<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-44997
PROSPECTUS
728,929 SHARES
BRE PROPERTIES, INC.
COMMON STOCK
This Prospectus relates to the offer and sale of up to 728,929 shares (the
"Shares") of Common Stock, $0.01 par value ("Common Stock"), of BRE Properties,
Inc. ("BRE" or the "Company"), which may be offered from time to time by a
certain shareholder of the Company (the "Selling Shareholder"). The Company is
registering the Shares on behalf of the Selling Shareholder, but the
registration of the Shares does not necessarily mean that any of the Shares will
be offered or sold by the Selling Shareholder. The Company will receive no part
of the proceeds of any sales of the Shares offered hereby.
All of the Shares were originally issued by the Company to the Selling
Shareholder in December 1997, in connection with the formation of the Selling
Shareholder as a unit investment trust. The Shares were issued pursuant to an
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"). The Shares are being registered by the Company
pursuant to a Registration Rights Agreement dated as of December 23, 1997 (the
"Registration Rights Agreement") between the Company and the Selling
Shareholder.
The Shares may be offered by the Selling Shareholder from time to time
directly or through agents, underwriters or broker-dealers, on terms to be
determined at the time of the sale, in one or more transactions on the New York
Stock Exchange, Inc. (the "NYSE") or any national securities exchange where the
Common Stock is listed or traded, in the over-the-counter market, in negotiated
transactions or otherwise. See "Plan of Distribution." The price at which any
of the Shares may be sold, and the commissions, if any, paid in connection with
any such sale, are unknown and may vary from transaction to transaction. The
Company will pay all expenses incident to the offering and sale of the Shares to
the public other than any commissions and discounts of underwriters, dealers or
agents and any transfer taxes. See "Selling Shareholder" and "Plan of
Distribution."
The Securities and Exchange Commission (the "Commission") may take the view
that, under certain circumstances, the Selling Shareholder and any broker-
dealers or agents that participate with the Selling Shareholder in the
distribution of the Shares may be deemed to be "underwriters" within the meaning
of the Securities Act. Commissions, discounts or concessions received by any
such broker-dealer or agent may be deemed to be underwriting commissions under
the Securities Act. The Company and the Selling Shareholder have agreed to
certain indemnification arrangements. See "Plan of Distribution."
The Common Stock is traded on the NYSE under the symbol "BRE." On March 2,
1998, the closing sale price of the Common Stock as reported on the NYSE was
$26.875 per share.
___________
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER
"RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
___________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
___________
The date of this Prospectus is March 6, 1998
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR AN APPLICABLE PROSPECTUS
SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER
OR ANY UNDERWRITER, DEALER OR AGENT. THIS PROSPECTUS AND ANY APPLICABLE
PROSPECTUS SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OFFERED HEREBY OR THEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS
SUPPLEMENT NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission in
accordance with the Exchange Act can be inspected and copied at the Commission's
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: Seven World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Commission maintains a home page on
the Internet that contains such information with respect to registrants that
file electronically such as the Company at http://www.sec.gov. The Company's
Common Stock is listed on the NYSE and similar information concerning the
Company can be inspected and copied at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement (as the
same may be amended from time to time, the "Registration Statement") of which
this Prospectus is a part under the Securities Act, with respect to the Shares
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain portions of which have been omitted
as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the contents of any contract or other
document do not purport to be complete, and in each instance reference is made
to the copy of such contract or other document filed or incorporated by
reference as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference and the exhibits and schedules
thereto. For further information regarding the Company and the Shares, reference
is hereby made to the Registration Statement and such exhibits and schedules,
which may be obtained from the Commission at its principal office in Washington,
D.C. upon payment of the fees prescribed by the Commission.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company with the
Commission and are incorporated herein by reference:
a. Report on Form 10-K for the fiscal year ended December 31, 1996, as amended
by the Report on Form 10-K/A filed on April 25, 1997.
b. Reports on Form 10-Q for the fiscal quarters ended March 31, June 30, and
September 30, 1997, filed on April 25, August 12, and November 14, 1997,
respectively.
c. Current Report on Form 8-K filed on January 14, 1997, as amended by the
Current Report on Form 8-K/A filed on February 13, 1997, and the Current
Report on Form 8-K/A filed on April 23, 1997.
d. Current Report on Form 8-K/A filed on April 23, 1997, amending the Current
Report on Form 8-K/A filed on December 10, 1996, and the Current Report on
Form 8-K filed on October 15, 1996.
e. Current Report on Form 8-K/A filed on April 23, 1997, amending the Current
Report on Form 8-K/A filed on May 21, 1996, and the Current Report on Form
8-K filed on April 1, 1996.
f. Current Report on Form 8-K filed on April 25, 1997.
g. Current Report on Form 8-K filed on June 12, 1997.
h. Current Report on Form 8-K filed on June 23, 1997.
i. Current Report on Form 8-K filed on September 3, 1997, as amended by the
Current Report on Form 8-K/A filed on October 30, 1997.
j. Current Report on Form 8-K filed on October 15, 1997.
k. Current Report on Form 8-K filed on November 24, 1997.
l. Current Report on Form 8-K filed on December 18, 1997.
m. Current Report on Form 8-K filed on February 24, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Shares shall be deemed to be incorporated
by reference in this Prospectus and to be part hereof from the date of filing of
such documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom this Prospectus has been delivered, upon
the written or oral request of such person, a copy of any and all documents
incorporated by reference in this Prospectus (other than exhibits to such
documents unless such exhibits are specifically incorporated by reference in
such documents). Requests for such copies should be directed to BRE Properties,
Inc., 44 Montgomery Street, Suite 3600, San Francisco, California 94104-4602,
Attn: Charles P. Wingard, Director of Financial Reporting, telephone number
(415) 445-6530.
3
<PAGE>
FORWARD-LOOKING STATEMENTS
In addition to historical information, the information included and
incorporated by reference in this Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Exchange Act, such as those pertaining
to the Company's capital resources, portfolio performance and results of
operations. In addition, the pro forma financial statements and other pro forma
information incorporated by reference in this Prospectus also contain certain
such forward-looking statements. Forward-looking statements involve numerous
risks and uncertainties and should not be relied upon as predictions of future
events. Certain such forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "pro forma,"
"estimates," or "anticipates" or the negative thereof or other variations
thereof or comparable terminology, or by discussions of strategy, plans or
intentions. Such forward-looking statements are necessarily dependent on
assumptions, data or methods that may be incorrect or imprecise and they may be
incapable of being realized. The following factors, among others, could cause
actual results and future events to differ materially from those set forth or
contemplated in the forward-looking statements: defaults or non-renewal of
leases, increased interest rates and operating costs, failure to obtain
necessary outside financing, difficulties in identifying properties to acquire
and in effecting acquisitions, failure to successfully integrate acquired
properties and operations, risks and uncertainties affecting property
development and construction (including, without limitation, construction
delays, cost overruns, inability to obtain necessary permits and public
opposition to such activities), failure to qualify as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (the "Code"),
environmental uncertainties, risks related to natural disasters, financial
market fluctuations, changes in real estate and zoning laws and increases in
real property tax rates. The success of the Company also depends upon economic
trends generally, including interest rates, income tax laws, governmental
regulation, legislation, population changes and those risk factors discussed in
this Prospectus under the heading "Risk Factors." Readers are cautioned not to
place undue reliance on forward-looking statements, which reflect management's
analysis only. The Company assumes no obligation to update forward-looking
statements. See also the Company's reports filed from time to time with the
Commission pursuant to the Exchange Act.
THE COMPANY
The Company, a Maryland corporation, is a fully integrated real estate
operating company which owns, acquires, develops, rehabilitates and manages
apartment communities in 12 targeted metropolitan markets in the western United
States. As of November 30, 1997, BRE's multifamily portfolio included 73
apartment communities aggregating 18,329 units in California, Arizona,
Washington, Oregon, Nevada, New Mexico, and Utah and eight apartment communities
under development aggregating approximately 2,445 units. See "Recent
Developments -- TCR-West Transaction." On that date, BRE also owned five
commercial and retail properties and held limited partnership interests in two
shopping centers and one apartment community.
The Company's business objective is to become the preeminent owner,
developer and operator of apartment communities in key growth markets of the
western United States. To further this objective, the Company implemented a
strategic plan in 1996, many goals of which have been achieved, including the
establishment of internal property management, the disposition of substantially
all non-core, non-apartment assets and increased liquidity of the Company's
common stock, par value $.01 per share (``Common Stock''). In addition, on
November 18, 1997, the Company completed the acquisition of certain assets and
operations of Trammell Crow Residential located in the western United States
(``TCR-West''), which further advanced significant objectives of the strategic
plan. See ``Recent Developments -- TCR-West Transaction.'' As a result of the
acquisition, BRE:
. Increased the number of completed multifamily units owned on the acquisition
date from 13,543 to 18,329;
. Acquired eight apartment communities under development aggregating
approximately 2,445 units;
4
<PAGE>
. Added development, construction and third party management capabilities,
creating fully-integrated multifamily real estate operations;
. Further strengthened and deepened the senior management team; and
. Significantly increased the geographic diversification of the portfolio by
expanding from nine western markets to 12, establishing a critical mass of at
least 1,000 multifamily units in seven markets, which the Company believes will
enable it to achieve additional operating efficiencies.
The Company believes that its future growth will be supported by the
continued implementation of its strategic plan. Key characteristics of the plan
are:
. A research-driven investment focus which includes:
-- The acquisition and development of apartment communities in defined
western United States markets;
-- The balancing of its multifamily portfolio across western metropolitan
markets with diverse economic and employment characteristics to reduce
individual market risk;
-- The selective sale of properties which management believes have reached
maximum cash flow potential;
. Utilization of the Company's fully-integrated multifamiliy operations to
continue to achieve operating efficiencies through internal property management
and to target attractive opportunities -- acquisition, development or
rehabilitation -- in each of its markets; and
. The maintenance of a strong balance sheet to enhance financial flexibility.
The following table summarizes certain information relating to the
Company's completed apartment communities as of November 30, 1997, after giving
effect to the TCR-West acquisition:
<TABLE>
<CAPTION>
Number of Number Percentage of
Metropolitan Market(1) Properties of Units Total Units
---------------------- --------------- --------------- ----------------
<S> <C> <C> <C>
Phoenix................................... 12 3,082 17%
San Francisco Bay Area.................... 9 2,960 16
Los Angeles/Orange County................. 10 2,352 13
San Diego................................. 9 1,899 10
Tucson.................................... 9 1,836 10
Seattle................................... 6 1,673 9
Sacramento................................ 7 1,543 8
Salt Lake City............................ 3 904 5
Las Vegas................................. 4 814 5
Albuquerque............................... 2 646 4
Portland.................................. 2 620 3
-- ------ ---
73 18,329 100%
== ====== ===
</TABLE>
- --------------
(1) Does not include the Denver metropolitan market where the Company is
currently developing a property and also acquired an apartment community in
January 1998.
All of the properties and operations acquired in the TCR-West acquisition
are held through newly-formed or newly-acquired subsidiaries of BRE. These
include BRE Property Investors LLC (the ``Operating Company''), a Delaware
limited liability company which acquired properties with a book
5
<PAGE>
value of approximately $430 million, and Blue Ravine Investors LLC (``Blue
Ravine''), a Delaware limited liability company which acquired a single property
with a book value of approximately $30 million. BRE is the sole managing member
of the Operating Company and, as of November 30, 1997, owned an approximately
70% equity interest therein. The remaining equity interests in the Operating
Company (all of which will be exchangeable at the option of the holders thereof,
commencing on November 18, 1998, into Common Shares, or, at the option of BRE,
cash in an amount equal to the market value of such Common Shares at the time of
exchange) are owned by other, non-managing members of the Operating Company. BRE
also holds an approximately 88% equity interest in and is the sole managing
member of Blue Ravine. The equity interests issued by Blue Ravine will be
exchangeable for Common Shares (or at BRE's option, cash) upon terms similar to
those applicable to the Operating Company. It is expected that Blue Ravine will
be merged with and into the Operating Company, with the Operating Company as the
surviving entity, on or after November 30, 1998. Upon such merger, the equity
interests issued by Blue Ravine will be changed into a like number of equity
interests in the Operating Company. See ``Recent Developments--TCR-West
Transaction.''
As used in this Prospectus, unless the context otherwise requires,
references to the "Company" shall include BRE, the Operating Company, Blue
Ravine and their respective affiliated and subsidiary companies. BRE's
principal executive offices are located at 44 Montgomery Street, Suite 3600, San
Francisco, California 94104-4602, and its telephone number is (415) 445-6530.
RECENT DEVELOPMENTS
TCR-West Transaction
On November 18, 1997, the Company acquired certain real estate assets and
operations of TCR-West (the ``TCR-West Transaction'') for a purchase price of
approximately $462 million. The acquisition included 17 completed apartment
properties comprising 4,786 units located in California, Arizona, Utah and New
Mexico. The following table sets forth certain information regarding those
properties:
<TABLE>
<CAPTION>
Number
Property Location of Units
-------- -------- --------
<S> <C> <C>
Deer Valley.............................. San Rafael, CA 171
Blue Rock Village I...................... Vallejo, CA 280
Blue Rock Village II..................... Vallejo, CA 280
Parkside Village......................... Riverside, CA 304
Parkside Terrace......................... Santa Ana, CA 240
Parkside Court........................... Santa Ana, CA 210
Overlook at Blue Ravine.................. Folsom, CA 400
Pinnacle at South Mountain I............. Phoenix, AZ 360
Pinnacle at South Mountain II............ Phoenix, AZ 192
Pinnacle at Union Hills.................. Phoenix, AZ 264
Pinnacle Heights......................... Tucson, AZ 310
Pinnacle Canyon.......................... Tucson, AZ 225
Pinnacle at Fort Union................... Salt Lake City, UT 160
Pinnacle Reserve......................... Salt Lake City, UT 492
Pinnacle Lakeside........................ Salt Lake City, UT 252
Pinnacle at High Desert.................. Albuquerque, NM 430
Pinnacle View............................ Albuquerque, NM 216
-----
Total................................. 4,786
=====
</TABLE>
In addition, the Company acquired eight apartment properties in various stages
of development. These development properties are expected to include
approximately 2,445 units and are located in Arizona, Colorado, Utah, New Mexico
6
<PAGE>
and Nevada (the ``Development Properties''). The Company expects to incur an
estimated $113 million to complete development and construction of the
Development Properties from November 1997 through 1999.
The Company also acquired TCR-West's development, construction and third-party
management operations in the transaction, including approximately 600 new
employees and three regional offices located in Arizona, California and Utah.
Prior to the acquisition, the Company was not engaged in the development and
construction of real estate properties or in the management of properties owned
by third parties.
The total cost of the TCR-West Transaction (including closing costs but
excluding the value of any Development OC Units (as defined below) which may be
issued pursuant to such transaction) was approximately $462 million. The Company
financed the cost of the acquisition with bank borrowings of approximately $160
million, the issuance of 3,713,331 Common Shares, 2,672,087 units and 152,500
performance units (``Performance OC Units'') of the Operating Company and Blue
Ravine, and assumed debt of $126 million. Under the terms of the transaction, up
to an additional 627,594 development units (``Development OC Units'') in the
Operating Company, subject to possible adjustment, may be issued if certain
completion schedule and budget objectives related to the Development Properties
are met in the future. Pursuant to the terms of the transaction, the Common
Shares and the OC Units (as defined below) issued in the transaction were valued
at $26.93 per Common Share and OC Unit. The units of the Operating Company and
Blue Ravine, including the Performance OC Units and the Development OC Units,
are hereinafter sometimes called ``OC Units.'' The OC Units will be
exchangeable, commencing November 18, 1998, at the option of the holders thereof
for Common Shares (at a rate of one Common Share per OC Unit, subject to
adjustment under certain circumstances) or, at BRE's election, into an
equivalent amount of cash based on the value of the Common Shares at the time of
the exchange. Upon the merger of Blue Ravine into the Operating Company, which
is anticipated will occur on or after November 30, 1998, the OC Units issued by
Blue Ravine will be changed into a like number of OC Units of the Operating
Company. See ``Risk Factors'' for a discussion of certain risks associated with
the TCR-West Transaction.
CREDIT FACILITY
In order to fund the cash payable at the closing of the TCR-West Transaction,
the Company arranged a new $265 million unsecured line of credit (the ``Credit
Facility'') with Bank of America National Trust and Savings Association
(``BofA''). The Credit Facility replaced the Company's then existing $115
million line of credit with BofA. As of March 3, 1998, borrowings of
approximately $50 million were outstanding under the Credit Facility and
approximately $29 million of borrowings were also outstanding under the
Company's $35 million unsecured line of credit with Sanwa Bank California (the
``Sanwa Line of Credit''). The Credit Facility may be used for acquisitions and
development of apartment projects and for general working capital purposes. The
Credit Facility is scheduled to mature on July 10, 2000. The Credit Facility
carries an interest rate based on the Company's credit rating and, as of the
date of this Prospectus, borrowings thereunder bore interest at the London
InterBank Offer Rate (``LIBOR'') plus 0.70%. Repayment of the Credit Facility
has been guaranteed by the Operating Company and it is anticipated that Blue
Ravine will also guarantee borrowings under the Credit Facility. The Operating
Company has also guaranteed repayment of borrowings under the Sanwa Line of
Credit. In addition, any subsidiaries of the Company which in the future meet
certain pre-defined levels of assets or net income will also be required to
guarantee borrowings under the Credit Facility and the Sanwa Line of Credit.
7
<PAGE>
PROPERTY ACQUISITIONS
On December 24, 1997, the Company acquired Arbor Pointe, which is a 240-unit
apartment community located in Sacramento, California, for a purchase price of
approximately $9 million. On January 30, 1998, the Company acquired The Landing
at Bear Creek, which is a 204-unit apartment community located in Lakewood,
Colorado, for a purchase price of approximately $18 million. These acquisitions
were financed with borrowings under the Company's Credit Facility.
CERTAIN 1997 FINANCIAL INFORMATION
On January 15, 1998, the Company announced the following unaudited financial
information for the quarter and year ended December 31, 1997.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Investments in rental properties:
Multifamily........................................... $1,248,012 $710,240
Commercial and retail................................. 11,929 103,528
Construction in progress.............................. 84,202 --
Less: accumulated depreciation and amortization....... (49,721) (49,690)
---------- --------
1,294,422 764,078
Investments in limited partnerships................... 2,780 2,621
---------- --------
Real estate portfolio................................. 1,297,202 766,699
Mortgage loans, net................................... 4,871 9,716
Cash and short-term investments....................... 4,216 184
Funds held in escrow.................................. 15,833 --
Other................................................. 19,776 7,115
---------- --------
Total assets.......................................... $1,341,898 $783,714
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans........................................ $ 232,367 $114,985
Unsecured senior notes................................ 123,000 73,000
Unsecured lines of credit............................. 186,000 124,000
Accounts payable and accrued expenses................. 16,970 7,615
---------- --------
Total liabilities..................................... 558,337 319,600
Minority interest..................................... 76,066 --
Shareholders' equity
Common stock.......................................... 417 329
Additional paid-in capital............................ 707,078 463,785
---------- --------
Total shareholders' equity............................ 707,495 464,114
---------- --------
Total liabilities and shareholders' equity............ $1,341,898 $783,714
========== ========
</TABLE>
8
<PAGE>
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Year ended
December 31, December 31,
1997 1996 1997 1996
------------ ------------ ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUE
Rental income:
Multifamily..................................................... $36,761 $24,498 $122,936 $ 77,834
Commercial and retail........................................... 373 3,601 5,742 15,301
Other income...................................................... 2,817 1,609 9,083 8,516
------- ------- -------- --------
Total revenue..................................................... 39,951 29,708 137,761 101,651
EXPENSES
Real estate expenses:
Multifamily..................................................... $13,329 $ 9,172 $ 44,049 $ 29,310
Commercial and retail........................................... 129 683 522 1,720
Depreciation and amortization..................................... 5,303 3,904 17,938 13,283
Interest expense.................................................. 6,261 5,106 21,606 16,325
General and administrative........................................ 1,188 831 4,301 3,999
------- ------- -------- --------
Total expenses.................................................... 26,210 19,696 88,416 64,637
Net income before gains on sales of real estate investments and
minority interests............................................... 13,741 10,012 49,345 37,014
Gains (losses) on sales of real estate investments................ (336) 3,247 27,824 52,825
------- ------- -------- --------
Income before minority interest................................... 13,405 13,259 77,169 89,839
Minority interest................................................. 972 -- 972 --
------- ------- -------- --------
Net Income........................................................ $12,433 $13,259 $ 76,197 $ 89,839
======= ======= ======== ========
Net income per outstanding Common Share:
Net income before gains on sales of real estate investments and
minority interests............................................... $ 0.35 $ 0.30 $ 1.37 $ 1.21
Gains on sales of real estate investments......................... (0.01) 0.10 0.77 1.73
------- ------- -------- --------
Net income per Common Share....................................... $ 0.34 $ 0.40 $ 2.14 $ 2.94
Funds from operations (1)......................................... $19,044 $13,916 $ 67,283 $ 50,297
Weighted average Common Shares outstanding........................ 39,400 32,840 36,040 30,520
</TABLE>
- --------------
(1) Management considers funds from operations ("FFO") to be an appropriate
supplemental measure of the performance of an equity REIT because it is
predicated on cash flow analyses which facilitate an understanding of the
operating performances of the Company's properties without giving effect to
non-cash items such as depreciation. FFO is defined by the National
Association of Real Estate Investment Trusts, Inc. as net income (loss)
(computed in accordance with generally accepted accounting principles)
excluding gains and losses from debt restructuring and sales of property,
plus depreciation and amortization of real estate assets. FFO does not
represent cash generated from operating activities in accordance with
generally accepted accounting principles, and therefore should not be
considered as a substitute for net income as a measure of results of
operations or for cash flow from operations as a measure of liquidity.
Additionally, the application and calculation of FFO by other REITs may vary
materially from that of the Company, and therefore the Company's FFO and the
FFO of other REITs may not be directly comparable.
Commencing with the year ended December 31, 1997, the Company will report
earnings per share (``EPS'') giving
9
<PAGE>
effect to the Financial Accounting Standards Board's Statement of Financial
Standards No. 128 (the ``Statement''). Under the Statement, EPS is calculated on
a weighted average basis based on the assumed conversion of options, OC Units
and other dilutive securities. As calculated under the Statement, the Company's
net income per Common Share for the year ended December 31, 1997 was $2.13.
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
matters described below before purchasing any of the Shares. The Company
cautions the reader that this list of factors does not purport to be exhaustive.
REAL ESTATE INVESTMENT RISKS
General
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend upon the amount of
revenues generated and expenses incurred. If properties do not generate revenues
sufficient to meet operating expenses, including debt service and capital
expenditures, the Company's results of operations and ability to make
distributions to its shareholders will be adversely affected. The performance of
the economy in each of the areas in which the properties are located affects
occupancy, market rental rates and expenses and, consequently, has an impact on
the revenues from the properties and their underlying values. The financial
results of major local employers also may have an impact on the revenues and
value of certain properties.
Revenues from properties may be further adversely affected by a variety of
factors, including the general economic climate, local conditions in the areas
in which properties are located, such as oversupply of space or a reduction in
the demand for rental space, the attractiveness of the properties to residents
or users, competition from other available space, the ability of the Company to
provide adequate facilities maintenance, services and amenities, and insurance
premiums and real estate taxes. The Company's revenues would also be adversely
affected if residents or users were unable to pay rent or the Company was unable
to rent apartments or commercial properties on favorable terms. If the Company
were unable to promptly relet or renew the leases for a significant number of
apartment units or commercial properties, or if the rental rates upon such
renewal or reletting were significantly lower than expected rates, then the
Company's funds from operations would, and ability to make expected
distributions to shareholders may, be adversely affected. There is also a risk
that as leases on the properties expire, residents or users will vacate or enter
into new leases on terms that are less favorable to the Company. Operating
costs, including real estate taxes, insurance and maintenance costs, and
mortgage payments, if any, do not, in general, decline when circumstances cause
a reduction in income from a property. If a property is mortgaged to secure
payment of indebtedness, and the Company is unable to meet its mortgage
payments, a loss could be sustained as a result of foreclosure on the property.
In addition, revenues from properties and real estate values are also affected
by such factors as applicable laws, including tax laws, interest rate levels and
the availability of financing.
In the normal course of business, the Company typically evaluates potential
acquisitions, enters into non-binding letters of intent, and may, at any time,
enter into contracts to acquire and may acquire additional properties. However,
no assurance can be given that the Company will have the financial resources to
make suitable acquisitions or that properties that satisfy the Company's
investment policies will be available for acquisition. Acquisitions of
properties entail risks that investments will fail to perform in accordance with
expectations. Such risks may include that construction costs may exceed original
estimates, possibly making a project uneconomical, financing may not be
available on favorable terms or at all and construction and lease-up may not be
completed on schedule. Estimates of the costs of improvements to bring an
acquired property up to standards established for the market position intended
for that property may prove inaccurate. In addition, there are general real
estate investment risks associated with any new real estate investment. Although
the Company undertakes an evaluation of the physical condition of each new
investment before it is acquired, certain defects or necessary repairs may not
be detected until after the investment is acquired, which could significantly
increase the Company's total acquisition costs and which could have a material
adverse effect on the Company and its ability to make distributions to
shareholders. Any statements included in or incorporated by reference in this
Prospectus pertaining to
10
<PAGE>
anticipated growth rates in target markets, anticipated growth in the Company's
funds from operations and anticipated market conditions, demographics or results
of operations constitute forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act and there
can be no assurance that such anticipated events or circumstances will be
achieved or will occur due to, among other things, the factors described under
``Risk Factors.''
Illiquidity of Real Estate and Reinvestment Risk
Real estate investments are relatively illiquid and, therefore, tend to limit
the ability of the Company to adjust its portfolio in response to changes in
economic or other conditions. Additionally, the Internal Revenue Code of 1986,
as amended (the ``Code'') places certain limits on the number of properties a
REIT may sell without adverse tax consequences. To effect its current operating
strategy, the Company has in the past raised, and will seek to continue to raise
additional acquisition funds, both through outside financing and through the
orderly disposition of commercial and retail properties, and, depending upon
interest rates, current acquisition opportunities and other factors, generally
to reinvest the proceeds in multifamily properties. In this respect, in the
markets the Company has targeted for future acquisition of multifamily
properties, there is considerable buying competition from other real estate
companies, many of whom may have greater resources, experience or expertise than
the Company. In many cases, this competition for acquisition properties has
resulted in an increase in property prices and a decrease in property yields.
Due to the relatively low capitalization rates currently prevailing in the
pricing of potential acquisitions of multifamily properties which meet the
Company's investment criteria, no assurance can be given that the proceeds
realized from the disposition of commercial and retail properties can be
reinvested to produce economic returns comparable to those being realized from
the properties disposed of, or that the Company will be able to acquire
properties meeting its investment criteria. To the extent that the Company is
unable to reinvest proceeds from the disposition of commercial and retail
properties, or if properties acquired with such proceeds produce a lower rate of
return than the properties disposed of, such results may have a material adverse
effect on the Company and its ability to make distributions to shareholders. In
addition, a delay in reinvestment of such proceeds may have a material adverse
effect on the Company and its ability to make distributions to shareholders.
The Company may seek to structure future dispositions as tax-free exchanges,
where appropriate, utilizing the nonrecognition provisions of Section 1031 of
the Code to defer income taxation on the disposition of the exchanged property.
For an exchange of such properties to qualify for tax-free treatment under
Section 1031 of the Code, certain technical requirements must be met. For
example, both the property exchanged and the property acquired must be held for
use in a trade or business or for investment, and the property acquired must be
identified within 45 days, and must be acquired within 180 days, after the
transfer of the exchanged property. If the technical requirements of Section
1031 of the Code are not met, then the exchanged property will be treated as
sold in a taxable transaction for a sales price equal to the fair market value
of the property received, in which event a distribution of cash to the
shareholders may be required to avoid a corporate-level income tax on the
resulting capital gain. Given the competition for properties meeting the
Company's investment criteria, it may be difficult for the Company to identify
suitable properties within the foregoing time frames in order to meet the
requirements of Section 1031. Even if a suitable tax-deferred exchange can be
structured, as noted above, no assurance can be given that the proceeds of any
of these dispositions will be reinvested to produce economic returns comparable
to those currently being realized from the properties which were disposed of.
Competition
All of the properties currently owned by the Company are located in developed
areas. There are numerous other multifamily properties and real estate
companies, many of which have greater financial and other resources than the
Company, within the market area of each of the properties which will compete
with the Company for tenants and development and acquisition opportunities. The
number of competitive multifamily properties and real estate companies in such
areas could have a material effect on (i) the Company's ability to rent the
apartments and the rents charged and (ii) development and acquisition
opportunities. The activities of these competitors could cause the Company to
pay a
11
<PAGE>
higher price for a new property than it otherwise would have paid or may
prevent the Company from purchasing a desired property at all, which could have
a material adverse effect on the Company and its ability to make distributions
to shareholders.
Geographic Concentration; Dependence on Western United States Regions
The Company's portfolio is principally located in the San Francisco Bay Area,
the Denver area, San Diego, Tucson, Phoenix, Seattle, Portland, Los
Angeles/Orange County, Sacramento, Las Vegas, Albuquerque and Salt Lake City.
The Company's performance could be adversely affected by economic conditions in,
and other factors relating to, these geographic areas, including supply and
demand for apartments in these areas, zoning and other regulatory conditions and
competition from other properties and alternative forms of housing. In that
regard, certain of these areas (particularly the Los Angeles/Orange County and
San Diego metropolitan areas) have in the recent past experienced economic
recessions and depressed conditions in the local real estate markets. To the
extent general economic or social conditions in any of these areas deteriorate
or any of these areas experiences natural disasters, the value of the portfolio,
the Company's results of operations and its ability to make distributions to
shareholders could be materially adversely affected.
Risks of Development, Construction and Acquisition Activities
Pursuant to the TCR-West Transaction, the Company acquired eight apartment
properties in various stages of development (the ``Development Properties'').
Prior to the acquisition, the Company was not engaged in the development and
construction of real estate properties.
The Company intends to actively pursue development and construction of
multifamily apartment communities, including the Development Properties. There
can be no assurance that the Company will complete development of the
Development Properties or any other development project which may be undertaken
by the Company. As a general matter, property development and construction
projects typically have a higher, and sometimes substantially higher, level of
risk than the acquisition of existing properties. Risks associated with the
Company's development and construction activities may include the following:
development opportunities may be abandoned; construction costs of multifamily
apartment communities may exceed original estimates, possibly making the
communities uneconomical; occupancy rates and rents at newly completed
communities may not be sufficient to make the communities profitable; financing
for the construction and development of projects may not be available on
favorable terms or at all; construction and lease-up may not be completed on
schedule; and expenses of operating a completed community may be higher than
anticipated. In addition, development and construction activities, regardless of
whether or not they are ultimately successful, typically require a substantial
portion of management's time and attention. Development and construction
activities are also subject to risks relating to the inability to obtain, or
delays in obtaining, all necessary zoning, land-use, building, occupancy, and
other required governmental permits and authorizations.
The Company also intends to continue actively to acquire multifamily apartment
communities. Acquisitions of multifamily apartment communities entail risks that
investments will fail to perform in accordance with expectations. Estimates of
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate. In addition, there are general investment risks associated with any
new real estate investment. In that regard, the properties acquired in the TCR-
West Transaction were acquired on an ``as is'' basis, meaning that the
properties were acquired without warranty by the sellers. Likewise, due to the
competitive nature of the bidding process for the TCR-West Properties, the
Company was able to perform only a limited investigation with respect to the
TCR-West Properties prior to acquiring them. Both of these factors increased the
risks associated with acquiring the TCR-West Properties.
The Company anticipates that future developments and acquisitions will be
financed, in whole or in part, under various construction loans, lines of
credit, other forms of secured or unsecured financing or through the issuance of
additional equity by the Company. The Company expects periodically to review its
financing options regarding the
12
<PAGE>
appropriate mix of debt and equity financing. Equity, rather than debt,
financing of future developments or acquisitions could have a dilutive effect on
the interests of existing shareholders of the Company. Similarly, financing
future developments and acquisitions with debt entails certain risks, including
those described below under ``--Real Estate Financing Risks.'' In addition, if
new development properties are financed through construction loans, there is a
risk that, upon completion of construction, permanent financing for such
properties may not be available or may be available only on disadvantageous
terms or that the cash flow from new properties will be insufficient to cover
debt service. If a newly developed or acquired property is unsuccessful, the
Company's losses may exceed its investment in the property. Any of the foregoing
could have a material adverse effect on the Company and its ability to make
distributions to shareholders.
Risks Relating to Growth Strategy
Pursuant to the TCR-West Transaction, the Company acquired 17 completed
apartment communities aggregating 4,786 units and eight Development Properties
aggregating approximately 2,445 units. This significant increase in the size of
the Company's operations after the acquisition has substantially increased the
demands placed upon the Company's management, including demands resulting from
the need to integrate the accounting systems, management information systems and
other operations acquired from TCR with those of the Company. Likewise, the
Company added approximately 600 persons previously employed by TCR and its
affiliates, which has also significantly increased the demands upon the
Company's management. Failure to effectively integrate the operations of the
acquired properties, operations and employees with those of the Company could
have a material adverse effect on the Company and its ability to make
distributions to shareholders.
A substantial portion of the Company's growth over the last several years has
been attributable to acquisitions. Further, a principal component of the
Company's strategy is to continue to grow in a controlled manner in both
existing and new markets by acquiring and developing new properties. The
Company's future growth will be dependent upon a number of factors, including
the Company's ability to identify acceptable properties for acquisition and
development, complete acquisitions and developments on favorable terms,
successfully integrate acquired and newly developed properties, and obtain
financing to support expansion. There can be no assurance that the Company will
be successful in implementing its growth strategy, that growth will continue at
historical levels or at all, or that any expansion will improve operating
results. The failure to identify, acquire, develop, and integrate new properties
effectively could have a material adverse effect on the Company and its ability
to make distributions to shareholders.
Restrictions in the Operations of the Operating Company
A substantial portion of the properties acquired in the TCR-West Transaction
are held by the Operating Company, a limited liability company. BRE is the sole
managing member of the Operating Company and, as of November 30, 1997, held
approximately a 70% equity interest therein. The remaining equity interests in
the Operating Company are held by third parties as non-managing members.
Under the terms of the limited liability company agreement governing the
operations of the Operating Company (the ``LLC Agreement''), the Operating
Company is required to maintain certain debt service coverage, debt-to-asset and
other financial ratios intended to protect the members' rights to receive
distributions. In addition, with respect to certain tax-exempt financing for
certain completed properties, the Operating Company is restricted from prepaying
its debt or taking certain other specified actions which could have adverse tax
consequences for
13
<PAGE>
the members. Further, the Company, as the managing member, is restricted from
taking certain other specified actions -- either absolutely or without the
consent of a majority in interest of the non-managing members (or of the non-
managing members affected thereby) -- including, but not limited to, any actions
that would make it impossible to carry out the business of the Operating
Company, or that would subject a non-managing member to liability as a managing
member, or that would cause the Operating Company to institute bankruptcy
proceedings or confess a judgment, or that would prohibit or restrict a member
from exercising its rights to exchange units in the Operating Company for Common
Stock. Any such requirement to maintain financial ratios and any such
restrictions on the actions of the Operating Company and its managing member
could have a material adverse effect on the Company and its ability to make
distributions to shareholders.
Further, under the terms of the LLC Agreement, the Operating Company may not,
without the consent of a majority in interest of the non-managing members, (i)
dispose of any of the properties held by the Operating Company in a taxable sale
or exchange prior to respective dates which are specified in the LLC Agreement
for each of the properties, ranging from one to ten years from November 18,
1997, or (ii) dissolve the Operating Company other than in certain limited
circumstances specified in the LLC Agreement, such as a sale of all or
substantially all of the Company's assets, or any merger, consolidation or other
combination by the Company with or into another person, or reclassification,
recapitalization or change of the Company's outstanding equity interests. These
restrictions on the Company's ability to dispose of a significant portion of its
properties and to dissolve the Operating Company, even when such a disposition
or dissolution of the Operating Company would be in the best interest of the
Company, could have a material adverse effect on the Company and its ability to
make distributions to shareholders.
The Operating Company also must distribute all Available Cash (as defined in
the LLC Agreement) on a quarterly basis: first, to members (other than BRE)
until each member has received, cumulatively on a per Operating Company unit
basis, distributions equal to the cumulative dividends declared with respect to
one share of Common Stock over the corresponding period (subject to adjustment
from time to time as applicable to account for stock dividends, stock splits and
similar transactions affecting the Common Stock) (the ``Priority
Distribution''); and second, the balance to BRE.
If the Operating Company's Available Cash in any quarterly period is
insufficient to permit distribution of the full amount of the Priority
Distribution for that quarter, BRE is required to make a capital contribution to
the Operating Company in an amount equal to the lesser of (i) the amount
necessary to permit the full Priority Distribution or (ii) an amount equal to
the sum of any capital expenditures made by the Operating Company plus the sum
of any payments made by the Operating Company on account of any loans to or
investments in, or any guarantees of the obligations of, BRE or its affiliates
for that quarterly period. The Operating Company's obligation to make Priority
Distributions and BRE's obligation to make additional capital contributions to
the Operating Company under such circumstances could have a material adverse
effect on the Company and its ability to make distributions to shareholders.
In addition, BRE may not be removed as the managing member of the Operating
Company by the non-managing members, with or without cause, other than with its
consent. BRE may not voluntarily withdraw from the Operating Company or transfer
all or any portion of its interest in the Operating Company without the consent
of all of the non-managing members, except in certain limited circumstances,
such as a sale of all or substantially all of BRE's assets, or any merger,
consolidation or other combination by BRE with or into another person, or any
reclassification, recapitalization or change of BRE's outstanding equity
interests. Such restrictions on the withdrawal of BRE as the managing member of
the Operating Company, and on BRE's ability to transfer its interest in the
Operating Company, could have a material adverse effect on the Company and its
ability to make distributions to shareholders.
Uninsured Loss; Limited Coverage
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance with respect to its properties with certain policy
specifications, limits and deductibles. While the Company currently carries
flood and earthquake insurance for its properties with an aggregate annual limit
of $100 million, subject to substantial deductibles, no assurance can be given
that such coverage will continue to be available on acceptable terms or at an
acceptable cost,
14
<PAGE>
or at all, in the future, or if obtained, that the limits of those policies will
cover the full cost of repair or replacement of covered properties. In addition,
there may be certain extraordinary losses (such as those resulting from civil
unrest) that are not generally insured (or fully insured against) because they
are either uninsurable or not economically insurable. Should an uninsured or
underinsured loss occur to a property, the Company could be required to use its
own funds for restoration or lose all or part of its investment in, and
anticipated revenues from, the property and would continue to be obligated on
any mortgage indebtedness on the property. Any such loss could have a material
adverse effect on the Company and its ability to make distributions to
shareholders.
Risks Associated with Survey Exceptions to Certain Title Insurance Policies
Although the Company believes that prior owners of the TCR-West Properties in
the past obtained surveys of those properties, the Company did not obtain
updated surveys when it acquired the TCR-West Properties. Because updated
surveys of the TCR-West Properties were not obtained, the title insurance
policies obtained by the Company for those properties contain exceptions for
matters which an updated survey might have disclosed. Such matters might include
such things as boundary encroachments, unrecorded easements or similar matters
which would have been reflected on a survey. Moreover, because no updated
surveys were prepared for those properties, there can be no assurance that the
title insurance policies in fact cover the entirety of the real property,
buildings, fixtures, and improvements which the Company believes they cover, any
of which could have a material adverse effect on the Company and its ability to
make distributions to shareholders.
Change in Laws
Increases in real estate taxes and income, service and transfer taxes cannot
always be passed through to residents or users in the form of higher rents, and
may adversely affect the Company's cash available for distribution and its
ability to make distributions to shareholders. Similarly, changes in laws
increasing the potential liability for environmental conditions existing on
properties or increasing the restrictions on discharges or other conditions, as
well as changes in laws affecting development, construction and safety
requirements, may result in significant unanticipated expenditures, which could
have a material adverse effect on the Company and its ability to make
distributions to shareholders. In addition, future enactment of rent control or
rent stabilization laws or other laws regulating multifamily housing may reduce
rental revenues or increase operating costs.
Laws Benefiting Disabled Persons
A number of federal, state and local laws (including the Americans with
Disabilities Act) and regulations exist that may require modifications to
existing buildings or restrict certain renovations by requiring improved access
to such buildings by disabled persons and may require other structural features
which add to the cost of buildings under construction. Legislation or
regulations adopted in the future may impose further burdens or restrictions on
the Company with respect to improved access by disabled persons. The costs of
compliance with these laws and regulations may be substantial, and limits or
restrictions on construction or completion of certain renovations may limit
implementation of the Company's investment strategy in certain instances or
reduce overall returns on its investments, which could have a material adverse
effect on the Company and its ability to make distributions to shareholders. The
Company reviews its properties periodically to determine the level of compliance
and, if necessary, takes appropriate action to bring such properties into
compliance. The Company's management believes, based on property reviews to
date, that the costs of such compliance should not have a material adverse
effect on the Company. Such conclusions are based upon currently available
information and data, and no assurance can be given that further review and
analysis of the Company's
15
<PAGE>
properties, or future legal interpretations or legislative changes, will not
significantly increase the costs of compliance.
Risks of Assumed Liabilities
In the TCR-West Transaction, pursuant to a contribution agreement (the
``Contribution Agreement'') the Company (i) acquired the TCR-West Properties
either by acquiring title to the properties and related assets (plus assumption
of certain associated contractual obligations, warranties and guarantees) or, as
to certain TCR-West Properties, by acquiring all of the ownership interests in
the partnerships or limited liability companies which held such properties, and
(ii) assumed certain loans secured by the TCR-West Properties. Under the terms
of the transaction, the Company has not expressly agreed to assume any
liabilities other than the assumed loans and the contractual obligations,
warranties and guarantees referenced above. However, as a matter of law, the
Company automatically assumed all of the liabilities (known, unknown or
contingent) of the partnerships and limited liability companies whose ownership
interests were acquired by the Company, potentially including liabilities
unrelated to the properties conveyed pursuant to such transfer. Moreover, even
in cases where title to the properties and related assets (rather than ownership
interests therein) was acquired by the Company, the legal doctrine of successor
liability may give creditors of and claimants against the prior owners the right
to hold the Company responsible for liabilities which arose with respect to such
properties prior to their acquisition by the Company, whether or not such
liabilities were expressly assumed by the Company under the terms of the
transaction.
As a result of the foregoing, there can be no assurance that the Company will
not be subject to liabilities and claims relating to the TCR-West Properties
arising from events which occurred or circumstances which existed prior to the
acquisition of those properties by the Company, which could have a material
adverse effect on the Company and its ability to make distributions to
shareholders. In that regard, the terms of the TCR-West Transaction do not
provide for the Company to be indemnified against any such liabilities and
claims. See ``--Limited Indemnification'' below.
Limited Indemnification
The Company acquired the TCR-West Properties on an ``as is'' basis, meaning
that the properties were acquired without warranty from the sellers. As a
result, the Company has no recourse against the sellers for matters relating to
the properties or the transaction, except to the limited extent described below.
The terms of the TCR-West Transaction provide the Company with only limited
indemnification with respect to claims or liabilities that might arise out of
the transaction or actions taken by the sellers before the closing.
Specifically, certain Trammell Crow Residential entities and related parties who
are signatories to the Contribution Agreement (the ``TCR Parties'') have agreed
to indemnify the Company and its affiliates only against claims arising out of
(i) any inaccuracy in the investment representations of any TCR Party or certain
representations about employment matters, or any failure of a TCR Party to
comply with any agreement with respect thereto, (ii) any breach by a TCR Party
of its fiduciary duties (including duties of disclosure) to any other person in
connection with the transaction, or (iii) any document filed by or on behalf of
a TCR Party or any affiliate with a governmental agency or prepared or
distributed in connection with the transaction (including any document
distributed in connection with the solicitation of consents by the TCR Parties
for the TCR-West Transaction) (provided, however, that the foregoing does not
apply to the information supplied by the Company or the Operating Company in
writing specifically for inclusion or incorporation by reference in any such
document or to any document prepared or filed by the Company or the Operating
Company). The Company has no recourse against the TCR Parties with respect to
any claims which are not within the specific coverage of the indemnity
provisions.
In addition, in the event that the Company is entitled to indemnification, the
terms of the TCR-West Transaction
16
<PAGE>
significantly limit the amount which the Company would be entitled to recover.
Specifically, the Company's sole recourse under a claim for indemnity is the
right to reduce the number of Development OC Units (as defined below) which the
Company might otherwise be required to deliver in connection with the TCR-West
Transaction. A maximum of up to 627,594 Development OC Units are issuable, each
of which will be exchangeable, commencing November 18, 1998, at the option of
the holders thereof for Common Stock (at the rate of one share of Common Stock
per Development OC Unit, subject to adjustment under certain circumstances) or,
at the Company's election, into an equivalent amount of cash based on the value
of the Common Stock at the time of exchange. For purposes of determining the
reduction in the number of Development OC Units in the event of a claim for
indemnity, the Development OC Units will be deemed to have a value equal to the
average of the closing prices of a share of Common Stock on the New York Stock
Exchange for the fifteen consecutive trading days concluding on the fifth
trading day preceding the day of the reduction. The TCR Parties' indemnification
obligations (and such obligations of the Company and the Operating Company, as
described below) are limited, in the aggregate, to an amount which, as of any
date, is obtained by multiplying the number of Development OC Units which have
not been distributed by the lower of (i) $26.93 or (ii) the average of the
closing prices of a share of Common Stock on the New York Stock Exchange for the
fifteen consecutive trading days concluding on the fifth trading day preceding
such date.
The ``Development OC Units'' are equity interests in the Operating Company
which will be issued to the TCR Parties if certain completion schedule and
budget objectives are met for the Development Properties. The Company currently
anticipates that all of the Development OC Units will either be awarded or will
become ineligible for award by the end of 1999. Accordingly, there can be no
assurance that the amount of any claim for indemnity will be made at a time when
a sufficient amount or any of the Development OC Units remain available for set-
off or that, even if the full number of Development OC Units is available, that
the value of those units will be sufficient to fully cover the claim for
indemnity.
There can be no assurance that the Company will not be confronted in the
future with claims by third parties relating to the TCR-West Transaction or to
the activities of the TCR Parties or the operations of the TCR-West Properties
and matters related thereto prior to the closing of the transaction. Likewise,
there can be no assurance that the properties acquired in the TCR-West
Transaction will meet the Company's expectations. Accordingly, the limited scope
of the indemnification could have a material adverse effect on the Company and
its ability to make distributions to shareholders. See ``--Risks of Assumed
Liabilities,'' above.
The Company and the Operating Company have also provided a limited indemnity
to the TCR Parties. Under the terms of the Contribution Agreement, the Company
and the Operating Company have agreed to indemnify the TCR Parties and their
affiliates against claims arising out of (i) any inaccuracy in certain
representations made by the Company about the registration rights it agreed to
provide to the TCR Parties who become shareholders of the Company or unitholders
of the Operating Company, or any failure by the Company to fulfill its
obligations under terms of the transaction, or (ii) any material misstatement or
omission in the information statement provided to the TCR Parties with respect
to the Company, the Operating Company, the Common Stock or units of the
Operating Company. The Company's indemnification obligations are limited to an
amount equal to the value of the remaining Development OC Units outstanding from
time to time, calculated in the same manner as the limit on the indemnification
obligations of the TCR Parties, as described above. Notwithstanding the limit
upon the Company's indemnification obligations, if claims within the coverage of
the indemnity provisions were brought against the Company, it could be required
to incur costs in defending against or satisfying the claims, which could have a
material adverse effect on the Company and its ability to make distributions to
shareholders.
17
<PAGE>
Potential Litigation Related to the TCR-West Transaction
Over the last several years, business reorganizations involving the conversion
of partnerships into REITs, the combination of several partnerships into a
single entity and the combination of multiple REITs into a single REIT have
given rise to investor lawsuits. If any lawsuits were filed in connection with
the TCR-West Transaction, whether by any of the TCR Parties or other persons,
such lawsuits could require the Company to incur costs in defending such
lawsuits or to pay any judgment awards or make settlement payments, any of which
could have a material adverse effect on the Company and its ability to make
distributions to shareholders.
REAL ESTATE FINANCING RISKS
Debt Financing and Maturities
The Company is subject to the normal risks associated with debt financing,
including the risk that the Company's cash flow will be insufficient to meet
required payments of principal and interest, the risk that indebtedness on its
properties, or unsecured indebtedness, will not be able to be renewed, repaid or
refinanced when due or that the terms of any renewal or refinancing will not be
as favorable as the terms of such indebtedness. If the Company were unable to
refinance its indebtedness on acceptable terms, or at all, the Company might be
forced to dispose of one or more of the properties on disadvantageous terms,
which might result in losses to the Company, which losses could have a material
adverse effect on the Company and its ability to make distributions to
shareholders. Furthermore, if a property is mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments, the mortgagee
could foreclose upon the property, appoint a receiver and receive an assignment
of rents and leases or pursue other remedies, all with a consequent loss of
revenues and asset value to the Company. Foreclosures could also create taxable
income without accompanying cash proceeds, thereby hindering the Company's
ability to meet the REIT distribution requirements of the Code.
Risk of Rising Interest Rates
The Company has incurred and expects in the future to incur indebtedness which
bears interest at a variable rate. Accordingly, increases in interest rates
would increase the Company's interest costs (to the extent that the related
indebtedness was not protected by interest rate protection arrangements), which
could have a material adverse effect on the Company and its ability to make
distributions to shareholders or cause the Company to be in default under
certain debt instruments. In addition, an increase in market interest rates may
lead holders of the Company's Common Stock to demand a higher yield on their
shares from distributions by the Company, which could adversely affect the
market price for the Common Stock.
Additional Debt
The Company currently funds acquisition opportunities partially through
borrowings (including its lines of credit) as well as from other sources such as
sales of non-core properties. The organizational documents of the Company do not
contain any limitation on the amount of indebtedness that the Company may incur.
Accordingly, the Company could become more highly leveraged, resulting in an
increase in debt service, which could have a material adverse effect on the
Company and its ability to make distributions to shareholders and in an
increased risk of default on its obligations.
18
<PAGE>
Terms of Certain Indebtedness
As of the date of this Prospectus, the Company had outstanding borrowings of
$73 million under two loan agreements which, among other things, (i) contain a
covenant which requires the Company to maintain an investment grade rating for
its long-term unsecured debt and (ii) define ``events of default'' to include
the acquisition by any person of either (x) 20% or more of the Company's
outstanding shares or securities (or other securities convertible into such
securities) or (y) 10% or more of the Company's outstanding shares or securities
(or other securities convertible into such securities) if such acquisition
results in any change of the board of directors of the Company or any change in
the management of the Company or any of its assets. In the event that the
Company fails to maintain an investment grade rating for its long-term unsecured
debt or if such an event of default occurs, the lender may declare all
borrowings under such loan agreements to be due and payable immediately, which
could have a material adverse effect on the Company and its ability to make
distributions to shareholders.
ENVIRONMENTAL RISKS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real estate may be liable for the costs
of removal or remediation of certain hazardous or toxic substances in, on,
around or under such property. Such laws often impose such liability without
regard to whether the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. The presence of, or failure to
remediate properly, such substances may adversely affect the owner's or
operator's ability to sell or rent the affected property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs of removal or
remediation of such substances at a disposal or treatment facility, whether or
not such facility is owned or operated by such person. Certain environmental
laws impose liability for release of asbestos-containing materials into the air,
and third parties may also seek recovery from owners or operators of real
properties for personal injury associated with asbestos-containing materials and
other hazardous or toxic substances. The operation and subsequent removal of
certain underground storage tanks are also regulated by federal and state laws.
In connection with the current or former ownership (direct or indirect),
operation, management, development and/or control of real properties, the
Company may be considered an owner or operator of such properties or as having
arranged for the disposal or treatment of hazardous or toxic substances and,
therefore, may be potentially liable for removal or remediation costs, as well
as certain other costs, including governmental fines, and claims for injuries to
persons and property.
The Company's current policy is to obtain a Phase I environmental study on
each property it seeks to acquire and to proceed accordingly. No assurance can
be given, however, that the Phase I environmental studies or other environmental
studies undertaken with respect to any of the Company's current or future
properties will reveal all or the full extent of potential environmental
liabilities, that any prior owner or operator of a property did not create any
material environmental condition unknown to the Company, that a material
environmental condition does not otherwise exist as to any one or more of such
properties or that environmental matters will not have a material adverse effect
on the Company and its ability to make distributions to shareholders. The
Company currently carries no insurance for environmental liabilities.
Certain environmental laws impose liability on a previous owner of property to
the extent that hazardous or toxic substances were present during the prior
ownership period. A transfer of the property does not relieve an owner of such
liability. Thus, the Company may have liability with respect to properties
previously sold by its predecessors.
RISKS OF THIRD PARTY MANAGEMENT BUSINESS
Possible Termination of Management Contracts
As part of the TCR-West Transaction, the Company also acquired TCR-West's
third-party management contracts. A wholly-owned subsidiary of the Company (the
``Management Company'') was
19
<PAGE>
organized to undertake this business.
Risks associated with the management of properties owned by third parties
include the risk that the management contracts (which are generally cancelable
upon a sale of the property or, in many cases, upon 30 days' notice) will be
terminated by the property owner or will be lost in connection with a sale of
such property, that contracts may not be renewed upon expiration or may not be
renewed on terms consistent with current terms, and that the rental revenues
upon which management fees are based will decline as a result of general real
estate market conditions or market factors affecting specific properties,
resulting in decreased management fee income. As a result, there can be no
assurance that the Management Company will perform in accordance with the
Company's expectations.
Possible Adverse Consequences of REIT Status on the Business of the Management
Company
Certain requirements for REIT qualifications may in the future limit the
Company's ability to increase third party management operations conducted and
related services offered by the Management Company without jeopardizing the
Company's qualifications as a REIT. See ``Federal Income Tax Considerations--
Third Party Management Income.''
SUBSIDIARY STRUCTURE
All of the Shares offered hereby will be obligations exclusively of the
Company. Because a significant portion of the operations of the Company is
conducted through its subsidiaries, including the Operating Company, the cash
flow of the Company and the consequent ability to make distributions and other
payments on its equity securities, including the Shares, will be partially
dependent upon the earnings of such subsidiaries and the distribution of those
earnings to the Company, or upon loans or other payments of funds made by such
subsidiaries to the Company. In addition, debt or other agreements of the
Company's subsidiaries may impose restrictions that affect, among other things,
the ability of the Company's subsidiaries to pay dividends or make other
distributions or loans to the Company.
PROVISIONS WHICH COULD LIMIT A CHANGE IN CONTROL OR DETER A TAKEOVER
In order to maintain its qualification as a REIT, not more than 50% in value
of the outstanding capital stock of the Company may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities). In order to protect the Company against risk of losing its
status as a REIT due to a concentration of ownership among its shareholders, the
articles of incorporation of the Company provide, among other things, that if
the Board of Directors determines, in good faith, that direct or indirect
ownership of the Company's Common Stock have or may become concentrated to an
extent that would prevent the Company from qualifying as a REIT, the Board of
Directors may prevent the transfer of the Common Stock or call for redemption
(by lot or other means affecting one or more shareholders selected in the sole
discretion of the Board of Directors) of a number of shares of Common Stock
sufficient in the opinion of the Board of Directors to maintain or bring the
direct or indirect ownership of the Common Stock into conformity with the
requirements for maintaining REIT status. These limitations may have the effect
of precluding acquisition of control of the Company by a third party without
consent of the Board of Directors.
In addition, certain other provisions contained in the Company's articles of
incorporation and bylaws, as well as its shareholder rights plan, may have the
effect of discouraging a third party from making an acquisition proposal for the
Company and may thereby inhibit a change in control of the Company. For example,
such provisions may (i) deter tender offers for Common Stock which offers may be
attractive to the shareholders, or (ii) deter purchases of large blocks of
Common Stock, thereby limiting the opportunity for shareholders to receive a
premium for their Common Stock over then-prevailing market prices.
20
<PAGE>
TAX RISKS
Tax Liabilities as a Consequence of Failure to Qualify as a REIT
Although management believes that the Company is organized and is operating so
as to qualify as a REIT under the Code, no assurance can be given that the
Company has in fact operated or will be able to continue to operate in a manner
so as to qualify or remain so qualified. Qualification as a REIT involves the
application of highly technical and complex Code provisions for which there are
only limited judicial or administrative interpretations and the determination of
various factual matters and circumstances not entirely within the Company's
control. For example, in order to qualify as a REIT, at least 95% of the
Company's taxable gross income in any year must be derived from qualifying
sources and the Company must make distributions to shareholders aggregating
annually at least 95% of its REIT taxable income (excluding net capital gains).
Thus, to the extent Third Party Management Income (as defined in ``Federal
Income Tax Considerations--Third Party Management Income'') represents 5% or
more of the Company's gross income in any taxable year, the Company will not
satisfy the 95% income test and may fail to qualify as a REIT, unless certain
relief provisions apply, and, even if those relief provisions apply, a tax would
be imposed with respect to excess net income, any of which could have a material
adverse effect on the Company and its ability to make distributions to
shareholders. See ``Federal Income Tax Considerations--Third Party Management
Income'' and ``Federal Income Tax Considerations--Income Tests.'' Additionally,
to the extent the Operating Company or any of the Subsidiary Entities (as
defined in ``Federal Income Tax Considerations--Requirements for
Qualification'') are determined to be taxable as a corporation, the Company
would not qualify as a REIT, which could have a material adverse effect on the
Company and its ability to make distributions to shareholders. See ``Federal
Income Tax Considerations--Federal Income Tax Aspects of the Operating Company
and the Subsidiary Entities.'' Finally, no assurance can be given that new
legislation, new regulations, administrative interpretations or court decisions
will not change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification.
If the Company fails to qualify as a REIT, the Company will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at corporate rates, which would likely have a material adverse
effect on the Company and its ability to make distributions to shareholders. In
addition, unless entitled to relief under certain statutory provisions, the
Company would also be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification is lost. This treatment
would reduce funds available for investment or distributions to security holders
because of the additional tax liability to the Company for the year or years
involved. In addition, distributions to shareholders would no longer be required
to be made. To the extent that distributions to shareholders would have been
made in anticipation of qualifying as a REIT, the Company might be required to
borrow funds or to liquidate certain of its investments to pay the applicable
tax.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Shares by the Selling Shareholder. All proceeds from the sale of the Shares will
be for the account of the Selling Shareholder.
SELLING SHAREHOLDER
The following table sets forth certain information as of the date of this
Prospectus regarding the ownership of shares of Common Stock by the Selling
Shareholder and as adjusted assuming the sale of all the Shares offered hereby.
All of the Shares being offered hereby by the Selling Shareholder were acquired
from the Company in December 1997, in connection with the formation of the
Selling Shareholder as a unit investment trust. In addition to the Shares which
were acquired from the Company and are offered hereby, the Selling Shareholder
owns 653 shares of Common Stock of the Company which it purchased in the open
market and are not being offered pursuant to this Prospectus. The Selling
Shareholder was formed to acquire the shares of nine domestic publicly traded
REITs, including the Company. It is anticipated that the shares of these REITs
will be held by the Selling Shareholder for approximately two years, and then
21
<PAGE>
all of such shares, including the Shares, will be sold in connection with the
termination of the Selling Shareholder, although under certain circumstances
they may be sold prior to such time. The Selling Shareholder has not had a
material relationship with the Company within the past three years other than as
a result of the ownership of the Shares.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES OF NUMBER OF SHARES OF
The Selling Shareholder COMMON STOCK OWNED NUMBER OF SHARES COMMON STOCK OWNED
BENEFICIALLY BEFORE BEING OFFERED BENEFICIALLY AFTER THE
THE OFFERING OFFERING
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Legg Mason Unit Investment Trust Series 7, 729,582 728,929 653
Legg Mason REIT Trust, December 1997 Series
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
DESCRIPTION OF COMMON STOCK
General
The following description of the Common Stock sets forth certain general terms
and provisions of the Common Stock to which this Prospectus relates. The
statements below describing the Common Stock, the Rights (as defined below) and
the Rights Agreement (as defined below) do not purport to be complete and are in
all respects subject to and qualified in their entirety by reference to the
applicable provisions of the Articles, the Bylaws and the Rights Agreement dated
as of August 14, 1989 (the ``Rights Agreement'') between the Company and Chase
Mellon Shareholder Services L.L.C. (``Chase Mellon'') (formerly Chemical Trust
Company of California), as successor rights agent, as supplemented, copies of
which have been filed or incorporated by reference as exhibits to the
Registration Statement of which this Prospectus is a part and are available as
described above under ``Available Information.''
The Articles authorize the issuance of up to 100,000,000 shares of Common
Stock, $0.01 par value. As of December 31, 1997, there were 41,738,704 shares of
Common Stock issued and outstanding. In addition, as of December 31, 1997, there
were 2,800,900 shares of Common Stock reserved for issuance upon the exercise of
options under the Company's stock option plans and 1,383,801 shares of Common
Stock were reserved for issuance under the Company's Dividend Reinvestment Plan.
As of December 31, 1997, there were 3,452,181 shares of Common Stock reserved
for issuance upon exchange of the units in the Operating Company and the units
of a certain other subsidiary of the Company which were issued or may be issued
in connection with the TCR-West Transaction. The Common Stock is listed on the
New York Stock Exchange under the symbol ``BRE.'' Chase Mellon is the transfer
agent and registrar of the Common Stock.
Holders of Common Stock are entitled to receive dividends ratably, when, as
and if declared by the Board of Directors of the Company, out of assets of the
Company legally available for payment, subject to any preferential rights of any
outstanding Preferred Stock. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in any assets of the Company available for
distribution to shareholders after payment of or provision for all liabilities
of the Company and any amounts owing in respect of any outstanding Preferred
Stock. The Common Stock does not have preemptive or conversion rights.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of the holders of Common Stock and, except as
otherwise required by law or as provided by the express provisions of any series
of Preferred Stock, the holders of the Common Stock will exclusively possess all
voting power of the shareholders of the Company. Holders of Common Stock do not
have cumulative voting rights in the election of directors.
The Board of Directors may, without the approval of the shareholders of the
Company, from time to time authorize the issuance of one or more series of
Preferred Stock with such rights, restrictions and other terms as may be
determined by the Board of Directors. The issuance of Preferred Stock, while
providing flexibility in connection with possible financings, acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
powers and other rights and interests of holders of Common Stock and, under
certain circumstances, could make it more difficult for
22
<PAGE>
a third party to gain control of the Company and could have the effect of
delaying or preventing an attempted takeover of the Company. As of March 4,
1998, no Preferred Stock was issued or outstanding.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
Several provisions of the Articles and Bylaws may have the effect of deterring
a takeover of the Company. These provisions include (i) the requirement that 70%
of the outstanding shares of voting stock approve certain mergers, sales of
assets or other business combinations with shareholders owning 10% or more of
then outstanding voting shares, unless the transaction is recommended by a
majority of the disinterested directors or meets certain fair price criteria,
(ii) a requirement that directors of the Company may be removed by the
shareholders only for ``cause'' and that vacancies in the Board of Directors may
be filled only by action of the remaining directors, (iii) the requirement that
70% of the outstanding shares of voting stock approve amendments to certain
provisions of the Articles, (iv) the classification of the Company's Board of
Directors into three classes serving staggered three-year terms, (v) a
prohibition on certain stock repurchases by the Company from a holder of 5% or
more of the outstanding voting shares for a price exceeding fair market value
unless certain conditions are met, and (vi) a requirement that shareholder
action without a meeting be taken by unanimous written consent.
Maryland law imposes certain restrictions on business combinations with a
greater than ten percent shareholder unless a company's charter states that it
has elected not to be governed by such provisions. The Company has made such an
election in the Articles and therefore is not subject to such provisions.
Maryland law eliminates the voting rights of any shares of voting stock held
by a person to the extent such shares exceed 20% of the outstanding voting stock
of the company, and permits a company to redeem any such shares at the fair
value of the stock, unless a company's charter states that it has elected not to
be governed by such provisions. The Company has made such an election in the
Articles and therefore is not subject to such provisions.
SHAREHOLDER RIGHTS PLAN
On August 14, 1989, the Company's Board of Directors declared a dividend
distribution to shareholders of record on September 7, 1989 of one common share
purchase right (a ``Right'') for each outstanding share of Common Stock. Each
Right entitled the holder to purchase from the Company one share of Common Stock
at a cash purchase price of $90.00 per share, subject to adjustment. Following
the Company's stock dividend of one share of Common Stock for each share
outstanding in June 1996, such cash purchase price was adjusted to $45.00 per
share, subject to adjustment. The terms of the Rights are set forth in the
Rights Agreement. The Rights are not exercisable until the Distribution Date
referred to below and will expire at the close of business on September 7, 1999,
unless earlier redeemed by the Company as described below (the ``Final
Expiration Date'').
Until the Distribution Date (or earlier redemption or expiration of the
Rights), (i) the Rights will be issued with newly issued shares of Common Stock
and (ii) the Rights will be evidenced by the Common Stock certificates and the
transfer of Common Stock certificates will also constitute the transfer of the
Rights associated with such Common Stock. As soon as practicable after the
Distribution Date, Rights certificates will be mailed to holders of record of
the Common Stock as of the close of business on the Distribution Date.
The Rights will separate from the Common Stock and a Distribution Date (as
defined in the Rights Agreement) will occur, in general, upon the earlier of (i)
10 days following a public announcement that a person (an ``Acquiring Person'')
has acquired 32% or more of the outstanding Common Stock (the ``Stock
Acquisition Date''), (ii) 10 business days following the commencement of a
tender or exchange offer for 40% or more of the outstanding Common Stock or
(iii) 10 business days after the Board of Directors determines that a person has
become an ``Adverse Person'' (as defined in the Rights Agreement).
In the event that, among other things, (i) the Company survives a merger or
business combination with an
23
<PAGE>
Acquiring Person or an Adverse Person without any exchange of its outstanding
Common Stock for other securities, cash or property, (ii) any person becomes the
owner of 40% or more of the then outstanding Common Stock, (iii) an Acquiring
Person or an Adverse Person engages in one of a number of self-dealing
transactions set forth in the Rights Agreement, or (iv) during such time as
there is an Acquiring Person or an Adverse Person, an event occurs which results
in such person's ownership interest being increased by more than 1%, each Right
will entitle the holder to receive, upon exercise, Common Stock having a value
equal to two times the exercise price of the Right. In the event that, at any
time following the Stock Acquisition Date or the date on which the Board of
Directors determines that a person is an Adverse Person, (i) the Company is
acquired in a merger or other business combination, (ii) the Company survives a
merger or business combination in which Common Stock is exchanged for other
securities, cash or property or (iii) 50% or more of the Company's assets or
earning power is sold or transferred, each Right will entitle the holder to
receive, upon exercise, common shares of the acquiring person having a value
equal to two times the exercise price of the Right.
In general, the Company may redeem the Rights in whole, but not in part, at a
price of $.01 per Right, at any time until ten days following the earlier of the
Stock Acquisition Date, the date on which a person is determined to be an
Adverse Person or the Final Expiration Date.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on redemption of the Rights by the Board of
Directors or on the acquisition by such person or group of a substantial number
of Rights.
RESTRICTIONS ON TRANSFERS OF CAPITAL STOCK; REDEMPTION
The Articles provide that any shareholder must, upon demand, disclose to the
Board of Directors of the Company in writing such information with respect to
its direct and indirect ownership of the shares of the Company's stock as the
Board of Directors deems necessary to permit the Company to comply (or to verify
compliance) with the REIT provisions of the Code, and the regulations
promulgated thereunder or the requirements of any other taxing authority. The
Articles further provide that, if the Board of Directors in good faith
determines that direct or indirect ownership of shares of the Company's stock
has or may become concentrated to an extent that would prevent the Company from
qualifying as a REIT (See ``Federal Income Tax Considerations''), the Board of
Directors is authorized to prevent the transfer of stock or to call for
redemption (by lot or by other means affecting one or more shareholders selected
in the sole discretion of the Board of Directors) of a number of shares of stock
sufficient in the opinion of the Board of Directors to maintain or bring the
direct or indirect ownership of the Company's stock into conformity with the
requirements for maintaining REIT status. If Common Stock is called for
redemption, the redemption price shall be (i) the last reported sale price of
the shares on the last business day prior to the redemption date on the
principal national securities exchange on which the shares are listed or
admitted to trading, (ii) if the shares are not so listed or admitted to trading
but are reported in the Nasdaq system, the last sale price on the last business
day prior to the redemption date, or if there is no sale on such day then at the
last bid price on such day as reported in the Nasdaq National Market, (iii) if
the shares are not so reported or listed or admitted to trading, the mean
between the highest bid and lowest asked prices on such last business day as
reported by the National Quotation Bureau Incorporated or a similar organization
selected by the Board of Directors for such purpose, or (iv) if not determined
by the foregoing methods, as determined in good faith by the Board of Directors.
From and after the date fixed for redemption by the Board of Directors, the
holder of any shares of stock so called for redemption will cease to be entitled
to dividends, distributions, voting rights and other benefits with respect to
such shares, excepting only the right to payment of the redemption price without
interest.
The Bylaws provide that, whenever it is determined by the Board of Directors
to be reasonably necessary to protect the REIT tax status of the Company, the
Board of Directors may require a statement or affidavit from each holder or
proposed transferee of shares of stock setting forth the number of shares
already owned by such holder or transferee or any related person. The Bylaws
further provide that if, in the opinion of the Board of Directors, which will be
conclusive upon any proposed transferor or transferee of shares, any proposed
transfer would jeopardize the status of the Company as a REIT under the Code,
the Board of Directors may refuse to permit such transfer; that any attempt to
transfer as to which the Board of Directors has refused its permission will be
void and of no effect to transfer any legal or beneficial
24
<PAGE>
interest in the shares; and that all contracts for the sale or other transfer of
shares are subject to these restrictions.
These provisions may have the effect of preventing acquisition of control of
the Company unless the Board of Directors determines that maintenance of REIT
status is no longer in the best interests of the Company.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of the material federal income tax
considerations to the Company and its shareholders relating to the Shares and
the treatment of the Company as a REIT. It is not intended to represent a
detailed description of the federal income tax consequences applicable to a
particular shareholder of the Company in view of a shareholder's particular
circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws. The
discussion in this section is based on current provisions of the Code, current
and proposed Treasury Regulations, court decisions and other administrative
rulings and interpretations, all of which are subject to change either
prospectively or retroactively. There can be no assurance that any such change,
future Code provision or other legal authority will not alter significantly the
tax considerations described herein.
EACH PROSPECTIVE PURCHASER IS URGED TO CONSULT HIS OWN TAX ADVISOR, REGARDING
THE SPECIFIC TAX CONSEQUENCES, IN VIEW OF SUCH PROSPECTIVE PURCHASER'S
INDIVIDUAL CIRCUMSTANCES, OF THE PURCHASE, OWNERSHIP AND SALE OF THE OFFERED
SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
GENERAL
Effective as of its formation on May 22, 1970, the Company has elected to be
taxed as a real estate investment trust under Code Sections 856 through 860. The
Company believes that it is organized and is operating in such a manner as to
qualify for taxation as a REIT under the Code. The Company intends to continue
to operate in such a manner, but no assurance can be given that it will operate
in a manner so as to qualify or remain qualified as a REIT.
In the opinion of Farella Braun & Martel LLP, based on certain assumptions and
representations, the Company was reorganized in Delaware in 1987 in conformity
with the requirements for qualification as a ``Real Estate Investment Trust''
under the Code, the Company has qualified as a REIT for its fiscal year ended
July 31, 1995, its short taxable year ended December 31, 1995 and its taxable
year ended December 31, 1996 (the years, to the best knowledge of counsel, that
are still subject to audit by the Internal Revenue Service), it is anticipated
that the Company will qualify as a REIT for its taxable year ended December 31,
1997, and the Company is organized and operates in a manner that will enable it
to qualify to be taxed as a REIT under the Code for its taxable year ending
December 31, 1998 and thereafter provided the Company continues to meet the
asset composition, source of income, shareholder diversification, distributions,
record keeping, and other requirements of the Code necessary for the Company to
qualify as a REIT. It must be emphasized that this opinion is based on various
assumptions and is conditioned upon certain representations made by the Company
as to factual matters including, but not limited to, those set forth below in
this discussion of ``Federal Income Tax Considerations'' and those concerning
the Company's business and properties as set forth and incorporated by reference
in this Prospectus. Moreover, such qualification and taxation as a REIT depends
upon the Company's ability to meet, through actual annual operating results,
distribution levels and diversity of stock ownership, and the various
qualification tests imposed under the Code discussed below the results of which
will not be reviewed by Farella Braun & Martel LLP. Accordingly, no assurance
can be given that the actual results of the Company's operations for any
particular taxable year will satisfy such requirements. See ``Failure to
Qualify.''
25
<PAGE>
TAXATION OF THE COMPANY
A REIT, such as the Company, generally will not be subject to federal
corporate income tax on its taxable income that is currently distributed to its
shareholders. This treatment substantially eliminates the ``double taxation''
(at the corporate and shareholder levels) that generally results from an
investment in a corporation. However, the Company will be subject to federal
income tax in several ways, including the following: First, the Company will be
taxed at regular corporate rates on any undistributed REIT taxable income,
including undistributed net capital gains. Second, under certain circumstances,
the Company may be subject to the ``alternative minimum tax.'' Third, if the
Company has: (i) net income from the sale or other disposition of ``foreclosure
property'' which is held primarily for sale to customers in the ordinary course
of business or (ii) other non-qualifying income from foreclosure property, it
will be subject to tax on such income at the highest corporate rate. Fourth, if
the Company has net income from ``prohibited transactions'' (which are, in
general, certain sales or other dispositions of property held primarily for sale
to customers in the ordinary course of business other than foreclosure
property), such income will be subject to a 100% corporate level tax. Fifth, if
the Company should fail to satisfy the 75% gross income test or the 95% gross
income test (each discussed below) but has nonetheless maintained its
qualification as a REIT by satisfying certain other requirements, it will be
subject to a 100% tax on an amount equal to the gross income attributable to the
greater of the amount by which the Company fails the 75% or 95% test, multiplied
by a fraction intended to reflect the Company's profitability. Sixth, if the
Company should fail to distribute during each calendar year at least the sum of:
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital
gain net income for such year and (iii) any undistributed taxable income from
prior periods, it will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Seventh, if the
Company acquires any asset from a C corporation (i.e., generally a corporation
subject to full corporate-level tax) in a transaction in which the basis of the
asset in the Company's hands is determined by reference to the basis of the
asset (or any other property) in the hands of the C corporation, and the Company
recognizes gain on the disposition of such asset during the ten-year period
beginning on the date the asset was acquired by the Company, then the excess of
(i) the fair market value of such asset as of the beginning of such period over
(ii) the Company's adjusted basis in such asset as of the beginning of such
period will be subject to tax at the highest regular corporate tax rate.
REQUIREMENTS FOR QUALIFICATION
A REIT is defined in the Code as a corporation, trust or association: (i)
which is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares or by transferable
certificates of beneficial interest; (iii) which would be taxable as a domestic
corporation, but for Code Sections 856 through 859; (iv) which is neither a
financial institution nor an insurance company subject to certain provisions of
the Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding stock of which is owned
during the last half of each taxable year, directly or indirectly, by or for
five or fewer individuals (as defined in the Code to include certain entities);
and (vii) which meets certain income and asset tests described below. Conditions
(i) through (iv) above must be met during the entire taxable year and condition
(v) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months. However,
conditions (v) and (vi) do not apply until after the first taxable year for
which an election is made to be taxed as a REIT.
With respect to its taxable years ending before January 1, 1998, in order to
maintain its election to be taxed as a REIT, the Company must also maintain
certain records and request certain information from its shareholders designed
to disclose the actual ownership of its stock. The Company believes that it has
complied and will comply with these requirements.
In the case of a REIT that is a partner in a partnership or a member in a
limited liability company (``LLC''), the REIT Provisions provide that the REIT
is deemed to own its proportionate share of the assets of the partnership or LLC
based on the REIT's capital interest in the partnership or LLC and is deemed to
be entitled to the income of the partnership or LLC attributable to such
proportionate share (unless specifically stated otherwise or the context
otherwise requires, the discussion under this section ``Federal Income Tax
Considerations'' relating to
26
<PAGE>
partnerships and the partners thereof also applies to LLCs and the members
thereof). In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of satisfying the gross income tests and the asset tests, described
below. Similar treatment applies with respect to lower-tier partnerships which
the REIT indirectly owns through its interests in higher-tier partnerships.
Thus, the Company's proportionate share of the assets, liabilities and items of
income of the Operating Company and the other partnerships and limited liability
companies in which the Company owns a direct or indirect interest (collectively,
the ``Subsidiary Entities''), will be treated as assets, liabilities and items
of income of the Company for purposes of applying the gross income tests and the
asset tests described below, provided that the Operating Company and the
Subsidiary Entities are treated as partnerships for federal income tax purposes.
See ``Federal Income Tax Aspects of the Operating Company and the Subsidiary
Entities'' below.
INCOME TESTS
In order to maintain qualification as a REIT, the Company annually must
satisfy three gross income requirements. First, at least 75% of the Company's
gross income (excluding gross income from prohibited transactions) 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, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from sale or disposition of stock or securities (or from any combination of the
foregoing). Third, for the Company's taxable years beginning prior to January 1,
1998, short-term gain from the sale or other disposition of stock or securities,
gain from prohibited transactions and gain on the sale or other disposition of
real property held for less than four years (apart from involuntary conversions
and sales of foreclosure property) must represent less than 30% of the Company's
gross income (including gross income from prohibited transactions) for each
taxable year.
Rents received by the Company will qualify as ``rents from real property'' in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent 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 the term ``rents from real
property'' solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as ``rents from real property'' in satisfying the gross
income tests if the REIT, or an owner of 10% or more of the REIT, directly or
constructively owns 10% or more of such tenant (a ``Related Party Tenant'').
Third, 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 such personal property will not
qualify as ``rents from real property.'' Finally, a REIT may provide services to
its tenants and the income will qualify as ``rents from real property'' only if
the services are of a type that a tax-exempt organization can provide to its
tenants without causing its rental income to be unrelated business taxable
income under the Code. Services that would give rise to unrelated business
taxable income if provided by a tax-exempt organization (``Prohibited
Services'') must be provided by an ``independent contractor'' who is adequately
compensated and from whom the REIT does not derive any income. Payments received
by a REIT for services furnished (whether or not rendered by an independent
contractor) that are not customarily provided to tenants in properties of a
similar class in the geographic market in which the REIT's property is 1ocated
will not qualify as ``rents from real property.'' For the Company's taxable
years beginning on or after January 1, 1998, the provision of Prohibited
Services by the Company in connection with a lease of real property will not
cause the rent to fail to qualify as ``rents from real property'' unless the
amount treated as received for the Prohibited Services exceeds l% of all amounts
received or accrued during the taxable year directly or indirectly by the
Company with respect to such property. The Company does not and will not charge
rent for any property that is based in whole or in part on the income or profits
of any person (except by reason of being based on a percentage of receipts or
sales, as described above), and the Company does not and will not rent any
personal property (other than personal property leased in connection with the
lease of real property, the amount of which is less than 15% of the total rent
received under the lease). The Company directly performs services under certain
of its leases, but such services
27
<PAGE>
should not be considered Prohibited Services.
To the extent that the performance of any services provided by the Company
would cause amounts received from its tenants to be excluded from ``rents from
real property,'' the Company intends to hire independent contractors from whom
the Company will derive no revenue in connection with such services.
The term ``interest'' generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends 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 the term ``interest''
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
For the Company's taxable years beginning prior to January 1, 1998, any gross
income derived from a prohibited transaction will be taken into account in
applying the 30% income test necessary to qualify as a REIT. The net income from
a prohibited transaction is subject to a 100% tax. The Company believes that no
asset directly or indirectly owned by it is held for sale to customers and that
the sale of any such property will not be in the ordinary course of business of
the Company, the Operating Company or the Subsidiary Entities.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions generally will be available if the Company's failure to meet such
tests was attributable to reasonable cause and not to willful neglect, the
Company attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not attributable to fraud with intent
to evade tax. It is not possible, however, to determine whether, in all
circumstances, the Company would be entitled to the benefit of those relief
provisions. As discussed above in ``--General,'' even if those relief provisions
apply, a tax would be imposed with respect to excess net income.
THIRD PARTY MANAGEMENT INCOME
In connection with the TCR-West Transaction, the Company acquired certain
management contracts (which were immediately contributed to the Management
Company, a newly created ``qualified REIT subsidiary,'' as defined in the Code)
whereby, in return for various fees, the Company is obligated to provide
management services related to properties that are not owned directly or
indirectly by the Company (``Third Party Management Income''). The Third Party
Management Income will not qualify under either 75% or 95% gross income test
described above. However, the Company does not believe that the receipt of this
income will cause the Company to fail to satisfy one or both of the 75% or 95%
gross income tests for the current or any future taxable year as this income,
along with other non-qualifying income, is expected to represent less than 5% of
the Company's gross income in any taxable year.
Inadvertent failure to satisfy the 75% and 95% gross income tests may not
disqualify the Company as a REIT if, as discussed above, certain relief
provisions apply. See ``--Income Tests.''
ASSET TESTS
At the close of each quarter of its taxable year, the Company must also
satisfy three tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by interests in real
property, interests in mortgages on real property to the extent the mortgage
balance does not exceed the value of the associated real property, shares in
other REITs, cash, cash items, government securities and certain securities
attributable to temporary investment of new capital. Second, not more than 25%
of the Company's total assets may be represented by securities other than those
in the 75% asset class. Third, of the investments included in the 25% asset
class, the value of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets and the
28
<PAGE>
Company may not own more than 10% of any one issuer's outstanding voting
securities.
As set forth above, the ownership of more than 10% of the voting securities of
any one issuer by a REIT is prohibited by the asset tests. However, the Company
owns stock in certain subsidiaries that are, in the opinion of Farella Braun &
Martel LLP (based on certain representations by the Company), ``qualified REIT
subsidiaries'' as defined in the Code, and as ``qualified REIT subsidiaries,''
such subsidiaries are not treated as separate corporations for federal income
tax purposes. Thus, the Company's ownership of stock of a ``qualified REIT
subsidiary'' will not cause the Company to fail the asset tests.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company is required to distribute dividends
(other than capital gain dividends) to its shareholders each year in an amount
at least equal to: (i) the sum of (a) 95% of the Company's ``REIT taxable
income'' (computed without regard to the dividends paid deduction and the
Company's net capital gain) and (b) 95% of the net income (after tax), if any,
from foreclosure property, minus (ii) the sum of certain items of non-cash
income. To the extent that the Company does not distribute all of its net
capital gain or distributes at least 95%, but less than 100%, of its ``REIT
taxable income,'' as adjusted, it will be subject to tax thereon at regular
ordinary and capital gains corporate tax rates. Furthermore, if the Company
fails to distribute during each calendar year at least the sum of: (i) 85% of
its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income
for such year and (iii) any undistributed taxable income from prior periods, the
Company will be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed (including for this purpose
as amounts distributed, amounts taxed at regular ordinary and capital gains
corporate tax rates). The Company intends to make timely distributions
sufficient to satisfy these annual distribution requirements.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement because of
timing differences between (i) the actual receipt of income and the actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at the taxable income of the Company. In
the event that such timing differences occur, in order to meet the 95%
distribution requirement the Company may find it necessary to arrange for short-
term, or possibly long-term, borrowings or to pay dividends in the form of
taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a certain year by paying ``deficiency
dividends'' to shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency dividends.
However, the Company will be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable corporate alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made by the Company. In such event, to the extent of
current and accumulated earnings and profits, all distributions to shareholders
will be taxable as ordinary income, and, subject to certain limitations, a
corporate distributee may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. Whether the Company
would be entitled to such statutory relief cannot be foreseen.
29
<PAGE>
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to its taxable
domestic shareholders out of current or accumulated earnings and profits (and
not designated as capital gain dividends) will result in ordinary income to such
shareholders. Corporate shareholders will not be entitled to the ``dividends
received'' deduction. Distributions that are designated as capital gain
dividends will be taxed as long-term capital gains (to the extent they do not
exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which the shareholder has held its shares. However,
corporate shareholders may be required to treat up to 20% of certain capital
gain dividends as ordinary income. Distributions by the Company in excess of its
current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that such distributions do not exceed the adjusted
basis of the shareholder's shares, but rather, will be a non-taxable reduction
in a shareholder's adjusted basis in such shares to the extent thereof and
thereafter will be taxed as capital gain.
Any dividend declared by the Company in October, November or December of any
year payable to a shareholder of record on a specified date in any such month
will be treated as both paid by the Company and received by the shareholder on
or before December 31 of such year, provided that the dividend is actually paid
by the Company by January 31 of the following calendar year.
Shareholders may not include any net operating losses or capital losses of the
Company in their individual income tax returns. In general, any loss upon the
sale or exchange of shares by a shareholder who has held such shares for six
months or less (after applying certain holding period rules) will be treated as
a long-term capital loss to the extent distributions from the Company are
required to be treated by such shareholder as long-term capital gain.
If the Company elects to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains, the Company would pay tax on such
retained net long-term capital gains. In addition, for taxable years of the
Company beginning an or after January 1, 1998, to the extent designated by the
Company, a taxable domestic shareholder generally would (i) include its
proportionate share of such undistributed long-term capital gains in computing
its long-term capital gains in its return for its taxable year in which the last
day of the Company's taxable year falls (subject to certain limitations as to
the amount so includible), (ii) be deemed to have paid the capital gains tax
imposed on the Company on the designated amounts included in such taxable
domestic shareholder's long-term capital gains, (iii) receive a credit or refund
for such amount of tax deemed paid by it, (iv) increase the adjusted basis of
its shares by the difference between the amount of such includible gains and the
tax deemed to have been paid by it, and (v) in the case of a taxable corporate
shareholder, appropriately adjust its earnings and profits for the retained
capital gains in accordance with Treasury Regulations to be prescribed by the
IRS.
BACKUP WITHHOLDING
The Company will report to its domestic shareholders and to the IRS the amount
of dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such
holder: (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (ii) provides a taxpayer
identification number, certifies to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide the Company with a
correct taxpayer identification number may also be subject to penalties imposed
by the IRS. Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions to any shareholders who fail to
certify their non-foreign status to the Company. See ``Taxation of Foreign
Shareholders.''
30
<PAGE>
TAXATION OF PENSION TRUSTS
For purposes of the ``five or fewer'' test described above, beneficiaries of a
domestic pension trust that owns shares in the Company generally will be treated
as owning such shares in proportion to their actuarial interests in the trust.
Generally, a tax-exempt investor that holds Common Stock as an investment and is
exempt from tax on its investment income will not be subject to tax on
distributions paid by the Company. However, if such tax-exempt investor is
treated as having purchased Common Stock with borrowed funds, some or all of its
distributions from the Common Stock will be subject to tax. Amounts distributed
by the Company to a tax-exempt pension trust generally do not constitute
``unrelated business taxable income'' (``UBTI'') to such trust unless the trust
owns more than ten percent of the Company's Common Stock, in which case a
portion of such amounts distributed may be treated as UBTI.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of nonresident alien
individuals or foreign corporations, foreign partnerships and other foreign
shareholders (collectively, ``Non-U.S. Shareholders'') are complex and no
attempt is made herein to provide more than a summary of such rules. In
addition, this discussion is based on current law, which is subject to change,
and assumes that the Company qualifies for taxation as a REIT. Prospective Non-
U.S. Shareholders should consult with their own tax advisors to determine the
impact of federal, state and local income tax laws with regard to an investment
in the Shares, including any reporting requirements.
It is currently anticipated that the Company will qualify as a ``domestically
controlled REIT'' (i.e., a REIT in which at all times during a specified testing
period less than 50% of the value of the capital stock of which is owned
directly or indirectly by Non-U.S. Shareholders) and therefore gain from the
sale of Common Stock by a Non-U.S. Shareholder generally will not be subject to
United States taxation unless such gain is treated as ``effectively connected''
with the Non-U.S. Shareholder's United States trade or business. As the Common
Stock is publicly traded, there can be no assurance that the Company will always
qualify as a ``domestically controlled REIT.''
If the Company ceases to be a ``domestically controlled REIT,'' gain arising
from the sale or exchange by a Non-U.S. Shareholder of Common Stock would be
subject to United States taxation under the Foreign Investment in Real Property
Tax Act of 1980 (``FIRPTA'') as a sale of a ``United States real property
interest'' unless the Common Stock is ``regularly traded'' (as defined by
applicable Treasury regulations) on an established securities market (e.g., the
New York Stock Exchange) and the selling Non-U.S. Shareholder held no more than
5% (after applying certain constructive ownership rules) of the Common Stock
during the shorter of (i) the period during which the taxpayer held such shares
or (ii) the 5-year period ending on the date of the disposition of such shares.
If gain on the sale or exchange of Common Stock were subject to taxation under
FIRPTA, the Non-U.S. Shareholder would be subject to regular United States
income tax with respect to such gain in the same manner as a domestic
shareholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporation), and the purchaser of the stock would be required to
31
<PAGE>
withhold and remit to the IRS 10% of the purchase price. The 10% withholding tax
will not apply if the Common Stock is``regularly traded'' in an established
securities market.
Notwithstanding the foregoing, gain from the sale or exchange of Common Stock
not otherwise subject to United States taxation will be taxable to a Non-U.S.
Shareholder if (i) investment in the Common Stock is effectively connected with
the Non-U.S. Shareholder's United States trade or business (or, if an income tax
treaty applies, is attributable to a United States permanent establishment of
the Non-U.S. Shareholder), in which case the Non-U.S. Shareholder will be
subject to the same treatment as domestic shareholders with respect to such gain
(except that a shareholder that is a foreign corporation may also be subject to
the 30% branch profits tax, as discussed below), or (ii) the Non-U.S.
Shareholder is a resident alien individual who is present in the United States
for 183 days or more during the taxable year and has a ``tax home'' in the
United States, in which case the nonresident alien individual will be subject to
a 30% tax on the individual's capital gains.
Distributions that are not attributable to gain from the sale or exchange by
the Company of United States real property interests (and are not designated as
capital gain dividends) (``Non-Capital Distributions'') will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions generally
will be subject to a United States withholding tax equal to 30% of the gross
amount of the distribution, subject to reduction or elimination under an
applicable income tax treaty. However, if dividends from the investment in the
Common Stock are treated as ``effectively connected'' with the Non-U.S.
Shareholder's conduct of a United States trade or business, such dividends will
be subject to regular U.S. income taxation (foreign corporations may also be
subject to the 30% branch profits tax). The Company will withhold United States
income tax at the rate of 30% on the gross amount of any Non-Capital
Distributions paid to a Non-U.S. Shareholder unless: (i) a lower treaty rate
applies and the Non-U.S. Shareholder files certain information evidencing its
entitlement to such lower treaty rate, or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is ``effectively
connected'' income. Distributions which exceed current and accumulated earnings
and profits of the Company will not be taxable to the extent that they do not
exceed the adjusted basis of shares, but rather will reduce (but not below zero)
the adjusted basis of such shares. To the extent that such distributions exceed
the adjusted basis of a Non-U.S. Shareholder's Common Stock, they generally will
give rise to United States tax liability if the Non-U.S. Shareholder would
otherwise be subject to tax on gain from the sale or disposition of his shares
in the Company, as described above. Because the Company will withhold 30% (or
lower treaty rate) of all Non-Capital Distributions, to the extent the Company
makes distributions in excess of its earnings and profits, generally the amount
withheld will exceed a Non-U.S. Shareholder's U.S. tax liability on such
distributions and such shareholder can seek a refund from the IRS to the extent
the amount withheld on its distributions exceeds its U.S. tax liability.
Distributions by the Company to a Non-U.S. Shareholder that are attributable
to gain from sales or exchanges by the Company of a United States real property
interest are subject to income and withholding tax under the provisions of
FIRPTA. Under FIRPTA, those distributions, if any, which are treated as gain
recognized from the sale of a United States real property interest, are taxed as
income ``effectively connected'' with a United States business. Non-U.S.
Shareholders would thus be taxed at the normal capital gain rates applicable to
U.S. shareholders (subject to the applicable alternative minimum tax and a
special alternative minimum tax for nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate shareholder not entitled to treaty exemption.
The Company will withhold 35% of any distribution to a Non-U.S. Shareholder that
could be designated by the Company as a capital gain dividend. This amount is
creditable against the Non-U.S. Shareholder's FIRPTA tax liability. A refund may
be available if the amount withheld exceeds the Non-U.S. Shareholder's federal
tax liability.
Distributions that are designated by the Company at the time of distribution
as capital gains dividends (other than those arising from the disposition of a
United States real property interest) generally will not be subject to United
States federal income taxation, unless (i) investment in the Common Stock is
effectively connected with the Non-U.S. Shareholder's United States trade or
business (or, if an income tax treaty applies, is attributable to a United
States permanent establishment of the Non-U.S. Shareholder), in which case the
Non-U.S. Shareholder will be subject to the same treatment as domestic
shareholders with respect to such gain (except that a shareholder that is a
foreign corporation may also be subject to the 30% branch profits tax, as
discussed above), or (ii) the Non-U.S. Shareholder is a resident
32
<PAGE>
alien individual who is present in the United States for 183 days or more during
the taxable year and has a ``tax home'' in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains.
On October 6, 1997, the IRS issued final Treasury Regulations concerning the
withholding of tax and information reporting for certain amounts paid to non-
resident individuals and foreign corporations. These new withholding rules
significantly change the current withholding regime. However, in general, these
new rules apply only to payments made after December 31, 1998. Prospective
purchasers should consult their tax advisors concerning the impact, if any, of
these new Treasury Regulations.
FEDERAL INCOME TAX ASPECTS OF THE OPERATING COMPANY AND THE SUBSIDIARY ENTITIES
As a result of the TCR-West Transaction, a portion of the Company's assets are
held indirectly through the Operating Company and the Subsidiary Entities.
The Operating Company and the Subsidiary Entities involve special tax
considerations, including the possibility of a challenge by the IRS of the
status of any of such partnerships or LLCs as a partnership (as opposed to an
association taxable as a corporation) for federal income tax purposes. Under
recently finalized Treasury Regulations pertaining to entity classification, the
Company believes that the Operating Company and Subsidiary Entities will be
classified as partnerships for federal income tax purposes. Nevertheless, if any
of such partnerships or LLCs were to be treated as a corporation, such entity
would be subject to an entity level tax on its income. Such an entity level tax
is likely to substantially reduce the amount of cash available for distribution
to the Company's shareholders. In addition, if the Operating Company or any of
the Subsidiary Entities were to be taxable as a corporation, the Company would
not qualify as a REIT, which could have a material adverse effect on the Company
and its ability to make distributions to shareholders.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES
Pursuant to 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 such that the contributing partner is charged with, or benefits from,
respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of the contributed property at the time of contribution and the adjusted
tax-basis of such property at the time of contribution (a ``Book-Tax
Difference''). Such 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 Company was formed by way of contributions of
property by TCR-West. Consequently, allocations with respect to such contributed
property must be made in a manner consistent with Code Section 704(c).
In general, the Company will be allocated higher amounts of depreciation
deductions for tax purposes than such deductions would be if determined on a pro
rata basis. In addition, in the event of the disposition of any of the
contributed assets which have a Book-Tax Difference, all income attributable to
such Book-Tax Difference will generally be allocated to the property-
contributing members and the Company will generally be allocated only its share
of capital gains attributable to appreciation, if any, occurring after the
contribution of such assets to the Operating Company. This will tend to
eliminate the Book-Tax Difference over the life of the Operating Company.
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 carryover basis of the
contributed assets in the hands of the Operating Company will cause the Company
to be allocated lower depreciation and other deductions, and possible amounts of
taxable income in the event of a sale of such contributed assets in excess of
the economic or book income allocated to it as a result of such sale. This may
cause the Company to recognize taxable income in excess of cash
33
<PAGE>
proceeds, which might adversely affect the Company's ability to comply with the
REIT distribution requirements. See ``Annual Distribution Requirements.''
The Treasury Regulations under Code Section 704(c) allow partnerships to use
any reasonable method of accounting for Book-Tax Differences so that the
contributing partner receives the tax benefits and burdens of any built-in gain
or loss associated with the contributed property. Book-Tax Differences
associated with the Operating Company will be allocated pursuant to the
``traditional method'' as described in the applicable Treasury Regulations. Use
of the ``traditional method'' may result in distributions to Company
shareholders being comprised of a greater portion of taxable income rather than
a return of capital.
PARTNERSHIP ANTI-ABUSE RULE
The IRS has published regulations that provide an anti-abuse rule (the ``Anti-
Abuse Rule'') under the partnership provisions of the Code (the ``Partnership
Provisions''). Under the Anti-Abuse Rule, if a partnership is formed or availed
of in connection with a transaction a principal purpose of which is to reduce
substantially the present value of the partners, aggregate federal tax liability
in a manner that is inconsistent with the intent of the Partnership Provisions,
the IRS can recast the transaction for federal tax purposes to achieve tax
results that are consistent with the intent of the Partnership Provisions. This
analysis is to be made based on all facts and circumstances. The Anti-Abuse Rule
states that the intent of the Partnership Provisions incorporates the following
requirements: (i) the partnership must be bona fide and each partnership
transaction or series of related transactions must be entered into for a
substantial business purpose; (ii) the form of each partnership transaction must
be respected under substance over form principles; and (iii) with certain
exceptions, the tax consequences under the Partnership Provisions to each
partner of partnership operations and the transactions between the partner and
the partnership must accurately reflect the partner's economic agreement and
clearly reflect the partner's income.
The Company believes that its indirect ownership of certain assets through its
interest in the Operating Company and the Subsidiary Entities is not
inconsistent with the intent of the Partnership Provisions and that, therefore,
the IRS should not be able to invoke the Anti-Abuse Rule to recast the structure
of the Company for federal income tax purposes. However, no assurance can be
given that the IRS or a court will concur with such opinion.
The Anti-Abuse Rule also provides that, unless a provision of the Code or the
Treasury Regulations prescribes the treatment of a partnership as an entity, in
whole or in part, and that treatment and the ultimate tax results, taking into
account all the relevant facts and circumstances, are clearly contemplated by
that provision, the IRS can treat a partnership as an aggregate of its partners,
in whole or in part, as appropriate to carry out the purpose of any provision of
the Code or the Treasury Regulations. Treatment of the Operating Company or any
of the Subsidiary Entities, in whole or in part, as an aggregate rather than an
entity is unlikely to materially change the federal tax consequences to any
partner. In addition, the REIT Provisions generally treat a partnership as an
aggregate rather than an entity for purposes of applying the REIT Requirements.
Therefore, the Anti-Abuse Rule should not have a material adverse effect on the
federal income tax consequences to any partner or on the ability of the Company
to qualify as a REIT.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local taxation in
various jurisdictions, including those in which it or they transact business or
reside. The state and local tax treatment of the Company and its shareholders
may not conform to the federal income tax consequences discussed above.
Prospective shareholders should consult their own tax advisors regarding the
effect of state and local tax laws on an investment in the Company.
PLAN OF DISTRIBUTION
Any or all of the Shares offered hereby may be sold from time to time, in one
or more transactions, on the NYSE,
34
<PAGE>
on any other exchange on which the Shares are listed or traded, in the over-the-
counter market or otherwise. Such sales may be made at prices and at terms then
prevailing or at prices related to the then current market price, or in
negotiated transactions. To the extent required, this Prospectus may be amended
or supplemented from time to time to describe a specific plan of distribution.
In addition, any or all of the Shares that qualify for sale pursuant to Rule 144
might be sold under Rule 144 rather than pursuant to this Prospectus. The
Selling Shareholder will act independently of the Company in making decisions
with respect to the timing, manner and size of each sale.
In effecting sales, brokers, dealers or agents engaged by the Selling
Shareholder may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
Selling Shareholder in amounts to be negotiated prior to the sale. Such
brokers, dealers and any other participating brokers or dealers may be deemed to
be "underwriters" within the meaning of the Securities Act in connection with
such sales, and any such commissions, discounts or concessions may be deemed to
be underwriting discounts or commissions under the Securities Act. The Company
will pay all expenses incident to the offering and sale of the Shares to the
public other than any commissions and discounts of underwriters, dealers or
agents and any transfer taxes.
In order to comply with the securities laws of certain states, if applicable,
the Shares must be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the Shares may not
be sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
The Company has advised the Selling Shareholder that the anti-manipulation
rules of Regulation M under the Exchange Act may apply to sales of Shares in the
market and to the activities of the Selling Shareholder and its affiliates. In
addition, the Company will make copies of this Prospectus available to the
Selling Shareholder and has informed it of the need for delivery of copies of
this Prospectus to purchasers at or prior to the time of any sale of the Shares
offered hereby. The Selling Shareholder may indemnify any broker-dealer that
participates in transactions involving the sale of the Shares against certain
liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of Shares is made, if required, a Prospectus
Supplement will be distributed that will set forth the number of Shares being
offered and the terms of the offering, including the name of any underwriter,
dealer or agent, the purchase price paid by any underwriter, any discount,
commission and other item constituting compensation, any discount, commission or
concession allowed or reallowed or paid to any dealer, and the proposed selling
price to the public.
The sale of Shares by the Selling Shareholder is subject to compliance by the
Selling Shareholder with certain contractual restrictions with the Company.
There can be no assurance that the Selling Shareholder will sell all or any of
the Shares.
The Company has agreed to indemnify the Selling Shareholder and any person
controlling the Selling Shareholder against certain liabilities, including
liabilities under the Securities Act. The Selling Shareholder has agreed to
indemnify the Company and certain related persons against certain liabilities,
including liabilities under the Securities Act.
The Company has agreed with the Selling Shareholder to use its reasonable
efforts to keep the Registration Statement of which this Prospectus constitutes
a part effective for up to two years following the effective date of such
Registration Statement (which period may be shortened or extended under certain
circumstances). The Company intends to de-register any of the Shares not sold
by the Selling Shareholder at the end of such two-year period; however, it is
anticipated that at such time any unsold Shares may be freely tradable subject
to compliance with Rule 144 of the Securities Act.
EXPERTS
The financial statements and related financial schedule of the Company
appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996, as amended, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. The statement of gross income and direct
operating expenses of Promontory Point Apartments for the year ended December
31, 1996, appearing in
35
<PAGE>
the Company's Current Report on Form 8-K/A filed on February 13, 1997, as
amended, has been audited by Ernst & Young LLP, as set forth in their report
thereon included therein and incorporated herein by reference. The statement of
gross income and direct operating expenses of Foster's Landing Apartments for
the year ended December 31, 1995, appearing in the Company's Current Report on
Form 8-K/A filed on December 9, 1996, as amended, has been audited by Ernst &
Young LLP, as set forth in their report thereon included therein and
incorporated herein by reference. The statement of gross income and direct
operating expenses of Red Hawk Ranch for the year ended December 31, 1996,
appearing in the Company's Current Report on Form 8-K filed on April 25, 1997,
has been audited by Ernst & Young LLP, as set forth in their report thereon
included therein and incorporated herein by reference. The statement of gross
income and direct operating expenses of Lakeshore Landing Apartments for the
year ended December 31, 1996, appearing in the Company's Current Report on Form
8-K/A filed on October 30, 1997, has been audited by Ernst & Young LLP, as set
forth in their report thereon included therein and incorporated herein by
reference. The statement of gross income and direct operating expenses of
certain TCR-West multifamily properties for the year ended December 31, 1996,
appearing in the Company's Current Report on Form 8-K filed on November 24,
1997, has been audited by Ernst & Young LLP, as set forth in their report
thereon included therein and incorporated herein by reference. Such financial
statements and schedule referred to above are incorporated herein by reference
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
LEGAL MATTERS
The validity of the Shares offered hereby, as well as certain legal matters
described under "Federal Income Tax Considerations," will be passed upon for the
Company by Farella Braun & Martel LLP, San Francisco, California.
36
