UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
September 29, 2009
Date of Report (Date of Earliest Event Reported)
SOVRAN SELF STORAGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Maryland
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1-13820
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16-1194043
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(State of Other Jurisdiction
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(Commission
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(I.R.S. Employer
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Of Incorporation)
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File Number)
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Identification Number)
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6467 Main Street
Williamsville, New York 14221
(Address of Principal Executive Offices)
(716) 633-1850
(Registrants Telephone Number, Including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions (
see
General Instruction
A.2. below):
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Written Communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
TABLE OF CONTENTS
Item 8.01. Other Events
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
Sovran Self Storage, Inc. (the Company or Sovran) is filing a description of the material
federal income tax considerations relating to the taxation of the Company as a real estate
investment trust (a REIT) and the acquisition, ownership and disposition of the Companys common
shares. This description replaces and supersedes prior descriptions of the material federal income
tax treatment of the Company and its shareholders to the extent that they are inconsistent with the
description contained in this Current Report on Form 8-K.
The following discussion describes the material federal income tax consequences relating to
the taxation of us as a REIT and the acquisition, ownership and disposition of our common shares.
For purposes of hereof, references to we, our and us mean only Sovran Self Storage, Inc. and
not its subsidiaries or other lower-tier entities or predecessor, except as otherwise indicated.
References to the operating partnership mean Sovran Acquisition Limited Partnership, our
operating partnership. The following discussion is not exhaustive of all possible tax
considerations and is not tax advice. The provisions of the Internal Revenue Code governing the
federal income tax treatment of REITs are highly technical and complex, and this summary is
qualified in its entirety by the applicable Code provisions, rules and regulations promulgated
under the Code, and the administrative and judicial interpretations of the Code.
This summary is based upon the Code, the regulations promulgated by the Treasury Department,
or the Treasury regulations, current administrative interpretations and practices of the Internal
Revenue Service, or IRS, (including administrative interpretations and practices expressed in
private letter rulings which are binding on the IRS only with respect to the particular taxpayers
who requested and received those rulings) and judicial decisions, all as currently in effect, and
all of which are subject to differing interpretations or to change, possibly with retroactive
effect. No assurance can be given that the IRS would not assert, or that a court would not
sustain, a position contrary to any of the tax consequences described below. No advance ruling has
been sought from the IRS regarding any matter discussed in this summary. The summary is also based
upon the assumption that our operation and the operation of our subsidiaries and other lower-tier
and affiliated entities, will in each case be in accordance with applicable organizational
documents and agreements. This summary does not purport to discuss all aspects of federal income
taxation that may be important to a particular shareholder in light of its investment or tax
circumstances, or to shareholders subject to special tax rules, such as:
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expatriates;
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persons who mark-to-market our common shares;
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subchapter S corporations;
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U.S. shareholders (as defined below) whose functional currency is not the U.S. dollar;
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financial institutions;
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insurance companies;
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broker-dealers;
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regulated investment companies;
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trusts and estates;
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holders who receive our common shares through the exercise of employee stock options
or otherwise as compensation;
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persons holding our common shares as part of a straddle, hedge, conversion
transaction, synthetic security or other integrated investment;
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persons subject to the alternative minimum tax provisions of the Code;
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persons holding their interest through a partnership or similar pass-through entity;
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persons holding a 10% or more (by vote or value) beneficial interest in us; and,
except to the extent discussed below;
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tax-exempt organizations; and
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non-U.S. shareholders (as defined below).
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This summary assumes that shareholders will hold our common shares as capital assets, which
generally means as property held for investment.
THE FEDERAL INCOME TAX TREATMENT OF HOLDERS OF OUR COMMON SHARES DEPENDS IN SOME INSTANCES ON
DETERMINATIONS OF FACT AND INTERPRETATIONS OF COMPLEX PROVISIONS OF FEDERAL INCOME TAX LAW FOR
WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF
HOLDING OUR COMMON SHARES TO ANY PARTICULAR SHAREHOLDER WILL DEPEND ON THE SHAREHOLDERS PARTICULAR
TAX CIRCUMSTANCES. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE FEDERAL,
STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES TO THEM, IN LIGHT OF THEIR PARTICULAR
INVESTMENT OR TAX CIRCUMSTANCES, OF ACQUIRING, HOLDING, AND DISPOSING OF OUR COMMON SHARES.
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Taxation of Sovran
We elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with
our taxable year ended December 31, 1995. We believe that we have been organized and have operated
in a manner which qualified for taxation as a REIT under the Code commencing with our taxable year
ended December 31, 1995. We intend to continue to operate in this manner. However, our
qualification and taxation as a REIT depend upon our ability to meet, through actual annual
operating results, asset diversification, distribution levels and diversity of stock ownership, the
various qualification tests imposed under the Code. Accordingly, there is no assurance that we
have operated or will continue to operate in a manner that will allow us to remain qualified as a
REIT. Furthermore, legislative, administrative or judicial action may change, perhaps
retroactively, the anticipated income tax treatment described in this prospectus. It is possible
that we may be unable to meet those changed requirements. The law firm of Phillips Lytle LLP has
acted as our tax counsel since our initial public offering in 1995. In the opinion of Phillips
Lytle LLP, we have been organized in conformity with the requirements for qualification as a REIT
beginning with our taxable year ending December 31, 1995, and our method of operation as
represented by us will enable us to continue to meet the requirements for REIT qualification. This
opinion is based on various assumptions and factual representations and covenants made by our
management regarding our organization, assets, the present and future conduct of our business
operations, the fair market value of our investments in taxable REIT subsidiaries and other items
regarding our ability to meet the various requirements for qualification as a REIT, and Phillips
Lytle LLP assumes that such representations and covenants are accurate and complete. REIT
qualification depends upon our ability to meet the various requirements imposed under the Code
through actual operating results, as discussed below. Phillips Lytle LLP will not review these
operating results, and no assurance can be given that actual operating results will meet these
requirements. The opinion of Phillips Lytle LLP is not binding on the IRS. In addition, the
opinion of Phillips Lytle LLP is based upon existing law, Treasury regulations, currently published
administrative positions of the IRS and judicial decisions, which are subject to change either
prospectively or retroactively.
Taxation of REITS in General
In any year in which we qualify as a REIT, we generally will not be subject to federal
corporate income taxes on that portion of our ordinary income or capital gain that is currently
distributed to shareholders. The REIT provisions of the Code generally allow a REIT to deduct
distributions paid to its shareholders. Shareholders generally will be subject to taxation on
dividends (other than designated capital gain dividends and qualified dividend income) at rates
applicable to ordinary income, instead of at lower capital gain rates. Qualification for taxation
as a REIT enables the REIT and its shareholders to substantially eliminate the double taxation
(that is, taxation at both the corporate and shareholder levels) that generally results from an
investment in a regular corporation. Regular corporations (non-REIT C corporations) generally
are subject to federal corporate income taxation on their income and shareholders of regular
corporations are subject to tax on any dividends that they receive. Currently shareholders of
non-REIT C corporations who are subject to individual income tax rates generally are taxed
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on dividends they receive at capital gain rates, which for individuals are lower than ordinary
income rates, and corporate shareholders of non-REIT C corporations receive the benefit of a
dividends received deduction that substantially reduces the effective rate that they pay on such
dividends. Income earned by a REIT and distributed currently to its shareholders generally will be
subject to lower aggregate rates of federal income taxation than if such income were earned by a
non-REIT C corporation, subjected to corporate income tax, and then distributed to shareholders
and subjected to the income tax rates applicable to those shareholders.
For the tax years through 2010, shareholders who are individual U.S. shareholders (as defined
below) are taxed on corporate dividends at a maximum federal income tax rate of 15% (the same as
long-term capital gain), thereby substantially reducing, though not completely eliminating, the
double taxation that has historically applied to corporate dividends. With limited exceptions,
however, dividends received by individual U.S. shareholders from us or from other entities that are
taxed as REITs will continue to be taxed at rates applicable to ordinary income, which are
currently subject to a maximum federal income tax rate of 35% through 2010.
Even if we qualify as a REIT, however, we will be subject to federal income tax in the
following respects:
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We will be taxed at regular corporate rates on our undistributed REIT
taxable income, including undistributed net capital gain.
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Under certain circumstances, we may be subject to the alternative
minimum tax as a consequence of our items of tax preference, if any.
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If we have net income from the sale or other disposition of
foreclosure property that is held primarily for sale to customers in
the ordinary course of business or other non-qualifying income from
foreclosure property, we will be subject to tax at the highest
corporate rate on that income.
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If we have net income from prohibited transactions, which are in
general certain sales or other dispositions of property, other than
foreclosure property, held primarily for sale to customers in the
ordinary course of business, that income will be subject to a 100%
tax.
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If we should fail to satisfy either the 75% or 95% gross income test,
which are discussed below, but have nonetheless maintained our
qualification as a REIT because other requirements have been met, we
will be subject to a 100% tax on (i) the net income attributable to
the greater of the amount by which we fail the 75% or 95% test,
multiplied by (ii) a fraction intended to reflect our profitability.
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If we fail to satisfy any of the REIT asset tests, as described below,
by larger than a de minimis amount, but our failure is due to
reasonable cause and not due to willful neglect and we nonetheless
maintain our REIT qualification because of specified cure provisions,
we will be required to pay a tax equal to the greater of $50,000 or
35% of the net income generated by the non-qualifying assets during
the period in which we failed to satisfy the asset tests.
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If we fail to satisfy any provision of the Code that would result in
our failure to qualify as a REIT (other than a gross income or asset
test requirement) and that violation is due to reasonable cause and
not due to willful neglect, we may maintain our REIT qualification,
but we will be required to pay a penalty of $50,000 for each such
failure.
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If we fail to distribute during each calendar year at least the sum of
(i) 85% of our REIT ordinary income for that year, (ii) 95% of our
REIT capital gain net income for that year and (iii) any undistributed
taxable income from prior periods, we will be subject to a 4% excise
tax on the excess of such required distributions over the sum of (x)
the amounts actually distributed (taking into account excess
distributions from prior years), plus (y) retained amounts on which
income tax is paid at the corporate level;
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We may be required to pay monetary penalties to the IRS in certain
circumstances, including if we fail to meet record-keeping
requirements intended to monitor our compliance with rules relating to
the composition of our shareholders, as described below.
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A 100% excise tax may be imposed on some items of income and expense
that are directly or constructively paid between us, our tenants
and/or our taxable REIT subsidiary (as described below) if and to
the extent that the IRS successfully adjusts the reported amounts of
these items.
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If we acquire any assets from a non-REIT C corporation in a carry
over basis transaction that have a fair market value at the time we
acquire those assets in excess of their adjusted tax basis and dispose
of them within ten years (within seven years if such assets are
disposed of in 2009 or 2010) of our acquisition of them (in each case,
we refer to the excess as built-in gain), then, to the extent of the
built-in gain, this gain generally will be subject to a tax at the
highest regular corporate rate.
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We may elect to retain and pay income tax on our net long-term capital
gain. In that case, a shareholder would include its proportionate
share of our undistributed long-term capital gain (to the extent we
make a timely designation of such gain to the shareholder) in its
income, would be deemed to have paid the tax that we paid on such
gain, and would be allowed to credit for its proportionate share of
the tax deemed to have been paid, and an adjustment would be made to
increase the shareholders basis in our common shares.
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We may have subsidiaries or own interests in other lower-tier entities
that are C corporations, including our taxable REIT subsidiaries,
the earnings of which will be subject to federal corporate income tax.
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If we are subject to taxation on our REIT taxable income or subject to tax due to the sale of
a built-in gain asset that was acquired in a carry-over basis from a non-REIT C Corporation, some
of the dividends we pay to our shareholders during the following year may be subject to tax at the
reduced capital gain rate, rather than at ordinary income rates. See Taxation of Our U.S.
Shareholders beginning on page 22.
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In addition, notwithstanding our status as a REIT, we may have to pay certain state and local
income taxes, because not all states and localities treat REITs in the same manner as they are
treated for federal income tax purposes, and our subsidiaries that are not subject to federal
income tax may have to pay state and local income taxes, because not all states and localities
treat these entities in the same manner as they are treated for federal income tax purposes.
Moreover, each of our taxable REIT subsidiaries (as further described below) is subject to federal
corporate income tax on its net income. We could also be subject to tax in situations and on
transactions not presently contemplated.
Requirements for Qualification General
To qualify as a REIT, we must meet the requirements, discussed below, relating to our
organization, sources of income, nature of assets and distributions of income to shareholders. The
Code defines a REIT as a corporation, trust or association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares or by transferable
certificates of beneficial interest;
(3) that would be taxable as a domestic corporation but for Sections 856 through 860 of the
Code;
(4) that is neither a financial institution nor an insurance company subject to specified
provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) at all times during the last half of each taxable year, not more than 50% in value of the
outstanding shares of which are owned, directly or indirectly, through the application of certain
attribution rules, by five or fewer individuals;
(7) that makes an election to be taxable as a REIT, or has made this election for a previous
taxable year that has not been revoked or terminated, and satisfies all relevant filing and other
administrative requirements established by the IRS that must be met to elect and maintain REIT
status; and
(8) that meets other tests, described below, regarding the nature of its income and assets.
The Code provides that conditions (1) through (4) above must be met during the entire taxable
year and that condition (5) must be met during at least 335 days of a taxable year of twelve
months, or during a proportionate part of a taxable year of less than twelve months. Conditions (5)
and (6) above, which we refer to as the 100 shareholder and five or fewer requirements, do not
need to be satisfied for the first taxable year for which an election to become a REIT has been
made. For purposes of condition (6), an individual generally includes a supplemental
unemployment compensation benefit plan, a private foundation, or a portion of a
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trust permanently set aside or used exclusively for charitable purposes, but does not include a
qualified pension plan or profit sharing trust.
To monitor compliance with condition (6) above, a REIT is required to send annual letters to
its shareholders requesting information regarding the actual ownership of its shares. If we comply
with the annual letters requirement and do not know, or by exercising reasonable diligence, would
not have known, of a failure to meet the condition (6) above, then we will be treated as having met
the condition.
Prior to the closing of our initial public offering in 1995, we did not satisfy several of the
conditions above. Our initial public offering allowed us to satisfy the 100 shareholder and five
or fewer requirements. We believe that we have been organized, have operated and have issued
sufficient shares of beneficial ownership with sufficient diversity of ownership to allow us to
satisfy the above conditions. In addition, our organizational documents contain restrictions
regarding the transfer of our stock that are intended to assist us in continuing to satisfy the
share ownership requirements described in conditions (5) and (6) above. The ownership restrictions
in our Amended and Restated Articles of Incorporation and bylaws generally prohibit the actual or
constructive ownership of more than 9.8% of the aggregate value of our outstanding stock, unless an
exception is established by the Board of Directors. The restrictions provide that if, at any time,
for any reason, those ownership limitations are violated or more than 50% in value of our
outstanding stock otherwise would be considered owned by five or fewer individuals, than the number
of shares of stock necessary to cure the violation will automatically and irrevocably be
transferred from the person causing the violation to a trust for the benefit of designated
charitable beneficiaries.
The REIT protective provisions of our organizational documents are modeled after certain
arrangements that the IRS has ruled in private letter rulings will preclude a REIT from being
considered to violate the ownership restrictions so long as the arrangements are enforceable as a
matter of state law and the REIT seeks to enforce them as and when necessary. There can be no
assurance, however, that the IRS might not seek to take a different position concerning us (a
private letter ruling is legally binding only as to the taxpayer to whom it was issued, and we have
not sought a private ruling on this issue) or contend that we failed to enforce these various
arrangements. Accordingly, there can be no assurance that these arrangements necessarily will
preserve our REIT status. If we fail to satisfy these share ownership requirements, we will fail
to qualify as a REIT.
To qualify as a REIT, we cannot have at the end of any taxable year any undistributed earnings
and profits that are attributable to a non-REIT taxable year. As a result of our formation in
1995, we succeeded to tax attributes of a C corporation, including any undistributed earnings and
profits. We do not believe that we have acquired any undistributed non-REIT earnings and profits.
However, there can be no assurance that the IRS would not contend otherwise on a subsequent audit.
In addition, a corporation may not elect to become a REIT unless its taxable year is the
calendar year. Since we became a REIT in 1995, our taxable year has been the calendar year.
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Effect of Subsidiary Entities
Ownership of Partnership Interests.
In the case of a REIT that is a partner in partnership,
Treasury regulations provide that the REIT is deemed to own its proportionate share of the
partnerships assets, and to earn its proportionate share of the partnerships gross income, in
each case, based on its pro rata share of capital interests in the partnership, for purposes of the
asset and gross income tests applicable to REITs, as described below. In addition, the assets and
gross income of the partnership generally are deemed to retain the same character in the hands of
the REIT. Thus, our proportionate share, based upon our percentage capital interest, of the assets
and items of income of partnerships in which we own an equity interest (including our interest in
the operating partnership and its equity interests in lower-tier partnerships), is treated as our
assets and items of income for purposes of applying the REIT requirements described below.
Consequently, to the extent that we directly or indirectly hold an equity interest in a
partnership, the partnerships assets and operations may affect our ability to qualify as a REIT.
In order to provide us with flexibility, we own the properties through the operating
partnership or joint ventures owned by the operating partnership. We hold a limited partnership
interest in the operating partnership. As of June 30, 2009, our aggregate holding in the
operating partnership is 98.2%, which is comprised of our direct limited partnership interest and
the interest of our wholly-owned subsidiary, Sovran Holdings, Inc., which holds a general partner
interest in the operating partnership. Sovran Holdings, Inc. is a qualified REIT subsidiary as
defined in Section 856(i) of the Code. A qualified REIT subsidiary is any corporation that is 100%
owned by a REIT at all times during the period the subsidiary is in existence. Under Section
856(i) of the Code, a qualified REIT subsidiary is not treated as a separate corporation from the
REIT, and all assets, liabilities, income, deductions, and credits of the qualified REIT subsidiary
are treated as assets, liabilities and those items, as the case may be, of the REIT. Because
Sovran Holdings, Inc. is a qualified REIT subsidiary, it is not subject to federal income tax,
although it may be subject to state and local tax in some states.
Taxable Subsidiaries.
A REIT, in general, may jointly elect with a subsidiary corporation,
whether or not wholly owned, to treat the subsidiary corporation as a taxable REIT subsidiary by
filing a Form 8875 with the IRS. The separate existence of a taxable REIT subsidiary or other
taxable corporation, unlike a disregarded subsidiary as discussed above, is not ignored for federal
income tax purposes. Accordingly, such an entity would generally be subject to corporate income
tax on its earnings, which may reduce the cash flow generated by us and our subsidiaries in the
aggregate, and our ability to make distributions to our shareholders.
A REIT is not treated as holding the assets of a taxable REIT subsidiary corporation or as
receiving any income that the subsidiary earns. Rather, the shares issued by such a subsidiary is
an asset in the hands of the REIT, and the REIT recognizes as income the dividends, if any, that it
receives from such subsidiary. This treatment can affect the gross income and asset test
calculations that apply to the REIT, as described below. Because a REIT does not include the
assets and income of such taxable REIT subsidiary corporations in determining the REITs compliance
with the REIT requirements, such entities may be used by the REIT to undertake indirectly
activities that the REIT rules might otherwise preclude it from doing directly or through
pass-though subsidiaries.
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Certain restrictions imposed on taxable REIT subsidiaries are intended to ensure that such
entities will be subject to appropriate levels of federal income taxation. First, a taxable REIT
subsidiary may not deduct interest payments made in any year to an affiliated REIT to the extent
that such payments exceed, generally, 50% of the taxable REIT subsidiarys adjusted taxable income
for that year (although the taxable REIT subsidiary may carry forward to, and deduct in, a
succeeding year the disallowed interest if the 50% test is satisfied in that year). In addition,
if amounts are paid to a REIT or deducted by a taxable REIT subsidiary due to transactions between
a REIT, its tenants and/or a taxable REIT subsidiary, that exceed the amount that would be paid to
or deducted by a party in an arms-length transaction, the REIT generally will be subject to an
excise tax equal to 100% of such excess. We and three of our corporate subsidiaries, Locke Sovran
I Manager, Inc., Locke Sovran II Manager, Inc. and Locke Leasing LLC, elected to have such
subsidiaries taxed as taxable REIT subsidiaries for federal income tax purposes.
Income Tests
To maintain qualification as a REIT, two gross income requirements must be satisfied annually.
First, at least 75% of our gross income, excluding gross income from certain dispositions of
property held primarily for sale to customers in the ordinary course of a trade or business, which
we refer to as prohibited transactions, certain hedging transactions and certain foreign currency
gain recognized after July 30, 2008, for each taxable year must be derived directly or indirectly
from investments relating to real property or mortgages on real property, including rents from
real property and interest in certain circumstances, or from certain types of temporary
investments. We refer to this requirement as the 75% test. Second, at least 95% of our gross
income, excluding gross income from prohibited transactions, certain hedging transactions entered
into after July 30, 2008 and certain foreign currency gain recognized after July 30, 2008, for each
taxable year must be derived from those real property investments and from dividends, interest and
gain from the sale or disposition of stock or securities or from any combination of the foregoing.
We refer to this requirement as the 95% test.
Rents received or deemed to be received by us will qualify as rents from real property in
satisfying the gross income requirements for a REIT described above only if the following
conditions are met:
(1) The amount of rent generally must not be based in whole or in part on the income or
profits of any person. However, an amount received or accrued generally will not be excluded from
rents of real property solely by reason of being based on a fixed percentage or percentages of
receipts or sales.
(2) The Code provides that rents from a tenant will not qualify as rents from real property
in satisfying the gross income tests if the REIT, or a direct or indirect owner of 10% or more of
the REIT, directly or constructively, owns 10% or more of that tenant, in which case we refer to
the tenant as a related party tenant.
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(3) If rent attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under the lease, then the portion of rent
attributable to the personal property will not qualify as rents from real property.
(4) For rents to qualify as rents from real property, the REIT must not operate or manage
the property or furnish or render services to tenants, other than through an independent
contractor who is adequately compensated and from whom the REIT does not derive any income. A
REIT may, however, directly provide services with respect to its properties and the income will
qualify as rents from real property if the services are usually or customarily rendered in
connection with the rental of a room or other space for occupancy only and are not otherwise
considered rendered to the occupant. In addition, a REIT may directly or indirectly provide
non-customary services to tenants of its properties without disqualifying all of the rent from the
property if the payment for such services does not exceed 1% of the total gross income from the
property. In such case, only the amounts for non-customary services are not treated as rents from
real property. The rest of the rent will be qualifying income. If the impermissible tenant
service income with respect to a property exceeds 1% of our total income from that property, than
all of the income from that property will fail to qualify as rents from real property. For
purposes of this test, the income received from such non-customary services is deemed to be at
least 150% of the direct cost of providing the services. Moreover, REITs are permitted to provide
services to tenants or others through a taxable REIT subsidiary without disqualifying the rental
income received from tenants for purposes of the REIT income tests.
Unless we determine that the resulting nonqualifying income under any of the following situations,
taken together with all other nonqualifying income earned by us in the taxable year, will not
jeopardize our status as a REIT, we do not and do not intend to (a) charge rent that is based in
whole or in part on the income or profits of any person; (b) derive rent attributable to personal
property leased in connection with real property that exceeds 15% of the total rents; or (c)
receive rent from related party tenants.
For approximately 10 months in 2004, we allowed new tenants to use trucks without charge for a
limited period of time as an inducement for the new tenants to lease space in our facilities. We
have treated the rental of trucks as the rental of personal property in connection with the rental
of real property. Generally, the 15% personal property test is applied on a lease by lease basis.
However, the Treasury Regulations allow a REIT that rents all (or a portion) of the units in a
multiple unit project under substantially similar leases to apply the 15% test on an aggregate
basis for the rents received under such substantially similar leases. All of our leases at each
self storage property are substantially similar, except for the cost of the unit which varies by
the size of the unit. We apply the 15% test on an aggregate basis at each of our facilities.
There can be no assurance that the IRS will not successfully challenge our position that the lease
of the trucks should be treated as the rental of personal property in connection with real property
or our methodology for determining the portion of each lease attributable to personal property. If
the IRS successfully challenged our position, we could have failed to satisfy the income tests.
This could prevent us from qualifying as a REIT. See Taxation of Sovran Failure to Qualify
beginning on page 18 for a discussion of the consequences if we fail to meet this test.
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We provide certain services with respect to the properties. We believe that the services
provided by us are usually or customarily rendered in connection with the rental of space for
occupancy only and are not otherwise rendered to particular tenants and, therefore, that the
provision of those services will not cause rents received with respect to the properties to fail to
qualify as rents from real property.
Prior to 2007, we earned a commission from a third party insurance company on personal
property insurance sold to some of our tenants by such insurance company. We believe that the
insurance contract provided by the insurance company is not a service provided by the insurance
company and that the commission we earned would not be impermissible tenant service income. If the
IRS successfully challenged our position on this issue, all rents from a property would not qualify
for purposes of the income tests if the commission income and any other impermissible tenant
service income from that property exceeded 1% of the income from that property. This could have
caused us to fail the income test for such year. This could prevent us from qualifying as a REIT.
See Taxation of Sovran Failure to Qualify on page 18 for a discussion of the consequences if
we fail to meet this test.
We also earn management fees from our management of property (i) held by joint ventures in
which we are investors and (ii) held by our taxable REIT subsidiary. For purposes of the gross
income tests, income we earn from management fees generally constitutes nonqualifying income.
Existing Treasury regulations do not address the treatment of management fees derived by a REIT
from a partnership in which the REIT holds a partnership interest, but the IRS has issued a number
of private letter rulings holding that the portion of the management fee that corresponds to the
REITs interest in the partnership, in effect, is disregarded in applying the 95% gross income test
when the REIT holds a substantial interest in the partnership. We disregard the portion of
management fees derived from the joint venture partnerships in which we are a partner that
corresponds to our interest in these partnerships in determining the amount of our nonqualifying
income. There can be no assurance, however, that the IRS would not take a contrary position with
respect to us, either rejecting the approach set forth in the private letter rulings mentioned
above or contending that our situation is distinguishable from those addressed in the private
letter rulings. We do not anticipate that we will receive sufficient management fees to cause us
to exceed the limit on nonqualifying income under the gross income tests. We will, however,
monitor the level of fees that we receive relative to our gross income generally and take actions
to ensure that the receipt of such fees does not cause us to fail to satisfy either of the gross
income tests.
Our share of any dividends received from our corporate subsidiaries that are not qualified
REIT subsidiaries (and from other corporations in which we own an interest) will qualify for
purposes of the 95% gross income test but not for purposes of the 75% gross income test. We do not
anticipate that we will receive sufficient dividends to cause us to exceed the limit on
nonqualifying income under the 75% gross income test.
Interest generally will be nonqualifying income for purposes of the 75% or 95% gross income
tests if it depends in whole or in part on the income or profits of any person. However, interest
based on a fixed percentage or percentages of receipts or sales may still qualify under the gross
income tests. We have received interest payments from our taxable REIT subsidiaries and
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our joint ventures that will constitute qualifying income for purposes of the 95% gross income
test but not the 75% gross income test. We do not anticipate that these amounts of interest will
affect our ability to qualify under the 75% test.
If we fail to satisfy one or both of the 75% or 95% tests for any taxable year, we may
nevertheless qualify as a REIT for that year if we are eligible for relief under specified
provisions of the Code. These relief provisions will generally be available if our failure to meet
these tests was due to reasonable cause and not due to willful neglect, we attach a schedule of the
sources of our income to our federal income tax return, and any incorrect information on the
schedule is not due to fraud with intent to evade tax. It is not possible, however, to state
whether, in all circumstances, we would be entitled to the benefit of these relief provisions. For
example, if we fail to satisfy the gross income tests because non-qualifying income that we
intentionally incur exceeds the limits on that income, the IRS could conclude that our failure to
satisfy the tests was not due to reasonable cause. As discussed above, even if these relief
provisions apply, a 100% tax would be imposed on the greater of the amount by which we fail either
the 75% or 95% gross income test, multiplied by a fraction intended to reflect our profitability.
Asset Tests
At the close of each calendar quarter, we must also satisfy four tests relating to the nature
of our assets. Under the first test, at least 75% of the value of our total assets must be
represented by some combination of real estate assets, cash, cash items, U.S. government
securities and, under some circumstances, stock or debt instruments purchased with new capital.
For this purpose, real estate assets include interests in real property, such as land, buildings,
leasehold interests in real property, stock of other corporations that qualify as REITs, and
certain kinds of mortgage-backed securities and mortgage loans. Assets that do not qualify for
purposes of the 75% test are subject to the additional asset tests described below.
The second asset test is that the value of any one issuers securities owned by us may not
exceed 5% of the value of our gross assets. Third, we may not own more than 10% of any one
issuers outstanding securities, as measured by either voting power or value. Fourth, the
aggregate value of all securities of taxable REIT subsidiaries held by us may not exceed 25% (20%
for taxable years beginning prior to July 31, 2008) of the value of our gross assets.
The 5% and 10% asset tests do not apply to securities of taxable REIT subsidiaries, qualified
REIT subsidiaries or securities that are real estate assets for purposes of the 75% gross asset
test described above.
The 10% value test does not apply to certain straight debt and other excluded securities, as
described in the Code including, but not limited to, any loan to an individual or estate, any
obligation to pay rents from real property and any security issued by a REIT. In addition, (a) a
REITs interest as a partner in a partnership is not considered a security for purposes of applying
the 10% value test to securities issued by the partnership; (b) any debt instrument issued by a
partnership (other than straight debt or another excluded security) will not be considered a
security issued by the partnership if at least 75% of the partnerships gross income is derived
from sources that would qualify for the 75% REIT gross income test; and (c) any debt instrument
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issued by a partnership (other than straight debt or another excluded security) will not be
considered a security issued by the partnership to the extent of the REITs interest as a partner
in the partnership. In general, straight debt is defined as a written, unconditional promise to
pay on demand or at a specific date a fixed principal amount, and the interest rate and payment
dates on the debt must not be contingent on profits or the discretion of the debtor. In addition,
straight debt may not contain a convertibility feature.
After initially meeting the asset tests at the close of any quarter, we will not lose our
status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by
reason of changes in asset values. If the failure to satisfy the asset tests results from an
acquisition of securities or other property during a quarter, the failure can be cured by
disposition of sufficient non-qualifying assets within 30 days after the close of that quarter. We
intend to maintain adequate records of the value of our assets to ensure compliance with the asset
tests and to take those other actions within 30 days after the close of any quarter as may be
required to cure any noncompliance.
We believe that our holdings of securities and other assets will comply with the foregoing
REIT asset requirements, and we intend to monitor compliance with such tests on an ongoing basis.
However, the values of some of our assets, including the securities of our taxable REIT
subsidiaries, may not be precisely valued, and values are subject to change in the future.
Furthermore, the proper classification of an instrument as debt or equity for federal income tax
purposes may be uncertain in some circumstances, which could affect the application of the REIT
asset tests. Accordingly, there can be no assurance that the IRS will not contend that our assets
do not meet the requirements of the REIT asset tests.
We would not lose our REIT status as the result of a failure of the 5% test or the 10% value
test if value of the assets causing the violation did not exceed the lesser of 1% of the value of
our assets at the end of the quarter in which the violation occurred or $10,000,000 and we were to
cure the violation by disposing of assets within six months of the end of the quarter in which we
identified the failure. In addition, for a failure of the 5% test, the 10% vote test or the 10%
value test that is larger than this amount, and for a failure of the 75% test, the 25% test, or the
25% (20% for taxable years beginning prior to July 31, 2008) taxable REIT subsidiary asset test, we
would not lose our REIT status if the failure were for reasonable cause and not due to willful
neglect and we were to (i) file a schedule with the IRS describing the assets causing the
violation, (ii) cure the violation by disposing of assets within six months of the end of the
quarter in which we identified the failure and (iii) pay a tax equal to the greater of $50,000 or
the product derived by multiplying the highest federal corporate income tax rate by the net income
generated by the non-qualifying assets during the period of the failure. It is not possible,
however, to state whether in all cases we would be entitled to these relief provisions.
Annual Distribution Requirements
To qualify as a REIT, we are required to make distributions, other than distributions of
capital gain dividends, to our shareholders in an amount at least equal to:
(a) the sum of:
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90% of our REIT taxable income, computed without regard to the
dividends-paid deduction and our net capital gain, and
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90% of our net income, if any, from foreclosure property in excess of
the special tax on income from foreclosure property, minus
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(b) the sum of specified items of our non-cash income.
These distributions must be paid in the taxable year to which they relate, or in the following
taxable year if such distributions are declared in October, November or December of the taxable
year, payable to shareholders of record on a specified date in any such month, and are actually
paid before the end of January of the following year. Such distributions are treated as both paid
by us and received by each shareholder on December 31 of the year in which they are declared. In
addition, at our election, a distribution for a taxable year may be declared before we timely file
our tax return for the year and paid with or before the first regular dividend payment after such
declaration, provided such payment is made during the 12-month period following the close of such
taxable year. These distributions are taxable to our shareholders in the year in which paid, even
though the distributions relate to our prior taxable year for purposes of the 90% distribution
requirement.
In order for distributions to be counted towards our distribution requirement, and to provide
us with a tax deduction, they must not be preferential dividends. A dividend is not a
preferential dividend if it is pro rata among all shares of stock within a particular class and is
in accordance with the preferences among different classes of stock as set forth in the
organizational documents.
To the extent that we distribute less than 100%, but at least 90%, of our net taxable income,
we will be subject to federal income tax at ordinary corporate tax rates on the retained portion.
In addition, we may elect to retain, rather than distribute, our net long-term capital gain and pay
tax on such gain. In this case, we could elect to have our shareholders include their
proportionate share of such undistributed long-term capital gain in income and receive a
corresponding credit for their proportionate share of the tax paid by us. Our shareholders would
then increase the adjusted basis of their shares in us by the difference between the designated
amounts included in their long-term capital gains and the tax deemed paid with respect to their
proportionate shares.
If we fail to distribute during each calendar year at least the sum of (i) 85% of our REIT
ordinary income for such year, (ii) 95% of our REIT capital gain income for such year and (iii) any
undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the
excess of such required distribution over the sum of (x) the amounts actually distributed (taking
into account excess distributions from prior periods) and (y) the amounts of income retained on
which we have paid corporate income tax. We intend to make timely distributions so that we are not
subject to the 4% excise tax.
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It is expected that our REIT taxable income will be less than our cash flow due to the
allowance of depreciation and other non-cash charges in computing REIT taxable income.
Accordingly, we anticipate that we will generally have sufficient cash or liquid assets to enable
us to satisfy the 90% distribution requirement. However, it is possible that, from time to time,
we may not have sufficient cash or other liquid assets to meet the 90% distribution requirement or
to distribute any greater amount as may be necessary to avoid income and excise taxation, due to
timing differences between the actual receipt of income and actual payment of deductible expenses,
and the inclusion of that income and deduction of those expenses in arriving at our taxable income,
or if the amount of nondeductible expenses, such as principal amortization or capital expenditures,
exceed the amount of non-cash deductions. In the event that those timing differences occur, we may
find it necessary to arrange for borrowings, if possible, in order to meet the distribution
requirement.
In addition, IRS Revenue Procedure 2009-15 sets forth a safe harbor pursuant to which certain
part-stock and part-cash dividends distributed by REITs in 2009 will satisfy the REIT distribution
requirements. Under the terms of this Revenue Procedure, up to 90% of our dividends could be paid
with our stock. We expect to pay our remaining 2009 dividends in the form of cash. However, the
final determination is subject to formal declaration of such dividends by our board of directors.
Under some instances, we may be able to rectify a failure to meet the distribution requirement
for a year by paying deficiency dividends to shareholders in a later year, which dividends may be
included in our deduction for dividends paid for the earlier year. Thus, we may be able to avoid
being taxed on amounts distributed as deficiency dividends. We will, however, be required to pay
interest to the IRS, based upon the amount of any deduction taken for deficiency dividends.
Prohibited Transactions
Net income derived from a prohibited transaction is subject to a 100% tax. A prohibited
transaction generally includes a sale or other disposition of property (other than foreclosure
property) that is held as inventory or primarily for sale to customers in the ordinary course of a
trade or business by a REIT, by a lower-tier partnership in which the REIT holds an equity interest
or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to the
REIT. We intend to hold our properties for investment with a view to long-term appreciation, to
engage in the business of owning and operating properties and to make sales of properties that are
consistent with our investment objectives. However, whether property is held as inventory or
primarily for sale to tenants in the ordinary course of our trade or business depends on the
particular facts and circumstances. No assurance can be given that any particular property in
which we hold a direct or indirect interest will not be treated as property held for sale to
tenants, or that certain safe-harbor provisions of the Code that prevent such treatment will apply.
The 100% tax will not apply to gain from the sale of property that is held through a taxable REIT
subsidiary although such income will be subject to tax in the hands of the taxable REIT subsidiary
at regular corporate income tax rates.
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Foreclosure Properties
Foreclosure property is real property and any personal property incident to such real property
(i) that is acquired by a REIT as a result of the REIT having bid in the property at foreclosure,
or having otherwise reduced the property to ownership or possession by agreement or process of law,
after there was a default (or default was imminent) on a lease of the property or a mortgage loan
held by the REIT and secured by the property, (ii) for which the related loan or lease was acquired
by the REIT at a time when default was not imminent or anticipated and (iii) for which such REIT
makes a proper election to treat the property as foreclosure property. REITs generally are subject
to tax at the maximum corporate rate (currently 35%) on any net income from foreclosure property,
including any gain from the disposition of the foreclosure property, other than income that would
otherwise be qualifying income for purposes of the 75% gross income test. Any gain from the sale
of property for which a foreclosure property election has been made will not be subject to the 100%
tax on gains from prohibited transactions described above, even if the gain would otherwise be
treated as a prohibited transaction. We do not anticipate that we will receive any income from
foreclosure property that is not qualifying income for purposes of the 75% gross income test, but,
if we do receive any such income, we intend to make an election to treat the related property as
foreclosure property.
Hedging Transactions
From time to time, we may enter into hedging transactions with respect to one or more of our
assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps,
and floors, options to purchase these items, and futures and forward contracts. Income from a
hedging transaction, including gain from the sale or disposition of such a transaction, that is
clearly identified as a hedging transaction as specified in the Code will not constitute gross
income for purposes of the 95% gross income test to the extent such a hedging transaction is
entered into on or after January 1, 2005, and will not constitute gross income for purposes of the
75% gross income test as well as the 95% gross income test to the extent such hedging transaction
is entered into after July 30, 2008. Income and gain from a hedging transaction, including gain
from the sale or disposition of such a transaction, entered into on or prior to July 30, 2008 will
be treated as nonqualifying income for purposes of the 75% gross income test. Income and gain from
a hedging transaction, including gain from the sale or disposition of such a transaction, entered
into prior to January 1, 2005 will be qualifying income for purposes of the 95% gross income test.
The term hedging transaction, as used above, generally means any transaction we enter into in the
normal course of our business primarily to manage risk of (1) interest rate changes or fluctuations
with respect to borrowings made or to be made by us to acquire or carry real estate assets, and (2)
for hedging transactions entered into after July 30, 2008, currency fluctuations with respect to
any item of income or gain that would be treated as qualifying income under the 75% or 95% gross
income test (or any property which generates such income or gain). To the extent that we do not
properly identify such transactions as hedges or we hedge with other types of financial
instruments, the income from those transactions is not likely to be treated as qualifying income
for purposes of the gross income tests. We intend to structure any hedging transactions in a
manner that does not jeopardize our status as a REIT.
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Failure to Qualify
If we fail to qualify as a REIT in any taxable year and the relief provisions do not apply, we
will be subject to tax, including any applicable alternative minimum tax, on our taxable income at
regular corporate rates. Distributions to shareholders in any year in which we fail to qualify
will not be deductible by us nor will they be required to be made. In that event, to the extent of
current and accumulated earnings and profits, all distributions to shareholders will be qualified
dividend income, taxable as capital gain (through 2010) for non-corporate shareholders, and
subject to limitations set forth in the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless we are entitled to relief under specific statutory
provisions, we also will be ineligible for qualification as a REIT for the four taxable years
following the year during which our qualification was lost. It is not possible to state whether in
all circumstances we would be entitled to statutory relief. For example, if we fail to satisfy the
gross income tests because non-qualifying income that we intentionally incur exceeds the limit on
that income, the IRS could conclude that our failure to satisfy the tests was not due to reasonable
cause.
Built-In Gain
To the extent we held any asset that has built-in gain as of the first day of the first
taxable year for which we qualified as a REIT (which was January 1, 1995), we may recognize a
corporate level tax at the time we dispose of that asset. Treasury Regulations have been issued
requiring a C corporation to recognize any net built-in gain that would have been realized if the
corporation had liquidated at the end of the last taxable year before the taxable year in which it
qualifies to be taxed as a REIT. However, instead of this immediate recognition rule, the
regulations permit a REIT to elect to be subject to rules similar to rules applicable to S
corporations with built-in gains under Section 1374 of the Code. Section 1374 of the Code generally
provides that a corporation with appreciated assets that elects S corporation status will recognize
a corporate level tax on the built-in gain if the S corporation disposes of the appreciated assets
within a ten-year period (within a seven-year period for 2009 and 2010) commencing on the date on
which the S corporation election was made. In certain cases, no tax will be imposed on the
net-recognized built-in gain for the 2009 and 2010 taxable years. We elected to have rules similar
to the rules of Section 1374 of the Code apply to us. For these purposes, the assets owned by us
prior to becoming a REIT will be appreciated assets. Any of these assets disposed of during the
ten-year period beginning January 1, 1995 and ending December 31, 2004 could have given rise to a
corporate level tax to the extent of the built-in gain attributable to the disposed assets.
Although we did recognize a built-in taxable gain on the disposition of certain properties in 1995
prior to the date of our initial public offering, we did not have any other dispositions of such
assets at a gain during the remainder of the ten-year period ending December 31, 2004. In
addition, if we were to acquire carry over basis assets from a C corporation, any excess of the
fair market value of the assets over the carry over basis would be built-in gain. To date, we have
not acquired carry over basis assets from a C corporation, other than the assets owned when we
became a REIT as of January 1, 1995.
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Tax Aspects of the Operating Partnership
Substantially all of our investments will be held indirectly through the operating
partnership. In general, partnerships are pass-through entities which are not subject to federal
income tax. Rather, partners are allocated their proportionate shares of the items of income,
gain, loss, deduction and credit of a partnership, and are potentially subject to tax thereon,
without regard to whether the partners receive a distribution from the partnership. We will
include in our income our proportionate share of the foregoing partnership items for purposes of
the various REIT income tests and in the computation of our REIT taxable income. Moreover, for
purposes of the REIT asset tests, we will include our proportionate share of assets held by the
operating partnership. See Taxation of Sovran beginning on page 4.
Entity Classification
Our interests in the operating partnership involve special tax considerations, including the
possibility of a challenge by the IRS of the status of the operating partnership as a partnership,
as opposed to an association taxable as a corporation, for federal income tax purposes. If the
operating partnership were treated as an association, it would be taxable as a corporation and
therefore be subject to an entity-level tax on its income. In that situation, the character of our
assets and items of gross income would change and preclude us from satisfying the asset tests and
the income tests. See Taxation of Sovran Asset Tests beginning on page 13 and Income
Tests beginning on page 10. This, in turn would prevent us from qualifying as a REIT. See
Taxation of Sovran Failure to Qualify on page 18 for a discussion of the effect of our failure
to meet these tests for a taxable year. In addition, any change in the operating partnerships
status for U.S. federal income tax purposes might be treated as a taxable event, in which case we
could have taxable income that is subject to the REIT distribution requirements without receiving
any cash.
Treasury Regulations that apply for the tax period beginning on or after January 1, 1997,
provide that an eligible entity may elect to be treated as a partnership for federal income tax
purposes. An eligible entity is a domestic business entity not otherwise classified as a
corporation and which has at least two members. Unless it elects otherwise, an eligible entity in
existence prior to January 1, 1997, will have the same classification for federal income tax
purposes that it claimed under the entity classification Treasury Regulations in effect prior to
this date. In addition, an eligible entity which did not exist, or did not claim a classification,
prior to January 1, 1997, will be classified as a partnership for federal income tax purposes
unless it elects otherwise. The operating partnership has claimed classification as a partnership
under these regulations.
Even if the operating partnership is treated as a partnership under these Treasury
Regulations, it could be treated as a corporation for federal income tax purposes under the
publicly traded partnership rules of Section 7704 of the Code. A publicly traded partnership is
a partnership whose interests trade on an established securities market or are readily tradable on
a secondary market, or the substantial equivalent thereof. While units of the operating
partnership are not and will not be traded on an established trading market, there is some risk
that the IRS might treat the units held by the limited partners of the operating partnership as
readily
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tradable because, after any applicable holding period, they may be exchanged for our common shares,
which are traded on an established market. A publicly traded partnership will be treated as a
corporation for federal income tax purposes unless at least 90% of that partnerships gross income
for a taxable year consists of qualifying income under the publicly traded partnership provisions
of Section 7704 of the Code. Qualifying income under Section 7704 of the Code includes interest,
dividends, real property rents, gain from the disposition of real property, and certain income or
gain from the exploitation of natural resources. Therefore, qualifying income under Section 7704
of the Code generally includes any income that is qualifying income for purposes of the 95% gross
income test applicable to REITs. We anticipate that the operating partnership will satisfy the 90%
qualifying income test under Section 7704 of the Code and, thus, will not be taxed as a
corporation.
There is one significant difference, however, regarding rent received from related party
tenants. For a REIT, rent from a tenant does not qualify as rents from real property if the REIT
and/or one or more actual or constructive owner of 10% or more of the REIT actually or
constructively owns 10% or more of the tenant. See Taxation of Sovran Income Tests beginning
on page 10. Under Section 7704 of the Code, rent from a tenant is not qualifying income if a
partnership and/or one or more actual or constructive owner of 5% or more of the partnership
actually or constructively owns 10% of more of the tenant.
Accordingly, we will monitor compliance with both the REIT rules and the publicly traded
partnership rules. The operating partnership has not requested, nor does it intend to request, a
ruling from the IRS that it will be treated as a partnership for federal income tax purposes. In
the opinion of Phillips Lytle LLP, which is based on the provisions of the partnership agreement of
the operating partnership and on certain factual assumptions and representations by us, the
operating partnership is classified as a partnership for federal income tax purposes and,
therefore, should be treated as a partnership rather than an association taxable as a corporation
for periods prior to January 1, 1997. Phillips Lytle LLPs opinion is not binding on the IRS or
the courts.
Partnership Allocations
A partnership agreement will generally determine the allocation of income and losses among
partners. However, these allocations will be disregarded for federal income tax purposes if they
do not comply with the provisions of Section 704(b) of the Code and the Treasury Regulations
promulgated under this section of the Code. Generally, Section 704(b) and the Treasury Regulations
promulgated under this section of the Code require that partnership allocations respect the
economic arrangement of the partners. If an allocation is not recognized for federal income tax
purposes, the item subject to the allocation will be reallocated in accordance with the partners
interests in the partnership. This reallocation will be determined by taking into account all of
the facts and circumstances relating to the economic arrangement of the partners with respect to
that item. The operating partnerships allocations of taxable income and loss are intended to
comply with the requirements of Section 704(b) of the Code and the Treasury Regulations promulgated
under this section of the Code.
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Tax Allocations with Respect to the Properties
Under Section 704(c) of the Code, income, gain, loss and deduction attributable to appreciated
or depreciated property that is contributed to a partnership in exchange for an interest in the
partnership must be allocated in a manner so that the contributing partner is charged with the
book-tax difference associated with the property at the time of the contribution. The book tax
difference with respect to property that is contributed to a partnership is generally equal to the
difference between the fair market value of contributed property at the time of contribution and
the adjusted tax basis of the property at the time of contribution. These allocations are solely
for federal income tax purposes and do not affect the book capital accounts or other economic or
legal arrangements among the partners. The operating partnership acquired the majority of its
assets at the time it was formed in 1995 by means of transactions treated as taxable acquisitions
of assets for tax purposes. Thus, in general, there were no book-tax differences associated with
these purchased assets at the time they were acquired by the operating partnership. Certain
persons have, however, contributed appreciated property to the operating partnership from time to
time in exchange for interests in the operating partnership.
The partnership agreement requires that these allocations be made in a manner consistent with
Section 704(c) of the Code. In general, limited partners of the operating partnership who acquired
their limited partnership interests through a contribution of appreciated property will be
allocated depreciation deductions for tax purposes which are lower than these deductions would be
if determined on a pro rata basis. In addition, in the event of the disposition of any of the
appreciated property, the contributed book-tax difference will generally be allocated to the
limited partners who contributed the property, and we will generally be allocated only our share of
capital gain attributable to the appreciation, if any, occurring after the time of contribution to
the operating partnership. This will tend to entirely eliminate the book-tax difference over the
life of the operating partnership. However, the special allocation rules of Section 704(c) do not
always entirely eliminate the book-tax difference on an annual basis or with respect to a specific
taxable transaction, such as a sale. Thus, the carry over basis of the contributed assets in the
hands of the operating partnership may cause us to be allocated lower depreciation and other
deductions. We could possibly be allocated an amount of taxable income in the event of a sale of
these contributed assets in excess of the economic or book income allocated to us as a result of
the sale. This may cause us to recognize taxable income in excess of cash proceeds, which might
adversely affect our ability to comply with the REIT distribution requirements. See Taxation of
Sovran Annual Distribution Requirements beginning on page 14.
Treasury Regulations issued under Section 704(c) of the Code provide partnerships with a
choice of several methods of accounting for book-tax differences, including retention of the
traditional method or the election of other methods which would permit any distortions caused by
a book-tax difference to be entirely rectified on an annual basis or with respect to a specific
taxable transaction, such as a sale. We and the operating partnership have determined to use the
traditional method to account for book-tax differences for the properties initially contributed
to the operating partnership and for some assets acquired subsequently. We and the operating
partnership have not yet decided what method will be used to account for book-tax differences for
properties acquired by the operating partnership in the future. Any property acquired by the
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operating partnership in a taxable transaction will initially have a tax basis equal to its fair
market value, and Section 704(c) of the Code will not apply.
Basis in the Operating Partnership Interest
The adjusted tax basis in our interest in the operating partnership generally will be equal to
the amount of cash and the basis of any other property we contribute to the operating partnership,
increased by our allocable share of the operating partnerships income and our allocable share of
indebtedness of the operating partnership, and reduced, but not below zero, by our allocable share
of losses suffered by the operating partnership, the amount of cash distributed to us and
constructive distributions resulting from a reduction in our share of indebtedness of the operating
partnership. If the allocation of our distributive share of the operating partnerships loss
exceeds the adjusted tax basis of our partnership interest in the operating partnership, the
recognition of this excess loss will be deferred until that time and to the extent that we have
adjusted tax basis in our interest in the operating partnership. We will recognize taxable income
to the extent that the operating partnerships distributions, or any decrease in our share of the
indebtedness of the operating partnership, exceeds our adjusted tax basis in the operating
partnership. A decrease in our share of the indebtedness of the operating partnership is
considered a cash distribution.
Sale of Partnership Property
Generally, any gain realized by a partnership on the sale of property held by the partnership
for more than one year will be long-term capital gain, except for any portion of that gain that is
treated as depreciation or cost recovery recapture. However, our share as a partner of any gain
realized by the operating partnership on the sale of any property held as inventory or other
property held primarily for sale to customers in the ordinary course of a trade or business will be
treated as income from a prohibited transaction that is subject to a 100% penalty tax. See
Taxation of Sovran Prohibited Transactions on page 16. Under existing law, whether property
is held as inventory or primarily for sale to customers in the ordinary course of a trade or
business is a question of fact that depends on all the facts and circumstances with respect to the
particular transaction.
Taxation of our U.S. Shareholders
For purposes of this discussion, a U.S. shareholder is a holder of shares of our stock that,
for federal income tax purposes, is:
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a citizen or resident of the United States,
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a corporation, partnership or other entity created or organized in or
under the laws of the United States or of any state or political
subdivision of the United States,
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an estate whose income from sources without the United
States is includible in gross income for federal
income tax purposes regardless of its connection with
the conduct of a trade or business within the United
States, or
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a trust, if (i) a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more United States persons has the authority to control all
substantial decisions of the trust or (ii) it has a valid election in
place to be treated as a U.S. shareholder.
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If an entity or arrangement treated as a partnership for federal income tax purposes holds our
shares, the federal income tax treatment of a partner generally will depend upon the status of the
partner and the activities of the partnership. A partner of a partnership holding our common
shares should consult its tax advisor regarding the federal income tax consequences to the partner
of the acquisition, ownership and disposition of our shares by the partnership.
As long as we qualify as a REIT, distributions to our taxable U.S. shareholders generally will
be includible in their income as ordinary income dividends to the extent the distributions do not
exceed our current or accumulated earnings and profits. Although a portion of these dividends may
be treated as capital gain dividends as explained below, no portion of these dividends will be
eligible for the dividends received deduction for corporate shareholders. In determining the
extent to which a distribution constitutes ordinary income for federal income tax purposes, our
current or accumulated earnings and profits will generally be allocated first to distributions with
respect to our preferred shares, if any, and thereafter to distributions with respect to shares of
our common stock. Dividends received from REITs are generally not eligible to be taxed at the
preferential qualified dividend income rates applicable to individual U.S. shareholders.
We may elect to designate a portion of distributions paid to our shareholders as qualified
dividend income. A portion of a distribution that is properly designated as qualified dividend
income is taxable to noncorporate U.S. shareholders as capital gain, provided that the shareholder
has held the common shares with respect to which the distribution is made for more than 60 days
during the 120-day period beginning on the date that is 60 days before the date on which such
common shares became ex-dividend with respect to the relevant distribution. The maximum amount of
our distributions eligible to be designated as qualified dividend income for a taxable year is
equal to the sum of the following:
(1) the qualified dividend income received by us during such taxable year from non-REIT
corporations (including our taxable REIT subsidiaries);
(2) the excess of any undistributed REIT taxable income recognized during the immediately
preceding year over the federal income tax paid by us with respect to such undistributed REIT
taxable income; and
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(3) the excess of any income recognized during the immediately preceding year attributable to
the sale of an asset with a built-in gain that was acquired in a carry over basis transaction from
a C corporation over the federal income tax paid by us with respect to such built-in gain.
Generally, dividends that we receive will be treated as qualified dividend income if the dividends
are received from a domestic corporation (other than a REIT or a regulated investment company) or a
qualifying foreign corporation and specified holding period requirements and other requirements
are met. A foreign corporation (other than a foreign personal holding company, a foreign
investment company, or passive foreign investment company) will be a qualifying foreign
corporation if it is incorporated in a possession of the United States, the corporation is eligible
for benefits of an income tax treaty with the United States that the Secretary of Treasury
determines is satisfactory, or the stock of the foreign corporation on which the dividend is paid
is readily tradable on an established securities market in the United States. We generally expect
that an insignificant portion, if any, of our distributions will consist of qualified dividend
income.
Distributions made out of our current or accumulated earnings and profits that we properly
designate as capital gain dividends will be taxed as long-term capital gain to the extent they do
not exceed our actual net capital gain for the taxable year and without regard to the period for
which a shareholder has held shares of our stock. However, corporate U.S. shareholders may be
required to treat up to 20% of certain capital gain dividends as ordinary income. To the extent
that we elect to retain amounts representing our net capital gain income, our U.S. shareholders
would be taxed on their designated proportionate share of our retained net capital gain as though
an amount were distributed and designated a capital gain dividend, and we would be taxed at regular
corporate capital gain tax rates on the retained amounts. In addition, each U.S. shareholder would
receive a credit for a designated proportionate share of the tax that we pay, and would increase
the adjusted basis in its shares by the excess of the amount of its proportionate share of the net
capital gain over its proportionate share of the tax that we pay. Both we and our corporate U.S.
shareholders will make commensurate adjustments in our respective earnings and profits for federal
income tax purposes. If we should elect to retain our net capital gain in this fashion, we will
notify our shareholders of the relevant tax information within 60 days after the close of our
taxable year.
Long-term capital gain is generally taxable at maximum federal income tax rates of 15%
(through 2010) in the case of U.S. shareholders who are individuals, and 35% for corporations.
Capital gain attributable to the sale of depreciated real property held for more than 12 months is
subject to a 25% maximum federal income tax rate for individual U.S. shareholders to the extent of
previously claimed depreciation deductions.
Distributions in excess of our current accumulated earnings and profits will not be taxable to
a U.S. shareholder to the extent that the distributions do not exceed the adjusted basis of the
U.S. shareholders shares but will reduce the U.S. shareholders basis in his shares. To the
extent that the distributions exceed the adjusted basis of a U.S. shareholders shares, they will
be included in income as long-term capital gain, generally taxed to noncorporate U.S. shareholders
at a maximum rate of 15% (through 2010), or included in income as short-term capital gain if the
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shares have been held for one year or less, provided in each case that the shares are a capital
asset in the hands of the shareholder.
Distributions that we declare in October, November or December of a taxable year to
shareholders of record on a date in one of those months will be deemed to have been received by the
shareholders on December 31, provided that we actually pay the dividends during the following
January.
Under IRS Revenue Procedure 2009-15, a REIT is permitted to pay taxable dividends in 2009 of
which up to 90% of the dividend is payable with the REITs stock. If we were to pay such a
dividend, taxable U.S. shareholders would generally be required to report the full amount of the
dividend, including the fair market value of any stock distributed, as ordinary income. We expect
to pay our remaining 2009 dividends in the form of cash. However the final determination of the
manner in which such dividends will be paid is subject to a formal declaration by our board of
directors.
The currently applicable provisions of the federal income tax laws relating to the 15% rate of
capital gain taxation and the applicability of capital gain rates for designated qualified dividend
income of REITs are currently scheduled to sunset or revert back to provisions of prior law
effective for taxable years beginning after December 31, 2010. Upon the sunset of the current
provisions, all dividend income of REITs and non-REIT corporations would be taxable at ordinary
income rates and the maximum capital gain tax rate for gain other than unrecaptured section 1250
gain would be increased (from 15% to 20%). The impact of this reversion is not discussed herein.
Consequently, shareholders should consult their own tax advisors regarding the effect of sunset
provisions on an investment in common shares.
U.S. shareholders may not include in their individual tax returns any net operating losses or
capital losses we incur. Instead, we would carry over those losses for potential offset against
our future income, subject to certain limitations. Taxable distributions that we make and gain
from the dispositions of our shares will not be treated as passive activity income and, therefore,
shareholders generally will not be able to apply any passive activity losses, such as losses from
certain types of limited partnerships in which a shareholder is a limited partner, against that
income. In addition, taxable distributions that we make generally will be treated as investment
income for purposes of the investment interest limitations. Capital gain from the disposition of
shares, or distributions treated as such, however, will be treated as investment income only if the
shareholder so elects, in which case that capital gain will be taxed at ordinary income rates. We
will notify shareholders regarding the portions of distributions for each year that constitute
ordinary income, return of capital, capital gain or represent tax preference items to be taken into
account for purposes of computing the alternative minimum tax liability of the shareholders.
A U.S. shareholders sale or exchange of shares will result in recognition of gain or loss in
an amount equal to the difference between the amount of cash and the fair market value of any
property received on such sale or exchange, exclusive of any portion attributable to accumulated
and declared but unpaid dividends that will generally be taxable to the shareholder as a
distribution on the shareholders shares, and the shareholders adjusted basis in the shares sold
or exchanged.
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This gain or loss will be capital gain or loss, provided that the shares are a capital asset
in the hands of the U.S. shareholder, and will be long-term capital gain or loss if the U.S.
shareholders holding period in the shares exceeds one year. Long-term capital gain will generally
be taxed to non-corporate U.S. shareholders at a maximum rate of 15% (through 2010). The IRS has
the authority to prescribe, but has not yet prescribed, regulations that would apply a capital gain
tax rate of 25% (which is generally higher than the long-term capital gain tax rates for
non-corporate shareholders) to a portion of capital gain realized by a non-corporate shareholder on
the sale of REIT shares that would correspond to the REITs unrecaptured Section 1250 gain.
Shareholders are urged to consult with their tax advisors with respect to their capital gain tax
liability. A corporate U.S. shareholder will be subject to tax at a maximum rate of 35% on capital
gain from the sale of our shares held for more than 12 months. In addition, in the case of a U.S.
shareholder who has owned the shares for six months or less, measured by using the holding period
rules of Section 857 of the Code, any loss upon a sale or exchange of shares will generally be
treated as a long-term capital loss to the extent of actual or constructive distributions from us
required to be treated by the U.S. shareholder as long-term capital gain.
If a U.S. shareholder recognizes a loss upon a subsequent disposition of our common shares in
an amount that exceeds a prescribed threshold, it is possible that the provisions of recently
adopted Treasury regulations involving reportable transactions could apply, with a resulting
requirement to separately disclose the loss generating transaction to the IRS. While these
regulations are directed towards tax shelters, they are written quite broadly, and apply to
transactions that would not typically be considered tax shelters. Shareholders should consult
their tax advisors concerning any possible disclosure obligation with respect to the receipt or
disposition of our common shares, or transactions that might be undertaken directly or indirectly
by us. Moreover, shareholders should be aware that we and other participants in transactions
involving us (including our advisors) might be subject to disclosure or other requirements pursuant
to these regulations.
Taxation of Our Tax-Exempt U.S. Shareholders
U.S. tax-exempt entities, including qualified employee pension and profit sharing trusts and
individual retirement accounts, generally are exempt from federal income taxation. However, they
are subject to taxation on their unrelated business taxable income, which we refer to in this
discussion as UBTI. While many investments in real estate generate UBTI, the IRS has ruled that
dividend distributions from a REIT to a tax-exempt entity do not constitute UBTI. Based on that
ruling, and provided that (i) a tax-exempt U.S. shareholder has not held our common shares as debt
financed property within the meaning of the Code (
i.e.
, where the acquisition or holding of the
property is financed through a borrowing by the tax-exempt shareholder), and (ii) our common shares
are not otherwise used in an unrelated trade or business, distributions from us and income from the
sale of our common shares generally should not be treated as UBTI to a tax-exempt U.S. shareholder.
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Tax-exempt U.S. shareholders that are social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts, and qualified group legal services plans exempt from
federal income taxation under sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the Code,
respectively, are subject to different UBTI rules, which generally will require them to
characterize distributions from us as UBTI.
In certain circumstances, a pension trust (i) that is described in Section 401(a) of the Code,
(ii) is tax exempt under section 501(a) of the Code, and (iii) that owns more than 10% of our
shares could be required to treat a percentage of the dividends from us as UBTI if we are a
pension-held REIT. We will not be a pension-held REIT unless (1) either (x) one pension trust
owns more than 25% of the value of our shares, or (y) a group of pension trusts, each individually
holding more than 10% of the value of our shares, collectively owns more than 50% of such shares
and (2) we would not have qualified as a REIT but for the fact that Section 856(h)(3) of the Code
provides that shares owned by such trusts shall be treated, for purposes of the requirement that
not more than 50% of the value of the outstanding shares of a REIT is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include certain entities).
Certain restrictions on ownership and transfer of our shares should generally prevent a tax-exempt
entity from owning more than 10% of the value of our shares, or us from becoming a pension-held
REIT.
Tax-exempt U.S. Shareholders are urged to consult their tax advisors regarding the federal, state
and local tax consequences of owning our shares.
Taxation of Our Non-U.S. Shareholders
A non-U.S. shareholder is a holder of shares of our stock that is not a U.S. shareholder.
The rules governing the federal income taxation of non-U.S. shareholders are complex, and the
following discussion is intended only as a summary of these rules. Shareholders who are non-U.S.
shareholders should consult with their own tax advisors to determine the impact of federal, state,
local, and foreign tax laws, including any tax return filing and other reporting requirements, with
respect to investment in our shares.
In general, a non-U.S. shareholder will be subject to federal income tax at graduated rates in
the same manner as our U.S. shareholders with respect to its investment in shares if that
investment is effectively connected with the non-U.S. shareholders conduct of a trade or business
in the United States. A corporate non-U.S. shareholder may also be subject to an additional 30%
branch profits tax on the repatriation from the United States of the effectively connected earnings
and profits. The balance of this discussion addresses only those non-U.S. shareholders whose
investment in our shares is not effectively connected with the conduct of a trade or business in
the United States.
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Under IRS Revenue Procedure 2009-15, a REIT is permitted to pay taxable dividends in 2009 of
which up to 90% of the dividend is payable with the REITs stock. If we were to pay such a
dividend, we may be required to withhold U.S. tax with respect to such dividends paid to non-U.S.
shareholders, including in respect of all or a portion of such dividend that is payable in stock.
We expect to pay our remaining 2009 dividends in the form of cash. However, the final
determination of the manner in which such dividends will be paid is subject to a formal declaration
by our board of directors.
A distribution by us to a non-U.S. shareholder that is not attributable to gain from the sale
or exchange by us of a United States real property interest and that is not designated by us as a
capital gain dividend will be treated as an ordinary income dividend to the extent that it is made
out of our current or accumulated earnings and profits. A distribution of this type will generally
be subject to federal withholding tax at the rate of 30% on the gross amount of the dividend, or a
lower rate that may be specified by a tax treaty if the non-U.S. shareholder has demonstrated his
entitlement to benefits under the tax treaty in the manner prescribed by the IRS. While tax
treaties may reduce or eliminate the withholding obligations on our distributions, under some
treaties, rates below the 30% generally applicable to ordinary income dividends from U.S.
corporations may not apply to ordinary income dividends from a REIT. Because we cannot determine
our current and accumulated profits until the end of our taxable year, withholding at the rate of
30% or applicable lower treaty rate will be imposed on the gross amount of any distribution to a
non-U.S. shareholder that we make and do not designate a capital gain dividend. Notwithstanding
this withholding, distributions in excess of our current and accumulated earnings and profits are a
nontaxable return of capital to the extent that they do not exceed the non-U.S. shareholders
adjusted basis in his shares, and the nontaxable return of capital will reduce the adjusted basis
in these shares. To the extent that distributions in excess of our current and accumulated
earnings and profits exceed the adjusted basis of a non-U.S. shareholders shares, the
distributions will give rise to a tax liability if the non-U.S. shareholder would otherwise be
subject to tax on any gain from the sale or exchange of his shares, as discussed below. A non-U.S.
shareholder may seek a refund of amounts withheld on distributions to him to the extent they exceed
the tax liability resulting from those distributions, provided that the required information is
furnished to the IRS.
For any year in which we qualify as a REIT, our distributions that are attributable to gain
from our sale or exchange of a United States real property interest within the meaning of Section
897 of the Code are taxable to a non-U.S. shareholder as if these distributions were gains
effectively connected with a trade or business in the United States conducted by the non-U.S.
shareholder. Accordingly, a non-U.S. shareholder will be taxed on these amounts at the normal
capital gain rates applicable to a U.S. shareholder, subject to any applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien individuals; the
non-U.S. shareholder would be required to file a federal income tax return reporting these amounts,
even if the applicable withholding were imposed as described below; and corporate non-U.S.
shareholders not entitled to any treaty relief or exemption may owe the 30% branch profits tax in
respect of these amounts. We are required to withhold from distributions to non-U.S. shareholders
35% of the maximum amount of any distribution that could be designated by us as a capital gain
dividend. However, the 35% withholding tax will not apply to any capital gain
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dividend with respect to any class of our shares that is generally traded on an established
securities market located in the United State if the non-U.S. shareholder did not own more than 5%
of such class of stock at any time during the taxable year. Instead, any capital gain dividend
will be treated as a distribution subject to the ordinary dividend rules described above. In
addition, for purposes of this withholding rule, if we designate prior distributions as capital
gain dividends, then subsequent distributions up to the amount of the designated prior
distributions will be treated as capital gain dividends subject to withholding. If, for any
taxable year, we elect to designate as capital gain dividends any portion of the dividends paid or
made available for the year to our shareholders, including our retained capital gains treated as
capital gain dividends, then the portion of the capital gain dividends so designated that is
allocable to the holders of shares will on a percentage basis equal the ratio of the amount of the
total dividends paid or made available to the holders of the shares for the year to the total
dividends paid or made available for the year to holders of all classes of our shares.
In addition, it is not entirely clear whether distributions that are (i) otherwise treated as
capital gain dividends, (ii) not attributable to the disposition of a U.S. real property interest,
and (iii) paid to non-U.S. shareholders who own less than 5% of the value of our common shares at
all times during the 1-year period ending on the date of such distribution, will be treated as (a)
long-term capital gain to such non-U.S. shareholders or as (b) ordinary dividends taxable in the
manner described above. If we were to pay a capital gain dividend described in the prior sentence,
non-U.S. shareholders should consult their tax advisors regarding the taxation of such distribution
in their particular circumstances.
The amount of any tax withheld by us with respect to a distribution to a non-U.S. shareholder
is creditable against the non-U.S. shareholders federal income tax liability, and if the amount of
tax withheld by us exceeds the non-U.S. shareholders federal income tax liability with respect to
the distribution, the non-U.S. shareholder may file for a refund of the excess from the IRS. In
this regard, note that the 35% withholding tax rate on capital gain dividends corresponds to the
maximum income tax rate applicable to corporate non-U.S. shareholders but is higher than the 15%
and 25% maximum rates on capital gain generally applicable to noncorporate non-U.S. shareholders.
Treasury regulations provide presumptions under which a non-U.S. shareholder is subject to backup
withholding and information reporting unless we receive certification from the shareholder of its
non-U.S. shareholder status. The Treasury regulations also provide special rules to determine
whether, for purposes of determining the applicability of a tax treaty, our distributions to a
non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning
an interest in that entity, and whether the entity or its owners are entitled to benefits under the
tax treaty.
If our shares are not United States real property interests within the meaning of Section
897 of the Code, a non-U.S. shareholders gain on sale of shares generally will not be subject to
federal income taxation, except that a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year will be subject to a 30% tax on that gain. The
shares will not constitute a United States real property interest if we are a domestically
controlled REIT. A domestically controlled REIT is a REIT in which, at all times during the
preceding five-year period, less than 50% in value of its shares was held directly or indirectly by
foreign persons. We believe that we are and will be a domestically controlled
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REIT and, thus, that a non-U.S. shareholders gain on sale of shares will not be subject to federal
income taxation. However, because our shares are publicly traded, we can provide no assurance that
we will be a domestically controlled REIT. If we are not a domestically controlled REIT, a
non-U.S. shareholders gain on sale of our shares will not be subject to federal income taxation as
a sale of a United States real property interest, if the shares are regularly traded, as defined
by applicable Treasury regulations, on an established securities market, such as the New York Stock
Exchange, and the non-U.S. shareholder has at all times during the preceding five years owned 5% or
less by value of the then-outstanding shares. Special rules may apply to sales or other
dispositions during the period before the shares are traded on the New York Stock Exchange. If the
gain on the sale of the shares were subject to federal income taxation, the non-U.S. shareholder
would generally be subject to the same treatment as a U.S. shareholder with respect to its gain,
subject to applicable alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals, would be required to file a federal income tax return reporting that
gain, and in the case of corporate non-U.S. shareholders might owe branch profits tax. In any
event, a purchaser of shares from a non-U.S. shareholder will not be required to withhold on the
purchase price if the purchased shares are regularly traded on an established securities market or
if we are a domestically controlled REIT. Otherwise, the purchaser of shares may be required to
withhold 10% of the purchase price paid to the non-U.S. shareholder and to remit the withheld
amount to the IRS. Any amount withheld would be creditable against the non-U.S. shareholders tax
liability.
Withholding and Reporting Requirements
We will report to our U.S. shareholders and to the IRS the amount of distributions paid during
each calendar year and the amount of tax withheld, if any. Under the backup withholding rules, a
U.S. shareholder may be subject to backup withholding at the rate of 28% with respect to
distributions paid unless the U.S. shareholder (i) is a corporation or comes within other exempt
categories and when required demonstrates that fact, or (ii) provides a taxpayer identification
number, certifies as to no loss of exemption from the backup withholding rules and otherwise
complies with applicable requirements of the backup withholding rules. A U.S. shareholder who does
not provide us with his correct taxpayer identification number may be subject to penalties imposed
by the IRS. In addition, we may be required to withhold a portion of capital gain distributions to
any U.S. shareholder who fails to certify his non-foreign status to us.
An individual who is a U.S. shareholder may satisfy the requirements for avoiding backup
withholding by providing us with an appropriately prepared IRS Form W-9.
We will report to our non-U.S. shareholders and to the IRS the amount of dividends paid during
each calendar year and the amount of tax withheld, if any. These information reporting
requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax
treaty or because the dividends were effectively connected with a U.S. trade or business. As
discussed above, withholding rates of 30% and 35% may apply to distributions to non-U.S.
shareholders.
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A non-U.S. shareholder who wishes to claim the benefit of an applicable treaty rate may need
to satisfy certification and other requirements, such as providing us with an IRS Form W-8BEN. A
non-U.S. shareholder who wishes to claim distributions are effectively connected with a U.S. trade
or business, may need to satisfy certification and other requirements, such as providing us with an
IRS Form W-8ECI.
The payment of the proceeds from the disposition of our shares to or through the U.S. office
of a U.S. or foreign broker will be subject to information reporting and, possibly, backup
withholding unless the non-U.S. shareholder certifies as to its non-U.S. status or otherwise
establishes an exemption, provided that the broker does not have actual knowledge that the
shareholder is a U.S. person or that the conditions of any other exemption are not, in fact,
satisfied. The proceeds of the disposition by a non-U.S. shareholder of our shares to or through a
foreign office of a broker generally will not be subject to information reporting or backup
withholding. However, if the broker is a U.S. person, a controlled foreign corporation for U.S.
tax purposes, or a foreign person 50% or more of whose gross income from all sources for specified
periods is from activities that are effectively connected with a U.S. trade or business,
information reporting generally will apply unless the broker has documentary evidence as to the
non-U.S. shareholders foreign status and has no actual knowledge to the contrary.
Any amounts required to be withheld from payments to shareholders will be collected by us or
other applicable withholding agents for remittance to the IRS. Backup withholding is not an
additional tax. If withholding results in an overpayment of taxes, over withheld amounts may be
refunded or credited against the shareholders federal income tax liability, provided that the
shareholder furnishes the required information to the IRS. In addition, the absence or existence of
applicable withholding does not necessarily excuse a shareholder from filing applicable federal
income tax returns.
Federal Estate Tax Consequences
Our shares that are held by a non-U.S. shareholder at time of death will be included in the
shareholders gross estate for U.S. federal estate tax purposes unless an applicable estate tax
treaty provides otherwise.
Other Tax Consequences
We and our shareholders may also be subject to state or local taxation in various state or
local jurisdictions, including those in which we or our shareholders transact business or reside.
State and local tax treatment may not conform to the federal income tax consequences discussed
above. Consequently, we advise parties to consult their own tax advisors regarding the specific
federal, state, local, foreign and other tax consequences to them of the acquisition, ownership,
and disposition of our shares.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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SOVRAN SELF STORAGE, INC.
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Date: September 29, 2009
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By
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/s/ DAVID L. ROGERS
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Name:
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David L. Rogers
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Title:
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Chief Financial Officer
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- 32 -
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