Real Estate Investment Trust (REIT) Due Diligence Supplemental Checklist

REIT Due Diligence Supplemental Checklist

1. Verify ownership of real properties, confirm their tax bases, and determine whether and to what extent any of the properties are pledged or otherwise encumbered by debt. Current appraisals of these properties also will be needed for purposes of Internal Revenue Code Sections 382 and 1374.

2. Determine the potential impact of proposed tax legislation that may affect the transaction, including legislation governing REIT taxation and elections.

3. If Target is not a REIT, verify that Target has never been a REIT.

4. If Target is not a REIT, verify that Target does not have any current or accumulated earnings and profits and will not have any such earnings and profits prior to the effective date of its REIT election. If Target is determined to have earnings and profits, provide for the distribution of such earnings and profits prior to the effective date of the REIT election.

5. Confirm that Target does not and will not own securities with respect to an issuer (excluding government securities) that represent either (a) more than 5% of the value of Target's assets or (b) more than 10% of the outstanding voting securities of such issuer. Determine whether Target has any wholly owned subsidiaries, and, if Target has any such subsidiaries, obtain a copy of a private letter ruling from the IRS that such subsidiaries will be treated as qualified REIT subsidiaries under Section 856(i) of the Code.

6. Review the property leases of Target for REIT qualification purposes. In particular, confirm that Target does not, and following completion of the Transaction will not own, directly or indirectly, including by attribution from any of its shareholders who own or are deemed to own at least 10% the stock of Target pursuant to the rules for determining constructive ownership of stock under Sections 856(d)(5) and 318 of the Code, (a) 10% or more of combined voting power or total number of shares of any corporation which is a tenant of any property in which Target, directly or indirectly, holds or following completion of the Transaction will hold an interest, or (b) 10% or more of the assets or net profits of any entity which is not a corporation and which is a tenant of any property in which Target, directly or indirectly, holds or following completion of the Transaction will hold an interest (a "Related Party Tenant"). If any of the tenants of any property in which Target, directly or indirectly, holds or will hold an interest is a Related Party Tenant, verify that rents from such Related Party Tenant will not cause Target to fail to qualify as a REIT under the 95% and 75% gross income tests of Section 856(c)(2) and (3) of the Code.

7. Confirm that any services which are being provided to any tenant at any of the properties in which Target, directly or indirectly, holds or following completion of the Transaction will hold any interest, are "usual and customary" within the meaning of Treasury Regulations Section 1.856-4(b)(5), or have been rendered by an "independent contractor" which satisfies the requirements of Section 856(d)(3) of the Code. If any services to any tenants of any property in which Target holds or following completion of the Transaction will hold a direct or indirect interest do not satisfy the test set forth in the preceding sentence, confirm that rent from such tenants will not cause Target to fail to qualify as a REIT under the 95% and 75% gross income tests of Section 856(c)(2) and (3) of the Code.

8. Confirm that any parking facility leased in connection with any property in which Target holds or following completion of the Transaction will hold a direct or indirect interest is on a non reserved basis and no fees are collected from customers or employees of any tenant for the use of any such parking facility. Confirm that any parking attendants or valet service are provided through an "independent contractor" as described above.

9. Confirm that no rent paid by any tenant of any property in which Target holds or following completion of the Transaction will hold a direct or indirect interest is a percentage rent (other than rent which is a fixed percentage of gross receipts, whether or not adjusted for returned merchandise, or federal or state or local sales taxes, and whether or not differing (but fixed) percentages of receipts or sales apply to discrete departments or floors of leased retail space). Confirm that any rents which do not satisfy the preceding sentence will not cause Target to fail to qualify as a REIT under the 95% and 75% gross income tests of Section 856(c)(2) and (3) of the Code.

10. Confirm that no rent which is or following completion of the Transaction will be paid directly or indirectly to Target is attributable to the lease of personal property, except in the case of personal property leased in connection with real property where the average adjusted basis of such personal property is less than or equal to 15% of the combined average adjusted basis of all property to which such lease relates, determined at the beginning and end of each taxable year (the "15% Personal Property Test"). Confirm that rents attributable to personal property which do not satisfy the "15% Personal Property Test" will not cause Target to fail to qualify as a REIT under the 95% and 75% gross income tests of Section 856(c)(2) and (3) of the Code.

11. Confirm that all rent being paid or that following completion of the Transaction will be paid directly or indirectly to Target represents market value for the use of the leased property, and in the case of any "stepped rents" such rents are reasonable in light of market conditions and projections at the time the lease was entered into. Confirm that any rents which do not satisfy the test set forth in the preceding sentence will not cause Target to fail to qualify as a REIT under the 95% and 75% gross income tests of Section 856(c)(2) and (3) of the Code.

12. Confirm that any leases from which Target receives or following completion of the Transaction will receive rent, directly or indirectly, are true leases for federal income tax purposes (as distinguished from financing arrangements). Confirm that any rents which do not satisfy the test set forth in the preceding sentence will not cause Target to fail to qualify as a REIT under the 95% and 75% gross income tests of Section 856(c)(2) and (3) of the Code.

13. Confirm that Target does not and following completion of the Transaction will not hold an interest, directly or indirectly, in any property which would be "foreclosure property" within the meaning of Section 856(e)(1) of the Code.

14. Confirm that Target does not hold and following completion of the Transaction will not hold, directly or indirectly, an interest in any property which is stock in trade or property includable in its inventory or which is held primarily for sale to customers in the ordinary course of a trade or business as described in Section 1221(1) of the Code.

15. Determine whether Target will satisfy each of the 95% test, 75% test, 30% test, and the asset test of Section 856(c)(2), (3), (4), and (5) of the Code for each taxable year including and following the Transaction, and, if not, determine appropriate restructuring in order to facilitate REIT qualification.

16. Confirm that following the Transaction, the cash flow of Target and its ability to pay dividends will be sufficient in order that Target's dividends-paid deduction for a taxable year pursuant to Section 857(a)(1) of the Code will exceed the sum of 95% of (a) its REIT taxable income computed without regard to (1) the deduction for dividends paid for such taxable year and (2) any net capital gain in such taxable year, plus (b) 95% of any net income from "foreclosure property" less the tax imposed thereon in such taxable year, minus (c) any "excess noncash income" as defined in Section 857(e) of the Code. In particular, any lender covenants restricting the ability of Target to pay dividends should be reviewed.

17. Identify the stock holdings of foreign shareholders of Target in order to assess the possible exposure for withholding tax.

18. Identify any obligations imposed upon Target pursuant to Section 3406 of the Code for back-up withholding by verifying that stockholders furnished and certified taxpayer identification numbers where required to do so, and that Target withheld in accordance with back-up withholding requirements when such taxpayer identification numbers were not supplied and certified or it otherwise was required to withhold.

19. Review the charter and by-laws of Target and determine appropriate modifications to safeguard REIT qualification. Confirm presence of "excess share" provision in Target's charter in order to prevent Target from possibly failing the 5/50 test if ownership becomes concentrated.

20. Verify that Target will satisfy the 100 shareholder and 5/50 tests of Section 856(a)(5) and (6) of the Code beginning with the first year of the REIT election.

21. If applicable, determine the transfer and property tax implications of the contemplated transfer of the Target properties to the operating entity, including, with respect to the California properties, whether the tax assessment of such properties following transfer would be increased to fair market value under Proposition 13.