Certain Material U.S. Federal Income Tax Considerations of the Merger
On October 5, 2006, CNL Retirement Properties, Inc. (“CRP”) merged with and into one of our subsidiaries. As a result of the merger, each share of CRP common stock that you held at the closing of the merger has been converted into the right to receive:
- $11.1293 cash and 0.0865 of a share of HCP common stock; and
- if the 0.0865 exchange ratio would have caused you to receive a fraction of a share of HCP common stock, cash in lieu of that fractional share in an amount equal to the fraction multiplied by $30.626.
As described in more detail in the proxy statement/prospectus filed August 8, 2006, this merger is taxable for U.S. federal income tax purposes. The following is a summary of certain information contained in the Registration Statement and proxy statement/prospectus. For more detailed information, click this link to view the proxy statement/prospectus.
Gain or Loss: For federal income tax purposes, if you are a former CRP stockholder whose shares of CRP common stock were converted in the merger into cash and shares of HCP common stock, you will recognize taxable gain or loss equal to the difference between:
- the aggregate amount of:
- (1) the amount of cash you received in the merger, plus
- (2) the fair value of the shares of HCP common stock you received in the merger as of October 5, 2006, less
- your tax basis in your shares of CRP common stock.
Tax Basis in Former Shares of CRP Common Stock: The tax basis of your former shares of CRP common stock is the price for which you purchased those shares adjusted to reflect any changes in tax basis that took place after you purchased those shares. The only changes in tax basis since August 1999 of which we are aware are distributions that are considered, for federal income tax purposes, as a return of capital. The amount of any such return of capital is specifically stated in the 1099DIV forms that you received from CRP over the years and will also be included in the 1099DIV that you will receive for 2006. If you have not retained your 1099DIV forms, and you have a financial advisor, you should contact that financial advisor. Click here to see a general list of the return of capital on CRP common stock of which we are aware. This list is incomplete and includes the return of capital on the CRP common stock through 2005 and does not include the return of capital for 2006. We will provide you with the return of capital for 2006 in the 1099DIV for 2006.
New Tax Basis in HCP Common Stock: Your new tax basis for each new share of HCP common stock that you received in the merger will be equal to the fair value of such share on October 5, 2006. Although not entirely clear, it is reasonable to determine the fair value of each share of HCP common stock as the average between the high and low prices for HCP common stock on October 5, 2006, which was $31.58.
Simple example – federal income tax
Assume at the time of the merger you held 100 shares of CRP common stock which you purchased two years ago for a total of $1,000.
For purposes of this example, assume that the tax basis adjustment over these two years was $50 (this means that you received back $50 from CRP as a return of your capital for tax purposes). Your tax basis in the CRP shares is therefore $950 instead of $1000.
In the merger, in return for these CRP shares you received:
- $1,132.84, which is the sum of the cash consideration of $1,112.93 and $19.91 cash in lieu of a fraction of a share; and
- $252.64, which is the fair value of 8 whole shares of HCP common stock should you decide to adopt the method of calculating value mentioned above.
Under this simple example, you would recognize gain in the amount of:
| $1132.84 | (cash) | |
| + | $252.64 | (fair value of 8 shares of shares of HCP common stock) |
| – | $950.00 | (basis in your former shares of CRP common stock) |
| = | $435.48 |
Your new tax basis in each of the 8 shares of HCP common stock will be $31.58, should you choose to adopt the method for calculating value mentioned above.
Important Limitations:
The above description is provided for general informational purposes only and there is no assurance that it will apply in your particular circumstances. For a more detailed description of the tax consequences of the transaction, please refer to “Material United States Federal Income Tax Considerations – Tax Consequences of the Merger” in the proxy statement/prospectus filed August 8, 2006.
The description above only addresses, in very general terms, the federal income tax consequences of the merger. This description does not address any foreign, state or local taxes that might also apply, does not address any withholding taxes that might apply and does not apply if you are a member of a special class of taxpayers subject to special rules under the Internal Revenue Code.
Each shareholder is strongly urged to consult his or her own tax advisor regarding the tax consequences of the merger, the determination of basis and the information they are required to file with any taxing authority.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that (i) any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code; (ii) any such tax advice is written in connection with the promotion or marketing of the matters addressed; and (iii) you should seek advice based on your particular circumstances from an independent advisor.