exempt organizations(except to the limited extent discussed below under “Taxation of Tax-ExemptShareholders”), financial institutions or broker-dealers, non-U.S. individualsand foreign corporations (except to the limited extent discussed below under “Taxationof Non-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.

 

Theinformation in this summary is based on the Code, current, temporary andproposed Treasury regulations, the legislative history of the Code, currentadministrative interpretations and practices of the Internal Revenue Service,including its practices and policies as endorsed in private letter rulings,which are not binding on the Internal Revenue Service, and existing courtdecisions.  Future legislation, regulations,administrative interpretations and court decisions could change current law oradversely affect existing interpretations of current law.  Any change could apply retroactively.  We have not obtained any rulings from theInternal Revenue Service concerning the tax treatment of the matters discussedin this summary.  Therefore, it ispossible that the Internal Revenue Service could challenge the statements inthis summary, which do not bind the Internal Revenue Service or the courts, andthat a court could agree with the Internal Revenue Service.

 

**We urge you to consult your own tax advisor regarding thespecific tax consequences to you of ownership of our common shares and of ourelection to be taxed as a REIT. Specifically, you should consult your own taxadvisor regarding the federal, state, local, foreign, and other taxconsequences of such ownership and election, and regarding potential changes inapplicable tax laws.**

 

**Qualificationof the Company as a REIT**

 

Weelected to be taxed as a REIT under the federal income tax laws beginning withour short taxable year ended December 31, 2004. We believe that, beginningwith such short taxable year, we have been organized and have operated in sucha manner as to qualify for taxation as a REIT under the Code and intend tocontinue to operate in such a manner. However, there can be no assurance thatwe have qualified or will remain qualified as a REIT

 

Ourcontinued qualification and taxation as a REIT depend upon our ability to meeton a continuing basis, through actual annual operating results, certainqualification tests set forth in the federal income tax laws. Thosequalification tests involve the percentage of income that we earn fromspecified sources, the percentage of our assets that falls within specifiedcategories, the diversity of our share ownership, and the percentage of ourearnings 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.

 

Pursuantto our declaration of trust, our board of trustees has the authority to makeany tax elections on our behalf that, in its sole judgment, are in our bestinterest.  This authority includes the ability to revoke or otherwiseterminate our status as a REIT.  Our board of trustees has the authorityunder our declaration of trust to make these elections without the necessity ofobtaining the approval of our shareholders.  In addition, our board oftrustees has the authority to waive any restrictions and limitations containedin our declaration of trust that are intended to preserve our status as a REITduring any period in which our board of trustees has determined not to pursueor preserve our status as a REIT.

 

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**Taxationof the Company as a REIT**

 

Thesections of the Code relating to qualification and operation as a REIT, and thefederal income taxation of a REIT, are highly technical and complex. The followingdiscussion sets forth only the material aspects of those sections. This summaryis qualified in its entirety by the applicable Code provisions and the relatedrules and regulations.

 

Ifwe qualify as a REIT, we generally will not be subject to federal income tax onthe taxable income that we distribute to our shareholders. The benefit of thattax treatment is that it avoids the “double taxation,” or taxation at both thecorporate and shareholder levels, that generally results from owning shares in acorporation. However, we will be subject to federal tax in the followingcircumstances:

 

·                                          We are subject to thecorporate federal income tax on any taxable income, including net capital gainthat we do not distribute to shareholders during, or within a specified timeperiod after, the calendar year in which the income is earned.

 

·                                          We may be subject to thecorporate “alternative minimum tax” on any items of tax preference, includingany deductions of net operating losses.

 

·                                          We are subject to tax, atthe highest corporate rate, on net income from the sale or other disposition ofproperty acquired through foreclosure (“foreclosure property”) that we holdprimarily for sale to customers in the ordinary course of business, and othernon-qualifying income from foreclosure property.

 

·                                          We are subject to a 100% taxon net income from sales or other dispositions of property, other thanforeclosure property, that we hold primarily for sale to customers in theordinary course of business.

 

·                                          If we fail to satisfy one orboth of the 75% gross income test or the 95% gross income test, as describedbelow under “Requirements for Qualification — Gross Income Tests,” butnonetheless continue to qualify as a REIT because we meet other requirements,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 to distributeduring a calendar year at least the sum of: (1) 85% of our REIT ordinaryincome for the year, (2) 95% of our REIT capital gain net income for theyear, and (3) any undistributed taxable income required to be distributedfrom earlier periods, then we will be subject to a 4% nondeductible excise taxon the excess of the required distribution over the amount we actuallydistributed.

 

·                                          If we fail any of the assettests, as described below under “Requirements for Qualification — Asset Tests,”other than certain de minimis failures, but our failure was due to reasonablecause and not to willful neglect, and we nonetheless maintain our REITqualification because of specified cure provisions, , we will pay a tax equalto 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 a tax equal tothe greater of $50,000 or 35% of the net income from the nonqualifying assetsduring the period in which we failed to satisfy the asset tests.

 

·                                          If we fail to satisfy one ormore requirements for REIT qualification, other than the gross income tests andthe asset tests, and such failure is due to reasonable cause and not to willfulneglect, we will be required to pay a penalty of $50,000 for each such failure.

 

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·                                          We may elect to retain andpay income tax on our net long-term capital gain.

 

·                                          We will be subject to a 100%excise tax on transactions with a taxable REIT subsidiary that are notconducted on an arm’s-length basis.

 

·                                          If we acquire any asset froma 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 be required to paymonetary penalties to the Internal Revenue Service in certain circumstances,including if we fail to meet record-keeping requirements intended to monitorour compliance with rules relating to the composition of a REIT’s shareholders,as described below in “Requirements for Qualification - RecordkeepingRequirements.”

 

·                                          The earnings of ourlower-tier entities that are subchapter C corporations, including taxable REITsubsidiaries, are subject to federal corporate income tax.

 

Inaddition, we may be subject to a variety of taxes, including payroll taxes andstate, local and foreign income, property and other taxes on our assets andoperations. We could also be subject to tax in situations and on transactionsnot presently contemplated.

 

**Requirementsfor Qualification**

 

Toqualify as a REIT, we must elect to be treated as a REIT, and we must meetvarious (a) organizational requirements, (b) gross income tests,(c) asset tests, and (d) annual distribution requirements.

 

***Organizational Requirements.***A REIT is acorporation, trust or association that meets each of the followingrequirements:

 

(1)           It is managed by one or moretrustees or directors;

 

(2)           Its beneficial ownership isevidenced by transferable shares, or by transferable certificates of beneficialinterest;

 

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

 

(4)           It is neither a financialinstitution nor an insurance company subject to special provisions of thefederal income tax laws;

 

(5)           At least 100 persons arebeneficial owners of its shares or ownership certificates (determined withoutreference to any rules of attribution);

 

(6)           Not more than 50% in valueof 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, orhas made such election for a previous taxable year which has not been revokedor terminated, and satisfies all relevant filing and other administrativerequirements established by the Internal Revenue Service that must be met toelect and maintain REIT status;

 

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(8)           It uses a calendar year forfederal income tax purposes and complies with the recordkeeping requirements ofthe 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.

 

Wemust meet requirements 1 through 4, 8 and 9 during our entire taxable year andmust meet requirement 5 during at least 335 days of a taxable year of12 months, or during a proportionate part of a taxable year of less than12 months. If we comply with all the requirements for ascertaininginformation concerning the ownership of our outstanding shares in a taxableyear and have no reason to know that we violated requirement 6, we will bedeemed to have satisfied requirement 6 for that taxable year. Our declarationof trust provides for restrictions regarding the ownership and transfer of ourshares of beneficial interest that are intended to assist us in continuing tosatisfy requirements 5 and 6.  However,these restrictions may not ensure that we will, in all cases, be able tosatisfy these requirements.  Theprovisions of the declaration of trust restricting the ownership and transferof our shares of beneficial interest are described in “Description of OurShares — Restrictions on Ownership and Transfer.”

 

Forpurposes of determining share ownership under requirement 6, an “individual”generally includes a supplemental unemployment compensation benefits plan, aprivate foundation, or a portion of a trust permanently set aside or usedexclusively for charitable purposes. An “individual,” however, generally doesnot include a trust that is a qualified employee pension or profit sharingtrust under the federal income tax laws, and beneficiaries of such a trust willbe treated as holding our shares in proportion to their actuarial interests inthe trust for purposes of requirement 6. We believe we have issued sufficientshares of beneficial interest with enough diversity of ownership to satisfyrequirements 5 and 6 set forth above.

 

Tomonitor compliance with the share ownership requirements, we are required tomaintain records regarding the actual ownership of our shares. To do so, wemust demand written statements each year from the record holders of certainpercentages of our shares in which the record holders are to disclose theactual owners of the shares (the persons required to include in gross incomethe dividends paid by us). A list of those persons failing or refusing tocomply with this demand must be maintained as part of our records. Failure byus to comply with these record-keeping requirements could subject us tomonetary penalties. If we satisfy these requirements and have no reason to knowthat condition (6) is not satisfied, we will be deemed to have satisfiedsuch condition. A shareholder that fails or refuses to comply with the demandis required by Treasury Regulations to submit a statement with its tax returndisclosing the actual ownership of the shares and other information.

 

***Qualified REIT Subsidiaries.***A corporationthat is a “qualified REIT subsidiary” is not treated as a corporation separatefrom its parent REIT. A “qualified REIT subsidiary” is a corporation, all ofthe capital stock of which is owned by the REIT and that has not elected to bea taxable REIT subsidiary. All assets, liabilities, and items of income,deduction, and credit of a “qualified REIT subsidiary” are treated as assets,liabilities, and items of income, deduction, and credit of the REIT. Thus, inapplying the requirements described herein, any “qualified REIT subsidiary”that we own will be ignored, and all assets, liabilities, and items of income,deduction, and credit of such subsidiary will be treated as our assets,liabilities, and items of income, deduction, and credit.

 

***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.***A REIT ispermitted 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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treatthe subsidiary 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.***We must satisfytwo gross income tests annually to maintain our qualification as a REIT. First,at least 75% of our gross income for each taxable year must consist of definedtypes of income that we derive, directly or indirectly, from investmentsrelating to real property or mortgages on real property or qualified temporaryinvestment income. Qualifying income for purposes of that 75% gross income testgenerally includes:

 

·                                          rents from real property;

 

·                                          interest on debt secured bymortgages on real property or on interests in real property (including certaintypes of mortgage-backed securities);

 

·                                          dividends or otherdistributions on, and gain from the sale of, shares in other REITs (excludingdividends from our taxable REIT subsidiaries);

 

·                                          gain from the sale of realestate assets;

 

·                                          income and gain derived fromforeclosure property; and

 

·                                          income derived from thetemporary investment of new capital that is attributable to the issuance of ourshares of beneficial interest or a public offering of our debt with a maturitydate of at least five years and that we receive during the one year periodbeginning on the date on which we receive such new capital.

 

Second,in general, at least 95% of our gross income for each taxable year must consistof income that is qualifying income for purposes of the 75% gross income test,other types of interest and dividends (including dividends from our taxableREIT subsidiaries), gain from the sale or disposition of stock or securities,or any combination of these.  Gross income from our sale of property thatwe hold primarily for sale to customers in the ordinary course of business isexcluded from 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 fromour real property will qualify as “rents from real property,” which isqualifying income for purposes of the 75% and 95% gross income tests, only ifthe following conditions are met:

 

First,the rent must not be based in whole or in part on the income or profits of anyperson. Participating rent, however, will qualify as “rents from real property”if it is based on percentages of receipts or sales and the percentages arefixed at the time the leases are entered into, are not renegotiated during theterm of the leases in a manner that has the effect of basing percentage rent onincome 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 anycorporate tenant or the assets or net profits of any tenant, referred to as arelated party tenant, other than a taxable REIT subsidiary. The constructiveownership rules generally provide that, if 10% or more in value of ourshares is owned, directly or indirectly, by or for any person, we areconsidered as owning the stock owned, directly or indirectly, by or for suchperson. We do not own any stock or any assets or net profits of any tenantdirectly. ** **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.

 

Underan exception to the related-party tenant rule described in the precedingparagraph, rent that we receive from a taxable REIT subsidiary will qualify as “rentsfrom real property” as long as (1) at least 90% of the leased space in theproperty is leased to persons other than taxable REIT subsidiaries andrelated-party tenants, and (2) the amount paid by the taxable REITsubsidiary to rent space at the property is substantially comparable to rentspaid by other tenants of the property for comparable space. The “substantiallycomparable” requirement must be satisfied when the lease is entered into, whenit is extended, and when the lease is modified, if the modification increasesthe rent paid by the taxable REIT subsidiary. If the requirement that at least90% of the leased space in the related property is rented to unrelated tenantsis met when a lease is entered into, extended, or modified, such requirementwill continue to be met as long as there is no increase in the space leased toany taxable 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 to the personal property leased in connection with alease of real property must not be greater than 15% of the total rent receivedunder the lease. The rent attributable to personal property under a lease isthe amount that bears the same ratio to total rent under the lease for thetaxable year as the average of the fair market values of the leased personalproperty at the beginning and at the end of the taxable year bears to theaverage of the aggregate fair market values of both the real and personalproperty covered by the lease at the beginning and at the end of such taxableyear (the “personal property ratio”). With respect to each of our leases, we believethat the personal property ratio generally is less than 15%. Where that is not,or may in the future not be, the case, we believe that any income attributableto personal property will not jeopardize our ability to qualify as a REIT.There can be no assurance, however, that the Internal Revenue Service would notchallenge our calculation of a personal property ratio, or that a court wouldnot uphold such assertion. If such a challenge were successfully asserted, wecould fail to satisfy the 75% or 95% gross income test and thus lose our REITstatus.

 

Fourth,we cannot furnish or render non-customary services to the tenants of ourproperties, or manage or operate our properties, other than through anindependent contractor who is adequately compensated and from whom we do notderive or receive any income. However, we need not provide services through an “independentcontractor,” but instead may provide services directly to our tenants, if theservices are “usually or customarily rendered” in connection with the rental ofspace for occupancy only and are not considered to be provided for the tenants’convenience. In addition, we may provide a minimal amount of “non-customary”services to the tenants of a property, other than through an independentcontractor, as long as our income from the services does not exceed 1% of ourincome from the related property. Finally, we may own up to 100% of the stockof one or more taxable REIT subsidiaries, which may provide non-customaryservices to our tenants without tainting our rents from the related properties.We have not performed, and do not intend to perform, any services other thancustomary ones for our tenants, other than services provided throughindependent contractors or taxable REIT subsidiaries.

 

Tenantsmay be required to pay, in addition to base rent, reimbursements for certainamounts we are obligated to pay to third parties (such as a lessee’sproportionate share of a property’s operational or capital expenses), penaltiesfor nonpayment or late payment of rent or additions to rent. These and othersimilar payments should qualify as “rents from real property.” To the extentthey do not, they should be treated as interest that qualifies for the 95%gross income test.

 

Ifa portion of the rent we receive from a property does not qualify as “rentsfrom real property” because the rent attributable to personal property exceeds15% of the total rent for a taxable year, the portion of the rent attributableto personal property will not be qualifying income for purposes of either the75% or 95% gross income 

 

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test.Thus, if rent attributable to personal property, plus any other income that isnonqualifying income for purposes of the 95% gross income test, during ataxable year exceeds 5% of our gross income during the year, we would lose ourREIT status, 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) we furnish non-customary services to the tenants of the property, ormanage or operate the property, other than through a qualifying independentcontractor or a taxable REIT subsidiary. In any of these circumstances, wecould lose our REIT status, unless we qualified for certain statutory reliefprovisions, because we would be unable to satisfy either the 75% or 95% grossincome test.

 

***Interest.***The term “interest”generally does not include any amount received or accrued, directly orindirectly, if the determination of the amount depends in whole or in part onthe income or profits of any person. However, an amount received or accruedgenerally will not be excluded from the term “interest” solely because it isbased on a fixed percentage or percentages of receipts or sales. Furthermore,to the extent that interest from a loan that is based on the profit or net cashproceeds from the sale of the property securing the loan constitutes a “sharedappreciation provision,” income attributable to such participation feature willbe treated as gain from the sale of the secured property.

 

***Prohibited Transactions.***A REIT willincur a 100% tax on the net income derived from any sale or other dispositionof property, 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 has held theproperty for not less than four years (or, for sales made after July 30,2008, two years);

 

·                                          the aggregate expendituresmade by the REIT, or any partner of the REIT, during the four-year period (or,for sales made after July 30, 2008, two-year period) preceding the date ofthe sale that are includable in the basis of the property do not exceed 30% ofthe selling price of the property;

 

·                                          either (1) during theyear 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 of property notacquired through foreclosure or lease termination, the REIT has held theproperty 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 has made morethan 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.

 

Weintend to hold properties for investment with a view to long-term appreciation,to engage in the business of acquiring, developing, owning and operatingproperties, and to make occasional sales of properties as are consistent withour investment objective.  We cannotassure you; however, that we can comply with the safe-harbor provisions thatwould prevent the imposition of the 100% tax or that we will avoid owningproperty that may be characterized as property held “primarily for sale tocustomers in the ordinary course of a trade or business.” The 100% tax does notapply to gains from the sale of property that is held through a taxable REITsubsidiary 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 besubject to 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 acquired by a REITas the result of the REIT having bid on such property at foreclosure, or havingotherwise reduced such property to ownership or possession by agreement orprocess of law, after there was a default or default was imminent on a lease ofsuch property or on indebtedness that such property secured;

 

·                                          for which the related loanor leased property was acquired by the REIT at a time when the default was notimminent or anticipated; and

 

·                                          for which the REIT makes aproper election to treat the property as foreclosure property.

 

AREIT will not be considered to have foreclosed on a property where the REITtakes control of the property as a mortgagee-in-possession and cannot receiveany profit or sustain any loss except as a creditor of the mortgagor. Propertygenerally ceases to be foreclosure property at the end of the third taxableyear following the taxable year in which the REIT acquired the property (orlonger if an extension is granted by the Secretary of the Treasury). Thisperiod (as extended, if applicable) terminates, and foreclosure property ceasesto be foreclosure property on the first day:

 

·                                          on which a lease is enteredinto for the property that, by its terms, will give rise to income that doesnot qualify for purposes of the 75% gross income test, or any amount isreceived or accrued, directly or indirectly, pursuant to a lease entered intoon or after such day that will give rise to income that does not qualify forpurposes of the 75% gross income test;

 

·                                          on which any constructiontakes place on the property, other than completion of a building or, any otherimprovement, where more than 10% of the construction was completed beforedefault became imminent; or

 

·                                          which is more than90 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.

 

Anygain from the sale of property for which a foreclosure property election hasbeen made will not be subject to the 100% tax on gains from prohibitedtransactions described above, even if the property is held primarily for saleto customers in the ordinary course of a trade or business.  Income and gain from foreclosure property arequalifying income for the 75% and 95% gross income tests.

 

***Hedging Transactions.***From time totime, we enter into hedging transactions with respect to our assets orliabilities. Our hedging activities may include entering into interest rateswaps, caps, and floors, options to purchase such items, and futures andforward contracts. For hedging transactions entered into on or beforeJuly 30, 2008, income and gain from “hedging transactions” will beexcluded from gross income for purposes of the 95% gross income test, but notthe 75% gross income test. For hedging transactions entered into afterJuly 30, 2008, income and gain from “hedging transactions” will beexcluded from gross income for purposes of both the 75% and 95% gross incometests. A “hedging transaction” means either (1) any transaction enteredinto in the normal course of our trade or business primarily to manage the riskof interest rate, price changes, or currency fluctuations with respect toborrowings made or to be made, or ordinary obligations incurred or to beincurred, to acquire or carry real estate assets or (2) for transactionsentered into after July 30, 2008, any transaction entered into primarilyto manage the risk of currency fluctuations with respect to any item of incomeor gain that would be qualifying income under the 

 

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75%or 95% gross income test (or any property which generates such income or gain).We will 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.***If we fail tosatisfy one or both of the gross income tests for any taxable year, wenevertheless may qualify as a REIT for that year if we qualify for relief undercertain provisions of the federal income tax laws. Those relief provisions willbe available if:

 

·                                          our failure to meet thosetests is due to reasonable cause and not to willful neglect; and

 

·                                          following such failure forany taxable year, a schedule of the sources of our income is filed with theInternal Revenue Service in accordance with regulations prescribed by theSecretary of the Treasury.

 

Wecannot predict, however, whether any failure to meet these tests will qualifyfor the relief provisions. As discussed above in “Taxation of the Company as aREIT,” even if the relief provisions apply, we would incur a 100% tax on thegross income attributable to the greater of (1) the amount by which wefail the 75% gross income test, or (2) the excess of 95% of our grossincome over the amount of gross income qualifying under the 95% gross income test,multiplied, in either case, by a fraction intended to reflect ourprofitability.

 

***Asset Tests.***To maintain ourqualification as a REIT, we also must satisfy the following asset tests at theend of each quarter of each taxable year.

 

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

 

·                                          cash or cash items,including certain receivables;

 

·                                          government securities;

 

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

 

·                                          interests in mortgages onreal property (including certain mortgage-backed securities);

 

·                                          stock in other REITs; and

 

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·                                          investments in stock or debtinstruments during the one year period following our receipt of new capitalthat we raise through equity offerings or public offerings of debt with atleast a five year term.

 

Second,of our investments not included in the 75% asset class, the value of ourinterest in any one issuer’s securities may not exceed 5% of the value of ourtotal assets, or the “5% asset test”.

 

Third,of our investments not included in the 75% asset class, we may not own morethan 10% of the voting power or value of any one issuer’s outstandingsecurities, or the “10% vote test” and “10% value test”, respectively.

 

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

 

Forpurposes of the 5% asset test, the 10% vote test and 10% value test, the term “securities”does not include stock in another REIT, equity or debt securities of aqualified REIT subsidiary or taxable REIT subsidiary, mortgage loans thatconstitute real estate 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 on demand or on aspecified date a sum certain in money if (i) the debt is not convertible,directly or indirectly, into stock, and (ii) the interest rate andinterest 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 following contingencies:(1) a contingency relating to the time of payment of interest orprincipal, as long as either (i) there is no change to the effective yieldof the debt obligation, other than a change to the annual yield that does notexceed the greater of 0.25% or 5% of the annual yield, or (ii) neither theaggregate 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 an individual oran estate.

 

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

 

·                                          Any obligation to pay “rentsfrom real property.”

 

·                                          Certain securities issued bygovernmental entities.

 

·                                          Any security issued by aREIT.

 

·                                          Any debt instrument issued byan entity treated as a partnership for federal income tax purposes in which weare a partner to the extent of our proportionate interest in the debt andequity securities of the partnership.

 

·                                          Any debt instrument issuedby an entity treated as a partnership for federal income tax purposes notdescribed 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 securities issued by the partnership,without regard to the securities described in the last 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 the asset testsat the end of the preceding calendar quarter; and

 

·                                          the discrepancy between thevalue of our assets and the asset test requirements arose from changes in themarket values of our assets and was not wholly or partly caused by theacquisition of one or more non-qualifying assets.

 

Ifthe failure to satisfy the asset tests results from an acquisition ofsecurities or other property during a quarter, the failure can be cured bydisposition of sufficient nonqualifying assets within 30 days after the closeof that quarter.  We intend to maintainadequate records of the value of our assets to ensure compliance with the assettests, and to take such other action within 30 days after the close of anyquarter as may be required to cure any noncompliance.  However, there can be no assurance that suchother action will always be successful. If we fail to cure any noncompliance with the asset tests within such timeperiod, our status as a REIT would be lost.

 

Inthe event that, at the end of any calendar quarter, we violate the 5% assettest, the 10% vote test or the 10% value test described above, we will not loseour REIT status if (i) the failure is de minimis (up to the lesser of 1%of our assets or $10 million) and (ii) we dispose of assets orotherwise comply with the asset tests within six months after the last day ofthe quarter in which we identify such failure. In the event the failure to meetthe asset test is more than de minimis, we will not lose our REIT status if(i) the failure was due to reasonable cause and not to willful neglect,(ii) we file a description of each asset causing the failure with theInternal Revenue Service, (iii) we dispose of assets or otherwise complywith the asset tests within six months after the last day of the quarter inwhich we identify the failure, and (iv) we pay a tax equal to the greaterof $50,000 or 35% of the net income from the nonqualifying assets during theperiod in which we failed to satisfy the asset tests.

 

***Annual Distribution Requirements.***Each taxableyear, we must distribute dividends, other than capital gain dividends anddeemed distributions of retained capital gain, to our shareholders in anaggregate amount not less than the sum of

 

·                                          90% of our “REIT taxableincome,” computed without regard to the dividends paid deduction and our netcapital gain or loss, and

 

·                                          90% of our after-tax netincome, if any, from foreclosure property, minus

 

·                                          the sum of certain items ofnon-cash income.

 

Generally,we must pay such distributions in the taxable year to which they relate, or inthe following taxable year if either (a) we declare the distributionbefore we timely file our federal income tax return for the year and pay thedistribution on or before the first regular dividend payment date after suchdeclaration or (b) we declare the distribution in October, November, orDecember of the taxable year, payable to shareholders of record on aspecified day in any such month, and we actually pay the dividend before theend of January of the following year. In both instances, thesedistributions relate to our prior taxable year for purposes of the 90%distribution requirement.

 

Inorder for distributions to be counted towards our distribution requirement, andto provide a tax deduction to us, they must not be “preferential dividends.” Adividend is not a preferential dividend if it is *pro rata*among all outstanding shares within a particularclass, and is in accordance with the preferences among our different classes ofshares as set forth in our organizational documents.

 

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Tothe extent that we distribute at least 90%, but less than 100%, of our nettaxable income, we will be subject to tax at ordinary corporate tax rates onthe retained portion. In addition, we may elect to retain, rather thandistribute, our net long-term capital gains and pay tax on such gains. In thiscase, we would elect to have our shareholders include their proportionate shareof such undistributed long-term capital gains in their income and receive acorresponding credit for their proportionate share of the tax paid by us. Ourshareholders would then increase their adjusted basis in our shares by thedifference between the amount included in their long-term capital gains and thetax deemed paid with respect to their shares.

 

Ifwe fail to distribute during a calendar year, or by the end of January ofthe following calendar year in the case of distributions with declaration andrecord dates falling in the last three months of the calendar year, at leastthe sum of:

 

·                                          85% of our REIT ordinaryincome for the year,

 

·                                          95% of our REIT capital gainincome for the year, and

 

·                                          any undistributed taxableincome from prior periods, we will incur a 4% nondeductible excise tax on theexcess of such required distribution over the amounts we actually distributed.If we so elect, we will be treated as having distributed any such retainedamount for purposes of the 4% nondeductible excise tax described above.

 

Itis possible that, from time to time, we may experience timing differencesbetween the actual receipt of income and actual payment of deductible expensesand the inclusion of that income and deduction of such expenses in arriving atour REIT taxable income. For example, because we may deduct capital losses onlyto the extent of our capital gains, our REIT taxable income may exceed oureconomic income.   Further, it ispossible that, from time to time, we may be allocated a share of net capitalgain from a partnership in which we own an interest attributable to the sale ofdepreciated property that exceeds our allocable share of cash attributable tothat sale. Although several types of non-cash income are excluded indetermining the annual distribution requirement, we will incur corporate incometax and the 4% nondeductible excise tax with respect to those non-cash incomeitems if we do not distribute those items on a current basis. As a result ofthe foregoing, we may have less cash than is necessary to distribute all of ourtaxable income and thereby avoid corporate income tax and the 4% nondeductibleexcise tax imposed on certain undistributed income. In such a situation, we mayissue additional common or preferred shares, we may borrow or may cause theoperating partnership to arrange for short-term or possibly long-term borrowingto permit the payment of required distributions, or we may pay dividends in theform of taxable in-kind distributions of property, including potentially, ourshares.

 

Undercertain circumstances, we may be able to correct a failure to meet thedistribution requirement for a year by paying “deficiency dividends” to ourshareholders in a later year. We may include such deficiency dividends in ourdeduction for dividends paid for the earlier year. Although we may be able toavoid income tax on amounts distributed as deficiency dividends, we will berequired to pay interest to the Internal Revenue Service based upon the amountof any deduction we take for deficiency dividends.

 

***Recordkeeping Requirements.***We mustmaintain certain records in order to qualify as a REIT. In addition, to avoidpaying 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.***If we were tofail to qualify as a REIT in any taxable year and no relief provision applied,we would have the following consequences: We would be subject to federal incometax and any applicable alternative minimum tax at regular corporate ratesapplicable to regular C corporations on our taxable income, determined withoutreduction for amounts distributed to shareholders. We would not be required tomake any distributions to shareholders. Unless we qualified for relief underspecific statutory provisions, we would not be permitted to elect taxation as aREIT for the four taxable years following the year during which we ceased toqualify as a REIT.

 

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Ifwe fail to satisfy one or more requirements for REIT qualification, other thanthe gross income tests and the asset tests, we could avoid disqualification ifour failure is due to reasonable cause and not to willful neglect and we pay apenalty of $50,000 for each such failure. In addition, there are reliefprovisions for a failure of the gross income tests and asset tests, asdescribed in “Requirements for Qualification — Gross Income Tests” and “Requirementsfor Qualification — Asset Tests.” It is not possible to state whether in allcircumstances the Company would be entitled to such statutory relief.

 

***State and Local Taxes.***We may besubject to taxation by various states and localities, including those in whichwe transact business or own property. The state and local tax treatment in suchjurisdictions may differ from the federal income tax treatment described above.

 

**TaxAspects of Investments in the Operating Partnership and Subsidiary Partnerships**

 

***Tax Aspects of Our Investments inthe Operating 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.***We are requiredto include in our income our distributive share of each Partnership’s incomeand to deduct our distributive share of each Partnership’s losses but only ifsuch Partnership is classified for federal income tax purposes as a partnership(or an entity that is disregarded for federal income tax purposes if the entityhas only one owner or member), rather than as a corporation or an associationtaxable as a corporation.

 

Anorganization with at least two owners or members will be classified as apartnership, rather than as a corporation, for federal income tax purposes ifit:

 

·                                          is treated as a partnershipunder the Treasury regulations relating to entity classification (the “check-the-boxregulations”); and

 

·                                          is not a “publicly traded”partnership.

 

Underthe check-the-box regulations, an unincorporated entity with at least twoowners or members may elect to be classified either as an association taxableas a corporation or as a partnership. If such an entity does not make anelection, it generally will be treated as a partnership for federal income taxpurposes. We intend that each Partnership will be classified as a partnershipfor federal income tax purposes (or else a disregarded entity where there arenot at least two separate beneficial owners).

 

Apublicly traded partnership is a partnership whose interests are traded on anestablished securities market or are readily tradable on a secondary market (ora substantial equivalent). A publicly traded partnership is generally treatedas a corporation for federal income tax purposes, but will not be so treatedif, for each taxable year beginning after December 31, 1987 in which itwas classified as a publicly traded partnership, at least 90% of thepartnership’s gross income consisted of specified passive income, includingreal property rents (which includes rents that would be qualifying income forpurposes of the 75% gross income test, with certain modifications that make iteasier for the rents to qualify for the 90% passive income exception), gainsfrom the sale or other disposition of real property, interest, and dividends (the“90% passive income exception”).

 

Treasuryregulations, referred to as PTP regulations, provide limited safe harbors fromtreatment as a publicly traded partnership. Pursuant to one of those safeharbors (the “private placement exclusion”), interests in a partnership willnot be treated as readily tradable on a secondary market or the substantialequivalent thereof if (1) all interests in the partnership were issued ina transaction or transactions that were not required to be registered under theSecurities Act of 1933, as amended, and (2) the partnership does not havemore than 100 partners at any time during the partnership’s taxable year. Forthe determination of the number of partners in a partnership, a person owningan interest in a partnership, grantor trust, or S corporation that owns aninterest in the partnership is treated 

 

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asa partner in the partnership only if (1) substantially all of the value ofthe owner’s interest in the entity is attributable to the entity’s direct orindirect interest in the partnership and (2) a principal purpose of theuse of the entity is to permit the partnership to satisfy the 100-partnerlimitation. The Company believes that each Partnership should qualify for theprivate placement exclusion.

 

Wehave not requested, and do not intend to request, a ruling from the InternalRevenue Service that the Partnerships will be classified as partnerships (ordisregarded entities, if the entity has only one owner or member) for federalincome tax purposes.  If for any reason a Partnership were taxable as acorporation, rather than as a partnership, for federal income tax purposes, wemay not be able to qualify as a REIT, unless we qualify for certain reliefprovisions. See “Requirements for Qualification — Gross Income Tests” and “Requirementsfor Qualification — Asset Tests.” In addition, any change in a Partnership’sstatus for tax purposes might be treated as a taxable event, in which case wemight incur tax liability without any related cash distribution. See “Requirementsfor Qualification — Annual Distribution Requirements.” Further, items of incomeand deduction of such Partnership would not pass through to its partners, andits partners would be treated as shareholders for tax purposes. Consequently,such Partnership would be required to pay income tax at corporate rates on itsnet income, and distributions to its partners would constitute dividends thatwould not be deductible in computing such Partnership’s taxable income.

 

***Partners, Not the Partnerships,Subject to Tax.***A partnership is not a taxable entity for federalincome tax purposes. We will therefore take into account our allocable share ofeach Partnership’s income, gains, losses, deductions, and credits for eachtaxable year of the Partnership ending with or within our taxable year, even ifwe receive no distribution from the Partnership for that year or a distributionless than our share of taxable income. Similarly, even if we receive adistribution, it may not be taxable if the distribution does not exceed ouradjusted tax basis in our interest in the Partnership.

 

***Partnership Allocations.***Although apartnership 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 toContributed Properties.***Income, gain, loss, anddeduction attributable to (a) appreciated or depreciated property that iscontributed to a partnership in exchange for an interest in the partnership or(b) property revalued on the books of a partnership must be allocated in amanner such that the contributing partner is charged with, or benefits from,respectively, the unrealized gain or unrealized loss associated with theproperty at the time of the contribution. The amount of such unrealized gain orunrealized loss, referred to as “built-in gain” or “built-in loss,” isgenerally equal to the difference between the fair market value of thecontributed or revalued property at the time of contribution or revaluation andthe adjusted tax basis of such property at that time, referred to as a book-taxdifference. Such allocations are solely for federal income tax purposes and donot affect the book capital accounts or other economic or legal arrangementsamong the partners. The U.S. Treasury Department has issued regulationsrequiring partnerships to use a “reasonable method” for allocating items withrespect to which there is a book-tax difference and outlining severalreasonable allocation methods. Unless we, as general partner, select adifferent method, our operating partnership will use the traditional method forallocating items with 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 in our Partnerships include appreciatedproperty contributed by its partners. Assets contributed to a Partnership in a tax-free transaction generallyretain the same depreciation method and recovery period as they had in thehands of the partner who contributed them to the partnership.  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.***Our adjustedtax basis in any partnership interest we own generally will be:

 

·                                          the amount of cash and thebasis of any other property we contribute to the partnership;

 

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

 

·                                          reduced, but not below zero,by our allocable share of the partnership’s loss (excluding any non-deductibleitems), the amount of cash and the basis of property distributed to us, andconstructive distributions resulting from a reduction in our share ofindebtedness of the partnership.

 

Lossallocated to us in excess of our basis in a partnership interest will not betaken into account until we again have basis sufficient to absorb the loss. Areduction of our share of partnership indebtedness will be treated as aconstructive cash distribution to us, and will reduce our adjusted tax basis.Distributions, including constructive distributions, in excess of the basis ofour partnership interest will constitute taxable income to us. Suchdistributions and constructive distributions normally will be characterized aslong-term capital gain.

 

***Sale of a Partnership’s Property.***Generally, anygain realized by a Partnership on the sale of property held for more than oneyear will be long-term capital gain, except for any portion of the gain treatedas depreciation or cost recovery recapture. Any gain or loss recognized by aPartnership on the disposition of contributed or revalued properties will beallocated 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.

 

Ourshare of any Partnership gain from the sale of inventory or other property heldprimarily for sale to customers in the ordinary course of the Partnership’strade or business will be treated as income from a prohibited transactionsubject to a 100% tax. Income from a prohibited transaction may have an adverseeffect on our ability to satisfy the gross income tests for REIT status. See “Requirementsfor Qualification — Gross Income Tests.” We do not presently intend to acquireor hold, 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.

 

**Taxationof Taxable U.S. Shareholders**

 

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

 

·                                          a citizen or resident of theUnited States;

 

·                                          a corporation (including anentity treated as a corporation for federal income tax purposes) created ororganized under the laws of the United States, any of its states or theDistrict of Columbia;

 

·                                          an estate whose income issubject to U.S. federal income taxation regardless of its source; or

 

·                                          any trust if (1) a U.S.court is able to exercise primary supervision over the administration of suchtrust 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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Ifa partnership, entity or arrangement treated as a partnership for federalincome tax purposes holds our common shares, the federal income tax treatmentof a partner in the partnership will generally depend on the status of thepartner and the activities of the partnership. If you are a partner in apartnership holding our common shares, you should consult your tax advisorregarding the consequences of the ownership and disposition of our commonshares by the partnership

 

***Taxation of U.S. Shareholders onDistributions. ***As long as wequalify as a REIT, a taxable “U.S. shareholder” will be required to take intoaccount as ordinary income distributions made out of our current or accumulatedearnings and profits that we do not designate as capital gain dividends orretained long-term capital gain. A U.S. shareholder will not qualify for thedividends-received deduction generally available to corporations. Dividendspaid to a U.S. shareholder generally will not qualify for the 15% tax rate for “qualifieddividend income.” Legislation enacted in 2003 and 2006 reduced the maximum taxrate for qualified dividend income to 15% for tax years 2003 through 2010.Without future congressional action, in 2011 the maximum tax rate on qualifieddividend income will revert to the rate then applicable to ordinary income.Qualified dividend income generally includes dividends paid by domestic Ccorporations and certain qualified foreign corporations to most noncorporateU.S. shareholders. Because a REIT is not generally subject to federal incometax on the portion of its REIT taxable income distributed to its shareholders,our dividends generally will not be eligible for the 15% rate on qualifieddividend income. As a result, our ordinary REIT dividends will be taxed at thehigher rate applicable to ordinary income. Currently, the highest marginalindividual income tax rate on ordinary income is 35%. However, the 15% tax ratefor qualified dividend income will apply to our ordinary REIT dividends, ifany, that are (i) attributable to dividends received by us from non-REITcorporations, such as our taxable REIT subsidiaries, and (ii) attributableto income upon which we have paid corporate income tax (e.g., to the extentthat we distribute less than 100% of our taxable income). In general, toqualify for the reduced tax rate on qualified dividend income, a U.S. shareholdermust hold our common shares for more than 60 days during the 121-dayperiod beginning on the date that is 60 days before the date on which ourcommon shares becomes ex-dividend.

 

Wemay distribute taxable dividends that are a payable partly in cash and partlyin shares of our common stock.  TaxableU.S. shareholders receiving such dividends will be required to include the fullamount of the dividends as ordinary income to the extent of our current andaccumulated earnings and profits.

 

Anydistribution we declare in October, November, or December of any year thatis payable to a U.S. shareholder of record on a specified date in any of thosemonths will be treated as paid by us and received by the U.S. shareholder onDecember 31 of the year, provided we actually pay the distribution duringJanuary of the following calendar year.

 

Distributionsto a U.S. shareholder which we designate as capital gain dividends willgenerally be treated as long-term capital gain, without regard to the periodfor which the U.S. shareholder has held its common shares. We generally willdesignate our capital gain dividends as either 15% or 25% rate distributions.Without future congressional action, in 2011 the maximum tax rate on capitalgain dividends will revert to 20%.  A corporateU.S. shareholder, however, may be required to treat up to 20% of certaincapital gain dividends as ordinary income.

 

Wemay elect to retain and pay income tax on the net long-term capital gain thatwe receive in a taxable year. In that case, a U.S. shareholder would be taxedon its proportionate share of our undistributed long-term capital gain. TheU.S. shareholder would receive a credit or refund for its proportionate shareof the tax we paid. The U.S. shareholder would increase the basis in its commonshares by the amount of its proportionate share of our undistributed long-termcapital gain, minus its share of the tax we paid.

 

AU.S. shareholder will not incur tax on a distribution in excess of our currentand accumulated earnings and profits if the distribution does not exceed theadjusted basis of the U.S. shareholder’s common shares. Instead, thedistribution will reduce the adjusted basis of the shares, and any amount inexcess of both our current and accumulated earnings and profits and the adjustedbasis will be treated as capital gain, long-term if the shares have been heldfor more than one year, provided the shares are a capital asset in the hands ofthe U.S. shareholder.

 

Shareholdersmay not include in their individual income tax returns any of our net operatinglosses or capital losses. Instead, these losses are generally carried over byus for potential offset against our future income. Taxable distributions fromus and gain from the disposition of common shares will not be treated as passiveactivity 

 

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income;and, therefore, shareholders generally will not be able to apply any “passiveactivity losses,” such as losses from certain types of limited partnerships inwhich the shareholder is a limited partner, against such income. In addition,taxable distributions from us and gain from the disposition of common sharesgenerally will be treated as investment income for purposes of the investmentinterest limitations. We will notify shareholders after the close of ourtaxable year as to the portions of the distributions attributable to that yearthat constitute ordinary income, return of 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.

 

Ifa U.S. shareholder recognizes a loss upon a subsequent disposition of ourshares in an amount that exceeds a prescribed threshold, it is possible thatthe provisions of Treasury Regulations involving “reportable transactions”could apply, with a resulting requirement to separately disclose the lossgenerating transactions to the IRS. While these regulations are directedtowards “tax shelters,” they are written broadly, and apply to transactions thatwould not typically be considered tax shelters. Significant penalties apply forfailure to comply with these requirements. You should consult your tax advisorsconcerning any possible disclosure obligation with respect to the receipt ordisposition of our shares, or transactions that might be undertaken directly orindirectly by us. Moreover, you should be aware that we and other participantsin transactions involving us (including our advisors) might be subject todisclosure or other requirements pursuant to these regulations.

 

Thetax-rate differential between capital gain and ordinary income fornon-corporate taxpayers may be significant. A taxpayer generally must hold acapital asset for more than one year for gain or loss derived from its sale orexchange to be treated as long-term capital gain or loss. The highest marginalindividual income tax rate is currently 35% (which rate will apply for theperiod through December 31, 2010). The maximum tax rate on long-termcapital gain applicable to U.S. shareholders taxed at individual rates is 15%through December 31, 2010. Without future congressional action, in 2011the maximum tax rate on long term capital gains will revert to 20%.  The maximum tax rate on long-term capitalgain from the sale or exchange of “section 1250 property” (i.e., generally,depreciable real property) is 25% to the extent the gain would have beentreated as ordinary income if the property were “section 1245 property” (i.e.,generally, depreciable personal property). We generally may designate whether adistribution we designate as capital gain dividends (and any retained capitalgain that we are deemed to distribute) is taxable to non-corporate shareholdersat a 15% or 25% rate. The characterization of income as capital gain or ordinaryincome may affect the deductibility of capital losses. A non-corporate taxpayermay deduct capital losses not offset by capital gains against its ordinaryincome only up to a maximum of $3,000 annually. A non-corporate taxpayer maycarry unused capital losses forward indefinitely. A corporate taxpayer must paytax on its net capital gain at corporate ordinary-income rates. A corporatetaxpayer may deduct capital losses only to the extent of capital gains, withunused losses carried back three years and forward five years.

 

***New Health Care Legislation***

 

OnMarch 30, 2010, the President signed into law the Health Care andReconciliation Act of 2010 (the “Reconciliation Act”).  The Reconciliation Act will require certainU.S. Shareholders who are individuals, estates or trusts and whose incomeexceeds certain thresholds to pay a 3.8% Medicare tax on, among other things,dividends on and capital gains from the sale or other disposition of shares,subject to certain exceptions.  This taxwill apply for taxable years beginning after December 31, 2012.  U.S. shareholders should consult their taxadvisors regarding the effect, if any, of this legislation on their ownershipand disposition of our common shares

 

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***Information Reporting Requirementsand Backup Withholding.***We will report to ourshareholders and to the Internal Revenue Service the amount of distributions wepay during each calendar year and the amount of tax we withhold, if any. Ashareholder may be subject to backup withholding at a rate of up to 28% withrespect to distributions unless the holder:

 

·                                          is a corporation or comeswithin certain other exempt categories and, when required, demonstrates thisfact; or

 

·                                          provides a taxpayeridentification number, certifies as to no loss of exemption from backupwithholding, and otherwise complies with the applicable requirements of thebackup withholding rules.

 

Ashareholder who does not provide us with its correct taxpayer identificationnumber also may be subject to penalties imposed by the Internal RevenueService.  In addition, we may be requiredto withhold a portion of capital gain distributions to any shareholders whofail to certify their non-foreign status to us. 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.

 

**Taxationof Tax-Exempt Shareholders**

 

Tax-exemptentities, including qualified employee pension and profit sharing trusts andindividual retirement accounts and annuities, generally are exempt from federalincome taxation. However, they are subject to taxation on their “unrelated businesstaxable income.” While many investments in real estate generate unrelatedbusiness taxable income, the Internal Revenue Service has issued a ruling thatdividend distributions from a REIT to an exempt employee pension trust do notconstitute unrelated business taxable income so long as the exempt employeepension trust does not otherwise use the shares of the REIT in an unrelatedtrade or business of the pension trust. Based on that ruling, amounts wedistribute to tax-exempt shareholders generally should not constitute unrelatedbusiness taxable income. However, if a tax-exempt shareholder were to financeits acquisition of common shares with debt, a portion of the income it receivedfrom us would constitute unrelated business taxable income pursuant to the “debt-financedproperty” rules. Furthermore, social clubs, voluntary employee benefitassociations, supplemental unemployment benefit trusts, and qualified grouplegal services plans that are exempt from taxation under special provisions ofthe federal income tax laws are subject to different unrelated business taxableincome rules, which generally will require them to characterize distributionsthey receive from us as unrelated business taxable income.

 

Incertain circumstances, a qualified employee pension or profit-sharing trustthat owns more than 10% of our shares of beneficial interest (by value) musttreat a percentage of the dividends it receives from us as unrelated businesstaxable income. Such percentage is equal to the gross income we derive from anunrelated trade or business, determined as if we were a pension trust, dividedby our total gross income for the year in which we pay the dividends. Thisrule applies to a pension trust holding more than 10% of our shares onlyif:

 

·                                          the percentage of ourdividends which the tax-exempt trust must treat as unrelated business taxableincome is at least 5%;

 

·                                          we are a “pension-held REIT,that is, we qualify as a REIT by reason of the modification of therule requiring that no more than 50% of our shares of beneficial interestbe owned by five or fewer individuals that allows the beneficiaries of thepension trust to be treated as holding our shares in proportion to theiractuarial interests in the pension trust; and either: (i) one pensiontrust owns more than 25% of the value of our shares of beneficial interest; or (ii) one or more pension trusts each individually holding more than 10% of the valueof our shares of beneficial interest collectively owns more than 50% of thevalue of our shares of beneficial interest.

 

Certainrestrictions on ownership and transfer of our shares should generally prevent atax-exempt entity from owning more than 10% of the value of our shares, or usfrom becoming a pension-held REIT.

 

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**Tax-exempt U.S. shareholders are urged to consult their tax advisorregarding the U.S. federal, state, local and foreign tax consequences of theacquisition, ownership and disposition of our shares.**

 

**Taxationof Non-U.S. Shareholders**

 

Theterm “non-U.S. shareholder” means a holder of our common shares that is not aU.S. shareholder or a partnership (or an entity treated as a partnership forfederal income tax purposes). The rules governing U.S. federal 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 treaty rate appliesand the non-U.S. shareholder files an IRS Form W-8BEN evidencingeligibility for that reduced rate with us; or

 

·                                          the non-U.S. shareholderfiles an IRS Form W-8ECI with us claiming that the distribution iseffectively connected income.

 

Anon-U.S. shareholder will not incur tax on a distribution in excess of ourcurrent and accumulated earnings and profits if the excess portion of suchdistribution does not exceed the adjusted basis of its common shares. Instead,the excess portion of the distribution will reduce the adjusted basis of suchshares. A non-U.S. shareholder will be subject to tax on a distribution thatexceeds both our current and accumulated earnings and profits and the adjustedbasis of its shares, if the non-U.S. shareholder otherwise would be subject totax on gain from the sale or disposition of common shares, as described below.Because we generally cannot determine at the time we make a distributionwhether the distribution will exceed our current and accumulated earnings andprofits, we normally will withhold tax on the entire amount of any distributionat the same rate as we would withhold on a dividend. However, a non-U.S.shareholder may obtain a refund of amounts we withhold if we later determinethat a distribution in fact exceeded our current and accumulated earnings andprofits.

 

Wemay be required to withhold 10% of any distribution that exceeds our currentand accumulated earnings and profits. Consequently, although we intend towithhold at a rate of 30% on the entire amount of any distribution, to theextent we do not do so, we may withhold at a rate of 10% on any portion of adistribution not subject to withholding at a rate of 30%.

 

Forany year in which we qualify as a REIT, except as discussed below with respectto 5% or less holders of regularly traded classes of shares, a non-U.S.shareholder will incur tax on distributions attributable to gain from our saleor exchange of a USRPI under the Foreign Investment in Real Property Tax Act of1980, or “FIRPTA”. A USRPI includes certain interests in real property andshares in corporations at least 50% of whose assets consist of interests inreal property. Under FIRPTA, a non-U.S. shareholder is taxed on distributionsattributable to gain from sales of USRPIs as if the gain were effectivelyconnected with the conduct of a U.S. business of the non-U.S. shareholder. Anon-U.S. shareholder would be taxed on such a distribution at the normalcapital gain rates applicable to U.S. shareholders, subject to applicablealternative minimum tax and a special alternative minimum tax in the case of anonresident alien individual. A non-U.S. corporate shareholder not entitled totreaty relief or exemption also may be subject to the 30% branch profits tax onsuch a distribution. We must withhold 35% of any 

 

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distributionthat we could designate as a capital gain dividend. A non-U.S. shareholder mayreceive a credit against our tax liability for the amount we withhold.

 

Capitalgain distributions to the holders of our common shares that are attributable toour sale of real property will be treated as ordinary dividends rather than asgain from the sale of a USRPI, as long as (i) our common shares continueto be “regularly traded” on an established securities market in the UnitedStates and (ii) the non-U.S. shareholder did not own more than 5% of ourcommon shares any time during the one-year period prior to the distribution. Asa result, non-U.S. shareholders owning 5% or less of our common sharesgenerally would be subject to withholding tax on such capital gaindistributions in the same manner as they are subject to withholding tax onordinary dividends. If our common shares cease to be regularly traded on anestablished securities market in the United States or the non-U.S. shareholderowned more than 5% of our common shares any time during the one-year periodprior to the distribution, capital gain distributions that are attributable toour sale of real property would be subject to tax under FIRPTA, as described inthe preceding paragraph.

 

***Taxation of Disposition of Shares.***  A non-U.S. shareholder generally will notincur tax under FIRPTA with respect to gain on a sale of common shares as longas we are a “domestically-controlled REIT,” which means that at all timesnon-U.S. persons hold, directly or indirectly, less than 50% in value of theoutstanding common shares. We cannot assure you that this test will be met.Further, even if we are a domestically controlled REIT, pursuant to “wash sale”rules under FIRPTA, a non-U.S. shareholder may incur tax underFIRPTA.  The “wash sale” rule appliesto the extent such non-U.S. shareholder disposes of our shares during the30-day period preceding a dividend payment, and such non-U.S. shareholder (or aperson related to such non-U.S. shareholder) acquires or enters into a contractor option to acquire our common shares within 61 days of the 1st dayof the 30 day period described above, and any portion of such dividendpayment would, but for the disposition, be treated as a USRPI capital gain tosuch non-U.S. shareholder, then such non-U.S. shareholder shall be treated ashaving USRPI capital gain in an amount that, but for the disposition, wouldhave been treated as USRPI capital gain.

 

Inaddition, a non-U.S. shareholder that owned, actually or constructively, 5% orless of the outstanding common shares at all times during a specified testingperiod will not incur tax under FIRPTA on gain from a sale of common shares ifthe shares are “regularly traded” on an established securities market. Becauseour common shares are “regularly traded” on an established securities market,we expect that a non-U.S. shareholder generally will not incur tax under FIRPTAon gain from a sale of common shares unless it owns or has owned more than 5%of the common shares at any time during the five year period to such sale. Anygain subject to tax under FIRPTA will be treated in the same manner as it wouldbe in 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.

 

Anon-U.S. shareholder generally will incur tax on gain not subject to FIRPTA if:

 

·                                          the gain is effectivelyconnected with the conduct of the non-U.S. shareholder’s U.S. trade orbusiness, 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 isa nonresident alien individual who was present in the U.S. for 183 days ormore during the taxable year and has a “tax home” in the United States, inwhich case the non-U.S. shareholder will incur a 30% tax on capital gains.

 

***Information Reporting and Backup WithholdingApplicable 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.

 

Paymentsof dividends or of proceeds from the disposition of stock made to a non-U.S.shareholder may be subject to information reporting and backup withholding unlesssuch holder establishes an exemption, for example, by properly certifying itsnon-United States status on an IRS Form W-8 BEN or another appropriateversion of IRS 

 

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Form W-8.Notwithstanding the foregoing, backup withholding may apply if either we or ourpaying agent has actual knowledge, or reason to know, that a non-U.S.shareholder is a United States person.

 

Backupwithholding is not an additional tax. Any amounts withheld under the backup withholding rules may beallowed as a refund or a credit against the shareholder’s income tax liability,provided the required information is furnished to the Internal Revenue Service.

 

**NewLegislation Relating to Foreign Accounts**

 

OnMarch 18, 2010 the President signed into law the Hiring Incentives toRestore Employment Act (the “HIRE Act”). The HIRE act may impose withholding taxes on certain types of paymentsmade to “foreign financial institutions and “non-financial foreign entities”(as defined under these rules). The legislation imposes a 30% withholding tax on dividends on,or gross proceeds from the sale or other disposition of, our common shares paidto a foreign financial institution or to a non-financial foreign entity, unless(i) the foreign financial institution undertakes certain diligence andreporting obligations with respect to certain U.S. account holders or (ii) thenon-financial foreign entity either certifies it does not have any substantialU.S. owners or furnishes identifying information regarding each substantialU.S. owner. If the payee is a foreign financial institution, it must enter intoan agreement with the United States Treasury requiring, among other things,that it undertake to identify accounts held by certain U.S. persons or U.S.-ownedforeign entities, annually report certain information about such accounts, andwithhold 30% on payments to account holders whose actions prevent it fromcomplying with these reporting and other requirements. The legislation wouldapply to payments made after December 31, 2012. Prospective investorsshould consult their tax advisors regarding the possible implications of this legislation on their investment in our common shares.

 

**Legislativeor Other Actions Affecting REITs**

 

Therules dealing with U.S. federal income taxation are constantly underreview by persons involved in the legislative process and by the InternalRevenue Service and the U.S. Treasury Department. No assurance can be given asto whether, when, or in what form, the U.S. federal income tax laws applicableto us and our shareholders may be enacted. Changes to the U.S. federal tax lawsand interpretations of U.S. federal tax laws could adversely affect aninvestment in our shares.

 

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