Alert October 14, 2008

Three-Year Sunset Does Not Apply to Operating Partnership Unit and Debt Security Conversion Shelf Registration Statements

We recently approached the staff of the SEC’s Division of Corporation Finance (the “Staff”) on behalf of a number of our Real Estate Investment Trust (“REIT”) clients seeking clarification as to the application of Rule 415(a)(1)(iv). We asked the Staff whether a shelf registration statement on Form S-3 for the exchange of units and/or debt securities of a partnership controlled by the REIT for shares of common stock of the REIT, where the REIT has a right either to issue its common stock or to redeem the outstanding units or debt securities for cash, would be subject to the three-year sunset under Rule 415(a)(5). The Staff concurred in our belief that Rule 415(a)(1)(iv) applies to the exchange in this situation and, accordingly, the three-year sunset would not apply.

The Staff’s position is of special importance to many Umbrella Partnership Real Estate Investment Trusts (“UPREITs”). An UPREIT is a REIT that holds all or substantially all of its assets through a partnership (an “Operating Partnership”) in which the REIT owns a controlling interest. There are two relatively common types of transactions engaged in by UPREITs that raise the issue for which we sought clarification from the Staff:  (1) the issuance of shares of common stock of the REIT (“REIT Shares”) in exchange for units of limited partnership interest in the REIT’s Operating Partnership (“OP Units”) and (2) the issuance of REIT Shares in exchange for all or a portion of exchangeable debt securities issued by a REIT’s Operating Partnership.

OP Units, other than those held by the REIT, are typically issued in private transactions to third parties in exchange for real estate assets acquired by the REIT through its Operating Partnership. In general, these OP Unit holders have the right to tender their OP Units back to the Operating Partnership and the REIT for either cash or REIT Shares (at the option of the REIT) at any time after a certain holding period has expired (often one year after issuance). Many publicly traded REITs have filed shelf registration statements on Form S-3 to register the issuance of REIT Shares in exchange for OP Units upon the tender of the OP Units by their holders.

Another situation addressed by the Staff’s position is the issuance of REIT Shares pursuant to the terms of exchangeable debt securities issued by the Operating Partnership. According to the terms of the exchangeable debt securities, upon the occurrence of specified events, the holders of the Operating Partnership’s exchangeable debt securities may exchange them for cash or, at the Operating Partnership’s option, for REIT Shares based on a specified exchange rate. In many cases, the issuance of the debt securities (or the resale of the debt securities) has been registered by the Operating Partnership, and in some cases, the issuance of the REIT Shares potentially issuable upon exchange of the debt securities has also been registered on Form S-3.

These offerings are clearly governed by SEC Rule 415, but it was unclear whether they would be subject to the three-year sunset that applies to some Form S-3 registration statements that register Rule 415 offerings. We previously published a client advisory describing the three-year sunset, which will begin to apply to Form S-3 registration statements on December 1, 2008, “Shelf Registration Statements Begin Expiring in December (July 14, 2008). We asked the Staff to confirm that the issuance of REIT Shares upon exchange of OP Units and/or Operating Partnership debt securities in the circumstances described above would fall under Rule 415(a)(1)(iv) – and therefore would not subject to the sunset – rather than Rule 415(a)(1)(x), which would be subject to the sunset.[1]  The Staff concurred in our opinion that Rule 415(a)(1)(iv) does apply to the issuance of REIT Shares in exchange for OP Units and/or exchangeable debt securities in the circumstances described above. As a result, the three-year sunset on Form S-3 registration statements under Rule 415(a)(5) will not apply to Form S-3 registration statements covering these issuances under Rule 415(a)(1)(iv). This will save REITs that have filed, or will file in the future, Form S-3 registration statements covering these issuances the burden and expense associated with re-filing registration statements every three years.