<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PRENTISS PROPERTIES TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS)
1717 MAIN STREET, SUITE 5000
DALLAS, TEXAS 75201
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
MICHAEL V. PRENTISS
PRENTISS PROPERTIES TRUST
1717 MAIN STREET, SUITE 5000
DALLAS, TEXAS 75201
(214) 761-1440
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
GEORGE C. HOWELL, III, ESQ. ROBERT E. KING, JR., ESQ.
MARK A. MURPHY, ESQ. ROGERS & WELLS
HUNTON & WILLIAMS 200 PARK AVENUE
951 EAST BYRD STREET NEW YORK, NEW YORK 10166
RICHMOND, VIRGINIA 23219 (212) 878-8000
(804) 788-8200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF SECURITIES BEING REGISTERED AMOUNT BEING REGISTERED(1) AMOUNT OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Common Shares of
beneficial interest,
$0.01 par value per
share................. 18,280,485 shares $126,072
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 2,137,500 Common Shares issuable upon exercise of the
underwriters' overallotment option.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(A) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
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<S> <C> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Inside Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges..... Outside Front Cover Page; Prospectus
Summary; Risk Factors; The Company;
Policies with Respect to Certain
Activities; Shares Available for Future
Sale
4. Determination of Offering Price......... Outside Front Cover Page; Formation
Transactions; Underwriting
5. Dilution................................ Dilution
6. Selling Security Holders................ Not Applicable
7. Plan of Distribution.................... Outside From Cover Page; Underwriting
8. Use of Proceeds......................... Use of Proceeds
9. Selected Financial Data................. Selected Financial Information
10. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
11. General Information as to Registrant.... Prospectus Summary; The Company;
Properties; Management; Formation
Transactions; Certain Provisions of
Maryland Law and of the Company's
Declaration of Trust and Bylaws
12. Policy With Respect to Certain Prospectus Summary; Policies with Respect
Activities............................. to Certain Activities; Certain Provisions
of Maryland Law and of the Company's
Declaration of Trust and Bylaws
13. Investment Policies of Registrant....... Prospectus Summary; Properties; Policies
with Respect to Certain Activities
14. Description of Real Estate.............. Prospectus Summary; Properties
15. Operating Data.......................... Properties
16. Tax Treatment of Registrant and its
Security Holders....................... Prospectus Summary; Federal Income Tax
Considerations
17. Market Price of and Dividends on the
Registrant's Common Equity and Related
Shareholder Matters.................... Risk Factors; Distribution Policy
18. Description of Registrant's Securities.. Description of Shares of Beneficial
Interest; Certain Provisions of Maryland
Law and of the Company's Declaration of
Trust and Bylaws
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
- ----------------------- ---------------------
<S> <C> <C>
19. Legal Proceedings....................... The Properties--Legal Proceedings
20. Security Ownership of Certain Beneficial
Owners and Management.................. Principal and Management Shareholders
21. Trustees and Executive Officers......... Management
22. Executive Compensation.................. Management
23. Certain Relationships and Related Prospectus Summary; Properties; Management;
Transactions........................... Certain Relationships and Transactions
24. Selection, Management and Custody of
Registrant's Investments............... Outside Front Cover Page; Prospectus
Summary; Properties; Management; Policies
with Respect to Certain Activities
25. Policies With Respect to Certain Risk Factors; Policies with Respect to
Transactions........................... Certain Transactions
26. Limitations of Liability................ Certain Provisions of Maryland Law and of
the Company's Declaration of Trust and
Bylaws
27. Financial Statements and Information.... Prospectus Summary; Selected Financial
Information; Financial Statements
28. Interests of Named Experts and Counsel.. Legal Matters; Experts
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated , 1996
PROSPECTUS
14,250,000 SHARES
PRENTISS PROPERTIES TRUST [LOGO]
COMMON SHARES OF BENEFICIAL INTEREST
----------
Prentiss Properties Trust (together with its subsidiaries, the "Company") is
a self-administered and self-managed real estate investment trust that has been
formed to continue and expand the national office and industrial property
acquisition, ownership, management, leasing, development and construction
businesses of Prentiss Properties Limited, Inc. and its affiliates (the
"Prentiss Group"). Upon the closing of this offering, the Company will own
interests in 85 office and industrial properties (the "Properties") with
approximately 8.5 million net rentable square feet. As of March 31, 1996, the
Properties were approximately 94% leased to 378 tenants. The Company intends to
continue the Prentiss Group's strategy of focusing its operations in select
markets throughout the nation and will initially operate in 20 markets
throughout the U.S.
All of the 14,250,000 shares of beneficial interest ("Common Shares") offered
hereby are being offered by the Company. In addition, 1,892,985 Common Shares
(representing an investment of approximately $37.9 million based on the initial
public offering price) are being concurrently sold by the Company at the
initial public offering price to certain owners of interests in the Properties
that are not affiliated with the Prentiss Group (the "Continuing Investors") in
exchange for their interests in those Properties. No underwriting discounts or
commissions will be applied to the Common Shares issued to the Continuing
Investors. See "Underwriting."
It is currently anticipated that the initial public offering price for the
Common Shares offered hereby will be $20.00. Prior to this offering, there has
been no public market for the Common Shares. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price. Upon completion of this offering, management will own approximately
15.4% of the Company on a consolidated basis. The Company intends to apply to
have the Common Shares listed on the New York Stock Exchange under the symbol
"PP."
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON SHARES INCLUDING, AMONG OTHERS:
. The consideration to be paid for the Properties and other assets to be
acquired may exceed their fair market value; therefore, the market value of
the Common Shares may not reflect the fair market value of the Company's
assets;
. Conflicts of interest relating to the formation of the Company and the
operation of its business;
. Limitations on ownership of Common Shares initially to 8.5% of the
outstanding Common Shares, which may deter third parties from seeking to
control or acquire the Company; and
. Taxation of the Company as a corporation if it fails to qualify as a REIT.
----------
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.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
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Total(3)................................... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at approximately
$3,100,000.
(3) The Company has granted the Underwriters an option to purchase up to an
aggregate of 2,137,500 Common Shares to cover overallotments. If all of
such shares are purchased, the total Price to Public, Underwriting Discount
and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
----------
The Common Shares offered by this Prospectus are offered by the Underwriters
subject to prior sale, withdrawal, cancellation or modification of the offer
without notice, to delivery to and acceptance by the Underwriters and to
certain further conditions. It is expected that delivery of the Common Shares
offered hereby will be made at the offices of Lehman Brothers Inc., New York,
New York on or about , 1996.
----------
LEHMAN BROTHERS
Alex. Brown & Sons
INCORPORATED
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
PRINCIPAL FINANCIAL SECURITIES, INC.
, 1996
<PAGE>
[INSERT PROPERTY LOCATION MAP AND PROPERTY PHOTOGRAPHS]
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON SHARES
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZATION, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
----------------
CAUTIONARY STATEMENT
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE" OR
"CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. THE CAUTIONARY STATEMENTS SET FORTH UNDER THE CAPTION "RISK
FACTORS" AND ELSEWHERE IN THE PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH
RESPECT TO SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
IN SUCH FORWARD-LOOKING STATEMENTS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 1
The Company.......................... 1
Risk Factors......................... 2
Business and Growth Strategies....... 3
Business Strategy.................... 3
Growth Strategies.................... 4
Properties........................... 6
Structure of the Company............. 8
Benefits to Related Parties.......... 9
The Offering......................... 10
Use of Proceeds...................... 10
Distributions........................ 10
Tax Status of the Company............ 11
Summary Financial Information........ 12
RISK FACTORS.......................... 15
Price to be Paid for Properties,
Common Shares and Other Assets May
Exceed Their Fair Market Value...... 15
Conflicts of Interests in the
Formation Transactions and the
Business of the Company............. 15
Maryland Business Combination Law.... 16
Anti-takeover Effect of Ownership
Limit, Staggered Board and Power to
Issue Additional Shares............. 16
Tax Risks............................ 18
Real Estate Financing Risks.......... 19
Reliance on Major Tenants............ 19
Geographic Concentration in Texas,
Dallas and Atlanta.................. 20
Changes in Policies Without
Shareholder Approval; No Limitation
on Debt............................. 20
Risks Associated with Rapid Growth;
Risks Associated with the
Acquisition of Substantial New
Properties; Lack of Operating
History............................. 20
Dependence on Key Personnel; Control
of Management....................... 20
Real Estate Investment Risks......... 21
Risk of Acquisition, Development and
Construction........................ 24
Risk of Continuing Entities and
Manager............................. 24
Risks of Third-Party Property
Management, Leasing, Development and
Construction Business and Related
Services............................ 24
Absence of Prior Public Market for
Common Shares....................... 25
Immediate and Substantial Dilution... 25
Effect of Market Interest Rates on
Price of Common Shares.............. 25
Possible Adverse Effect of Shares
Available for Future Sale on Price
of Common Shares.................... 26
THE COMPANY........................... 27
General.............................. 27
History.............................. 27
Operations........................... 28
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BUSINESS OBJECTIVES....................................................... 30
Business Strategy........................................................ 30
Growth Strategies........................................................ 31
Third-Party Management................................................... 34
Financing Strategies..................................................... 36
USE OF PROCEEDS........................................................... 37
DISTRIBUTION POLICY....................................................... 39
CAPITALIZATION............................................................ 42
DILUTION.................................................................. 43
SELECTED FINANCIAL INFORMATION............................................ 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 47
Overview................................................................. 47
Comparison of Pro Forma Three Months Ended March 31, 1996 to Historical
Three Months Ended March 31, 1996....................................... 47
Comparison of Pro Forma Year Ended December 31, 1995 to Historical Year
Ended December 31, 1995................................................. 47
Comparison of the Three Months Ended March 31, 1996 to the Three Months
Ended March 31, 1995.................................................... 48
Comparison of Year Ended December 31, 1995 to Year Ended December 31,
1994.................................................................... 48
Comparison of Year Ended December 31, 1994 to Year Ended December 31,
1993.................................................................... 49
Liquidity and Capital Resources.......................................... 50
Inflation................................................................ 51
PROPERTIES................................................................ 52
General.................................................................. 52
Location of Properties; Market Overview.................................. 54
Los Angeles............................................................. 55
Austin.................................................................. 56
Dallas/Fort Worth....................................................... 56
Detroit................................................................. 58
Kansas City............................................................. 59
Milwaukee............................................................... 59
Washington, D.C. (including Northern Virginia).......................... 60
Baltimore............................................................... 61
Atlanta................................................................. 61
Office Properties........................................................ 62
Industrial Properties.................................................... 70
Leasing Activity......................................................... 71
Tenant Information....................................................... 72
Option Properties........................................................ 78
Option Parcels........................................................... 80
Historical Non-Incremental Revenue-Generating Capital Expenditures,
Tenant Improvement Costs and Leasing Commissions........................ 81
Historical Incremental Revenue-Generating Tenant Improvement Costs and
Leasing Commissions..................................................... 82
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prentiss Properties Service Business.................................... 82
Insurance............................................................... 82
Environmental Matters................................................... 83
Depreciation of the Properties.......................................... 85
Real Estate Taxes on Significant Properties............................. 85
Legal Proceedings....................................................... 85
Prentiss Group Assets Not Acquired By the Company....................... 85
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES.............................. 86
Investment Policies..................................................... 86
Financing Policies...................................................... 87
Conflict of Interest Policies........................................... 87
Policies with Respect to Other Activities............................... 89
Working Capital Reserves................................................ 89
MANAGEMENT............................................................... 90
Trustees and Executive Officers......................................... 90
Board of Trustees....................................................... 93
Committees of the Board of Trustees..................................... 93
Compensation of Trustees................................................ 94
Executive Compensation.................................................. 94
Employment Agreements................................................... 95
1996 Share Incentive Plan............................................... 95
Incentive Compensation.................................................. 97
The Trustees' Plan...................................................... 97
Savings Plan............................................................ 98
Share Purchase Plan..................................................... 99
Indemnification......................................................... 99
FORMATION TRANSACTIONS................................................... 99
Reasons for the Formation of the Company................................ 99
Formation Transactions.................................................. 100
Benefits to Related Parties............................................. 101
Effects of the Formation Transactions................................... 102
Valuation of the Company and Properties................................. 102
CERTAIN RELATIONSHIPS AND TRANSACTIONS................................... 103
Repayment of Termination Fee Note....................................... 103
PRINCIPAL AND MANAGEMENT SHAREHOLDERS.................................... 104
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST............................. 105
General................................................................. 105
Common Shares........................................................... 105
Preferred Shares........................................................ 106
Classification or Reclassification of Common Shares or Preferred
Shares................................................................. 106
Restrictions on Transfer................................................ 106
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION OF
TRUST AND BYLAWS........................................................ 109
Classification of the Board of Trustees................................. 109
Removal of Trustees..................................................... 109
Business Combinations................................................... 110
Control Share Acquisitions.............................................. 110
Amendment............................................................... 111
Limitation of Liability and Indemnification............................. 111
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Operations............................................................... 112
Dissolution of the Company............................................... 112
Advance Notice of Trustee Nominations and New Business................... 112
Possible Anti-takeover Effect of Certain Provisions of Maryland Law and
of the Declaration of Trust and Bylaws.................................. 112
Maryland Asset Requirements.............................................. 112
Transfer Agent........................................................... 113
SHARES AVAILABLE FOR FUTURE SALE.......................................... 113
OPERATING PARTNERSHIP AGREEMENT........................................... 115
Management............................................................... 115
Transferability of Interests............................................. 115
Capital Contribution..................................................... 115
Exchange Rights.......................................................... 116
Registration Rights...................................................... 116
Operations............................................................... 116
Distributions............................................................ 117
Allocations.............................................................. 117
Term..................................................................... 117
Fiduciary Duty........................................................... 117
Tax Matters.............................................................. 117
FEDERAL INCOME TAX CONSIDERATIONS......................................... 118
Taxation of the Company.................................................. 118
Requirements for Qualification........................................... 119
Failure to Qualify....................................................... 125
Taxation of Taxable U.S. Shareholders.................................... 125
Taxation of Shareholders on the Disposition of the Common Shares......... 126
Capital Gains and Losses................................................. 126
Information Reporting Requirements and Backup Withholding................ 126
Taxation of Tax-Exempt Shareholders...................................... 127
Taxation of Non-U.S. Shareholders........................................ 127
Other Tax Consequences................................................... 128
Tax Aspects of the Operating Partnership and the Noncorporate Subsidiar-
ies...................................................................... 129
Sale of the Operating Partnership's or a Noncorporate Subsidiary's
Property................................................................. 132
Manager................................................................... 132
UNDERWRITING.............................................................. 134
LEGAL MATTERS............................................................. 135
EXPERTS................................................................... 136
ADDITIONAL INFORMATION.................................................... 136
GLOSSARY.................................................................. G-1
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes that (i) the transactions
relating to the formation of the Company (the "Formation Transactions") are
consummated,(ii) the Underwriters' overallotment option is not exercised and
(iii) the offering price (the "Offering Price") is $20 per Common Share. Unless
the context otherwise requires, all references in this Prospectus to the(i)
"Company" shall mean Prentiss Properties Trust and its subsidiaries on a
consolidated basis, including(a) Prentiss Properties, Inc. (the "General
Partner"), (b) Prentiss Properties Acquisitions Partners, L.P. (the "Operating
Partnership") and its subsidiaries, (c) Prentiss Properties Run Deep, Inc. (the
"Manager"), and (d) entities through which the Operating Partnership owns
interests in certain of the Properties; (ii) "Prentiss Group" shall mean
Prentiss Properties Limited, Inc. ("PPL"), the companies and partnerships
affiliated with PPL and Michael V. Prentiss, Thomas F. August, Dennis J. DuBois
and Richard B. Bradshaw, Jr. (the "Prentiss Principals") and (iii) "Common
Shares" shall mean the Company's common shares of beneficial interest, par
value $.01 per share. Capitalized terms used but not defined herein shall have
the meanings set forth in the Glossary.
THE COMPANY
The Company is a self-administered and self-managed real estate investment
trust ("REIT") that has been formed to continue and expand the national office
and industrial property acquisition, ownership, management, leasing,
development and construction businesses of the Prentiss Group. Upon the closing
of this offering (the "Offering") of Common Shares, the Company will own a
diversified portfolio of 85 office and industrial properties (the "Properties")
with approximately 8.5 million net rentable square feet. The Properties are
located in 10 major U.S. markets and consist of 26 office buildings (the
"Office Properties") containing approximately 3.4 million net rentable square
feet and 59 industrial buildings (the "Industrial Properties") containing
approximately 5.0 million net rentable square feet. The Prentiss Group
developed nine of the Office Properties containing approximately 1.6 million
net rentable square feet. As of March 31, 1996, the Office Properties were
approximately 94% leased to 258 tenants, and the Industrial Properties were
approximately 93% leased to120 tenants. The Company believes that upon the
closing of this Offering, it will be one of the 20 largest managers of office
and industrial properties in the U.S., managing approximately 39 million square
feet in approximately 330 office and industrial properties that are owned by
the Company and by third parties, and that are leased to approximately 2,700
tenants. The Company intends to continue the Prentiss Group's strategy of
focusing its operations in select markets throughout the nation and will
initially operate in 20 markets throughout the U.S.
The Company operates from its Dallas, Texas headquarters and its four other
regional offices (Los Angeles, Chicago, Washington, D.C. and Atlanta). The
Company is a full-service real estate company with approximately 600 employees
and in-house expertise in acquisitions, development, property management,
leasing, facilities management, corporate services, finance, tax, construction,
dispositions, marketing, real estate law and accounting. The eleven senior
executives, which include the four Prentiss Principals (Michael V. Prentiss,
Thomas F. August, Dennis J. DuBois and Richard B. Bradshaw, Jr.), Richard J.
Bartel (the Chief Operating Officer of Property Management), Mark R. Doran (the
Treasurer), and the managing directors of each of the Company's five regions,
have an average tenure of 11 years with the Prentiss Group and its
predecessors. Upon completion of the Offering, management will, in the
aggregate, own approximately 15.4% of the Company on a consolidated basis. See
"Management--Trustees and Executive Officers".
The Company will seek to maximize the profitability of the Properties by
continuing the Prentiss Group's success in renewing leases, maintaining high
occupancy rates, increasing rental rates and reducing operating costs. The
Company will also seek to grow through the acquisition of additional office and
industrial properties and through development, primarily on a build-to-suit
basis. The Company believes that its five regional offices, presence in 20
markets throughout the U.S., diversified base of approximately 2,700 tenants
and existing
<PAGE>
relationships with 45 management clients will provide it with a competitive
advantage in identifying and competing for new office and industrial
acquisition and development opportunities nationally. Additionally, the Company
expects that its existing infrastructure from its extensive management
operation will allow it to grow in new and existing markets without the
substantial cost of opening new offices or hiring and training new employees.
RISK FACTORS
An investment in the Common Shares involves various risks, and prospective
investors should carefully consider the matters discussed under "Risk Factors"
prior to an investment in the Company. Such risks include, among others:
. The valuation of the Properties was not based on third-party appraisals,
and the market value of the Common Shares may exceed the aggregate fair
market value of the Company's portfolio of Properties;
. conflicts of interests between the Company and the Prentiss Principals,
who will serve as executive officers, in relation to the Formation
Transactions and business decisions regarding the Company, which
conflicts of interest could result in decisions that do not fully reflect
the interests of all of the Company's shareholders;
. anti-takeover effect of limiting ownership of the shares of beneficial
interest of the Company initially to 8.5% of any class of shares (other
than for Michael V. Prentiss, for whom the ownership limitation initially
is 15%) and of certain other provisions contained in the organizational
documents of the Company, which could delay, deter or prevent a
transaction that might involve a premium price for the Common Shares;
. taxation of the Company as a regular corporation if it fails to qualify
as a REIT;
. risks associated with borrowing, such as the possibilities that (i) the
Company may not be able to refinance outstanding indebtedness upon
maturity or refinance such indebtedness on favorable terms,(ii) the
Company's properties may be foreclosed upon if it cannot make required
debt service payments, and (iii) the Company's debt service on variable
rate indebtedness could increase;
. risks arising from the ability of the Company's Board of Trustees to
change the Company's investment, financing, borrowing, distribution and
other policies at any time without shareholder approval;
. risks associated with the reliance on major tenants, of which the largest
accounted for approximately 24%, and five others accounted for
approximately 15% in the aggregate, of the Company's 1995 annual Base
Rent (as defined herein) from the Properties, including the risk of such
tenants' inability to make rent payments;
. concentration of 25 of the 85 Properties in Texas, including 13
Properties located in the Dallas area, and concentration of nine of the
Properties in the Atlanta area, which concentrations subject the Company
to risks associated with local market conditions;
. real estate investment considerations, such as the effect of economic and
other conditions on property cash flows and values, the inability of a
property to generate revenue sufficient to meet operating expenses,
potential liability for costs of removal or remediation of hazardous or
toxic substances on a property, and the illiquidity of real estate
investments, all of which may affect the Company's ability to make
distributions to its shareholders;
. risks associated with the ownership, acquisition, development and
construction of office and industrial properties, including the risks of
abandonment of development, unexpected construction costs or delays,
newly developed or acquired properties' failure to perform as expected,
and failure to obtain or delays in obtaining governmental permits and
authorizations; and
. absence of a prior market for the Common Shares, lack of assurances that
an active trading market will develop or that Common Shares will trade at
or above the initial public offering price, and potential negative effect
of rising market interest rates on the market price of the Common Shares.
2
<PAGE>
BUSINESS AND GROWTH STRATEGIES
BUSINESS STRATEGY
The Company's primary objective is to maximize shareholder value through
increases in distributable cash flow per share and appreciation in the value of
the Common Shares. The Company intends to achieve this objective through a
combination of internal and external growth. The Company intends initially to
focus its growth activities in (a) the 10 major markets throughout the U.S.
where the Properties are located, (b) the other 10 U.S. markets where the
Company currently has property management, development or related operations
and (c) new markets with favorable investment environments. The following table
sets forth the distribution of owned and managed properties in each of the
Company's 20 current markets:
GEOGRAPHIC PROPERTY BREAKDOWN
<TABLE>
<CAPTION>
NET RENTABLE SQUARE
NUMBER OF FOOTAGE
PROPERTIES (IN THOUSANDS)
------------------- --------------------
MARKET OWNED MANAGED TOTAL OWNED MANAGED TOTAL
- ------ ----- ------- ----- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
WESTERN REGION:
Phoenix, Arizona...................... -- 5 5 -- 534 534
Los Angeles, California............... 18 113 131 1,253 8,055 9,308
Oakland, California................... -- 16 16 -- 1,610 1,610
Sacramento, California................ -- 15 15 -- 1,510 1,510
San Francisco, California............. -- 10 10 -- 1,651 1,651
--- --- --- ----- ------ ------
Subtotal Western Region.............. 18 159 177 1,253 13,360 14,613
SOUTHWEST REGION:
Amarillo, Texas....................... -- 3 3 -- 482 482
Austin, Texas(/1/).................... 7 1 8 1,112 389 1,501
Dallas, Texas......................... 13 33 46 1,644 6,454 8,098
Fort Worth, Texas..................... -- 1 1 -- 1,008 1,008
Houston, Texas........................ 5 4 9 75 955 1,030
--- --- --- ----- ------ ------
Subtotal Southwest Region............ 25 42 67 2,831 9,288 12,119
MIDWEST REGION:
Chicago, Illinois..................... -- 8 8 -- 618 618
Southfield, Michigan.................. 1 -- 1 242 -- 242
Kansas City, Missouri................. 7 -- 7 1,341 -- 1,341
Milwaukee, Wisconsin.................. 17 -- 17 1,218 -- 1,218
--- --- --- ----- ------ ------
Subtotal Midwest Region.............. 25 8 33 2,801 618 3,419
MID-ATLANTIC REGION:
Washington, D.C....................... -- 5 5 -- 1,316 1,316
Baltimore, Maryland................... 6 -- 6 731 -- 731
Northern New Jersey................... -- 1 1 -- 263 263
Northern Virginia..................... 2 23 25 337 2,482 2,819
--- --- --- ----- ------ ------
Subtotal Mid-Atlantic Region......... 8 29 37 1,068 4,061 5,129
SOUTHEAST REGION:
Orlando, Florida...................... -- 3 3 -- 523 523
Atlanta, Georgia...................... 9 12 21 530 2,626 3,156
--- --- --- ----- ------ ------
Subtotal Southeast Region............ 9 15 24 530 3,149 3,679
Total.............................. 85 253 338 8,483 30,476 38,959
=== === === ===== ====== ======
</TABLE>
- --------
(/1/The)Company owns a 49.9% interest in the general partnership that owns a
leasehold interest in the seven owned Broadmoor Austin Properties in
Austin, Texas.
3
<PAGE>
GROWTH STRATEGIES
Internal Growth
The Company's internal growth strategies include maintaining high occupancy
rates, increasing rental rates, renewing leases on favorable terms, and
continuing to maximize the efficient operation of the Properties.
. Since 1993, the Prentiss Group has maintained average year-end occupancy
rates of approximately 94% and 95%, respectively, for those Office
Properties and Industrial Properties under its management during that
period.
. The Company will continue the Prentiss Group's use of benchmarking and
best practices methodologies to compare performance indicators at its
owned or managed properties to a variety of standardized measures. These
methodologies enable the Company to identify and replicate practices used
at the best performing properties, and reduce operating costs at other
properties. Based on publicly available statistics compiled by the
Building Owners and Managers Association, the Company believes that the
annual operating costs at each of the Properties it has managed since
1991 have been 11% to 19% less than the average annual operating costs
for comparable buildings.
External Growth
The Company's external growth strategies include:
. acquiring office and industrial buildings priced lower than replacement
cost, with an emphasis onClass A suburban office buildings and industrial
buildings;
. redeveloping properties owned by the Company;
. developing office and industrial buildings primarily on a build-to-suit
basis; and
. expanding the Company's third-party property management, leasing and
facilities management business.
Acquisitions. The Company intends to continue the Prentiss Group's strategy
of opportunistic investment, particularly in assets that are (i) managed by the
Company and become available for sale, (ii) performing at a level believed to
be substantially below potential due to identifiable management weaknesses or
temporary market conditions, (iii) encumbered by indebtedness that is in
default or is not performing; or (iv) held or controlled by short-term owners
(such as assets held by insurance companies and financial institutions under
regulatory pressure to sell). Since 1991, the Prentiss Group has acquired
approximately $265 million of office properties and approximately $103 million
of industrial properties, including approximately $98 million of office
properties acquired from third-party management clients. The Company believes
that its five regional offices, presence in 20 markets throughout the U.S.,
diversified base of approximately 2,700 tenants and existing relationships with
45 management clients will provide it with contacts and market knowledge that
will enable it to capitalize on favorable investment opportunities in its
markets throughout the U.S. as opportunities arise. The Company has options to
acquire one office building containing approximately 1.0 million net rentable
square feet and four industrial buildings containing approximately 268,000 net
rentable square feet. See "Properties--Option Properties."
Redevelopment. The Company will pursue the redevelopment of its Properties
and of any other properties acquired as opportunities arise. For example, the
Company is currently implementing its redevelopment strategy at the Cumberland
Office Park Properties, which are situated in an under-utilized development
within the Northwest submarket of Atlanta. These Properties are a mixture of
low-rise and mid-rise buildings built between 1972 and 1980. Upon acquiring the
Cumberland Office Park Properties in 1991, the Prentiss Group applied for and
received approval to rezone the properties to permit up to 2.1 million square
feet of additional office space. Although the Cumberland Office Park Properties
are currently fully leased, the Company believes that their long-term value
potential lies in the redevelopment of those sites currently occupied by
smaller, older, less functional
4
<PAGE>
buildings into new Class A suburban office buildings. In 1995, the Prentiss
Group began implementing this strategy by demolishing a single-story 7,500
square-foot building on a site that will accommodate up to 280,000 net rentable
square feet of new improvements. The Company is currently seeking future
tenants for a 140,000 net rentable square foot office building that the Company
intends to build if it secures such tenants in 1997.
Development. The Company intends to continue developing industrial and office
properties primarily on a build-to-suit basis, but will also consider selective
opportunities for speculative development of industrial properties and
development of office properties where significant pre-leasing is possible.
Since 1980, the Prentiss Group and its predecessors have developed for itself
or third parties, 31 office buildings comprising approximately 16.3 million net
rentable square feet (including nine of the Office Properties comprising
approximately 1.6 million net rentable square feet) and 25 industrial buildings
comprising approximately 3.2 million net rentable square feet. With landmark
projects such as Broadmoor Austin in Austin, Park West in Dallas, Fairview Park
in Northern Virginia, Burnett Plaza in Fort Worth, and Continental Executive
Parke in Chicago, the Company expects to benefit from the Prentiss Group's
national reputation as a leading developer that produces quality properties
within budget. The Company owns six development parcels comprising
approximately 30.4 acres that can support approximately 1.4 million square feet
of net rentable space. See "Business Objectives--Growth Strategies--
Development" and "Properties." The Company also has options to acquire five
development parcels comprising approximately 60.0 acres that can support
approximately 1.2 million square feet of net rentable space for industrial use.
Third-Party Management. The Company manages, in addition to the Properties,
approximately 30 million net rentable square feet of office and industrial
space owned by third parties. The managed properties are located in 16 markets
and contain over 2,300 tenants. In addition to property management and leasing,
the Company offers a full range of related services for a fee, including tenant
construction, marketing, insurance, accounting, tax, real estate law,
acquisition, disposition, facilities management, corporate services and asset
management (collectively, the "Prentiss Properties Service Business"). Fees for
these services are generally negotiated on a case-by-case basis and vary based
on the scope of the services. The Company believes that management and leasing
assignments will help it to expand its base of national tenants, achieve
economies of scale with its property management systems and provide access to
acquisition and development opportunities nationally without incurring the
substantial cost of opening new offices and hiring and training new employees.
The Company believes it will benefit from the increasing trend of institutional
owners of real estate retaining sophisticated national service providers for
their property management needs. Since 1989, approximately 60% of the Prentiss
Group's new third-party management business has come from existing customers.
The Company believes that its long-term customer base will continue to provide
a stable source of fee income and opportunities to expand on existing
relationships.
Financing Strategy
The Company intends to maintain a conservative debt policy (the "Debt
Limitation") limiting the Company's total combined indebtedness plus its pro
rata share of indebtedness of unconsolidated investments ("Joint Venture Debt")
to 50% of the Company's total combined equity market capitalization plus its
combined indebtedness and pro rata share of Joint Venture Debt ("Total Market
Capitalization"). However, the Company's organizational documents do not limit
the amount of indebtedness that the Company may incur. At the closing of the
Offering, the Company will have outstanding combined indebtedness of
approximately $63.3 million or 14.2% of Total Market Capitalization (excluding
its pro rata share of Joint Venture Debt) and, together with its pro rata share
of Joint Venture Debt, will have outstanding total indebtedness of
approximately $133.3 million or 25.9% of Total Market Capitalization. As of the
Closing Date, the Company will have the capacity to borrow an additional $248.2
million under the Debt Limitation. The Company intends to obtain a commitment
for a $100 million line of credit (the "Line of Credit") prior to completion of
the Offering. The Line of Credit is expected to be used primarily to finance
the acquisition and development of additional properties and
5
<PAGE>
redevelopment of properties owned by the Company. The Company believes that its
access to capital through the Line of Credit and other sources of private
financing, as well as its access to the public capital markets, will provide it
with a competitive advantage in acquisitions and developments over certain
competitive bidders which may have to qualify their bids with financing
conditions or which have less access to financing.
PROPERTIES
The Properties consist of the 26 Office Properties comprising approximately
3.4 million net rentable square feet and the 59 Industrial Properties
comprising approximately 5.0 million net rentable square feet. All of the
Properties are wholly-owned by the Company (through its subsidiaries), except
the Broadmoor Austin Properties, which are owned by a joint venture in which
the Company owns a 49.9% managing general partnership interest. The Company
also owns six development parcels (the "Development Parcels") which can support
approximately 1.4 million net rentable square feet of development. The Company
has options to acquire one office building containing approximately 1.0 million
net rentable square feet, four industrial buildings containing approximately
268,000 net rentable square feet and five development parcels that can support
approximately 1.2 million net rentable square feet of industrial development
(the "Options"). See "Properties--Option Properties" and "--Option Parcels."
The Company also owns a 25% interest in a general partnership that owns an
industrial building containing approximately 71,000 net rentable square feet in
Itasca, Illinois.
6
<PAGE>
The following chart contains certain information regarding the Properties:
<TABLE>
<CAPTION>
NET PERCENT
RENTABLE LEASED
YEAR BUILT/ NUMBER SQUARE AS OF
PROPERTY NAME MARKET RENOVATED OF BUILDINGS FEET MARCH 31, 1996
- ------------- ----------------- ----------- ------------ --------- --------------
<S> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
Cumberland Office
Park.................. Atlanta, GA 1972-1980 9 530,228 99%
One Northwestern
Plaza(/1/)............ Southfield, MI 1989 1 241,751 92
Broadmoor Austin(/2/).. Austin, TX 1991 7 1,112,236 100
Park West.............. Dallas, TX 1989 1 344,216 98
5307 East Mockingbird.. Dallas, TX 1979/1993 1 118,316 76
Walnut Glen Tower...... Dallas, TX 1985 1 464,289 83
Cottonwood Office
Center................ Dallas, TX 1986 3 164,111 92
Plaza on Bachman
Creek................. Dallas, TX 1986 1 125,903 87
3141 Fairview Park
Drive................. Northern Virginia 1988 1 192,108 90
8521 Leesburg Pike..... Northern Virginia 1984/1993 1 145,257 92
--- --------- ---
Subtotal/weighted average for Office Properties....... 26 3,438,415 94%
--- --------- ---
INDUSTRIAL PROPERTIES:
Pacific Gateway
Center................ Los Angeles, CA 1972-1984 18 1,252,708 88%
8869 Greenwood......... Baltimore, MD 1986-1987 1 89,582 74
1329 Western Ave....... Baltimore, MD 1988 1 185,600 80
Deep Run 1&2........... Baltimore, MD 1988 2 169,112 100
4611 Mercedes Drive.... Baltimore, MD 1990 1 178,133 100
9050 Junction.......... Baltimore, MD 1989 1 108,350 100
Northland Park......... Kansas City, MO 1975-1980 4 925,007 100
North Topping Street... Kansas City, MO 1975-1980 1 119,118 100
Airworld Drive......... Kansas City, MO 1975-1980 1 200,000 100(/3/)
107th Terrace.......... Kansas City, MO 1975-1980 1 96,700 100
Nicholson III.......... Dallas, TX 1981 3 155,712 73
13425 Branchview....... Dallas, TX 1970 1 121,250 100
1002 Avenue T.......... Dallas, TX 1981 1 100,000 100
1625 Vantage........... Dallas, TX 1984 1 50,000 100
West Loop Business
Park.................. Houston, TX 1986 5 75,231 87
Airport Properties..... Milwaukee, WI 1970-1980 12 572,953 97
Oakcreek Properties.... Milwaukee, WI 1970-1979 2 232,000 100
North West Properties.. Milwaukee, WI 1973-1987 3 413,371 83
--- --------- ---
Subtotal/weighted average for Industrial Properties... 59 5,044,827 93%
--- --------- ---
Consolidated total/weighted average for all
Properties........................................... 85 8,483,242 94%
=== ========= ===
</TABLE>
- --------
(/1/The)Company owns a 100% leasehold interest in this Property.
(/2/The)Company owns a 49.9% interest in the general partnership which owns a
100% leasehold interest in these Properties. The Company accounts for its
interest in this partnership under the equity method.
(/3/One)tenant leased the entire space at this Property and this tenant's lease
expired at the close of business on March 31, 1996. The space is currently
vacant.
7
<PAGE>
STRUCTURE OF THE COMPANY
The following chart illustrates the structure of the Company and beneficial
ownership of the Company and its two principal operating subsidiaries, the
Operating Partnership and the Manager, after the completion of the Formation
Transactions and the closing of the Offering. See "Formation Transactions."
THE COMPANY
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
COMMON SHARES COMMON SHARES
BEFORE EXCHANGE AFTER EXCHANGE
OWNER OF UNITS OF UNITS
----- --------------- --------------
<S> <C> <C>
Public Investors.............................. 88.3% 74.7%
Management(/1/)............................... --% 15.4%
Continuing Investors(/2/)..................... 11.7% 9.9%
</TABLE>
THE OPERATING PARTNERSHIP
<TABLE>
<CAPTION>
OWNERSHIP INTEREST OWNERSHIP INTEREST
BEFORE EXCHANGE AFTER EXCHANGE
OWNER OF UNITS OF UNITS
----- ------------------ ------------------
<S> <C> <C>
Company(/3/)......................... 84.6% 100.0%
Management(/1/)...................... 15.4% --%
</TABLE>
THE MANAGER
<TABLE>
<CAPTION>
VOTING NON-VOTING TOTAL
OWNER COMMON STOCK COMMON STOCK EQUITY INTEREST
----- ------------ ------------ ---------------
<S> <C> <C> <C>
Operating Partnership(/4/).... --% 100.0% 95.0%
Michael V. Prentiss(/5/)...... 100.0% --% 5.0%
</TABLE>
- --------
(/1/Including)entities wholly-owned by one or more Prentiss Principals.
(/2/Includes)three pre-Offering institutional investors in the Operating
Partnership who will receive Common Shares in the Formation Transactions in
exchange for their interests in the Operating Partnership.
(/3/Includes)a 0.2% interest owned by the General Partner.
(/4/The)Operating Partnership also owns a promissory note of the Manager with
an initial principal balance of approximately $26.95 million. As a result
of the Operating Partnership's ownership of non-voting common stock and
debt of the Manager, the Company, through the Operating Partnership,
expects to receive most of the after-tax economic benefits of the Manager.
(/5/The)voting common stock of the Manager is owned by a corporation that is
wholly owned by Michael V. Prentiss.
8
<PAGE>
The value of the Company has been derived from (i) a capitalization of the
Company's adjusted pro forma consolidated cash flow available for distribution
to its shareholders, (ii) an analysis of the Company's potential for growth,
(iii) comparisons to other office and industrial REITs, and (iv) other factors
set forth in "Underwriting." The value of the Company has not been determined
on a property-by-property basis. The aggregate number of Common Shares and
units of limited partnership interest in the Operating Partnership ("Units")
issued in connection with the Formation Transactions was arrived at by
determining the percentage of the equity of the Company that was available
after sufficient equity was allocated to the purchasers of Common Shares in the
Offering to enable the Company to pay initial distributions on the Common
Shares at an annual rate of 8.0% based on the Offering Price.
BENEFITS TO RELATED PARTIES
The Prentiss Group, including the Prentiss Principals, will realize certain
benefits as a result of the Offering and the Formation Transactions (see
"Formation Transactions"), including the following:
. Members of the Prentiss Group will receive a total of 2,931,184 Units in
consideration for their interests in the Properties, the Development
Parcels, the Options and Prentiss Properties Service Business in
connection with the Formation Transactions. These Units (representing
approximately 15.4% of the Company on a consolidated basis) will have a
total value of approximately $58.6 million based on the Offering Price,
compared to a net tangible book value of the assets contributed to the
Operating Partnership by the Prentiss Group of approximately $4.8
million. The Company believes that the net tangible book value of the
individual assets contributed to the Operating Partnership by the
Prentiss Group (which reflects the historical cost of such assets less
accumulated depreciation) is less than the aggregate current market value
of such assets.
. Members of the Prentiss Group will realize an immediate increase of $23.7
million in the net tangible book value of their investment in the
Company.
. Any time after two years following the date of the closing of the
Offering (the "Closing Date"), the members of the Prentiss Group holding
Units may, in accordance with the terms of the second amended and
restated agreement of limited partnership of the Operating Partnership
(the "Operating Partnership Agreement"), exchange all or a portion of
such Units for cash or, at the election of the Company, Common Shares on
a one-for-one basis. The Company currently expects that it will not elect
to pay cash for Units in connection with any such exchange request, but
instead will exchange Common Shares for such Units.
. Messrs. Prentiss and August will enter into employment agreements with
the Company. See "Management--Employment Agreements."
. The Company will grant to the Prentiss Principals, 41 other employees of
the Company and the five independent trustees of the Company (the
"Independent Trustees") options to purchase an aggregate of 1,291,439
Common Shares under the Company's 1996 Share Incentive Plan at the
Offering Price, subject to certain vesting requirements. See
"Management--1996 Share Incentive Plan."
. The Formation Transactions may provide the members of the Prentiss Group
with increased liquidity and, until the disposition of certain assets
contributed to the Company, with continued deferral of the taxable gain
associated with those assets.
. PPL currently manages eighteen industrial buildings located in Torrance,
California (the Pacific Gateway Properties) that the Company will
purchase from an affiliate of the Prentiss Group, The Prentiss/Copley
Investment Group ("PCIG"). After the closing of the Offering, PPL will
receive approximately $500,000 from the seller's proceeds from the sale
of these Properties as partial repayment of a note from PCIG payable upon
termination of certain management contracts (the "Termination Fee Note").
The Prentiss Group will receive no other payments from the proceeds of
the sale of these Properties.
9
<PAGE>
. The Company has agreed to maintain at least $1.3 million of indebtedness
secured by certain of the Properties outstanding for two years and to
permit certain Prentiss Group members to guaranty such debt in order to
defer certain tax consequences associated with the Formation
Transactions.
Additional information concerning benefits to executive officers, trustees
and significant shareholders of the Company is set forth under "Formation
Transactions" and "Certain Relationships and Transactions."
THE OFFERING
All of the Common Shares offered hereby are being sold by the Company.
Shares Offered:
<TABLE>
<S> <C>
To the Pub-
lic....... 14,250,000
To the Con-
tinuing
Investors.. 1,892,985
----------
Total...... 16,142,985
==========
Shares and
Units Out-
standing Af-
ter the Of-
fering...... 19,074,169(/1/)
Proposed New
York Stock
Exchange
Symbol...... "PP"
</TABLE>
- --------
(/1/Includes)2,931,184 Units issued to the Prentiss Group in the Formation
Transactions. See "Formation Transactions." Excludes 1,291,439 Common
Shares reserved for issuance upon exercise of options to be granted
pursuant to the 1996 Share Incentive Plan upon completion of the Offering.
USE OF PROCEEDS
The net cash proceeds to the Company from the Offering will be used for the
acquisition of interests in the Properties and other assets, the repayment of
mortgage and other indebtedness (including prepayment penalties), and for
working capital. Approximately $54.0 million of the net proceeds will be used
to acquire interests in Properties from an affiliate of Lehman Brothers Inc.
("Lehman") and approximately $64.5 million will be used to repay an affiliate
of Lehman certain mortgage indebtedness secured by certain Properties.
DISTRIBUTIONS
The Company intends to pay regular quarterly distributions to the holders of
Common Shares. The first distribution, for the period commencing on the Closing
Date and ending on December 31, 1996, is expected to be approximately $ per
Common Share, which is equivalent to a quarterly distribution of approximately
$.40 per share and an annual distribution of approximately $1.60 per share, or
approximately 8.00% of the Offering Price. The Company has established the
initial annual distribution rate based on the Company's estimate of cash
available for distribution, for the 12 months following the Offering, which was
derived from the Company's Pro Forma Funds from Operations (as defined in Note
5 of "Summary Financial Information") for the 12 months ended March 31, 1996
under present conditions. Funds from Operations does not represent cash
generated from operating activities in accordance with GAAP and should not be
considered as an alternative to net income as an indication of the Company's
performance or to cash flows as a measure of liquidity or ability to make
distributions. The expected distribution for the 12 months following completion
of the Offering will be approximately 88.2% of the estimated cash available for
distribution for that period. The Company intends to maintain its initial
distribution rate for at least 12 months following the consummation of the
Offering unless actual results of operations, economic conditions or other
factors differ from the assumptions used in calculating the estimate. The
Company does not intend to reduce the expected distribution per share if the
Underwriters' overallotment option is exercised. Based on the Company's
estimated results of operations for the twelve months ending March 31, 1997,
the Company estimates that approximately 16.0% of the anticipated initial
annual distribution to shareholders will represent a return of capital for
federal income tax purposes and that the Company would have been required to
distribute $20.6 million or $1.28 per share during such 12-month period
10
<PAGE>
in order to maintain its status as a REIT. If future taxable income increases
above or decreases below the estimated taxable income for the 12 months
following the Offering, the percentage of the anticipated initial annual
distribution representing a return of capital will decrease or increase,
respectively. See "Distribution Policy" for the calculation of estimated pro
forma cash available for distributions and related assumptions.
TAX STATUS OF THE COMPANY
The Company intends to qualify and will elect to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its short taxable year ending December 31, 1996. If
the Company qualifies for taxation as a REIT, the Company generally will not be
subject to federal corporate income tax on its taxable income that is
distributed to its shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income. Although the
Company does not intend to request a ruling from the Internal Revenue Service
(the "Service") as to its REIT status, the Company will receive at the closing
of the Offering an opinion of its legal counsel that the Company will qualify
to be taxed as a REIT under the Code, which opinion will be based on certain
assumptions and representations and will not be binding on the Service or any
court. Even if the Company qualifies for taxation as a REIT, the Company may be
subject to certain federal, state and local taxes on its income and property.
See "Risk Factors--Tax Risks" and "--Anti-takeover Effect of Ownership Limit,
Staggered Board and Power to Issue Additional Shares" and "Federal Income Tax
Considerations--Taxation of the Company."
11
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following table sets forth (i) summary combined financial data for the
Predecessor Company on a historical basis, and (ii) pro forma financial data
for the Company at and for the three months ended March 31, 1996 and for the
year ended December 31, 1995. The combined financial statements of the
Predecessor Company include (i) 100% of the assets and results of operations
from 47 Properties for the periods presented, (ii) 100% of the assets and
results of operations of the 3141 Fairview Park Drive Property for the portion
of the periods after a Prentiss Group member acquired the Property, (iii) a 25%
equity investment in the Broadmoor Austin Properties; (iv) a 15% equity
investment in the Park West Property for the portion of the periods in which
the Prentiss Group owned its 15% non-controlling interest, (v) a 25% equity
investment in the industrial building in Itasca, Illinois and (vi) results of
operations of the Prentiss Properties Service Business (conducted primarily by
PPL). The selected financial data at and for the three months ended March 31,
1996 and March 31, 1995 are derived from unaudited financial statements. The
unaudited financial information includes all adjustments (consisting of normal
recurring adjustments) that management considers necessary for fair
presentation of the financial position and results of operations for these
periods. Operating results for the three months ended March 31, 1996 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1996. The following data should be read in conjunction with (i)
the pro forma financial statements and notes thereto of the Company; (ii) the
historical financial statements and notes thereto for the Predecessor Company
and Acquisition Properties; and (iii) "Management's Discussion and Analysis of
Financial Condition and Results of Operations," each included elsewhere in this
Prospectus.
Historical operating results, including net income, may not be comparable to
future operating results. In addition, the Company believes that the book value
of the Properties, which reflects historical costs of such real estate assets
less accumulated depreciation, is not indicative of the fair value of the
Properties.
Pro forma information is presented as if the Formation Transactions and the
completion of the Offering and the application of the net proceeds therefrom as
described under "Use of Proceeds" had occurred at the beginning of the pro
forma periods presented with respect to the pro forma operating data and at
March 31, 1996 with respect to the pro forma balance sheet data. The pro forma
information is based upon certain assumptions that are included in the notes to
the pro forma financial statements included elsewhere in this Prospectus. The
pro forma financial information is unaudited and is not necessarily indicative
of what the financial position and results of operations of the Company would
have been as of the dates and for the periods indicated, nor does it purport to
represent or project the financial position and results of operations for
future periods.
12
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------- -----------------------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA ----------------- PRO FORMA -------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
--------- -------- ------- --------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Rental income........... $ 14,483 $ 8,026 $ 7,063 $56,989 $ 29,423 $ 25,256 $ 14,412 $ 8,169 $ 5,194
Fee and other
income(/1/)............ 985 5,526 5,022 3,522 25,741 26,702 23,609 24,278 35,346
-------- -------- ------- ------- -------- -------- --------- -------- --------
Total revenues......... 15,468 13,552 12,085 60,511 55,164 51,958 38,021 32,447 40,540
Operating
expenses(/1/).......... 5,111 7,593 7,280 19,607 31,272 33,178 28,667 31,925 35,848
Real estate taxes....... 1,254 839 774 4,797 3,030 2,691 1,631 712 428
Interest expense........ 1,273 1,202 973 5,091 3,882 3,191 1,444 491 60
Real estate depreciation
and amortization....... 3,030 1,777 1,712 12,070 7,060 5,451 3,312 1,900 721
Other depreciation and
amortization........... -- 4 27 -- 106 106 106 106 96
Equity in joint venture
and subsidiary(/1/).... 914 14 24 6,262 11 13 (4) 2 211
-------- -------- ------- ------- -------- -------- --------- -------- --------
Income (loss) before
gain on sale of
property and minority
interest............... 5,714 2,151 1,343 25,208 9,825 7,354 2,857 (2,685) 3,598
Gain on sale of
property............... -- -- -- -- -- 1,718 -- -- --
Minority interest(/2/).. (880) -- -- (3,882) -- -- -- -- --
-------- -------- ------- ------- -------- -------- --------- -------- --------
Net income (loss)...... $ 4,834 $ 2,151 $ 1,343 $21,326 $ 9,825 $ 9,072 $ 2,857 $ (2,685) $ 3,598
======== ======== ======= ======= ======== ======== ========= ======== ========
Net income per share.... $ 0.30 -- -- $ 1.32 -- -- -- -- --
Weighted average number
shares outstanding..... 16,143 -- -- 16,143 -- -- -- -- --
BALANCE SHEET DATA (END
OF PERIOD):
Real estate, before
accumulated
depreciation(/3/)..... $356,269 $186,000 -- -- $165,331 $160,662 $ 95,083 $ 46,556 $ 26,423
Cash................... 7,259 971 -- -- 1,033 9,133 1,605 8,004 3,202
Total assets........... 368,938 174,978 -- -- 154,490 164,307 117,819 53,327 29,900
Debt on real
estate(/3/)........... 63,297 68,864 -- -- 46,442 46,732 20,473 10,186 717
Total liabilities...... 67,207 72,774 -- -- 50,769 51,713 23,773 11,480 1,759
Stockholders' equity... 255,264 102,204 -- -- 103,721 112,594 94,046 41,847 28,141
OTHER DATA (END OF
PERIOD):
EBITDA(/4/)............. $ 9,103 $ 5,120 $ 4,031 $36,107 $ 20,862 $ 16,089 $ 7,723 $ (190) $ 4,264
======== ======== ======= ======= ======== ======== ========= ======== ========
Funds from
Operations(/5/)........ $ 9,286 $ 4,199 $ 3,326 $39,445 $ 17,968 $ 13,888 $ 7,252 $ 298 $ 4,901
======== ======== ======= ======= ======== ======== ========= ======== ========
Cash flow from
operations............. -- $ 4,156 $ 2,406 -- $ 16,238 $ 13,059 $ 6,115 $ (755) $ 4,241
Cash flow from
investing.............. -- $(20,972) $(1,498) -- $ (4,301) $(40,909) $ (71,977) $(20,133) $(25,541)
Cash flow from
financing.............. -- $ 16,754 $(8,373) -- $(20,037) $ 35,378 $ 59,463 $ 25,690 $ 24,502
PROPERTY DATA (END OF
PERIOD)(/6/):
Number of Properties.... 85 56 54 85 55 54 47 23 16
Total GLA in sq. ft..... 8,483 6,515 5,979 8,483 6,323 5,976 4,793 2,733 1,650
Occupancy %............. 94% 95% 97% 95% 97% 96% 95% 97% 94%
</TABLE>
- --------
(/1/)The Manager's operations are combined with the property operations in the
historical statements and are accounted for under the equity method in the
pro forma statements; therefore, the historical statements include the
Manager's revenues and expenses on a gross basis in the respective income
and expense line items and the pro forma statements present only the
Manager's net operations in the line item titled "Equity in joint venture
and subsidiary."
Equity in joint venture and subsidiary includes the Company's 25% and 49.9%
interest in the partnership owning the Broadmoor Austin Properties (the
"Broadmoor Austin Partnership") on a historical and pro forma basis,
respectively, which is accounted for on the equity method for all periods
presented. For more information on the operations and accounts of the
Broadmoor Austin Partnership refer to footnote (11) in the footnotes to the
Predecessor Company's financial statements.
Equity in joint venture and subsidiary on a historical basis also includes
the 15% general partnership interest owned by members of the Prentiss Group
in the Park West Property. The operations and accounts are combined on a
pro forma basis.
13
<PAGE>
(/2/Represents)the approximate 15.4% interest in the Operating Partnership
which will be owned by the Prentiss Principals and certain other members of
management.
(/3/The)pro forma balance sheet as of March 31, 1996 reflects the Company's
investment in Broadmoor Austin using the equity method of accounting. As a
result, the Company's 49.9% share of the Broadmoor Austin Partnership's
real estate and related debt are not shown in the line items titled "Real
estate, before accumulated depreciation" and "Debt on real estate." The
following schedule represents the Balance Sheet Data as of March 31, 1996
on a pro forma basis as if the Company's share of the Broadmoor Austin
Partnership's real estate and related debt thereon were included. This
presentation is provided for informational purposes only:
<TABLE>
<CAPTION>
PRO FORMA 3/31/96 ADJUSTMENTS PRO FORMA 3/31/96
BALANCE SHEET FOR COMBINING BROADMOOR'S BALANCE SHEETDATA
DATA AS PRESENTED 49.9% OWNERSHIP BROADMOOR COMBINED
----------------- ------------------------- ------------------
<S> <C> <C> <C>
Real estate before
accumulated
depreciation........... $356,269 $70,000 $426,269
Debt on real estate..... $ 63,297 $70,000 $133,297
</TABLE>
(/4/Does)not include the Company's pro rata share of the operations in the
entities accounted for under the equity method; such amounts are $3,142 and
$16,511 for the pro forma three months ended March 31, 1996 and the pro
forma year ended December 31, 1995, respectively. EBITDA means operating
income before mortgage and other interest, income taxes, depreciation and
amortization. EBITDA does not represent cash generated from operating
activities in accordance with GAAP, is not to be considered as an
alternative to net income or any other GAAP measurement as a measure of
operating performance and is not necessarily indicative of cash available
to fund all cash needs. The Company has presented EBITDA herein because the
Company believes that it is one measure used by certain investors to
determine operating cash flow. EBITDA does not include the amounts
reflected in "equity in joint venture and subsidiary," nor does it add back
the depreciation, interest and taxes included therein.
(/5/Industry)analysts generally consider Funds from Operations an appropriate
measure of performance of an equity REIT. "Funds from Operations" as
defined by the National Association of Real Estate Investment Trusts
("NAREIT") means net income (computed in accordance with GAAP) excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after adjustments
for unconsolidated partnerships and joint ventures. The Company believes
that in order to facilitate a clear understanding of the combined
historical operating results of the Prentiss Group and the Company, Funds
from Operations should be examined in conjunction with net income (loss) as
presented in the audited combined financial statements and information
included elsewhere in this Prospectus. Funds from Operations does not
represent cash generated from operating activities in accordance with GAAP
and should not be considered as an alternative to net income as an
indication of the Company's performance or to cash flows as a measure of
liquidity or ability to make distributions.
(/6/The)Property Data includes information on the Broadmoor Austin, Park West
and 3141 Fairview Park Drive Properties only for the end of the periods
subsequent to the Prentiss Group's acquisition of an ownership interest in
the respective Properties.
14
<PAGE>
RISK FACTORS
An investment in the Common Shares involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus before making a
decision to purchase Common Shares in the Offering.
PRICE TO BE PAID FOR PROPERTIES, COMMON SHARES AND OTHER ASSETS MAY EXCEED
THEIR FAIR MARKET VALUE
No independent valuations or appraisals were obtained in connection with the
Formation Transactions except with respect to the Properties that were owned
by the Operating Partnership prior to the Offering, and it is possible that
the aggregate market value of the Common Shares may exceed their proportionate
share of the fair market value of the Company's assets. The valuation of the
Company has been derived from a capitalization of the Company's pro forma
adjusted Funds from Operations, estimated cash available for distribution, the
Company's potential for growth and the other factors referred to in
"Underwriting." There can be no assurance that the price paid by the Company
for its Properties and other assets will not exceed their fair market value.
The valuation of Prentiss Properties Service Business has been derived
primarily from a capitalization of the revenue derived from PPL's contracts
with third-parties for management, leasing, development and construction
services. Upon consummation of the Offering, the Company, through the
Operating Partnership and the Manager, expects to provide these same services
to third-parties. These contracts are generally terminable upon 30 days notice
by either party or upon sale of the property. In valuing Prentiss Properties
Service Business, the Company has assumed that these third-party contracts
will remain in effect. In the event any of these contracts is terminated, the
Company's revenues would be adversely affected. Accordingly, if all or a
substantial portion of these contracts were to be terminated following the
consummation of the Offering, the initial value assigned to Prentiss
Properties Service Business by the Company would not be indicative of its true
fair market value.
CONFLICTS OF INTERESTS IN THE FORMATION TRANSACTIONS AND THE BUSINESS OF THE
COMPANY
Formation Transactions not at Arms Length. Benefits to Prentiss
Principals. The Formation Transactions are not the result of arm's-length
negotiations. The Prentiss Principals (including Messrs. Prentiss, August,
DuBois and Bradshaw, who are founders and owners of PPL and senior executive
officers of the Company) have preexisting ownership interests in certain
Properties, the Prentiss Properties Service Business and certain of the other
assets to be acquired by the Company through their direct or indirect
interests in the Prentiss Group, and will receive, directly or indirectly,
Units in exchange for such interests in the Formation Transactions. There will
be no independent valuation or appraisal of the interests contributed to the
Company by the Prentiss Group in connection with the Formation Transactions.
PPL holds (and after the Formation Transactions will continue to hold) the
Termination Fee Note from PCIG, a Prentiss Group affiliate, which is paid with
the proceeds of sales of properties owned by the affiliate. The Company will
acquire one Property from PCIG in the Formation Transactions and PPL will
receive a payment of approximately $500,000 under the Termination Fee Note.
The Company will have options on certain industrial properties owned by PCIG
which, if exercised, would result in additional payments to PPL under the
Termination Fee Note. See "Properties--Option Properties" and "--Option
Parcels." The Prentiss Principals will realize certain benefits from the
Formation Transactions that will not generally be received by other persons
participating in the formation of the Company. See "Formation Transactions--
Benefits to Related Parties" and "Management 1996 Share Incentive Plan," "--
Executive Compensation" and "--Employment Agreements." Because these persons
were involved in structuring the Formation Transactions, they had the ability
to influence the type and level of benefits they received. As such, these
persons may have interests that conflict with the interests of others
participating in the Formation Transactions and with the interests of persons
acquiring Common Shares in the Offering. The type and level of benefits the
Prentiss Principals receive may have been different if they had not
participated in structuring the Formation Transactions.
15
<PAGE>
Enforcement of Terms of Contribution and Other Agreements. The Prentiss
Principals each, directly or indirectly, have ownership interests in certain
of the Properties and in the other assets to be acquired by the Company.
Following the consummation of the Offering and the Formation Transactions, the
Company, under the agreements relating to the contribution of such interests,
will be entitled to indemnification and damages in the event of breaches of
representations or warranties. Each of the Prentiss Principals have entered
into employment and/or noncompetition agreements with the Company pursuant to
which they have agreed not to engage in certain business activities in
competition with the Company. See "Management--Employment Agreements." To the
extent that the Company chooses to enforce its rights under any of these
contribution or employment and/or noncompetition agreements, it may determine
to pursue available remedies, such as actions for damages or injunctive
relief, less vigorously than it otherwise might because of its desire to
maintain its ongoing relationship with the individual involved.
Tax Consequences Upon Sale, Refinancing or Prepayment of Indebtedness of
Properties. As holders of Units, the Prentiss Principals and affiliates may
have unrealized taxable gain associated with their interests in certain
Properties contributed to the Operating Partnership. Because the Prentiss
Principals may suffer different and more adverse tax consequences than the
Company upon the sale or refinancing of those Properties, the Prentiss
Principals and the Company may have different objectives regarding the
appropriate pricing and timing of any sale or refinancing of such Properties.
While the Company (through the General Partner) has the exclusive authority as
to whether and on what terms to sell or refinance an individual Property, the
Prentiss Principals through their status as senior executives and/or Trustees
of the Company and those members of the Company's management and Board of
Trustees who directly or indirectly hold Units (i.e., Messrs. Prentiss,
August, DuBois and Bradshaw) may influence the Company not to sell, or
refinance or prepay the indebtedness associated with, the Properties even
though such event might otherwise be financially advantageous to the Company,
or may influence the Company to refinance Properties with a high level of
debt. See "Policies With Respect to Certain Activities--Conflict of Interest
Policies."
Policies with Respect to Conflicts of Interests. The Company has adopted
certain policies relating to conflicts of interest. These policies include a
bylaw provision requiring all transactions in which executive officers or
trustees have a conflicting interest to that of the Company to be approved by
a majority of the Independent Trustees or a majority of the Common Shares held
by disinterested shareholders. There can be no assurance that the Company's
policies will be successful in eliminating the influence of such conflicts,
and if they are not successful, decisions could be made that might fail to
reflect fully the interests of all shareholders. The Company's Declaration of
Trust also includes a provision permitting Independent Trustees to engage in
the type of business activities conducted by the Company without first
presenting any investment opportunities to the Company, even though such
investment opportunities may be within the scope of the Company's investment
policies. See "Policies with Respect to Certain Activities--Conflict of
Interest Policies."
MARYLAND BUSINESS COMBINATION LAW
Under the Maryland General Corporation Law, as amended ("MGCL"), as
applicable to real estate investment trusts, certain "business combinations"
(including certain issuances of equity securities) between a Maryland real
estate investment trust and any person who beneficially owns ten percent or
more of the voting power of the trust's shares (an "Interested Shareholder")
or an affiliate thereof are prohibited for five years after the most recent
date on which the Interested Shareholder becomes an Interested Shareholder.
Thereafter, any such business combination must be approved by two super-
majority shareholder votes unless, among other conditions, the trust's common
shareholders receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as previously
paid by the Interested Shareholder for its common shares.
ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT, STAGGERED BOARD AND POWER TO ISSUE
ADDITIONAL SHARES
Ownership Limitation. For the Company to maintain its qualification as a
REIT under the Code, not more than 50% in value of the outstanding shares of
beneficial interest of the Company may be owned, directly or
16
<PAGE>
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of the Company's taxable
year (other than the first taxable year for which the election to be treated
as a REIT has been made).
To ensure that the Company will not fail to qualify as a REIT under this and
other tests under the Code, the Company's Declaration of Trust, subject to
certain exceptions, authorizes the trustees to take such actions as are
necessary and desirable to preserve its qualification as a REIT and to limit
any person to direct or indirect ownership of no more than 8.5% (the
"Ownership Limit") of (i) the number of the outstanding Common Shares, except
for Michael V. Prentiss, who may own initially no more than 15% of the number
of such outstanding shares or (ii) the number of outstanding Preferred Shares
of any series of Preferred Shares. The Ownership Limit will adjust upward, to
a maximum of 9.8%, and the limit applicable to Mr. Prentiss will adjust
downward, in proportion to any reduction in Mr. Prentiss' direct or indirect
consolidated percentage ownership of the Company declines as a result of
additional issuances of securities by the Company or the Operating Partnership
or dispositions or redemption of the Units held directly or indirectly by Mr.
Prentiss upon completion of the Formation Transactions. The Company's Board of
Trustees, upon receipt of a ruling from the Service, an opinion of counsel or
other evidence satisfactory to the Board and upon such other conditions as the
Board may establish, may exempt a proposed transferee from the Ownership
Limit. However, the Board may not grant an exemption from the Ownership Limit
to any proposed transferee whose ownership, direct or indirect, of in excess
of the Ownership Limit of the number of any class of the outstanding shares of
beneficial interest of the Company would result in the termination of the
Company's status as a REIT. See "Description of Shares of Beneficial
Interest--Restrictions on Transfer." These restrictions on transferability and
ownership will not apply if the Board of Trustees determines that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT.
The Ownership Limit may have the effect of delaying, deterring or preventing
a transaction or a change in control of the Company that might involve a
premium price for the Common Shares or otherwise be in the best interest of
the shareholders. See "Description of Shares of Beneficial Interest--
Restrictions on Transfer."
Staggered Board. The Company's Board of Trustees is divided into three
classes. The initial terms of the first, second and third classes will expire
in 1997, 1998, and 1999, respectively. Beginning in 1997, trustees of each
class will be chosen for three-year terms upon the expiration of their current
terms and each year one class of trustees will be elected by the shareholders.
The staggered terms of trustees may reduce the possibility of a tender offer
or an attempt to change control of the Company, even though a tender offer or
change in control might be in the best interest of the shareholders. See
"Certain Provisions of Maryland Law and of the Company's Declaration of Trust
and Bylaws--Classification of the Board of Trustees."
Issuance of Additional Shares. The Company's Declaration of Trust authorizes
the Board of Trustees to (i) amend the Declaration of Trust to increase or
decrease the aggregate number of shares of beneficial interest or the number
of shares of beneficial interest of any class that the Company has the
authority to issue, (ii) cause the Company to issue additional authorized but
unissued Common or Preferred Shares and (iii) classify or reclassify any
unissued Common Shares and Preferred Shares and to set the preferences, rights
and other terms of such classified or unclassified shares. See "Description of
Shares of Beneficial Interest--Preferred Shares." Although the Board of
Trustees has no such intention at the present time, it could establish a
series of Preferred Shares that could, depending on the terms of such series,
delay, defer or prevent a transaction or a change in control of the Company
that might involve a premium price for the Common Shares or otherwise be in
the best interest of the shareholders. The Declaration of Trust and Bylaws of
the Company also contain other provisions that may have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for the Common Shares or otherwise
be in the best interest of the shareholders. See "Certain Provisions of
Maryland Law and of the Company's Declaration of Trust and Bylaws--Removal of
Trustees," "--Control Share Acquisitions" and "--Advance Notice of Trustee
Nominations and New Business."
17
<PAGE>
TAX RISKS
Failure to Qualify as a REIT. The Company intends to operate so as to
qualify as a REIT for federal income tax purposes. Although the Company has
not requested, and does not expect to request, a ruling from the Service that
it qualifies as a REIT, it will receive at the closing of the Offering an
opinion of its counsel that, based on certain assumptions and representations,
it so qualifies. Investors should be aware, however, that opinions of counsel
are not binding on the Service or any court. The REIT qualification opinion
only represents the view of counsel to the Company based on counsel's review
and analysis of existing law, which includes no controlling precedent.
Furthermore, both the validity of the opinion and the qualification of the
Company as a REIT will depend on the Company's continuing ability to meet
various requirements concerning, among other things, the ownership of its
outstanding stock, the nature of its assets, the sources of its income, and
the amount of its distributions to its shareholders. See "Federal Income Tax
Considerations--Taxation of the Company."
If the Company were to fail to qualify as a REIT for any taxable year, the
Company would not be allowed a deduction for distributions to its shareholders
in computing its taxable income and would be subject to federal income tax
(including any applicable minimum tax) on its taxable income at regular
corporate rates. Unless entitled to relief under certain Code provisions, the
Company also would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification was lost. As a
result, cash available for distribution would be reduced for each of the years
involved. Although the Company intends to operate in a manner designed to
qualify as a REIT, it is possible that future economic, market, legal, tax or
other considerations may cause the Board of Trustees, with the consent of
shareholders holding at least two-thirds of all the outstanding Common Shares,
to revoke the REIT election. See "Federal Income Tax Considerations."
REIT Minimum Distribution Requirements; Possible Incurrence of Additional
Debt. In order to qualify as a REIT, the Company generally will be required
each year to distribute to its shareholders at least 95% of its net taxable
income (excluding any net capital gain). In addition, the Company will be
subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less
than the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its
capital gain net income for that year, and (iii) 100% of its undistributed
taxable income from prior years.
The Company intends to make distributions to its shareholders to comply with
the 95% distribution requirement and to avoid the nondeductible excise tax.
The Company's income will consist primarily of its share of the income of the
Operating Partnership, and the cash available for distribution by the Company
to its shareholders will consist of its share of cash distributions from the
Operating Partnership. Differences in timing between (i) the actual receipt of
income and actual payment of deductible expenses and (ii) the inclusion of
such income and deduction of such expenses in arriving at taxable income of
the Company could require the Company, through the Operating Partnership, to
borrow funds on a short-term basis to meet the 95% distribution requirement
and to avoid the nondeductible excise tax. The requirement to distribute a
substantial portion of the Company's net taxable income could cause the
Company to distribute amounts that otherwise would be spent on future
acquisitions, unanticipated capital expenditures or repayment of debt, which
would require the Company to borrow funds or to sell assets to fund the costs
of such items.
Failure of the Operating Partnership to be Classified as a Partnership for
Federal Income Tax Purposes; Impact on REIT Status. Although the Company has
not requested, and does not expect to request, a ruling from the Service that
the Operating Partnership (and each of its Noncorporate Subsidiaries, as
defined in "Federal Income Tax Considerations") will be classified as
partnerships for federal income tax purposes, the Company will receive at the
closing of the Offering an opinion of its counsel stating that the Operating
Partnership (and each Noncorporate Subsidiary) will be classified as a
partnership, and not as a corporation or an association taxable as a
corporation for federal income tax purposes. If the Service were to challenge
successfully the tax status of the Operating Partnership (or a Noncorporate
Subsidiary) as a partnership for federal income tax purposes, the Operating
Partnership (or the Noncorporate Subsidiary) would be taxable as a
corporation. In such event, the Company likely would cease to qualify as a
REIT for a variety of reasons. Furthermore, the imposition of a corporate
income tax on the Operating Partnership would reduce substantially the amount
of cash available
18
<PAGE>
for distribution from the Operating Partnership to the Company and its
shareholders. See "Federal Income Tax Considerations--Tax Aspects of the
Operating Partnership and the Noncorporate Subsidiaries."
REAL ESTATE FINANCING RISKS
Debt Financing. The Company will be subject to risks normally associated with
debt financing, including the risk that the Company's cash flow will be
insufficient to pay distributions at expected levels and meet required payments
of principal and interest, the risk that indebtedness on the Properties (which
will not have been fully amortized at maturity in all cases) will not be able
to be refinanced or that the terms of such refinancing will not be as favorable
as the terms of existing indebtedness. Upon consummation of the Offering and
the Formation Transactions, the Company expects to have outstanding
indebtedness, including the Company's pro rata share of Joint Venture Debt
(approximately $70 million), of approximately $133.3 million, all of which will
be secured by certain of the Properties, with maturities ranging from 1999 to
2003, including approximately $80 million of indebtedness due in 1999. If
principal payments due at maturity cannot be refinanced, extended or paid with
proceeds of other capital transactions, such as new equity capital, the Company
expects that its cash flow will not be sufficient in all years to pay
distributions at expected levels and to repay all maturing debt. Furthermore,
if prevailing interest rates or other factors at the time of refinancing result
in higher interest rates upon refinancing, the interest expense relating to
such refinanced indebtedness would increase, which would adversely affect the
Company's cash flow and the amounts available for distributions to its
shareholders. If a property or properties are mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments, the property
could be foreclosed upon by or otherwise transferred to the mortgagee with a
consequent loss of income and asset value to the Company.
Rising Interest Rates. The Company will obtain a mortgage loan with an
initial principal balance of approximately $10 million in connection with the
Formation Transactions that will bear interest at a variable rate equal to one-
month LIBOR plus 165 basis points (7.10% per annum based on the one-month LIBOR
rate in effect on July 31, 1996.) In addition, the Company anticipates that
advances under the Line of Credit will bear interest at a variable rate equal
to one-month LIBOR plus between 150 and 250 basis points (6.95% and 7.95%,
respectively, per annum based upon the one-month LIBOR rate in effect on July
31, 1996). In addition, the Company may incur additional indebtedness in the
future that also bears interest at variable rates. Variable rate debt creates
higher debt service requirements if market interest rates increase, which would
adversely affect the Company's cash flow and the amounts available for
distributions to its shareholders. The Company may in the future engage in
transactions to limit its exposure to rising interest rates as appropriate and
cost effective. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Construction Loans. If new developments are financed through construction
loans, there is a risk that upon completion of construction, permanent
financing for newly developed properties may not be available or may be
available only on disadvantageous terms. In the event that the Company is
unable to obtain permanent financing for a developed property on favorable
terms, it could be forced to sell such property at a loss or the property could
be foreclosed upon by the lender and result in loss of income and asset value
to the Company.
RELIANCE ON MAJOR TENANTS
On a pro forma basis during the year ended December 31, 1995, the Company's
largest tenant, IBM, accounted for approximately 24% of the Company's pro forma
total 1995 annual Base Rent on the Properties. The Company's two leases with
IBM expire in 1999 and 2006. See "Properties--Office Properties." In addition,
five other tenants collectively accounted for approximately 15% of the
Company's pro forma total 1995 annual Base Rent. The Company would be adversely
affected in the event of bankruptcy or insolvency of, or a downturn in the
business of any such tenants, which resulted in a failure or delay in the
tenants' rent payments.
19
<PAGE>
GEOGRAPHIC CONCENTRATION IN TEXAS, DALLAS AND ATLANTA
Twenty-five of the Company's 85 Properties are located in Texas, including
13 Properties located in the Dallas area, and nine of the Properties are
located in Atlanta, Georgia. Like other real estate markets, these commercial
real estate markets have experienced economic downturns in the past, and
future declines in any of these economies or real estate markets could
adversely affect the Company's cash available for distribution. The Company's
financial performance and its ability to make distributions to shareholders
are therefore dependent on the economic conditions in Texas, Dallas and
Atlanta. The Company's revenues and the value of its Properties may be
affected by a number of factors, including the local economic climate (which
may be adversely impacted by business layoffs or downsizing, industry
slowdowns, changing demographics and other factors) and local real estate
conditions (such as oversupply of or reduced demand for office, industrial and
other competing commercial properties). There can be no assurance as to the
continued growth of the Texas, Dallas and Atlanta area economies or the future
growth rate of the Company.
CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL; NO LIMITATION ON DEBT
The investment, financing, borrowing and distribution policies, including
the Debt Limitation, of the Company and its policies with respect to all other
activities, including growth, capitalization and operations, will be
determined by the Board of Trustees. The Company's Debt Limitation is a policy
limiting the Company's total combined indebtedness plus its pro rata share of
Joint Venture Debt to 50% or less of the Company's Total Market
Capitalization, but the organizational documents of the Company do not contain
any limitation on the amount of indebtedness the Company may incur. Although
the Company's Board of Trustees has no present intention to do so, these
policies may be amended or revised at any time and from time to time at the
discretion of the Board of Trustees without a vote of the shareholders of the
Company. A change in these policies could adversely affect the Company's
financial condition, results of operations or the market price of the Common
Shares. See "Policies with Respect to Certain Activities."
RISKS ASSOCIATED WITH RAPID GROWTH; RISKS ASSOCIATED WITH THE ACQUISITION OF
SUBSTANTIAL NEW PROPERTIES; LACK OF OPERATING HISTORY
The Company may experience a period of rapid growth. The Company's ability
to manage its growth effectively will require it to integrate successfully its
new acquisitions into its existing management structure. Four of the
Properties have relatively short or no operating history under management by
affiliates of the Prentiss Group. The Prentiss Group has had limited control
over the operation of these Properties, and such Properties may have
characteristics or deficiencies unknown to the Company affecting their
valuation or revenue potential. The operating performance of these Properties
may decline under the Company's management.
DEPENDENCE ON KEY PERSONNEL; CONTROL OF MANAGEMENT
The Company is dependent on the efforts of its executive officers,
particularly Messrs. Prentiss and August. The loss of their services could
have an adverse effect on the operations of the Company. Prior to the
consummation of the Offering, each of Messrs. Prentiss and August will enter
into an employment agreement with the Company. See "Management--Employment
Agreements." Certain assets of the Prentiss Group are not being contributed to
the Company and certain of the executive officers of the Company, including
Messrs. Prentiss and August, may devote some of their management time towards
those excluded assets. See "The Properties--Prentiss Group Assets Not Acquired
by the Company."
None of the trustees or officers of the Company is selling any Common Shares
in the Offering. Upon completion of the Offering, all trustees and executive
officers of the Company as a group will beneficially own approximately 15.4%
of the total issued and outstanding Common Shares and Units (which, after two
years from the Offering, will be exchangeable by the holders for cash or, at
the election of the General Partner, Common Shares on a one-for-one basis).
See "Principal and Management Shareholders." The Company currently expects
that the General Partner will elect to exchange such Units for Common Shares.
Mr. Prentiss will serve as Chairman and Chief Executive Officer of the
Company. Mr. August will serve as President and Chief Operating
20
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Officer of the Company. Mr. DuBois will serve as Executive Vice President of
the Company and Mr. Bradshaw will serve as Executive Vice President and
National Director of Corporate Development of the Company. In addition, Mr.
Prentiss and Mr. August will be on the initial Board of Trustees of the
Company. Accordingly, such persons will have substantial influence on the
Company, which influence might not be consistent with the interests of other
shareholders, and may in the future have a substantial influence on the
outcome of any matters submitted to the Company's shareholders for approval if
all of their Units are exchanged for Common Shares. See "--Conflicts of
Interests in the Formation Transactions and the Business of the Company."
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend in
large part on the amount of income generated and expenses incurred. If the
Properties do not generate revenues sufficient to meet operating expenses,
including debt service, tenant improvements, leasing commissions and other
capital expenditures, the Company may have to borrow additional amounts to
cover fixed costs and the Company's cash flow and ability to make
distributions to its shareholders will be adversely affected.
The Company's revenues and the value of its properties may be adversely
affected by a number of factors, including the national, state and local
economic climate and real estate conditions (such as oversupply of or reduced
demand for space and changes in market rental rates); the perceptions of
prospective tenants of the safety, convenience and attractiveness of the
properties; the ability of the owner to provide adequate management,
maintenance and insurance; the ability to collect on a timely basis all rent
from tenants; the expense of periodically renovating, repairing and reletting
spaces; and increasing operating costs (including real estate taxes and
utilities) which may not be passed through to tenants. Certain significant
expenditures associated with investments in real estate (such as mortgage
payments, real estate taxes, insurance and maintenance costs) are generally
not reduced when circumstances cause a reduction in rental revenues from the
property. In addition, real estate values and income from properties are also
affected by such factors as compliance with laws, including tax laws, interest
rate levels and the availability of financing. Also, the amount of available
net rentable square feet of commercial property is often affected by market
conditions and may therefore fluctuate over time.
Tenant Defaults and Bankruptcy. A significant portion of the Company's
income will be derived from rental income on the Properties and, consequently,
the Company's distributable cash flow and ability to make expected
distributions to shareholders would be adversely affected if a significant
number of tenants of the Properties failed to meet their lease obligations. At
any time, a tenant of the Properties may seek the protection of the bankruptcy
laws, which could result in delays in rental payments or in the rejection and
termination of such tenant's lease and thereby cause a reduction in the
Company's cash flow and the amounts available for distributions to its
shareholders. No assurance can be given that tenants will not file for
bankruptcy protection in the future or, if any tenants file, that they will
affirm their leases and continue to make rental payments in a timely manner.
In addition, a tenant from time to time may experience a downturn in its
business which may weaken its financial condition and result in the failure to
make rental payments when due. If tenant leases are not affirmed following
bankruptcy or if a tenant's financial condition weakens, the Company's cash
flow and the amounts available for distributions to its shareholders may be
adversely affected.
Operating Risks. The Properties are subject to operating risks common to
commercial real estate in general, any and all of which may adversely affect
occupancy or rental rates. The Properties are subject to increases in
operating expenses such as cleaning; electricity; heating, ventilation and air
conditioning; elevator repair and maintenance; insurance and administrative
costs; and other general costs associated with security, landscaping, repairs
and maintenance. While the Company's tenants generally are obligated to pay a
portion of these escalating costs, there can be no assurance that tenants will
agree to pay such costs upon renewal or that new tenants will agree to pay
such costs. If operating expenses increase, the local rental market may limit
the extent to which rents may be increased to meet increased expenses without
decreasing occupancy rates. While the Company implements cost-saving incentive
measures at each of its Properties, the Company's ability to make
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<PAGE>
distributions to stockholders could be adversely affected if operating
expenses increase without a corresponding increase in revenues.
Renewal of Leases and Reletting of Space. The Company will be subject to the
risk that upon expiration of leases for space located in the Properties, the
leases may not be renewed, the space may not be relet or the terms of renewal
or reletting (including the cost of required renovations) may be less
favorable than current lease terms. Leases on a total of approximately 5% and
11% of the total net rentable square feet in the Properties will expire in the
second half of 1996 and in 1997, respectively. The Company has established
initial and annual reserves for renovation and reletting expenses, which take
into consideration its views of both the current and expected business
conditions in the appropriate markets, but no assurance can be given that
these reserves will be sufficient to cover such expenses. Furthermore, because
PPL has managed four Properties for less than six months, its estimate of
projected leasing commissions and tenant improvement costs for renewing leases
at these Properties may be understated. If the Company were unable to promptly
relet or renew the leases for all or a substantial portion of this space, if
the rental rates upon such renewal or reletting were significantly lower than
expected rates or if its reserves for these purposes proved inadequate, then
the Company's cash flow and ability to make expected distributions to
shareholders may be adversely affected.
Competition. Numerous office and industrial properties compete with the
Properties in attracting tenants to lease space. Some of these competing
properties are newer, better located or better capitalized than the Company's
Properties.
Possible Environmental Liabilities. Under various federal, state, and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such property.
Such laws often impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect the owner's ability to
borrow using such real 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 hazardous substances at the disposal or
treatment facility, whether or not such facility is or ever was owned or
operated by such person. Certain environmental laws and common law principles
could be used to impose liability for release of and exposure to hazardous
substances, including asbestos-containing materials ("ACMs") into the air, and
third parties may seek recovery from owners or operators of real properties
for personal injury or property damage associated with exposure to released
hazardous substances, including ACMs. As the owner of the Properties, the
Company may be potentially liable for any such costs. Phase I environmental
site assessments ("ESAs") have been obtained on all of the Properties. The
purpose of Phase I ESAs is to identify potential sources of contamination for
which the Company may be responsible and to assess the status of environmental
regulatory compliance. For a number of the Properties, the Phase I ESAs
referenced prior Phase II ESA's obtained on such Properties. Phase II ESAs
generally involve more invasive procedures than Phase I ESAs, such as soil
sampling and testing or the installation and monitoring of groundwater wells.
The ESA for the Industrial Properties located in Milwaukee, Wisconsin,
revealed lead contamination near the property lines of two of the Properties
and the Development Parcel adjacent to those Properties. In addition, the ESAs
for Pacific Gateway Center detected certain ground-water contamination at the
site. The Operating Partnership, the owner of the Industrial Properties in
Milwaukee, Wisconsin prior to the Offering, and PCIG, the owner of the Pacific
Gateway Properties prior to the Offering, have entered into or expect to enter
into arrangements with the prior owners or operators of these Properties that
will inure to the benefit of the Company and should limit the Company's
exposure to losses from the environmental contamination at those Properties.
See "Properties--Environmental Matters."
Except as noted above, the ESAs have not revealed any environmental
condition, liability or compliance concern that the Company believes would
have a material adverse affect on the Company's business, assets or results of
operations, nor is the Company aware of any such condition, liability or
concern. It is possible that the ESAs relating to any one of the Properties do
not reveal all environmental conditions, liabilities or compliance
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<PAGE>
concerns or that there are material environmental conditions, liabilities or
compliance concerns that arose at a Property after the related ESA report was
completed of which the Company is otherwise unaware.
Americans with Disabilities Act Compliance. Under the Americans with
Disabilities Act of 1990 (the "ADA"), all public accommodations and commercial
facilities are required to meet certain federal requirements related to access
and use by disabled persons. Compliance with the ADA requirements could
require removal of access barriers and non-compliance could result in
imposition of fines by the U.S. government or an award of damages to private
litigants. Although the Company believes that the Properties are substantially
in compliance with these requirements, a determination that the Company is not
in compliance with the ADA could result in the imposition of fines or an award
of damages to private litigants. If the Company were required to make
unanticipated expenditures to comply with the ADA, the Company's cash flow and
the amounts available for distributions to its shareholders may be adversely
affected.
Changes in Laws. Because increases in income, service or transfer taxes are
generally not passed through to tenants under leases, such increases may
adversely affect the Company's cash flow and its ability to make distributions
to shareholders. The Properties also are subject to various federal, state and
local regulatory requirements and to state and local fire and life-safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
compliance with all such regulatory requirements. However, there can be no
assurance that these requirements will not be changed or that new requirements
will not be imposed which would require significant unanticipated expenditures
by the Company and could have an adverse effect on the Company's cash flow and
expected distributions.
Uninsured Loss. The Company will initially carry comprehensive liability,
fire, flood (where appropriate), extended coverage and rental loss insurance
with respect to the Properties with policy specifications and insured limits
customarily carried for similar properties. There are, however, certain types
of losses (such as from wars or earthquakes in Properties located outside of
California) that may be either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, the
Company could lose both its capital invested in a property, as well as the
anticipated future revenue from such property, and would continue to be
obligated on any mortgagee indebtedness or other obligations related to the
property. Any such loss would adversely affect the business of the Company and
its financial condition and results of operations.
Risks Involved in Property Ownership Through Partnerships and Joint
Ventures. Following the completion of the Offering, the Company, through the
Operating Partnership, will own a 49.9% general partnership interest in the
entity that owns a leasehold interest in the Broadmoor Austin Office Property
in Austin, Texas. Through this general partnership interest, the Company will
act as managing partner and have the sole authority to conduct the business
and affairs of the Broadmoor Austin Partnership subject to certain
limitations. See "Properties--Office Properties--Description of Office
Properties." The Company will also own minority interests in a general
partnership that owns an industrial building in Itasca, Illinois. See
"Properties--Industrial Properties." To avoid a technical termination of the
Broadmoor Austin Partnership for tax purposes, the Prentiss Group will
continue to own a 0.1% interest, which the Company will have an option to
acquire up to one year and one day after the Closing Date. International
Business Machines Corporation ("IBM"), the tenant leasing 100% of the space at
the Property, will own the remaining 50% interest.
The Company may also participate with other entities in property ownership
through joint ventures or partnerships. Partnership or joint venture
investments may, under certain circumstances, involve risks not otherwise
present, including the possibility that the Company's partners or co-venturers
might become bankrupt, that such partners or co-venturers might at any time
have economic or other business interests or goals that are inconsistent with
the business interests or goals of the Company, and that such partners or co-
venturers may be in a position to take action contrary to the instructions or
the requests of the Company or contrary to the Company's policies or
objectives, including the Company's policy with respect to maintaining its
qualification as a REIT. The Company will, however, seek to maintain
sufficient control of such partnerships or joint ventures to permit the
Company's business objectives to be achieved. There is no limitation under the
Company's
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<PAGE>
organizational documents as to the amount of available funds that may be
invested in partnerships or joint ventures.
In addition, the Company may in the future acquire either a limited
partnership interest in a property partnership without partnership management
responsibility or a co-venturer interest or co-general partnership interest in
a property partnership with shared responsibility for managing the affairs of
a property partnership or joint venture and, therefore, will not be in a
position to exercise sole decision-making authority regarding the property
partnership or joint venture.
Liquidity of Real Estate. Equity real estate investments are relatively
illiquid. Such liquidity will tend to limit the ability of the Company to vary
its portfolio promptly in response to changes in economic or other conditions.
In addition, the Code limits the ability of a REIT to sell properties held for
fewer than four years, which may affect the Company's ability to sell
properties without adversely affecting returns to holders of Common Shares.
RISK OF ACQUISITION, DEVELOPMENT AND CONSTRUCTION
The Company intends to acquire office and industrial properties to the
extent that they can be acquired on advantageous terms and meet the Company's
investment criteria. See "Business Objectives--Growth Strategies--Acquisition
Strategies." Acquisitions of office and industrial properties 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.
The Company intends to continue development and construction of office and
industrial buildings in accordance with the Company's development policies.
See "Business Objectives--Growth Strategies--Development." Risks associated
with the Company's development and construction activities may include:
abandonment of development opportunities; construction costs of a property
exceeding original estimates, possibly making the property uneconomical;
occupancy rates and rents at a newly completed property may not be sufficient
to make the property profitable; financing may not be available on favorable
terms for development of a property; permanent financing may not be available
on favorable terms to replace a short-term construction loan and construction
and lease-up may not be completed on schedule, resulting in increased debt
service expense and construction costs. In addition, new development
activities, regardless of whether they are ultimately successful, typically
require a substantial portion of management's time and attention. Development
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.
RISK OF CONTINUING ENTITIES AND MANAGER
The Operating Partnership and its subsidiaries, including the Manager, have
been in existence for varying lengths of time up to 10 years. See "The
Company--History." As a result, the Operating Partnership and its subsidiaries
are subject to all of the potential liabilities of an existing company.
Although the Prentiss Group formed the Operating Partnership and a member of
the Prentiss Group has served as its general partner since inception, there
can be no assurances that there are no current liabilities and will not be any
future liabilities arising from prior activities that are unknown and,
therefore, not disclosed in this Prospectus.
RISKS OF THIRD-PARTY PROPERTY MANAGEMENT, LEASING, DEVELOPMENT AND
CONSTRUCTION BUSINESS AND RELATED SERVICES
Termination of Management and Leasing Contracts. The Company, through the
Operating Partnership, and the Manager, intends to pursue the management,
leasing, development and construction of properties owned by third parties.
Risks associated with the management, leasing, development and construction of
properties owned by third parties include the risk that the related contracts
(which are typically cancelable upon 30-days
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<PAGE>
notice or upon certain events, including sale of the property) 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, leasing and development fees are based will decline as
a result of general real estate market conditions or specific market factors
affecting properties managed, leased or developed by the Company, resulting in
decreased management or leasing fee income.
Adverse Consequences of Lack of Control Over the Business of the
Manager. The capital stock of the Manager will be divided into two classes:
voting common stock, all of which will be owned by a corporation wholly-owned
by Michael V. Prentiss, and nonvoting common stock, all of which will be held
by the Company, through the Operating Partnership. The voting common stock and
the nonvoting common stock represent 5% and 95%, respectively, of the
ownership interests in the Manager. Michael V. Prentiss, as the indirect
holder of all of the Manager's voting common stock, will have the ability to
elect the directors of the Manager. The Company will not be able to elect
directors and, therefore, will not be able to influence the day-to-day
management decisions of such entity. As a result, the board of directors and
management of the Manager may implement business policies or decisions that
would not have been implemented by persons controlled by the Company and that
are adverse to the interests of the Company or that lead to adverse financial
results, which could adversely impact the Company's net operating income and
cash flow.
Adverse Consequence of REIT Status on the Third-Party Business. Certain
requirements for REIT qualification may in the future limit the Company's
ability to increase the third-party management, leasing, development and
construction operations conducted, and related services offered, by the
Operating Partnership and the Manager without jeopardizing the Company's
qualification as a REIT. See "Federal Income Tax Considerations --Failure to
Qualify."
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON SHARES
Prior to the Offering, there has been no public market for the Common Shares
and there can be no assurance that an active trading market will develop or be
sustained or that Common Shares will be resold at or above the Offering Price.
The Company intends to apply to list the Common Shares on the NYSE. The
Offering Price of the Common Shares has been determined by agreement among the
Company and the Underwriters and may not be indicative of the market price for
the Common Shares after the Offering. See "Formation Transactions--Valuation
of the Company and Properties" and "Underwriting." The market value of the
Common Shares could be substantially affected by general market conditions,
including changes in interest rates. Moreover, numerous other factors, such as
regulatory action and changes in tax laws, could have a significant impact on
the future market price of the Common Shares. There also can be no assurances
that, upon listing, the Company will continue to meet the criteria for
continued listing of the Common Shares on the NYSE.
IMMEDIATE AND SUBSTANTIAL DILUTION
As set forth more fully under "Dilution," the Properties and other assets to
be contributed by the Prentiss Principals and the Continuing Investors in
exchange for Units and Common Shares have a pro forma net tangible book value
of $15.30 per share. As a result, the pro forma net tangible book value per
share of the assets of the Company after the Offering will be substantially
less than the Offering Price per share. Accordingly, purchasers of the Common
Shares offered hereby will experience immediate and substantial dilution of
$4.70 per share in the net tangible book value of the Common Shares based on
the Offering Price. See "Dilution."
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON SHARES
One of the factors that will influence the market price of the Common Shares
in public markets will be the annual distribution rate on the Common Shares.
An increase in market interest rates may lead prospective purchasers of the
Common Shares to demand a higher annual distribution rate from future
distributions. Such an increase in the required distribution rate may
adversely affect the market price of the Common Shares.
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POSSIBLE ADVERSE EFFECT OF SHARES AVAILABLE FOR FUTURE SALE ON PRICE OF COMMON
SHARES
Sales of a substantial number of Common Shares, or the perception that such
sales could occur, could adversely affect prevailing market prices of the
Common Shares. In connection with the formation of the Company, 2,931,184
Units will be issued in addition to Common Shares offered by the Company in
the Offering. See "Formation Transactions." The Continuing Investors will not
be permitted to offer, sell, contract to sell or otherwise dispose of Common
Shares, except in certain circumstances, for one year after the closing of the
Offering, and the Prentiss Principals will not be permitted to offer, sell,
contract to sell or otherwise dispose of Units, except in certain
circumstances, for two years after the closing of the Offering. See "Shares
Available for Future Sale" and "Underwriting." At the conclusion of such
periods, Common Shares issued to the Continuing Investors will be freely
tradeable in the secondary market and upon the subsequent exchange of Units,
the Common Shares received therefor may be sold in the public market pursuant
to shelf registration statements which the Company is obligated to file on
behalf of limited partners of the Partnership (i.e., the Prentiss Principals),
or pursuant to any available exemptions from registration.
Options to purchase a total of 1,291,439 Common Shares will be granted to
certain executive officers, employees and trustees upon the closing of the
Offering. See "Management--Compensation of Trustees," "--Executive
Compensation" and "--1996 Share Incentive Plan." No prediction can be made
about the effect that future sales of Common Shares will have on the market
prices of shares.
26
<PAGE>
THE COMPANY
GENERAL
The Company has been formed to continue and expand the national, office and
industrial property acquisition, ownership, management, leasing, development
and construction businesses of the Prentiss Group. Upon the closing of this
Offering, the Company will own interests in a diversified portfolio of 85
office and industrial properties with approximately 8.5 million net rentable
square feet. The Properties are located in 10 major U.S. markets and consist
of the 26 Office Properties containing approximately 3.4 million net rentable
square feet and the 59 Industrial Properties containing approximately 5.0
million net rentable square feet. The Prentiss Group developed nine of the
Office Properties containing approximately 1.6 million square feet. As of
March 31, 1996, the Office Properties were approximately 94% leased to 258
tenants, and the Industrial Properties were approximately 93% leased to 120
tenants. The Company believes that upon the closing of this Offering, it will
be one of the 20 largest managers of office and industrial properties in the
U.S., managing approximately 39 million square feet in approximately 330
office and industrial properties that are owned by the Company and by third
parties, and that are leased to approximately 2,700 tenants. The Company
intends to continue the Prentiss Group's strategy of focusing its operations
in select markets throughout the nation and will initially operate in 20
markets throughout the U.S.
The Company operates from its Dallas, Texas headquarters and its four other
regional offices (Los Angeles, Chicago, Washington, D.C. and Atlanta). The
Company is a full service real estate company with approximately 600 employees
and in-house expertise in acquisitions, development, property management,
leasing, facilities management, corporate services, finance, tax,
construction, disposition, marketing, real estate law and accounting. The
eleven senior executives, which include the four Prentiss Principals, Richard
J. Bartel (the Chief Operating Officer of Property Management), Mark R. Doran
(the Treasurer), and the managing directors of each of the Company's five
regions, have an average tenure of 11 years with the Prentiss Group and its
predecessors. Upon completion of the Offering, management will, in the
aggregate, own approximately 15.4% of the Company on a consolidated basis. See
"Management--Trustees and Executive Officers."
The Company will seek to maximize the profitability of the Properties by
continuing the Prentiss Group's success in renewing leases, maintaining high
occupancy rates, increasing rental rates, and reducing operating costs. The
Company will also seek to grow through the acquisition of additional office
and industrial properties and through development, primarily on a build-to-
suit basis. The Company believes that its five regional offices, presence in
20 markets throughout the U.S., diversified base of approximately 2,700
tenants and existing relationships with 45 management clients will provide it
with a competitive advantage in identifying and competing for new office and
industrial acquisition and development opportunities nationally. Additionally,
the Company expects that its existing infrastructure from its extensive
management operation will allow it to grow in new and existing markets without
the substantial cost of opening new offices or hiring and training new
employees.
The Company is a Maryland real estate investment trust which expects to
qualify as a REIT for federal income tax purposes, and will be self-
administered and self-managed. See "Federal Income Tax Considerations." The
Company's principal executive offices are located at 1717 Main Street, Suite
5000, Dallas, Texas 75201, and its telephone number is (214) 761-1440.
HISTORY
In 1979, Michael V. Prentiss opened an office for The Cadillac Fairview
Corporation Limited ("Cadillac Fairview") in Dallas, Texas to conduct Cadillac
Fairview's U.S. operations. Under the leadership of Mr. Prentiss, the Dallas
office became the headquarters for Cadillac Fairview's largest business unit,
Cadillac Fairview Urban Development, Inc. ("Cadillac Urban"), which developed
and operated more than 35 million square feet of office buildings, mixed-use
centers, hotels and suburban office parks in the U.S. and Canada during the
early 1980's.
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In 1987, a Prentiss Group affiliate and Boston-based Copley Real Estate
Advisors, Inc. formed PCIG to acquire substantially all of the U.S. office and
industrial assets of Cadillac Fairview. PCIG's objective was to manage, develop
and sell the Cadillac Fairview portfolio over a 15-year period. Initially,
PCIG's portfolio included more than 100 properties and 17 million square feet
of office and industrial space. PCIG currently owns 6.6 million net rentable
square feet of office and industrial properties, all of which is being marketed
for sale. It is expected that by year-end 1996, only 1.3 million square feet,
or approximately 4% of the assets currently under third-party management, will
remain under PCIG ownership. At the time of PCIG's formation, Mr. Prentiss,
along with Thomas F. August, Dennis J. DuBois and Richard B. Bradshaw, Jr. also
founded Prentiss Properties Limited, Inc. (PPL) to manage all of PCIG's
properties. Substantially all of Cadillac Urban's officers and employees
transferred to PPL. PPL also managed and leased properties for unaffiliated
third parties, and by 1996 had more than 30 million square feet under
management. In 1989, PPL expanded its services to include portfolio management
and disposition services for government agencies, including the Resolution
Trust Corporation, the Federal Savings and Loan Insurance Corporation and the
Federal Deposit Insurance Corporation, as well as ownership of properties for
its own account.
In 1991, the Prentiss Group formed Prentiss Properties Acquisition Partners,
L.P. (the Operating Partnership), a closed-end commingled real estate
investment limited partnership capitalized with $102.5 million of equity, $100
million of which was raised from four U.S. pension funds and $2.5 million of
which was contributed by a PPL affiliate. The Operating Partnership's objective
was to acquire under-performing institutional quality office and industrial
properties throughout the U.S. Prior to the Offering, the Operating Partnership
owned 47 office and industrial properties, all of which will be owned by the
Company, through the Operating Partnership, after the completion of the
Offering and Formation Transactions. Three of the four original investors in
the Operating Partnership (the Continuing Investors) will continue as investors
in the Company.
OPERATIONS
The Company is organized into five regions with its headquarters in Dallas,
Texas and four regional offices in Los Angeles, California, Chicago, Illinois,
Washington, D.C., and Atlanta, Georgia. Managing Directors lead each region,
and each region has development, acquisition, property management, construction
and client development expertise. The following table summarizes the operations
and organization of the five regional offices and the Company's headquarters
office.
<TABLE>
<CAPTION>
NET RENTABLE
SQUARE FEET
NUMBER NUMBER NUMBER (IN THOUSANDS)
MANAGING OF OF OF ------------------
REGION DIRECTOR STATES OFFICES EMPLOYEES OWNED MANAGED ONLY
- ------ ---------------------- ------ ------- --------- ----- ------------
<S> <C> <C> <C> <C> <C> <C>
West.................... David C. Robertson 10 46 165 1,253 13,360
Southwest............... Jeffrey T. Courtwright 6 46 182 2,831 9,288
Midwest................. Lawrence J. Krueger 14 14 16 2,801 618
Mid-Atlantic............ Robert K. Wiberg 13 15 64 1,068 4,061
Southeast............... James B. Meyer 7 13 55 530 3,149
Headquarters............ -- 1 112 -- --
--- --- --- ----- ------
Total................... 50 135 594 8,483 30,476
=== === === ===== ======
</TABLE>
West Region. In the Company's West region, which includes 10 states, the
Company has 165 employees and approximately 14.6 million square feet under
management at 46 locations. The Company has 10 locations under management in
the San Francisco Bay area, nine locations under management in Sacramento,
California, 20 locations under management in Southern California, and six
locations under management in Phoenix, Arizona. The Company's primary markets
are Los Angeles, Oakland, and San Francisco, California. The Company owns 18
industrial buildings containing approximately 1.3 million net rentable square
feet in Los Angeles (Torrance), California. The Company manages two office
buildings that PPL developed, the approximately 435,000 net rentable square
foot 6500 Wilshire Boulevard in Los Angeles and the approximately 271,000 net
rentable square
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foot World Savings Center in Oakland. The Company manages approximately 3.5
million net rentable square feet of industrial space in two major industrial
parks in Southern California--Los Angeles Industrial Center and Orange County
Industrial Center. The Company has three facilities management assignments for
major corporations and has multiple property management and leasing
assignments for pension funds, pension fund advisors, individuals and
corporations.
Southwest Region. In the Company's Southwest region, which includes six
states, the Company has 182 employees and approximately 12.1 million square
feet under management at 46 locations. The Company's primary markets in the
Southwest region include Austin and Dallas, Texas. The Company owns 14 office
buildings containing approximately 2.3 million net rentable square feet and 11
industrial buildings containing 502,193 net rentable square feet in this
region. The Company also has options to acquire the Burnett Plaza office
building in Fort Worth, Texas, containing approximately 1.0 million net
rentable square feet, and a total of approximately 30.0 acres in the Park West
Commerce Center, on which 640,000 net rentable square feet of industrial space
may be built. See "Properties--Option Properties" and "Option Parcels." PPL
has developed more than 6 million net rentable square feet of office and
industrial space in Texas, including the approximately 1.1 million net
rentable square foot Broadmoor Austin Property in Austin, the approximately
1.5 million net rentable square foot Bank One Center in Dallas, the
approximately 1.3 million net rentable square foot 1700 Pacific Street
building in Dallas, and the approximately 1.0 million square foot Burnett
Plaza in Fort Worth. PPL also developed approximately 1.6 million net rentable
square feet of office and hotel space at the Park West Office Park in suburban
Dallas, which the Company manages and in which the Park West Office Property
is located.
Midwest Region. In the Company's Midwest region, which includes 14 states,
the Company has 16 employees and approximately 3.4 million square feet under
management at 14 locations. The Company's primary markets in the Midwest
region include Milwaukee, Wisconsin; Kansas City, Missouri; Southfield,
Michigan; and Chicago, Illinois. The Company owns 17 industrial buildings in
Milwaukee, containing an aggregate of 1,218,324 net rentable square feet,
seven industrial buildings in Kansas City, containing an aggregate of
1,340,825 net rentable square feet and a leasehold interest in an office
building in Southfield, Michigan containing 241,751 net rentable square feet.
The Company also has options to purchase four industrial buildings containing
an aggregate of 265,085 net rentable square feet in Chicago, Illinois. The
buildings are part of the Continental Executive Parke, a high-end office and
distribution park in the northern suburbs of Chicago that was developed by PPL
and is managed by the Company. The Company also has options to acquire a total
of approximately 30.0 acres at Continental Executive Parke on which
approximately 600,000 net rentable square feet of industrial space may be
built. See "Properties--Option Properties" and "Option Parcels."
Mid-Atlantic Region. In the Company's Mid-Atlantic region, which includes 13
states and the District of Columbia, the Company has 64 employees and
approximately 5.1 million net rentable square feet under management at 15
locations. The Company's primary markets in the Mid-Atlantic region are
Northern Virginia; Baltimore, Maryland; Washington, D.C.; and Northern New
Jersey. The Company owns 3141 Fairview Park Drive, a 192,108 net rentable
square foot Class A office building in Fairfax County, Virginia; 8521 Leesburg
Pike, a 145,257 net rentable square foot Class A office building in Tyson's
Corner, Virginia and six industrial buildings in Baltimore, containing an
aggregate of 730,777 net rentable square feet. The Company manages Fairview
Park, a 220 acre office park in Fairfax County, Virginia on which PPL has
developed 1.25 million net rentable square feet of office space and on which
the Company's 3141 Fairview Park Drive Property is located. The Company also
manages the approximately 762,000 net rentable square foot Techworld Plaza in
Washington, D.C.
Southeast Region. In the Company's Southeast region, which includes seven
states, the Company has 55 employees and approximately 3.7 million net
rentable square feet under management at 13 locations. The Company's primary
markets in the Southeast region are Atlanta, Georgia and Orlando, Florida. In
Atlanta, the Company owns the approximately 530,228 net rentable square foot
Cumberland Office Park and manages approximately 2.6 million net rentable
square feet of property owned by third parties. The Company's management
projects in Atlanta include the One Atlantic Center building in Midtown
Atlanta which PPL
29
<PAGE>
developed in partnership with IBM. PPL was named "Office Development Firm of
the Year" in 1995 by the Georgia Chapter of the National Association of
Industrial and Office Parks for PPL's role in developing the approximately 1.7
million net rentable square foot Atlanta Federal Center. The Company also
manages approximately 523,000 net rentable square feet in Orlando, Florida.
Headquarters. While the regional managing directors are responsible for
overseeing all management decisions in their regions, the Company's Chief
Executive Officer and President make all final decisions on capital
allocation, acquisition, development and financing and the Company's Chief
Operating Officer of Property Management supervises property management
operations to ensure quality and consistency throughout all of the Company's
regions. The Company's headquarters in Dallas, Texas supports the regional
offices by providing numerous services including accounting, information
systems, real estate law, insurance, human resources, and training. The
Company's central accounting and reporting group features 60 accountants and
20 Certified Public Accountants. It produces more than 50 quarterly reports
and 30 monthly reports for internal and external clients. The Company's
information systems group includes 15 employees who are designated to set
standards for the Company's information systems to maintain compatibility and
improve quality levels throughout the Company's regions. The Company's in-
house legal department reviews all legal documents relating to financing to
insure consistency in the Company's legal documents. The Company's insurance
group sponsors the MgmtPlus+ Preferred Risk Real Estate Insurance program
through which a leading insurance broker offers the Company's clients
insurance coverage specifically designed for real estate. See "Properties--
Insurance." The Company's human resources group manages employee benefits and
employment issues for all Company employees. The Company's training
organization, Prentiss Properties University, provides regularly scheduled
classes and seminars on subjects related to real estate and finance for the
Company's employees and clients.
BUSINESS OBJECTIVES
BUSINESS STRATEGY
The Company's primary objective is to maximize shareholder value through
increases in distributable cash flow per share and appreciation in the value
of the Common Shares. The Company intends to achieve this objective through a
combination of internal and external growth. The Company's strategy for
internal growth seeks to increase cash flow at the Properties and any future
properties primarily by (a) renewing or replacing expiring leases with new
leases at higher rental rates, (b) operating in markets with the potential for
rental growth, (c) improving occupancy rates, and (d) applying benchmarking
and best practices methodologies to identify and capitalize on cost reduction
opportunities. The Company's external growth strategies are to (i) acquire
existing industrial and office buildings that meet its acquisition criteria
and are located in markets where acquisition cost is less than replacement
cost; (ii) selectively redevelop existing office and industrial buildings that
it currently owns or acquires; (iii) develop new office and industrial
buildings primarily on a build-to-suit, and, where appropriate, speculative,
basis; and (iv) expand its third-party property management, leasing and
facilities management businesses.
The Company intends to focus initially its growth activities in the 10 major
markets throughout the U.S. where the Properties are located, in the other 10
U.S. markets where the Company currently has property management, development
or related operations and in new markets with favorable investment
environments. The following table sets forth certain information regarding the
properties that are owned or managed by the Company in 20 markets throughout
the U.S.
30
<PAGE>
GEOGRAPHIC PROPERTY BREAKDOWN
<TABLE>
<CAPTION>
NET RENTABLE SQUARE
NUMBER OF FOOTAGE
PROPERTIES (IN THOUSANDS)
------------------- --------------------
MARKET OWNED MANAGED TOTAL OWNED MANAGED TOTAL
------ ----- ------- ----- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
WESTERN REGION:
Phoenix, Arizona..................... -- 5 5 -- 534 534
Los Angeles, California.............. 18 113 131 1,253 8,055 9,308
Oakland, California.................. -- 16 16 -- 1,610 1,610
Sacramento, California............... -- 15 15 -- 1,510 1,510
San Francisco, California............ -- 10 10 -- 1,651 1,651
--- --- --- ----- ------ ------
Subtotal Western Region.............. 18 159 177 1,253 13,360 14,613
SOUTHWEST REGION:
Amarillo, Texas...................... -- 3 3 -- 482 482
Austin, Texas(/1/)................... 7 1 8 1,112 389 1,501
Dallas, Texas........................ 13 33 46 1,644 6,454 8,098
Fort Worth, Texas.................... -- 1 1 -- 1,008 1,008
Houston, Texas....................... 5 4 9 75 955 1,030
--- --- --- ----- ------ ------
Subtotal Southwest Region............ 25 42 67 2,831 9,288 12,119
MIDWEST REGION:
Chicago, Illinois.................... -- 8 8 -- 618 618
Southfield, Michigan................. 1 -- 1 242 -- 242
Kansas City, Missouri................ 7 -- 7 1,341 -- 1,341
Milwaukee, Wisconsin................. 17 -- 17 1,218 -- 1,218
--- --- --- ----- ------ ------
Subtotal Midwest Region.............. 25 8 33 2,801 618 3,419
MID-ATLANTIC REGION:
Washington, D.C...................... -- 5 5 -- 1,316 1,316
Baltimore, Maryland.................. 6 -- 6 731 -- 731
Northern New Jersey.................. -- 1 1 -- 263 263
Northern Virginia.................... 2 23 25 337 2,482 2,819
--- --- --- ----- ------ ------
Subtotal Mid-Atlantic Region......... 8 29 37 1,068 4,061 5,129
SOUTHEAST REGION:
Orlando, Florida..................... -- 3 3 -- 523 523
Atlanta, Georgia..................... 9 12 21 530 2,626 3,156
--- --- --- ----- ------ ------
Subtotal Southeast Region............ 9 15 24 530 3,149 3,679
Total.............................. 85 253 338 8,483 30,476 38,959
=== === === ===== ====== ======
</TABLE>
- --------
(/1/The)Company owns a 49.9% interest in the general partnership that owns a
leasehold interest in the Broadmoor Austin Properties in Austin, Texas.
GROWTH STRATEGIES
Internal Growth
The Company will seek to maximize the profitability of the Properties by
continuing the Prentiss Group's success in renewing leases, maintaining high
occupancy rates, increasing rental rates, and reducing operating costs. The
Company intends to increase rental revenues by negotiating leases that include
increases in rent during the lease term, by replacing expiring leases with new
leases at higher rental rates and by improving occupancy rates. The Company
will seek to continue the Prentiss Group's success at renewing existing
leases, which reduces the cost of lease rollovers, reduces rental revenue
fluctuations and enhances long-term relationships with national
31
<PAGE>
tenants that may have space needs in the Company's other markets. Since January
1, 1993, the Prentiss Group has renewed approximately 66% of expiring leases
with the same tenants at those Properties that were owned or managed by the
Prentiss Group since January 1, 1993. Additionally, the Company has maintained
average year-end occupancy rates of approximately 94% and 95%, respectively,
for those Office Properties and Industrial Properties owned or managed during
that period.
The Company intends to continue the Prentiss Group's efforts to reduce
operating and administrative costs by performing many functions (e.g.,
engineering, tax and legal) in-house instead of hiring third parties and by
employing PPL's benchmarking and best practices methodologies. The Company's
benchmarking program compares operating costs and efficiencies of each property
with other Company properties and with other office and industrial properties.
Under the program, the Company conducts monthly evaluations of 40 key
performance indicators at each building and compares the results to a variety
of benchmarks (e.g., specific buildings, portfolios, regions, the industry).
The Company's best practices methodology involves continuously analyzing the
benchmarking data, investigating properties that perform better than the norm
and regularly disseminating and sharing information with respect to the best
practices employed at the better performing properties throughout the Company's
management system. By employing these methodologies, the Company believes that
it can continue to capitalize on opportunities to reduce operating costs and
operate the Properties more efficiently and effectively. Based on publicly
available statistics compiled by the Building Owners and Managers Association,
the Company believes that the annual operating costs at each of the Properties
it has managed since 1991 have been 11% to 19% lower than the average annual
operating costs for comparable buildings.
Acquisitions
The Company intends to continue the Prentiss Group's strategy of
opportunistic investment, particularly in assets that are (i) managed by the
Company and become available for sale, (ii) performing at a level believed to
be substantially below potential due to identifiable management weaknesses or
temporary market conditions, (iii) encumbered by indebtedness that is in
default or is not performing; or (iv) held or controlled by short-term owners
(such as assets held by insurance companies and financial institutions under
regulatory pressure to sell). Since 1991, the Prentiss Group has acquired
approximately $265 million of office properties and approximately $103 million
of industrial properties, including approximately $98 million of office
properties acquired from third-party management clients. The Company believes
that its five regional offices, presence in 20 markets throughout the U.S.,
diversified base of approximately 2,700 tenants and existing relationships with
45 different management clients will provide it with a competitive advantage in
identifying and competing for new acquisition and development opportunities in
the office and industrial property sectors in major markets in the U.S.
In evaluating potential acquisition opportunities, the Company will continue
to rely on the experience of its employees and on its internal research
capabilities in considering a number of factors, including: (i) whether the
property is strategically located within its market; (ii) the construction
quality and condition of the property; (iii) the occupancy of and demand for
properties of a similar type in the same geographic market; (iv) whether the
property is capable of increased cash flow after benefiting from the Company's
renovations, refurbishment and upgrades; (v) whether the property is priced
below replacement cost, thereby enabling the Company to operate the property at
lower rents than those realized from newly developed properties; (vi) whether
the property is able to generate returns at or above levels of expected growth
and appreciation in the property's value and (vii) whether there is existing
demand for the property from one or more of the Company's tenants or customers.
Further, the Company believes its development expertise gives it the advantage
of identifying the potential for improvement in an acquisition opportunity
which might not be apparent to a buyer without similar development expertise.
In several instances, the Prentiss Group has purchased buildings with
substantial vacancies at reduced prices having first identified a particular
tenant that would occupy the space immediately. For example, the Prentiss Group
identified the 8521 Leesburg Pike Office Property in Tyson's Corner, Virginia
because of its location within one of Northern Virginia's best sub-markets, its
low occupancy (40%) and its functional design. Through
32
<PAGE>
its operations and presence in the local market, the Prentiss Group identified
several potential tenants actively looking for large contiguous blocks of space
in the market. The Prentiss Group's research projected a significant decrease
of supply and consequently a significant near-term increase in rental rates.
The prior owner of the Property, an insurance company, was not motivated to
spend the time or capital required to reposition the Property. The Prentiss
Group used its local relationships, national reputation and proven ability to
finance acquisitions to acquire the Property. As part of its asset management
strategy, the Prentiss Group upgraded the common areas, garage, exterior
walkways and entrances. Additionally, the Prentiss Group installed an energy
management system and made other equipment upgrades which significantly reduced
operating costs. Eighteen months after the purchase, the Property was 94%
leased, physically improved and financially stabilized. Due to conservative
assumptions in the acquisition budget and improving market conditions, the
largest lease in the building, which covers more than 50% of net rentable
square feet at this Property, is 25% higher than original projections. See
"Properties."
The Company has options to acquire the following office and industrial
properties (the "Option Properties") containing a total of approximately 1.3
million net rentable square feet, all of which it currently manages:
OPTION PROPERTIES
<TABLE>
<CAPTION>
1995 NET
OPERATING
NUMBER OF NET RENTABLE PERCENTAGE INCOME
PROPERTY LOCATION BUILDINGS SQUARE FEET LEASED(1) ($000S)
-------- -------- --------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Burnett
Plaza(/2/)........ Fort Worth, Texas 1 1,008,141 85% $11,551
Wood Dale 1 &
2(/3/)............ Chicago, Illinois 2 116,076 100% 493
155 Alexandra
Way(/3/).......... Chicago, Illinois 1 110,000 100% 386
Lincolnshire(/3/).. Chicago, Illinois 1 42,009 100% 121
--- --------- --- -------
Total/Weighted
Average......... 5 1,276,226 88% $12,551
=== ========= === =======
</TABLE>
- --------
(/1/As)of March 31, 1996.
(/2/The)Company's purchase price for Burnett Plaza is set out in "Properties--
Option Properties--Burnett Plaza."
(/3/The)Company's option price for Wood Dale 1 & 2, 155 Alexandra Way and
Lincolnshire are set out in "Properties--Option Properties--Chicago
Industrial Buildings."
Redevelopment
The Company will pursue the redevelopment of its Properties and of any other
properties acquired as opportunities arise. For example, the Company is
currently implementing its redevelopment strategy at the Cumberland Office Park
Properties, which are situated in an under-utilized development within the
Northwest submarket of Atlanta. These Properties are a mixture of low-rise and
mid-rise buildings built between 1972 and 1980. Upon acquiring the Cumberland
Office Park Properties in 1991, the Prentiss Group applied for and received
approval to rezone the properties to permit up to 2.1 million square feet of
additional office space. Although the Cumberland Office Park Properties are
currently fully leased, the Company believes that their long-term value
potential lies in the redevelopment of those sites currently occupied by
smaller, older, less functional buildings into new Class A suburban office
buildings. In 1995, the Prentiss Group began implementing this strategy by
demolishing a single-story 7,500 square-foot building on a site that will
accommodate up to 280,000 net rentable square feet of new improvements. The
Company is currently seeking future tenants for a 140,000 net rentable square
foot office building that the Company intends to build if it secures such
tenants.
Development
In addition to acquisition and redevelopment opportunities, the Company
expects to develop properties selectively in markets with favorable
supply/demand characteristics. The Company intends to develop properties
33
<PAGE>
in which it controls all aspects of the development process, including site
selection, project concept, design and construction, financing, leasing and
property management. The Company intends to continue developing industrial and
office properties primarily on a build-to-suit basis but will also consider
selective opportunities for speculative development of industrial properties
and development of office properties when significant pre-leasing is possible.
Since 1980, the Prentiss Group and its predecessors have developed for itself
or third parties 31 office buildings containing approximately 16.3 million net
rentable square feet (including nine of the Office Properties containing
approximately 1.6 million square feet) and 25 industrial buildings containing
approximately 3.2 million net rentable square feet. With landmark projects
such as Broadmoor Austin in Austin (approximately 1.1 million net rentable
square feet), Park West in Dallas (approximately 1.6 million net rentable
square feet), Fairview Park in Northern Virginia (approximately 1.5 million
net rentable square feet), Burnett Plaza in Fort Worth (approximately 1.0
million net rentable square feet) and Continental Executive Parke in Chicago
(approximately 3.2 million net rentable square feet), the Company expects to
benefit from the Prentiss Group's national reputation as a leading developer
that produces quality properties within budget.
The Company owns or has options to acquire the following eleven Development
Parcels, each of which is located either within an industrial park developed
by PPL or adjacent to one of the Company's Properties.
<TABLE>
<CAPTION>
PARCEL MAXIMUM
ACREAGE DEVELOPMENT COMPANY'S
(APPROX.) LOCATION/ADJACENT PROPERTY MARKET (SQUARE FEET) INTEREST
--------- -------------------------- ------ ------------- ---------
<S> <C> <C> <C> <C>
OFFICE:
1.6 Cumberland Office Park Atlanta, GA 280,000 Fee
4.2 Walnut Glen Dallas, TX 500,000 Fee
4.0 Broadmoor Austin Austin, TX 200,000 Leasehold(/1/)
---- ---------
9.8 980,000
---- ---------
INDUSTRIAL:
3.6 Airworld Drive Kansas City, MO 100,000 Fee
13.0 Airport Properties Milwaukee, WI 250,000 Fee
4.0 Airport Properties Milwaukee, WI 50,000 Fee
15.2 Park West Commerce Center Dallas, TX 320,000 Option(/2/)
14.8 Park West Commerce Center Dallas, TX 320,000 Option
14.1 Continental Executive Parke Chicago, IL 275,000 Option
12.7 Continental Executive Parke Chicago, IL 250,000 Option(/2/)
3.2 Continental Executive Parke Chicago, IL 75,000 Option
----
---------
80.6 1,640,000
----
---------
90.4 2,620,000
====
=========
</TABLE>
- --------
(/1/The)Company owns a 49.9% interest in the general partnership that owns the
leasehold interest in this parcel.
(/2/The)Company is obligated to purchase each of these parcels if a building
permit has been obtained before January 1, 1997, and if a building permit
has not been obtained by such date, the Company will have an option to
purchase the parcel at any time. See "The Properties--Option Parcels."
THIRD-PARTY MANAGEMENT
The Company manages approximately 250 office and industrial properties for
45 third-party management clients. These properties are located in 16 markets
throughout the U.S., contain approximately 30 million net rentable square feet
and are leased to over 2,300 tenants. The Company has served its ten largest
management clients (measured by total space under management) for an average
of 6.6 years and, since 1989, approximately 60% of new third-party management
business has been generated from existing clients. In addition to property
management and leasing, the Company offers its clients a full range of related
services including tenant construction, marketing, insurance, accounting, tax,
real estate law, acquisition, disposition, facilities management, corporate
services and asset management. The following table sets forth the number of
properties,
34
<PAGE>
total net rentable square feet, occupancy and number of tenants for the
properties managed by PPL as of June 30, 1996 and as of December 31 for the
years 1991 through 1995.
MANAGED PROPERTIES
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------------
1996 1995 1994 1993 1992 1991
-------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
MANAGED OFFICE PROPERTIES
Number...................... 123 113 69 117 83 69
Total Net Rentable Square
Feet....................... 21,430 18,650 15,951 23,232 16,862 14,619
Occupancy %................. 86% 87% 82% 88% 88% 83%
MANAGED INDUSTRIAL PROPERTIES
Number...................... 130 148 155 164 144 155
Total Net Rentable Square
Feet....................... 9,046 10,361 9,888 11,158 10,322 12,891
Occupancy %................. 98% 94% 94% 87% 87% 89%
TOTAL MANAGED PROPERTIES
Number...................... 253 261 224 281 227 224
Total Net Rentable Square
Feet....................... 30,476 29,011 25,839 34,390 27,184 27,510
Occupancy %................. 90% 90% 87% 87% 88% 85%
Number of Third-Party
Owners..................... 45 38 36 37 24 18
</TABLE>
The Company believes it has successfully developed and maintained
relationships with its broad base of national management clients and intends to
develop relationships with additional clients in the future. The Company uses
several tools to measure customer satisfaction. The Company uses the REACT
customer survey program to measure its management performance from the
perspective of the building owners and tenants and to compare those results to
other managers. REACT is administered and compiled by CEL & Associates, Inc.,
an independent third party. Results of the Spring 1996 REACT survey for all
office properties managed by the Company are shown as follows by region (85%-
100% is considered outstanding based on benchmarked studies by the testing
company):
<TABLE>
<CAPTION>
REGION(/1/) BUILDING OWNER TENANTS
----------- -------------- -------
<S> <C> <C>
West.................................................. 94.9% 84.7%
Southwest............................................. 83.8% 84.3%
Mid-Atlantic.......................................... 94.8% 86.9%
Southeast............................................. 92.3% 86.5%
----- -----
Average............................................... 91.4% 85.6%
</TABLE>
- --------
(/1/The)Company owns only one Office Property in its Midwest region and has
managed that Property since March 1, 1996. The Company manages no other
office buildings in this region.
The Company intends to focus future growth of its management business on the
expansion of profitable long-term arrangements with existing clients and on
high margin business with new clients for large spaces. The Company will target
long-term relationships with clients who need high-quality property services
and who have intermediate to long-term ownership objectives. The Company
believes that its long-term relationships with its customer base will provide a
stable source of fee income. Furthermore, the Company believes it will benefit
from the increasing trend of institutional owners of real estate consolidating
their property management relationships with sophisticated national service
providers.
The Company believes that the third party management business provides the
Company with several important benefits. These benefits include (i) access to a
national tenant base with space needs in multiple markets, (ii) access to
acquisition and development opportunities in markets throughout the country,
and (iii) the ability to achieve greater economies of scale with its property
management systems and to defray the costs of maintaining its presence in key
markets.
35
<PAGE>
The Company will seek to maximize the owner's objectives for each property
using strategies employed at the Properties. The Company's third-party service
contracts vary in length and generally provide for management fees ranging from
1% to 3% of gross revenues plus recovery of the costs of on-site personnel, and
leasing commissions at market rates. The contracts typically assign the
responsibility for management of property operations, marketing and property-
level accounting to the Company. While many contracts are terminable on 30-days
notice in accordance with industry practice, the Company believes that it will
benefit from the Prentiss Group's long-term relationships with key clients.
The Company's third party management will be conducted primarily by the
Manager. Through the Operating Partnership's ownership of non-voting equity and
debt interests in the Manager, the Company expects to receive most of the
after-tax economic benefits from the Manager's third party management business.
FINANCING STRATEGIES
The Company intends to maintain a conservative debt policy through its Debt
Limitation, which limits the Company's total combined indebtedness plus its pro
rata share of Joint Venture Debt to 50% of the Company's Total Market
Capitalization, although the Company's organizational documents do not limit
the amount of indebtedness that the Company may incur. At the closing of the
Offering, the Company will have outstanding combined indebtedness of
approximately $63.3 million, or 14.2% of Total Market Capitalization (excluding
its pro rata share of Joint Venture Debt), and, together with its pro rata
share of Joint Venture Debt, will have outstanding total indebtedness of
approximately $133.3 million, or approximately 25.9% of Total Market
Capitalization. To the extent that the Underwriters' overallotment option to
purchase 2,137,500 Common Shares is exercised, the Company expects to use the
additional net proceeds of up to approximately $39.8 million to repay certain
indebtedness incurred in connection with the Formation Transactions. If the
Underwriters' overallotment option is exercised in full and the proceeds
therefrom are used to repay outstanding indebtedness, the Company's combined
outstanding indebtedness after such repayment would be $93.5 million or 19.7%
of its Total Market Capitalization. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." Assuming the overallotment option is not exercised, the Company
will have the capacity to borrow up to $248.2 million under the Debt
Limitation. The Company intends to obtain a commitment for the $100 million
Line of Credit prior to completion of the Offering. The Line of Credit may be
used, among other things, to finance the acquisition or development of
additional properties and the redevelopment of properties owned by the Company.
The Company believes that its access to capital through the Line of Credit and
other sources of private financing, as well as its access to the public capital
markets, will provide it with a competitive advantage in acquisitions and
developments over certain competitive bidders which may have to qualify their
bids with financing conditions or which have less access to capital.
Acquisition financings through the Line of Credit and other sources of
unsecured financing may be subject to certain risks. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." In addition, the Company also enjoys a
competitive advantage over many bidders because of the ability to fund or
partially fund acquisitions through the issuance of Units to the sellers of
such properties, which may, in certain circumstances, defer a seller's tax
consequences related to the transfer of those properties.
36
<PAGE>
USE OF PROCEEDS
The net cash proceeds to the Company from the Offering, after deducting the
underwriting discount and estimated expenses of the Offering, are estimated to
be approximately $262.0 million (approximately $301.8 million if the
Underwriters' overallotment option is exercised in full). In connection with
the Formation Transactions, the Company is also obtaining two mortgage loans
with an aggregate principal balance of $50 million from an affiliate of
Lehman. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Underwriting."
The net cash proceeds of the Offering and the two mortgage loans will be used
by the Company as follows: (i) approximately $203.6 million to acquire
interests in the Properties and the Prentiss Properties Service Business,
including approximately $54.0 million to acquire interests in the Properties
from an affiliate of Lehman; (ii) approximately $97.4 million to repay certain
mortgage indebtedness secured by the Properties as set forth in the table
below, including approximately $64.5 million which will be repaid to an
affiliate of Lehman; (iii) approximately $1.0 million for prepayment penalties
associated with such debt; (iv) to establish $7.1 million in reserves for
capital expenditures; (v) to establish a cash balance of approximately $2.3
million for working capital purposes; and (vi) to pay approximately $500,000
in financing costs relating to the Line of Credit.
Certain information regarding the indebtedness to be repaid is set forth
below:
DEBT TO BE REPAID WITH A PORTION OF OFFERING PROCEEDS
<TABLE>
<CAPTION>
PROPERTY MATURITY DATE INTEREST RATE AMOUNT TO BE REPAID(/1/)
-------- ------------- ------------- ------------------------
<S> <C> <C> <C>
Walnut Glen Tower....... January 31, 2001 7.500% $ 1,099,312(/2/)
8521 Leesburg Pike...... September 1, 1999 8.500% 5,062,727
Northland Park(/3/)..... July 1, 1999 8.750% 9,500,000
North Topping Street,... October 1, 2001 8.300% 3,435,182
Airworld Drive,
107th Terrace
Nicholson III,.......... October 1, 2001 8.300% 3,464,818
13425 Branchview
and 1002 Avenue T
Milwaukee
Industrial(/3/)........ May 1, 2000 8.125% 10,323,479
3141 Fairview Park
Drive.................. February 21, 1999 LIBOR + 3.50%(/4/)(/5/) 22,500,000(/6/)(/7/)
Bachman Creek........... August 9, 1997 LIBOR + 1.65%(/4/) 6,500,000(/7/)
Park West............... March 31, 1997 9.000% 35,517,327(/7/)
-----------
Total........................................................... $97,402,845
===========
</TABLE>
- --------
((/1/The)Company estimates that the indebtedness to be repaid with a portion
of the proceeds of the Offering will have a weighted average interest
rate of approximately 8.3% and a weighted average maturity of
approximately 3.38 years as of August 31, 1996. Exact repayment amounts
may differ due to amortization.
((/2/Represents)prepayment of principal amortization payments required through
the maturity date, effectively restructuring the loan to an interest-only
loan. Following such prepayment the loan will have a principal balance of
approximately $13.3 million and only payments of interest will be due
until maturity.
((/3/In)connection with the Formation Transactions, the Company is obtaining a
mortgage loan with an initial principal balance of approximately $40
million that will be secured by a lien on all of the Company's Industrial
Properties in Kansas City, Missouri and Milwaukee, Wisconsin. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
((/4/The)30 Day LIBOR rate of 5.50% as of July 5, 1996 was used for
calculation of the weighted average interest rate in note 1 above.
((/5/In)connection with the Formation Transactions the Company is obtaining a
mortgage loan that will be secured by a lien on the 3141 Fairview Park
Drive Property. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation.
((/6/Includes)two notes, one in the amount of $19 million with a maturity date
of February 21, 1999, and the second in the amount of $3.5 million with a
maturity date of February 21, 1997.
((/7/Financing)provided by an affiliate of Lehman.
37
<PAGE>
To the extent the Underwriters' overallotment option to purchase up to
2,137,500 Common Shares is exercised in full, the Company expects to use the
additional net proceeds of up to approximately $39.8 million to repay certain
indebtedness incurred in connection with the Formation Transactions. If the
Underwriters' overallotment option is exercised in full and the proceeds
therefrom are used to repay outstanding indebtedness, the Company's total
outstanding indebtedness after such repayment would be $93.5 million or 19.7%
of its Total Market Capitalization. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Pending application of net proceeds, the Company will invest such portion of
the net proceeds in interest-bearing accounts and short-term, interest-bearing
securities, which are consistent with the Company's intention to qualify for
taxation as a REIT.
38
<PAGE>
DISTRIBUTION POLICY
The Company intends to pay regular quarterly distributions to its
shareholders. The first distribution, for the period commencing on the Closing
Date and ending December 31, 1996, is expected to be approximately $
per Common Share, which is equivalent to a quarterly distribution of
approximately $0.40 per Common Share and an annual distribution of $1.60 per
Common Share, or approximately 8.00% of the Offering Price. The Company does
not expect to change its estimated initial distribution per Common Share if
the Underwriters' over allotment option is exercised. See "Formation
Transactions."
The Company's initial intended annual distribution rate is based on an
estimate of cash flow that will be available for distribution. This estimate
is based on historical cash flows provided by operations of the Prentiss Group
for the 12 months ended March 31, 1996. Except as reflected in the table below
and the notes thereto, investing and financing activities are not expected to
have a material adverse effect on estimated cash available for distributions.
The estimate of Funds from Operations is being made solely for the purpose of
setting the initial distribution rate and is not intended to be a prediction
or forecast of the Company's results of operations or of its liquidity.
The following table illustrates the adjustments made by the Company to its
pro forma Funds from Operations for the 12 months ended March 31, 1996 in
order to calculate initial estimated distributions.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
----------------------
<S> <C>
Pro forma net income (before minority interest of
$3,882) for the year ended December 31, 1995.......... $25,208
Real estate depreciation and amortization............ 12,070
Broadmoor depreciation(/1/).......................... 2,167
-------
Pro forma Funds from Operations, year ended December
31, 1995(/2/)......................................... 39,445
Less: Pro forma Funds from Operations for the quarter
ended March 31, 1995................................ (8,722)
Add: Pro forma Funds from Operations for the quarter
ended March 31, 1996................................ 9,286
-------
Pro forma Funds from Operations, 12 months ended March
31, 1996(/2/)......................................... 40,009
=======
Adjustments:
Contractual net increases in rent(/3/)............... 1,252
Reduction in cash received from the Manager(/4/)..... (1,534)
-------
Estimated Funds from Operations for the twelve months
ended March 31, 1997.................................. 39,727
=======
Estimated capital expenditures for the
Properties(/5/)..................................... (4,350)
Estimated capital expenditures for furniture,
fixtures and equipment of the Manager............... (190)
Straight line rent accrual adjustments............... (764)
Amortization of non-real estate assets(/6/).......... 179
-------
Estimated cash available for distributions............. 34,602
=======
Estimated initial annual distributions................. 30,519
=======
Company's share of estimated initial annual
distributions......................................... 25,819
=======
Payout ratio based on estimated cash available for
distributions(/7/).................................... 88.2%
=======
</TABLE>
- --------
(/1/The)Broadmoor depreciation adjustment represents the Company's share of
the depreciation recognized on the Broadmoor Austin Office Properties by
the joint venture that owns these properties which are accounted for on
the equity method.
(/2/Funds)from Operations, as defined by NAREIT, represents net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization on
real estate assets and after adjustments for unconsolidated partnerships
and joint ventures. Funds from Operations, therefore, does not represent
cash generated from operating activities in accordance with GAAP and
should not be considered an alternative to net income as an indication of
the Company's performance or to cash flow as a measure of liquidity or the
ability to pay distributions. Pro forma Funds from Operations for the
three months ended March 31, 1996 and 1995 was calculated as follows:
39
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
--------- ---------
<S> <C> <C>
Pro forma net income (before minority interest of $880
and $803)............................................ $ 5,714 $ 5,215
Adjustments:
Real estate depreciation and amortization............ 3,030 2,965
Broadmoor depreciation............................... 542 542
--------- ---------
Pro forma Funds from Operations....................... $ 9,286 $ 8,722
========= =========
</TABLE>
(/3/Represents)the net effect on Estimated Funds from Operations for the 12
months ended March 31, 1997 from (i) the net change in rental revenue from
renewals or new leases signed and existing leases expiring after March 31,
1996, and (ii) contractual rent increases and decreases under leases in
effect as of March 31, 1996. To date, the Prentiss Group has renewed the
leases on approximately 54% of the space subject to leases expiring after
March 31, 1996. In total, the Prentiss Group has renewed or re-leased
approximately 74% of the space subject to leases expiring after March 31,
1996.
(/4/Represents)an estimated reduction in cash from the Manager due to fee
income adjustments, net of taxes, as detailed below.
<TABLE>
<CAPTION>
TOTAL
-------
<S> <C>
Net reduction in the annual fee income recognized by the Manager... $(2,767)
Income tax savings on reduction of fee income...................... 968
-------
Net reduction in Manager's income.................................. (1,799)
-------
Company's 95% share of Manager's reduction......................... (1,709)
Add: Interest income due under the installment note from the
Manager to the Company excluded from Equity in joint venture and
subsidiary........................................................ 175
-------
Total net reduction................................................ $(1,534)
=======
</TABLE>
(/5/The)estimated annual unreimbursed capital expenditures of $4,350 were
derived by estimating the capital improvements to be made to each property
along with a specific review of all lease rollovers and all signed new
leases or renewals for the period from April 1, 1996 to March 31, 1997.
The analysis below is a comparison of the estimated amount to the
historical actual costs incurred. A comparison to the average dollars
actually spent on these items is provided along with a comparison to
historical amounts adjusted for the Company's portfolio of Properties. The
adjusted historical amounts were derived by using per square foot
historical cost amounts applied to the square footage of the Company. In
addition, the Company will set aside $7.1 million of the net Offering
proceeds for estimated specific non-recurring capital expenditures and
leasing costs, including tenant improvements and leasing commissions for
currently vacant space in the Walnut Glen Office Property, re-leasing
costs for the major leases of the Park West and Walnut Glen Office
Properties, which expire in October 1999 and July 1998, respectively, and
the 21,000 square foot expansion of one of the Milwaukee Industrial
Properties. Unused portions of the funds, if any, will be applied to
reduce outstanding indebtedness. See "Properties--Historical Non-
Incremental Revenue-Generating Capital Expenditures, Tenant Improvement
Cost and Leasing Commissions" and "--Historical Incremental Revenue-
Generating Tenant Improvement Costs and Leasing Commissions."
<TABLE>
<CAPTION>
NON-INCREMENTAL TENANT
CAPITAL EXPENSES IMPROVEMENT AND LEASING
-------------------------------- --------------------------------
OFFICE INDUSTRIAL OFFICE INDUSTRIAL
--------------- ---------------- ---------------- --------------- TOTAL
PER SQ FT TOTAL PER SQ FT TOTAL PER SQ FT TOTAL PER SQ FT TOTAL AMOUNT
--------- ----- --------- ------ --------- ------ --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated Amounts....... $0.15 $516 $0.20 $1,009 $6.21 $2,125 $1.68 $700 $4,350
Historical Amounts...... $0.17 $359 $0.18 $ 838 $5.73 $1,584 $1.06 $906 $3,687
Estimated Amounts based
on Historical Rates.... $0.17 $585 $0.18 $ 908 $5.73 $1,960 $1.06 $441 $3,894
</TABLE>
(/6/Represents)the amortization of deferred financing costs of $179, which is
reflected as an expense in the pro forma financial statements of the
Company.
(/7/The)Company's payout ratio is based on estimated cash available for
distribution, calculated by dividing the Estimated initial annual
distributions by the Estimated cash available for distributions.
The Company believes that its estimated cash available for distributions
constitutes a reasonable basis for setting the initial distribution rate on
the Common Shares and intends to maintain its initial distribution rate for
the 12 months following the Offering unless actual results from operations,
economic conditions or other factors differ from the assumptions used in its
estimate. The actual return that the Company will realize and the amount
available for distributions to shareholders will be affected by a number of
factors, including the revenues received from the Properties, the
distributions received from the Operating Partnership, the operating expenses
of the
40
<PAGE>
Company, the interest expense incurred on its borrowings and unanticipated
capital expenditures. No assurance can be given that the Company's estimate
will prove accurate. In addition, pro forma results of operations do not
purport to present the actual results that can be expected for future periods.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Funds from Operation."
The Company anticipates that Funds from Operations will exceed earnings and
profits due to non-cash expenses, primarily depreciation and amortization,
expected to be incurred by the Company. Distributions by the Company to the
extent of its current or accumulated earnings and profits for federal income
tax purposes, other than capital gain dividends, will be taxable to
shareholders as ordinary dividend income. Capital gain dividends generally will
be treated as long-term capital gain. Distributions in excess of earnings and
profits generally will be treated as a non-taxable reduction of the
shareholder's basis in the Common Shares to the extent thereof, and thereafter
as capital gain. Distributions treated as a non-taxable reduction in basis will
have the effect of deferring taxation until the sale of a shareholder's Common
Shares. The Company does not intend to reduce the expected initial distribution
per share if the Underwriters' overallotment option is exercised. Based on the
Company's estimated results of operations for the twelve months ending March
31, 1997, the Company estimates that approximately 16.0% of the anticipated
initial annual distribution to shareholders will represent a return of capital
for federal income tax purposes and that the Company would have been required
to distribute $20.6 million or $1.28 per share during such 12-month period in
order to maintain its status as a REIT. If actual Funds from Operations or
taxable income varies from these amounts, the percentage of distributions which
represents a return of capital may be materially different. In addition, the
percentage of distributions may vary substantially in future years. For a
discussion of the tax treatment of distributions to holders of Common Shares,
see "Federal Income Tax Considerations--Taxation of Taxable U.S. Shareholders"
and "--Taxation of Non-U.S. Shareholders." In order to qualify to be taxed as a
REIT, the Company must make annual distributions to shareholders of at least
95% of its REIT taxable income (determined by excluding any net capital gain),
which the Company anticipates will be less than its share of adjusted Funds
from Operations. Under certain circumstances, the Company may be required to
make distributions in excess of cash available for distribution in order to
meet such distribution requirements.
Future distributions by the Company will be at the discretion of the Board of
Trustees and will depend on the actual Funds from Operations of the Company,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code (see "Federal Income Tax
Considerations--Requirements for Qualification"), and such other factors as the
Board of Trustees deems relevant. See "Risk Factors--Changes in Policies
Without Shareholder Approval."
41
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 and on a pro forma basis assuming completion of the Formation
Transactions and the Offering and the application of the assumed net proceeds
therefrom as if such transactions had occurred on March 31, 1996. See "Use of
Proceeds." The information set forth in the table should be read in
conjunction with the combined financial statements of the Company and notes
thereto included elsewhere in this Prospectus, the pro forma financial
information and notes thereto included elsewhere in this Prospectus and the
discussion under "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------------
HISTORICAL PRO FORMA
----------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
DEBT................................... $ 68,864 $ 63,297(/1/)
---------------- ----------------
MINORITY INTEREST...................... -- 46,467
---------------- ----------------
SHAREHOLDERS' EQUITY:
Common Shares, $.01 par value;
100,000,000 authorized; 100 issued
and outstanding and 16,142,985
issued and outstanding on a pro
forma basis(/2/).................... -- 162(/2/)
Preferred shares, $.01 par value,
20,000,000 authorized, no shares
issued or outstanding............... -- --
Additional paid-in capital........... -- 299,648
Accumulated equity (deficit) of
continuing interests................ 102,204 (44,546)
---------------- ----------------
Total shareholders' equity........... 102,204 255,264
---------------- ----------------
Total capitalization................. $ 171,068 $ 365,028
================ ================
</TABLE>
- --------
(/1/Excludes)the Company's pro rata share of indebtedness of the partnership
that owns the Broadmore Austin Property. For more detailed information on
the operations and accounts of Broadmoor Austin, refer to footnote (11) in
the notes to the Predecessor Company's financial statements.
(/2/Does)not include Common Shares reserved for issuance upon (i) possible
exchange of 2,931,184 Units issued and outstanding after the Offering and
(ii) exercise of 1,291,439 options to be granted pursuant to the 1996
Share Incentive Plan effective upon the completion of the Offering. See
"Management--1996 Share Incentive Plan."
42
<PAGE>
DILUTION
The initial price per share to the public of the Common Shares offered
hereby exceeds the net tangible book value per share immediately following
consummation of the Offering and the other Formation Transactions. Therefore,
the Continuing Investors and holders of Units issued in connection with the
Formation Transactions (the Prentiss Principals, directly or indirectly, and
other management members) will realize an immediate increase in the net
tangible book value of their Common Shares and Units, respectively, while
purchasers of the Common Shares in the Offering will realize an immediate
dilution in the net tangible book value of their shares. Pro forma net
tangible book value per share is determined by subtracting the Company's total
liabilities from its total tangible assets and dividing the remainder by the
number of Common Shares and Units that will be outstanding after the Offering.
The following table illustrates the dilution to purchasers of shares sold in
the Offering, based on the Offering Price of $20.00 per share.
<TABLE>
<S> <C> <C>
Initial price per share to the public............................. $20.00
Pro forma net tangible book value per share as of March 31, 1996
prior to the Offering (/1/).................................... $7.20
Increase in net tangible book value per share attributable to
payments by purchasers of Common Shares in the Offering (/1/).. $8.10
-----
Pro forma net tangible book value per share as of March 31, 1996
after the Offering (/2/)......................................... $15.30
------
Dilution per share sold in the Offering........................... $ 4.70
======
</TABLE>
- --------
(/1/)Based on the Pro Forma Combined Balance Sheet contained elsewhere in this
Prospectus.
(/2/)Based on pro forma shareholders' equity of $255,264 and minority interests
in the Operating Partnership of $46,467, net of intangible assets, divided
by 19,074,169 Common Shares outstanding. This assumes all Units have been
converted into Common Shares.
The following table sets forth the number of Common Shares offered to the
public hereby, the total price to be paid for the Common Shares offered
hereby, the number of Restricted Shares and Units previously outstanding or to
be issued to Continuing Investors and the Prentiss Principals in connection
with the Formation Transactions, the pro forma net book value as of March 31,
1996 attributable to the Restricted Shares and Units issued directly or
indirectly to the Continuing Investors and the Prentiss Principals, the book
value as of March 31, 1996 of the assets contributed to the Operating
Partnership and the purchase price per Common Share in the Offering and book
value of the contributions per Restricted Share or Unit.
<TABLE>
<CAPTION>
CASH/BOOK VALUE OF
SHARES/UNITS ISSUED TOTAL CONTRIBUTIONS PURCHASE PRICE/
BY THE COMPANY TO THE COMPANY(/1/) BOOK VALUE/
-------------------- ------------------- OF CONTRIBUTIONS
SHARES/UNITS PERCENT AMOUNT(/1/) PERCENT PER SHARE/UNIT(/2/)
------------ ------- ----------- ------- -------------------
<S> <C> <C> <C> <C> <C>
Common Shares offered by
the Company to the
Public................. 14,250 74.7% $285,000 89.1% $20.00
Common Shares and Units
issued to Continuing
Investors and Prentiss
Principals............. 4,824 25.3% $ 34,754 10.9% $ 7.20
------ ----- -------- -----
Total................. 19,074 100.0% $319,754 100.0%
</TABLE>
- --------
(/1/)Based on the March 31, 1996 net book value of the assets to be contributed
in connection with the Formation Transactions, net of liabilities to be
assumed.
(/2/)Before deducting the Underwriters' discount and estimated expenses of the
Offering.
43
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth (i) selected combined financial data for the
Predecessor Company on a historical basis, and (ii) pro forma financial data
for the Company at and for the three months ended March 31, 1996 and for the
year ended December 31, 1995. The combined financial statements of the
Predecessor Company include (i) 100% of the assets and results of operations
from 47 Properties for the periods presented, (ii) 100% of the assets and
results of operations of the 3141 Fairview Park Drive Property for the portion
of the periods after a Prentiss Group member acquired the Property, (iii) a
25% equity investment in the Broadmoor Austin Properties; (iv) a 15% equity
investment in the Park West Property for the portion of the periods in which
the Prentiss Group owned its 15% non-controlling interest, (v) a 25% equity
investment in Itasca, Illinois owned by a partnership in which a Prentiss
Group member has a non-controlling interest and (vi) results of operations of
the Prentiss Properties Service Business (conducted primarily by PPL). The
selected financial data at and for the three months ended March 31, 1996 and
March 31, 1995 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments (consisting of normal recurring
adjustments) that management considers necessary for a fair presentation of
the financial position and results of operations for those periods. Operating
results for the three months ended March 31, 1996 are not necessarily
indicative of the results to be expected for the entire year ending December
31, 1996. The following data should be read in conjunction with (i) the pro
forma financial statements and notes thereto of the Company; (ii) the
historical financial statements and notes thereto for the Predecessor Company
and the Acquisition Properties; and (iii) "Management's Discussion and
Analysis of Financial Condition and Results of Operations," each included
elsewhere in this Prospectus.
Historical operating results may not be comparable to future operating
results. In addition, the Company believes that the book value of the
Properties, which reflects historical costs of such real estate assets less
accumulated depreciation, is not indicative of the fair value of the
Properties.
Pro forma information is presented as if (i) the transfer of the Properties,
the Prentiss Properties Service Business and other assets of the Prentiss
Group and (ii) the completion of the Offering and the application of the net
proceeds therefrom as described under "Use of Proceeds" had occurred at the
beginning of the pro forma periods with respect to the pro forma operating
data and at March 31, 1996 with respect to the pro forma balance sheet data.
The pro forma information is based upon certain assumptions that are included
in the notes to the pro forma financial statements included elsewhere in this
Prospectus. The pro forma financial information is unaudited and is not
necessarily indicative of what the financial position and results of
operations of the Company would have been as of the dates and for the periods
indicated, nor does it purport to represent or project the financial position
and results of operations for future periods.
44
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------- -----------------------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA ----------------- PRO FORMA -------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
--------- -------- ------- --------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Rental Income........... $ 14,483 $ 8,026 $ 7,063 $56,989 $ 29,423 $ 25,256 $ 14,412 $ 8,169 $ 5,194
Fee and other
income(/1/)............ 985 5,526 5,022 3,522 25,741 26,702 23,609 24,278 35,346
-------- -------- ------- ------- -------- -------- --------- -------- --------
Total Revenues......... 15,468 13,552 12,085 60,511 55,164 51,958 38,021 32,447 40,540
Operating
expenses(/1/).......... 5,111 7,593 7,280 19,607 31,272 33,178 28,667 31,925 35,848
Real estate taxes....... 1,254 839 774 4,797 3,030 2,691 1,631 712 428
Interest expense........ 1,273 1,202 973 5,091 3,882 3,191 1,444 491 60
Real estate depreciation
and amortization....... 3,030 1,777 1,712 12,070 7,060 5,451 3,312 1,900 721
Other depreciation and
amortization........... -- 4 27 -- 106 106 106 106 96
Equity in joint venture
and subsidiary(/1/).... 914 14 24 6,262 11 13 (4) 2 211
-------- -------- ------- ------- -------- -------- --------- -------- --------
Income (loss) before
gain on sale of
property and minority
interest............... 5,714 2,151 1,343 25,208 9,825 7,354 2,857 (2,685) 3,598
Gain on sale of
property............... -- -- -- -- -- 1,718 -- -- --
Minority interest(/2/).. (880) -- -- (3,882) -- -- -- -- --
-------- -------- ------- ------- -------- -------- --------- -------- --------
Net income (loss)...... $ 4,834 $ 2,151 $ 1,343 $21,326 $ 9,825 $ 9,072 $ 2,857 $ (2,685) $ 3,598
======== ======== ======= ======= ======== ======== ========= ======== ========
Net income per share.... $ 0.30 -- -- $ 1.32 -- -- -- -- --
Weighted average number
shares outstanding..... 16,143 -- -- 16,143 -- -- -- -- --
BALANCE SHEET DATA (END
OF PERIOD):
Real estate, before
accumulated
depreciation(/3/)...... $356,269 $186,000 -- -- $165,331 $160,662 $ 95,083 $ 46,556 $ 26,423
Cash.................... 7,259 971 -- -- 1,033 9,133 1,605 8,004 3,202
Total assets............ 368,938 174,978 -- -- 154,490 164,307 117,819 53,327 29,900
Debt on real
estate(/3/)............ 63,297 68,864 -- -- 46,442 46,732 20,473 10,186 717
Total liabilities....... 67,207 72,774 -- -- 50,769 51,713 23,773 11,480 1,759
Stockholders' equity.... 255,264 102,204 -- -- 103,721 112,594 94,046 41,847 28,141
OTHER DATA (END OF
PERIOD):
EBITDA(/4/)............. $ 9,103 $ 5,120 $ 4,031 $36,107 $ 20,862 $ 16,089 $ 7,723 $ (190) $ 4,264
======== ======== ======= ======= ======== ======== ========= ======== ========
Funds from
Operations(/5/)........ $ 9,286 $ 4,199 $ 3,326 $39,445 $ 17,968 $ 13,888 $ 7,252 $ 298 $ 4,901
======== ======== ======= ======= ======== ======== ========= ======== ========
Cash flow from
operations............. -- $ 4,156 $ 2,406 -- $ 16,238 $ 13,059 $ 6,115 $ (755) $ 4,241
Cash flow from
investing.............. -- $(20,972) $(1,498) -- $ (4,301) $(40,909) $ (71,977) $(20,133) $(25,541)
Cash flow from
financing.............. -- $ 16,754 $(8,373) -- $(20,037) $ 35,378 $ 59,463 $ 25,690 $ 24,502
PROPERTY DATA (END OF
PERIOD)(/6/):
Number of Properties.... 85 56 54 85 55 54 47 23 16
Total GLA in sq. ft..... 8,483 6,515 5,979 8,483 6,323 5,976 4,793 2,733 1,650
Occupancy %............. 94% 95% 97% 95% 97% 96% 95% 97% 94%
</TABLE>
- --------
(/1/)The Manager's operations are combined with the property operations in the
historical statements and are accounted for under the equity method in the
pro forma statements; therefore, the historical statements include the
Manager's revenues and expenses on a gross basis in the respective income
and expense line items, and the pro forma statements present only the
Manager's net operations in the line item titled "Equity in joint venture
and subsidiary."
Equity in joint venture and subsidiary includes the Company's 25% and 49.9%
interest in the Broadmoor Austin Partnership on a historical and pro forma
basis, respectively, which is accounted for on the equity method for all
periods presented. For more information on the operations and accounts of
the Broadmoor Austin Partnership refer to footnote (11) in the footnotes to
the Predecessor Company's financial statements.
Equity in joint venture and subsidiary on a historical basis also includes
the 15% general partnership interest owned by members of the Prentiss Group
in the Park West property. The operations and accounts are combined on a
pro forma basis.
45
<PAGE>
(/2/Represents)the approximate 15.4% interest in the Operating Partnership
which will be owned by the Prentiss Principals.
(/3/The)pro forma balance sheet as of March 31, 1996 reflects the Company's
investment in Broadmoor Austin using the equity method of accounting. As a
result, the Company's share (49.9%) of the Broadmoor Austin Partnership's
real estate and related debt are not shown in the line items titled "Real
estate, before accumulated depreciation" and "Debt on real estate." The
following schedule represents the Balance Sheet Data as of March 31, 1996
on a pro forma basis as if the Company's share of the Broadmoor Austin
Partnership's real estate and related debt thereon were included. This
presentation is provided for informational purposes only:
<TABLE>
<CAPTION>
PRO FORMA 3/31/96 ADJUSTMENTS PRO FORMA 3/31/96
BALANCE SHEET DATA FOR COMBINING BROADMOOR'S BALANCE SHEET DATA
AS PRESENTED 49.9% OWNERSHIP BROADMOOR COMBINED
------------------ ------------------------- ------------------
<S> <C> <C> <C>
Real estate before
accumulated
depreciation........... $356,269 $70,000 $426,269
Debt on real estate..... $ 63,297 $70,000 $133,297
</TABLE>
(/4/Does)not include the Company's pro rata share of the operations in the
entities accounted for under the equity method; such amounts are $3,142
and $16,511 for the pro forma three months ended March 31, 1996 and the
pro forma year ended December 31, 1995, respectively. EBITDA means
operating income before mortgage and other interest, income taxes,
depreciation and amortization. EBITDA does not represent cash generated
from operating activities in accordance with GAAP, is not to be considered
as an alternative to net income or any other GAAP measurement as a measure
of operating performance and is not necessarily indicative of cash
available to fund all cash needs. The Company has presented EBITDA herein
because the Company believes that it is one measure used by certain
investors to determine operating cash flow. EBITDA does not include the
amounts reflected in "equity in joint venture and subsidiary," nor does it
add back the depreciation, interest and taxes included therein.
(/5/Industry)analysts generally consider Funds from Operations an appropriate
measure of performance of an equity REIT. "Funds from Operations" as
defined by NAREIT means net income (computed in accordance with GAAP)
excluding gains (or losses) from debt restructuring and sales of property,
plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. The
Company believes that in order to facilitate a clear understanding of the
combined historical operating results of the Prentiss Group and the
Company, Funds from Operations should be examined in conjunction with net
income (loss) as presented in the audited combined financial statements
and information included elsewhere in this Prospectus. Funds from
Operations does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income as an indication of the Company's performance or to cash flows as a
measure of liquidity or ability to make distributions.
(/6/The)Property Data includes information on the Broadmoor Austin, Park West
and 3141 Fairview Park Drive Properties only for the pro forma periods and
the historical periods subsequent to the Prentiss Group's acquisition of
an ownership interest in the respective Properties.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Information" and the historical and pro forma financial statements
appearing elsewhere in this Prospectus. The following discussion is based
primarily on the Combined Financial Statements of the Predecessor Company for
the periods prior to the completion of the Offering and Formation
Transactions. The combined financial statements of the Predecessor Company
include (i) the results of operations from 47 Properties for the periods
presented, (ii) the results of operations of the 3141 Fairview Park Drive
Property for the portion of the periods after a Prentiss Group member acquired
the Property, (iii) a 49.9% equity interest in the Broadmoor Austin
Properties; (iv) a 15% equity interest in the Park West Property for the
portion of the periods in which the Prentiss Group owned a non-controlling
interest, (v) a 25% equity interest in the industrial building in Itasca,
Illinois and (vi) results of operations of the Prentiss Properties Service
Business conducted primarily by PPL in the periods presented.
Historical results set forth in the "Selected Financial Information," the
Combined Financial Statements of the Predecessor Company, and the Pro Forma
Financial Statements of the Company should not be taken as an indication of
future operations of the Company.
OVERVIEW
The Company operates commercial office and industrial properties throughout
the United States. The Company generally receives real estate operating
revenues from wholly-owned properties and from interests in real estate joint
ventures. The Company also receives service revenues from its development,
management, sale and leasing contracts for owned properties as well as for
real estate owned by unrelated third parties.
COMPARISON OF PRO FORMA THREE MONTHS ENDED MARCH 31, 1996 TO HISTORICAL THREE
MONTHS ENDED MARCH 31, 1996
For the three months ended March 31, 1996, pro forma rental income, property
expenses and depreciation and amortization were higher than the historical
amounts as a result of the Company's ownership in the pro forma period of
certain Properties acquired after March 31, 1996, the results of which
Properties are not included in the historical financial data. In addition, the
decrease in the pro forma period of fee income by $4,561,000, or 82.5%,
general office and administrative expenses by $951,000, or 63.6%, and
personnel costs by $3,036,000, or 85.1%, primarily results from the Company's
contribution of certain contracts to the Manager in the pro forma period, net
of additional expenses associated with being a public company. The $259,000,
or 26.7%, net increase in interest expense, in the pro forma period, is
attributable to the full quarter of interest expense recorded on the 3141
Fairview Park Drive property in the pro forma period and a partial quarter of
interest expense recorded in the historical amounts as a result of the
purchase of that property during the three months ended March 31, 1996, net of
a reduction of interest expense due to the repayment of certain mortgage
loans. The decrease in non-cash interest expense by $188,000, or 80.7%, in the
pro forma period results from the write-off of deferred financing costs
associated with mortgage debt repaid (including deferred financing costs
associated with the acquisition of 3141 Fairview Park Drive during the period
concurrent with the Offering), net of the amortization of deferred financing
costs incurred in connection with the terms of the Line of Credit.
COMPARISON OF PRO FORMA YEAR ENDED DECEMBER 31, 1995 TO HISTORICAL YEAR ENDED
DECEMBER 31, 1995
For the year ended December 31, 1995, pro forma rental income, property
expenses and depreciation and amortization were higher than the historical
amounts as a result of the Company's ownership in the pro forma period of
certain Properties acquired after December 31, 1995, the results of which
Properties are not included in the historical financial data. In addition, the
decrease in the pro forma period of fee income by $22,317,000, or 86.7%,
general office and administrative by $4,344,000, or 67.5%, and personnel costs
by $15,193,000, or 88.7%, results primarily from the Company's contribution of
certain contracts to the Manager in the pro forma period, net of additional
expenses associated with being a public company. The $1,129,000, or 29.8%,
increase
47
<PAGE>
in interest expense in the pro forma period is attributable to the debt
incurred in the purchase of properties subsequent to December 31, 1995. The
increase in non-cash interest expense by $80,000, or 80.8%, in the pro forma
period results from the write-off of deferred financing costs associated with
mortgage debt repaid concurrent with the Offering, net of the amortization of
deferred financing costs incurred in connection with the terms of the Line of
Credit.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1996 TO THE THREE MONTHS ENDED
MARCH 31, 1995
Total Revenues increased by $1,467,000, or 12.1%, to $13,552,000 in the
first three months of 1996 from $12,085,000 in the first three months of 1995
due to increases in rental revenues and fee and other income. Rental revenues
increased by $963,000, or 13.6%, to $8,026,000 from $7,063,000 as a result of
the addition of 3141 Fairview Park Drive, which increased rental revenues by
$313,000, and increased occupancy at various properties including 8521
Leesburg Pike, which increased rental revenues by $650,000. Fee and other
income increased by $504,000, or 10%, from $5,022,000 to $5,526,000, primarily
due to a $478,000 increase in sale fees, other fees and other income.
Total Expenses increased $649,000, or 6.0%, to $11,415,000 in the first
three months of 1996 from $10,766,000 in the same period of 1995. Operating
expenses increased by $313,000, or 4.3%, to $7,593,000 from $7,280,000
primarily as a result of $198,000 in additional operating expenses related to
the 3141 Fairview Park Drive acquisition and a general increase in operating
expenses of $213,000 due to higher occupancy, partially offset by a decrease
in shareholder compensation payments of $98,000. Real estate tax expense
increased $65,000, or 8.4%, to $839,000 from $774,000 due to the 3141 Fairview
Park Drive acquisition. Mortgage interest expense increased $229,000, or
23.5%, to $1,202,000 from $973,000 primarily as a result of the 3141 Fairview
Park Drive acquisition and related debt thereon. Depreciation and amortization
expense increased by $42,000, or 2.4%, to $1,781,000 in the first three months
of 1996 from $1,739,000 in the first three months of 1995, primarily due to
additional tenant improvements at 8521 Leesburg Pike and the acquisition of
3141 Fairview Park Drive.
Net income for the three months ended March 31, 1996 increased $808,000, or
60.2%, to $2,151,000 from $1,343,000 for the same period of 1995. The increase
in net income was the result of the increase in total revenues of $1,467,000,
offset by the increase in total expenses of $649,000 and a decrease in income
from equity investments of $10,000.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Total Revenues increased by $3,206,000, or 6.2%, to $55,164,000 for the year
ended December 31, 1995 from $51,958,000 for the same period in 1994. Rental
revenues increased $4,167,000, or 16.5%, to $29,423,000 from $25,256,000
primarily as a result of the Company's acquisition of industrial properties in
Baltimore in late 1994, 8521 Leesburg Pike in late 1994 and two additional
industrial properties in the Kansas City portfolio in May 1994. Fee and other
income decreased $961,000, or 3.6%, to $25,741,000 from $26,702,000, primarily
due to a decrease in development, management and leasing fees in the amount of
$5,923,000, offset by an increase in sale, other fees and other income of
$4,962,000.
Total Expenses increased by $733,000, or 1.6%, to $45,350,000 for the year
ended December 31, 1995 from $44,617,000 for the same period in 1994.
Operating expenses decreased by $1,906,000, or 5.7%, to $31,272,000 from
$33,178,000. The primary reason for this decrease was a decrease in the
Manager's operating costs of $2,781,000 (of which shareholder compensation
accounted for $1,131,000), partially offset by an increase in property
operating expenses of $875,000 primarily due to acquisitions during the
period. Real estate tax expense increased $339,000, or 12.6%, to $3,030,000
for the year ended December 31, 1995 from $2,691,000 for the same period 1994.
This increase was also primarily attributable to the acquisitions during the
period discussed above. Mortgage interest expense increased $691,000, or
21.7%, to $3,882,000 for the year ended December 31, 1995 from $3,191,000 for
the same period 1994. This increase was primarily the result of new financing
related to acquisitions during the period along with additional financing
obtained on the Dallas Industrial properties. Depreciation and amortization
expense increased $1,609,000, or 28.9%, to $7,166,000 for the year ended
48
<PAGE>
December 31, 1995 from $5,557,000 for the same period 1994. This increase was
primarily the result of the acquisitions during the period along with
additional depreciation related to new improvements to the property for the
period.
Gains on sale of property for the year ended December 31, 1995 was $0. Gains
on sale of property for the year ended December 31, 1994 was $1,718,000. This
gain was the result of the sale of an industrial building in Ontario,
California. The property was purchased in 1993.
Net income for the year ended December 31, 1995 increased by $753,000, or
8.3%, to $9,825,000 from $9,072,000 for the same period, 1994. As discussed
above, the increase in net income was the result of an increase in total
revenues of $3,206,000, offset by an increase in total expenses of $733,000, a
decrease in income from equity investments of $2,000 and a decrease in gains
on sale of property of $1,718,000.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993
Total Revenues increased by $13,937,000, or 36.7%, to $51,958,000 for the
year ended December 31, 1994 from $38,021,000 for the year ended December 31,
1993. Rental revenues increased by $10,844,000, or 75.2%, to $25,256,000 for
the year ended December 31, 1994 from $14,412,000 for the year ended December
31, 1993. The primary reason for this increase was acquisitions during the
period of the Walnut Glen Tower, 8521 Leesburg Pike, five industrial buildings
in Baltimore, Maryland and two additional industrial buildings in Kansas City,
Missouri. Fee and other income increased by $3,093,000, or 13.1%, to
$26,702,000 for the year ended December 31, 1994 from $23,609,000 for the year
ended December 31, 1993. The increase was primarily attributable to an
increase in development, management and leasing fees of $1,661,000 and an
increase in sale, other fees and other income of $1,432,000.
Total Expenses increased by $9,457,000, or 26.9%, to $44,617,000 for the
year ended December 31, 1994 from $35,160,000 for the year ended December 31,
1993. Operating expenses increased by $4,511,000, or 15.7%, to $33,178,000 for
the year ended December 31, 1994 from $28,667,000 for the year ended
December 31, 1993. The primary reason for this increase was the acquisitions
of the above-mentioned properties along with an increase of $1,528,000 in
operating expenses of the management company. The management company's
operating expense increase was comprised of an increase of $2,755,000 in
shareholder compensation and a decrease in other operating expenses of
$1,227,000. Real estate tax expense increased by $1,060,000, or 65%, to
$2,691,000 for the year ended December 31, 1994 from $1,631,000 for the year
ended December 31, 1993. This increase was attributable to the acquisitions
during the period. Mortgage interest expense increased by $1,747,000, or 121%,
to $3,191,000 for the year ended December 31, 1994 from $1,444,000 for the
year ended December 31, 1993. This increase was primarily the result of new
financing placed on the Milwaukee properties along with financing obtained
upon the purchase of Walnut Glen. Depreciation and amortization expense
increased by $2,139,000, or 62.6%, to $5,557,000 for the year ended December
31, 1994 from $3,418,000 for the year ended December 31, 1993. This increase
was primarily the result of the above discussed acquisitions during the period
along with additional depreciation related to new improvements made to the
properties during the period.
Gains on sale of property for the year ended December 31, 1994 was
$1,718,000. This gain was the result of the sale of an industrial building in
Ontario, California. The building was purchased in 1993. Gain on sale of
property for the year ended December 31, 1993 was $0.
Net income for the year ended December 31, 1994 increased by $6,215,000, or
218%, to $9,072,000 from $2,857,000 for the comparable year ended December 31,
1993. As discussed above the increase in net income was the result of an
increase in total revenues of $13,937,000, an increase in income from equity
investments of $17,000 and an increase in gain on sale of property of
$1,718,000, offset by an increase in total expenses of $9,457,000.
49
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Upon the closing of the Offering, the Company will have total outstanding
indebtedness including the Company's pro rata share of Joint Venture Debt of
approximately $133.3 million (the "Mortgage Debt"), which will be secured by 33
Properties. The Mortgage Debt will represent approximately 25.9% of the
Company's Total Market Capitalization at the closing of the Offering.
Approximately $50 million of the Mortgage Debt consists of two mortgage loans
that the Company is obtaining from an affiliate of Lehman in connection with
the Formation Transactions. The proceeds of these two mortgage loans will be
used to fund a portion of the Company's acquisition of interests in the
Properties. The remainder of the Mortgage Debt consists of prior indebtedness
of the Prentiss Group that is secured by certain of the Properties and is not
being fully repaid with the net proceeds of the Offering. The following table
sets forth certain information regarding the Mortgage Debt immediately after
the closing of the Offering.
REMAINING MORTGAGE DEBT
<TABLE>
<CAPTION>
PRINCIPAL INTEREST ANNUAL
PROPERTY(IES) AMOUNT RATE AMORTIZATION MATURITY PAYMENT
------------- ------------ -------------- ------------ ------------------ -----------
<S> <C> <C> <C> <C> <C>
All Industrial
Properties in Kansas
City, MO and Milwaukee,
WI..................... $ 40,000,000 8.00% None September 30, 2003 $ 3,200,000
3141 Fairview Park
Drive.................. 10,000,000 LIBOR+1.65%(1) None September 30, 1999 715,000
Walnut Glen............. 13,297,056 7.500% None January 31, 2001 997,279
Broadmoor Austin........ 70,000,000(/2/) 9.750% None April 1, 2001 6,825,000
------
------------ -----------
Total/Weighted Average.. $133,297,056 8.805% $11,737,279
</TABLE>
- --------
(/1/The)30 day LIBOR rate of 5.50% as of July 5, 1996, was used for calculation
of the weighted average rate in the table above.
(/2/The)Company, through the Operating Partnership, will own a 49.9% general
partnership interest in the entity that owns the Broadmoor Austin
Properties, which interest is accounted for under the equity method of
accounting. The amount shown reflects the Company's proportionate share of
the mortgage indebtedness secured by the Property.
If the Underwriters exercise all or a portion of their overallotment option,
the Company expects to use the additional proceeds to (i) repay the $10 million
mortgage loan secured by a lien upon the 3141 Fairview Park Drive Property, and
(ii) repay part of the $40 million mortgage loan secured by all of the
Company's Industrial Properties in Kansas City, Missouri, and Milwaukee,
Wisconsin. If the Underwriters exercise in full their overallotment to purchase
2,137,500 Common Shares and the Company applies the additional net proceeds of
$39.8 million to repay indebtedness as described above, the Company's combined
indebtedness plus its pro rata share of Joint Venture Debt would be $93.5
million or 19.7% of its Total Market Capitalization. If the Company repays all
or a part of the $10 million mortgage loan, the Company will have, under
certain circumstances, the option over the loan term (maturing September 2000)
to borrow an amount equal to or less than the difference between $10 million
and the then-current outstanding principal amount for the purpose of funding
acquisitions or developments.
The Company intends to obtain a commitment for the $100 million Line of
Credit, which will close contemporaneously with the closing of the Offering.
The Company believes that the Line of Credit is adequate for its needs
initially. The Company intends to use proceeds from the Line of Credit to fund
future acquisitions and development, including the acquisition of the Option
Properties, and redevelopment of properties owned by the Company. In the event
that the Company acquires all of the Option Properties, it will have $57.5
million of further borrowing capacity available under the Line of Credit for
future acquisitions or development. See "Properties--Option Properties."
Pursuant to the Debt Limitation, the Company's combined indebtedness plus its
pro rata share of Joint Venture Debt is limited so that at the time such debt
is incurred, it does not exceed 50% of the Company's Total Market
Capitalization. At the closing of the Offering, the Company will have
outstanding combined indebtedness of approximately $63.3 million or
approximately 14.2% of Total Market Capitalization (excluding its pro rata
50
<PAGE>
share of Joint Venture Debt) and, together with its pro rata share of Joint
Venture Debt, will have total outstanding indebtedness of approximately $133.3
million, or approximately 25.9% of Total Market Capitalization. As of the
Closing Date, the Company will have the capacity to borrow up to an additional
approximately $248.2 million under the Debt Limitation. The amount of
indebtedness that the Company may incur, and the policies with respect
thereto, are not limited by the Company's Declaration of Trust and By-laws,
and are solely within the discretion of the Company's Board of Trustees. See
"Risk Factors--Changes in Policies Without Shareholder Approval; No Limitation
on Debt."
The Company's operating properties require periodic investments of capital
for tenant-related capital expenditures and for general capital improvements
projects. For the years ended December 31, 1993, 1994 and 1995, the Company's
recurring non-incremental capital investments in its properties have been
$3,335,000, $2,732,000 and $4,993,000, respectively. These costs for each of
the three years equated to $8.03, $4.66 and $6.16 per improved square foot for
the office properties, respectively, and $1.85, $1.02 and $1.12 per improved
square foot for the industrial properties, respectively. The Company has
estimated its annual recurring capital costs to be $4,350,000 or $6.36 per
square foot of improved office space and $1.88 per square foot of improved
industrial space. The Company believes its estimate of capital expenditures is
conservative given the historical results discussed above along with its
detailed forecast of these costs for the prospective twelve month period. In
addition, the Company will set aside approximately $7.1 million of the net
Offering proceeds for certain estimated non-recurring capital expenditures and
leasing costs, including tenant improvements and leasing commissions for
currently vacant space in the Walnut Glen Office Property, re-leasings costs
associated with the major leases of the Park West and Walnut Glen Office
Properties, which expire in October 1999 and July 1998, respectively, and the
21,000 square foot expansion of one of the Milwaukee Industrial Properties.
Unused portions of the funds will be applied to reduce outstanding
indebtedness.
Following the closing of the Offering, the Company will have approximately
$2.3 million in working capital. The Company has considered its short-term
liquidity needs and the adequacy of adjusted pro forma cash flows and other
expected liquidity sources to meet these needs. The Company believes that its
principal short-term liquidity needs are to fund normal recurring expenses,
debt service requirements and the minimum distribution required to maintain
the Company's REIT qualification under the Code. The Company anticipates that
these needs will be fully funded from the Company's initial working capital
and the cash flows provided by operating activities and, when necessary to
fund shortfalls resulting from the timing of collections of accounts
receivable in the ordinary course of business, the Line of Credit.
The Company expects to meet its long-term liquidity requirements for the
funding of activities such as development, property acquisitions, scheduled
debt maturities, major renovations, expansions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness and the
issuance of additional equity securities from the Company and the Operating
Partnership. The Company also intends to use proceeds from the Line of Credit
to fund property acquisitions, development, redevelopment, expansions and
capital improvements on an interim basis.
The Company expects to make distributions to its shareholders primarily
based on its distributions from the Operating Partnership. The Operating
Partnership's income will be derived primarily from lease revenues from the
Properties, to a limited extent, from fees generated by its office and
industrial real estate management, leasing development and construction
business and from the Manager. The Manager's sole source of income will be
fees generated by its office and industrial real estate management, leasing,
development and construction business.
INFLATION
Most of the leases on the Properties require tenants to pay increases in
operating expenses, including common area charges and real estate taxes,
thereby reducing the impact on the Company of the adverse effects of
inflation. Leases also vary in term from one to 15 years, further reducing the
impact on the Company of the adverse effects of inflation.
51
<PAGE>
PROPERTIES
GENERAL
Upon the completion of the Offering, the Company will own or have an
interest in a diversified portfolio of 85 Properties comprising approximately
8.5 million net rentable square feet. The Properties are located in 10 major
markets throughout the U.S. The Properties consist of the 26 Office Properties
comprising approximately 3.4 million net rentable square feet and the 59
Industrial Properties comprising 5.0 million net rentable square feet. As of
March 31, 1996, the Properties were approximately 94% leased to 378 tenants.
The Company also owns the six Development Parcels comprising approximately
30.4 acres that can support approximately 1.4 million square feet of net
rentable space. Three of the Development Parcels are zoned for office use and
three are zoned for industrial use. In addition, the Company has options to
acquire an office building containing approximately 1.0 million net rentable
square feet, four industrial buildings containing approximately 268,065 net
rentable square feet and five development parcels comprising an aggregate of
approximately 60.0 acres that can support approximately 1.2 million net
rentable square feet of development. See "--Option Properties," "--Option
Parcels" and "Business Objectives--Growth Strategies--Acquisitions" and "--
Development." The Company also owns a 25% interest in a general partnership
that owns an industrial building containing approximately 71,000 net rentable
square feet.
52
<PAGE>
Set forth below is a summary of the Company's Properties. For additional
information regarding the Office Properties see "--Office Properties" and for
additional information regarding the Industrial Properties, see "--Industrial
Properties."
PROPERTY DATA
<TABLE>
<CAPTION>
BASE RENT
PER SQUARE
PERCENT TOTAL BASE FOOT FOR
NET LEASED RENT FOR TWELVE
YEAR(S) NUMBER RENTABLE AS OF TWELVE MONTHS PERCENT MONTHS
BUILT/ OF SQUARE MARCH 31, ENDED OF TOTAL ENDED
PROPERTY NAME(/1/) MARKET RENOVATED BUILDINGS FEET 1996 12/31/95(/1/) PORTFOLIO 12/31/95
------------------ ------ --------- --------- -------- --------- ------------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
Cumberland Office
Park................ Atlanta, GA 1972-1980 9 530,228 99% $ 6,141 11% $11.70
One Northwestern
Plaza(/2/).......... Southfield, MI 1989 1 241,751 92 4,772 8 21.12
Broadmoor
Austin(/3/)......... Austin, TX 1991 7 1,112,236 100 8,824 16 15.87
Park West............ Dallas, TX 1989 1 344,216 98 5,468 10 16.22
5307 East
Mockingbird......... Dallas, TX 1979/1993 1 118,316 76 679 1 7.80
Walnut Glen Tower.... Dallas, TX 1985 1 464,289 83 7,254 13 17.74
Cottonwood Office
Center.............. Dallas, TX 1986 3 164,111 92 1,922 3 12.32
Plaza on Bachman
Creek............... Dallas, TX 1986 1 125,903 87 1,155 2 9.79
3141 Fairview Pk.
Drive............... Northern Virginia 1988 1 192,108 90 2,780 5 16.29
8521 Leesburg Pike... Northern Virginia 1984/1993 1 145,257 92 1,940 3 13.86
--- --------- --- ------- --- ------
Subtotal/weighted average for Office
Properties(/4/).................................. 26 3,438,415 94% $40,935 72% $14.86
=== ========= === ======= === ======
INDUSTRIAL PROPERTIES:
Pacific Gateway
Center.............. Los Angeles, CA 1972-1984 18 1,252,708 88% $ 4,855 8% $ 4.25
8869 Greenwood....... Baltimore, MD 1986-1987 1 89,582 74 296 1 3.29
1329 Western Ave..... Baltimore, MD 1988 1 185,600 80 713 1 4.79
Deep Run 1&2......... Baltimore, MD 1988 2 169,112 100 629 1 3.72
4611 Mercedes Drive.. Baltimore, MD 1990 1 178,133 100 711 1 3.99
9050 Junction........ Baltimore, MD 1989 1 108,350 100 395 1 3.66
Northland Park....... Kansas City, MO 1975-1980 4 925,007 100 2,312 4 2.50
North Topping
Street.............. Kansas City, MO 1975-1980 1 119,118 100 276 * 2.32
Airworld Drive....... Kansas City, MO 1975-1980 1 200,000 100(/5/) 358 1 1.79
107th Terrace........ Kansas City, MO 1975-1980 1 96,700 100 244 * 2.52
Nicholson III........ Dallas, TX 1981 3 155,712 73 468 1 3.90
13425 Branchview..... Dallas, TX 1970 1 121,250 100 274 * 2.26
1002 Avenue T........ Dallas, TX 1981 1 100,000 100 233 * 2.33
1625 Vantage Drive... Dallas, TX 1984 1 50,000 100 193 * 3.86
West Loop Business
Park................ Houston, TX 1986 5 75,231 87 508 1 6.96
Airport Properties... Milwaukee, WI 1970-1980 12 572,953 97 1,906 3 3.48
Oak Creek
Properties.......... Milwaukee, WI 1970-1979 2 232,000 100 673 1 2.90
North West
Properties.......... Milwaukee, WI 1973-1987 3 413,371 83 1,258 2 3.04
--- --------- --- ------- --- ------
Subtotal/weighted average for Industrial
Properties....................................... 59 5,044,827 93% $16,302 28% $ 3.31
=== ========= === ======= === ======
Consolidated total/ weighted average for all
Properties 100%.................................. 85 8,483,242 94% $57,237 100% $11.57
=== ========= === ======= === ======
</TABLE>
- --------
* Less than one percent
(/1/The)Company also will own a minority interest in a partnership that owns a
70,535 net rentable square foot building in Itasca, Illinois.
(/2/The)Operating Partnership owns a 100% leasehold interest in this Property.
(/3/The)Operating Partnership owns a 49.9% interest in the general partnership
that owns a 100% leasehold interest in this Property. The Company accounts
for its interest in this partnership under the equity method. The net
rentable square feet for this Property reflects the entire Property and
the Base Rent data for the property reflects the Company's receipt of
49.9% of such rent.
(/4/"Base)Rent" means the fixed base rental amount paid by a tenant under the
terms of the related lease agreement, which amount generally does not
include payments on account of real estate taxes, operating expense
escalations and utility charges.
(/5/One)Tenant leased the entire space at this Property and this Tenant's
lease expired at the close of business March 31, 1996. The space is
currently vacant.
53
<PAGE>
LOCATION OF PROPERTIES; MARKET OVERVIEW
The Properties are located in 10 major markets and in every region of the
U.S. The following tables indicate, by the net rentable square feet and 1995
Base Rent, respectively, the Properties by location and type of property at
December 31, 1995:
NET RENTABLE SQUARE FEET OF PROPERTIES
BY LOCATION AND TYPE OF PROPERTY
<TABLE>
<CAPTION>
NUMBER OF OFFICE INDUSTRIAL PERCENT OF
LOCATION PROPERTIES PROPERTIES PROPERTIES TOTAL TOTAL
-------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Los Angeles, CA......... 18 -- 1,252,708 1,252,708 15%
Atlanta, GA............. 9 530,228 -- 530,228 6
Baltimore, MD........... 6 -- 730,777 730,777 9
Southfield, MI.......... 1 241,751 -- 241,751 3
Kansas City, MO......... 7 -- 1,340,825 1,340,825 16
Austin, TX.............. 7 1,112,236 -- 1,112,236 13
Dallas, TX.............. 13 1,216,835 426,962 1,643,797 19
Houston, TX............. 5 -- 75,231 75,231 1
Northern Virginia....... 2 337,365 -- 337,365 4
Milwaukee, WI........... 17 -- 1,218,324 1,218,324 14
--- --------- --------- --------- ---
Total................... 85 3,438,415 5,044,827 8,483,242 100%
=== ========= ========= ========= ===
Percent of Total........ 41% 59% 100%
========= ========= =========
Number of Properties.... 26 59 85
========= ========= =========
</TABLE>
The following table sets forth the 1995 annual Base Rent of the Properties by
location and type of property:
1995 BASE RENT OF PROPERTIES
BY LOCATION AND TYPE OF PROPERTY
<TABLE>
<CAPTION>
NUMBER OF OFFICE INDUSTRIAL PERCENT OF
LOCATION PROPERTIES PROPERTIES PROPERTIES TOTAL TOTAL
-------- ---------- ---------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Los Angeles, CA........... 18 $ -- $ 4,855 $ 4,855 8%
Atlanta, GA............... 9 6,141 -- 6,141 11
Baltimore, MD............. 6 -- 2,744 2,744 5
Southfield, MI............ 1 4,772 -- 4,772 8
Kansas City, MO........... 7 -- 3,190 3,190 6
Austin, TX(/1/)........... 7 8,824 -- 8,824 15
Dallas, TX................ 13 16,478 1,168 17,646 31
Houston, TX............... 5 -- 508 508 1
Northern Virginia......... 2 4,720 -- 4,720 8
Milwaukee, WI............. 17 -- 3,837 3,837 7
--- ------- ------- ------- ---
Total..................... 85 $40,935 $16,302 $57,237 100%
=== ======= ======= ======= ===
Percent of Total.......... 72% 28% 100%
======= ======= =======
Number of Properties...... 26 59 85
======= ======= =======
</TABLE>
- --------
(/1/) Base Rent calculation for the Broadmoor Austin Properties reflects the
Company's 49.9% interest in the partnership that owns a leasehold interest
in the Properties.
54
<PAGE>
ECONOMIC SUMMARY OF COMPANY'S MAJOR MARKETS
<TABLE>
<CAPTION>
TOTAL TOTAL
SIZE OF PMSA POPULATION JOB UNEMPLOY- OFFICE INDUSTRIAL
REGION AND MARKET POPULATION(/1/) GROWTH(/2/) GROWTH(/3/) MENT RATE(/4/) STOCK (SF) STOCK (SF)
----------------- --------------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
WESTERN REGION:
Phoenix, AZ............. 2,563,582 14.5% 4.6% 3.2% 43,400,000 70,600,000
Los Angeles, CA......... 9,138,798 4.8 1.3 5.8 150,000,000 760,000,000
San Francisco, CA....... 4,668,023(/5/) 5.2 2.4 4.7 93,266,000 394,000,000
SOUTHWEST REGION:
Austin, TX.............. 999,936 18.1 6.0 3.5 19,969,000 17,010,499
Dallas/Ft. Worth, TX.... 4,449,875(/6/) 10.2 3.4 4.6 166,413,465 314,445,400
Houston, TX............. 3,710,844 11.7 2.0 5.7 195,000,000 198,000,000
MIDWEST REGION:
Chicago, IL............. 7,724,770 4.2 2.2 4.8 181,574,456 830,000,000
Detroit, MI............. 4,320,203 1.3 3.0 4.2 56,108,047 500,000,000
Kansas City, MO......... 1,663,453 5.1 2.0 3.0 52,100,000 166,755,000
Milwaukee, WI........... 1,457,939 1.8 5.0 2.7 12,915,328 191,244,500
MID-ATLANTIC REGION:
Washington, DC
(including Northern
Virginia).............. 4,509,932 6.8 0.6 3.6 304,100,000 26,200,000
Baltimore, MD........... 2,469,985 3.7 0.2 5.0 51,262,737 101,151,428
Northern New Jersey..... 6,255,741 1.6 0.8 6.7 133,000,000 364,000,000
SOUTHEAST REGION:
Orlando, FL............. 1,390,574 13.5 3.3 4.8 17,750,000 66,000,000
Atlanta, GA............. 3,431,983 16.0 4.4 3.7 89,100,000 273,000,000
National Average........ N/A 2.6 5.4 N/A
</TABLE>
- --------
Source: Prepared by the Company using data from Valuation International,
Viewpoint.96, Cushman & Wakefield, Inc. and U.S. Government Statistics.
(/1/Size)of population in the primary metropolitan statistical area ("PMSA")
as of July 1, 1995
(/2/Average)rate of growth 1990-1995.
(/3/Average)for three years ended May 31, 1996
(/4/As)of May 31, 1996
(/5/Includes)San Francisco PMSA (1,645,815), San Jose PMSA (1,565,253) and
Sacramento PMSA (1,456,955). The job growth unemployment and population
growth data are weighted averages for the combined area.
(/6/Includes)Dallas PMSA (2,957,910) and Fort Worth PMSA (1,491,965).
Los Angeles
Los Angeles is the second largest metropolitan area in the U.S. with a
population of 9.1 million as of July 1, 1995. The area had an average
population growth rate of 4.8% from 1990 to 1995. The average annual job
growth rate for the three years ended May 31, 1996 was 1.3%. The unemployment
rate as of May 31, 1996 was 5.8%. Major employers in the area are Hughes
Aircraft (21,000 employees), Kaiser Permanente (19,500 employees), Northrop
Grumman (18,500 employees) and McDonnell-Douglas (18,400 employees).
The Company owns 18 Industrial Properties in Los Angeles with more than 1.2
million net rentable square feet, representing approximately 25% of the
Company's total industrial square footage. The properties are located in the
Torrance submarket of the South Bay Industrial Sector. The Company also
manages 28 office properties and 85 industrial properties in the Los Angeles
market.
The Los Angeles industrial market is one of the largest in the U.S.
consisting of approximately 760,000,000 net rentable square feet of industrial
space. The overall vacancy rate for the market was approximately 8% at March
31, 1996. The South Bay Industrial Sector contains approximately 194,000,000
net rentable square feet of industrial space and had a vacancy rate of
approximately 10% at March 31, 1996. The Torrance submarket of the South Bay
Industrial Sector contains approximately 26 million net rentable square feet
of industrial space. This submarket has excellent access to the San Diego
Freeway, the Harbor Freeway and the Artesia Freeway all of which are located
within one mile of the Company's Properties. Torrance also has convenient
access to Los
55
<PAGE>
Angeles International Airport and the Ports of Long Beach and Los Angeles. The
South Bay area has benefitted from the growth in international trade through
area ports in Los Angeles and Long Beach, and the availability of large blocks
of high quality space. The Los Angeles Customs District now handles more cargo
than any other district in the U.S. Conditions are expected to continue to
improve as the Alameda Corridor project progresses. This project is an 18-mile
fixed route between the Ports of Los Angeles and Long Beach, linking rail and
truck traffic to area warehouses, rail yards and factories. The South Bay
Industrial Sector continues to recover from the federal government's cutbacks
in defense spending. In 1995, the market absorbed 11 million square feet of
industrial space and the vacancy rate declined from 12.8% in 1994 to 9.8% at
March 31, 1996. The overall economic activity in this sector was stimulated by
an $18 billion defense contract awarded to Long Beach's McDonnell-Douglas in
1995.
[Insert Chart: LA Industrial Property Supply/Demand1991-1995]
[Insert Chart: LA Industrial Property
Vacancy/Rent 1991-6/30/96]
Austin
The metropolitan area of Austin, the capital of Texas, has a population of
approximately 1.0 million as of July 1, 1995. Between 1990 and 1995, the Austin
metropolitan area's population increased at an average rate of 18.1%. According
to statistics compiled by the U.S. Government, Bureau of Labor Statistics,
Austin experienced a 33% growth in jobs from December 1990 to December 1995 as
compared to the National Average of 7.6% for the same period. The average
annual job growth rate for the three years ending May 31, 1996 was 6.0%. The
unemployment rate as of May 31, 1996 was 3.5%. The two largest public sector
employers in the area are the State of Texas and the University of Texas-
Austin. The University of Texas-Austin, the third-largest public university in
the country with nearly 48,000 students enrolled in the 1995-96 school year,
employs approximately 20,000 people. The largest private sector employers are
Motorola (7,500 employees), IBM (6,800 employees), and Dell Computers (4,500
employees). Austin is home to approximately 825 high-tech firms employing
nearly 85,000 people. Motorola and Advanced Micro Devices recently opened $1
billion facilities in Austin and Samsung Electronics has announced its plans to
build a $1.3 billion semiconductor plant, which is expected to employ
approximately 1,600 people.
The Company owns seven Office Properties in the Austin which contain
approximately 1.1 million aggregate net rentable square feet. The Company's
Austin properties are located in the Northwest submarket of Austin. The Company
also manages one office property in the Austin market. Austin's suburban office
sector is one of the tightest in the U.S. with five of the six non-CBD office
submarkets having occupancies of at least 90% as of year end 1995. The
Northwest submarket is Austin's dominant non-CBD office submarket with an
inventory totaling almost 5.5 million net rentable square feet. The Northwest
submarket is the highest rent submarket in metropolitan Austin, with a 4%
vacancy rate at the end of 1995.
[Insert Chart: Austin Office Market Supply/Demand1991-95]
[Insert Chart: Austin Office MarketVacancy/Rent
1991-6/30/96]
Dallas/Fort Worth
Dallas/Fort Worth is the nation's eighth-largest consolidated metropolitan
area with a total population of 4.4 million as of July 1, 1995. The area had an
average population growth rate of 10.2% from 1990 to 1995. The average annual
job growth rate for the three years ended May 31, 1996 was 3.4. The
unemployment rate as of May 31, 1996 was 4.6%. Eight cities in the Dallas area
have over 100,000 residents. The unemployment rate was 4.6% at May 31, 1996.
The major employers in the metropolitan area are AMR Corporation, the parent
company of American Airlines (29,000 employees), Texas Instruments (22,500
employees) and Lockheed Martin (12,500 employees). Other large private sector
employers include Kroger and Electronic Data Systems (EDS), each of which
employs over 10,000 people.
56
<PAGE>
Dallas continues to be a leading choice for corporate relocations. In the
first quarter of 1996, Quaker State Corporation moved its corporate
headquarters from Oil City, Pennsylvania to Las Colinas in Irving, leasing
125,000 net rentable square feet of space vacated by Exxon, which moved to a
new world headquarters facility also in Las Colinas. Pizza Hut moved its
national headquarters to Dallas from Wichita, Kansas, filling one of the last
available office buildings along Dallas' North Tollway. Netcom On-line, a
California based Internet service provider, opened a Dallas office in one of
the Park West buildings originally built by the Prentiss Group and managed by
the Company.
Five of the Company's Office Properties, representing 35% of its total
office square footage, and four of the Company's Industrial Properties,
representing 8% of its industrial square footage, are located in the
Dallas/Fort Worth metropolitan area. The Company also manages 16 office
properties and 17 industrial properties in this market. The Dallas area real
estate market has improved dramatically over the past three years, as have the
submarkets in which the Company's Properties are located. Dallas is the
location of the Company's corporate headquarters and Southwest region office.
DALLAS SUBMARKETS
North Central Expressway. The Company's Walnut Glen and 5307 Mockingbird
Office Properties are located in the North Central Expressway submarket, which
extends from downtown Dallas north to the LBJ Freeway (Interstate 635). This
submarket contains 7.4 million net rentable square feet of office space and
had a vacancy rate of 18% as of March 31, 1996, down significantly from a peak
of 38% at year-end 1991. The North Central submarket is located in close
proximity to the prime residential areas of Dallas and offers numerous
amenities, including restaurants, shopping areas and hotels.
Central Expressway (I-75), one of the principal north-south arteries serving
Dallas and the northern suburbs, is currently undergoing a $500 million
improvement project which commenced in the mid-1980s. The completion of the
initial phases of this development project, combined with the tight vacancy
conditions of less than 10% in neighboring submarkets, have contributed to the
improving occupancy and rental rate trends that the North Central submarket
has experienced in recent years. The Company expects that these trends will
continue as additional phases of the improvement project are completed.
[Insert Charts: Supply/Demand 1991-1995 and Vacancy Rent 1991-6/30/95]
West LBJ Freeway. The Company's Park West Property is located in the Park
West development in the heart of the West LBJ submarket, which is located
along the LBJ Freeway within one mile of Interstate 35. This submarket
provides convenient access to Dallas-Fort Worth International Airport ("DFW
Airport") via the LBJ Freeway and to downtown Dallas and Love Field via I-35.
This submarket contains 2.6 million square feet of office space.
[Insert Chart: West LBJ Freeway Supply/Demand 1991-95]
[Insert Chart: West LBJ Freeway
Vacancy/Rent 1991-
6/30/96]
Las Colinas. Las Colinas is a 12,000 acre master-planned office, retail,
hotel and residential community located in Irving, Texas. Las Colinas is
approximately 10 minutes from DFW Airport and approximately 15 and 25 minutes,
respectively, from downtown Dallas and Fort Worth. Las Colinas has its own
CBD, consisting of a number of high-rise office buildings around Lake Carolyn,
known as the Las Colinas Urban Center. The Company's Cottonwood Office Center
Properties are located in the North Irving Subsection on the western border of
the office development of Las Colinas. This submarket contains 4.9 million net
rentable square feet of multi-tenant office space and had a vacancy rate of
6.25% as of March 31, 1996.
[Insert Chart: North Irving Supply/Demand 1991-95]
[Insert Chart: North Irving
Vacancy/Rent 1991-
6/30/96]
Valwood Industrial Market. The Valwood industrial market (which includes the
Nicholson III and the 13425 Branchview Industrial Properties) encompasses an
area approximately two and one half miles to the west
57
<PAGE>
of the intersection of the LBJ and Stemmons Freeways. The Valwood industrial
market consists of approximately 25 million net rentable square feet of
industrial space and had a 9.5% vacancy rate as of March 31, 1996. The Valwood
industrial market appeals to national firms seeking a central location in
Dallas' traditional industrial corridor, with functional buildings and a
plentiful labor supply. Among the firms with a large presence in the Valwood
Industrial District are Minyards, Boise Cascade, Motorola, Duracell, Stanley
Works and Toys R Us.
The area is convenient to the Dallas CBD, North Dallas, DFW Airport and the
Mid-Cities (Arlington and Grand Prairie). Continued migration of Dallas'
suburban population to the north should serve to establish Valwood as the
economic industrial center of the Metroplex.
[Insert Chart: Valwood Submarket Supply/Demand 1991-95]
[Insert Chart: Valwood Submarket
Vacancy/Rent 1991-
6/30/96]
Carrollton/Farmers Branch Industrial Market. The Carrollton/Farmers Branch
industrial market straddles the cities of Farmers Branch and Carrollton. The
Company's 1625 Vantage Drive Industrial Property is located in this submarket.
This submarket extends approximately three miles east from the intersection of
the LBJ Freeway and Stemmons Freeway to the North Dallas Tollway.
The Carrollton/Farmers Branch industrial market is home to numerous national
and regional companies including Whirlpool, Chrysler, CompUSA, Neiman Marcus
and Lennox. These companies are attracted to this submarket because of its
location, access to the local customer base and the ability to distribute
regionally and nationally via the freeway network and rail service. This
submarket contains approximately 25.2 million net rentable square feet of
industrial space with a vacancy rate of 5.1% at March 31, 1996.
[Insert Chart: Carrollton/Farmers Branch Supply/Demand 1991-95]
[Insert Chart: Carrollton/Farmers
Branch Vacancy/Rent
1991-6/30/96]
Great Southwest/CentrePort Industrial Market. The Great Southwest/CentrePort
industrial market contains approximately 41.3 million net rentable square feet
of industrial space and had a vacancy rate of 3.4% at March 31, 1996. The
submarket is further divided into the North and South Great Southwest
Industrial Districts.
The Company's 1002 Avenue T Industrial Property is located in the north
sector of this submarket which is between State Highway 183 and I-30. This
submarket is one of the largest industrial submarkets in the Dallas area and
appeals to firms seeking a location in the heart of the Dallas/Fort Worth area
with a plentiful labor supply.
[Insert Chart: Great Southwest Supply/Demand 1991-95]
[Insert Chart: Great Southwest
Vacancy/Rent 1991-
6/30/96]
Detroit
Detroit is the sixth largest metropolitan area in the U.S. with a population
of 4.3 million as of July 1, 1995. The area had an average population growth
rate of 1.3% from 1990 to 1995. The average annual job growth rate for the
three years ended May 31, 1996 was 3.0%. The unemployment rate was 4.2% as of
May 31, 1996. The Big Three automakers remain the largest local private sector
employers. Within the six-county metropolitan region, Ford employs 79,000
workers, General Motors 68,000 workers, and Chrysler 39,000 workers. Other
large private sector employers include Electronic Data Systems (14,000
employees), Detroit Medical Center (12,900 employees) and Henry Ford Health
System (7,400 employees).
The Company owns one Property in Detroit, a 241,751 square foot Class A
Office in the Southfield submarket. Southfield is the largest office market in
Michigan with an inventory of approximately 12.6 million net rentable square
feet of Class A and B office space. Vacancy rates in suburban Detroit's office
markets declined from 13.5% at June 30, 1995 to 7.4% as of June 30, 1996.
58
<PAGE>
[Insert Chart: Detroit Market Supply/Demand 1991-95]
[Insert Chart: Detroit Market
Vacancy/Rent 1991-6/30/96]
Kansas City
Kansas City is the 24th largest metropolitan area in the country with a
population of approximately 1.7 million as of July 1, 1995. The Kansas City
market has exhibited steady economic and demographic trends, which makes it an
attractive market for investment despite its relatively small size. The
average population growth rate from 1990 to 1995 was 5.1%. The average annual
job growth rate for the three years ended May 31, 1996 was 2.0%. The
unemployment rate as of May 31, 1996 was 3.0%. Major employers in the Kansas
City area include Sprint (9,000 employees), Health Midwest (8,000 employees)
and Hallmark Cards (7,000 employees).
The Company owns seven Industrial Properties with an aggregate of
approximately 1.3 million net rentable square feet in the Kansas City
metropolitan area. The Kansas City metropolitan area contains approximately
167 million net rentable square feet of industrial properties. The vacancy
rate for Kansas City industrial properties was 5% at June 30, 1996. The
Company's Kansas City Industrial Properties are located in three submarkets,
North Kansas City, Executive Park and Airport Industrial.
North Kansas City is an independent municipality that has access to most
major thoroughfares in Kansas City. This submarket has over 19 million net
rentable square feet of industrial space with a 9% vacancy rate as of March
31, 1996. Among the incentives that draw companies to the North Kansas City
submarket are the low income taxes, lack of inventory property tax and the
lowest property tax in the Kansas City metropolitan area.
The Executive Park submarket is an industrial area four miles northeast of
the CBD. Executive Park attracts companies looking for newer buildings and
Missouri's low-cost base. Executive Park contains approximately 15.5 million
net rentable square feet of industrial space and had a 9% vacancy rate as of
March 31, 1996.
The Airport Industrial submarket is in the northern industrial area of
Kansas City. The area contains approximately 1.9 million net rentable square
feet with a 21% vacancy rate. The vacancy rate increased dramatically in the
first quarter of 1996 because of Sony Corporation's relocation out of the
Company's 200,000 net rentable square foot building in the Airworld Industrial
Park ("Airworld"). Airworld is the centerpiece of this submarket, holding 70%
of the industrial base. Its attractions include proximity to the airport, good
freeway access, available labor supply, lower occupancy costs and high-quality
telecommunications and electrical infrastructure.
[Insert Chart: Kansas City Market Supply/Demand 1991-95]
[Insert Chart: Kansas City Market
Vacancy/Rent 1991-6/30/96]
Milwaukee
Milwaukee is the 25th largest metropolitan area in the United States with a
population of 1.5 million as of July 1, 1995. The area had an average
population growth rate of 1.8% from 1990 to 1995. The average annual job
growth rate for the three years ended May 31, 1996 was 5.0%. The unemployment
rate was 2.7% as of May 31, 1996. Milwaukee's unemployment rate has remained
lower than the national average for the past nine years due largely to the
stability of the industrial base which employs 22% of Milwaukee's workforce.
Milwaukee ranks number one nationally in the manufacturing of industrial
equipment such as industrial controls, mining machinery, hoists, drives and
gears. Major employers in the Milwaukee area include Aurora Health Care, Inc.
(9,407 employees), Covenant Healthcare System, Inc. (8,758 employees), Briggs
and Stratton Corp. (7,000 employees) and Ameritech (8,600 employees).
The Company owns 17 Industrial Properties in the Milwaukee area with an
aggregate of approximately 1.2 million net rentable square feet. The four-
county Milwaukee metropolitan area contains a total industrial inventory of
over 5,000 buildings comprising approximately 200 million net rentable square
feet. The 1996 occupancy rate is 97%, up from last year's rate of 94%.
Milwaukee's largest concentration of industrial space (130.4 million net
rentable square feet or 69% of the total market) is in Milwaukee County which
includes the
59
<PAGE>
Airport/Oak Creek and Northwest Milwaukee submarkets. The Milwaukee County
submarkets have benefitted from the increase in air freight activity at General
Mitchell International Airport over the last 10 to 15 years.
The Airport/Oak Creek submarket has approximately 2.9 million net rentable
square feet with a vacancy rate of 2.9%. Twelve of the Company's Properties in
the Airport/Oak Creek submarket are adjacent to General Mitchell International
Airport. Four of the buildings are serviced by the 500 Line and Chicago
Northwestern railroads. Access is provided by IH-43, IH-94 and South Howell
Street.
At March 31, 1996, the Northwest Milwaukee submarket has more than 1.9
million net rentable square feet of industrial space with a vacancy rate of
2.4%. The remaining three Properties are in the northwest Milwaukee submarket.
Access to the industrial park in which these Properties are located is provided
by IH-894 and State Highway 18.
[Insert Chart: Milwaukee Industrial Market Supply/Demand 1991-95]
[Insert Chart: Milwaukee Industrial
Market Vacancy/Rent 1991-6/30/96]
Washington, D.C. (including Northern Virginia)
The population of the Washington, D.C. metropolitan area, which includes
Northern Virginia was 4.5 million as of July 31, 1995. The Washington, D.C.
metropolitan area had an average population growth rate of 6.8% from 1990 to
1995. The average annual job growth rate for the three years ended May 31, 1996
was 0.6%. The unemployment rate was 3.6% as of May 31, 1996.
The Company owns two Office Properties in Northern Virginia. Northern
Virginia is the largest office market in the Washington, D.C. metropolitan
area, with 104 million net rentable square feet of space, nearly two-thirds of
which was built in the past ten years. The vacancy rate in this market has
improved from 13 percent in 1993 to 8% as of March 31, 1996. The decline in the
vacancy rate is a result of the attraction that Northern Virginia holds for
government agencies, expanding high tech and communication firms, and firms and
associations looking to leave the District of Columbia for less expensive
office space. Outside of the public sector, the largest employers in Northern
Virginia include Giant Food (19,000 employees), Marriott Corporation (11,000
employees), Inova Health System (10,000 employees), Walter Reed Army Medical
Center (8,800 employees), Medlantic Healthcare Group (8,300 employees), MCI
(5,300 employees) and Washington Hospital Center (5,200 employees).
The Company's Properties, 3141 Fairview Park and 8521 Leesburg, are located
in Fairfax County, which contains 63 million net rentable square feet
representing over 60% of the office inventory in Northern Virginia. Fairfax
County is one of the prime growth centers in the Washington, D.C. metropolitan
area. Located west of Washington, D.C., linked by a sophisticated
transportation system and served by a highly educated labor force, Fairfax
County has numerous characteristics that have attracted many corporate users of
office space.
8521 Leesburg and 3141 Fairview are located more specifically in the Tyson's
Corner and Merrifield submarkets, respectively, of Fairfax County. The Tyson's
Corner office market has grown significantly over the past 20 years and is
currently one of the county's largest office markets with more than 19 million
square feet of existing space. The vacancy rate at March 31, 1996 was 8.5%.
Tyson's Corner has a number of amenities. A wide range of hotels have opened
to serve business travelers and provide conference facilities. The expansion of
the Tyson's Shopping Center, the opening of the Galleria regional shopping
center and the high end shops at Fairfax Square, including Tiffany's, Hermes
and Gucci, have established Tyson's Corner as a premier retail location in
Northern Virginia. In addition, Tyson's Corner has many multifamily projects
which are located near its business districts.
The Merrifield submarket is centered around the intersection of the Capital
Beltway and U.S. Route 50. This market has experienced strong development since
1980 and has an inventory of 4.1 million net rentable
60
<PAGE>
square feet of office space as of March 31, 1996. Fairview Park is situated in
the heart of the Merrifield office market and offers a unique, high quality
planned environment. Fairview Park's tenants include several Fortune 500
firms, including Bell Atlantic, Computer Sciences Corporation and IBM. The
Merrifield vacancy rate at March 31, 1996 was approximately 5%. Merrifield
offers a highly accessible location with less congestion than Tyson's Corner.
Merrifield is midway between Dulles and National airports and is conveniently
located twenty minutes from the District of Columbia.
[Insert Chart: Northern Virginia Supply/Demand 1991-95]
[Insert Chart: Northern Virginia
Vacancy/Rent 1991-
6/30/96]
Baltimore
Baltimore is the 17th largest metropolitan area in the U.S. with a
population of 2.5 million as of July 1, 1995. The area had an average
population growth rate of 3.7% from 1990 to 1995. The average annual job
growth rate for the three years ended May 31, 1996 was 0.2%. The unemployment
rate was 5.0% as of May 31, 1996. Baltimore is the home of one of the top five
seaports on the eastern seaboard. Major employers in the metropolitan area are
John Hopkins University (18,000 employees), Helix Health (9,300 employees) and
Westinghouse Electronic Systems Group (8,800 employees).
The Company has six Industrial Properties in the Baltimore metropolitan area
with an aggregate of 730,777 net rentable square feet. Metropolitan Baltimore
contains a total of approximately 46.8 million square feet of industrial
space. The vacancy rate as of June 30, 1996 was 9.3%. The Company's Properties
are located in the Harford County and Howard County submarkets.
Harford County contains 5.9 million net rentable square feet of industrial
space with a 3.3% vacancy rate as of March 31, 1996. It is the site of several
large corporate distribution facilities including facilities occupied by GE,
Procter & Gamble, Pier 1 Imports, Clorox Company and The Gap. Saks Fifth
Avenue is currently building a 450,000 net rentable square foot distribution
facility in this county. Harford County also is a strong build-to-suit market.
Howard County is located in the Baltimore Washington Corridor. This
submarket contains 17.6 million square feet of industrial space and had a
vacancy rate of 7.9% as of March 31, 1996. Access within the corridor is
provided by I-95 and Route 1.
[Insert Chart: Baltimore Market Supply/Demand 1991-95]
[Insert Chart: Baltimore Market
Vacancy/Rent 1991-
6/30/96]
Atlanta
Atlanta has a population of 3.4 million as of July 1, 1995 and is one of the
fastest growing metropolitan areas in the United States. The area had an
average population growth rate of 16.0% from 1990 to 1995. The average annual
job growth rate for the three years ended May 31, 1996 was 4.4%. The
unemployment rate was 3.7% as of May 31, 1996. Major employers in the
metropolitan area are Delta Airlines (23,000 employees), AT&T (20,000
employees), Bell South (16,000 employees) and Emory University (14,000
employees). Atlanta is the home of the Georgia World Congress Center, the
second largest convention center in the country at 2.8 million square feet,
and the Atlanta Market Center, a four-building complex with 500,000 square
feet of exhibit and meeting space. Hartsfield International Airport is the
busiest airport in the world.
The Company owns nine Office Properties with 530,228 net rentable square
feet in Atlanta. The overall vacancy rate for Atlanta as of March 31, J 1996
was 9.5%, the lowest level since 1982. The Company also manages two office
properties and ten industrial properties in Atlanta. The Company's Cumberland
Office Properties are located in the Northwest submarket.
The Northwest submarket has approximately 235 office projects consisting of
approximately 17.8 million square feet of net rentable space. Of this space
approximately 8.6 million net rentable square feet are considered
61
<PAGE>
Class B, with a vacancy rate of 11.4%. This submarket is the second largest
area in the Atlanta market and contains 20% of the office space. The Company's
strategy is to selectively redevelop Cumberland into a mixture of new Class A
buildings and high-quality, functional Class B buildings.
[Insert Chart Atlanta Market Supply/Demand 1991-95]
[Insert Chart Atlanta Market
Vacancy/Rent 1991-6/30/96]
OFFICE PROPERTIES
General
The Company's 26 Office Properties comprise approximately 3.4 million net
rentable square feet and are located in five major markets: Atlanta, Georgia;
Southfield (Detroit), Michigan; Austin, Texas; Dallas, Texas; and Northern
Virginia. Nine of the 26 Office Properties were developed by the Prentiss Group
and all of the Office Properties are currently managed by PPL. The weighted
average age of the Office Properties is 9.8 years. As of March 31, 1996, the
Office Properties were 94% leased to 258 tenants. The total 1995 annualized
Base Rent of the Office Properties was approximately $40.9 million, and the
average 1995 Base Rent per leased square foot was $14.86. Except as noted in
the description of the One Northwestern Plaza and Broadmoor Austin Properties
below, the Company owns the entire fee interest in the Office Properties. See
"--Description of Office Properties."
The space leases on the Office Properties generally have original lease terms
ranging from 1 year to 15 years. A typical lease requires (i) payment of Base
Rent, (ii) payment of base utility charges, (iii) payment of the tenant's
proportionate share of real estate tax, common area and other operating expense
escalations over a base year, and (iv) payment of overtime HVAC and electrical
use. Under these leases, the Company is typically responsible for external and
structural repairs and repairs relating to the common areas. Some of the leases
have renewal options of varying duration which extend the original lease terms,
typically at either market rent or negotiated rental rates set forth in the
lease.
Historical Occupancy and Rental Information
The following table sets forth as of the dates indicated certain information
regarding the Office Properties that have been managed by PPL since 1991.
OFFICE PROPERTIES MANAGED BY PPL SINCE 1991
HISTORICAL OCCUPANCY AND RENTAL RATES
<TABLE>
<CAPTION>
TOTAL NET
RENTABLE PERCENTAGE AVERAGE ANNUAL
SQUARE FEET LEASED AT BASE RENT PER
DATE (IN THOUSANDS) PERIOD END LEASED SQUARE FOOT(/1/)(/2/)
- ---- -------------- ---------- ----------------------------
<S> <C> <C> <C>
March 31, 1996........... 3,438 94% $15.52
December 31, 1995........ 3,032 96 14.86
December 31, 1994........ 3,032 93 14.85
December 31, 1993........ 2,296 94 14.76
December 31, 1992........ 2,178 96 14.71
December 31, 1991........ 2,178 91 12.65
</TABLE>
- --------
(/1/Calculated)as total annualized Base Rent for the previous twelve months
divided by the total leased square feet at period end.
(/2/Represents)actual Base Rent for the previous twelve months from signed
leases for the period except that only 49.9% of the Base Rent from the
Broadmoor Austin Property is included in the calculations of total annual
Base Rent, reflecting the Company's 49.9% interest in the partnership
owning the leasehold interest in that Property.
62
<PAGE>
Lease Expirations
The following table sets forth a schedule of the lease expirations for the
Office Properties for leases in place as of March 31, 1996, assuming that none
of the tenants exercises renewal options or termination rights, if any:
OFFICE PROPERTIES
LEASE EXPIRATIONS
<TABLE>
<CAPTION>
PERCENTAGE BASE RENT
OF TOTAL PER NET
NET RENTABLE ANNUAL BASE PERCENTAGE OF RENTABLE
SQUARE FEET SQUARE FEET RENT UNDER ANNUAL BASE SQUARE
NUMBER SUBJECT TO UNDER EXPIRING RENT UNDER FEET UNDER
OF LEASES EXPIRING EXPIRING LEASES EXPIRING EXPIRING
PERIOD OF LEASE EXPIRATION EXPIRING LEASES LEASES (IN THOUSANDS) LEASES(/1/) LEASES
- -------------------------- --------- ----------- ------------ -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
July 1, 1996 to December
31, 1996............... 49 185,662 6% $ 2,746 6% $14.79
1997.................... 47 347,636 11 4,496 10 12.93
1998.................... 46 467,133 15 7,860 18 16.83
1999.................... 45 524,953 17 8,281 19 15.77
2000.................... 26 261,696 8 4,203 10 16.06
2001.................... 13 123,084 4 2,405 6 19.54
2002.................... 4 63,174 2 646 1 10.23
2003.................... 0 -- -- -- -- 0.00
2004.................... 1 62,600 2 1,710 4 27.32
2005.................... 2 11,365 -- 153 -- 13.46
2006.................... 1 1,112,236 35 11,030(/2/) 25 19.83
After 2006.............. -- -- -- -- -- --
--- --------- --- ------- --- ------
Total/Weighted Average.. 234 3,159,539 100% $43,530 100% $15.87
=== ========= === ======= === ======
</TABLE>
- --------
(/1/Calculated)by dividing annual Base Rent as adjusted for contractual
increases expiring during each period by the total Base Rent inclusive of
contractual increases.
(/2/Represents)the Company's 49.9% interest in the annual Base Rent from this
lease.
Leasing Activity
The following table sets forth for the Office Properties that have been
managed by the Company since 1993 a schedule regarding the number of leases
signed, total net rentable square feet, the annualized Base Rent per leased
square foot and effective rent per leased square foot for the years 1993 (the
year that PPL began recording such historical leasing information) through
1995 and for the three months ended March 31, 1996.
OFFICE PROPERTIES MANAGED BY THE COMPANY SINCE 1993
HISTORICAL LEASING ACTIVITY
<TABLE>
<CAPTION>
ANNUALIZED EFFECTIVE
BASE RENT RENT PER
NUMBER OF RENTABLE PER LEASED LEASED
PERIOD LEASES SQUARE FEET SQUARE FOOT SQUARE FOOT(/1/)
------ --------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
January 1, 1996 through March 31, 1996.......... 15 72,748 $15.04 $13.73
1995............................................ 77 376,008 14.71 10.83
1994............................................ 77 280,706 11.87 9.90
1993............................................ 51 189,372 11.23 8.91
</TABLE>
- --------
(/1/Equals)aggregate Base Rent received over all lease transactions with
respect to such Office Properties during the period minus all tenant
improvements, leasing commissions and concessions from all lease
transactions during the period, divided by the lease terms (in months),
multiplied by 12 and then divided by the total net rentable square feet
leased under all lease transactions during the period.
63
<PAGE>
Tenant Information
The Office Properties are leased to 258 tenants which engage in a variety of
businesses including computer services, telecommunications, insurance and food
and beverage services. During the year ended 1995, the largest tenant in the
Office Properties, IBM, accounted for approximately 24% of the Company's pro
forma annual Base Rent for that period. Sixty-four percent of IBM's annual
Base Rent is derived from a lease at the Company's Broadmoor Austin Property,
which expires in 2006. The Company and IBM own 49.9% and 50.0% interests,
respectively, in the Broadmoor Austin Partnership that owns a long-term ground
lease on that Property. The Prentiss Group will continue to own a 0.1%
interest in this partnership, which the Company will have an option to acquire
one year and one day after the Closing Date. The remaining 36% of IBM's
portion of the Company's pro forma 1995 Base Rent is derived from a lease at
the Park West Property, which expires in 1999. The following table sets forth
the annual Base Rent as of December 31, 1995 derived from the 20 largest
tenants at the Office Properties.
OFFICE PROPERTIES
20 LARGEST TENANTS BY 1995 ANNUAL BASE RENT
<TABLE>
<CAPTION>
TOTAL NET RENTABLE ANNUAL PERCENTAGE OF MONTHS
SQUARE FEET BASE RENT ANNUAL REMAINING
TENANT (IN THOUSANDS) (IN THOUSANDS) BASE RENT AFTER JUNE 30, 1996
------ ------------------ -------------- ------------- -------------------
<S> <C> <C> <C> <C>
IBM..................... 1,382 $13,709(/1/) 24.0% 117
Dr. Pepper(/2/)......... 168 3,887 6.8 25
The Wyatt Company....... 63 1,404 2.5 94
Medaphis Corporation.... 92 1,166 2.0 44
MCI Communications...... 63 1,153 2.0 46
Liberty Mutual Life
Insurance.............. 84 1,024 1.8 15
Sandwell, Inc........... 52 596 1.0 20
Hewlett Packard......... 21 509 0.9 64
Express One............. 37 479 0.8 44
GTE..................... 35 412 0.7 42
Intergraph Corporation.. 24 396 0.7 27
R.R. Donnelley & Sons... 17 381 0.7 39
Total System Services... 33 379 0.7 7
Tower Marketing......... 29 375 0.7 74
General Reinsurance..... 26 353 0.6 50
The Weather Channel..... 33 337 0.6 22
TCC Communications...... 24 322 0.6 22
Blum Consulting......... 19 315 0.6 60
Hitachi Systems......... 13 310 0.5 1(/3/)
Decision Consultants.... 14 271 0.5 34
----- ------- ----
Total................... 2,229 $27,778 48.7%
===== ======= ====
</TABLE>
- --------
(/1/Includes)approximately $4.9 million derived from a lease at the Company's
Park West Property and approximately $8.8 million derived from a lease at
the Company's Broadmoor Austin Property, which amount reflects the
Company's 49.9% interest in the total annual Base Rent from that Property.
(/2/Dr.)Pepper recently announced that it intends not to renew its lease at
the Walnut Glen Tower Property when it expires in July of 1998.
(/3/Due)to corporate downsizing, Hitachi Systems will renew its lease for
5,000 square feet of its current space. The remaining space will be leased
to Federal Computer Weekly commencing September 1, 1996. Hitachi Systems
is currently holding over in the 13,000 square foot lease at 150% of its
Base Rent under the terms of the Lease.
64
<PAGE>
The following table sets forth information relating to the diversity of the
Company's tenants at the Office Properties based upon net rentable square feet
under lease as of March 31, 1996:
OFFICE PROPERTIES
DISTRIBUTION OF LEASES BY SIZE OF SPACE
<TABLE>
<CAPTION>
ANNUAL
TOTAL BASE
SQUARE FOOTAGE NUMBER OF PERCENT OF SQUARE PERCENT OF RENT PERCENT OF
UNDER LEASE LEASES TOTAL FEET TOTAL (IN THOUSANDS) TOTAL
-------------- --------- ---------- --------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Less than 10,000........ 203 79% 592,030 18% $ 7,855 20%
10,000--20,000.......... 36 14 475,758 15 6,519 16
20,001--40,000.......... 12 5 341,148 11 4,078 10
40,001--60,000.......... 1 0 59,158 2 629 2
60,001--80,000.......... 2 1 125,157 4 2,564 6
80,001--100,000......... 1 0 83,922 3 1,024 2
100,001 and over........ 3 1 1,547,797 48 17,580 44
--- --- --------- --- ------- ---
Total................... 258 100% 3,224,970 100% $40,249 100%
=== === ========= === ======= ===
</TABLE>
Description of Office Properties
Cumberland Office Park (Atlanta, GA). Cumberland Office Park is a campus-
style office facility comprised of nine one to five-story office buildings.
These Properties were developed between 1972 and 1980 and contain a total of
530,288 net rentable square feet. Upon acquiring the property in 1991, the
Prentiss Group applied and received approval for rezoning to allow up to 2.1
million square feet of additional development. The Properties are located at
the intersection of I-285 and Paces Ferry Road, in the heart of Atlanta's
Northwest submarket, and have convenient access to all parts of the Atlanta
metropolitan area, especially the central business district and the airport.
Amenities found either within the complex or within a few minutes drive
include hotels, restaurants, shopping malls, athletic clubs, day care centers,
banks and postal facilities. As of March 31, 1996, the Properties were 99%
leased, and the average 1995 annual Base Rental rate was $11.70 per leased
square foot. Major tenants at Cumberland Office Park include Medaphis
Corporation (approximately 102,000 net rentable square feet with an option to
expand by approximately 22,000 net rentable square feet), GTE Communications
(approximately 36,000 net rentable square feet) and Cap Logistics
(approximately 35,000 net rentable square feet) under leases that expire in
2000, 1999 and 2001, respectively. The aggregate net rentable square footage
of leases expiring in 1996 (after June 30), 1997 and 1998 represent 5%, 7% and
33% of the net rentable square footage of this office park, respectively.
One Northwestern Plaza (Southfield, MI). One Northwestern Plaza is a 13-
story, Class A suburban office building. The building was developed in 1989
and contains 241,751 net rentable square feet with heated underground parking
facilities. The Company owns the entire leasehold interest in the Property
which expires in 2054. The main lobby is a two-story atrium with prominent
main entrances on the east and west sides of the building. Amenities within
the Property include a restaurant, sundry shop, florist/gift shop, travel
agency, hair salon, dentist, jewelry store, stock broker and mail room. The
building is located at the intersection of I-696 and Northwestern Highway. As
of March 31, 1996, the Property was 92% leased, and the 1995 annual Base Rent
was $21.12 per leased square foot. The Property's major tenants are The Wyatt
Company (approximately 62,000 net rentable square feet), Intergraph
Corporation (approximately 21,000 net rentable square feet) and Prudential
Insurance (approximately 11,000 net rentable square feet), under leases that
expire in 2004, 1998 and 1996, respectively. The aggregate net rentable square
footage of leases expiring in 1996 (after June 30), 1997 and 1998 represent
13%, 11% and 14% of this Property's net rentable square footage, respectively.
Broadmoor Austin (Austin, TX). Broadmoor Austin is a seven-building, campus-
style, Class A office complex consisting of one single story, three six-story
and three eight-story office buildings. The Properties were
65
<PAGE>
developed by PPL in 1991 and contain 1,112,236 net rentable square feet and
parking for approximately 3,000 cars. The land on which the building is
located is currently leased from IBM for $150,000 per year through 2005 and
$300,000 per year through 2015 under a long-term ground lease expiring no
earlier than 2015. The ground lease may be renewed for two successive terms of
25 years at the Company's option. After March 2015, yearly rent for the ground
lease will be equal to (i) 90% of fair market value, but not less than
$300,000 per year in the first renewal period and (ii) fair market value, but
not less than $300,000 per year in the second renewal period. The Company owns
a 49.9% managing general partnership interest in the partnership owning the
leasehold interest. The Prentiss Group will continue to own a 0.1% interest in
this partnership, which the Company will have an option to acquire one year
and one day after the Closing Date. IBM owns the other 50.0% interest in that
partnership. The Properties are located on 62 acres which includes four acres
for future development. IBM has the right to terminate the ground lease with
respect to 83 acres at no cost and it expects to exercise this right after it
obtains certain governmental approvals necessary for a planned development.
Until such time, the Company is the nominal owner of those 83 acres with no
rights to develop them. The Properties are located in northwest Austin, at
MoPac (Loop 1) and FM 1325 (Burnett Road), one mile north of Highway 183. The
Properties are adjacent to a 563-acre IBM software manufacturing and
operations facility. IBM has leased 100% of the rentable area of the
Properties since March 1991 under an occupancy lease with an initial term of
15 years with three five-year renewal options. The occupancy lease with IBM
provides for annual rent payments of approximately $17.6 million per year
through March 2001 and approximately $22.1 million from April 2001 through
March 2006. After March 2006, the rent payments under the occupancy lease
shall be 90% of fair market value but not less than approximately $22.1
million per year in each renewal term. The average 1995 annual Base Rent was
$15.87 per square foot. The Properties represent IBM's first centralized
office complex in Austin and accommodate approximately 3,500 IBM employees.
Park West (Dallas, TX). Park West is a seven-story, Class A office building.
The Property was developed by PPL in 1989 and contains 344,216 net rentable
square feet with an adjacent five-story garage. The exterior of the Property
is made of architectural concrete with black granite aggregate and full-height
windows of silver dual pane reflective glass. The Property's interior features
a 10,000 square foot, full-height atrium that is contained by walls of clear
glass. The Property is part of the Park West Master Plan, which consists of
350 acres located along the LBJ Freeway less than one mile west of I-35. The
location provides direct access along the LBJ Freeway to DFW Airport, and to
downtown Dallas and Love Field via I-35. The Park West Master Plan includes an
extensive package of amenities including restaurants, full-service banking,
travel agency, athletic club and jogging trails and a Doubletree Hotel. As of
March 31, 1996, the Property was 98% leased, and the average 1995 annual Base
Rent was $16.22 per leased square foot. The Property's principal tenants are
IBM (approximately 270,000 net rentable square feet), Ultimate Corporation
(approximately 18,000 net rentable square feet) and CIGNA (approximately
15,000 net rentable square), under leases expiring in 1999, 1999 and 2002
respectively. The aggregate net rentable square footage of leases expiring in
1996 (after June 30), 1997 and 1998 represent 2%, 0% and 0% of this Property's
net rentable square footage, respectively.
5307 East Mockingbird (Dallas, TX). 5307 East Mockingbird is a ten-story
suburban office building. The Property was developed in 1979 and contains
118,316 net rentable square feet with an attached six-story garage. Both the
building and the parking structure are reinforced concrete structures. Tenant
common areas and office spaces were renovated in 1993 with upgraded carpet,
wall coverings and recessed lighting. The Property is located on the northeast
corner of the intersection of North Central Expressway and East Mockingbird.
The North Central Expressway is undergoing a substantial renovation that is
expected to increase access to and visibility of the Property. The renovation
is expected to be completed in 2000. Local amenities include proximity to
various restaurants, theaters and retail centers, including North Park Mall.
As of March 31, 1996, the Property was 76% leased, and the average 1995 annual
Base Rent was $7.80 per leased square foot. The Property's major tenants are
Staff Benefits, Inc. (approximately 13,000 net rentable square feet),
Guarantee Federal Bank, F.S.B. (approximately 12,000 net rentable square feet)
and Cardinal Communications (approximately 7,000 net rentable square feet)
under leases that expire in 1998, 1999 and 2002, respectively. The aggregate
net rentable square footage of leases expiring in 1996 (after June 30), 1997
and 1998 represent 4%, 9% and 27% of this Property's net rentable square
footage, respectively.
66
<PAGE>
Walnut Glen Tower (Dallas, TX). Walnut Glen is an 18-story, Class A suburban
office building. The Property was developed in 1985 and contains 466,289 net
rentable square feet with an adjacent six-story garage. The building is
situated around a full-height atrium with an 84-foot waterfall and consists of
a reinforced concrete and structural steel frame, and a polished granite and
insulated glass interior. Walnut Glen is located in the North Central Corridor
of Dallas, Texas and has direct access to North Central Expressway with easy
access to the LBJ Freeway and downtown Dallas. As of March 31, 1996, the
Property was 87% leased, and the average 1995 annual Base Rent was $17.74 per
leased square foot. The major tenants of Walnut Glen are Dr. Pepper/Cadbury
North America (approximately 205,000 net rentable square feet), General
Reinsurance (approximately 26,000 net rentable square feet), and the American
Association of Retired Persons (approximately 7,000 net rentable square feet)
under leases that expire in 1999, 2001 and 2001, respectively. Dr.
Pepper/Cadbury North America recently announced that it intends to relocate
its offices from this Property when its current lease expires in 1998. The
aggregate net rentable square footage of leases expiring in 1996 (after June
30), 1997 and 1999 represent 7%, 7% and 48% of the Property's net rentable
square footage, respectively. As part of the Formation Transactions, the
Company will also acquire a 4.2 acre parcel adjacent to the Property which can
support approximately 500,000 net rentable square feet of new office
development. The parcel is currently ground leased to a restaurant.
Cottonwood Office Center (Dallas, TX). Cottonwood Office Center is a Class A
suburban office complex consisting of two two-story buildings and one three-
story building. The three Properties were developed in 1986 and contain a
total of 164,111 net rentable square feet. The Properties have surface and
underground parking. All three buildings are connected via a glass-enclosed
atrium. The Properties are located at 2110 Walnut Hill Lane, on the western
border of the office development of Las Colinas. The majority of the building
has a view of the golf course at the Cottonwood Valley Country Club. As of
March 31, 1996, the Properties were 92% leased, and the average 1995 annual
Base Rent was $12.32 per leased square foot. The Properties' major tenants
include Liberty Mutual Life (approximately 96,000 net rentable square feet),
Glade Properties (approximately 17,000 net rentable square feet) and GTE
Visnet Incorporated (approximately 11,000 net rentable square feet) under
leases that expire in 2004, 2000 and 2000, respectively. The aggregate net
rentable square footage of leases expiring in 1996 (after June 30), 1997 and
1998 represent 5%, 0% and 5% of the Properties' net rentable square footage,
respectively.
The Plaza on Bachman Creek (Dallas, TX). The Plaza on Bachman Creek is a
seven-story, Class A suburban office building. The Property was developed in
1986 and contains 125,903 net rentable square feet. The interior of the
building includes a two-story atrium lobby that is finished in travertine and
polished verde marble. This Property is situated on an eight-acre site, which
includes an adjacent 248 room Embassy Suites hotel and four-story, 72,000
square foot office building of similar design. Common areas for all three
buildings are controlled through a condominium agreement. Total parking
provided for all three buildings is for 1,066 cars. The Plaza on Bachman Creek
is located at the intersection of Northwest Highway and Lemmon Avenue. Major
business centers and transportation facilities are easily accessible via
Stemmons Freeway, LBJ Freeway and the North Dallas Tollway. In addition, Love
Field is one mile to the south and DFW Airport is eleven miles to the west. As
of March 31, 1996, the Property was 87% leased, and the average 1995 annual
Base Rent was $9.79 per square foot. The Property's major tenants are Express
One (approximately 37,000 net rentable square feet) and Tower Marketing
(approximately 29,000 net rentable square feet) under leases that expire in
2000 and 2002, respectively. The Company intends to relocate its headquarters
to this Property in the fourth quarter of 1996 and to lease approximately
37,000 net rentable square feet at this building under a lease that expires in
2001. The aggregate net rentable square footage of leases expiring in 1996
(after June 30), 1997 and 1998, represent 20%, 23% and 20% of the Property's
net rentable square footage, respectively.
3141 Fairview Park Drive (Northern Virginia). 3141 Fairview Park Drive is an
eight-story, Class A suburban office building. The Property was developed by
PPL in 1988 and contains 192,108 net rentable square feet. The building shares
an adjacent parking garage with a Marriott Hotel. The exterior of the building
is composed of granite and glass with a slate roof and dormer windows on the
top floor. The Property overlooks a retail court and expansive tiered
fountain. The main lobby of the building features a 28-foot high barrel-
vaulted
67
<PAGE>
ceiling. The Property is located in the Fairfax County submarket of Northern
Virginia and is the centerpiece of Fairview Park, a 220-acre master-planned
office community developed by the Prentiss Group. As of March 31, 1996, the
Property was 90% leased, and the average 1995 annual Base Rent was $16.29 per
square foot. The Property's major tenants include Hewlett-Packard
(approximately 21,000 net rentable square feet), Equitable Life (approximately
17,000 net rentable square feet) and R.R. Donnelly & Sons (approximately 17,000
net rentable square feet) under leases that expire 2001, 2002 and 1999. The
aggregate net rentable square footage of leases expiring in 1996 (after June
30), 1997 and 1998 represent 34%, 1% and 7% of the Property's net rentable
square footage, respectively.
8521 Leesburg Pike (Northern Virginia). 8521 Leesburg Pike is a seven-story,
Class A suburban office building. The Property was developed in 1984 and was
substantially renovated in 1993. It contains 145,257 net rentable square feet
with an adjacent four-story garage. The building's exterior is composed of an
acid washed pre-cast curtain wall and has green tinted double pane insulating
glass. The Property's lobby features marble floors, marble wainscot and painted
drywall finishes. The Property is located in Tyson's Corner, Virginia, near the
intersection of Leesburg Pike and the Dulles Access Road. The Tyson's Corner
submarket of Northern Virginia has evolved from a regional retail shopping
center and low-cost offices for high-tech firms to one of the largest office
markets in the country. There are a number of amenities in the Tyson's Corner
area, including day-care centers, luxury hotels, such as the Ritz-Carlton, and
retail shops, including Tiffany's, Hermes and Gucci. As of March 31, 1996 the
Property was 92% leased, and the average 1995 annual Base Rent was $13.86 per
square foot. The Property's major tenants are MCI Telecommunications
(approximately 84,000 net rentable square feet), Optical Data Systems
(approximately 7,000 net rentable square feet) and Wolf & Cohen (approximately
5,000 net rentable square feet) under leases that expire in 2000, 1997 and
2001, respectively. The aggregate net rentable square footage of leases
expiring in 1996 (after June 30), 1998 and 1999 represent 0%, 5% and 0% of the
Property's net rentable square footage, respectively.
68
<PAGE>
The following table sets forth additional information regarding each of the
Office Properties.
OFFICE PROPERTIES -- ADDITIONAL DATA
<TABLE>
<CAPTION>
1995
ANNUAL
COMPANY'S OWNERSHIP TOTAL BASE BASE
PERCENTAGE INTEREST NUMBER RENT FOR RENT
OWNERSHIP (GROUND OF PERCENT YEAR ENDED PER NUMBER
AFTER LEASE LAND NUMBER FLOORS RENTABLE LEASED 12/31/95 LEASED OF
FORMATION EXPIRATION YEAR YEAR AREA OF PER SQUARE AS OF (IN SQUARE TENANT
PROPERTY TRANSACTION DATE)(/1/) DEVELOPED ACQUIRED ACRES BLDGS. BLDG. FEET 3/31/96 THOUSANDS) FOOT LEASES
-------- ----------- ---------- --------- -------- ----- ------ ------ --------- ------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumberland 100% Fee 1972-1980 1991 46.7 9 1-5 530,228 99% $ 6,141 $11.70 82
Office Park....
One Northwestern 100% Leasehold 1989 1996 8.9 1 14 241,751 92 4,772 21.12 30
Plaza.......... (6/30/54)
Broadmoor 50% Leasehold 1991 1991 62.0(/3/) 7 6-8 1,112,236 100 8,824 15.87 1
Austin(/2/).... (3/31/65)
Park West....... 100% Fee 1989 1995 8.8 1 7 344,216 98 5,468 16.22 7
5307 East 100% Fee 1979 1993 1.7 1 10 118,316 76 679 7.80 34
Mockingbird....
Walnut Glen 100% Fee 1985 1994 10.0(/4/) 1 18 464,289 83 7,254 17.74 40
Tower..........
Cottonwood 100% Fee 1986 1996 4.8 3 2-3 164,111 92 1,922 12.32 8
Office Center..
Plaza on Bachman 100% Fee 1986 1996 2.9 1 7 125,903 87 1,155 9.79 11
Creek..........
3141 Fairview 100% Fee 1988 1996 5.6 1 8 192,108 90 2,780 16.29 33
Park Drive.....
8521 Leesburg 100% Fee 1984 1994 3.3 1 7 145,257 92 1,940 13.86 12
Pike...........
----- --- --------- --- ------- ------ ---
Total--Office 154.7 26 3,438,415 94% $40,935 $14.86 258
Properties.....
===== === ========= === ======= ====== ===
<CAPTION>
SQUARE FEET
LEASED BY
SIGNIFICANT
SIGNIFICANT TENANTS
PROPERTY TENANTS (NAME) (IN THOUSANDS)
-------- ---------------------------- --------------
<S> <C> <C>
Cumberland Medaphis Corp. Sandwell Inc. 92
Office Park.... 52
One Northwestern The Wyatt Company 63
Plaza.......... Intergraph Corporation 24
Broadmoor IBM 1,112
Austin(/2/)....
Park West....... IBM 270
Ultimate Corp. 18
5307 East Staff Benefits, Inc. 13
Mockingbird.... Guaranty Federal Bank 12
Walnut Glen Dr. Pepper 168
Tower.......... General Reinsurance 26
Cottonwood Liberty Mutual Life 84
Office Center.. GTE Visnet Incorporated 11
Plaza on Bachman Express One 37
Creek.......... Tower Marketing 29
3141 Fairview Hewlett Packard 21
Park Drive..... RR Donnelley 17
8521 Leesburg MCI Communications 63
Pike........... Coscan Homes 13
--------------
Total--Office 2,125
Properties.....
==============
</TABLE>
- ------
(/1/Ground)lease expirations assume exercise of renewal options by the lessee.
(/2/The)Base Rent data reflects the Company's 49.9% interest in the general
partnership owning the leasehold interest in this Property.
(/3/Initially)approximately 145 acres. IBM has the right to terminate the
ground lease with respect to 83 acres at no cost to the Company, after IBM
obtains certain governmental approvals necessary for a planned development
by it on that site. Until such time the Company is the nominal owner of
those 83 acres with no rights to develop them.
(/4/3.2)acres are ground leased to an adjoining restaurant.
69
<PAGE>
INDUSTRIAL PROPERTIES
The 59 Industrial Properties comprise approximately 5.0 million square feet
of net rentable area and are located in six major markets: Los Angeles,
California; Baltimore, Maryland; Kansas City, Missouri; Dallas, Texas;
Houston, Texas and Milwaukee, Wisconsin. As of March 31, 1996, the Industrial
Properties were 93% leased to 120 tenants. The total 1995 annualized Base Rent
of the Industrial Properties was approximately $16.3 million and average 1995
Base Rent per leased square foot of the Industrial Properties was $3.31. The
Company owns 100% of the Industrial Properties.
The current leases on the Industrial Properties generally have original
lease terms ranging from 1 to 15 years. A typical lease requires (i) payment
of Base Rent, (ii) payment of base utility charges, and (iii) payment of
tenant's proportionate share of fixed costs subject to an expense stop or base
year. Some of the leases have renewal options of varying duration which extend
the original lease terms, typically at either market rent or negotiated rental
rates set forth in the lease.
In addition to the Industrial Properties, the Company owns a 25% interest in
a partnership that owns a 70,735 net rentable square foot industrial building
in Itasca, Illinois. The Company may derive some income from this minority
interest, but its principal benefit is the possibility that this interest may
provide the Company with opportunities to increase its development business.
See "Business Objectives--Growth Strategies--Development Strategy."
Historical Occupancy and Rental Information
The following table sets forth certain information regarding those
Industrial Properties that have been managed by PPL since 1991.
INDUSTRIAL PROPERTIES MANAGED BY PPL SINCE 1991
HISTORICAL OCCUPANCY AND RENTAL RATES
<TABLE>
<CAPTION>
TOTAL RENTABLE PERCENTAGE AVERAGE ANNUAL
SQUARE FEET LEASED AT BASE RENT PER
DATE (IN THOUSANDS) PERIOD END LEASED SQUARE FOOT(/1/)
- ---- -------------- ---------- -----------------------
<S> <C> <C> <C>
March 31, 1996................ 4,937 93% $3.53
December 31, 1995............. 4,937 96 3.31
December 31, 1994............. 4,862 94 3.12
December 31, 1993............. 4,032 93 3.38
December 31, 1992............. 2,334 86 4.17
December 31, 1991............. 1,253 77 6.40
</TABLE>
- --------
(/1/Calculated)as total annualized Base Rent for the previous twelve months
divided by the total leased square feet at period end.
70
<PAGE>
Lease Expirations
The following table sets forth a schedule of the lease expirations for the
Industrial Properties for leases in place as of March 31, 1996 assuming that
none of the tenants exercises renewal options or termination rights, if any:
INDUSTRIAL PROPERTIES
LEASE EXPIRATIONS
<TABLE>
<CAPTION>
NET RENTABLE PERCENTAGE OF ANNUAL BASE PERCENTAGE OF RENT PER NET
YEAR OF NUMBER OF SQUARE FEET TOTAL NET RENTABLE RENT UNDER ANNUAL BASE RENTABLE SQUARE
LEASE LEASES SUBJECT TO SQUARE FEET UNDER EXPIRING LEASES RENT UNDER FOOT UNDER
EXPIRATION EXPIRING EXPIRING LEASES EXPIRING LEASES (IN THOUSANDS) EXPIRING LEASES(/1/) EXPIRING LEASES
---------- --------- --------------- ------------------ --------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
July 1, 1996 to
December 31, 1996...... 12 233,203 5% $ 1,075 6% $4.61
1997.................... 18 562,154 12 2,223 13 3.95
1998.................... 21 1,038,585 22 3,241 19 3.12
1999.................... 21 674,496 14 2,435 14 3.61
2000.................... 20 1,334,647 29 4,797 27 3.59
2001.................... 5 328,720 7 1,081 6 3.29
2002.................... 2 55,140 1 286 2 5.19
2003.................... 2 196,350 4 894 5 --
2004.................... 2 94,947 2 407 2 4.29
2005.................... 3 177,338 4 1,036 6 5.84
2006.................... 0 -- -- -- -- --
After 2006.............. 0 -- -- -- -- --
--- --------- --- ------- --- -----
Total/Weighted Average.. 106 4,695,580 100% $17,475 100% $3.72
=== ========= === ======= === =====
</TABLE>
- --------
(/1/Calculated)by dividing annual base rent as adjusted for contractual
increases expiring during each period by the total base rent inclusive of
contractual increases.
LEASING ACTIVITY
The following table sets forth a schedule regarding the Industrial
Properties of number of leases signed, total net rentable square feet, the
annualized base rent per leased square foot and effective rent per leased
square foot for the years 1993 (the year that PPL began recording such
historical leasing information) to 1995 and the three months ended March 31,
1996.
INDUSTRIAL PROPERTIES MANAGED BY THE COMPANY SINCE 1993
HISTORICAL LEASING ACTIVITY
<TABLE>
<CAPTION>
ANNUALIZED EFFECTIVE
BASE RENT RENT PER
RENTABLE PER LEASED LEASED
PERIOD SQUARE FEET SQUARE FOOT SQUARE FOOT(/1/)
------ ----------- ----------- ----------------
<S> <C> <C> <C>
January 1, 1996 through March 31,
1996................................ 448,397 $2.94 $2.82
1995................................. 1,644,064 3.85 3.53
1994................................. 771,934 3.20 2.89
1993................................. 974,437 3.50 3.05
</TABLE>
- --------
(/1/Equals)aggregate Base Rent received over all lease transactions with
respect to such Industrial Properties during the period minus all tenant
improvements, leasing commissions and concessions from all lease
transactions during the period, divided by the lease terms (in months),
multiplied by 12 and then divided by the total net rentable square feet
leased under all lease transactions during the period.
71
<PAGE>
TENANT INFORMATION
The Industrial Properties are leased to 120 tenants which engage in a variety
of businesses including electronics, tire manufacturing and food systems. Major
tenants in the Industrial Properties include Nippon Express USA, Crown Cork &
Seal and Dunlop Tire Corporation. During the year ended December 31, 1995, the
Company's two largest tenants at the Industrial Properties, Nippon Express USA
and Crown Cork & Seal accounted for approximately 2% and 1%, respectively, of
the Company's pro forma annual Base Rent for the period. The following table
sets forth the annual base rent as of December 31, 1995 derived from the 15
largest tenants at the Industrial Properties.
INDUSTRIAL PROPERTIES
15 LARGEST TENANTS BY 1995 ANNUAL BASE RENT
<TABLE>
<CAPTION>
MONTHS
TOTAL NET RENTABLE ANNUAL PERCENTAGE REMAINING
SQUARE FEET BASE RENT OF TOTAL AFTER
TENANT (IN THOUSANDS) (IN THOUSANDS) BASE RENT JUNE 30, 1996
------ ------------------ -------------- ---------- -------------
<S> <C> <C> <C> <C>
Nippon Express USA...... 353 $1,308 2.3% 54
Crown Cork & Seal....... 178 677 1.2 46
Dunlop Tire Corp........ 230 525 0.9 49
Distribution Services... 163 386 0.7 8
General Electric
Company................ 118 382 0.7 16(/1/)
Pepsico Food Systems.... 120 354 0.6 19
Elite Spice............. 89 331 0.6 46
Distribution
Specialists............ 112 319 0.6 17
Ambrosia Chocolate...... 101 318 0.6 40
Bradley Corp............ 119 316 0.6 54
Serv-Tech............... 67 304 0.5 12
Northwestern Mutual
Life................... 100 301 0.5 144
Fujitsu-Ten
Corporation............ 76 301 0.5 39
Tate Access Floors...... 81 288 0.5 21
Standard
Communications......... 54 282 0.5 109
----- ------ ----
Total............... 1,961 $6,392 11.2%
===== ====== ====
</TABLE>
- --------
(/1/Represents)the weighted average of a lease for 56,000 net rentable square
feet which expires in November of 1998 and a lease for 62,000 net rentable
square feet which expires in November of 1996.
The following table sets forth information relating to the diversity of the
tenants at the Industrial Properties based upon square feet under lease at
December 31, 1995:
INDUSTRIAL PROPERTIES
DISTRIBUTION OF LEASES BY SIZE OF SPACE
<TABLE>
<CAPTION>
TOTAL ANNUAL
SQUARE FOOTAGE NUMBER OF PERCENT OF NET RENTABLE PERCENT OF BASE RENT PERCENT OF
UNDER LEASE LEASE TOTAL SQUARE FEET TOTAL (IN THOUSANDS) TOTAL
-------------- ---------- ---------- ------------ ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Less than 10,000........ 39 32% 214,265 4% $ 930 6%
10,001-20,000........... 18 15 267,780 5 1,070 5
20,001-40,000........... 16 13 464,091 10 1,973 12
40,001-60,000........... 20 17 972,455 20 4,019 25
60,001-80,000........... 7 6 470,931 10 1,830 11
80,001-100,000.......... 6 5 529,569 11 1,458 9
100,001 and over........ 14 12 1,923,479 40 5,056 31
--- --- --------- --- ------- ---
Total............... 120 100% 4,842,570 100% $16,336 100%
=== === ========= === ======= ===
</TABLE>
72
<PAGE>
Industrial Properties Descriptions
LOS ANGELES INDUSTRIAL PROPERTIES.
Pacific Gateway Center. Pacific Gateway Center is an industrial complex
composed of 18 buildings containing 1,252,708 net rentable square feet. The
Property's major tenants are Nippon Express USA, R.R. Donnelly & Sons,
Fujitsu-Ten Corporation, Toyota Motor Sales and Shimadzu. The Properties are
located in Torrance, California, approximately 14 miles south of downtown Los
Angeles and approximately 10 miles from the ports of Long Beach and Los
Angeles and Los Angeles International Airport. Pacific Gateway Center is
within one mile from each of the San Diego (405) Freeway, the Harbor (110)
Freeway and the Artesia (91) Freeway. The Torrance submarket contains
approximately 26 million net square feet and includes the Los Angeles
Enterprise Zone (in which Pacific Gateway Center is located), which provides
tenants with various tax and cost benefits.
BALTIMORE INDUSTRIAL PROPERTIES. The Company owns six Industrial Properties
containing 730,777 net rentable square feet in five locations throughout the
Baltimore/Washington Industrial Corridor (the "BWI Corridor"). The BWI
Corridor contains approximately 55 million square feet of distribution,
warehouse and research property in five counties. Howard County and Anne
Arundel County contain the primary bulk distribution/warehouse inventory for
the BWI Corridor, a total of 41 million square feet in seven major industrial
parks. The Baltimore Industrial Properties consist of 8869 Greenwood, 1329
Western Avenue, Deep Run 1 & 2, 4611 Mercedes Drive and 9050 Junction.
8869 Greenwood. 8869 Greenwood is a multi-tenant warehouse/distribution
building containing 89,582 net rentable square feet. The Property's major
tenants are Mid-Atlantic Coca-Cola, Systems Connection and Wilmar Industries.
The Property is located in Howard County and is part of Corridor Industrial
Park which is an eleven building industrial park totaling 1.4 million net
rentable square feet.
1329 Western Avenue. 1329 Western Avenue is a multi-tenant bulk distribution
building containing 185,600 net rentable square feet, of which 14,500 square
feet are devoted to office area. The Property's major tenants are Holt Paper
and Chemical and Electronic Data Systems, Inc. The Property is located at 1329
Western Avenue, Baltimore, Maryland, in the Southwest submarket of the BWI
Corridor. This submarket contains approximately 7.2 million net rentable
square feet of industrial/warehouse space. 5.2 million net rentable square
feet of this submarket was constructed prior to 1960. Only one million square
feet has been constructed since 1980.
Deep Run 1 & 2. Deep Run 1 & 2 are two warehouses containing a total of
169,112 net rentable square feet. Elite Spice and Tate Access Floors currently
lease 100% of Deep Run 1 and 2, respectively. The Properties are located at
7151 and 7155 Montevideo Road, Jessup, Maryland, on the Route 1 Corridor
submarket of the BWI Corridor. This submarket contains approximately 8.6
million square feet of industrial/warehouse space that on average was
constructed in 1982. This submarket has a strategic location with proximity to
the Port of Baltimore and excellent access to major trucking routes.
4611 Mercedes Drive. 4611 Mercedes Drive is a one-story
warehouse/distribution facility containing 178,133 net rentable square feet.
Crown, Cork & Seal currently leases 100% of the Property. The Property is
located at 4611 Mercedes Drive, Belcamp, Maryland, in the Harford County
submarket of the northeast corridor of Maryland. This submarket contains 44
buildings totaling over 6,750,000 net rentable square feet. The Property is
part of Riverside Park, an industrial park consisting of 19 buildings totaling
approximately 2,400,000 net rentable square feet. Harford County has grown
into a significant location for warehouse/distribution activities during the
past several years, as a number of Fortune 500 companies have moved into this
submarket.
9050 Junction. 9050 Junction is a bulk industrial building containing
108,350 net rentable square feet. Professional Mailing currently leases 100%
of the Property. The Property is located in the Annapolis Junction Business
Park in Savage (Howard County), Maryland. The Annapolis Junction Business Park
is strategically
73
<PAGE>
located in the southeastern quadrant of the intersection of Route 1 and Route
32 in the heart of the BWI Corridor. This location affords the Property
convenient access to the area's major roadways such as Route 32, which
intersects with I-95, approximately 1.5 miles west of the Property.
KANSAS CITY INDUSTRIAL PROPERTIES. The Company owns seven Industrial
Properties containing 1,340,781 net rentable square feet in four locations
throughout Kansas City, Missouri. The Kansas City Industrial Properties
consist of Northland Park, North Topping Street, Airworld Drive and 107th
Terrace.
Northland Park. Northland Park is an industrial complex composed of four
warehouse/distribution facilities containing 925,007 net rentable square feet.
The Property is located in North Kansas City, Missouri, in the Paseo
Industrial District. Paseo was developed by Burlington Northern Railroad in
the mid-1960s and sold to developers expected to be high volume rail
customers. The Paseo Industrial District contains over 13 million net rentable
square feet of industrial and warehouse space with minimal land available for
future development. North Kansas City has access to all three of the
interstate highways in Kansas City. Other incentives of this independent
municipality are the low income taxes, lack of an inventory property tax and
the lowest property tax in the Kansas City metroplex.
North Topping Street. North Topping Street is an industrial warehouse
building containing 119,118 net rentable square feet. The Property's major
clients are Quality Warehouse and Porteous Realty Investments. The Property is
located at 1501-1599 North Topping Street, in Executive Park, an industrial
area four miles northeast of the central business district. Executive Park
draws companies looking for newer product with Missouri's low cost base.
Executive Park contains approximately 7.5 million net rentable square feet of
industrial and warehouse space.
Airworld Drive. Airworld Drive is a warehouse building containing 200,000
net rentable square feet. The Property was 100% leased to a single tenant
whose lease expired on March 31, 1996, and the Property is currently not
leased. The Company is negotiating with a number of potential tenants for the
space. The Property is located at 107 NW Airworld Drive, Kansas City,
Missouri. Airworld Drive is part of the Airworld Center, which is a 330 acre
master planned office and industrial park located in the Airport Industrial
submarket in the northern industrial area of Kansas City, Missouri. The
Airport submarket contains approximately 1.9 million net rentable square feet
of industrial and warehouse space. The centerpieces of this submarket are
Airworld Center and Executive Hills North, an office park. Airworld's
attraction for tenants includes proximity to the airport, good freeway access,
available labor supply, lower occupancy costs and high quality
telecommunications and electrical infrastructure. The Company also owns a 3.6
acre potential development parcel adjacent to this Property.
107th Terrace. 107th Terrace is a warehouse building containing 96,700 net
rentable square feet. Sony Corporation currently leases 100% of the Property.
The Property is located at 8281 NW Airworld Drive, Kansas City, Missouri. The
Property is also part of the Airworld Center.
DALLAS INDUSTRIAL PROPERTIES. The Company's Industrial Properties in Dallas,
Texas consist of four complexes containing warehouse, distribution,
manufacturing, service and technical center space. The four complexes making
up the Dallas Industrial Properties are: Nicholson III, 13425 Branchview Lane,
1002 Avenue T, and 1526 Vantage Drive.
Nicholson III. Nicholson III is a three building industrial distribution,
warehousing and service center complex containing 155,712 net rentable square
feet. The Properties' major tenants are DFW Water Quality, Inc. and Aloe
Commodities, Inc. The Properties are located at 12901 Nicholson Road, Farmers
Branch, Texas, in the Valwood Industrial submarket, which is just outside the
Valwood Improvement District. The Properties have very good freeway access to
all parts of the city, via I-35 and I-635.
74
<PAGE>
13425 Branchview Lane. 13425 Branchview Lane is an industrial distribution
and warehousing property containing 121,250 net rentable square feet. Iron
Mountain Records Management currently leases 100% of the Property. The
Property is located at 13425 Branchview Lane, Farmers Branch, Texas, 200 yards
off the I-35 access road and close to the LBJ Freeway. The Property is in the
Valwood Industrial submarket, which is just outside the Valwood Improvement
District. The Valwood Industrial submarket is among the largest and highest
quality in the Dallas area with approximately 31 million square feet of
industrial space.
1002 Avenue T. 1002 Avenue T is a distribution and warehousing facility
containing 100,000 net rentable square feet. The Room Store currently leases
100% of the Property. The Property is located at 1002 Avenue T, Grand Prairie,
Texas, in the north section of the Great Southwest/CentrePort Industrial
District, the second largest submarket in the Dallas area. The northern
section of the Great Southwest/CentrePort Industrial District is distinguished
from the southern section by the quality of the building and the restrictive
codes and covenants enacted to protect the image of this submarket. This
Property is of equal distance from the Central Business Districts of both
Dallas and Fort Worth and is ten minutes from DFW Airport.
1625 Vantage Drive. 1625 Vantage Drive is a single-story industrial
distribution building containing 50,000 net rentable square feet, of which
6,000 square feet are devoted to office area. Dal-Ton Shippers Association
currently leases 100% of the Property. The Property is located at 1625 Vantage
Drive, Carrollton, Texas, in the North Dallas submarket which contains
approximately 33 million net rentable square feet of industrial property. This
area has a history of strong occupancies with warehouse/distribution lease
rates above the citywide average. The submarket is well placed in close
proximity to the employment centers in North Dallas, the Dallas North Tollway
and I-35E.
HOUSTON INDUSTRIAL PROPERTIES.
West Loop Business Park. The West Loop Business Park is a service center
development located in the northwest area of Houston, Texas. The Properties
consist of five one-story buildings containing a total of 75,231 square feet.
The Properties' major tenants are Houston Cellular and Sawyer and Associates.
The Properties are part of Western Loop Business Park, a twelve-building mixed
use business park located just off the west loop of Interstate 610 in the
Galleria area of Houston.
MILWAUKEE INDUSTRIAL PROPERTIES. The Company owns 17 Industrial Properties
containing approximately 1.2 million net rentable square feet in 3 locations
in Milwaukee, Wisconsin. The buildings were built between the years of 1970 to
1987. The Milwaukee Industrial Properties are made up of three groups of
properties: the Airport Properties, the Oakwood Properties and the North West
Properties.
Airport Properties. The Airport Properties consist of 12 Industrial
Properties containing a total of 572,953 net rentable square feet. The major
tenants at these Properties are General Electric Company and Northwestern
Mutual Life. The Airport Properties are located adjacent to General Mitchell
International Airport.
In addition to the buildings, the Company owns two Development Parcels
totaling 17 gross acres adjacent to the Airport Properties. The net acreage of
13.5 acres will support up to 250,000 square feet of new development. The
largest parcel of 13 acres, which can support 250,000 square feet, is graded
into pad sites and is being actively marketed for build-to-suit development. A
contract has been executed with Budget Car Rental for approximately 6 acres of
the 13 acre parcel at the corner of Sixth Street and Grange Avenue and is
scheduled to close in August of 1996. A 21,000 square foot expansion of
Building 10 for Airborne Express which will utilize approximately 1.5 acres
adjacent to the existing structure, is scheduled to begin construction in
September of 1996.
Oak Creek Properties. The Oak Creek Properties consist of two
warehouse/distribution centers, Buildings 7 and 13, containing approximately
232,000 net rentable square feet. Pepsico and Distribution Specialists
currently lease 100% of Building 7 and 13, respectively. The Oak Creek
Properties are located in the Airport/Oak Creek submarket, just southwest of
the General Mitchell International Airport.
75
<PAGE>
North West Properties. The North West Properties consist of three
warehouse/distribution centers, Buildings 14, 15 and 18, containing a total of
413,371 net rentable square feet. Ambrosia Chocolate and the Bradley
Corporation currently lease 100% of Buildings 14 and 15, respectively. Building
18 is currently unoccupied. The North West Properties are located in the
Bradley Industrial Park which is located in northwestern suburban Milwaukee
near the town of Brown Deer.
76
<PAGE>
The following table sets forth additional information for each of the
Industrial Properties.
INDUSTRIAL PROPERTIES--ADDITIONAL DATA
<TABLE>
<CAPTION>
COMPANY'S
PERCENTAGE TOTAL BASE 1995
OWNERSHIP NET PERCENT RENT FOR ANNUAL
AFTER OWNERSHIP LAND RENTABLE LEASED YEAR ENDED BASE RENT
FORMATION INTEREST YEAR YEAR AREA NUMBER SQUARE AS OF 12/31/95 PER LEASED
PROPERTY TRANSACTIONS DATE) DEVELOPED ACQUIRED ACRES OF BLDGS. FEET 3/31/96 (IN THOUSANDS) SQUARE FOOT
-------- ------------ --------- --------- -------- ----- --------- --------- ------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOS ANGELES
INDUSTRIALS:
Pacific Gateway
Center......... 100% Fee 1972-1984 1996 68.0 18 1,252,708 88% $ 4,855 $4.25
BALTIMORE
INDUSTRIALS:
8869 Greenwood.. 100 Fee 1986-1987 1993 5.0 1 89,582 74 296 3.29
1329 Western
Avenue......... 100 Fee 1988 1994 14.4 1 185,600 80 713 4.79
Deep Run 1 & 2.. 100 Fee 1988 1994 10.7 2 169,112 100 629 3.72
4611 Mercedes
Drive.......... 100 Fee 1990 1994 10.2 1 178,133 100 711 3.99
9050 Junction 100 Fee 1989 1993 7.0 1 108,350 100 395 3.66
Drive..........
KANSAS CITY
INDUSTRIALS:
Northland Park.. 100 Fee 1975-1980 1992 40.1 4 925,007 100 2,312 2.50
North Topping
Street......... 100 Fee 1975-1980 1993 5.9 1 119,118 100 276 2.32
Airworld Drive.. 100 Fee 1975-1980 1994 13.1 1 200,000 100(1) 358 1.79
107th Terrace... 100 Fee 1975-1980 1994 6.3 1 96,700 100 244 2.52
DALLAS
INDUSTRIALS:
Nicholson III... 100 Fee 1981 1992 7.2 3 155,712 73 468 3.90
13425
Branchview..... 100 Fee 1970 1993 5.5 1 121,250 100 274 2.26
1002 Avenue T... 100 Fee 1981 1993 4.6 1 100,000 100 233 2.33
1625 Vantage
Drive.......... 100 Fee 1984 1993 3.9 1 50,000 100 193 3.66
HOUSTON
INDUSTRIALS:
West Loop
Business Park.. 100 Fee 1986 1995 6.7 5 75,231 87 508 6.96
MILWAUKEE
INDUSTRIALS:
Airport
Properties..... 100 Fee 1970-1980 1993 34.5 12 572,953 97 1,906 3.48
Oak Creek
Properties..... 100 Fee 1970-1979 1993 12.1 2 232,000 100 673 2.90
North West
Properties..... 100 Fee 1973-1987 1993 23.7 3 413,371 83 1,258 3.04
----- --- --------- --- ------- -----
Total--
Industrial
Properties..... 278.9 59 5,044,827 93% $16,302 $3.31
===== === ========= === ======= =====
<CAPTION>
SQUARE FEET
LEASED BY
NUMBER OF MAJOR
TENANT SIGNIFICANT TENANTS
PROPERTY LEASES TENANTS (NAME) (IN THOUSANDS)
-------- --------- --------------------------- --------------
<S> <C> <C> <C>
LOS ANGELES
INDUSTRIALS:
Pacific Gateway
Center......... 22 Fujitsu-Ten Corp. 76
Nippon Express 353
BALTIMORE
INDUSTRIALS:
8869 Greenwood.. 3 Wilmar Industries 29
Systems Connection 23
1329 Western
Avenue......... 7 Winchester Homes 48
Electr. Data Systems Corp. 28
Deep Run 1 & 2.. 3 Elite Spice 88
Tate Access Floors 81
4611 Mercedes
Drive.......... 1 Crown Cork and Steel 178
9050 Junction 1 Professional Mailing and
Drive.......... Distribution Services 108
KANSAS CITY
INDUSTRIALS:
Northland Park.. 13 Dunlop Tire Corp. 230
Distribution Services 162
North Topping
Street......... 3 Quality Warehouse 86
Porteous Realty Investments 18
Airworld Drive.. 1 Sony Electronics(1) 200
107th Terrace... 1 Sony Electronics 97
DALLAS
INDUSTRIALS:
Nicholson III... 15 DFW Water Quality, Inc. 33
Aloe Commodities Int'l 20
13425
Branchview..... 1 Iron Mtn. Records Mgmt. 121
1002 Avenue T... 1 The Room Store 100
1625 Vantage
Drive.......... 1 Dal-Ton Shippers 50
HOUSTON
INDUSTRIALS:
West Loop
Business Park.. 12 Houston Cellular 15
Sawyer and Associates 12
MILWAUKEE
INDUSTRIALS:
Airport
Properties..... 29 General Electric Company 118
Northwestern Mutual Life 100
Oak Creek
Properties..... 2 Pepsico Food Systems 120
Distribution Specialists 112
North West
Properties..... 4 Bradley Corp. 119
---------
Ambrosia Chocolate 101
--------------
Total--
Industrial
Properties..... 120 2,826
========= ==============
</TABLE>
- ------
(/1/A)lease with a tenant for 100% of the space at the Airworld Drive expired
April, 1996. The Property is currently not leased.
77
<PAGE>
OPTION PROPERTIES
The Company has options to acquire an office building containing
approximately 1.0 million net rentable square feet and four industrial
buildings containing approximately 268,085 net rentable square feet. All of
the Option Properties are managed by the Company. The following table sets
forth the location, number of buildings, net rentable square feet, occupancy
(as of March 31, 1996) and 1995 net operating income for each Option Property.
OPTION PROPERTIES
<TABLE>
<CAPTION>
1995 NET
NUMBER OF NET RENTABLE PERCENTAGE OPERATING
PROPERTY LOCATION BUILDINGS SQUARE FEET LEASED(/1/) INCOME
- -------- -------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Burnett Plaza........... Fort Worth, Texas 1 1,008,141 85% $11,551
Wood Dale 1 & 2......... Chicago, Illinois 2 116,076 100% 493
155 Alexandra Way....... Chicago, Illinois 1 110,000 100% 386
Lincolnshire............ Chicago, Illinois 1 42,009 100% 121
--- --------- --- -------
Total/Weighted Average.. 5 1,276,226 88% $12,551
=== ========= === =======
</TABLE>
- --------
(/1/As)of March 31, 1996.
Burnett Plaza
Burnett Plaza is a 40-story, Class A office building located in downtown
Fort Worth, Texas. The building was developed by PPL in 1983 and contains
1,008,141 net rentable square feet with an attached parking facility. The
building is constructed primarily of reinforced concrete with an exterior of
architectural concrete and grey insulating glass set in dark anodized aluminum
frames. Interior spaces are large and column free making them ideal for larger
users. PPL currently manages this property. Major tenants of the building are
Union Pacific Resource Corporation ("UPRC") and Meridian Oil, which occupy
approximately 439,000 and 204,000 square feet of area, respectively, under
leases that expire in 1998 and 2013, respectively.
The building is located at 801 Cherry Street, Fort Worth, Texas, in a block
bounded by Burnett Park and Tenth, Cherry and Seventh streets. This location
provides access to downtown Fort Worth and DFW Airport and has excellent
visibility from surrounding freeways. Located on the southwestern side of the
Fort Worth central business district, Burnett Plaza is close to Forth Worth's
more exclusive residential neighborhoods and its primary cultural and
educational centers, such as the Kimball Art Museum, the Amon Carter Museum of
Western Art and the Fort Worth Zoological Park.
The Company has a contingent agreement to purchase 100% of the partnership
interests of the current owner of Burnett Plaza, within 18 months after the
closing of the Offering, for an aggregate purchase price of $11 million,
including approximately $8 million in Units (the number of which shall be
based on the price of the Common Shares at the time of purchase) and the
assumption of $110 million of debt secured by the property. The current owner
of Burnett Plaza is a member of the Prentiss Group. The contingent purchase
agreement is subject to approval by the Board of Trustees (and including a
majority of the Independent Trustees) of the Company. If the Company purchases
the partnership interests in Burnett Plaza, it intends to pay down immediately
$32 million of the approximately $110 million of mortgage debt on the
property. The remaining approximately $78 million of mortgage debt will accrue
interest at 7.625% per annum and will mature on or about March 1, 2003. The
Company will have the option to extend the term of the loan for an additional
three years at an interest rate equal to 1.70% over the interest rate on
comparable term Treasury notes at the time of the extension but not less than
7.65%. If approved by the Board, the Company must close under the contingent
purchase agreement if, within the 18 month period, UPRC, which currently
leases approximately 440,000 net rentable square feet, enters into a new or
amended lease extending the term of its current lease beyond its 1998
expiration and modifying its terms. The purchase price was determined assuming
that under the new UPRC lease, the property would have an
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annual net operating income of approximately $10.8 million, producing a
contribution to the Company's annual Funds from Operations of approximately
$4.85 million and a Funds from Operations yield of 12.125%. If UPRC executes a
lease on terms different from those proposed by the Company but covering
substantially all of the square footage covered by the current lease, the
purchase price for the building will be adjusted to maintain the Company's
Funds from Operation yield from the property at 12.125%. If UPRC does not
execute a new lease for substantially the same square footage, the Company has
no obligation to purchase Burnett Plaza. Although the current owner of Burnett
Plaza is currently negotiating the terms of a new lease with UPRC, there are
no assurances that UPRC will execute a new lease or, therefore, that the
Company will acquire the property.
The Company also has an option to acquire Burnett Plaza (subject to the
approval of the Board of Trustees, including a majority of Independent
Trustees) for its fair market value as determined by appraisal within
30 months after the closing of the Offering if UPRC does not execute a new
lease or executes a lease for substantially less space. The Company does not
intend to exercise the option unless one or more tenants are secured to occupy
substantially all of the space currently leased to and vacated by UPRC. The
current owner of Burnette Plaza is not currently actively seeking replacement
tenants for the UPRC lease because discussions with UPRC are ongoing and the
space would not be available until 1998. There are no assurances that the
space currently leased by UPRC will be leased within the option period if UPRC
does not renew its lease, or that the Company will exercise the option. Upon
the expiration of the option period, the Company will thereafter have a right
of first offer with respect to Burnett Plaza. Notwithstanding the Company's
option and right of first offer, if the UPRC lease is not renewed within 18
months, there are no assurances that the current owner will have funds
sufficient to pay debt service to the mortgage lender (in light of the
potential loss of all or a portion of the UPRC rental income) or that the
lender will not foreclose on Burnett Plaza as a result of other defaults by
the current owner. If the mortgage lender forecloses on Burnett Plaza, the
Company's option and right of first refusal on that property will terminate.
Chicago Industrial Buildings
The Company has an option to purchase the four industrial properties in
Chicago, Illinois listed above (the "Chicago Industrial Buildings") at fair
market value less one-half of a market rate real estate commission. The
Company has tendered an offer to the current owner of the Chicago Industrial
Buildings to purchase them for $10.5 million. The Company has not yet received
a response to its offer. If the current owner of the Chicago Industrial
Buildings does not accept the Company's offer, the Company and the owner will
determine the fair market value of the properties under the terms specified in
the agreement creating the Company's option. The determination of fair market
value could take several months. Consequently, there can be no assurances as
to the timing of the purchases of the Chicago Industrial Buildings or the
purchase price that the Company will pay for them.
Wood Dale 1 and 2. Wood Dale 1 and 2 is a two-building industrial,
distribution, warehouse and servicing complex containing 116,076 net rentable
square feet. The major tenants are Vacumette Corporation, Sun Chemical and
General Electric Company. The buildings are located in Wood Dale (DuPage
County), Illinois.
155 Alexandra Way. 155 Alexandra Way is an industrial distribution,
warehouse and servicing building containing 110,000 net rentable square feet.
Michelin Tire Corporation currently leases 100% of the building. The building
is located in Carol Stream (DuPage County), Illinois.
Lincolnshire. Lincolnshire is an industrial distribution, warehouse and
servicing building containing 42,009 net rentable square feet. Food Equipment
Technologies currently leases 100% of the building. The building is located in
Lincolnshire (Lake County), Illinois.
Financing
The Company intends to fund the cash portion of the purchase price of
Burnett Plaza and the entire purchase price of the Chicago Industrial
Buildings, if it exercises the related options, with borrowings under the Line
of Credit. In the event that the Company acquires all of the Option
Properties, it will have approximately $57.5 million of further borrowing
capacity available under the Line of Credit for future acquisitions or
development.
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OPTION PARCELS
The Company has contingent purchase agreements and/or options and rights of
first refusal to acquire the following five Development Parcels, each of which
is located within an industrial park developed by PPL.
<TABLE>
<CAPTION>
PARCEL MAXIMUM
ACREAGE DEVELOPMENT
(APPROX.) LOCATION MARKET (SQUARE FEET)
--------- -------- ------ -------------
<S> <C> <C> <C>
15.2 Park West Commerce Center Dallas, TX 320,000
14.8 Park West Commerce Center Dallas, TX 320,000
14.1 Continental Executive Parke Chicago, IL 275,000
12.7 Continental Executive Parke Chicago, IL 250,000
3.2 Continental Executive Parke Chicago, IL 75,000
---- ---------
60.0 1,240,000
==== =========
</TABLE>
The Company, on January 1, 1997, will acquire a 15.2 acre Development Parcel
located in the Park West Commerce Center in Coppell, Texas, a northwest suburb
of Dallas near the DFW Airport, if a building permit has been obtained by that
time for construction on the parcel. The parcel is zoned for industrial use
and can support approximately 320,000 net rentable square feet of development.
The Prentiss Group intends to commence the development of a 320,000 square
foot industrial warehouse distribution building on this site in January 1997.
If a building permit has been obtained by that time, the Company will, on
January 1, 1997, acquire the Prentiss Group's interest in the parcel at its
cost (including acquisition, development, financing and construction costs, if
any), and complete the development. If a building permit has not been obtained
at that time, the Company will have the option to acquire the parcel, at any
time, at a cost equal to the Prentiss Group's costs up to the closing of the
acquisition. The Prentiss Group may seek a joint venturer in any development
on the parcel, and the Company would succeed to the Prentiss Group's joint
venture interest if it exercises the option, including any rights to receive
management, development, or leasing fees and expense reimbursements. The Park
West Commerce Center was developed by PPL.
The Company also holds an option to purchase an adjacent 14.8 acre parcel of
developable land in the Park West Commerce Center in Dallas from PCIG, an
affiliate of the Prentiss Group. This parcel is zoned for industrial use and
can also support approximately 320,000 net rentable square feet of
development. The parcel may be purchased in increments. The option period
expires on February 15, 1998, and the purchase price will be equal to the fair
market value of the exercised parcel less an amount equal to fifty percent
(50%) of a market rate real estate commission. After February 15, 1998, the
Company will have a right of first refusal with respect to such parcel.
The Company will, on January 1, 1997, acquire from the Prentiss Group a 12.7
acre Development Parcel in the Continental Executive Parke, located in Vernon
Hills, Illinois, which is a part of the northwestern suburbs of Chicago,
Illinois, if a building permit for construction on the parcel has been
obtained by that time. The parcel is zoned for industrial use and can support
250,000 net rentable square feet of development. If a building permit for
construction on the parcel has been obtained by January 1, 1997, the Company
will acquire the Prentiss Group's interest in the parcel at its cost at that
time, and complete the development. If a building permit has not been obtained
at that time, the Company will have the option to acquire the parcel, at any
time, at a cost equal to the Prentiss Group's costs up to the closing of the
acquisition. The Continental Executive Parke was developed by PPL.
The Company also holds an option to purchase two parcels of development land
totalling approximately 17.3 acres in Continental Executive Parke from PCIG.
The parcels consists of five separate lots, are zoned for industrial use and
can support a total of 350,000 net rentable square feet of development. Each
parcel may be purchased in increments. The option period expires on February
15, 1998, and the purchase price for any lot on which the option is exercised
will be the fair market value of the exercised lots less an amount equal to
50% of a market rate real estate commission. The Company will additionally
have a right of first refusal after February 15, 1998 to purchase any of the
lots which are offered for sale.
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HISTORICAL NON-INCREMENTAL REVENUE-GENERATING CAPITAL EXPENDITURES, TENANT
IMPROVEMENT COSTS AND LEASING COMMISSIONS
The following table sets forth annual and per square foot recurring, non-
incremental revenue-generating capital expenditures and non-incremental
revenue-generating tenant improvement costs and leasing commissions to retain
revenues attributable to existing leased space for the period 1993 through
1995 for the Office Properties and the Industrial Properties. Revenue-
generating tenant improvement costs and leasing commissions are not included
in the table set forth below. The historical capital expenditures are not
necessarily indicative of future recurring non-incremental revenue-generating
capital expenditures or non-incremental revenue-generating tenant improvement
costs or leasing commissions.
<TABLE>
<CAPTION>
1993-1995
1993 1994 1995 AVERAGE
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CAPITAL EXPENDITURES:
Office Properties
Annual............................ $320,055 $ 166,717 $ 591,349 $ 359,374
Per Square Foot................... 0.19 0.07 0.26 0.17
Industrial Properties
Annual............................ 817,381 423,912 1,272,747 838,013
Per Square Foot................... 0.20 0.09 0.26 0.18
NON-INCREMENTAL REVENUE-GENERATING
TENANT IMPROVEMENT COSTS
AND LEASING COMMISSIONS
Office Properties
Annual Tenant Improvement Costs... $834,358 $1,078,643 $1,344,143 $1,085,715
Per square foot improved.......... 5.34 3.14 4.07 3.93
Annual leasing commissions........ 391,090 499,440 603,836 498,122
Per square foot improved.......... 2.50 1.45 1.83 1.80
Total per square foot............. 7.84 4.59 5.90 5.73
Industrial Properties
Annual Tenant Improvement Costs... $555,247 $ 286,092 $ 465,877 $ 435,739
Per square foot improved.......... 0.94 0.47 0.34 0.51
Annual leasing commissions........ 418,052 276,927 714,606 469,862
Per square foot improved.......... 0.71 0.46 0.52 0.55
Total per square foot............. 1.65 0.93 0.86 1.06
</TABLE>
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HISTORICAL INCREMENTAL REVENUE-GENERATING TENANT IMPROVEMENT COSTS AND LEASING
COMMISSIONS
The following table sets forth annual and per square foot incremental
revenue-generating tenant improvement costs and leasing commissions for the
period 1993 through 1995 for the Office Properties and the Industrial
Properties. There were no historical incremental revenue-generating capital
expenditures. The foregoing table provides all remaining tenant improvement
costs and leasing commissions not included in the table set forth above for
the Properties. Incremental revenue-generating tenant improvement costs and
leasing commissions generally relate to vacant space that is not generating
income. The historical incremental revenue-generating tenant improvement costs
and leasing commissions set forth below are not necessarily indicative of
future incremental revenue-generating tenant improvement costs and leasing
commissions.
<TABLE>
<CAPTION>
1993-1995
1993 1994 1995 AVERAGE
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
INCREMENTAL REVENUE-GENERATING TENANT
IMPROVEMENT COSTS AND LEASING COMMISSIONS
Office Properties
Annual Tenant Improvements.............. $483,274 $691,166 $2,318,668 $1,164,370
Per square foot improved................ 9.41 3.50 7.86 6.42
Annual Leasing Commissions.............. 185,095 302,380 744,493 410,656
Per square foot leased.................. 3.60 1.53 2.52 2.27
Total per square foot................... 13.01 5.03 10.38 8.69
Industrial Properties
Annual Tenant Improvements.............. $777,912 $246,880 $ 588,315 $ 537,702
Per square foot improved................ 2.12 1.70 2.26 2.09
Annual Leasing Commissions.............. 189,011 108,853 214,407 170,756
Per square foot leased.................. 0.52 0.75 0.82 0.66
Total per square foot................... 2.64 2.45 3.08 2.75
</TABLE>
PRENTISS PROPERTIES SERVICE BUSINESS
The Company manages approximately 250 office and industrial properties owned
by third parties with approximately 30 million net rentable square feet leased
to over 2,300 tenants. These properties are owned by over 45 different clients
and are located in 16 markets throughout the U.S. In addition to property
management and leasing, the Company offers its clients a full range of related
services including tenant construction, marketing, insurance, accounting, tax,
real estate law, acquisition, disposition, facilities management, corporate
services and asset management.
INSURANCE
The Company will keep in force comprehensive insurance, including liability,
fire, workers' compensation, extended coverage, rental loss and, when
available on reasonable commercial terms, flood and earthquake insurance, with
policy specifications, limits and deductibles customarily carried for similar
properties. The Company currently maintains a $20 million blanket earthquake
policy on the Properties it manages and the Properties it owns in California.
Certain types of losses, however (generally of a catastrophic nature such as
acts of war, earthquakes for properties located outside of California, etc.),
are either uninsurable or are not economically insurable. Certain types of
losses, such as those arising from subsidence activity, are insurable only to
the extent that certain standard policy exceptions to insurability are waived
by agreement with the insurer. See "Risk Factors--Real Estate Investment
Risks--Uninsured Loss." The Company believes, however, that the Properties are
adequately insured in accordance with industry standards.
In 1995, an affiliate of PPL invested in a managing general agency which was
a leading insurance broker. Through the MgmtPlus+ Preferred Risk Real Estate
Insurance Program sponsored by PPL, a leading insurance
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broker has offered its clients insurance cost savings, better asset protection,
higher limits and improved claims handling through insurance coverage
specifically designed for real estate. The PPL affiliate received distributions
of $54,000 in 1995 from its investment in the managing general agency. In
connection with the Formation Transactions, a subsidiary of the Operating
Partnership will acquire the investment in the managing general agency.
ENVIRONMENTAL MATTERS
In connection with the ownership and operation of the Properties, the Company
or the Operating Partnership, as the case may be, may be potentially liable for
costs associated with the removal or remediation of certain hazardous or toxic
substances or the release of or exposure to hazardous substances, including
ACMs, into the air. See "Risk Factors--Real Estate Investment Risks--Possible
Environmental Liabilities."
Phase I ESAs have been obtained on all of the Properties prior to the closing
of the Offering to identify potential sources of contamination for which the
Properties may be responsible and to assess the status of environmental
regulatory compliance. The Phase I ESAs included historical reviews of the
Properties, reviews of certain public records, preliminary investigations of
the lots and surrounding properties, screening for the presence of asbestos,
PCBs and underground storage tanks, and the preparation and issuance of a
written report. The Phase I ESAs did not include invasive procedures, such as
soil sampling or ground water analysis.
For a number of the Properties, the Phase I ESAs referenced prior Phase II
ESAs obtained on such Properties. Phase II ESAs generally involve more invasive
procedures than Phase I ESAs, such as soil sampling and testing or the
installation and monitoring of groundwater wells. Except as noted below, the
ESAs have not revealed any environmental condition, liability or compliance
concern that the Company believes would have a material adverse affect on the
Company's business, assets or results of operations, nor is the Company aware
of any such condition, liability or concern.
The land (the "Plant Site") underlying one industrial complex containing
eighteen Industrial Properties, Pacific Gateway Center ("PGC"), was formerly
the site of a synthetic rubber manufacturing plant (the "Plant") owned by the
United States Government and subsequently owned or operated by numerous
companies, including Shell Oil Company ("Shell") and Dow Chemical Company
("Dow"). During the operation of the Plant, wastes were disposed of in pits and
ponds located just to the south of PGC (the "Plant Site Affected Area"). In
1994, the Plant Site Affected Area was deeded back to Shell by the Prentiss
Group affiliate that owned the property, and Shell agreed to indemnify the
Prentiss Group affiliate and any successors in interest against (i) any costs
of remediation of the Plant Site Affected Area and (ii) any suit for damages
for personal injury or property damage brought by neighboring landowners.
Environmental studies conducted by Dow and Shell on the Plant Site have
detected the presence of groundwater contamination about 60 feet below the
surface of the Plant Site, which appears to be related to the operations of the
Plant. Limited soil contamination has also been found on parcels in the area,
including parcels that will be owned by the Company. In July 1991, the United
States Environmental Protection Agency ("EPA") proposed that the Plant Site
Affected Area be listed on the National Priorities List ("NPL") of Superfund
sites. Comments were submitted to the EPA challenging the proposal, but no
action was taken by the EPA. On June 17, 1996, the EPA re-proposed that the
Plant Site Affected Area be listed on the NPL. It is unclear whether the Plant
Site Affected Area will be included on the NPL. In addition, PGC is located
about one block east of an additional Superfund site, the Montrose Chemical
Superfund Site. Contaminants associated with this site have been detected in
the groundwater in the vicinity of PGC. Contamination also has been found in
groundwater to the south of the Plant Site Affected Area (the "Study Area").
According to reports prepared by Shell and Dow, this contamination appears to
be associated with leaks from pipelines located in that area.
All past and present owners of the land underlying PGC, including the United
States Government, Dow, Shell and the current owner, in which a Prentiss Group
affiliate is a general partner, are Potentially Responsible
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Parties for the investigation and remediation of the Plant Site. However, the
current owner is close to execution of an indemnification agreement with Shell
whereby, in consideration of the waiver by the current owner of any claim it
might have against Shell for damage to or diminution in the value of its
property, Shell would (i) agree to indemnify and hold harmless any successor of
the current owner, including the Company and any subsequent purchasers, tenants
and lenders, from any liability relating to clean up or remediation costs for
the Plant Site or for any contamination resulting from the interrelationship of
(a) the Montrose Chemical Superfund Site and/or the Study Area and (b) the
Plant Site, and (ii) indemnify and hold harmless any successor of the current
owner, including the Company, from any liability arising out of any third party
tort claims for personal injury or property damage. While this indemnity does
not extend to claims for diminution in value or consequential damages resulting
from the remediation of the property or Shell's actions, any affected party,
including the Company, would have the right to make a claim for any such
damages against the responsible party.
In addition to these indemnification arrangements, the EPA has indicated its
willingness to enter into a de minimis landowner settlement with the current
owner of PCG by which the owner would receive a release, covenant not to sue
and contribution protection from the United States in exchange for a one-time
payment. The current owner has requested that the EPA extend that protection to
subsequent purchasers of all or any portion of the property; if successful, the
benefit of this agreement would extend to the Company.
The Company believes that its effective share of any costs to remediate the
Plant Site will not have a material adverse effect on the Company. The Company
believes that despite its possible technical liability as an owner or operator
of contaminated property, existing evidence makes clear that the contamination
of concern to the regulatory agencies did not result from the present use of
the Plant Site as an industrial park. Further, the Company believes that the
existing and pending indemnifications from Shell and the potential future de
minimis settlement agreement with the EPA will protect the Company against any
future costs of a material nature.
The ESAs for the Industrial Properties located in Milwaukee, Wisconsin,
revealed lead contamination in some of the soil near the property lines of two
of the Properties and the Development Parcel adjacent to those Properties (the
"Milwaukee Affected Areas"). The ESAs and the Wisconsin Department of Natural
Resources ("WDNR") have concluded that the contamination is the result of
unauthorized placement of contaminated soil by the owner of a vacant lot that
is located between the two Properties and the Development Parcel. The placement
occurred prior to the acquisition of these Industrial Properties by the
Prentiss Group affiliate that currently owns the Properties. Upon discovery of
the unauthorized placement, the Company brought suit against the owner of the
vacant lot, the generators of the contaminated soil and the prior owner of the
Properties. The contaminated soil consists of foundry sand which was found to
contain lead in excess of acceptable trace levels. According to the ESA, the
contamination does not affect the groundwater and is not likely to migrate or
leech into adjoining land or groundwater in the future. A settlement to the
lawsuit has been negotiated under which (i) the Company will transfer the
Milwaukee Affected Areas (a total of approximately 1.6 acres) to the owner of
the vacant lot in exchange for $100,000 and (ii) the owner of the vacant lot
and the generators of the contaminated soil agree to assume all responsibility
for the remediation of the contaminated soil. While the court must approve the
settlement and the WDNR must approve the remediation plan, the Company believes
that both of these events will occur in the near future. In connection with the
settlement, the court has been asked to enter a finding that the current owner
was not in the chain of ownership of the Milwaukee Affected Areas. It is not
possible to predict with certainty what remediation, if any, will be required
at the site if the settlement and remediation plan are not approved or,
therefore, what costs the Company would incur in connection with the
remediation (or related investigation or legal costs). However, based on all
available information, the Company does not believe that the costs would be
material to the Company.
In addition to these matters, it is possible that the ESAs related to any one
of the Properties do not reveal all environmental conditions, liabilities or
compliance concerns or that there are material environmental conditions,
liabilities or compliance concerns that arose at a Property after the related
ESA report was completed of which the Company is otherwise unaware.
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Except as noted above, the Company believes that the Properties are in
compliance in all material respects with all federal, state and local laws,
ordinances and regulations regarding hazardous or toxic substances and other
environmental matters. Neither the Company nor, to the knowledge of the
Company, any of the current owners of the Properties has been notified by any
governmental authority of any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental substances in
connection with any of its present or former properties.
DEPRECIATION OF THE PROPERTIES
For federal income tax purposes, the basis in the Properties of the Company
and the Operating Partnership was approximately $378 million at December 31,
1995. The real property associated with the Properties (other than land)
generally will be depreciated for federal income tax purposes over 40 years
using the straight line method. For financial reporting purposes, the
Properties are recorded at their historical cost and are depreciated using the
straight line method over their estimated useful lives, typically 40 years.
Depreciation, taking the federal tax basis on the Cumberland Office Park
Properties, equals approximately $11.0 million for the land and approximately
$16.9 million for the building. Depreciation on these Properties is computed
on the straight line method at a rate of 2.5% and the life claimed with
respect to the buildings is 40 years. Depreciation is taken on the Walnut Glen
Property, with the federal tax basis equaling approximately $5.4 million for
the land and approximately $32.6 million for the building. Depreciation on
this Property is computed on the straight line method at a rate of 2.5% and
the life claimed with respect to the buildings is 40 years. IBM, which owns a
50% interest in the partnership owning the Broadmoor Austin Properties, takes
all of the depreciation allocated to those Office Properties.
REAL ESTATE TAXES ON SIGNIFICANT PROPERTIES
The 1996 annual real estate taxes paid on the Broadmoor Austin Properties
were approximately $2.1 million, of which the Company would have been
responsible for the payment of 49.9% had the Offering been completed prior to
the time such taxes were due. The Dallas real estate tax rate is 3.868% of
assessed value. The 1996 annual real estate taxes paid on the Walnut Glen
Property were $782,100. The Atlanta real estate tax rate is 2.607% of assessed
value. The 1995 annual real estate taxes paid on Cumberland Office Park were
$418,482. The Austin real estate tax is 2.394% of assessed value.
LEGAL PROCEEDINGS
The Company, the General Partner and the Manager have no operating history
and are not currently parties to any legal proceedings. Additionally, neither
the Operating Partnership, nor any Prentiss Group member (other than in a
representative capacity), is presently subject to any material litigation or,
to the Company's knowledge, has any litigation been threatened against the
Company, the Prentiss Group or the Prentiss Principals, other than routine
actions and administrative proceedings substantially all of which are expected
to be covered by liability insurance and in the aggregate which are not
expected to have a material adverse effect on the business or financial
condition of the Company.
PRENTISS GROUP ASSETS NOT ACQUIRED BY THE COMPANY
PPL and certain other entities owned by the Prentiss Principals will retain
certain assets and liabilities which will not be transferred to the Company in
the Formation Transactions. These assets either were determined to be
inconsistent with the Company's investment objectives or are not continuing
businesses. The most significant excluded assets include the Burnett Plaza
office building (which the Company has an option to purchase); a 5% interest
in a partnership that owns an industrial development near Philadelphia,
Pennsylvania that the Prentiss Group intends to sell in the near future; a 71%
interest in a partnership that owns a 5% profits interest in a limited
liability company that owns a leasehold interest in 50.4 acres zoned for
industrial use at O'Hare International Airport; the Termination Fee Note; fee
receivables relating to prior development projects of the Prentiss Group,
including non-recurring fees relating to the Atlanta Federal Center and the
Atlanta Criminal Justice Center;
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minority interests in distressed assets that are being sold or are soon to be
sold; assets and liabilities of the Prentiss Group relating to contracts and
partnerships with the Resolution Trust Corporation and the Federal Deposit
Insurance Corporation, all of which are expected to expire or dissolve by the
end of 1997; mortgage brokerage contracts within the Prentiss Group that are
scheduled to be sold; and interests in inactive corporate affiliates.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and other
policies of the Company. These policies have been determined by the Company's
Board of Trustees and may be amended or revised from time to time without the
approval of the Company's shareholders, except (i) the Company may not change
its policy of holding its assets and conducting its businesses only through
the Operating Partnership and its subsidiaries, including the General Partner
and the Manager, or joint ventures in which it or a subsidiary is a partner,
without the consent of the Limited Partners as provided in the Operating
Partnership Agreement, (ii) changes in certain policies with respect to
conflicts of interest must be consistent with legal requirements, and (iii)
the Company cannot take any action intended to terminate its qualification as
a REIT without the approval of the holders of two-thirds of the outstanding
Common Shares.
INVESTMENT POLICIES
The Company will conduct all of its investment activities through the
Operating Partnership and its subsidiaries, including joint ventures in which
it is a partner. The Company's investment objectives are to provide quarterly
cash distributions and achieve long-term capital appreciation through
increases in the value of the Company. For a discussion of the Company's
Properties and its development, acquisition and other strategic objectives,
see "Properties" and "Business Objectives."
The Company may purchase income-producing office and industrial and other
types of properties for long-term investment, expand and improve the
Properties or other properties purchased, or sell such real estate properties,
in whole or in part, when circumstances warrant. The Company may also
participate with third parties in property ownership, through joint ventures
or other types of co-ownership. Equity investments may be subject to existing
mortgage financing and other indebtedness or such financing or indebtedness as
may be incurred in connection with acquiring or refinancing these investments.
Debt service with respect to such financing or indebtedness will have a
priority over any distributions with respect to the Common Shares.
While the Company's current portfolio consists of, and the Company's
business objectives emphasize, equity investments in office and industrial
real estate, the Company may, at the discretion of the Board of Trustees,
invest in other types of equity real estate investments, mortgages (including
participation in convertible mortgages) and other real estate interests. Other
than the limitations described in the succeeding paragraph, future development
or investment activities will not be limited to any geographic area or product
type or to a specified percentage of the Company's assets. While the Company
intends to diversify in terms of property location, size and market, the
Company does not have any limit on the amount or percentage of its assets that
may be invested in any one property or any one market area.
Subject to the limitations on ownership of certain types of assets and the
gross income tests imposed by the Code, the Company also may invest in the
securities of other REITs, other entities engaged in real estate activities or
other issuers, including for the purpose of exercising control over such
entities. See "Federal Income Tax Considerations--Requirements for
Qualification--Income Tests" and "--Requirements for Qualification--Asset
Tests." The Company may enter into joint ventures or partnerships for the
purpose of obtaining an equity interest in a particular property in accordance
with the Company's investment policies. Such investments may permit the
Company to own interests in larger assets without unduly restricting
diversification and, therefore, add flexibility in structuring its portfolio.
The Company will not enter into a joint venture or partnership to make an
investment that would not otherwise meet its investment policies. Investments
in such securities are also
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subject to the Company's policy not to be treated as an investment company
under the Investment Company Act of 1940.
FINANCING POLICIES
The Company's Debt Limitation is a policy of incurring debt only if upon
such incurrence the ratio of the Company's combined indebtedness plus its pro
rata share of Joint Venture Debt would be 50% or less of the Company's Total
Market Capitalization. Upon completion of the Offering and the Formation
Transactions, the Company's combined indebtedness will be approximately $63.3
million or approximately 14.2% of Total Market Capitalization (excluding its
pro rata share of Joint Venture Debt), and, together with its pro rata share
of Joint Venture Debt its outstanding total indebtedness will be approximately
$133.3 million or approximately 25.9% of the Company's Total Market
Capitalization. The ratio, which is based, in part, upon the aggregate market
value of the outstanding Common Shares on a fully diluted basis, will
fluctuate with changes in the price of the Common Shares (and the issuance of
additional Common Shares or Preferred Shares, if any) and differ from a debt
to book capitalization ratio, which is based upon book values. A company's
debt to book capitalization ratio may not reflect the current income potential
of its assets and operations, and the Company believes that a debt to Total
Market Capitalization ratio provides a more appropriate indication of leverage
for a company whose assets are primarily income-producing real estate. The
Company's Declaration of Trust and Bylaws do not, however, limit the amount or
percentage of indebtedness that the Company may incur. Accordingly, the Board
of Trustees could alter or eliminate this policy at will. The Company may from
time to time modify its debt policy in light of current economic conditions,
relative costs of debt and equity capital, market values of its properties,
general conditions in the market for debt and equity securities, fluctuations
in the market price of Common Shares, growth opportunities, the Company's
continued REIT qualification requirements and other factors. Accordingly, the
Company may increase or decrease its debt to market capitalization ratio
beyond the limits described above.
To the extent that the Board of Trustees decides to obtain additional
capital, the Company may raise such capital through additional equity
offerings (including offerings of senior securities), debt financings or
retention of cash available for distribution (subject to provisions in the
Code concerning taxability of undistributed REIT income), or a combination of
these methods. As long as the Operating Partnership is in existence, the net
proceeds of the sale of Common Shares by the Company will be transferred to
the Operating Partnership in exchange for that number of Units in the
Operating Partnership equal to the number of Common Shares sold by the
Company. The Company presently anticipates that any additional borrowings
would be made through the Operating Partnership, although the Company may
incur indebtedness directly and loan the proceeds to the Operating
Partnership. Borrowings may be unsecured or may be secured by any or all of
the assets of the Company, the Operating Partnership or any existing or new
property owning partnership and may have full or limited recourse to all or
any portion of the assets of the Company, the Operating Partnership or any
existing or new property owning partnership. Indebtedness incurred by the
Company may be in the form of bank borrowings, purchase money obligations to
sellers of properties, publicly or privately placed debt instruments or
financing from institutional investors or other lenders. The proceeds from any
borrowings by the Company may be used for working capital, to refinance
existing indebtedness or to finance acquisitions, expansions or the
development of new properties, and for the payment of distributions. See
"Federal Income Tax Considerations." Other than restrictions that may be
imposed by lenders from time to time in connection with outstanding
indebtedness, the Company has no established limit on the number or amount of
mortgages that may be placed on any single property or on its portfolio as a
whole.
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered into certain agreements
designed to minimize potential conflicts of interest. See "Management--
Employment Agreements." The Company's Board of Trustees is subject to certain
provisions of Maryland law, which are designed to eliminate or minimize
certain potential conflicts of interest. However, there can be no assurance
that these policies always will be successful in eliminating the influence of
such conflicts, and if they are not successful, decisions could be made that
might fail to reflect fully the interests of all shareholders.
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Declaration of Trust and Bylaw Provisions
The Company's Declaration of Trust, with limited exceptions, requires that a
majority of the Company's Board of Trustees be comprised of persons who are
not officers or employees of the Company or any Affiliate, or Affiliates of
any lessee of any property of the Company. The Declaration of Trust provides
that such Independent Trustee requirement may not be amended, altered, changed
or repealed without the affirmative vote of 85% of the Trustees or the
affirmative vote of two-thirds of the outstanding shares of the Company
entitled to vote. In addition, the Company's Bylaws provide that any
transaction involving the Company, including the purchase, sale, lease or
mortgage of any real estate asset or any other transaction, in which a trustee
or officer of the Company, or any Affiliate of the foregoing, has any direct
or indirect interest other than solely as a result of his status as a trustee,
officer or shareholder of the Company, must be approved by a majority of the
trustees, including a majority of the Independent Trustees, even if the
Independent Trustees constitute less than a quorum. The Company's Bylaws also
include a provision permitting Trustees to engage in the type of business
activities conducted by the Company without first presenting any investment
opportunities to the Company even though such investment opportunities may be
within the scope of the Company's investment policies. These provisions are
subject to any non-competition agreements that may exist. See "Management--
Employment Agreements."
Employment Agreements
At the Closing of the Offering, Michael V. Prentiss and Thomas F. August
will enter into an employment and noncompetition agreement with the Company
that will, subject to certain limited exceptions, prohibit them from engaging
in activities that compete with the Company's businesses during the term of
their employment by the Company and for a period ending two years after the
termination of their employment with the Company. See "Management--Employment
Agreements."
The Operating Partnership
A conflict of interest may arise between the Company and the other Limited
Partners of the Operating Partnership, including the Prentiss Principals, due
to the possibility that a disproportionately large share of any gain
recognized from the sale of any of the Properties contributed by the Limited
Partners, directly or indirectly, to the Operating Partnership will be
allocated to the Limited Partners. The Operating Partnership Agreement gives
the General Partner, a wholly-owned subsidiary of the Company, full, complete
and exclusive discretion in managing and controlling the business of the
Operating Partnership and in making all decisions affecting the business and
assets of the Operating Partnership. In addition, the Company's Bylaws provide
that any transaction (including the sale of a real estate asset) involving the
Company in which an advisor, trustee, officer or shareholder of the Company,
or any Affiliate of the foregoing, has a direct or indirect interest other
than solely as a result of his status as an advisor, trustee, officer, or
shareholder of the Company, must be approved by a majority of the Independent
Trustees. Pursuant to the Operating Partnership Agreement, the Limited
Partners have agreed that in the event of any conflict in the fiduciary duties
owed by the Company to its shareholders, and by the General Partner to such
Limited Partners, the General Partner will fulfill its fiduciary duties to
such Limited Partners by acting in the best interests of the Company's
shareholders. In addition, the General Partner is not responsible for any
misconduct or negligence on the part of its agents, provided that the General
Partner appointed such agents in good faith.
Provisions of Maryland Law
Pursuant to Maryland law (the jurisdiction under which the Company is
organized), each Trustee is required to discharge his duties in good faith,
with the care an ordinarily prudent person in a like position would exercise
under similar circumstances and in a manner he reasonably believes to be in
the best interest of the Company. In addition, under Maryland law, a
transaction between the Company and any of its Trustees or between the Company
and a corporation, firm or other entity in which a Trustee is a director or
has a material financial interest is not void or voidable solely because of
the Trustee's directorship or the Trustee's interest in the transaction if (i)
the transaction is authorized, approved or ratified, after disclosure of the
interest, by the affirmative vote of a majority of the disinterested Trustees,
or by the affirmative vote of a majority of the votes
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<PAGE>
cast by shareholders entitled to vote other than the votes of shares owned of
record or beneficially by the interested Trustee or corporation, firm or other
entity, or (ii) the transaction is fair and reasonable to the Company.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer shares of beneficial interest or other
securities and to repurchase or otherwise reacquire its shares or any other
securities and may engage in such activities in the future. As described under
"Shares Available for Future Sale," the Company expects to issue Common Shares
to holders of Units upon exercise of their Exchange Rights. The Company has
not issued Common Shares, interests or any other securities to date, except in
connection with the formation of the Company. The Company has no outstanding
loans to other entities or persons, including its officers and Trustees. The
Company has not engaged in trading, underwriting or agency distribution or
sale of securities of other issuers, nor has the Company invested in the
securities of other issuers other than the Operating Partnership for the
purpose of exercising control and does not intend to do so in the future. The
Company makes and intends to continue to make investments in such a way that
it will not be treated as an investment company under the Investment Company
Act of 1940. The Company's policies with respect to such activities may be
reviewed and modified or amended from time to time by the Company's Board of
Trustees without approval of shareholders.
At all times, the Company intends to make investments in such a manner
consistent with the requirements of the Code for the Company to qualify as a
REIT unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Company's Board of Trustees, with the consent of
the holders of two-thirds of the outstanding Common Shares, determines that it
is no longer in the best interests of the Company to qualify as a REIT.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves in amounts that the Board
of Trustees determines to be adequate to meet normal contingencies in
connection with the operation of the Company's business and investments.
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MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Trustees and executive officers of the Company immediately after the closing
of the Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael V. Prentiss..... 52 Chief Executive Officer and Chairman of the Board of
Trustees (Term will expire in 1999)
Thomas F. August........ 48 President, Chief Operating Officer and Trustee (Term will
expire 1998)
Thomas J. Hynes*........ 57 Independent Trustee (Term will expire in 1999)
Barry J. C. Parker*..... 49 Independent Trustee (Term will expire in 1999)
Dr. Leonard M. Riggs, 53
Jr.*................... Independent Trustee (Term will expire in 1998)
Ronald G. Steinhart*.... 56 Independent Trustee (Term will expire in 1998)
Lawrence A. Wilson*..... 61 Independent Trustee (Term will expire in 1997)
Dennis J. DuBois........ 50 Executive Vice President
Richard B. Bradshaw, 44 Executive Vice President and National Director of Corporate
Jr..................... Development
Richard J. Bartel....... 45 Executive Vice President--Financial Operations and
Administration, Chief Operating Officer--Property
Management
Mark R. Doran........... 42 Executive Vice President and Treasurer
Lawrence J. Krueger..... 40 Executive Vice President and Managing Director, Midwest
Region
Jeffrey T. Courtwright.. 36 Senior Vice President and Managing Director, Southwest
Region
James B. Meyer.......... 37 Senior Vice President and Managing Director, Southeast
Region
David Robertson......... 39 Senior Vice President and Managing Director, Western Region
Robert K. Wiberg........ 41 Senior Vice President and Managing Director, Mid-Atlantic
Region
</TABLE>
- --------
* Has agreed to be nominated as a Trustee, but is not expected to become a
Trustee until immediately after the consummation of the Offering.
The following are biographical summaries of the Trustees and executive
officers of the Company:
Michael V. Prentiss will serve as Chairman of the Board and Chief Executive
Officer of the Company. Mr. Prentiss, the founder and majority owner of PPL,
has over 25 years experience in real estate development, acquisitions, and
investment management and has acquired or developed properties with an
aggregate value in excess of $2 billion. From 1987 to 1992 he served as
President and Chief Executive Officer of PPL and since 1992 he has served as
its Chairman and Chief Executive Officer. From 1978 to 1987, Mr. Prentiss
served as President of Cadillac Urban, Executive Vice President and member of
the Board of Trustees of Cadillac Fairview, and a member of Cadillac
Fairview's Executive Committee. Cadillac Urban was the largest business unit
of Cadillac Fairview, responsible for all of its office, mixed-use and
suburban office park development activity in the U.S. and Canada. Prior to
1978, Mr. Prentiss was President of Ackerman Development Company. Mr. Prentiss
is a Baker Scholar graduate of the Harvard Graduate School of Business
Administration. He holds a Bachelor of Science degree in Civil Engineering and
a B.A. degree in Business Administration from Washington State University.
Thomas F. August serves as President, Chief Operating Officer and Trustee of
the Company. Mr. August has served as President and Chief Operating Officer of
PPL since 1992. From 1987 to 1992, Mr. August served as Executive Vice
President and Chief Financial Officer of PPL. From 1985 to 1987, Mr. August
served in executive capacities with Cadillac Urban. Prior to joining Cadillac
Urban in 1985, Mr. August was Senior Vice President of Finance for Oxford
Properties, Inc., in Denver, Colorado, an affiliate of a privately-held
Canadian real estate firm. Previously, he was a Vice President of Citibank,
responsible for real estate lending activities in the upper Midwest. Mr.
August holds a B.A. degree from Brandeis University and an M.B.A. degree from
Boston University.
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Thomas J. Hynes serves as an Independent Trustee of the Company. Mr. Hynes
is President and Chief Executive Officer of Meredith & Grew Incorporated, a
Boston-based real estate brokerage firm, and has served in that capacity since
1988. Mr. Hynes has been employed by Meredith & Grew Incorporated since 1965
in which time he has held various offices. Mr. Hynes holds a B.A. degree from
Boston College.
Barry J. C. Parker serves as an Independent Trustee of the Company. Mr.
Parker is the immediate past Chairman of the Board, President and Chief
Executive Officer of County Seat, Inc., a nationwide chain of 740 specialty
apparel stores. Prior to joining County Seat, Inc. in 1985, Mr. Parker worked
for the Children's Place, Inc. for 10 years and held various offices with that
company including Senior Vice President and Chief Financial Officer, and Vice
President and General Merchandising Manager. Mr. Parker worked for Federated
Department Stores, Inc. prior to 1975 and held various management positions
with that company's F&R Lazarus Department Store division. Mr. Parker holds a
B.A. degree from Washington University in St. Louis and an M.B.A. degree from
the University of Pennsylvania's Wharton School of Finance and Commerce.
Dr. Leonard M. Riggs, Jr. serves as an Independent Trustee of the Company.
Dr. Riggs is Chairman and Chief Executive Officer of EmCare, Holdings Inc., a
publicly-held physician practice management company specializing in emergency
medicine. Dr. Riggs founded EmCare Holdings, Inc. as Emergency Health Service
Associates in 1972. Dr. Riggs has also served as the Director of Emergency
Medicine at Baylor University Medical Center since 1974. Dr. Riggs is past
president of the American College of Emergency Physicians and is a director
and member of the compensation committee of American Oncology Resources, Inc.
He holds a B.S. degree from Centenary College of Shreveport, Louisiana and an
M.D. degree from the University of Texas Southwestern Medical School in
Dallas, Texas.
Ronald G. Steinhart serves as an Independent Trustee of the Company. Mr.
Steinhart is Chairman and Chief Executive Officer of Banc One Texas, N.A. and
has served in that capacity since 1995. He was also appointed as Regional
Executive for Banc One Corporation's operations in Oklahoma, Arizona, Colorado
and Utah earlier this year. Prior to 1995, Mr. Steinhart served as President
and Chief Operating Officer of Banc One Texas, N.A. to which he was appointed
in 1992 in connection with the merger of Team Bank into Banc One Texas, N.A.
Prior to that merger, Mr. Steinhart served as Chairman and Chief Executive
Officer of Team Bank, which he founded as Deposit Guaranty Bank in 1988. Mr.
Steinhart served as President and Chief Operating Officer of InterFirst
Corporation from 1981 to 1987. Prior to joining InterFirst Corporation in
1980, Mr. Steinhart organized investors to charter and purchase six banks. Mr.
Steinhart holds a B.A. degree in accounting and a M.S. in finance from the
University of Texas in Austin. He is also a Certified Public Accountant.
Lawrence A. Wilson serves as an Independent Trustee of the Company. Mr.
Wilson is President and Chief Executive Officer of HCB Contractors, a
construction and project management company that is a subsidiary of the Beck
Group. Mr. Wilson serves as a director of TU Electric. Mr. Wilson holds a
L.L.B. degree from the Woodrow Wilson College of Law in Atlanta, Georgia and
is a graduate of the Emory University Advanced Management Program.
Dennis J. DuBois serves as Executive Vice President of the Company. Mr.
DuBois served as Executive Vice President of PPL since 1994 and from 1987 to
1993 as its General Counsel. He has more than 22 years of real estate
experience in acquisitions, development and leasing of major buildings and
mixed-use urban properties. Beginning in 1981, Mr. DuBois served as General
Counsel for Cadillac Urban. Before joining Cadillac Urban in 1981, Mr. DuBois
was a partner in a prominent Baltimore law firm. Mr. DuBois holds a B.A.
degree from the University of Massachusetts and a J.D. from the University of
Maryland Law School. He is a member of the Order of the Coif and a member of
the Bar in the state of Maryland.
Richard B. Bradshaw, Jr. serves as Executive Vice President and National
Director of Corporate Development of the Company, overseeing the property
management, leasing and new business development functions. Mr. Bradshaw has
served PPL in that capacity since 1995. Prior to 1995, he was Executive Vice
President of PPL in charge of development for its eastern region. Prior to
1987, Mr. Bradshaw was Senior Vice President of Cadillac Urban, where he was
involved with a variety of Cadillac Urban's real estate projects. Mr.
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Bradshaw holds a B.A. degree in Business Administration from the University of
Georgia and is a Harvard Business School PMD graduate. He is a member of the
Board of Trustees of Central Atlanta Progress and the Midtown Alliance, and
serves on the Urban Land Institute's Regional Steering Committee.
Richard J. Bartel serves as Executive Vice President--Financial Operations
and Administration and Chief Operating Officer--Property Management of the
Company. Since 1995, Mr. Bartel has served in similar capacities for PPL,
overseeing the operating aspects of its property management business,
including quality control, management training and day-to-day operations. He
also directs financial operations and administration, including accounting and
reporting, taxes, insurance and human resources. Mr. Bartel served as Senior
Vice President of Financial Operations of PPL from 1989 to 1995, Vice
President of Financial Operations of PPL from 1987 to 1989 and Vice President
of Financial Operations of Cadillac Urban from 1986 to 1987. Mr. Bartel holds
a B.S. degree in Accounting from the University of Illinois and a Masters in
Management from Northwestern University's Kellogg Graduate School of
Management. He is also a Certified Public Accountant.
Mark R. Doran serves as Executive Vice President and Treasurer of the
Company. Mr. Doran is responsible for securing interim and long-term financing
and establishing and maintaining relationships with project financing sources.
In 1992 and 1993, Mr. Doran served as Senior Vice President and Treasurer of
PPL, and in 1990 and 1991 he served as its Vice President and Treasurer. Prior
to joining PPL in 1990, Mr. Doran served as Senior Vice President for Lincoln
Property Company, where he was responsible for the financing of Lincoln's
commercial projects throughout the United States. Mr. Doran holds an M.B.A.
degree and a B.B.A. degree in Accounting from Baylor University and is a
member of the Urban Land Institute.
Lawrence J. Krueger serves as Executive Vice President and a Managing
Director of the Company's Midwest region. Mr. Krueger has served in that
capacity for PPL since 1994. He also has primary responsibility for the
development and construction of the 525-acre Continental Executive Parke
office and light industrial complex in suburban Chicago. He served as Senior
Vice President--Development of PPL from 1990 to 1994, Vice President--
Development of PPL from 1987 to 1990 and Vice President--Development Cadillac
Urban from 1986 to 1997. Mr. Krueger holds a B.A. degree in Business from
Indiana University and a Masters degree in Urban Land Economics and Real
Estate Investment Analysis from the University of Wisconsin, Madison. He is a
member of the National Association of Industrial and Office Parks, the
Industrial Development Research Council and the Japan-American Society of
Chicago.
Jeffrey T. Courtwright serves as Senior Vice President and a Managing
Director of the Company's Southwest region. He is also responsible for
development and construction activities for the approximately 1.6 million
square foot Park West office park, and Park West Commerce Center, a 366-acre
industrial park, both in suburban Dallas. From 1993 to 1995, Mr. Courtwright
was Senior Vice President of Lincoln Property Company in Dallas, where he
handled leasing, property development and business development. Mr.
Courtwright holds a B.A. in Business from Southern Methodist University, is a
licensed real estate broker in Texas, a council member of the National
Association of Industrial and Office Parks and a member of the Executive
Committee for the Board of Directors of the Central Dallas Association.
James B. Meyer serves as Senior Vice President and a Managing Director of
the Company's Southeast region. Mr. Meyer has served as Senior Vice President
and Managing Director of PPL since 1995, was Senior Vice President from 1994
to 1995 and was a Vice President from 1990 to 1994. Mr. Meyer was also
responsible for the acquisition of the 500,000 square foot Cumberland Office
Park in Atlanta and the development and sale of One Atlantic Center (IBM
Tower), a 1.1 million net rentable square foot landmark building in Midtown
Atlanta. Prior to 1990, Mr. Meyer worked in various capacities for Cadillac
Fairview, which he joined in 1984. Mr. Meyer holds an M.B.A. from the
University of Pennsylvania's Wharton School of Finance and Commerce and a B.S.
degree in civil engineering from Purdue University. He has served on the
Boards of the Midtown Alliance, Downtown Atlanta Partnership, and numerous
other civic and professional organizations.
David Robertson serves as Senior Vice President and a Managing Director of
the Company's Western region. Mr. Robertson has served as a Senior Vice
President and Managing Director of PPL since 1995, a Vice
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President since 1993 and a General Manager since 1990. From 1986 to 1990, he
worked in various capacities for Cadillac Fairview. Before joining Cadillac
Fairview in 1986, Mr. Robertson was responsible for the management of various
properties for Gerald D. Hines Interests and Henry S. Miller Management
Corporation in Dallas. Mr. Robertson holds a California Real Estate License,
and is a candidate for the Certified Property Manager designation from the
Institute of Real Estate Management. He received a B.S. in banking and finance
from Mississippi State University, and is actively involved in the Institute
of Real Estate Management and the Building Owners and Managers Association.
Robert K. Wiberg serves as Senior Vice President and a Managing Director of
the Company's Mid-Atlantic region. Mr. Wiberg has served as a Senior Vice
President and Managing Director of PPL since 1995 and a Vice President for
Development and Acquisitions since 1990. Prior to joining Cadillac Fairview in
1984, Mr. Wiberg was employed by Coldwell Banker in its Los Angeles office. As
Vice President of Development and Acquisitions, Mr. Wiberg was responsible for
PPL's development in Washington, D.C. and Northern Virginia, including the
Fairview Park project. Mr. Wiberg holds an M.B.A. degree from the University
of California, at Berkeley; a Masters degree in City and Regional Planning
from Harvard University, and a B.A. degree from Cornell University.
BOARD OF TRUSTEES
The business and affairs of the Company will be managed by a Board of
Trustees which will initially have seven members, five of whom will be
Independent Trustees. Messrs. Prentiss and August presently serve as Trustees
of the Company. Immediately following the consummation of the Offerings,
Messrs. Hynes, Parker, Steinhart and Wilson and Dr. Riggs will become
Trustees.
Pursuant to the terms of the Company's Declaration of Trust, the Trustees
are divided into three classes. One class will hold office initially for a
term expiring at the annual meeting of shareholders to be held in 1997, a
second class will hold office initially for a term expiring at the annual
meeting of shareholders to be held in 1998, and a third class will hold office
initially for a term expiring at the annual meeting of shareholders to be held
in 1999. At each annual meeting of the shareholders of the Company, the
successors to the class of Trustees whose terms expire at that meeting will be
elected to hold office for a term continuing until the annual meeting of
shareholders held in the third year following the year of their election and
the election and qualification of their successors. See "Certain Provisions of
Maryland Law and of the Company's Declaration of Trust and Bylaws."
The Continuing Investors have a right, exercisable within one year of the
Closing of the Offering, to nominate one person acceptable to management as a
Trustee. The Company is obligated to facilitate a shareholder vote on such
nominee at a special shareholders meeting to be called upon such nomination.
At such meeting, management will endorse the nominee for election as a Trustee
for a term expiring no less than one year after the election. If elected, such
nominee will have such rights, powers and obligations as any other single
Trustee of the Company possesses. Such a Trustee will not be an Independent
Trustee.
COMMITTEES OF THE BOARD OF TRUSTEES
Audit Committee. Within 30 days following consummation of the Offering, the
Board of Trustees of the Company will establish an Audit Committee that will
consist of two Independent Trustees. The Audit Committee will make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls.
Executive Compensation Committee. The Board of Trustees will also establish
a Compensation Committee (the "Compensation Committee") comprised of two or
more of the Independent Trustees to determine compensation for the Company's
executive officers and to implement the Company's 1996 Share Incentive Plan.
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The Board of Trustees does not have a standing nominating committee. The
full Board of Trustees performs the functions of such a committee.
COMPENSATION OF TRUSTEES
The Company intends to pay its Trustees who are not officers of the Company
fees for their services as trustees. Each such Trustee will receive annual
compensation of $10,000 in Common Shares payable quarterly and a fee of $1,250
plus expenses for attendance in person at each meeting of the Board of
Trustees, $250 for each telephonic meeting of the Board of Trustees and $500
for each committee meeting attended. In addition, each such Trustee will
receive options under the 1996 Trustees' Share Incentive Plan (the "Trustees'
Plan") to purchase 10,000 Common Shares at an exercise price equal to the
Offering Price, which options will vest in equal installments over a four-year
period on the anniversary of the date of grant. Officers of the Company who
are Trustees will not be paid any trustee fees.
EXECUTIVE COMPENSATION
The Company was organized as a Maryland real estate investment trust in July
1996, and paid no cash compensation to its executive officers for the year
ended December 31, 1995.
The following table sets forth the base compensation to be awarded to each
of the five most highly compensated executive officers of the Company during
the fiscal year ending December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS AND
NAME AND PRINCIPAL POSITION SALARY(/1/) OPTIONS(/2/)
--------------------------- ------------ ------------
<S> <C> <C>
Michael V. Prentiss
Chairman and CEO.................................................. $180,000 386,762
Thomas F. August
President and COO................................................. 175,000 173,944
Richard J. Bartel
Executive Vice President.......................................... 160,000 75,000
Richard B. Bradshaw
Executive Vice President.......................................... 150,000 64,366
Dennis J. DuBois
Executive Vice President.......................................... 150,000 39,366
</TABLE>
- --------
(/1/Amounts)given are annualized projections for fiscal year 1996, which ends
December 31, 1996. Does not include bonuses that may be paid to the above
individuals. See "Incentive Compensation".
(/2/Upon)the effective date of the Offering, options to purchase a total of
1,291,439 Common Shares will be granted to Trustees and employees of the
Company under the 1996 Share Incentive Plan (the "1996 Plan") and
Trustees' Plan at a price equal to the Offering Price. In addition, the
Company will award under the 1996 Plan options to purchase 2,000 Common
Shares at the then-current trading price at the time of the award to each
employee achieving a combined 10 years of service with the Prentiss Group
and the Company. In 1996, those awards are expected to total approximately
20,000 options. See "1996 Share Incentive Plan."
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OPTION GRANTS IN FISCAL YEAR 1996(1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF TOTAL ANNUAL RATES OF SHARE
OPTIONS PRICE APPRECIATION FOR
GRANTED OPTION TERM
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION ----------------------
NAME GRANTED (/1/) FISCAL YEAR PER SHARE (/2/) DATE (/3/) 5% 10%
---- ------------- ---------------- --------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael V. Prentiss..... 386,762 29.9% $20.00 , 2006 $4,864,649 $12,327,979
Thomas F. August........ 173,944 13.5% 20.00 , 2006 2,187,848 5,544,439
Richard J. Bartel....... 75,000 5.8% 20.00 , 2006 943,342 2,390,614
Richard B. Bradshaw..... 64,366 5.0% 20.00 , 2006 809,588 2,051,656
Dennis J. DuBois........ 39,366 3.0% 20.00 , 2006 495,141 1,254,785
</TABLE>
- --------
(/1/The)options will become exercisable for one-third of the covered shares
(disregarding fractional shares if any) on the first and second
anniversaries of the date of grant, and for the balance of the covered
shares on the third anniversary of the date of grant.
(/2/Based)on the Offering Price.
(/3/The)expiration date will be ten years after the date of grant.
EMPLOYMENT AGREEMENTS
Messrs. Prentiss and August will enter into employment agreements with the
Company. Each agreement will be for an initial term of three years, which will
be automatically renewed for successive one year periods unless otherwise
terminated. The agreements will provide for base annual compensation (as set
forth in "--Executive Compensation" above) and incentive compensation to be
determined by the Compensation Committee (within the terms set forth in "--
Incentive Compensation Program" below). Each employment agreement provides
that the Compensation Committee may approve increases in the base salaries.
Each of the employment agreements provides for certain severance payments in
the event of disability or termination by the Company without cause or by the
employee with cause. No other employee of the Company will be employed
pursuant to an employment agreement.
The terms of Messrs. Prentiss's and August's employment agreements require
that Messrs. Prentiss and August devote substantially all of their business
time to the affairs of the Company. These agreements also, subject to certain
exceptions, prohibit them from engaging, directly or indirectly, during the
term of their employment or the Noncompetition Period (as defined below), in
any activity anywhere in the U.S. that competes with the Company (the
"Competitive Activities"). These provisions of each employment agreement
survive the termination of such agreement until the expiration of the
Noncompetition Period. The "Noncompetition Period" is the period beginning on
the date of the termination of employment with the Company and ending on the
second anniversary of such date.
Messrs. Bradshaw and DuBois will enter into noncompetition agreements with
the Company that, subject to certain limited exceptions, prohibit them from
engaging, directly or indirectly, in Competitive Activities in the
Southeastern U.S. and the Southwestern U.S., respectively, during the
Noncompetition Period.
1996 SHARE INCENTIVE PLAN
Prior to the Offering, the Board of Trustees will adopt, and the sole
shareholder of the Company will approve, the 1996 Plan. As used in this
summary, "--1996 Share Incentive Plan," "--Incentive Compensation" below, "--
The Trustees' Plan" below, "--Savings Plan" below and "--Share Purchase Plan"
below, the term "Company" shall not include the Operating Partnership, the
Manager, or other corporate or noncorporate subsidiaries of the Company. The
1996 Plan will be administered by the Compensation Committee of the Board of
Trustees, or its delegate. The Compensation Committee may not delegate its
authority with respect to grants and awards to individuals subject to Section
16 of the Exchange Act. As used in this summary, the term "Administrator"
means the Compensation Committee or its delegate, as appropriate.
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Officers and other employees of the Company, the Operating Partnership and
designated subsidiaries, including the Manager, generally will be eligible to
participate in the 1996 Plan. The Administrator selects the individuals who
will participate in the 1996 Plan ("Participants"), but no person may
participate in the 1996 Plan while he is a member of the Compensation
Committee. No Participant may be granted, in any calendar year, options that
cover more than 390,000 Common Shares or Share Appreciation Rights ("SARs")
that cover more than 390,000 Common Shares. Options granted with tandem SARs
shall be treated as a single award for purposes of applying the limitation in
the preceding sentence. No Participant may be issued, in any calendar year,
more than 50,000 Common Shares pursuant to one or more Share Awards, including
an award of Restricted Shares (defined below), or Performance Shares (defined
below) for more than 50,000 Common Shares.
The 1996 Plan authorizes the issuance of up to 1,614,300 Common Shares, plus
automatic increases equal to 8% of newly issued and outstanding Common Shares
of the Company (other than Common Shares issued under the 1996 Plan, Trustees'
Plan, or other benefit plans of the Company). The Plan provides for the grant
of (i) share options not intended to qualify as incentive stock options under
Section 422 of the Code, (ii) Performance Shares, (iii) SARs, issued alone or
in tandem with options, (iv) Share Awards, including awards of restricted
Common Shares ("Restricted Shares") contingent upon the attainment of
performance goals or subject to vesting requirements or other restrictions and
(v) incentive awards. The Administrator shall prescribe the conditions which
must occur for Restricted Shares and Performance Shares to vest or incentive
awards to be earned. These conditions may include, for example, a
Participant's continued employment for a specified period or that the Company
or the Participant achieve stated, performance-related objectives such as
earnings per share, fair market value, Funds from Operations per share, or
return on assets. Not more than 10% of the Common Shares authorized to be
issued under the 1996 Plan at any time may be issued pursuant to Share Awards,
including awards of Restricted Shares, or in full or partial settlement of an
incentive award or an award of Performance Shares. The share limitations
described in this paragraph and the terms of outstanding awards shall be
adjusted as the Compensation Committee deems appropriate in the event of a
share dividend, share split, combination, reclassification, recapitalization
or other similar event.
In connection with the grant of options under the 1996 Plan, the
Administrator will determine the option exercise period and any vesting
requirements. The initial options granted under the Plan will have 10-year
terms and will become exercisable for one-third of the covered shares
(disregarding fractional shares, if any) on the first and second anniversaries
of the date of grant, and for the balance of the shares on the third
anniversary of the date of grant subject to acceleration of vesting upon a
change in control of the Company (as defined in the 1996 Plan). An option may
be exercised for any number of whole shares less than the full number for
which the option could be exercised. A Participant will have no rights as a
shareholder with respect to Common Shares subject to his or her option until
the option is exercised. To the extent an option has not become exercisable at
the time of a Participant's termination of employment, it will be forfeited
unless the Administrator exercises its discretion to accelerate vesting for
the Participants. If a Participant is terminated due to dishonesty or similar
reasons, all unexercised options, whether vested or unvested, will be
forfeited. Any Common Shares subject to options which are forfeited (or expire
without exercise) pursuant to the vesting requirement or other terms
established at the time of grant will again be available for grant under the
1996 Plan. The exercise price of options granted under the 1996 Plan may not
be less than the fair market value of the Common Shares on the date of grant.
Payment of the exercise price of an option granted under the 1996 Plan may be
made in cash, cash equivalents acceptable to the Compensation Committee or, if
permitted by the option agreement, by exchanging Common Shares having a fair
market value equal to the option exercise price.
Upon exercise of an option, a Participant will be deemed to receive ordinary
income in an amount equal to the difference between the exercise price and the
fair market value of the underlying shares of Common Shares on the date of the
exercise. Upon the exercise of an option by a Participant who is an employee
of the Company, the Company will be entitled to a deduction for the amount
recognized as ordinary income by such Participant.
On the effective date of the Offering, options for 1,291,439 Common Shares
will be granted to employees and officers, including the officers named in "--
Executive Compensation" above, at an exercise price equal to the Offering
Price.
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The Compensation Committee will determine the service requirements and
performance goals to which future awards of Restricted Shares will be subject.
Restricted Shares that have not vested at the time of a Participant's
termination of employment with the Company generally will be forfeited, except
where such termination occurs by reason of death or disability. The
Compensation Committee will also have discretion to accelerate vesting for
Participants whose employment ceases, under appropriate circumstances. The
Participant will have all the rights of a shareholder both prior to and after
vesting of Restricted Shares, including the right to vote and receive
distributions with respect to the shares.
A Share Award will create no tax consequences for the Participant or the
Company until it is transferable or nonforfeitable (unless the Participant
makes an election pursuant to Section 83(b) of the Code). The Participant will
recognize ordinary income when a Share Award, including an award of Restricted
Shares, becomes transferable or nonforfeitable, in an amount equal to the fair
market value of the shares on the date of vesting less any consideration paid
by the Participant for such shares. If the Participant makes an election
pursuant to Section 83(b) of the Code, the Participant will recognize income
at the time the shares are awarded (based upon the value of such shares at the
time of award) rather than when the shares become transferable or
nonforfeitable. The Company will be allowed a business expense deduction for
the amount of any taxable income recognized by a Participant who is an
employee of the Company at the time such income is recognized.
No option, SAR, Share Award (including an award of Restricted Shares),
incentive award or Performance Shares may be granted under the 1996 Plan after
December 31, 2006. The Board may amend or terminate the 1996 Plan at any time,
but an amendment will not become effective without shareholder approval if the
amendment materially (i) increases the number of shares that may be issued
under the 1996 Plan (other than an adjustment or automatic increase described
above); (ii) changes the eligibility requirements; or (iii) increases the
benefits that may be provided under the 1996 Plan. No amendment will affect a
Participant's outstanding award without the Participant's consent.
INCENTIVE COMPENSATION
The Company may award incentive compensation to employees of the Company and
its subsidiaries, including incentive awards under the 1996 Plan that may be
earned on the attainment of performance objectives stated with respect to
criteria described above or other performance-related criteria. The
Compensation Committee may, in its discretion, approve bonuses to executive
officers and certain other officers and key employees if the Company achieves
Company-wide, regional and/or business unit performance objectives determined
by it each year. To the extent a bonus exceeds 100% of such an employee's base
salary, the Company may pay such excess in Restricted Shares.
THE TRUSTEES' PLAN
Prior to the Offering, the Board of Trustees will also adopt, and the
Company's sole shareholder will approve, the Trustees' Plan to provide
incentives to attract and retain Independent Trustees.
The Trustees' Plan provides for the grant of options and the award of Common
Shares to each eligible Trustee of the Company. No Trustee who is an employee
of the Company, the Operating Partnership, or designated subsidiaries,
including the Manager, is eligible to participate in the Trustees' Plan.
The Trustees' Plan provides that each Independent Trustee who is a member of
the Board of Trustees on the effective date of the Offering (a "Founding
Trustee") will be granted an option for 10,000 Common Shares at an exercise
price equal to the Offering Price. Each Independent Trustee who is not a
Founding Trustee will receive an option for 10,000 Common Shares on the date
of the first Board of Trustees meeting following the annual meeting of
shareholders at which the Independent Trustee is first elected to the Board of
Trustees; provided, however, that an Independent Trustee (other than a
Founding Trustee) who is first elected or appointed to the Board of Trustees
other than at an annual meeting of shareholders shall receive an option for
10,000 Common Shares on the date of such election or appointment. The exercise
price of options granted in accordance
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with the preceding sentence shall be the fair market value of a Common Share
on the date of grant. The exercise price of options granted under the
Trustees' Plan may be paid in cash, acceptable cash equivalents, Common Shares
or a combination thereof. Options issued under the Trustees' Plan are
exercisable for ten years from the date of grant.
An option granted under the Trustees' Plan shall become exercisable for
2,500 shares on each of the first through fourth anniversaries of the date of
grant, provided that Trustee is a member of the Board of Trustees on such
anniversary date. To the extent an option has become exercisable under the
Trustees' Plan, it may be exercised whether or not the Trustee is a member of
the Board on the date or dates of exercise. An option may be exercised for any
number of whole shares less than the full number for which the option could be
exercised. A Trustee will have no rights as a shareholder with respect to
Common Shares subject to his or her option until the option is exercised.
Each Independent Trustee will also receive quarterly an award of Common
Shares. Awards will be made on each March 1, June 1, September 1 and December
1 (each date, a "Quarterly Award Date") during the term of the Trustees' Plan.
Each Independent Trustee will receive, on each Quarterly Award Date on which
he or she is a member of the Board of Trustees, the number of Common Shares
having a fair market value on that date that as nearly as possible equals, but
does not exceed, $2,500. A Trustee will be immediately and fully vested in all
such Common Shares awarded to him or her under the Trustees' Plan.
The terms of outstanding options, the number of Common Shares for which
options will thereafter be awarded, and the number of Common Shares to be
awarded on a Quarterly Award Date shall be subject to adjustment in the event
of a share dividend, share split, combination, reclassification,
recapitalization or other similar event.
The Trustees' Plan provides that the Board of Trustees may amend or
terminate the Trustees' Plan, but the Trustees' Plan may not be amended more
than once every six months other than to comply with changes in the Internal
Revenue Code, the Employee Retirement Income Security Act of 1974, or the
rules thereunder. An amendment will not become effective without shareholder
approval if the amendment materially changes the eligibility requirements or
increases the benefits that may be provided under the Trustees' Plan. No
options for Common Shares may be granted and no Common Shares may be awarded
under the Trustees' Plan after December 31, 2002.
SAVINGS PLAN
The Company intends to assume and continue, and the Operating Partnership
and designated subsidiaries, including the Manager (each, a "Participating
Employer"), intend to adopt, the Employee Savings Plan & Trust (the "401(k)
Plan") of PPL which was originally adopted in 1987. Prior service with PPL
will be credited in full as service with the Company or a Participating
Employer for all purposes under the 401(k) Plan, including eligibility and
vesting.
Each employee of the Company and a Participating Employer may enroll in the
401(k) Plan on March 1, June 1, September 1, and December 1 after completing
one year and 1,000 hours of service and attaining age 21 (an enrolled employee
is a "Plan Participant"). Plan Participants are immediately vested in their
pre-tax and after-tax contributions, matching and discretionary Company
contributions, and earnings thereon.
The 401(k) Plan permits each Plan Participant to elect to defer up to 15% of
base compensation, subject to the annual statutory limitation ($9,500 for
1996) prescribed by Section 402(g) of the Code, on a pre-tax basis. Plan
Participants may also elect to make an after-tax contribution of up to 8% of
their base compensation. The Company and the Participating Employers will make
matching contributions equal to 25% of amounts deferred up to $500 in
deferrals. The Company and the Participating Employers may also make annual
contributions if the Company achieves certain performance objectives to be
determined on an annual basis by the Compensation Committee. Matching and
discretionary contributions will be made in cash or Common Shares.
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SHARE PURCHASE PLAN
Prior to the Offering, the Company will adopt a "Share Purchase Plan." Under
the Share Purchase Plan, employees of the Company, will be able to purchase
Common Shares directly from the Company at a 15% discount to the then-current
market value at the date of purchase. Purchases may be made by any employee
(other than certain shareholders of the Company or certain subsidiary
corporations) with more than one full year of continuous employment on March
1, June 1, September 1, or December 1. An employee's purchases, on an annual
basis, under the Share Purchase Plan will be limited to the lesser of 15% of
the employee's base salary or $20,000. The maximum number of Common Shares
that may be purchased under the Share Purchase Plan is 250,000. The Company
will also adopt a similar plan for employees of the Operating Partnership and
designated subsidiaries, including the Manager, and employees of the Company
who may not purchase shares under the Share Purchase Plan under which a
maximum of 250,000 Common Shares may be purchased. Employees other than
Company employees will recognize income equal to the discount at the time of a
purchase.
INDEMNIFICATION
For a description of the limitation of liability and indemnification rights
of the Company's officers and Trustees, see "Certain Provisions of Maryland
Law and of the Company's Declaration of Trust and Bylaws--Limitation of
Liability and Indemnification."
FORMATION TRANSACTIONS
The Company was formed to continue and expand the Prentiss Group's national
acquisition, property management, leasing, development and construction
businesses and to acquire the 85 Properties. Prior to or simultaneous with the
closing of the Offering, the Company will engage in the Formation Transactions
described below, which are designed to consolidate the ownership of the
Properties and the Prentiss Properties Service Business in the Company, to
facilitate the Offering and to enable the Company to qualify as a REIT
commencing with its short taxable year ending December 31, 1996.
REASONS FOR THE FORMATION OF THE COMPANY
The Prentiss Group is pursuing the Formation Transactions and the Offering
because it believes that public ownership of the Properties and the Prentiss
Properties Service Business will provide new opportunities for growth and
enhance the overall value of the Properties and the Prentiss Properties
Service Business, and, consequently, the Prentiss Group's interests therein,
by centralizing ownership of the Properties and reducing aggregate outstanding
indebtedness. As a publicly owned entity, the Company believes that it will
have greater access to debt and equity capital markets, which should
facilitate and improve the terms of future financings and refinancings of
indebtedness and provide increased opportunities for growth through expansions
of existing Properties and the development and/or acquisition of additional
industrial or office properties.
The Formation Transactions may have certain disadvantages for purchasers of
shares in the Offering and will have various beneficial effects on the
operation of the Properties and Prentiss Properties Service Business acquired
by the Company. The Company believes that the advantages outweigh the
disadvantages. The disadvantages include:
. conflicts of interest between the Prentiss Principals and the Company in
connection with the Formation Transactions, including a lack of
independent valuation of the Properties and the Prentiss Properties
Service Business and the resulting risk that the consideration paid
therefor may exceed the fair market value of such assets, conflicts
relating to the enforcement of agreements between the Company (or the
Operating Partnership) and the Prentiss Principals and other conflicts in
determinations of when or whether to sell or refinance certain Properties
in the future.
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. the aggregate expenses of the Offering are expected to be approximately
$3.1 million, and approximately $1 million in prepayment penalties will
be paid on the retirement of indebtedness with the proceeds of the
Offering.
. the significant costs to be incurred in operating as a public company.
The benefits include repayment of indebtedness and the consequent reduction
in aggregate debt service on the Properties and the average interest rate
thereon, increased financing capacity resulting from access to public capital
markets, asset diversification and growth, including the Company's acquisition
of an interest in the Prentiss Properties Service Business.
FORMATION TRANSACTIONS
The Formation Transactions include the following, which will occur in
connection with the closing of the Offering:
. The Company will sell to the public 14,250,000 Common Shares and will
issue 1,892,985 Common Shares to the Continuing Investors in exchange for
interests in the Operating Partnership. The Company will transfer 14.5%
of the net proceeds of the Offering to the current limited partners of
the Operating Partnership which include the Continuing Investors in
exchange for interests in the Operating Partnership, 85.329% directly to
the Operating Partnership in exchange for Units, and 0.171% of the net
proceeds of the Offering to the General Partner, which the General
Partner will in turn contribute to the Operating Partnership in exchange
for a 0.2% general partnership interest in the Operating Partnership.
After the completion of the Offering, the Company will have issued a
total of 16,142,985 Common Shares and will own, either directly or
through the General Partner, 16,142,985 Units.
. The Prentiss Group will contribute to the Operating Partnership all of
its interests in the Properties, the Development Parcels, the Options and
the Prentiss Properties Service Business in exchange for an aggregate of
2,931,184 Units.
. The Prentiss Group member which currently serves as general partner of
the Operating Partnership will convert its interest into a limited
partnership interest and will distribute the Units representing such
interest to its partners, all of whom are members of the Prentiss Group
and will be limited partners of the Operating Partnership.
. The Units received by the Prentiss Group in connection with the Formation
Transactions will have a total value of approximately $58.6 million based
on the Offering Price of $20 per Common Share and will be redeemable for
cash or Common Shares on a one for one basis, no earlier than two years
after the Closing Date.
. The Operating Partnership will contribute a portion of the Prentiss
Properties Service Business as required for the Company to maintain its
status as a REIT to the Manager in exchange for all of the non voting
common stock of the Manager, which stock shall represent 95% of the
ownership interest in such company, and a promissory note in the
principal amount of $26.95 million, bearing interest at an annual rate of
13%. Accrued interest on the outstanding principal balance of the note
shall be paid monthly. No principal on the note will be due in the first
three years, after which time 10% of the initial principal balance will
be repaid each year for 10 years.
. The Operating Partnership will borrow $50.0 million from an affiliate of
Lehman to fund a portion of the acquisition of the Properties.
. A corporation wholly owned by Michael Prentiss, the Chairman and Chief
Executive Officer of the Company, will contribute $ in cash to the
Manager in exchange for all of the voting common stock of the Manager,
which stock shall represent 5% of the ownership interest in such company.
. The Operating Partnership will use approximately $54.0 million of the net
proceeds of the Offering to acquire interests in certain Properties from
an affiliate of Lehman, and will use approximately $64.5 of the net
proceeds of the Offering to repay mortgage loans made by an affiliate of
Lehman and secured by certain of such Properties.
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. The Operating Partnership will use approximately $149.6 million of the
net proceeds of the Offering and the proceeds from the loans from an
affiliate of Lehman to acquire certain Properties from an affiliate of
the Prentiss Group.
. The Operating Partnership will use approximately $32.9 million of the net
proceeds of the Offering to repay indebtedness secured by certain
Properties currently held by the Operating Partnership or to be acquired
from the Prentiss Group and to pay associated prepayment penalties.
. The Operating Partnership will use approximately $1.0 million of the net
proceeds of the Offering to pay prepayment penalties associated with all
of the debt to be repaid in the Formation Transactions.
BENEFITS TO RELATED PARTIES
The Prentiss Group, including the Prentiss Principals, will realize certain
benefits as a result of the Offering and the Formation Transactions, including
the following:
. Members of the Prentiss Group will receive a total of 2,931,184 Units in
consideration for their interests in the Properties, the Development
Parcels, the Options and the Prentiss Properties Service Business in
connection with the Formation Transactions. These Units (representing
approximately 15.4% of the Company on a consolidated basis) will have a
total value of approximately $58.6 million based on the Offering Price of
the Common Shares, compared to a net tangible book value of the assets
contributed to the Operating Partnership by the Prentiss Group of
approximately $4.8 million. The Company believes that the net tangible
book value of the individual assets contributed to the Operating
Partnership by the Prentiss Group (which reflects the historical cost of
such assets less accumulated depreciation), is less than the aggregate
current market value of such assets.
. Members of the Prentiss Group will realize an immediate increase of $23.7
million in the net tangible book value of their investment in the
Company.
. Any time after two years following the date of the closing of the
Offering (the "Closing Date"), the members of the Prentiss Group holding
Units may, in accordance with the Operating Partnership Agreement,
exchange all or a portion of such Units for cash or, at the election of
the Company, Common Shares on a one-for-one basis. The Company currently
expects that it will not elect to pay cash for Units in connection with
any such exchange request, but instead will exchange Common Shares for
such Units.
. Messrs. Prentiss and August will enter into employment agreements with
the Company. See "Management--Employment Agreements."
. The Company will grant to the Prentiss Principals, 41 employees of the
Company and the Independent Trustees, options to purchase an aggregate of
1,291,439 Common Shares under the Company's 1996 Share Incentive Plan at
the Offering Price, subject to certain vesting requirements. See
"Management--1996 Share Incentive Plan."
. The Formation Transactions may provide the members of the Prentiss Group
with increased liquidity and, until disposition of certain assets
contributed to the Company, with continued deferral of the taxable gain
associated with those assets.
. PPL currently manages the PGC Properties that the Company will purchase
from PCIG, an affiliate of the Prentiss Group. Subsequent to the
Offering, PPL will receive approximately $500,000 from PCIG's proceeds
from these Properties as partial repayment of the Termination Fee Note.
The Prentiss Group will receive no other payments from the proceeds of
the sale of these Properties. The Chicago Industrial Buildings, which are
Option Properties, and the Option Parcels, are owned by PCIG. If the
Company acquires those properties, or other properties owned by that
Prentiss Group affiliate, PPL may be entitled to additional payments
under the Termination Fee Note.
. The Company has agreed to maintain at least $1.3 million of indebtedness
secured by certain of the Properties outstanding for two years and to
permit certain Prentiss Group members to guaranty such debt in order to
defer certain tax consequences associated with the Formation
Transactions.
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Additional information concerning benefits to executive officers, trustees
and significant shareholders of the Company is set forth under "Certain
Relationships and Transactions."
EFFECTS OF THE FORMATION TRANSACTIONS
As a result of the transactions involved in the formation of the Company
(including the Offering), the Company initially will hold directly or
indirectly approximately 84.6% of the Units in the Operating Partnership, and
the remaining Units will be held directly or indirectly by the Prentiss
Principals. Immediately following completion of the Offering, purchasers of
Common Shares in the Offering will hold approximately 74.7% of the
consolidated equity of the Company, the Prentiss Principals will directly or
indirectly hold approximately 15.4% and the Continuing Investors will hold
approximately 9.9% of the consolidated equity of the Company.
In addition to the Properties owned by the Operating Partnership prior to
the Offering, the Operating Partnership will own (i) 100% of the fee interest
in 18 Properties, (ii) 99% general partnership interests of two limited
partnerships that own, in the aggregate, three Properties, the 1% limited
partner of which is the Manager, (iii) a 98.01% general partnership interest
of a limited partnership that owns one Property, the 1.99% limited partner of
which is the Manager, (iv) 99% limited partnership interests in six limited
partnerships that each own one Property, the 1% general partner of which is a
limited partnership in which the Operating Partnership owns a 99% general
partnership interest, (v) a 49.9% general partnership interest in a general
partnership that owns a leasehold interest in a Property, (vi) a 25% general
partnership interest in a general partnership that owns an individual property
in Itasca, Illinois, (vii) a 99% general partnership interest in a limited
partnership that owns the management contracts with respect to the Properties
owned, directly or indirectly, by the Operating Partnership before the
completion of the Formation Transactions, (viii) a 99% interest as the
managing member of a limited liability company that owns (A) the title
insurance agency that underwrites policies on properties located in Texas
(including the policies obtained on the Texas Properties in connection with
the Formation Transactions) and (B) a 1% interest in, and contract rights with
respect to, the insurance agency that underwrites the policies in the
Company's MgmtPlus+ insurance program (see "Properties--Insurance"), the 1%
member of which limited liability company is the Manager, and (xi) all of the
nonvoting stock of the Manager, representing 95% of the beneficial interests
therein, with a corporation wholly owned by Michael V. Prentiss owning all of
the voting stock of the Manager, representing 5% of the beneficial interests
therein.
VALUATION OF THE COMPANY AND PROPERTIES
Neither the Prentiss Group nor the Company sought or obtained any third
party determination of the value of the assets contributed to the Operating
Partnership in connection with the Formation Transactions, except with respect
to the 47 Properties owned by the Operating Partnership prior to the Offering.
With respect to those Properties, an appraisal was performed in June 1996 by
Landauer Associates, Inc., solely to assist the Prentiss Group in determining
the purchase prices payable to the current partners of the Operating
Partnership, including the Continuing Investors and the Prentiss Group member
serving as managing general partner, for their interests therein.
The Total Market Capitalization of the Company at the Offering Price may not
be indicative of, and may exceed: (i) the aggregate appraised values of the
Properties and other assets to be acquired by the Company if appraisals had
been obtained on all such assets in connection with the formation of the
Company, and (ii) the fair market value of the Properties and such other
assets. The value of the Company has been derived from a capitalization of the
Company's pro forma consolidated cash flow, as adjusted, available for
distribution to its shareholders, the Company's potential for growth and
comparisons to other REITs and other factors set forth in "Underwriting." This
methodology has been used because the Company believes it is appropriate to
value the Company as an ongoing business, rather than through values that
could be obtained from a liquidation of the Company or of its individual
assets. No assurance can be given that the Offering Price will be an
indication of the actual value of the Common Shares, which will be determined
by market conditions and other factors. The aggregate number of Common Shares
and Units allocated to members of the Continuing Investors and Prentiss Group,
respectively, was arrived at by determining the percentage of equity of the
Company remaining
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after sufficient equity is allocated to the public Offering to enable the
Company to pay out of expected cash flow an annual distribution of $20.6
million or $1.28 per share. The distribution rate was derived by comparison to
distribution rates of other REITs that the Company believes may be comparable
and in light of current market conditions. The percentage of Common Shares
allocated to the purchasers of shares sold by the Company in the Offering
(74.7%) is equal to the percentage of estimated pro forma cash flow available
for distribution necessary to pay the targeted distribution rate and the
remaining equity of the Company was allocated to members of the Prentiss Group
and Continuing Investors. Thus, the aggregate number of Restricted Shares and
Units allocated to persons participating in the formation of the Company was
not based on a valuation of the assets contributed other than the range of
estimated values that the public market may place on the Company as a whole.
See "Risk Factors--Prices to be Paid for Properties."
CERTAIN RELATIONSHIPS AND TRANSACTIONS
See "Formation Transactions" for a summary of certain related party
transactions that will be consummated prior to or simultaneously with the
closing of the Offering.
REPAYMENT OF TERMINATION FEE NOTE
PPL holds (and after the Formation Transactions will continue to hold) the
Termination Fee Note from PCIG which is paid with the proceeds of sales of
properties owned by PCIG. The Company will acquire the PGC Properties from
PCIG that in the Formation Transactions and subsequent to the Offering, PPL
will receive a payment of approximately $500,000 under the Termination Fee
Note. The Company will have certain options on properties owned by PCIG which,
if exercised, would result in additional payments to PPL under the Termination
Fee Note. See "Properties--Option Parcels."
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PRINCIPAL AND MANAGEMENT SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Shares of
(i) each person who is a shareholder of the Company owning more than 5% of the
beneficial interest in the Company, (ii) each person who is a trustee or
executive officer of the Company and (iii) the trustees and executive officers
of the Company as a group. Unless otherwise indicated in the footnotes, all of
such interests are owned directly, and the indicated person or entity has sole
voting and investment power. The number of shares represents the number of
Common Shares the person is expected to hold plus the number of shares for
which Units expected to be held by the person are redeemable (if the Company
elects to issue Common Shares rather than pay cash upon such redemption). The
extent to which the persons will hold Common Shares as opposed to Units is set
forth in the notes.
<TABLE>
<CAPTION>
NUMBER OF SHARES AND
UNITS BENEFICIALLY
OWNED AFTER PERCENT OF ALL COMMON PERCENT OF ALL
NAME OF BENEFICIAL OWNER THE OFFERING SHARES AND UNITS(/1/) COMMON SHARES(/1/)
- ------------------------ -------------------- --------------------- ------------------
<S> <C> <C> <C>
Michael V.
Prentiss(/2/)(/3/)..... 2,295,161 12.0% 12.4%
Thomas F.
August(/2/)(/4/)....... 293,141 1.5% 1.8%
Thomas J. Hynes(/5/).... 500 * *
Barry J.C. Parker(/5/).. 500 * *
Dr. Leonard Riggs,
Jr.(/5/)............... 500 * *
Ronald G.
Steinhart(/5/)......... 500 * *
Lawrence A.
Wilson(/5/)............ 500 * *
Richard B. Bradshaw,
Jr.(/3/)(/6/).......... 162,587 0.9% 1.0%
Dennis J.
DuBois(/2/)(/7/)....... 180,295 1.0% 1.1%
Richard J. Bartel(/8/).. -- -- --
Mark R. Doran(/9/)...... -- -- --
Lawrence J.
Krueger(/8/)........... -- -- --
Jeffrey T.
Courtwright(/1//0/).... -- -- --
James B. Meyer(/1//0/).. -- -- --
David
Robertson(/1//0/)...... -- -- --
Robert K.
Wiberg(/1//0/)......... -- -- --
All Trustees and
executive officers (11
persons)............... 2,933,684 15.4% 15.4%
</TABLE>
- --------
* Less than 1%.
(/1/Assumes)that all Units held by the person are redeemed for Common Shares.
The total number of Common Shares outstanding used in calculating the
percentage of all Common Shares and Units assumes that all of the Units
held by other persons are redeemed for Common Shares. The total number of
Common Shares outstanding used in calculating the percentage of all
Common Stock assumes that none of the Units held by other persons are
redeemed for Common Shares.
(/2/Includes)the principal's allocable share of Units held by PPL and various
other Prentiss Group entities which received units in the Formation
Transactions, in exchange for interests in Properties or the Prentiss
Properties Service Business.
(/3/Excludes)386,762 Common Shares issuable upon the exercise of options
granted under the 1996 Plan, which vest in equal installments on each of
the first three anniversaries of the date of the grant. Units redeemable
for 115,102 Common Shares are held in a trust of which Mr. Prentiss is a
trustee, and in which Mr. Prentiss disclaims beneficial ownership.
(/4/Excludes)173,944 Common Shares issuable upon the exercise of options
granted under the 1996 Plan, which vest in equal installments on each of
the first three anniversaries of the date of the grant.
(/5/The)Independent Trustees will receive a fee of $10,000 per year payable
quarterly in Common Shares. The table includes the shares to be issued in
the year following the closing of the Offering, based on the Offering
Price. Excludes 10,500 Common Shares issuable upon the exercise of
options granted under the Trustees' Plan, which vest in equal
installments over a four-year period on the anniversary date of the
grant.
(/6/Excludes)64,366 Common Shares issuable upon the exercise of options
granted under the 1996 Plan, which vest in equal installments on each of
the first three anniversaries of the date of the grant.
(/7/Excludes)39,366 Common Shares issuable upon the exercise of options
granted under the 1996 Plan, which vest in equal installments on each of
the first three anniversaries of the date of the grant.
(/8/Excludes)75,000 Common Shares issuable upon the exercise of options
granted under the 1996 Plan, which vest in equal installments on each of
the first three anniversaries of the date of the grant.
(/9/Excludes)50,000 Common Shares issuable upon the exercise of options
granted under the 1996 Plan, which vest in equal installments on each of
the first three anniversaries of the date of the grant.
(/1//Excludes025,000/Common)Shares issuable upon the exercise of options
granted under the 1996 Plan, which vest in equal installments on each of
the first three anniversaries of the date of the grant.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the terms of the shares of beneficial interest of
the Company does not purport to be complete and is subject to and qualified in
its entirety by reference to the Declaration of Trust and Bylaws of the
Company, copies of which are exhibits to the Registration Statement of which
this Prospectus is a part. See "Additional Information."
GENERAL
The Declaration of Trust of the Company provides that the Company may issue
up to 100,000,000 Common Shares and 20,000,000 preferred shares of beneficial
interest, $0.01 par value per share ("Preferred Shares"). Upon completion of
this Offering and the related transactions, 16,142,985 Common Shares will be
issued and outstanding (18,280,485 shares if the Underwriters' overallotment
option is exercised in full) and no Preferred Shares will be issued and
outstanding. As permitted by the Maryland statute governing real estate
investment trusts formed under the laws of that state (the "Maryland REIT
Law"), the Declaration of Trust contains a provision permitting the Board of
Trustees, without any action by the shareholders of the Trust, to amend the
Declaration of Trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of any class of shares of
beneficial interest that the Trust has authority to issue.
Both the Maryland REIT Law and the Company's Declaration of Trust provide
that no shareholder of the Company will be personally liable for any
obligation of the Company solely as a result of his status as a shareholder of
the Company. The Company's Bylaws further provide that the Company shall
indemnify each shareholder against any claim or liability to which the
shareholder may become subject by reason of his being or having been a
shareholder or former shareholder and that the Company shall pay or reimburse
each shareholder or former shareholder for all legal and other expenses
reasonably incurred by him in connection with any claim or liability. Inasmuch
as the Company carries public liability insurance which it considers adequate,
any risk of personal liability to shareholders is limited to situations in
which the Company's assets plus its insurance coverage would be insufficient
to satisfy the claims against the Company and its shareholders.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or
series of beneficial interest and to the provisions of the Company's
Declaration of Trust regarding the restriction of the transfer of shares of
beneficial interest, holders of Common Shares are entitled to receive
dividends on shares if, as and when authorized and declared by the Board of
Trustees of the Company out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
shareholders in the event of its liquidation, dissolution or winding-up after
payment of, or adequate provision for, all known debts and liabilities of the
Company.
Each outstanding Common Share entitles the holder to one vote on all matters
submitted to a vote of shareholders, including the election of trustees, and,
except as provided with respect to any other class or series of shares of
beneficial interest, the holders of such Common Shares possess the exclusive
voting power. There is no cumulative voting in the election of trustees, which
means that the holders of a majority of the outstanding Common Shares can
elect all of the trustees then standing for election and the holders of the
remaining shares will not be able to elect any trustees.
Holders of Common Shares have no preference, conversion, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of the Company. Subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of Shares of beneficial interest,
Common Shares have equal dividend, distribution, liquidation and other rights.
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<PAGE>
Under the Maryland REIT Law, a Maryland real estate investment trust
generally cannot dissolve, amend its declaration of trust or merge unless
approved by the affirmative vote of shareholders holding at least two-thirds
of the shares entitled to vote on the matter unless a lesser percentage (but
not less than a majority of all the votes entitled to be cast on the matter)
is set forth in the real estate investment trust's declaration of trust. The
Company's Declaration of Trust provides for approval by a majority of all the
votes entitled to be cast on the matter in all situations permitting or
requiring action by the shareholders except with respect to: (a) the
intentional disqualification of the Company as a real estate investment trust
or revocation of its election to be taxed as a real estate investment trust
(which requires the affirmative vote of two-thirds of the number of Common
Shares entitled to vote on such matter at a meeting of the shareholders of the
Company); (b) the election of trustees (which requires a plurality of all the
votes cast at a meeting of shareholders of the Company at which a quorum is
present); (c) the removal of trustees (which requires the affirmative vote of
the holders of a majority the outstanding voting shares of the Company); (d)
the amendment or repeal of the Independent Trustee provision in the
Declaration of Trust (which requires the affirmative vote of 85% of the
Trustees or two-thirds of the outstanding shares entitled to vote on the
matter); (e) the amendment of the Declaration of Trust by shareholders (which
requires the affirmative vote of a majority of votes entitled to be cast on
the matter, except under certain circumstances specified in the Declaration of
Trust which require the affirmative vote of two-thirds of all the votes
entitled to be cast on the matter); and (f) the dissolution of the Company
(which requires the affirmative vote of two-thirds of all the votes entitled
to be cast on the matter). Under the Maryland REIT Law, a declaration of trust
may permit the trustees by a two-thirds vote to amend the declaration of trust
from time to time to qualify as a real estate investment trust under the Code
or the Maryland REIT Law without the affirmative vote or written consent of
the shareholders. The Company's Declaration of Trust permits such action by
the Board of Trustees. As permitted by the Maryland REIT Law, the Declaration
of Trust contains a provision permitting the Board of Trustees, without any
action by the shareholders of the Trust, to amend the Declaration of Trust to
increase or decrease the aggregate number of shares of beneficial interest or
the number of shares of any class of shares of beneficial interest that the
Trust has authority to issue.
PREFERRED SHARES
The Declaration of Trust authorizes the Board of Trustees to classify any
unissued Preferred Shares and to reclassify any previously classified but
unissued Preferred Shares of any series from time to time in one or more
series, as authorized by the Board of Trustees. Prior to issuance of shares of
each series, the Board of Trustees is required by the Maryland REIT Law and
the Company's Declaration of Trust to set for each such series, subject to the
provisions of the Company's Declaration of Trust regarding the restriction on
transfer of shares of beneficial interest, the terms, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such series. Thus, the Board of Trustees could authorize
the issuance of Preferred Shares with terms and conditions which could have
the effect of delaying, deferring or preventing a transaction or a change in
control of the Company that might involve a premium price for holders of
Common Shares or otherwise might be in their best interest. As of the date
hereof, no Preferred Shares are outstanding and the Company has no present
plans to issue any Preferred Shares.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED SHARES
The Company's Declaration of Trust authorizes the Trustees to classify or
reclassify any unissued Common Shares or Preferred Shares into one or more
classes or series of shares of beneficial interest by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or distributions, qualifications or terms or
conditions of redemption of such new class or series of shares of beneficial
interest.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of beneficial
interest. Specifically, not more than 50% in value of the
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<PAGE>
Company's outstanding shares of beneficial interest may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year, and the Company must
be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year. See "Federal Income Tax Considerations--Requirements for Qualification."
Because the Board of Trustees believes it is essential for the Company to
continue to qualify as a REIT, the Declaration of Trust, subject to certain
exceptions described below, provides that no person may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than 8.5% of (i)
the number of outstanding Common Shares, except for Michael V. Prentiss, who
may own initially no more than 15.0% of the number of such outstanding shares
or (ii) the number of outstanding Preferred Shares of any series of Preferred
Shares (the "Ownership Limitation"), except for Michael V. Prentiss, who may
own initially no more than 15.0% of the number of such outstanding shares. The
Ownership Limitation will adjust upward, to a minimum of 9.8%, and the limit
applicable to Mr. Prentiss will adjust downward, in proportion to any
reduction in Mr. Prentiss' direct or indirect consolidated percentage
ownership of the Company as a result of additional issuances of securities of
the Company or the Operating Partnership or dispositions or redemptions of
Units held directly or indirectly by Mr. Prentiss upon the completion of the
Formation Transactions. Any transfer of Common or Preferred Shares that would
(i) result in any person owning, directly or indirectly, Common or Preferred
Shares in excess of the Ownership Limitation, (ii) result in the Common and
Preferred Shares being owned by fewer than 100 persons (determined without
reference to any rules of attribution), (iii) result in the Company being
"closely held" within the meaning of Section 856(h) of the Code, or (iv) cause
the Company to own, directly or constructively, 10% or more of the ownership
interests in a tenant of the Company's or the Partnership's real property,
within the meaning of Section 856 (d) (2) (B) of the Code, shall be null and
void, and the intended transferee will acquire no rights in such Common or
Preferred Shares.
Subject to certain exceptions described below, if any purported transfer of
Common or Preferred Shares would (i) result in any person owning, directly or
indirectly, Common or Preferred Shares in excess of the Ownership Limitation,
(ii) result in the Common and Preferred Shares being owned by fewer than 100
persons (determined without reference to any rules of attribution), (iii)
result in the Company being "closely held" within the meaning of Section
856(h) of the Code, or (iv) cause the Company to own, directly or
constructively, 10% or more of the ownership interests in a tenant of the
Company's or the Operating Partnership's real property, within the meaning of
Section 856(d)(2)(B) of the Code, the Common or Preferred Shares will be
designated as "Shares-in-Trust" and transferred automatically to a trust (the
"Share Trust") effective on the day before the purported transfer of such
Common or Preferred Shares. The record holder of the Common or Preferred
Shares that are designated as Shares-in-Trust (the "Prohibited Owner") will be
required to submit such number of Common or Preferred Shares to the Company
for registration in the name of the Share Trust. The Share Trustee will be
designated by the Company, but will not be affiliated with the Company. The
beneficiary of the Share Trust (the "Beneficiary") will be one or more
charitable organizations that are named by the Company.
Shares-in-Trust will remain issued and outstanding Common or Preferred
Shares and will be entitled to the same rights and privileges as all other
shares of the same class or series. The Share Trust will receive all dividends
and distributions on the Shares-in-Trust and will hold such dividends and
distributions in trust for the benefit of the Beneficiary. The Share Trustee
will vote all Shares-in-Trust. The Share Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires
such Shares-in-Trust without such acquisition resulting in a transfer to
another Share Trust and resulting in the redesignation of such Common or
Preferred Shares as Shares-in-Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Share Trust the amount of any dividends or distributions received
by the Prohibited Owner (i) that are attributable to any Shares-in-Trust and
(ii) the record date of which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Share
Trustee the lesser of (i) the price per share such Prohibited Owner paid for
the Common or Preferred Shares that were designated as Shares-in-Trust (or, in
the
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<PAGE>
case of a gift or devise, the Market Price (as defined below) per share on the
date of such transfer) and (ii) the price per share received by the Share
Trustee from the sale of such Shares-in-Trust. Any amounts received by the
Share Trustee in excess of the amounts to be paid to the Prohibited Owner will
be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in
the case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
purported transfer which resulted in such Shares-in-Trust and (ii) the date
the Company determines in good faith that a transfer resulting in such Shares-
in-Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the NYSE or, if the Common or
Preferred Shares are not listed or admitted to trading on the NYSE, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Common or Preferred Shares are listed or admitted to trading or, if
the Common or Preferred Shares are not listed or admitted to trading on any
national securities exchange, the last quoted price, or if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal
automated quotations system that may then be in use or, if the Common or
Preferred Shares are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in the Common or Preferred Shares selected by the Board of
Trustees. "Trading Day" shall mean a day on which the principal national
securities exchange on which the Common or Preferred Shares are listed or
admitted to trading is open for the transaction of business or, if the Common
or Preferred Shares are not listed or admitted to trading on any national
securities exchange, shall mean any day other than a Saturday, a Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
Any person who acquires or attempts to acquire Common or Preferred Shares in
violation, of the foregoing restrictions, or any person who owned Common or
Preferred Shares that were transferred to a Share Trust, will be required (i)
to give immediately written notice to the Company of such event and (ii) to
provide to the Company such other information as the Company may request in
order to determine the effect, if any, of such transfer on the Company's
status as a REIT.
The Declaration of Trust requires all persons who own, directly or
indirectly, more than 5% (or such lower percentages as required pursuant to
regulations under the Code) of the outstanding Common and Preferred Shares,
within 30 days after January 1 of each year, to provide to the Company a
written statement or affidavit stating the name and address of such direct or
indirect owner, the number of Common and Preferred Shares owned directly or
indirectly, and a description of how such shares are held. In addition, each
direct or indirect shareholder shall provide to the Company such additional
information as the Company may request in order to determine the effect, if
any, of such ownership on the Company's status as a REIT and to ensure
compliance with the Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
Common or Preferred Shares by an underwriter that participates in a public
offering of such shares. In addition, the Board of Trustees, upon receipt of a
ruling from the Service or an opinion of counsel and upon such other
conditions as the Board of Trustees may direct, may exempt a person from the
Ownership Limitation under certain circumstances. The foregoing restrictions
will continue to apply until (i) the Board of Trustees determines that it is
no longer in the best
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<PAGE>
interests of the Company to attempt to qualify, or to continue to qualify, as
a REIT and (ii) there is an affirmative vote of two-thirds of the votes
entitled to be cast on such matter at a regular or special meeting of the
shareholders of the Company.
The Ownership Limitation could delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Shares or otherwise be in the best interest of the shareholders of the
Company.
All certificates representing Common or Preferred Shares will bear a legend
referring to the restrictions described above.
CERTAIN PROVISIONS OF MARYLAND LAW
AND OF THE COMPANY'S DECLARATION
OF TRUST AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Declaration of Trust and Bylaws of the Company is subject to and qualified in
its entirety by reference to Maryland law and to the Declaration of Trust and
Bylaws of the Company.
CLASSIFICATION OF THE BOARD OF TRUSTEES
The Bylaws provide that the number of trustees of the Company may be
established by the Board of Trustees but may not be fewer than three nor more
than nine. At the closing of the Offering, there will be seven Trustees. The
Trustees may increase or decrease the number of Trustees by a vote of at least
80% of the members of the Board of Trustees, provided that the number of
Trustees shall never be less than the number required by Maryland law and that
the tenure of office of a Trustee shall not be affected by any decrease in the
number of Trustees. Any vacancy will be filled, including a vacancy created by
an increase in the number of Trustees, at any regular meeting or at any
special meeting called for that purpose, by a majority of the remaining
Trustees.
Pursuant to the Declaration of Trust, the Board of Trustees is divided into
three classes of trustees. The initial terms of the first, second and third
class will expire in 1997, 1998 and 1999, respectively. Beginning in 1997,
Trustees of each class are chosen for three-year terms upon the expiration of
their current terms and each year one class of trustees will be elected by the
shareholders. The Company believes that classification of the Board of
Trustees will help to assure the continuity and stability of the Company's
business strategies and policies as determined by the Board of Trustees.
Holders of Common Shares will have no right to cumulative voting in the
election of Trustees. Consequently, at each annual meeting of shareholders,
the holders of a majority of the Common Shares are able to elect all of the
successors of the class of trustees whose terms expire at that meeting.
The classified board provision could have the effect of making the
replacement of incumbent trustees more time consuming and difficult. At least
two annual meetings of shareholders, instead of one, will generally be
required to effect a change in a majority of the Board of Trustees. The
staggered terms of Trustees may reduce the possibility of a tender offer or an
attempt to change control of the Company or other transaction that might
involve a premium price for holders of Common Shares, even though a tender
offer, change of control or other transaction might be in the best interest of
the shareholders.
REMOVAL OF TRUSTEES
The Declaration of Trust provides that a Trustee may be removed with or
without cause upon the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of Trustees. This provision, when coupled
with the provision in the Bylaws authorizing the Board of Trustees to fill
vacant trusteeships, precludes shareholders from removing incumbent Trustees,
except upon a substantial affirmative vote, and filling the vacancies created
by such removal with their own nominees.
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BUSINESS COMBINATIONS
Under the MGCL, as applicable to Maryland real estate investment trusts,
certain "business combinations" (including a merger, consolidation, share
exchange or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland real estate
investment trust and any person who beneficially owns ten percent or more of
the voting power of the trust's shares or an affiliate of the trust who, at
any time within the two-year period prior to the date in question, was an
Interested Shareholder or an affiliate thereof are prohibited for five years
after the most recent date on which the Interested Shareholder becomes an
Interested Shareholder. Thereafter, any such business combination must be
recommended by the board of trustees of such trust and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by
holders of outstanding voting shares of beneficial interest of the trust and
(b) two-thirds of the votes entitled to be cast by holders of voting shares of
the trust other than shares held by the Interested Shareholder with whom (or
with whose affiliate) the business combination is to be effected, unless,
among other conditions, the trust's common shareholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Shareholder for its shares. These provisions of Maryland law do not apply,
however, to business combinations that are approved or exempted by the board
of trustees of the trust prior to the time that the Interested Shareholder
becomes an Interested Shareholder.
CONTROL SHARE ACQUISITIONS
The MGCL, as applicable to Maryland real estate investment trusts, provides
that control shares (as defined below) of a Maryland real estate investment
trust acquired in a "control share acquisition" have no voting rights except
to the extent approved by a vote of two-thirds of the votes entitled to be
cast on the matter, excluding shares of beneficial interest owned by the
acquiror, by officers or by trustees who are employees of the trust. "Control
Shares" are voting shares of beneficial interest which, if aggregated with all
other such shares of beneficial interest previously acquired by the acquiror
or in respect of which the acquiror is able to exercise or direct the exercise
of voting power (except solely by virtue of a revocable proxy), would entitle
the acquiror to exercise voting power in electing trustees within one of the
following ranges of voting power: (i) one-fifth or more but less than one-
third, (ii) one-third or more but less than a majority, or (iii) a majority or
more of all voting power. Control Shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
shareholder approval. A "control share acquisition" means the acquisition of
Control Shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of trustees of the trust to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the trust may itself
present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the trust may redeem any
or all of the Control Shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the Control Shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of such shares are considered and not approved. If
voting rights for Control Shares are approved at a shareholders meeting and
the acquiror becomes entitled to vote a majority of the shares entitled to
vote, all other shareholders may exercise appraisal rights. The fair value of
the shares as determined for purposes of such appraisal rights may not be less
than the highest price per share paid by the acquiror in the control share
acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the trust is a party to the
transaction or (b) to acquisitions approved or exempted by the declaration of
trust or bylaws of the trust.
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The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's Common or Preferred Shares. There can be no assurance that such
provision will not be amended or eliminated at any time in the future.
AMENDMENT
The Declaration of Trust may be amended with the approval of at least a
majority of all of the votes entitled to be cast on the matter, provided, that
certain provisions of the Declaration of Trust regarding (i) the Company's
Board of Trustees, (ii) the restrictions on transfer of the Common Shares and
the Preferred Shares, (iii) amendments to the Declaration of Trust by the
Trustees and the shareholders of the Company, and (iv) the termination of the
Company may not be amended, altered, changed or repealed without the approval
of two-thirds of all of the votes entitled to be cast on these matters. In
addition, the Declaration of Trust may be amended by the Board of Trustees,
without shareholder approval to conform the Declaration of Trust to the
Maryland REIT law. The Company's Bylaws may be amended or altered exclusively
by the Board of Trustees.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit
or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. The Declaration of Trust of the Company contains such a provision
which limits such liability to the maximum extent permitted by Maryland law.
The Declaration of Trust of the Company authorizes it, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding
to (a) any present or former Trustee or officer or (b) any individual who,
while a Trustee of the Company and at the request of the Company, serves or
has served another real estate investment trust corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
trustee, director, officer, partner of such real estate investment trust
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer or partner of such real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise from and against any claim or
liability to which such person may become subject or which such person may
incur by reason of his status as a present or former shareholder, Trustee, or
officer of the Company. The Bylaws of the Company obligate it, to the maximum
extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former Trustee or officer who is made a party to the proceeding by
reason of his service in that capacity, or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust corporation,
partnership, joint venture, trust, employee benefit plan or any other
enterprise and who is made a party to the proceeding by reason of his service
in that capacity against any claim or liability to which he may become subject
by reason of such status. The Declaration of Trust and Bylaws also permit the
Company to indemnify and advance expenses to any person who served a
predecessor of the Company in any of the capacities described above and to any
employee or agent of the Company or a predecessor of the Company. The Bylaws
require the Company to indemnify Trustee or officer who has been successful,
on the merits or otherwise, in the defense of any proceeding to which he is
made a party by reason of his service in that capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
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their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In accordance with the MGCL, the Bylaws of
the Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the director or officer of his good faith belief that
he has met the standard of conduct necessary for indemnification by the
Company as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
OPERATIONS
The Company is generally prohibited from engaging in certain activities,
including incurring consolidated indebtedness, in the aggregate, in excess of
the Debt Limitation and acquiring or holding property or engaging in any
activity that would cause the Company to fail to qualify as a real estate
investment trust.
DISSOLUTION OF THE COMPANY
Pursuant to the Company's Declaration of Trust, and subject to the
provisions of any class or series of shares of beneficial interest of the
Company then outstanding, the shareholders of the Company, at any meeting
thereof, may dissolve the Company by the affirmative vote of two-thirds of all
of the votes entitled to be cast on the matter.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual meeting
of shareholders, nominations of persons for election to the Board of Trustees
and the proposal of business to be considered by shareholders may be made only
(i) pursuant to the Company's notice of the meeting, (ii) by the Board of
Trustees or (iii) by a shareholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and
(b) with respect to special meetings of Shareholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of shareholders and nominations of persons for election to the Board of
Trustees may be made only (i) pursuant to the Company's notice of the meeting,
(ii) by the Board of Trustees or, (iii) provided that the Board of Trustees
has determined that Trustees shall be elected at such meeting, by a
shareholder who is entitled to vote at the meeting and has complied with the
advance notice provisions set forth in the Bylaws.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS
The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Declaration of Trust on classification of the Board of
Trustees, the removal of Trustees and the restrictions on the transfer of
shares of beneficial interest and the advance notice provisions of the Bylaws
could have the affect of delaying, deferring or preventing a transaction or a
change in control of the Company that might involve a premium price for
holders of Common Shares or otherwise be in their best interest.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland real estate investment trust,
the Maryland REIT Law requires at least 75% of the value of the Company's
assets to be held, directly or indirectly, in real estate assets, mortgages or
mortgage related securities, government securities, cash and cash equivalent
items, including high-grade short
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term securities and receivables. The Maryland REIT Law also prohibits the
Company from using or applying land for farming, agricultural, horticultural
or similar purposes.
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Shares is .
SHARES AVAILABLE FOR FUTURE SALE
Upon the closing of the Offering and the Formation Transactions, the Company
will have 16,142,985 Common Shares issued and outstanding (18,280,485 Common
Shares if the Underwriter's overallotment option is exercised in full),
2,931,184 Common Shares will be reserved for issuance upon redemption of Units
and 1,614,300 Common Shares (plus 8% of newly issued and outstanding Common
Shares other than shares issued under the 1996 Plan or Trustees Plan) will be
reserved for issuance under the 1996 Share Incentive Plan. The Common Shares
issued in the Offering will be freely tradeable by persons other than
"Affiliates" of the Company without restriction under the Securities Act of
1933, as amended (the "Securities Act"), subject to certain limitations on
ownership set forth in the Declaration of Trust. See "Description of Shares of
Beneficial Interest--Restrictions on Transfer."
Pursuant to the Operating Partnership Agreement, the Limited Partners (other
than the Company) have Exchange Rights which, beginning two years from the
date of the closing of the Offering, enable them to cause the Operating
Partnership to exchange their Units for cash or, at the option of the General
Partner, Common Shares on a one-for-one basis.
The Common Shares that will be issuable to holders of Units upon exercise of
the Exchange Rights will be "restricted" securities under the meaning of Rule
144 promulgated under the Securities Act ("Rule 144") and may not be sold in
the absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144. As
described below, the Company has granted the holders registration rights with
respect to such Common Shares.
In general, under Rule 144 as currently in effect, if two years have elapsed
since the later of the date of acquisition of restricted shares from the
Company or any "Affiliate" of the Company, as that term is defined under the
Securities Act, the acquiror or subsequent holder thereof is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding Common Shares or the average weekly
trading volume of the Common Shares during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 also are subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. If three years have elapsed
since the date of acquisition of restricted shares from the Company or from
any Affiliate of the Company, and the acquiror or subsequent holder thereof is
deemed not to have been an Affiliate of the Company at any time during the
three months preceding a sale, such person would be entitled to sell such
shares in the public market under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements.
The Company has agreed to file, as soon as practicable after two years from
the Closing Date, a registration statement with the Commission for the purpose
of registering the sale of 2,931,184 Common Shares to be issuable upon
redemption of the Units. The Company will use its best efforts to have each of
the registration statements declared effective and to keep it effective for a
period of two years. Upon effectiveness of the related registration
statements, those persons holding Common Shares upon redemption of the
applicable Units other than "Affiliates" of the Company, as that term is
defined under the Securities Act may sell such shares in the secondary market
without being subject to the volume limitations or other requirements of Rule
144. The Operating Partnership will bear expenses incident to the registration
requirements, except that such expenses shall not include any underwriting
discounts or commissions, Commission or state securities registration fees,
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transfer taxes or certain other fees or taxes relating to such shares.
Registration rights may be granted to future sellers of properties to the
Operating Partnership who elect to receive, in lieu of cash, Common Shares,
Units, or other securities convertible into Common Shares.
Prior to the Offering there has been no public market for the Common Shares.
The Company intends to apply to list the Common Shares on the NYSE.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Shares prevailing from time to time. Sales of substantial
amounts of Common Shares, or the perception that such sales could occur, may
affect adversely prevailing market prices of the Common Shares. See "Risk
Factors--Effect of Shares Available for Future Sale on Price of Common Shares"
and "Operating Partnership Agreement--Transferability of Interests."
For a description of certain restrictions on transfers of Common Shares held
by certain shareholders of the Company, see "Underwriting."
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OPERATING PARTNERSHIP AGREEMENT
The following summary of the Operating Partnership Agreement, and the
descriptions of certain provisions thereof set forth elsewhere in this
Prospectus, is qualified in its entirety by reference to the Operating
Partnership Agreement, which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
MANAGEMENT
The Operating Partnership has been organized as a Delaware limited
partnership pursuant to the terms of the First Amended and Restated Agreement
of Limited Partnership of the Operating Partnership (the "Operating
Partnership Agreement"). Pursuant to the Operating Partnership Agreement, the
General Partner, as the sole general partner of the Partnership, has full,
exclusive and complete responsibility and discretion in the management and
control of the Operating Partnership, and the Limited Partners have no
authority in their capacity as Limited Partners to transact business for, or
participate in the management activities or decisions of, the Operating
Partnership except as required by applicable law. However, any amendment to
the Operating Partnership Agreement that would (i) adversely affect the
Exchange Rights (as defined herein), (ii) adversely affect the Limited
Partners' rights to receive cash distributions, (iii) alter the Operating
Partnership's allocations of income or loss, or (iv) impose on the Limited
Partners any obligations to make additional contributions to the capital of
the Operating Partnership, requires the consent of Limited Partners (other
than the General Partner) holding more than two-thirds of the Units held by
such partners.
TRANSFERABILITY OF INTERESTS
The General Partner may not voluntarily withdraw from the Operating
Partnership or transfer or assign its interest in the Operating Partnership
unless the transaction in which such withdrawal or transfer occurs results in
the Limited Partners receiving property in an amount equal to the amount they
would have received had they exercised their Exchange Rights immediately prior
to such transaction, or unless the successor to the General Partner
contributes substantially all of its assets to the Operating Partnership in
return for an interest in the Operating Partnership. With certain limited
exceptions, the Limited Partners may not transfer their interests in the
Operating Partnership, in whole or in part, without the written consent of the
General Partner, which consent the General Partner may withhold in its sole
discretion. The General Partner may not consent to any transfer that would
cause the Operating Partnership to be treated as a corporation for federal
income tax purposes.
CAPITAL CONTRIBUTION
The Company will contribute to the Operating Partnership, approximately
85.329% of the net proceeds of the Offering in exchange for the issuance to
the Company of Units to be held by the Company. The Company will contribute to
the General Partner and the General Partner will contribute to the Operating
Partnership approximately 0.171% of the net proceeds of the Offering in
exchange for a 0.2% general partnership interest in the Operating Partnership
to be held by the General Partner. The Company will transfer the remaining
14.5% of the net proceeds of the Offering to the current limited partners of
the Operating Partnership, which include the Continuing Investors, in exchange
for interests in the Operating Partnership. After the completion of the
Offering, the Company will have issued a total of 16,142,985 Common Shares and
will own, either directly or through the General Partner, 16,142,985 Units.
Although the Operating Partnership will receive the net proceeds of the
Offering, the Company and the General Partner will be deemed to have made a
capital contribution to the Operating Partnership in the amount of the gross
proceeds of the Offering and the Operating Partnership will be deemed
simultaneously to have paid the underwriter's discount and other expenses paid
or incurred in connection with the Offering. Following the closing of the
Offering the Limited Partners (other than the Company) that are members of the
Prentiss Group, including the Prentiss Principals, will collectively own
approximately 15.4% of the outstanding Units. The Operating Partnership
Agreement provides that if the Operating Partnership requires additional funds
at any time or from time to time in excess of funds available to the Operating
Partnership from borrowing or capital contributions, the General Partner or
the Company may borrow such funds from a financial institution or other lender
and lend such funds to the Operating Partnership on the same terms and
conditions as
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are applicable to the General Partner's or the Company's, as applicable,
borrowing of such funds. Moreover, the General Partner is authorized to cause
the Operating Partnership to issue partnership interests for less than fair
market value if the Company (i) has concluded in good faith that such issuance
is in the best interest of the Company and the Operating Partnership and (ii)
the General Partner makes a capital contribution in an amount equal to the
proceeds of such issuance. Under the Operating Partnership Agreement, the
General Partner generally is obligated to contribute or cause the Company to
contribute the proceeds of a share offering by the Company as additional
capital to the Operating Partnership. Upon such contribution, the General
Partner or the Company, as applicable, will receive additional Units and the
General Partner's or the Company's, as applicable, percentage interest in the
Operating Partnership will be increased on a proportionate basis based upon
the amount of such additional capital contributions. Conversely, the
percentage interests of the Limited Partners will be decreased on a
proportionate basis in the event of additional capital contributions by the
General Partner or the Company. In addition, if the General Partner or the
Company contributes additional capital to the Operating Partnership, the
General Partner will revalue the property of the Operating Partnership to its
fair market value (as determined by the General Partner) and the capital
accounts of the partners will be adjusted to reflect the manner in which the
unrealized gain or loss inherent in such property (that has not been reflected
in the capital accounts previously) would be allocated among the partners
under the terms of the Operating Partnership Agreement if there were a taxable
disposition of such property for such fair market value on the date of the
revaluation.
EXCHANGE RIGHTS
Pursuant to the Operating Partnership Agreement, the Limited Partners (other
than the Company) have exchange rights ("Exchange Rights") that enable them to
cause the Operating Partnership to exchange their Units for cash, or at the
option of the General Partner, Common Shares on a one-for-one basis. The
exchange price will be paid in cash in the event that the issuance of Common
Shares to the exchanging Limited Partner would (i) result in any person
owning, directly or indirectly, Common Shares in excess of the Ownership
Limitation, (ii) result in shares of beneficial interest of the Company being
owned by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, (iv) cause the Company to own, actually
or constructively, 10% or more of the ownership interest in a tenant of the
Company's or the Operating Partnership's real property, within the meaning of
Section 856(d)(2)(B) of the Code, or (v) cause the acquisition of Common
Shares by such redeeming Limited Partner to be "integrated" with any other
distribution of Common Shares for purposes of complying with the Securities
Act. The Exchange Rights may be exercised by the Limited Partners at any time
after the second anniversary of the date of the closing of the Offering,
provided that not more than two exchanges may occur during each calendar year
and each Limited Partner may not exercise the Exchange Right for less than
1,000 Units or, if such Limited Partner holds less than 1,000 Units, all of
the Units held by such Limited Partner. See "Federal Income Tax
Considerations--Tax Aspects of the Operating Partnership." After the closing
of the Offering the aggregate number of Common Shares issuable upon exercise
of the Exchange Rights will be approximately 2,931,184. The number of Common
Shares issuable upon exercise of the Exchange Rights will be adjusted upon the
occurrence of share splits, mergers, consolidations or similar pro rata share
transactions, which otherwise would have the effect of diluting the ownership
interests of the Limited Partners or the shareholders of the Company.
REGISTRATION RIGHTS
For a description of certain registration rights held by the Limited
Partners, see "Shares Available for Future Sale."
OPERATIONS
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable the Company to satisfy the
requirements for being classified as a REIT for federal tax purposes, to
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avoid any federal income or excise tax liability imposed by the Code, and to
ensure that the Operating Partnership will not be classified as a "publicly
traded partnership" for purposes of Section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, the Operating Partnership will pay all
administrative costs and expenses of the Company and the General Partner
(collectively, the "Company Expenses") and the Company Expenses will be
treated as expenses of the Operating Partnership. The Company Expenses
generally will include (i) all expenses relating to the formation and
continuity of existence of the Company and the General Partner, (ii) all
expenses relating to the public offering and registration of securities by the
Company, (iii) all expenses associated with the preparation and filing of any
periodic reports by the Company under federal, state or local laws or
regulations, (iv) all expenses associated with compliance by the Company and
the General Partner with laws, rules and regulations promulgated by any
regulatory body and (v) all other operating or administrative costs of the
General Partner incurred in the ordinary course of its business on behalf of
the Partnership.
DISTRIBUTIONS
The Operating Partnership Agreement provides that the Operating Partnership
shall distribute cash from operations (including net sale or refinancing
proceeds, but excluding net proceeds from the sale of the Operating
Partnership's property in connection with the liquidation of the Operating
Partnership) on a quarterly (or, at the election of the General Partner, more
frequent) basis, in amounts determined by the General Partner in its sole
discretion, to the partners in accordance with their respective percentage
interests in the Operating Partnership. Upon liquidation of the Operating
Partnership, after payment of, or adequate provision for, debts and
obligations of the Operating Partnership, including any partner loans, any
remaining assets of the Operating Partnership will be distributed to all
partners with positive capital accounts in accordance with their respective
positive capital account balances. If the Company has a negative balance in
its capital account following a liquidation of the Operating Partnership, it
will be obligated to contribute cash to the Operating Partnership equal to the
negative balance in its capital account.
ALLOCATIONS
Income, gain and loss of the Operating Partnership for each fiscal year
generally is allocated among the partners in accordance with their respective
interests in the Operating Partnership, subject to compliance with the
provisions of Code Sections 704(b) and 704(c) and Treasury Regulations
promulgated thereunder.
TERM
The Operating Partnership shall continue until December 31, 2050, or until
sooner dissolved upon (i) the bankruptcy, dissolution or withdrawal of the
General Partner (unless the Limited Partners elect to continue the Operating
Partnership), (ii) the sale or other disposition of all or substantially all
the assets of the Operating Partnership, (iii) the redemption of all limited
partnership interests in the Partnership (other than those held by the
Company, if any), or (iv) the election by the General Partner.
FIDUCIARY DUTY
The Limited Partners have agreed that in the event of any conflict in the
fiduciary duties owed by the Company to its shareholders and by the General
Partner to such Limited Partners, the General Partner will fulfill its
fiduciary duties to such limited partnership by acting in the best interests
of the Company's shareholders.
TAX MATTERS
Pursuant to the Operating Partnership Agreement, the General Partner is the
tax matters partner of the Operating Partnership and, as such, has authority
to handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of Common Shares in the Company.
Hunton & Williams has acted as counsel to the Company and has reviewed this
summary and is of the opinion that it fairly summarizes the federal income tax
considerations that will be material to a holder of the Common Shares. The
discussion contained herein does not address all aspects of taxation that may
be relevant to particular shareholders in light of their personal investment
or tax 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 statements in this discussion and the opinion of Hunton & Williams are
based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, existing administrative rulings and practices of the
Service, and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF
SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company currently has in effect an election to be taxed as a pass-
through entity under Subchapter S of the Code, but intends to revoke its S
election on the day prior to the closing of the Offering. The Company plans to
make an election to be taxed as a REIT under sections 856 through 860 of the
Code, effective for its short taxable year beginning on the day prior to the
Closing of the Offering and ending on December 31, 1996. The Company believes
that, commencing with such taxable year, it will be organized and will operate
in such a manner as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner, but no assurance can
be given that the Company will operate in a manner so as to qualify or remain
qualified as a REIT.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
Hunton & Williams has acted as counsel to the Company in connection with the
Offering and the Company's election to be taxed as a REIT. In the opinion of
Hunton & Williams, assuming that the elections and other procedural steps
described in this discussion of "Federal Income Tax Considerations" are
completed by the Company in a timely fashion, the Company's organization and
proposed method of operation will enable it to qualify to be taxed as a REIT
under the Code commencing with the Company's short taxable year beginning the
day prior to the closing of the Offering and ending December 31, 1996, and for
its future taxable years. Investors should be aware, however, that opinions of
counsel are not binding upon the Service or any court. It must be emphasized
that Hunton & Williams' opinion is based on various assumptions and is
conditioned upon certain representations made by the Company as to factual
matters, including representations regarding the nature of the Company's
properties and the future conduct of its business. Such factual assumptions
and representations are described below in this discussion of "Federal Income
Tax Considerations" and are set out in the federal
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income tax opinion that will be delivered by Hunton & Williams at the closing
of the Offering. Moreover, such qualification and taxation as a REIT depends
upon the Company's ability to meet on a continuing basis, through actual
annual operating results, distribution levels, and share ownership, the
various qualification tests imposed under the Code discussed below. Hunton &
Williams will not review the Company's compliance with those tests on a
continuing basis. Accordingly, no assurance can be given that the actual
results of the Company's operations for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is distributed
currently to its shareholders. That treatment substantially eliminates the
"double taxation" (i.e., taxation at both the corporate and shareholder
levels) that generally results from investment in a corporation. However, the
Company will be subject to federal income tax in the following circumstances.
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" on its items of tax preference, if any. Third, if
the Company has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate rate
on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property (other than foreclosure property) held primarily for sale to
customers in the ordinary course of business), such income will be subject to
a 100% tax. Fifth, if the Company should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), and nonetheless has
maintained its qualification as a REIT because certain other requirements have
been met, it will be subject to a 100% tax on the net income attributable to
the greater of the amount by which the Company fails the 75% or 95% gross
income test. 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, the Company would 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., a corporation generally 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
asset) in the hands of the C corporation and the Company recognizes gain on
the disposition of such asset during the 10-year period beginning on the date
on which such asset was acquired by the Company, then to the extent of such
asset's "built-in-gain" (i.e., the excess of the fair market value of such
asset at the time of acquisition by the Company over the adjusted basis in
such asset at such time), such gain will be subject to tax at the highest
regular corporate rate applicable (as provided in Treasury Regulations that
have not yet been promulgated). The results described above with respect to
the recognition of "built-in-gain" assume that the Company will make an
election pursuant to IRS Notice 88-19 if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that 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) that would be taxable as a domestic corporation,
but for sections 856 through 860 of the Code; (iv) that 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 shares of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of each taxable year (the
"5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the Service that must be met
in order to elect and maintain REIT status; (viii) that uses a calendar year
for federal income tax purposes and complies with the recordkeeping
requirements of the Code and Treasury Regulations promulgated thereunder; and
(ix) that meets certain other tests, described below, regarding the nature of
its income and assets. The Code provides that
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conditions (i) to (iv), inclusive, must be met during the entire taxable year
and that 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. Conditions (v) and (vi) will not apply until after the first taxable
year for which an election is made by the Company to be taxed as a REIT. For
purposes of determining stock ownership under the 5/50 Rule, a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of
a trust permanently set aside or used exclusively for charitable purposes
generally is considered an individual. A trust that is a qualified trust under
Code section 401(a), however, generally is not considered an individual and
beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in such trust for purposes of the 5/50
Rule.
Prior to the consummation of the Offering, the Company did not satisfy
conditions (v) and (vi) in the preceding paragraph. The Company anticipates
issuing sufficient Common Shares with sufficient diversity of ownership
pursuant to the Offering to allow it to satisfy requirements (v) and (vi). In
addition, the Company's Declaration of Trust provides for restrictions
regarding transfer of the Common Shares that are intended to assist the
Company in continuing to satisfy the share ownership requirements described in
clauses (v) and (vi) above. Such transfer restrictions are described in
"Description of Shares of Beneficial Interest--Restrictions on Transfer."
The Company currently has one subsidiary, the General Partner, and may have
additional subsidiaries in the future. Code section 856(i) provides that a
corporation that is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation, all of the capital stock of
which has been held by the REIT at all times during the period such
corporation was in existence. Thus, in applying the requirements described
herein, any "qualified REIT subsidiaries" of the Company will be ignored, and
all assets, liabilities, and items of income, deduction, and credit of such
subsidiaries will be treated as assets, liabilities, and items of income,
deduction, and credit of the Company. The General Partner is a "qualified REIT
subsidiary." The General Partner, therefore, will not be subject to federal
corporate income taxation, although it may be subject to state and local
taxation.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the gross income of the partnership attributable to such share. In addition,
the assets and gross income of the partnership will retain the same character
in the hands of the REIT for purposes of section 856 of the Code, including
satisfying the gross income and asset tests described below. Thus, the
Company's proportionate share of the assets, liabilities, and items of income
of the Operating Partnership and the noncorporate subsidiaries of the
Operating Partnership (the "Noncorporate Subsidiaries") will be treated as
assets, liabilities, and items of income of the Company for purposes of
applying the requirements described herein.
Income Tests
In order for the Company to qualify and to maintain its qualification as a
REIT, three requirements relating to the Company's gross income must be
satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must consist of defined types of income 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
temporary investment income. 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 or temporary investments, and
from dividends, other types of interest, and gain from the sale or disposition
of stock or securities, or from any combination of the foregoing. Third, not
more than 30% of the Company's gross income (including gross income from
prohibited transactions) for each taxable year may be gain from the sale or
other disposition of (i) stock or securities held for less than one year, (ii)
dealer property that is not foreclosure property, and (iii) certain real
property held for
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less than four years (apart from involuntary conversions and sales of
foreclosure property). The specific application of these tests to the Company
is discussed below.
The rent received by the Company from its tenants ("Rent") 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 Company, or a
direct or indirect owner of 10% or more of the Company, 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, for the Rent to
qualify as "rents from real property," the Company generally must not operate
or manage the Properties or furnish or render services to the tenants of such
Properties, other than through an "independent contractor" who is adequately
compensated and from whom the Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by the Company are "usually or customarily rendered" in connection
with the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant."
The Company does not anticipate charging Rent for any portion of 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 fixed percentage or percentages
of receipts of sales, as described above). Furthermore, the Company has
represented that, with respect to other properties that it may acquire in the
future, it will not charge Rent for any portion of any property that is based,
in whole or in part, on the income or profits of any person to the extent that
the receipt of such Rent would jeopardize the Company's status as a REIT. In
addition, the Company does not anticipate receiving any Rent from a Related
Party Tenant, and the Company has represented that, to the extent that it
receives Rent from a Related Party Tenant in the future, such Rent will not
cause the Company to fail to satisfy either the 75% or 95% gross income test.
The Company also does not anticipate that the Rent attributable to personal
property leased in connection with any lease (a "Lease") of real property will
exceed 15% of the total Rent received under the Lease. The Company has
represented that, in the future, it will not allow the Rent attributable to
personal property leased in connection with any Lease of real property to
exceed 15% of the total Rent received under the Lease, if the receipt of such
Rent would cause the Company to fail to satisfy either the 75% or 95% gross
income test.
Through the Operating Partnership, the Noncorporate Subsidiaries, and the
Manager, none of which constitutes a qualifying independent contractor, the
Company will provide certain services to its tenants. The Company believes
(and has represented to Hunton & Williams) that all such services will be
considered "usually or customarily rendered" in connection with the rental of
space for occupancy only and will not otherwise be considered "rendered to the
occupant," so that the provision of such services will not jeopardize the
qualification of the Rent as "rents from real property." In the case of any
services that are not "usual and customary" under the foregoing rules, the
Company intends to employ qualifying independent contractors to provide such
services. Furthermore, the Company has represented that it will not provide
noncustomary services with respect to other properties that it acquires in the
future (other than through a qualifying independent contractor) to the extent
that the provision of such services would cause the Company to fail to satisfy
either the 75% or 95% gross income test.
If any portion of the Rent does not qualify as "rents from real property"
because the Rent attributable to personal property leased in connection with
any Lease of real property exceeds 15% of the total Rent received under the
Lease for a taxable year, the portion of the Rent that is attributable to
personal property will not be qualifying income for purposes of either the 75%
or 95% gross income test. Thus, if the Rent attributable to personal property,
plus any other income received by the Company during a taxable year that is
not qualifying income for purposes of the 95% gross income test, exceeds 5% of
the Company's gross income during such
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year, the Company likely would lose its REIT status. If, however, any portion
of the Rent received under a Lease does not qualify as "rents from real
property" because either (i) the Rent is considered based on the income or
profits of any person or (ii) the tenant is a Related Party Tenant, none of
the Rent received by the Company under such Lease would qualify as "rents from
real property." In that case, if the Rent received by the Company under such
Lease, plus any other income received by the Company during the taxable year
that is not qualifying income for purposes of the 95% gross income test,
exceeds 5% of the Company's gross income for such year, the Company likely
would lose its REIT status. Finally, if any portion of the Rent does not
qualify as "rents from real property" because the Company furnishes
noncustomary services with respect to a Property other than through a
qualifying independent contractor, none of the Rent received by the Company
with respect to the related Property would qualify as "rents from real
property." In that case, if the Rent received by the Company with respect to
the related Property, plus any other income received by the Company during the
taxable year that is not qualifying income for purposes of the 95% gross
income test, exceeds 5% of the Company's gross income for such year, the
Company would lose its REIT status.
The Company, through the Operating Partnership, may receive certain types of
income that will not qualify for purposes of the 75% or 95% gross income test.
In particular, dividends paid with respect to the stock of the Manager owned
by the Operating Partnership will be qualifying income for purposes of the 95%
gross income test, but not the 75% gross income test. In addition, the
Operating Partnership, through a Noncorporate Subsidiary, will receive its
allocable shares of fees received by the Noncorporate Subsidiary in
consideration of the performance of certain services with respect to
Properties that are owned, directly or indirectly, by the Operating
Partnership. Although the law is not entirely clear, to the extent that the
Operating Partnership owns, directly or indirectly, an interest in such
Properties and an interest in the Noncorporate Subsidiary, such fees should be
disregarded for purposes of the 75% and 95% gross income tests. The Operating
Partnership, through a Noncorporate Subsidiary, also may provide services to
third parties. Any fees received in exchange for such services will not be
qualifying income for purposes of the 75% and 95% gross income tests.
Furthermore, to the extent that the Company receives interest that is accrued
on the late payment of the Rent, such amounts will not qualify as "rents from
real property" and, thus, will not be qualifying income for purposes of the
75% gross income test, but instead will be treated as interest that qualifies
for the 95% gross income test. The Company believes that the aggregate amount
of any such nonqualifying income in any taxable year will not cause the
Company to fail to satisfy either the 75% or 95% gross income test.
It is possible that, from time to time, the Company or the Operating
Partnership will enter into hedging transactions with respect to one or more
of its assets or liabilities. Any such hedging transactions could take a
variety of forms, including interest rate swap contracts, interest rate cap or
floor contracts, futures or forward contracts, and options. To the extent that
the Company or the Operating Partnership enters into an interest rate swap or
cap contract to hedge any variable rate indebtedness incurred to acquire or
carry real estate assets, any periodic income or gain from the disposition of
such contract should be qualifying income for purposes of the 95% gross income
test, but not the 75% gross income test. Furthermore, any such contract would
be considered a "security" for purposes of applying the 30% gross income test.
To the extent that the Company or the Operating Partnership hedges with other
types of financial instruments or in other situations, it may not be entirely
clear how the income from those transactions will be treated for purposes of
the various income tests that apply to REITs under the Code. The Company
intends to structure any hedging transactions in a manner that does not
jeopardize its status as a REIT.
Based on the foregoing, Hunton & Williams is of the opinion that the Rent
will qualify as "rents from real property" for purposes of the 75% and 95%
gross income tests, and that the Company's proposed method of operation will
enable it to satisfy the 75% and 95% gross income tests. As described above,
the opinion of Hunton & Williams is based upon an analysis of all the facts
and circumstances and upon rulings and judicial decisions involving situations
that are considered to be analogous, as well as representations by the Company
and assumptions that are described above and set out in the federal income tax
opinion of Hunton & Williams to be delivered at the closing of the Offering.
Opinions of counsel are not binding upon the Service or any court.
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Accordingly, there can be no complete assurance that the Service will not
assert successfully a contrary position and, therefore, prevent the Company
from qualifying as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due 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 due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations--Taxation of the
Company," even if those relief provisions apply, a 100% tax would be imposed on
the net income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test. No such relief is available for
violations of the 30% income test.
Asset Tests
The Company, at the close of each quarter of each taxable year, also must
satisfy two 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 cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock
or debt instruments during the one-year period following the Company's receipt
of such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the principal
balance of a mortgage does not exceed the value of the associated real
property, and shares of other REITs. For purposes of the 75% asset test, the
term "interest in real property" includes an interest in land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold of real property, and an option to acquire real property (or a
leasehold of real property). Second, of the investments not included in the 75%
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 Company may
not own more than 10% of any one issuer's outstanding voting securities (except
for its interests in the Operating Partnership, the Noncorporate Subsidiaries,
the General Partner, and any other qualified REIT subsidiary).
For purposes of the asset tests, the Company will be deemed to own its
proportionate share of the assets of the Operating Partnership and each
Noncorporate Subsidiary, rather than its interests in those entities. The
Operating Partnership will own 100% of the nonvoting common stock of the
Manager. The Company has represented that, as of the date of the Offering, (i)
at least 75% of the value of its total assets will be represented by real
estate assets, cash and cash items (including receivables), and government
securities and (ii) it will not own (A) securities of any one issuer the value
of which exceeds 5% of the value of the Company's total assets or (B) more than
10% of any one issuer's outstanding voting securities (except for its interests
in the Operating Partnership, the Noncorporate Subsidiaries, the General
Partner, and any other qualified REIT subsidiary). In addition, the Company has
represented that it will not acquire or dispose, or cause the Operating
Partnership to acquire or dispose, of assets in the future in a way that would
cause it to violate either asset test. Based on the foregoing, Hunton &
Williams is of the opinion that the Company will satisfy both asset tests for
REIT status.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the
asset tests either did not exist immediately after the acquisition of any
particular asset or was not wholly or partly caused by such an acquisition
(i.e., the discrepancy arose from changes in the market values of its assets).
If the condition described in clause (ii) of the preceding sentence were not
satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
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Distribution Requirements
The Company, in order to qualify as a REIT, is required to distribute with
respect to each taxable year dividends (other than capital gain dividends) to
its shareholders in an aggregate amount at least equal to (i) the sum of (A)
95% of its "REIT taxable income" (computed without regard to the dividends
paid deduction and its 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 noncash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its federal income tax return for such year and if paid
on or before the first regular dividend payment date after such declaration.
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 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 income for
such year, and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% nondeductible excise tax on the excess of
such required distribution over the amounts actually distributed. The Company
intends to make timely distributions sufficient to satisfy the annual
distribution requirements.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income. Further, it is possible
that, from time to time, the Company may be allocated a share of net capital
gain attributable to the sale of depreciated property that exceeds its
allocable share of cash attributable to that sale. Therefore, the Company may
have less cash than is necessary to meet its annual 95% distribution
requirement or to avoid corporate income tax or the excise tax imposed on
certain undistributed income. In such a situation, the Company may find it
necessary to arrange for short-term (or possibly long-term) borrowings or to
raise funds through the issuance of Preferred Shares or additional Common
Shares.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirements for a year by paying "deficiency dividends"
to its shareholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay to the Service interest based upon the amount of any
deduction taken for deficiency dividends.
Recordkeeping Requirements
Pursuant to applicable Treasury Regulations, in order to be able to elect to
be taxed as a REIT, the Company must maintain certain records and request on
an annual basis certain information from its shareholders designed to disclose
the actual ownership of its outstanding shares. The Company intends to comply
with such requirements.
Partnership Anti-Abuse Rule
The U.S. Treasury Department has issued a final regulation (the "Anti-Abuse
Rule") under the partnership provisions of the Code (the "Partnership
Provisions") that authorizes the Service, in certain "abusive" transactions
involving partnerships, to disregard the form of the transaction and recast it
for federal tax purposes as the Service deems appropriate. The Anti-Abuse Rule
applies where a partnership is formed or utilized in connection with a
transaction (or series of related transactions) with a principal purpose of
substantially reducing the present value of the partners' aggregate federal
tax liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible economic arrangement that accurately reflects
the partners' economic agreement and clearly reflects the partners' income
without incurring any entity-level tax. The purposes for structuring a
transaction involving a partnership are determined based on all of the facts
and circumstances, including a comparison of the purported business purpose
for a transaction and the claimed tax benefits resulting from the transaction.
A reduction in the present value of the
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partners' aggregate federal tax liability through the use of a partnership
does not, by itself, establish inconsistency with the intent of the
Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, some of the limited partners
have the right, beginning two years after the formation of the partnership, to
require the redemption of their limited partnership interests in exchange for
cash or REIT stock (at the REIT's option) equal to the fair market value of
their respective interests in the partnership at the time of the redemption.
The example concludes that the use of the partnership is not inconsistent with
the intent of the Partnership Provisions and, thus, cannot be recast by the
Service. Based on the foregoing, Hunton & Williams is of the opinion that the
Anti-Abuse Rule will not have any adverse impact on the Company's ability to
qualify as a REIT. However, the Exchange Rights do not conform in all respects
to the redemption rights contained in the foregoing example. Moreover, the
Anti-Abuse Rule is extraordinarily broad in scope and is applied based on an
analysis of all of the facts and circumstances. As a result, there can be no
assurance that the Service will not attempt to apply the Anti-Abuse Rule to
the Company. If the conditions of the Anti-Abuse Rule are met, the Service is
authorized to take appropriate enforcement action, including disregarding the
Operating Partnership for federal tax purposes or treating one or more of its
partners as nonpartners. Any such action potentially could jeopardize the
Company's status as a REIT.
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 alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's 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. 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 of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which the Company
ceased to qualify as a REIT. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of Common Shares that
for U.S. federal income tax purposes is (i) a citizen or resident of the U.S.,
(ii) a corporation, partnership, or other entity created or organized in or
under the laws of the U.S. or of any political subdivision thereof, or (iii)
an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source. 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 his Common
Shares. However, corporate shareholders may be required to treat up to 20% of
certain capital gain dividends as ordinary income. Distributions in excess of
current and accumulated earnings and profits will not be taxable to a
shareholder to the extent that they do not exceed the adjusted basis of the
shareholder's Common Shares, but rather will reduce the adjusted basis of such
shares. To the extent that such distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of a shareholder's
Common Shares, such distributions will be included in income as long-term
capital gain (or short-term capital gain if the Common Shares have been held
for one year or less), assuming the Common Shares are capital assets in the
hands of the shareholder. In addition, any distribution declared by the
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Company in October, November, or December of any year and payable to a
shareholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the shareholder on December 31 of
such year, provided that the distribution is actually paid by the Company
during January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Shares will not be treated as passive
activity income and, therefore, shareholders generally will not be able to
apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which a shareholder is a limited partner) against such
income. In addition, taxable distributions from the Company generally will be
treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Common Shares (or
distributions treated as such), however, will be treated as investment income
only if the shareholder so elects, in which case such capital gains will be
taxed at ordinary income rates. The Company will notify shareholders after the
close of the Company's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return of capital,
and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, any gain or loss realized upon a taxable disposition of the
Common Shares by a shareholder who is not a dealer in securities will be
treated as long-term capital gain or loss if the Common Shares have been held
for more than one year and otherwise as short-term capital gain or loss.
However, any loss upon a sale or exchange of Common 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 of distributions from the Company required to be treated by such
shareholder as long-term capital gain. All or a portion of any loss realized
upon a taxable disposition of the Common Shares may be disallowed if other
Common Shares are purchased within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
A capital asset generally must be held for more than one year in order for
gain or loss derived from its sale or exchange to be treated as long-term
capital gain or loss. The highest marginal individual income tax rate is
39.6%, and the tax rate on net capital gains applicable to individuals is 28%.
Thus, the tax rate differential between capital gain and ordinary income for
individuals may be significant. In addition, the characterization of income as
capital or ordinary may affect the deductibility of capital losses. Capital
losses not offset by capital gains may be deducted against an individual's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. shareholders and to the Service the
amount of distributions 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 distributions
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 as to no loss of exemption from
backup withholding, and otherwise complies with the applicable requirements of
the backup withholding rules. A shareholder who does not provide the Company
with his correct taxpayer identification number also may be subject to
penalties imposed by the Service. 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 nonforeign status to the Company.
The Service issued proposed
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regulations in April 1996 regarding the backup withholding rules as applied to
Non-U.S. Shareholders. Those proposed regulations would alter the current
system of backup withholding compliance. See "--Taxation of Non-U.S.
Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the Service has issued a published ruling that
dividend distributions from a REIT to an exempt employee pension trust do not
constitute UBTI, provided that the shares of the REIT are not otherwise used
in an unrelated trade or business of the exempt employee pension trust. Based
on that ruling, amounts distributed by the Company to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Common Shares with debt, a portion of its
income from the Company will constitute UBTI pursuant to the "debt-financed
property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions
from the Company as UBTI. In addition, in certain circumstances, a pension
trust that owns more than 10% of the Company's shares is required to treat a
percentage of the dividends from the Company as UBTI (the "UBTI Percentage").
The UBTI Percentage is the gross income derived by the Company from an
unrelated trade or business (determined as if the Company were a pension
trust) divided by the gross income of the Company for the year in which the
dividends are paid. The UBTI rule applies to a pension trust holding more than
10% of the Company's stock only if (i) the UBTI Percentage is at least 5%,
(ii) the Company qualifies as a REIT by reason of the modification of the 5/50
Rule that allows the beneficiaries of the pension trust to be treated as
holding shares of the Company in proportion to their actuarial interests in
the pension trust, and (iii) either (A) one pension trust owns more than 25%
of the value of the Company's shares or (B) a group of pension trusts
individually holding more than 10% of the value of the Company's shares
collectively owns more than 50% of the value of the Company's shares.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no
attempt will be made herein to provide more than a summary of such rules.
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 COMMON SHARES, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends 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
ordinarily will be subject to a withholding tax equal to 30% of the gross
amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Common
Shares is treated as effectively connected with the Non-U.S. Shareholder's
conduct of a U.S. trade or business, the Non-U.S. Shareholder generally will
be subject to federal income tax at graduated rates, in the same manner as
U.S. shareholders are taxed with respect to such distributions (and also may
be subject to the 30% branch profits tax in the case of a Non-U.S. Shareholder
that is a non-U.S. corporation). The Company expects to withhold U.S. income
tax at the rate of 30% on the gross amount of any such distributions made to a
Non-U.S. Shareholder unless (i) a lower treaty rate applies and any required
form evidencing eligibility for that reduced rate is filed with the Company or
(ii) the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming
that the distribution is effectively connected income. The Service issued
proposed regulations in April 1996 that would modify the manner in which the
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Company complies with the withholding requirements. Distributions in excess of
current and accumulated earnings and profits of the Company will not be
taxable to a shareholder to the extent that such distributions do not exceed
the adjusted basis of the shareholder's Common Shares, but rather will reduce
the adjusted basis of such shares. To the extent that distributions in excess
of current and accumulated earnings and profits exceed the adjusted basis of a
Non-U.S. Shareholder's Common Shares, such distributions will give rise to tax
liability if the Non-U.S. Shareholder would otherwise be subject to tax on any
gain from the sale or disposition of his Common Shares, as described below.
Because it generally cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profits, the entire amount of any distribution normally will be
subject to withholding at the same rate as a dividend. However, amounts so
withheld are refundable to the extent it is determined subsequently that such
distribution was, in fact, in excess of current and accumulated earnings and
profits of the Company.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
U.S. real property interests are taxed to a Non-U.S. Shareholder as if such
gain were effectively connected with a U.S. business. Non-U.S. Shareholders
thus would be taxed at the normal capital gain rates applicable to U.S.
shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to the 30% branch profits
tax in the hands of a non-U.S. corporate shareholder not entitled to treaty
relief or exemption. The Company is required to withhold 35% of any
distribution that is designated by the Company as a capital gains dividend.
The amount withheld is creditable against the Non-U.S. Shareholder's FIRPTA
tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his Common Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by non-U.S. persons. It is currently anticipated that the
Company will be a "domestically controlled REIT" and, therefore, the sale of
the Common Shares will not be subject to taxation under FIRPTA. However,
because the Common Shares will be publicly traded, no assurance can be given
that the Company will be a "domestically controlled REIT." Furthermore, gain
not subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i)
investment in the Common Shares is effectively connected with the Non-U.S.
Shareholder's U.S. trade or business, in which case the Non-U.S. Shareholder
will be subject to the same treatment as U.S. shareholders with respect to
such gain, or (ii) the Non-U.S. Shareholder is a nonresident alien individual
who was present in the U.S. for 183 days or more during the taxable year and
certain other conditions apply, in which case the nonresident alien individual
will be subject to a 30% tax on the individual's capital gains. If the gain on
the sale of the Common Shares were to be subject to taxation under FIRPTA, the
Non-U.S. Shareholder would be subject to the same treatment as U.S.
shareholders with respect to such gain (subject to 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 non-U.S. corporations).
OTHER TAX CONSEQUENCES
The Company, the General Partner, the Operating Partnership, the Manager, a
Noncorporate Subsidiary, or the Company's shareholders may be subject to state
or local taxation in various state or local jurisdictions, including those in
which it or they own property, 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. CONSEQUENTLY, PROSPECTIVE
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE EFFECT OF
STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN THE COMPANY.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas, including REITs
that are organized as corporations. The Texas franchise tax imposed
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on a corporation doing business in Texas generally is equal to the greater of
(i) .25% of its "taxable capital" (generally, its financial accounting net
worth with certain adjustments) apportioned to Texas; or (ii) 4.5% of its
"taxable earned surplus" (generally, its federal taxable income with certain
adjustments) apportioned to Texas. A corporation's taxable capital and taxable
earned surplus are apportioned to Texas based upon a fraction, the numerator
of which is the corporation's gross receipts from business transacted in Texas
and the denominator of which is the corporation's gross receipts from all
sources.
Because the Company will be organized as a Maryland real estate investment
trust, and not as a corporation or a limited liability company, the Company
should not be subject to Texas franchise tax. Similarly, neither the Operating
Partnership nor any Noncorporate Subsidiary organized as a partnership should
be subject to the Texas franchise tax. The Company will request a ruling from
the office of the Texas State Comptroller of Public Accounts (the
"Comptroller"), the administrative agency that administers the Texas franchise
tax, that neither the Company, the Operating Partnership nor any Noncorporate
Subsidiary organized as a partnership will be subject to the Texas franchise
tax. There can be no assurance, however, that the Texas legislature, which
next meets in regular session in 1997, will not expand the scope of the Texas
franchise tax to apply to trusts such as the Company or partnerships such as
the Operating Partnership or the Noncorporate Subsidiaries that are organized
as partnerships.
Both the General Partner and the Manager will be organized as corporations.
Furthermore, the General Partner will be the general partner of a partnership
doing business in Texas (i.e., the Operating Partnership) and will register in
the State of Texas as a foreign corporation qualified to transact business in
Texas. Similarly, the Manager will conduct business in Texas and will register
in the State of Texas as a foreign corporation qualified to transact business
in Texas. Accordingly, both the General Partner and the Manager will be
subject to the Texas franchise tax. Finally, one of the Noncorporate
Subsidiaries, Riverside Industrial, LLC, is organized as a limited liability
company, will conduct business in Texas and will register in the State of
Texas as a foreign limited liability company qualified to transact business in
Texas. Accordingly, that Noncorporate Subsidiary also will be subject to the
Texas franchise tax.
Coopers & Lybrand L.L.P., special tax consultant to the Company ("Coopers &
Lybrand"), has reviewed the discussion in this section with respect to Texas
franchise tax matters and is of the opinion that it fairly summarizes the
Texas franchise tax considerations that will be material to the Company. The
opinion rendered by Coopers & Lybrand is not binding upon the Comptroller or
any court. Furthermore, Coopers & Lybrand expresses no opinion with respect to
(i) any federal or other state tax considerations affecting the Company
including, but not limited to, other taxes imposed by the State of Texas; or
(ii) any of the tax considerations affecting a holder of Common Shares
including, but not limited to, the Texas franchise tax implications to a
holder of owning Common Shares.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE NONCORPORATE SUBSIDIARIES
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in
the Operating Partnership and the Noncorporate Subsidiaries (each of the
Operating Partnership and the Noncorporate Subsidiaries is referred to herein
as a "Partnership"). The discussion does not cover state or local tax laws or
any federal tax laws other than income tax laws.
Classification as a Partnership
The Company will be entitled to include in its income its distributive share
of each Partnership's income and to deduct its distributive share of each
Partnership's losses only if each Partnership is classified for federal income
tax purposes as a partnership rather than as a corporation or an association
taxable as a corporation. An organization formed as a partnership will be
treated as a partnership, rather than as a corporation, for federal income tax
purposes if it (i) has no more than two of the four corporate characteristics
that the Treasury Regulations use to distinguish a partnership from a
corporation for tax purposes and (ii) is not a "publicly traded" partnership.
Those four corporate characteristics are continuity of life, centralization of
management,
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limited liability, and free transferability of interests. A publicly traded
partnership is a partnership whose interests are traded on an established
securities market or are readily tradable on a secondary market (or the
substantial equivalent thereof). A publicly traded partnership will be treated
as a corporation for federal income tax purposes unless at least 90% of such
partnership's gross income for a taxable year consists of "qualifying income"
under Section 7704(d) of the Code, which generally includes any income that is
qualifying income for purposes of the 95% gross income test applicable to
REITs (the "90% Passive-Type Income Exception"). See "--Requirements for
Qualification--Income Tests."
The U.S. Treasury Department recently issued regulations effective for
taxable years beginning after December 31, 1995 (the "PTP Regulations") that
provide limited safe harbors from the definition of a publicly traded
partnership. Pursuant to one of those safe harbors, (the "Private Placement
Exclusion"), interests in a partnership will not be treated as readily
tradable on a secondary market or the substantial equivalent thereof if (i)
all interests in the partnership were issued in a transaction (or
transactions) that was not required to be registered under the Securities Act
of 1933, as amended, and (ii) the partnership does not have more than 100
partners at any time during the partnership's taxable year. In determining the
number of partners in a partnership, a person owning an interest in a flow-
through entity (i.e., a partnership, grantor trust, or S corporation) that
owns an interest in the partnership is treated as a partner in such
partnership only if (a) substantially all of the value of the owner's interest
in the flow-through entity is attributable to the flow-through entity's
interest (direct or indirect) in the partnership and (b) a principal purpose
of the use of the tiered arrangement is to permit the partnership to satisfy
the 100-partner limitation. Each Partnership qualifies for the Private
Placement Exclusion. If the Operating Partnership is considered a publicly
traded partnership under the PTP Regulations because it is deemed to have more
than 100 partners, such Partnership should not be treated as a corporation
because it should be eligible for the 90% Passive-Type Income Exception.
The Company has not requested, and does not intend to request, a ruling from
the Service that each Partnership will be classified as a partnership for
federal income tax purposes. Instead, Hunton & Williams is of the opinion
that, based on certain factual assumptions and representations, each
Partnership does not possess more than two corporate characteristics and will
not be treated as a publicly traded partnership and, thus, will be treated for
federal income tax purposes as a partnership and not as a corporation or an
association taxable as a corporation, or a publicly traded partnership. Unlike
a tax ruling, an opinion of counsel is not binding upon the Service, and no
assurance can be given that the Service will not challenge the status of each
Partnership as a partnership for federal income tax purposes. If such
challenge were sustained by a court, the Partnership would be treated as a
corporation for federal income tax purposes, as described below. In addition,
the opinion of Hunton & Williams is based on existing law, which is to a great
extent the result of administrative and judicial interpretation. No assurance
can be given that administrative or judicial changes would not modify the
conclusions expressed in the opinion.
If for any reason one of the Partnerships were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company
would not be able to qualify as a REIT. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests" and "--
Requirements for Qualification--Asset Tests." In addition, any change in a
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur a tax liability without any related cash
distribution. See "Federal Income Tax Considerations--Requirements for
Qualification--Distribution Requirements." Further, items of income and
deduction of such Partnership would not pass through to its partners, and its
partners would be treated as shareholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute dividends that
would not be deductible in computing such Partnership's taxable income.
Income Taxation of the Partnerships and their Partners
Partners, Not Partnerships, Subject to Tax. A partnership is not a taxable
entity for federal income tax purposes. Rather, the Company will be required
to take into account its allocable share of each Partnership's income, gains,
losses, deductions, and credits for any taxable year of such Partnership
ending within or with the
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taxable year of the Company, without regard to whether the Company has
received or will receive any distribution from such Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under section 704(b) of the Code if they
do not comply with the provisions of section 704(b) of the Code and the
Treasury Regulations promulgated thereunder. If an allocation is not
recognized for federal income tax purposes, the item subject to the allocation
will be reallocated in accordance with the partners' interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the partners with
respect to such item. Each Partnership's allocations of taxable income and
loss are intended to comply with the requirements of section 704(b) of the
Code and the Treasury Regulations promulgated thereunder.
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 for federal
income tax purposes in a manner such that the contributor is charged with, or
benefits from, 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. The Treasury
Department recently issued regulations requiring partnerships to use a
"reasonable method" for allocating items affected by section 704(c) of the
Code and outlining several reasonable allocation methods. The Operating
Partnership plans to elect to use the traditional method for allocating Code
section 704(c) items with respect to the Properties it acquires in exchange
for Units.
Under the Operating Partnership Agreement, depreciation or amortization
deductions of the Operating Partnership generally will be allocated among the
partners in accordance with their respective interests in the Operating
Partnership, except to the extent that the Operating Partnership is required
under Code section 704(c) to use a method for allocating tax depreciation
deductions attributable to the Properties that results in the Company
receiving a disproportionately large share of such deductions. In addition,
gain on the sale of a Property contributed to the Operating Partnership by a
member of the Prentiss Group in exchange for Units will be specially allocated
to such member to the extent of any "built-in" gain with respect to such
Property for federal income tax purposes. Depending on the allocation method
elected under Code section 704(c), it is possible that the Company (i) may be
allocated lower amounts of depreciation deductions for tax purposes with
respect to contributed Properties than would be allocated to the Company if
such Properties were to have a tax basis equal to their fair market value at
the time of contribution and (ii) may be allocated taxable gain in the event
of a sale of such contributed Properties in excess of the economic profit
allocated to the Company as a result of such sale. These allocations may cause
the Company to recognize taxable income in excess of cash proceeds, which
might adversely affect the Company's ability to comply with the REIT
distribution requirements, although the Company does not anticipate that this
event will occur. The foregoing principles also will affect the calculation of
the Company's earnings and profits for purposes of determining which portion
of the Company's distributions is taxable as a dividend. The allocations
described in this paragraph may result in a higher portion of the Company's
distributions being taxed as a dividend than would have occurred had the
Company purchased the Properties for cash.
Basis in Operating Partnership Interest. The Company's adjusted tax basis in
its partnership interest in the Operating Partnership generally is equal to
(i) the amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) increased by (A) its allocable
share of the Operating Partnership's income and (B) its allocable share of
indebtedness of the Operating Partnership, and (iii) reduced, but not below
zero, by (A) the Company's allocable share of the Operating Partnership's loss
and (B) the amount of cash distributed to the Company, including constructive
cash distributions resulting from a reduction in the Company's share of
indebtedness of the Operating Partnership.
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If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition
of such loss will be deferred until such time as the recognition of such loss
would not reduce the Company's adjusted tax basis below zero. To the extent
that the Operating Partnership's distributions, or any decrease in the
Company's share of the indebtedness of the Operating Partnership (such
decrease being considered a constructive cash distribution to the partners),
would reduce the Company's adjusted tax basis below zero, such distributions
(including such constructive distributions) will constitute taxable income to
the Company. Such distributions and constructive distributions normally will
be characterized as capital gain, and, if the Company's partnership interest
in the Operating Partnership has been held for longer than the long-term
capital gain holding period (currently one year), the distributions and
constructive distributions will constitute long-term capital gain.
SALE OF THE OPERATING PARTNERSHIP'S OR A NONCORPORATE SUBSIDIARY'S PROPERTY
Generally, any gain realized by the Operating Partnership or a Noncorporate
Subsidiary on the sale of property held for more than one year will be long-
term capital gain, except for any portion of such gain that is treated as
depreciation or cost recovery recapture. Any gain recognized by the Operating
Partnership or a Noncorporate Subsidiary on the disposition of the Properties
contributed by the Prentiss Group in exchange for Units will be allocated
first to the applicable members of the Prentiss Group under section 704(c) of
the Code to the extent of their "built-in gain" on those Properties for
federal income tax purposes. The Limited Partners' "built-in gain" on the
Properties sold will equal the excess of the Limited Partners' proportionate
share of the book value of those Properties over the Limited Partners' tax
basis allocable to those Properties at the time of the sale. Any remaining
gain recognized by the Operating Partnership or a Noncorporate Subsidiary on
the disposition of the contributed Properties, and any gain recognized upon
the disposition of the Properties acquired by the Operating Partnership for
cash, will be allocated among the partners in accordance with their respective
percentage interests in the Operating Partnership or such Noncorporate
Subsidiary. The Bylaws of the Company provide that any decision to sell any
real estate asset in which a trustee, or officer of the Company, or any
Affiliate of the foregoing, has a direct or indirect interest, will be made by
a majority of the Trustees including a majority of the Independent Trustees.
See "Policies with Respect to Certain Activities--Conflict of Interest
Policies--Declaration of Trust and Bylaw Provisions."
The Company's share of any gain realized by the Operating Partnership or a
Noncorporate Subsidiary on the sale of any property held by the Operating
Partnership or a Noncorporate Subsidiary as inventory or other property held
primarily for sale to customers in the ordinary course of the Operating
Partnership's or a Noncorporate Subsidiary's trade or business will be treated
as income from a prohibited transaction that is subject to a 100% penalty tax.
Such prohibited transaction income also may have an adverse effect upon the
Company's ability to satisfy the income tests for REIT status. See "Federal
Income Tax Considerations--Requirements For Qualification--Income Tests"
above. The Company, however, does not presently intend to allow the Operating
Partnership or a Noncorporate Subsidiary to acquire or hold any property that
represents inventory or other property held primarily for sale to customers in
the ordinary course of the Company's, the Operating Partnership's or a
Noncorporate Subsidiary's trade or business.
MANAGER
The Operating Partnership owns 100% of the nonvoting stock of the Manager.
Such stock represents in the aggregate a 95% economic interest in the Manager.
The Operating Partnership also holds a $26.95 million note issued by the
Manager. By virtue of its ownership of the Operating Partnership, the Company
is considered to own its pro rata share of such stock and note.
As noted above, for the Company to qualify as a REIT the Company's
proportionate share of the value of the equity and debt securities of the
Manager held by the Operating Partnership may not exceed 5% of the total value
of the Company's assets. In addition, the Company's proportionate share of the
Manager's equity securities may not constitute more than 10% of the voting
securities of the Manager. The Company does not own, directly or through the
Operating Partnership, any of the voting securities of the Manager. In
addition, the Company
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believes its proportionate share of the value of the equity and debt
securities of the Manager held by the Operating Partnership does not exceed 5%
of the total value of the Company's assets. If the Service were to
successfully challenge these determinations, however, the Company likely would
fail to qualify as a REIT.
The Manager will be organized as a corporation and will pay federal, state
and local income taxes on its taxable income at normal corporate rates. Any
such taxes will reduce amounts available for distribution by the Manager which
in turn will reduce amounts available for distribution to the Company's
stockholders.
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UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to the
underwriters named below (the "Underwriters"), for whom Lehman Brothers Inc.,
Alex. Brown & Sons Incorporated, A.G. Edwards & Sons, Inc., Prudential
Securities Incorporated, Smith Barney Inc. and Principal Financial Securities,
Inc. are acting as representatives (the "Representatives"), and each of the
Underwriters has severally agreed to purchase, the respective number of Common
Shares set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc...............................................
Alex. Brown & Sons Incorporated...................................
A.G. Edwards & Sons, Inc..........................................
Prudential Securities Incorporated................................
Smith Barney Inc..................................................
Principal Financial Securities, Inc...............................
---
Total.........................................................
===
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the Common Shares are subject to certain conditions precedent and
that if any of the foregoing Common Shares are purchased by the Underwriters
pursuant to the Underwriting Agreement, all such Common Shares must be so
purchased.
The Company has been advised by the Underwriters that they propose to offer
the Common Shares directly to the public at the initial public offering price
set forth on the cover page of this Prospectus and to certain dealers at such
public offering price less a concession not in excess of $. per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $. per share to certain other underwriters or to certain other
brokers or dealers. After the initial public offering, the public offering
price, the concession to selected dealers and the reallowance to other dealers
may be changed by the Representatives.
The Company has granted to the Underwriters an option to purchase up to an
additional 2,137,500 Common Shares at the initial public offering price less
underwriting discounts and commissions, solely to cover overallotments, if
any. The Underwriters may exercise this option at any time up to 30 days after
the date of this Prospectus. To the extent that the Underwriters exercise this
option, each of the Underwriters will be obligated, subject to certain
conditions, to purchase a number of additional Common Shares proportionate to
such Underwriter's initial commitment reflected in the foregoing table.
The Company has agreed that it will not, without the prior written consent
of Lehman Brothers Inc., offer for sale, contract to sell, sell or otherwise
dispose of, directly or indirectly, any Common Shares (other than shares
issued pursuant to the 1996 Share Incentive Plan and certain other agreements)
or any securities convertible or exchangeable into Common Shares or sell or
grant options, rights or warrants with respect to any Common Shares, for a
period of six months after the consummation of the Offering. Each of the
officers, Trustees and affiliates of the Company who have acquired Units in
connection with the organization of the Company and the Formation Transactions
has entered into agreements with the Underwriters providing that, subject to
certain exceptions, such holders of Units will not sell any Units prior to the
second anniversary of the Closing Date, without the consent of the Company and
Lehman Brothers Inc. Each of the Continuing Investors has agreed that, subject
to certain exceptions, it will not sell any Common Shares prior to the first
anniversary of the Closing Date. The Company has agreed with the Continuing
Investors that it will issue 1,892,985 Common Shares (representing an
investment of approximately $37.9 million based on the Offering Price) in
exchange for their interests in the Operating Partnership. No underwriting
discounts or commissions will be applied to the Common Shares to be issued to
the Continuing Investors.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriters may be required to make
in respect thereof.
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The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common
Shares. Consequently, the offering price was determined by negotiations among
the Company and the Representatives. Among the principal factors considered in
such negotiations were prevailing market and general economic conditions,
dividend yields and Funds from Operation multiples of comparable publicly
traded REITs, the revenues and earnings of the Company in recent periods, the
current financial position of the Company and estimates of the business
potential and earnings prospects of the Company. Additionally, consideration
was given to the general status of the securities market, the market
conditions for new issues of securities and the demand for securities of
comparable companies at the times the offerings are made.
Certain of the Underwriters and their affiliates have from time to time
performed, and may continue to perform in the future, various investment
banking services for the Company, for which customary compensation has been
received. The Company will pay an advisory fee equal to 0.5% of the gross
proceeds of the Offering (including any exercise of the Underwriters'
overallotment option) to Lehman Brothers Inc. for advisory services in
connection with the evaluation, analysis and structuring of the Company's
formation as a REIT. In connection with the Offering, (i) affiliates of Lehman
Brothers Inc. will receive $54.0 million of the net proceeds as consideration
for the sale of such affiliates' interests in certain of the Properties to the
Company in the Formation Transactions, (ii) an affiliate of Lehman Brothers
Inc. will be repaid mortgage loans in the principal amount of approximately
$64.5 million made by it to certain affiliates of the Company prior to the
Offering and (iii) an affiliate of Lehman Brothers Inc. has delivered
commitments to make two mortgage loans available to the Company in the
aggregate principal amount of $50 million. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Results."
Although the Conduct Rules of the National Association of Securities
Dealers, Inc. exempt REITs from the conflict of interest provisions thereof,
because affiliates of Lehman Brothers Inc. will receive more than 10% of the
net proceeds of the Offering as consideration for the sale of interests in
certain of the properties and in repayment of currently outstanding
indebtedness, the Underwriters have determined to conduct the Offering in
accordance with the applicable provisions of Rule 2720 of the Conduct Rules.
In accordance with these requirements, A.G. Edwards & Sons, Inc. (the
"Independent Underwriter") is assuming the responsibilities of acting as
"qualified independent underwriter," and will recommend the maximum initial
public offering price for the Common Shares in compliance with the
requirements of the Conduct Rules. In connection with the Offering, the
Independent Underwriter is performing due diligence investigations and is
reviewing and participating in the preparation of this Prospectus and the
Registration Statement of which this Prospectus forms a part. The initial
public offering price of the Common Shares will be no higher than the price
recommended by the Independent Underwriter.
As of March 31, 1996, the Principal Mutual Insurance Company occupied
approximately 6,650 square feet of the Company's One Northwestern Plaza
Property in Southfield, Michigan (approximately 2.8% of the net rentable
square feet) pursuant to leases which expire June 30, 1997. Total annual base
rent under the Principal Mutual Insurance Company's leases was approximately
$147,533 as of March 31, 1996. As of March 31, 1996, The Prudential Insurance
Company of America occupied approximately 11,470 square feet of One
Northwestern Plaza (approximately 4.7% of the net rentable square feet)
pursuant to a lease which expires December 31, 1996. Total annual base rent
under the Prudential Insurance Company of America lease was approximately
$270,533 as of March 31, 1996.
The Company intends to apply to have the Common Shares listed on the NYSE
under the symbol "PP."
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Hunton &
Williams, Richmond, Virginia, as corporate, securities and tax counsel to the
Company, and by Akin, Gump, Strauss, Hauer & Feld, L.L.P., Dallas,
135
<PAGE>
Texas as real estate counsel to the Company, and for the Underwriters by
Rogers & Wells, New York, New York. Hunton & Williams and Rogers & Wells will
rely on Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland as to certain
matters of Maryland law.
EXPERTS
The financial statements as listed on the Index to Financial Statements on
F-1, included in this Prospectus, have been included herein in reliance on the
reports of Coopers & Lybrand, L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing. The description
of Texas franchise tax matters set forth in the Prospectus under the heading
"Federal Income Tax Considerations--Other Tax Consequences" is based upon the
opinion of Coopers & Lybrand, L.L.P.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 under the Securities Act and the rules and regulations promulgated
thereunder, with respect to the Common Shares offered pursuant to this
Prospectus. This Prospectus, which is part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits and financial statement schedules thereto. For further
information with respect to the Company and the Common Shares, reference is
made to the Registration Statement and such exhibits and financial statement
schedules, copies of which may be examined without charge at or obtained upon
payment of prescribed fees from, the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and will also be available for inspection and copying at the regional offices
of the Commission located at 13th Floor, 7 World Trade Center, New York, New
York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement
are not necessarily complete, and each such statement is qualified in its
entirety by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. In addition to
applicable legal or NYSE requirements, if any, holders of Common Shares will
receive annual reports containing audited financial statements with a report
thereon by the Company's independent certified public accounts, and quarterly
reports containing unaudited financial information for each of the first three
quarters of each fiscal year.
136
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus.
"401(k) Plan" means the Employee Savings Plan & Trust of PPL that will be
assumed and continued by the Company.
"5/50 Rule" means not more than 50% in value of the outstanding shares is
owned, directly or indirectly, by five or fewer individuals during the last
half of each taxable year.
"90% Passive-Type Income Exception" means that a publicly traded partnership
will be treated as a corporation for federal income tax purposes unless at
least 90% of such partnership's income for a taxable year consists of certain
passive-type income.
"ACMs" means asbestos-containing materials.
"ADA" means the Americans with Disabilities Act of 1990.
"ADS" means the alternative depreciation system of depreciation.
"Affiliate" means (i) any person that, directly or indirectly, controls or
is controlled by or is under common control with such person, (ii) any other
person that owns, beneficially, directly or indirectly, five percent (5%) or
more of the outstanding capital stock, shares or equity interests of such
person, or (iii) any officer, director, employee, partner or trustee of such
person or any person controlling, controlled by or under common control with
such person (excluding trustees and persons serving in similar capacities who
are not otherwise an Affiliate of such person). The term "person" means and
includes individuals, corporations, general and limited partnerships, stock
companies or associations, joint ventures, associations, companies, trusts,
banks, trust companies, land trusts, business trusts, or other entities and
governments and agencies and political subdivisions thereof. For the purposes
of this definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
through the ownership of voting securities, partnership interests or other
equity interests.
"Anti-Abuse Rule" means a final regulation issued by the United States
Treasury Department under the Partnership Provisions that authorizes the
Service, in certain "abusive" transactions involving partnerships, to
disregard the form of the transaction and recast it for federal tax purposes
as the Service deems appropriate.
"Beneficiary" means the beneficiary of the Share Trust.
"Broadmoor Austin Partnership" means the partnership owning the Broadmoor
Austin Property in which the Company owns a 49.9% interest.
"BWI Corridor" means the Baltimore/Washington Industrial Corridor.
"Bylaws" means the Company's Bylaws.
"Cadillac Fairview" means The Cadillac Fairview Corporate Limited and its
subsidiaries, including Corporate Limited Urban Development.
"CBD" means Central Business District.
"Chicago Industrial Buildings" means the four industrial buildings located
in Chicago, Illinois as to which the Company will have options to acquire
after the completion of the Formation Transactions.
G-1
<PAGE>
"Closing Date" means the date of the closing of the Offering.
"Closing Price" means the last sale price, regular way, or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Common or Preferred Shares
are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange on
which the Common or Preferred Shares are listed or admitted to trading or, if
the Common or Preferred Shares are not listed or admitted to trading on any
national securities exchange, the last quoted price, or if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal other
automated quotations system that may then be in use or, if the Common or
Preferred Shares are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker
making a market in the Common or Preferred Shares selected by the Board of
Trustees.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means common shares of beneficial interest, par value $.01
per share, of the Company.
"Company" means Prentiss Properties Trust and its subsidiaries on a
consolidated basis.
"Company Expenses" means administrative costs and expenses of the Company
and the General Partner.
"Compensation Committee" means the committee comprised of two or more of the
Independent Trustees established by the Board of Trustees to determine
compensation for the Company's executive officers and to implement the
Company's 1996 Share Incentive Plan.
"Competitive Activities" means engaging in, directly or indirectly, the
acquisition, development, construction, operation, management or leasing of
any office or industrial real estate property anywhere in the U.S. that the
Company conducts its affairs.
"Continuing Investors" means the pre-offering institutional investors in the
Operating Partnership who will receive restricted Common Shares in the
Formation Transactions.
"Control Share Acquisition" means the acquisition of Control Shares, subject
to certain exceptions.
"Control Shares" means shares of beneficial interest that, if aggregated
with all other such shares of beneficial interest of the Company previously
acquired by the acquiror, would entitle the acquiror to exercise voting power
in electing trustees within one of the following ranges of voting power: (i)
one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority, or (iii) a majority of all voting power, but does not include
shares which the acquiring person is then entitled to vote as a result of
having previously obtained shareholder approval.
"Debt Limitation" means the limitation on indebtedness that the Company
intends to maintain by limiting the Company's total combined indebtedness plus
its pro rata share of Joint Venture Debt to 50% of the Company's Total Market
Capitalization.
"Declaration of Trust" means the amended and restated Declaration of Trust
of the Company.
"Development Parcels" means the six parcels of land owned by the Company
that are adjacent to certain of the Properties.
G-2
<PAGE>
"DFW Airport" means Dallas-Fort Worth International Airport.
"Dow" means the Dow Chemical Corporation.
"EPA" means the United States Environmental Protection Agency.
"ESAs" means the Phase I environmental site assessments obtained by the
Company on all of the Properties prior to the closing of the Offering.
"Exchange Rights" means the right of Limited Partners to exchange all or a
portion of their units for Common Shares on a one-for-one basis pursuant to
the terms of the Operating Partnership Agreement.
"Exempt Organizations" means tax-exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Formation Transactions" means principal transactions in connection with the
formation of the Company and the acquisition of interests in the Properties by
the Operating Partnership.
"General Partner" means Prentiss Properties General Partner, Inc., as
general partner of the Operating Partnership.
"IBM" means International Business Machines Corporation.
"Independent Trustees" means a trustee of the Company that is not an officer
or employee of the Company, any affiliate of an officer or employee or any
affiliate of (i) any advisor to the Company under an advisory agreement, (ii)
any lessee of any property of the Company, (iii) any subsidiary of the Company
or (iv) any partnership that is an affiliate of the Company.
"Industrial Properties" means the 59 industrial buildings that the Company
will own after the completion of the Formation Transactions.
"Interested Shareholder" means a beneficial owner of ten percent or more of
the voting power of the then outstanding voting shares of beneficial interest
of a trust or an affiliate thereof.
"ISO" means share options of the Company that qualify as incentive share
options.
"Joint Venture Debt" means indebtedness of unconsolidated investments.
"Lease" means a lease of real property to which the Company is a party.
"Lehman" means Lehman Brothers Inc.
"LIBOR" means the London Interbank Offered Rate.
"Limited Partners" means the limited partners of the Operating Partnership
after the completion of the Formation Transactions.
"Line of Credit" means the $100 million line of credit that the Company
intends to obtain simultaneously with the closing of the Offering.
"MACRS" means the modified accelerated cost recovery system of depreciation.
"Manager" means Prentiss Properties Run Deep, Inc.
G-3
<PAGE>
"Market Price" means the average of the Closing Price for the five
consecutive Trading Days.
"Maryland REIT Law" means Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended.
"MGCL" means the Maryland General Corporation Law, as amended.
"Milwaukee Affected Areas" means the land on two Industrial Properties and a
Development Parcel in Milwaukee, Wisconsin on which lead-contaminated soil has
been found.
"Mortgage Debt" means the approximately $133.3 million of indebtedness
secured by 33 Properties that the Company will have outstanding after the
closing of the Offering.
"NAREIT" means National Association of Real Estate Investment Trusts, Inc.
"Non-U.S. Shareholders" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders.
"Noncompetition Period" means the period set forth in employment and
noncompetition agreements with Michael V. Prentiss and Thomas F. August during
which Messrs. Prentiss and August are prohibited from engaging, directly or
indirectly, in any Competitive Activities.
"NPL" means the National Priorities List of Superfund sites.
"NQSO" means share options of the Company that do not qualify as incentive
share options.
"NYSE" means the New York Stock Exchange.
"Offering" means the offering of Common Shares hereby.
"Offering Price" means the mid point of the range set forth on the cover of
this Prospectus.
"Office Properties" means the 26 office buildings that the Company will own
after the completion of the Formation Transactions.
"Operating Partnership" means Prentiss Properties Acquisition Partners, L.P.
"Operating Partnership Agreement" means the partnership agreement of the
Operating Partnership.
"Option Properties" means the Chicago Industrial Properties and Burnett
Plaza.
"Ownership Limitation" means the ownership of more than 9.8% of shares of
beneficial interest in the Company.
"Partnership" means each of the Operating Partnership and the Noncorporate
Subsidiaries.
"Partnership Provisions" means partnership provisions of the Code.
"PCIG" means Prentiss/Copley Investment Group.
"PGC" means the Pacific Gateway Center, an industrial complex containing 18
Industrial Properties.
"Plant Site" means the former synthetic rubber manufacturing plant owned by
the United States government located at the Plant Site.
G-4
<PAGE>
"Plant Site Affected Area" means the area south of the Plant Site on which
wastes from the Operation of the Plant was disposed.
"PMSA" means Primary Metropolitan Statistical Area.
"PPL" means Prentiss Properties Limited, Inc.
"Predecessor Company" means (i) 100% of the assets and results of operations
from 47 Properties for the periods presented, (ii) 100% of the assets and
results of operations of the 3141 Fairview Park Drive Property for the portion
of the periods after a Prentiss Group member acquired the Property, (iii)
49.9% of the assets and results of operations of the Broadmoor Austin
Properties; (iv) 15% of the assets and results of operations from the Park
West Property for the portion of the periods in which the Prentiss Group owned
a non-controlling interest, (v) a 25% of the assets and results of operations
of the industrial building in Itasca, Illinois and (vi) results of operations
of the Prentiss Properties Service Businesses conducted primarily by PPL in
the periods presented.
"Preferred Shares" means the preferred shares of beneficial interest, par
value $ per share, of the Company.
"Prentiss Group" means Prentiss Properties Limited, Inc., the companies and
partnerships affiliated with PPL and the Prentiss Principals and their
affiliates.
"Prentiss Principals" means Michael V. Prentiss, Thomas F. August, Dennis J.
DuBois and Richard B. Bradshaw, Jr.
"Prentiss Properties Service Business" means PPL's office and industrial
property management, leasing, development and construction businesses that the
Company will acquire in the Formation Transactions.
"Private Placement Exclusion" means the safe harbor from the definition of a
publicly traded partnership as provided for in the PTP Regulations.
"Prohibited Owner" means the record holder of the Common or Preferred Shares
that are designated as Shares-in-Trust.
"Properties" means, collectively, the Industrial Properties and the Office
Properties.
"PTP Regulations" means regulations recently issued by the United States
Treasury Department effective for taxable years beginning after December 31,
1995 that provide limited safe harbors from the definition of a publicly
traded partnership.
"Purchase Agreement" means the purchase agreement whereby the Company has
agreed to sell to the Underwriters, and each of the Underwriters has severally
agreed to purchase, a certain number of Common Shares as set forth therein.
"REIT" means real estate investment trust.
"Related Party Tenant" means the Company, or an owner of 10% or more of the
Company, directly or constructively owns 10% or more of a tenant.
"Rent" means rent received by the Company from its tenants.
"Restricted Shares" means restricted Common Shares of the Company.
"Rule 144" means Rule 144 promulgated under the Securities Act.
G-5
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the U.S. Internal Revenue Service.
"Share Trust" means a trust which holds Common or Preferred Shares of the
Company which have been designated as Shares-in-Trust.
"Shares-in-Trust" means Common or Preferred Shares which are transferred
automatically to the Share Trust.
"Shell" means the Shell Oil Company.
"Study Area" means the area south of the Plant Site Affected Area in which
the contamination of ground water has been found.
"Termination Fee Note" means the promissory note from a Prentiss Group
affiliate to PPL which is paid with the proceeds of sales of properties owned
by the affiliate.
"Total Market Capitalization" means the Company's combined equity market
capitalization plus its combined indebtedness and its pro rata share of Joint
Venture Debt.
"Trading Day" means a day on which the principal national securities
exchange on which the Common or Preferred Shares are listed or admitted to
trading is open for the transaction of business or, if the Common or Preferred
Shares are not listed or admitted to trading on any national securities
exchange, shall mean any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by
law or executive order to close.
"Trustees" means trustees of the Company.
"UBTI" means unrelated business taxable income.
"UBTI Percentage" means the percentage of dividends treated as UBTI in
certain circumstances where a pension trust owns more than 10% of the
Company's shares.
"Underwriters" means the Underwriters named in this Prospectus.
"Units" means units of limited partnership interest in the Operating
Partnership.
"UPRC" means Union Pacific Resource Corporation.
"WDNR" means the Wisconsin Department of Natural Resources.
G-6
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Combined Financial Information
Pro Forma Combined Balance Sheet as of March 31, 1996................... F-2
Pro Forma Combined Statement of Income for the three months ended March
31, 1996............................................................... F-3
Pro Forma Combined Statement of Income for the year ended December 31,
1995................................................................... F-4
Notes and Management's Assumptions to the Pro Forma Combined Financial
Information............................................................ F-5
Prentiss Properties Trust
Report of Independent Accountants....................................... F-18
Balance Sheet as of July 12, 1996....................................... F-19
Notes to Balance Sheet.................................................. F-20
Predecessor Company
Report of Independent Accountants....................................... F-23
Combined Balance Sheets as of March 31, 1996 (unaudited) and as of De-
cember 31, 1995 and 1994............................................... F-24
Combined Statements of Income for the three-month periods ended March
31, 1996 and 1995
(unaudited) and for the years ended December 31, 1995, 1994 and 1993... F-25
Combined Statements of Owners' Equity for the three-month period ended
March 31, 1996 (unaudited) and for the years ended December 31, 1995,
1994 and 1993.......................................................... F-26
Combined Statements of Cash Flows for the three-month periods ended
March 31, 1996 and 1995 (unaudited) and for the years ended December
31, 1995, 1994 and 1993................................................ F-27
Notes to Combined Financial Statements.................................. F-28
Schedule III: Real Estate and Accumulated Depreciation as of December
31, 1995............................................................... F-41
Prentiss Group Acquisition Properties
Report of Independent Accountants....................................... F-43
Combined Statements of Revenues and Certain Operating Expenses for the
three-month period ended March 31, 1996 (unaudited) and for the years
ended December 31, 1995, 1994 and 1993................................. F-44
Notes to Combined Statements of Revenues and Certain Operating Ex-
penses................................................................. F-45
Other Acquisition Properties
Report of Independent Accountants....................................... F-47
Combined Statements of Revenues and Certain Operating Expenses for the
three-month period ended March 31, 1996 (unaudited) and for the years
ended December 31, 1995 and 1994 (unaudited)........................... F-48
Notes to Combined Statements of Revenues and Certain Operating Ex-
penses................................................................. F-49
Bachman Creek
Report of Independent Accountants....................................... F-50
Statements of Revenues and Certain Operating Expenses for the three-
month period ended March 31, 1996 (unaudited) and for the year ended
December 31, 1995...................................................... F-51
Notes to Statements of Revenues and Certain Operating Expenses.......... F-52
</TABLE>
F-1
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS (NOTE 5)
----------------------------------------------------------
THE BACHMAN CREEK PRENTISS
PRENTISS GROUP AND OTHER PROPERTIES
PREDECESSOR ACQUISITION ACQUISITION THE OTHER TRUST
COMPANY PROPERTIES (A) PROPERTIES (B) OFFERING (C) ADJUSTMENTS (D) PRO FORMA
----------- -------------- -------------- ------------ --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Real estate............. $186,000 $87,682 $56,139 $ -- $ 26,448 $356,269
Less: accumulated
depreciation and
amortization......... (19,935) -- -- -- -- (19,935)
-------- ------- ------- -------- --------- --------
166,065 87,682 56,139 -- 26,448 336,334
Deferred financing
costs, net........... 2,238 -- -- -- (1,680) 558
Receivables, net...... 2,697 -- -- -- -- 2,697
Organization costs and
other assets, net.... 591 -- -- -- -- 591
Escrowed funds........ 1,362 -- -- -- -- 1,362
Cash and cash
equivalents.......... 971 (86,632) (53,039) 261,950 (115,991) 7,259
Investments in limited
partnership and joint
venture.............. 1,054 -- -- -- 19,083 20,137
-------- ------- ------- -------- --------- --------
Total Assets........ $174,978 $ 1,050 $ 3,100 $261,950 $ (72,140) $368,938
======== ======= ======= ======== ========= ========
Liabilities and
Shareholders' Equity:
Debt on real estate... $ 68,864 $ -- $ -- $ -- $ (5,567) $ 63,297
Accounts payable and
other liabilities.... 3,229 -- -- -- -- 3,229
Amounts due to
affiliates........... 681 -- -- -- -- 681
-------- ------- ------- -------- --------- --------
Total Liabilities... 72,774 -- -- -- (5,567) 67,207
-------- ------- ------- -------- --------- --------
Minority interest....... -- -- -- -- 46,467 46,467
-------- ------- ------- -------- --------- --------
Shareholders' Equity:
Common shares......... -- -- -- 143 19 162
Additional paid-in
capital.............. -- -- -- 261,807 37,841 299,648
Accumulated equity
(deficit) of
continuing
interests............ 102,204 1,050 3,100 -- (150,900) (44,546)
-------- ------- ------- -------- --------- --------
Total Shareholders'
Equity............. 102,204 1,050 3,100 261,950 (113,040) 255,264
-------- ------- ------- -------- --------- --------
Total Liabilities
and Shareholders'
Equity............. $174,978 $ 1,050 $ 3,100 $261,950 $ (72,140) $368,938
======== ======= ======= ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA COMBINED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS (NOTE 5)
--------------------------------------------
BACHMAN CREEK
THE AND OTHER PRENTISS
PRENTISS GROUP ACQUISITION PROPERTIES
PREDECESSOR ACQUISITION PROPERTIES OTHER TRUST
COMPANY PROPERTIES (A) (B) ADJUSTMENTS (D) PRO FORMA
----------- -------------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income......... $ 8,026 $4,074 $2,230 $ 153 $ 14,483
Management fees....... 2,517 -- -- (1,911) 606
Development, leasing,
sales and other
fees................. 3,009 18 2 (2,650) 379
------- ------ ------ -------- ----------
Total revenues...... 13,552 4,092 2,232 (4,408) 15,468
Expenses:
Property operating and
maintenance.......... 2,531 946 710 (156) 4,031
Real estate taxes..... 839 250 147 18 1,254
General office and ad-
ministration......... 1,495 5 -- (951) 549
Personnel costs, net.. 3,567 -- -- (3,036) 531
Interest expense...... 969 -- -- 259 1,228
Interest expense (non-
cash)................ 233 -- -- (188) 45
Depreciation and amor-
tization............. 1,781 -- -- 1,249 3,030
------- ------ ------ -------- ----------
Total expenses...... 11,415 1,201 857 (2,805) 10,668
Equity in joint ven-
ture and subsidiary.. 14 -- -- 900 914
------- ------ ------ -------- ----------
Income before minority
interest............... 2,151 2,891 1,375 (703) 5,714
Minority interest..... -- -- -- (880) (880)
------- ------ ------ -------- ----------
Net income.............. $ 2,151 $2,891 $1,375 $ (1,583) $ 4,834
======= ====== ====== ======== ==========
Net income per share.... $ .30
==========
Weighted average number
of shares
outstanding............ 16,142,985
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS (NOTE 6)
---------------------------------------------
THE BACHMAN CREEK PRENTISS
PRENTISS GROUP AND OTHER PROPERTIES
PREDECESSOR ACQUISITION ACQUISITION OTHER TRUST
COMPANY PROPERTIES (A) PROPERTIES (B) ADJUSTMENTS (C) PRO FORMA
----------- -------------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income......... $29,423 $17,563 $9,393 $ 610 $ 56,989
Management fees....... 9,979 -- -- (7,641) 2,338
Development, leasing,
sales and other
fees................. 15,762 36 62 (14,676) 1,184
------- ------- ------ ------- ----------
Total revenues...... 55,164 17,599 9,455 (21,707) 60,511
Expenses:
Property operating and
maintenance.......... 7,696 5,546 2,956 (630) 15,568
Real estate taxes..... 3,030 912 782 73 4,797
General office and ad-
ministration......... 6,438 -- -- (4,344) 2,094
Personnel costs, net.. 17,138 -- -- (15,193) 1,945
Interest expense...... 3,783 -- -- 1,129 4,912
Interest expense (non-
cash)................ 99 -- -- 80 179
Depreciation and amor-
tization............. 7,166 -- -- 4,904 12,070
------- ------- ------ ------- ----------
Total expenses...... 45,350 6,458 3,738 (13,981) 41,565
Equity in joint ven-
ture and subsidiary.. 11 -- -- 6,251 6,262
------- ------- ------ ------- ----------
Income before minority
interest............... 9,825 11,141 5,717 (1,475) 25,208
Minority interest..... -- -- -- (3,882) (3,882)
------- ------- ------ ------- ----------
Net income.............. $ 9,825 $11,141 $5,717 $(5,357) $ 21,326
======= ======= ====== ======= ==========
Net income per share.... $ 1.32
==========
Weighted average number
of shares
outstanding............ 16,142,985
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION:
Prentiss Properties Trust (the "Company"), was organized in the state of
Maryland on July 12, 1996. The Company intends to qualify as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended,
commencing with its taxable year ending December 31, 1996. The Company will
acquire a sole general partnership interest in Prentiss Properties Acquisition
Partners, L.P. (the "Operating Partnership") through the Company's wholly
owned subsidiary Prentiss Properties GP, Inc., a Texas corporation, and will
own an 84.6% limited partnership interest in the Operating Partnership
directly.
The Company has been formed to succeed to substantially all of the interests
of Prentiss Properties Limited, Inc. ("PPL") and its affiliates in (i) a
portfolio of office and industrial properties and (ii) the national
acquisition, property management, leasing, development and construction
businesses of PPL and its affiliates. The acquisition, property management,
leasing, development and construction businesses will be carried out directly
by the Operating Partnership and the Company's majority-owned affiliate (the
"Manager"), which will be renamed Prentiss Properties Limited, Inc. subsequent
to the completion of the Offering.
The Company has had no operations to date.
2. FORMATION TRANSACTIONS:
The Offering
The Company has filed a registration statement on Form S-11 with the
Securities and Exchange Commission with respect to the public offering (the
"Offering") of 14,250,000 Common shares (exclusive of 2,137,500 Common shares
subject to the underwriters' over-allotment option and 1,892,985 Common shares
being concurrently sold by the Company at the initial public offering price to
certain owners of interests in the Properties, that are not affiliated with
the Prentiss Group in exchange for their interests in certain Properties, as
defined below) at an estimated initial offering price of $20.00 per share. The
Company will use some of the net proceeds from the Offering to purchase
certain limited partners' interests in the Operating Partnership and will
contribute the remaining net proceeds to the Operating Partnership in exchange
for 16,142,985 partnership units ("Units"), representing an approximate 84.6%
interest, in the Operating Partnership.
The Properties
Upon consummation of the Offering and certain related transactions
(collectively, the "Formation Transactions"), the Company will own 85
properties (the "Properties"), including 26 office and 59 industrial
properties, located in 10 major markets throughout the U.S. and containing 8.5
million net rentable square feet. The Properties consist of the following:
(a) twelve office properties and thirty-five industrial properties owned
currently by the Operating Partnership and its subsidiaries. The Operating
Partnership is an affiliate of the Prentiss Group (as defined below).
Certain Prentiss Group members who collectively serve as the general
partner of the Operating Partnership will receive Units. The interests of
the limited partners of the Operating Partnership will be acquired by the
Company with Common shares and cash;
(b) a 49.9% interest in seven properties (collectively, the "Broadmoor
Austin office properties"). A 24.9% joint venture interest in the Broadmoor
Austin office properties will be contributed to the Operating Partnership
upon consummation of the Offering by Michael V. Prentiss, Thomas F. August,
Dennis J. DuBois and Richard B. Bradshaw or entities owned, directly or
indirectly, by one or more of such persons (such individuals and entities
being referred to collectively herein as the "Prentiss Group"), in exchange
F-5
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
for Units. An additional 25% interest in the Broadmoor Austin office
properties will be purchased from a third party with cash. The Operating
Partnership will have an option to acquire an additional .1% interest in
the Broadmoor Austin office properties after the Formation Transactions,
which would increase the Operating Partnership's ownership in Broadmoor
Austin to 50%. The option may be exercised at any time one year and one day
after the Offering.
(c) the 3141 Fairview Park Drive office property, which will be
contributed to the Operating Partnership by the Prentiss Group in exchange
for Units; the Park West office property, in which a 15% interest will be
contributed to the Operating Partnership by the Prentiss Group in exchange
for Units and in which the remaining 85% will be acquired by the Operating
Partnership with cash and through the assumption and repayment of debt from
an affiliate of Lehman Brothers Inc.; a 25% general partnership interest in
the 71,000 square foot Itasca Industrial property, which will be
contributed to the Operating Partnership by the Prentiss Group, and the 18
industrial properties comprising Pacific Gateway Center, which will be
acquired from an affiliate of the Prentiss Group upon the closing of the
Offering with cash; and
(d) an additional six industrial properties and five office properties.
One of such office properties, Bachman Creek, is under contract by the
Prentiss Group, who will contribute the property to the Company in exchange
for Units and the assumption and repayment of debt from an affiliate of
Lehman Brothers Inc. The remaining 10 properties will be acquired from
affiliates of Lehman Brothers Inc. in exchange for cash.
The Contracts
Certain management contracts of PPL (the "Contracts") will be contributed by
the Prentiss Group to the Operating Partnership in exchange for Units. The
Operating Partnership will contribute the majority of the Contracts to the
Manager in exchange for a note in the amount of $26,950. The note bears
interest at 13% per year and has interest only payments for the first three
years with a subsequent 10-year amortization. Due to the affiliation of the
Manager and the Operating Partnership, the note has been classified in
Shareholders' equity. Due to the capital nature of this transaction, interest
income and expense amounts are recorded directly to Shareholders' equity.
The Line of Credit
Concurrent with the consummation of the Offering, the Operating Partnership
intends to enter into a three-year, $100,000 revolving credit facility (the
"Line of Credit") under which the Operating Partnership may borrow to finance
the acquisition of additional properties and for other corporate purposes,
including to obtain additional working capital. The Company anticipates that
borrowings under the Line of Credit will bear interest at LIBOR plus an
additional percentage and will be secured by first mortgage liens on certain
of the Properties and may be secured by other properties acquired by the
Company and will be guaranteed by the Company. The Company expects that an
origination fee of approximately 0.5% or $500 will be paid to obtain the Line
of Credit.
Approximately $97.6 million of the net proceeds of the Offering will be used
to repay certain mortgage indebtedness secured by the Properties as set forth
in the table below, including approximately $64.5 million which will be repaid
to an affiliate of Lehman Brothers Inc. Concurrent with the Offering, the
Company will obtain mortgage loans with an aggregate principal amount
totalling $50 million from an affiliate of Lehman Brothers Inc.
F-6
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
Certain information regarding the indebtedness to be repaid is set forth
below:
DEBT TO BE REPAID WITH A PORTION OF OFFERING PROCEEDS
<TABLE>
<CAPTION>
PROPERTY MATURITY DATE INTEREST RATE AMOUNT TO BE REPAID
- ----------------------- ----------------- ------------- -------------------
<S> <C> <C> <C>
Walnut Glen Tower...... January 31, 2001 7.500% $1,241(/1/)
8521 Leesburg Pike..... September 1, 1999 8.500% 5,102(/1/)
Northland Park......... July 1, 1999 8.750% 9,500
North Topping Street... October 1, 2001 8.300% 3,435
Airworld Drive, 107th
Terrace
Nicholson III, 13425... October 1, 2001 8.300% 3,465
Branchview and 1002
Avenue T
Milwaukee Industrial... May 1, 2000 8.125% 10,323
3141 Fairview Park
Drive................. February 21, 1999 LIBOR + 3.50% 22,500(/2/)(/3/)
Bachman Creek.......... August 9, 1997 LIBOR + 1.65% 6,500(/3/)
Park West.............. March 31, 1997 9.000% 35,517(/3/)
</TABLE>
- --------
(/1/The)amounts to be repaid are based on the actual debt balances as of the
March 31, 1996 Balance Sheet. The actual amounts to be repaid may differ
due to amortization of the principal balance of the debt.
(/2/The)amount includes two notes, one with a face amount of $19 million and a
maturity date of February 21, 1999, and the second with a face amount of
$3.5 million and a maturity date of February 21, 1997.
(/3/Debt)to be repaid to an affiliate of Lehman Brothers Inc.
3. BASIS OF PRESENTATION:
The accompanying unaudited pro forma financial information has been prepared
based upon certain pro forma adjustments to the historical combined financial
statements of Prentiss Properties Acquisition Partners, L.P., the operations
of PPL, a 50% equity investment in Austex Associates L.P. ("Austex"), which
holds a 50% interest in the Broadmoor Austin office properties, the accounts
of Fairview Eleven Investors L.P. ("3141 Fairview Park Drive") from February
23, 1996 through March 31, 1996, a 25% equity investment in Prentiss/Copley
Itasca Associates and a 15% equity investment in Park West C-2 Associates
("Park West") from September 5, 1995 through March 31, 1996 (collectively, the
"Predecessor Company"). The pro forma adjustments reflect the Offering, the
purchase of properties affiliated with the Prentiss Group (the "Prentiss Group
Acquisition Properties"), the Other Acquisition Properties and other
adjustments (for purposes of the pro forma financial information, Bachman
Creek is included in the Other Acquisition Properties).
The pro forma balance sheet of the Company as of March 31, 1996 has been
prepared as if the Formation Transactions, as discussed above, had been
consummated on March 31, 1996. The pro forma statements of income for the
three months ended March 31, 1996 and for the year ended December 31, 1995,
have been prepared as if the Formation Transactions had been consummated on
January 1, 1996 and 1995, respectively.
Effective September 5, 1995, the Prentiss Group acquired a 15% non-
controlling interest in Park West. This investment is accounted for in the
Predecessor Company's combined financial statements under the equity method of
accounting. On February 23, 1996, the Prentiss Group acquired the 3141
Fairview Park Drive property. Subsequent to the acquisition, operations of the
3141 Fairview Park Drive property are reflected in the combined financial
statements of the Predecessor Company.
The Manager has been included in the pro forma financial information under
the equity method of accounting due to the Operating Partnership's ownership
of a non-controlling, non-voting interest.
F-7
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
Information regarding the Prentiss Group Acquisition Properties is presented
separately from the Predecessor Company financial data for those properties
not owned by the Prentiss Group during the periods presented. The Other
Acquisition Properties are presented separately from the Predecessor Company
financial data as the acquisition of such properties will close subsequent to
March 31, 1996, concurrent with the consummation of the Offering.
The unaudited pro forma financial information is not necessarily indicative
of what the actual financial position would have been at March 31, 1996, or
what the actual results of operations would have been for the three months
ended March 31, 1996, or for the year ended December 31, 1995, had the
Formation Transactions been consummated on March 31, 1996, January 1, 1996 and
January 1, 1995, nor do they purport to present the future financial position
or results of operations of the Company.
The pro forma financial information should be read in conjunction with the
historical combined financial statements and notes thereto of the Predecessor
Company, the Prentiss Group Acquisition Properties, the Other Acquisition
Properties and Bachman Creek.
4. ASSUMPTIONS:
Certain assumptions regarding the operations of the Company have been made
in connection with the preparation of the pro forma financial information.
These assumptions are as follows:
(a) The pro forma financial information assumes that the Company has
elected to be, and qualified as, a REIT for federal income tax purposes and
has distributed all of its taxable income for the applicable periods, and,
therefore, incurred no federal income tax liabilities.
(b) Rental income has been recognized on a straight-line method of
accounting in accordance with generally accepted accounting principles.
(c) The over-allotment option granted to the underwriters is not
exercised.
(d) General and administrative expenses historically incurred by the
Properties and the Predecessor Company have been adjusted to reflect the
self-administered structure of the Company and the additional expenses of
being a public company.
(e) The Company will execute a new lease agreement for its corporate
offices resulting in an approximate pre-tax savings of $300 per year. The
new lease is expected to begin in or around October 1996.
(f) Pro forma net income per share has been calculated using 16,142,985
Common shares as the weighted average number of shares outstanding during
the pro forma period reflecting the issuance of 14,250,000 Common shares to
the public in the Offering and 1,892,985 Common shares to three of the non-
continuing limited partners (the "Continuing Investors") in the Operating
Partnership.
5. PRO FORMA ADJUSTMENTS FOR MARCH 31, 1996:
A. The Prentiss Group Acquisition Properties:
Balance Sheet
The balance sheet reflects the acquisition of the Park West and the Pacific
Gateway Center properties. The purchase price of Park West (including certain
related transfer costs estimated to be $82) is $44,082. The acquisition of
Park West will be consummated pursuant to a cash payment of $43,032 for an
affiliate's 85% interest in the property, repayment of debt on the property
and related transfer costs, and an issuance of Units valued at $1,050 for the
Prentiss Group's 15% interest in the property, resulting in an increase in
Real estate of
F-8
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
$44,082 and an increase in Accumulated equity (deficit) of continuing
interests of $1,050 (see March 31, 1996 Balance Sheet adjustment D(4) for
additional information). The Pacific Gateway Center property will be acquired
with cash of $43,600 (including certain related transfer costs estimated to be
$225). The 3141 Fairview Park Drive property was purchased by the Prentiss
Group in February 1996 and, therefore, is included in the balance sheet of the
Predecessor Company at March 31, 1996.
Statement of Income
The statement of income reflects the historical operations of the Prentiss
Group Acquisition Properties. Operations for the 3141 Fairview Park Drive
property are included in the Predecessor Company's combined financial
statements from February 23, 1996 (the date of acquisition by the Prentiss
Group) through March 31, 1996. Operations for this property prior to its
acquisition by the Prentiss Group and the operations of Park West and Pacific
Gateway Center for the three months ended March 31, 1996 are reflected in the
Prentiss Group Acquisition Properties financial information as presented in
the table below:
<TABLE>
<CAPTION>
3141 FAIRVIEW PACIFIC
PARK DRIVE PARK WEST GATEWAY CENTER TOTAL
------------- --------- -------------- ------
<S> <C> <C> <C> <C>
Rental income................... $489 $2,162 $1,423 $4,074
Other income.................... 2 16 -- 18
---- ------ ------ ------
Total revenues................ 491 2,178 1,423 4,092
Property operating and
maintenance.................... 215 518 213 946
Real estate taxes............... 33 163 54 250
Other expenses.................. 1 4 -- 5
---- ------ ------ ------
Total expenses................ 249 685 267 1,201
---- ------ ------ ------
Revenues in excess of certain
operating expenses............. $242 $1,493 $1,156 $2,891
==== ====== ====== ======
</TABLE>
The table below presents operations for the 3141 Fairview Park Drive
property, both prior and subsequent to its acquisition by the Prentiss Group.
<TABLE>
<CAPTION>
3141 FAIRVIEW PARK DRIVE
--------------------------------------
OPERATIONS
TOTAL INCLUDED IN
FOR THE OPERATIONS PRENTISS
THREE MONTHS INCLUDED IN GROUP
ENDED PREDECESSOR ACQUISITION
MARCH 31, 1996 COMPANY PROPERTIES
-------------- ----------- -----------
<S> <C> <C> <C>
Rental income.......................... $802 $313 $489
Other income........................... 5 3 2
---- ---- ----
Total revenues....................... 807 316 491
Property operating and maintenance..... 391 176 215
Real estate taxes...................... 77 44 33
Other expenses......................... 1 -- 1
---- ---- ----
Total expenses....................... 469 220 249
---- ---- ----
Revenues in excess of certain operating
expenses.............................. $338 $ 96 $242
==== ==== ====
</TABLE>
B. Bachman Creek and Other Acquisition Properties:
Balance Sheet
The balance sheet reflects the purchase of the One Northwestern, Cottonwood,
West Loop Business Park, 9050 Junction and Bachman Creek properties. The
purchase price of these properties (including certain related
F-9
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
transfer costs estimated to be $339) is $56,139. The acquisition of the
properties will be consummated pursuant to a cash payment of $53,039 and the
issuance of $3,100 in Units for the Prentiss Group's equity interest in
Bachman Creek.
Statement of Income
Reliable historical financial information for the West Loop Business Park
properties, to be acquired for $3,261, is not available. Accordingly,
operating results for the Other Acquisition Properties excludes the operations
of the West Loop Business Park properties for all periods presented. The
statement of income reflects the historical operations of One Northwestern,
Cottonwood, 9050 Junction and the Bachman Creek properties for the three
months ended March 31, 1996 as follows:
<TABLE>
<CAPTION>
BACHMAN CREEK
OTHER AND OTHER
ONE 9050 ACQUISITION ACQUISITIONS
NORTHWESTERN COTTONWOOD JUNCTION PROPERTIES BACHMAN CREEK PROPERTIES
------------ ---------- -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rental income........... $1,255 $535 $56 $1,846 $384 $2,230
Other income............ -- 1 -- 1 1 2
------ ---- --- ------ ---- ------
Total revenues........ 1,255 536 56 1,847 385 2,232
Property operating and
maintenance............ 409 158 28 595 115 710
Real estate taxes....... 114 -- -- 114 33 147
------ ---- --- ------ ---- ------
Total expenses........ 523 158 28 709 148 857
------ ---- --- ------ ---- ------
Revenues in excess of
certain operating
expenses............... $ 732 $378 $28 $1,138 $237 $1,375
====== ==== === ====== ==== ======
</TABLE>
C. The Offering:
Balance Sheet
Reflects the initial capitalization of the Company and the issuance of
14,250,000 Common shares in connection with the Offering at an assumed initial
public offering price of $20.00 per share. The estimated costs of the
Offering, totalling $23,050, have been reflected as an offset to Additional
paid-in capital. The resulting net proceeds of the Offering total $261,950. An
additional 1,892,985 Common shares will be issued to the Continuing Investors.
D. Other Adjustments:
The following notes should be read in conjunction with the Pro Forma
Adjustment Summary presented on page F-17.
Balance Sheet
(1) Reflects the incremental increase in basis of the Predecessor Company's
Real estate resulting from the purchase of the limited partners' interest of
97.5% in the Operating Partnership. The purchase of the limited partners'
interest in the Operating Partnership (including certain related transfer
costs estimated to be $369) will be as follows:
F-10
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
ACCUMULATED
EQUITY TOTAL
ADDITIONAL (DEFICIT) OF STOCK
REAL COMMON PAID-IN CONTINUING HOLDERS'
CASH ESTATE STOCK CAPITAL INTERESTS EQUITY
-------- -------- ------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Cash payment for limited
partners' interest..... $(88,708) $ -- $ -- $ -- $ -- $ --
Common shares issued for
Continuing Investors'
interest............... -- -- (19) (37,841) -- (37,860)
Equity of limited part-
ners in Prentiss
Properties Acquisition
Partners, L.P. ........ -- -- -- -- 100,203 100,203
Step-up in basis for ac-
quisition of limited
partners' interest..... -- 26,365 -- -- -- --
-------- -------- ----- ------- ------- -------
$(88,708) $ 26,365 $62,343
======== ======== =======
</TABLE>
(2) Represents the transfer costs paid and the corresponding increase in
basis of the 3141 Fairview Park Drive property totalling $83 in connection
with the contribution of the property by the Prentiss Group concurrent with
the Offering.
(3) Represents the write-off of previously capitalized deferred financing
costs on mortgage loans to be repaid concurrent with the Offering of $2,180,
offset by a $500 fee to be paid for the Line of Credit.
(4) Reflects the acquisition price of $17,133 for a 50% interest in Austex
($9,292 of the purchase price, including transfer costs, is in excess of the
book value of the net assets acquired and will be amortized over 40 years),
net of a $1,050 pro forma adjustment to reverse the Prentiss Group's prior
equity in the Park West property, which is included in both the Predecessor
Company and Prentiss Group Acquisition Properties. Also, reflects $3,000 cash
contributed to the Manager by the Operating Partnership.
(5) Reflects the expected paydown of outstanding mortgage loans of the
Predecessor Company properties in the amount of $55,567 with proceeds from the
Offering, net of the assumption of new debt totalling $50,000 as follows:
<TABLE>
<S> <C>
Walnut Glen........................................................ $(1,241)
8521 Leesburg Pike................................................. (5,102)
Kansas City Industrials(/1/)....................................... (9,500)
Kansas City/Dallas Industrials(/2/)................................ (6,900)
Milwaukee Industrials.............................................. (10,324)
3141 Fairview Park Drive........................................... (22,500)
-------
Total debt repayment............................................. (55,567)
Debt acquired concurrent with the Offering......................... 50,000
-------
Net decrease in debt on Predecessor Company properties........... $(5,567)
=======
</TABLE>
- --------
(/1/Includes)the Northland Park properties
(/2/Includes)the North Topping Street, Airworld Drive, 107th Terrace,
Nicholson III, 13425 Branchview and 1002 Avenue T properties
F-11
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
(6) Reflects the prepayment penalties on early retirement of mortgage loans
charged directly to pro forma Shareholders' equity:
<TABLE>
<S> <C>
Prepayment penalty on debt repayment of mortgage loan on Northland
Park............................................................... $ 456
Prepayment penalty on debt repayment of mortgage loan on other
Kansas City Industrials............................................ 186
Prepayment penalty on debt repayment of mortgage loan on Milwaukee
Industrials........................................................ 358
------
$1,000
======
</TABLE>
(7) Represents the equity attributable to Units owned by the Prentiss Group.
The Company, through its wholly owned subsidiary, is the sole general partner
of the Operating Partnership and will own approximately 84.6% of the Operating
Partnership. The Prentiss Group will own in the aggregate 2,931,184 Units,
which will represent an approximate 15.4% minority interest in the Operating
Partnership.
Statement of Income
(1) Represents the estimated operations of the West Loop Business Park
properties to be acquired concurrent with the Offering, including Rental
income of $153, Property operating and maintenance expense of $34 and Real
estate tax expense of $18.
(2) In connection with the Formation Transactions, certain third-party
management contracts will be assigned to the Manager in return for a $26,950
note payable to the Operating Partnership. As a result of the assignment,
current operating income, expenses and overhead attributable to the contracts
will be reflected in the operations of the Manager as detailed below:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Management fees...................................................... $1,760
Other fees and recoveries............................................ 2,183
General and administrative........................................... (755)
Personnel cost, net.................................................. (2,446)
------
$ 742
======
</TABLE>
In addition to the above, the Manager will benefit from a reduction in
occupancy cost totalling $75, resulting in net income to the Manager of $817.
(3) The Operating Partnership will hold a 95% economic interest in the
Manager and record an equity interest of $776 on the $817 net income.
(4) Represents the intercompany elimination of Management fee revenues and
expenses (Property operating and maintenance) of $151 as a result of the in-
house management of the Company's properties.
(5) Represents a reduction in property management fee expense (Property
operating and maintenance) of $39 previously paid to a third party. Subsequent
to the Offering, these properties will be owned and managed by the Company.
(6) Represents a reduction of $467 in Recoveries in connection with in-house
tax and legal staffing changes after the Offering.
(7) Reflects the decrease of $221 in fees formerly paid by the Predecessor
Company to an affiliate for acquisition and advisory services performed.
F-12
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
(8) Reflects an increase of $14 and a decrease of $413 in General office and
administration expense and Personnel costs, net, respectively, as a result of
staffing changes after the Offering.
(9) Reflects the decrease of $177 in compensation paid to the Prentiss
Principals. As a privately held company, PPL distributed a portion of
quarterly cash flow, in the form of compensation, to the Prentiss Principals.
Subsequent to the Offering, this compensation will no longer be paid.
(10) Reflects the net increase in Interest expense as a result of the
assumption of debt in connection with the acquisition of certain properties,
less a decrease in Interest expense as a result of the repayment of a portion
of the existing mortgage indebtedness. The following outlines the components
of the net increase in Interest expense:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Reduction in Interest expense due to expected repayment of
Predecessor Company
debt with proceeds of the Offering................................. $ (720)
Increase in Interest expense due to debt assumed with the
acquisition of
certain properties................................................. 979
------
Total Interest expense adjustment................................. $ 259
======
</TABLE>
(11) Reflects the net decrease in the amortization of deferred financing
costs (Interest expense, non-cash) as a result of $42 in amortization of the
$500 fee on the Line of Credit, less a reduction of $230 in amortization of
deferred financing costs to be written-off concurrent with the Offering.
(12) Reflects the net increase in Depreciation and amortization expense as a
result of the acquisition of properties and the related step-up in basis in
connection with the Offering, less a reduction in amortization of
organizational costs to be written-off concurrent with the Offering. The
following outlines the components of the net increase:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Increase in depreciation as a result of the step-up in basis of the
Predecessor Company properties in connection with the purchase of
the limited partners' interests..................................... $ 210
Depreciation on 3141 Fairview Park Drive............................. 107
Increase in depreciation as a result of the purchase of the Prentiss
Group Acquisition Properties (excludes 3141 Fairview Park Drive).... 543
Increase in depreciation as a result of the purchase of the Other
Acquisition Properties.............................................. 335
Net decrease in amortization recorded pursuant to the purchase and
pro forma
consolidation of Austex............................................. (40)
Decrease in amortization of organizational costs..................... (4)
------
Total Depreciation and amortization expense adjustment............. $1,151
======
</TABLE>
(13) Reflects the net Investment income, Amortization and General office and
administration expenses of $124, $98 and $11, respectively, as a result of the
pro forma consolidation of Austex.
(14) Represents net income attributable to the Prentiss Group's interest in
the Operating Partnership. The Company, through its wholly owned subsidiary,
is the sole general partner and will own approximately 84.6% of the Operating
Partnership. The Prentiss Group will own in the aggregate approximately 15.4%
of the Operating Partnership.
F-13
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
6. PRO FORMA ADJUSTMENTS FOR DECEMBER 31, 1995:
A. The Prentiss Group Acquisition Properties:
The statement of income reflects the historical operations of the Prentiss
Group Acquisition Properties for the year ended December 31, 1995 as follows:
<TABLE>
<CAPTION>
3141 FAIRVIEW PACIFIC GATEWAY
PARK DRIVE PARK WEST CENTER TOTAL
------------- --------- --------------- -------
<S> <C> <C> <C> <C>
Rental income................. $3,667 $8,365 $5,531 $17,563
Other income.................. 5 31 -- 36
------ ------ ------ -------
Total revenues.............. 3,672 8,396 5,531 17,599
Property operating and
maintenance.................. 1,608 2,463 1,475 5,546
Real estate taxes............. 196 592 124 912
------ ------ ------ -------
Total expenses.............. 1,804 3,055 1,599 6,458
------ ------ ------ -------
Revenues in excess of certain
operating expenses........... $1,868 $5,341 $3,932 $11,141
====== ====== ====== =======
</TABLE>
B. Bachman Creek and Other Acquisition Properties:
The statement of income reflects the historical operations of One
Northwestern, Cottonwood, 9050 Junction and the Bachman Creek properties for
the year ended December 31, 1995 as follows:
<TABLE>
<CAPTION>
BACHMAN CREEK
OTHER AND OTHER
ONE 9050 ACQUISITION BACHMAN ACQUISITION
NORTHWESTERN COTTONWOOD JUNCTION PROPERTIES CREEK PROPERTIES
------------ ---------- -------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rental income........... $5,436 $2,270 $505 $8,211 $1,182 $9,393
Other income............ 59 1 -- 60 2 62
------ ------ ---- ------ ------ ------
Total revenues........ 5,495 2,271 505 8,271 1,184 9,455
Property operating and
maintenance............ 1,548 818 54 2,420 536 2,956
Real estate taxes....... 440 219 -- 659 123 782
------ ------ ---- ------ ------ ------
Total expenses........ 1,988 1,037 54 3,079 659 3,738
------ ------ ---- ------ ------ ------
Revenues in excess of
certain operating ex-
penses................. $3,507 $1,234 $451 $5,192 $ 525 $5,717
====== ====== ==== ====== ====== ======
</TABLE>
C. Other Adjustments:
(1) Represents the estimated operations of the West Loop Business Park
properties to be acquired concurrent with the Offering, including Rental
income of $610, Property operating and maintenance expense of $137 and Real
estate tax expense of $73.
(2) In connection with the Formation Transactions, certain third-party
management contracts will be assigned to the Manager in return for a $26,950
note payable to the Operating Partnership. As a result of the assignment, a
portion of the current operating income, expenses and overhead will be
reflected in the operations of the Manager as detailed below:
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
Management fees..................................................... $ 7,091
Other fees and recoveries........................................... 12,781
General office and administrative................................... (3,174)
Personnel cost, net................................................. (9,488)
-------
$ 7,210
=======
</TABLE>
F-14
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
In addition to the above, the Manager will incur income tax expense
estimated at $1,407 and will benefit from a reduction in occupancy cost
totalling $300, resulting in net income to the Manager of $6,103.
(3) The Operating Partnership will hold a 95% economic interest in the
Manager and record an equity interest of $5,798 on the $6,103 of net income.
(4) Represents the intercompany elimination of Management and Recovery fee
revenues of $550 and $8, respectively, and Management fee expenses (Property
operating and maintenance) of $558 as a result of in-house management of the
Company's properties.
(5) Represents a reduction in property management fee expense (Property
operating and maintenance) of $209 previously paid to a third party.
Subsequent to the Offering, these properties will be owned and managed by the
Company.
(6) Represents a reduction of $1,887 in Recoveries in connection with in-
house tax and legal staffing changes after the Offering.
(7) Reflects the decrease of $858 in fees formerly paid by the Predecessor
Company to an affiliate for acquisition and advisory services performed.
(8) Reflects a decrease of $361 and $1,371 in General office and
administration expense and Personnel cost, net, as a result of staffing
changes after the Offering.
(9) Reflects the decrease of $4,334 in compensation paid to the Prentiss
Principals. As a privately held company, PPL, distributed a portion of annual
cash flow, in the form of compensation, to the Prentiss Principals. Subsequent
to the Offering, this compensation will no longer be paid.
(10) Reflects the net increase in Interest expense as a result of the
assumption of debt in connection with the acquisition of certain properties,
less a decrease in Interest expense as a result of the repayment of a portion
of the existing mortgage indebtedness. The following outlines the components
of the net increase in Interest expense:
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
Reduction in Interest expense due to expected repayment of
Predecessor Company debt with proceeds of the Offering........... $(2,786)
Increase in Interest expense due to debt incurred with the acqui-
sition
of certain properties............................................ 3,915
-------
Total Interest expense adjustment............................... $ 1,129
=======
</TABLE>
(11) Reflects the net increase in the amortization of deferred financing
costs (Interest expense, non-cash) as a result of $167 in amortization of the
$500 fee on the Line of Credit, less a reduction of $87 in amortization of
deferred financing costs to be written-off concurrent with the Offering.
(12) Reflects the net increase in Depreciation and amortization expense as a
result of the acquisition of properties and related step-up in basis in
connection with the Offering, less a reduction in amortization of
organizational costs to be written-off concurrent with the Offering. The
following outlines the components of the net increase:
F-15
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
Increase in depreciation as a result of the step-up in basis of the
Predecessor Company properties in connection with the purchase of
the limited partners' interests................................... $ 840
Increase in depreciation as a result of the purchase of the
Prentiss Group Acquisition Properties (includes 3141 Fairview Park
Drive)............................................................ 2,599
Increase in depreciation as a result of the purchase of the Other
Acquisition Properties............................................ 1,339
Net decrease in amortization recorded pursuant to the purchase and
pro forma consolidation of Austex................................. (161)
Decrease in amortization of organizational costs................... (106)
-------
Total Depreciation and amortization expense adjustment........... $ 4,511
=======
The increase in Depreciation and amortization expense in connection with the
acquisition and step-up in basis of the limited partners' interests in the
Predecessor Company is calculated as follows:
Incremental increase in basis of properties........................ $26,365
Estimated weighted average useful life (years)..................... 31.4
Increase in annual depreciation expense.......................... $ 840
=======
</TABLE>
(13) Reflects the net Investment income, Amortization and General office and
administration expenses of $453, $393 and $49, respectively, as a result of
the pro forma consolidation of Austex.
(14) Represents Net income attributable to the Prentiss Group's interest in
the Operating Partnership. The Company, through its wholly owned subsidiary,
is the sole general partner and will own approximately 84.6% of the Operating
Partnership. The Prentiss Group will own in the aggregate approximately 15.4%
of the Operating Partnership.
F-16
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA ADJUSTMENT SUMMARY
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
INVEST.
DEFERRED CASH & IN LTD. DEBT ON STOCK-
REAL FINANCING CASH PARTNERSHIP REAL MINORITY HOLDERS'
OTHER ADJUSTMENT ESTATE COSTS, NET EQUIV. & JV ESTATE INTEREST EQUITY
---------------- ------- ---------- --------- ----------- ------- -------- --------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
Purchase of limited
5D (1) partners' interests..... $26,365 $ $ (88,708) $ $ $ $ 62,343
5D (2) Transfer costs paid..... 83 (83)
Deferred financing
5D (3) costs, net.............. (1,680) (500) 2,180
5D (4) Equity investments...... (20,133) 19,083 1,050
Mortgage loan repayment,
5D (5) net..................... (5,567) 5,567
Debt prepayment
5D (6) penalties............... (1,000) 1,000
Prentiss Group
5D (7) ownership............... (46,467) 46,467
------- ------- --------- ------- ------ -------- --------
$26,448 $(1,680) $(115,991) $19,083 $5,567 $(46,467) $113,040
======= ======= ========= ======= ====== ======== ========
</TABLE>
STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PROPERTY REAL GEN PER- INTEREST
RENTAL MGMT OTHER OPERATING ESTATE OFFICE & SONNEL INTEREST EXPENSE DEPR & INVEST MINORITY
INCOME FEES FEES & MAINT. TAXES ADMIN COSTS EXPENSE NON-CASH AMORT INCOME INTEREST
------ ------- ------- --------- ------ -------- ------- -------- -------- ------ ------ --------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5D (1) Estimated
operations of
Westloop....... $153 $ $ $ 34 $18 $ $ $ $ $ $ $
5D (2) Assignment of (1,760) (2,183) (755) (2,446)
contracts......
5D (3) Equity 776
investment
income.........
5D (4) Management of (151) (151)
REIT prop......
5D (5) Acquisition and
management of
REIT prop...... (39)
5D (6) Other fees & (467)
recoveries.....
5D (7) Advisory fees.. (221)
5D (8) Prop mgmt g&a 14 (413)
and salaries...
5D (9) Special comp... (177)
5D(10) Mortgage 259
interest.......
5D(11) Amortization of
deferred
financing
costs.......... (188)
5D(12) Depreciation 1,151
expense........
5D(13) Consolidation 11 98 124
of Austex......
5D(14) Prentiss Group (880)
ownership......
---- ------- ------- ----- --- ----- ------- ---- ----- ------ ---- -----
$153 $(1,911) $(2,650) $(156) $18 $(951) $(3,036) $259 $(188) $1,249 $900 $(880)
==== ======= ======= ===== === ===== ======= ==== ===== ====== ==== =====
</TABLE>
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PROPERTY REAL GEN PER- INTEREST
RENTAL MGMT OTHER OPERATING ESTATE OFFICE & SONNEL INTEREST EXPENSE DEPR & INVEST
INCOME FEES FEES & MAINT. TAXES ADMIN COSTS EXPENSE NON-CASH AMORT INCOME
------ ------- -------- --------- ------ -------- -------- -------- -------- ------ ------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6C(1) Estimated
operations of
Westloop....... $610 $ $ $ 137 $73 $ $ $ $ $ $
6C(2) Assignment of (7,091) (12,781) (3,174) (9,488)
contracts......
6C(3) Equity 5,798
investment
income.........
6C(4) Management of (550) (8) (558)
REIT prop......
6C(5) Acquisition and
management of
REIT prop...... (209)
6C(6) Other fees & (1,887)
recoveries.....
6C(7) Advisory fees.. (858)
6C(8) Prop mgmt g&a (361) (1,371)
and salaries...
6C(9) Special comp... (4,334)
6C(10) Mortgage 1,129
interest.......
6C(11) Amortization of
deferred
financing
costs.......... 80
6C(12) Depreciation 4,511
expense........
6C(13) Consolidation 49 393 453
of Austex......
6C(14) Prentiss Group
ownership......
---- ------- -------- ----- --- ------- -------- ------ --- ------ ------
$610 $(7,641) $(14,676) $(630) $73 $(4,344) $(15,193) $1,129 $80 $4,904 $6,251
==== ======= ======== ===== === ======= ======== ====== === ====== ======
<CAPTION>
MINORITY
INTEREST
---------
<C>
$
(3,882)
---------
$(3,882)
=========
</TABLE>
F-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors Prentiss Properties Trust
We have audited the accompanying balance sheet of Prentiss Properties Trust
as of July 12, 1996. This balance sheet is the responsibility of the
management of Prentiss Properties Trust. Our responsibility is to express an
opinion on the balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Prentiss Properties Trust as of
July 12, 1996 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
July 15, 1996
Dallas, Texas
F-18
<PAGE>
PRENTISS PROPERTIES TRUST
BALANCE SHEET
JULY 12, 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
Cash.................................................................. $ 1
----
$ 1
====
SHAREHOLDERS' EQUITY
Shareholders' equity:
Common shares, $.01 par value, 100,000 shares authorized, 1,000 issued
and outstanding...................................................... $--
Additional paid-in capital............................................ 1
----
$ 1
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION:
Prentiss Properties Trust (the "Company"), was organized in the state of
Maryland on July 12, 1996 with $1 capitalization. The Company intends to
qualify as a real estate investment trust ("REIT") under the Internal Revenue
Code commencing with its taxable year ended December 31, 1996. The Company
will acquire a sole general partnership interest in Prentiss Properties
Acquisition Partners, L.P. (the "Operating Partnership") through the Company's
wholly owned subsidiary Prentiss Properties GP, Inc., a Texas corporation and
will own an 84.6% limited partnership interest in the Operating Partnership
directly.
The Company has been formed to succeed to substantially all of the interests
of Prentiss Properties Limited, Inc. ("PPL") and its affiliates in (i) a
portfolio of office and industrial properties and (ii) the national
acquisition, property management, leasing, development and construction
businesses of PPL and its affiliates. The acquisition, property management,
leasing, development and construction businesses will be carried out by the
Operating Partnership and the Company's majority-owned affiliate, (the
"Manager"), which will be renamed Prentiss Properties Limited, Inc. subsequent
to the completion of the Offering.
The Company has had no operations to date.
2. FORMATION TRANSACTIONS:
The Offering
The Company is filing a registration statement on Form S-11 with the
Securities and Exchange Commission with respect to the public offering (the
"Offering") of 14,250,000 Common shares (exclusive of 2,137,500 Common shares
subject to the underwriter's over-allotment option and 1,892,985 Common shares
being concurrently sold by the Company at the initial public offering price to
certain owners of interests in the Properties, that are not affiliated with
the Prentiss Group in exchange for their interests in certain Properties, as
defined below) at an estimated initial offering price of $20.00 per share. The
Company will use some of the net proceeds from the Offering to purchase
certain limited partners' interests in the Operating Partnership and will
contribute the remaining net proceeds to the Operating Partnership in exchange
for 16,142,985 partnership units (the "Units"), representing an approximate
84.6% interest, in the Operating Partnership.
The Properties
Upon consummation of the Offering and certain related transactions
(collectively, the "Formation Transactions"), the Company will own 85
properties, 26 office and 59 industrial (the "Properties") located in 10 major
markets throughout the U.S. and containing 8.5 million net rentable square
feet.
The Line of Credit
Concurrent with the consummation of the Offering, the Operating Partnership
intends to enter into a three-year, $100,000 revolving credit facility (the
"Line of Credit") under which the Operating Partnership may borrow to finance
the acquisition of additional properties and for other corporate purposes,
including to obtain additional working capital. The Company anticipates that
borrowings under the Line of Credit will bear interest at LIBOR plus an
additional percentage and will be secured by first mortgage liens on certain
of the properties and may be secured by other properties acquired by the
Company and will be guaranteed by the Company. The Company believes that an
origination fee of approximately .5% or $500 will be paid to secure the Line
of Credit.
3. INCENTIVE, SAVINGS AND SHARE PURCHASE PLANS:
The Company intends to adopt the 1996 Share Incentive Plan (the "1996
Incentive Plan"), a non- employee Trustees' Share Incentive Plan (the
"Trustees' Plan"), an Employee Savings Plan & Trust (the "401(k) Plan") and a
Share Purchase Plan (the "Share Purchase Plan").
F-20
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The 1996 Incentive Plan
The 1996 Incentive Plan is designed to provide incentives to attract, retain
and motivate Officers and other employees (the "Participants") of the Company
and its subsidiaries, including the Manager. The 1996 Incentive Plan
authorizes the issuance of up to 1,623,000 Common shares, plus automatic
increases equal to 8% of newly issued and outstanding Common shares of the
Company. The 1996 Incentive Plan provides for the grant of (i) Share Options,
(ii) Performance Shares, (iii) Share Appreciation Rights ("SARs"), (iv) Share
Awards, and (v) Incentive Awards.
The Administrator shall prescribe the conditions which must occur for
Restricted Shares and Performance Shares to vest or Incentive Awards to be
earned. In connection with the grant of options under the 1996 Plan, the
Administrator will determine the option exercise period and any vesting
requirements. On the effective date of the Offering, options for 1,291,439
Common shares will be granted to the Participants, at an exercise price equal
to the Offering Price. The initial options granted under this Plan will have
10-year terms and will become exercisable for one-third of the covered shares
on the first and second anniversaries of the date of grant, and for the
balance of the shares on the third anniversary of the date of grant subject to
the acceleration of vesting upon a change in control of the Company. No
Participants may be granted, in any calendar year, options that cover more
than 200,000 Common shares or SARs that cover more than 200,000 Common shares.
The Trustees' Plan
Prior to the Offering the Company will adopt the Trustees' Plan to provide
incentives to attract and retain Independent Trustees. The Trustees Plan
provides for the grant of options and the award of Common shares to each
eligible Trustee of the Company. Under the Trustees' Plan, each Independent
Trustee who is not an employee of the Company will receive, upon closing of
the Offering, options to purchase 10,000 Common shares at an exercise price
equal to the Offering Price. An option granted under the Trustees' Plan shall
become exercisable for 2,500 shares on each of the first through fourth
anniversaries of the date of grant, provided the Trustee is a member of the
Board of Trustees on such anniversary date. Each Independent Trustee will also
receive quarterly awards of Common shares on which he or she is a member of
the Board of Trustees, for a number of Common shares having a fair market
value on the date that as nearly as possible equals, but does not exceed,
$2,500.
The Trustees' Plan provides that the Board of Trustees may amend or
terminate the Trustees' Plan. No options for Common shares may be granted and
no Common shares will be awarded under the Trustees Plan after December 31,
2002.
401(K) Plan
The Company intends to assume and continue, and the Operating Partnership
and designated subsidiaries, including the Manager, intend to adopt the 401(k)
Plan of PPL which was originally adopted in 1987. Prior service with PPL will
be credited in full as service with the Company or a Participating Employer
for all purposes under the 401(k) Plan including eligibility and vesting.
Each employee of the Company and a Participating Employer may enroll in the
401(k) Plan after completing 1,000 hours of service and attaining age 21. Plan
participants are immediately vested in their pre-tax and after tax
contributions, matching and discretionary Company contributions, and earnings.
The 401(k) Plan permits each Plan Participant to elect to defer up to 15% of
base compensation, subject to limitation on a pre-tax basis. Plan Participants
may also elect to make an after-tax contribution of up to 8% of
F-21
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO BALANCE SHEET--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
their base compensation. The Company and the participating employers will make
matching contributions equal to 25% of amounts deferred up to $500 in
deferrals. The Company and the participating employers may also make annual
contributions if the Company achieves certain performance objectives to be
determined on an annual basis by the Compensation Committee. Matching and
discretionary contributions will be made in cash or Common shares.
Share Purchase Plan
Prior to the Offering, the Company will adopt the Share Purchase Plan. Under
this plan, employees of the Company, the Operating Partnership and designated
subsidiaries, including the Manager, will be able to purchase Common shares
directly from the Company at a 15% discount to the then current market value
at the date of purchase. Purchases may be made by any employee with more than
one full year of continuous employment, limited to the lesser of 15% of the
employees base salary or $20,000. The maximum number of Common shares that may
be purchased under the Share Purchase Plan is 250,000.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners and Owners ofthe Predecessor Company
We have audited the accompanying combined balance sheets of the Predecessor
Company as of December 31, 1995 and 1994, and the related combined statements
of income, owners' equity, and cash flows for each of the three years in the
period ended December 31, 1995 and the financial statement schedule included
on the index at F-1 of this Prospectus. These financial statements are the
responsibility of the management of the Predecessor Company. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Predecessor Company as of December 31, 1995 and 1994, and the combined results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be set forth therein.
Coopers & Lybrand L.L.P.
July 15, 1996Dallas, Texas
F-23
<PAGE>
PREDECESSOR COMPANY
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1996 1995 1994
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Assets:
Real estate.................................. $186,000 $165,331 $160,662
Less: accumulated depreciation and amorti-
zation.................................... (19,935) (18,157) (11,094)
-------- -------- --------
166,065 147,174 149,568
Deferred financing costs, net................ 2,238 471 569
Receivables, net............................. 2,697 2,755 2,340
Organization costs and other assets, net..... 591 713 1,077
Escrowed funds............................... 1,362 1,294 1,569
Cash and cash equivalents.................... 971 1,033 9,133
Investments in limited partnership and joint
venture..................................... 1,054 1,050 51
-------- -------- --------
Total Assets............................... $174,978 $154,490 $164,307
======== ======== ========
Liabilities and Owners' Equity:
Debt on real estate.......................... $ 68,864 $ 46,442 $ 46,732
Accounts payable and other liabilities....... 3,229 3,622 4,378
Amounts due to affiliates.................... 681 705 603
-------- -------- --------
Total Liabilities.......................... 72,774 50,769 51,713
Commitments and contingencies
Owners' Equity............................... 102,204 103,721 112,594
-------- -------- --------
Total Liabilities and Owners' Equity....... $174,978 $154,490 $164,307
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
PREDECESSOR COMPANY
COMBINED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- --------------------------
1996 1995 1995 1994 1993
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income............ $ 8,026 $ 7,063 $ 29,423 $ 25,256 $ 14,412
Management fees ......... 2,517 2,290 9,979 9,810 11,040
Development, leasing,
sales and other fees.... 3,009 2,732 15,762 16,892 12,569
------- ------- -------- -------- --------
Total revenues......... 13,552 12,085 55,164 51,958 38,021
Expenses:
Property operating and
maintenance............. 2,531 1,946 7,696 7,040 4,204
Real estate taxes........ 839 774 3,030 2,691 1,631
General office and admin-
istration............... 1,495 1,630 6,438 5,323 6,265
Personnel costs, net..... 3,567 3,704 17,138 20,815 18,198
Interest expense......... 969 948 3,783 3,120 1,404
Interest expense (non-
cash)................... 233 25 99 71 40
Depreciation and amorti-
zation.................. 1,781 1,739 7,166 5,557 3,418
------- ------- -------- -------- --------
Total expenses......... 11,415 10,766 45,350 44,617 35,160
Equity (loss) in joint
venture................. 14 24 11 13 (4)
------- ------- -------- -------- --------
Income before gain on sale
of property............... 2,151 1,343 9,825 7,354 2,857
Gain on sale of proper-
ty...................... -- -- -- 1,718 --
------- ------- -------- -------- --------
Net income............... $ 2,151 $ 1,343 $ 9,825 $ 9,072 $ 2,857
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
PREDECESSOR COMPANY
COMBINED STATEMENTS OF OWNERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at January 1, 1993............................................ $ 41,847
Net income.......................................................... 2,857
Contributions....................................................... 49,900
Deemed distributions of PPL income.................................. (558)
--------
Balance at December 31, 1993.......................................... 94,046
Net income.......................................................... 9,072
Contributions....................................................... 12,139
Deemed distributions of PPL income.................................. (2,663)
--------
Balance at December 31, 1994.......................................... 112,594
Net income.......................................................... 9,825
Distributions....................................................... (15,250)
Deemed distributions of PPL income.................................. (4,498)
Contributed equity on purchase of Park West......................... 1,050
--------
Balance at December 31, 1995.......................................... 103,721
Net income (unaudited).............................................. 2,151
Distributions (unaudited)........................................... (2,400)
Deemed distributions of PPL income (unaudited)...................... (1,268)
--------
Balance at March 31, 1996 (unaudited)................................. $102,204
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
PREDECESSOR COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------- ----------------------------
1996 1995 1995 1994 1993
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income............. $ 2151 $1,343 $ 9,825 $ 9,072 $ 2,857
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Gain on sale of prop-
erty................ -- -- -- (1,718) --
Depreciation and am-
ortization.......... 1,781 1,739 7,166 5,557 3,418
Amortization of de-
ferred financing
costs............... 233 25 99 71 40
Increase in Receiv-
ables............... (123) (165) (265) (654) (1,686)
Increase (decrease)
in Provision for
doubtful accounts... 181 (40) (150) 310 100
Decrease (increase)
in Organization
costs and other
assets.............. 118 330 258 (609) (209)
Decrease (increase)
in Escrowed funds... 235 691 (93) (698) (211)
(Decrease) increase
in Accounts payable
and other
liabilities......... (393) (1,768) (756) 1,557 1,529
(Decrease) increase
in Amounts due to
affiliates.......... (24) 275 102 124 216
(Equity) loss in
joint venture....... (14) (24) (11) (13) 4
Decrease in Other.... 11 -- 63 60 57
-------- ------ -------- -------- --------
Cash flows provided by
operating activities.... 4,156 2,406 16,238 13,059 6,115
Cash flows from investing
activities:
Acquisition of Real es-
tate.................. (19,946) -- -- (68,114) (45,271)
Proceeds from sale of
Real estate........... -- -- -- 7,894 --
Investment in Real es-
tate.................. (723) (1,866) (4,669) (3,742) (2,995)
(Increase) decrease in
Escrowed funds........ (303) 368 368 23,053 (23,711)
-------- ------ -------- -------- --------
Cash flows used in in-
vesting activities...... (20,972) (1,498) (4,301) (40,909) (71,977)
Cash flows from financing
activities:
Partners' contributions
...................... -- -- -- 12,139 49,900
Partners' distribu-
tions................. (2,400) (8,000) (15,250) -- --
Funding of Debt on Real
estate................ 22,500 -- -- 27,100 10,323
Repayment of Debt on
Real estate........... (78) (70) (289) (841) (36)
Financing costs of Debt
on Real estate........ (2,000) -- -- (357) (166)
Deemed distributions of
PPL income............ (1,268) (303) (4,498) (2,663) (558)
-------- ------ -------- -------- --------
Cash flows provided by
(used in) financing
activities.............. 16,754 (8,373) (20,037) 35,378 59,463
Net increase (decrease)
in Cash and cash
equivalents............. (62) (7,465) (8,100) 7,528 (6,399)
Cash and cash equiva-
lents, beginning of
year.................... 1,033 9,133 9,133 1,605 8,004
-------- ------ -------- -------- --------
Cash and cash equiva-
lents, end of year...... $ 971 $1,668 $ 1,033 $ 9,133 $ 1,605
======== ====== ======== ======== ========
Supplemental cash flow
information:
Cash paid for inter-
est................... $ 969 $ 948 $ 3,786 $ 2,946 $ 1,333
======== ====== ======== ======== ========
Net (prepaids) liabili-
ties assumed in con-
nection with the ac-
quisition of Real es-
tate.................. $ -- $ -- $ -- $ (44) $ 261
======== ====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-27
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(1) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements of the Predecessor Company
include the accounts of Prentiss Properties Acquisition Partners, L.P. ("the
Operating Partnership"), the operations of Prentiss Properties Limited, Inc.
("PPL"), a 50% equity investment in Austex Associates L.P. ("Austex"), the
accounts of Fairview Eleven Investors L.P. ("3141 Fairview Park Drive") from
February 23, 1996 through March 31, 1996, a 25% equity investment in
Prentiss/Copley Itasca Associates, and a 15% equity investment in Park West C-
2 Associates ("Park West") from September 5, 1995 through March 31, 1996. The
accounts are presented on a combined basis as the above properties are under
the control of common investors (the "Prentiss Group"), common ownership
interest, common management, and are subject to the expected formation of
Prentiss Properties Trust (the "Trust").
The Trust is expected to be formed with the intent of qualifying as a Real
Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as
amended. The Trust expects to raise equity through an initial public offering
(the "Offering") and has structured the business combination so that the
limited partners receive cash and common shares and the Prentiss Group will
receive partnership units ("Units"). The proceeds from the Offering will be
used to purchase the general partnership interest in the Operating Partnership
and other properties through the Trust's wholly owned subsidiary, Prentiss
Properties GP, Inc., a Texas corporation to be formed prior to consummation of
the Offering. Prentiss Properties GP, Inc. will be the sole general partner
and majority owner of the Operating Partnership, which will hold the operating
assets and liabilities of the Trust.
The following schedules summarize the Predecessor Company's interest in the
properties. All properties have been combined by the Predecessor Company
unless otherwise indicated in the notes.
Properties at December 31, 1995:
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR
NUMBER OF COMPANY COMPANY
PROPERTIES OWNERSHIP % LOCATION NOTES
---------- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
OFFICE PROPERTIES
Cumberland Office Park.. 9 100% Atlanta, GA
Broadmoor Austin........ 7 25% Austin, TX (A)
Park West............... 1 15% Dallas, TX (B)
5307 East Mockingbird... 1 100% Dallas, TX
Walnut Glen Tower....... 1 100% Dallas, TX
8521 Leesburg Pike...... 1 100% Tysons Corner, VA
INDUSTRIAL PROPERTIES
Baltimore Industrial.... 5 100% Baltimore, MD (C)
Kansas City Industrial.. 7 100% Kansas City, MO
Dallas Industrial....... 6 100% Dallas, TX
Milwaukee Industrial.... 17 100% Milwaukee, WI
Prentiss/Copley Itasca
Associates............. -- 25% Itasca, IL (D)
Property acquired during the three months ended March 31, 1996:
OFFICE PROPERTY
3141 Fairview Park
Drive.................. 1 100% Merrifield, VA
</TABLE>
(A) The Predecessor Company holds a non-controlling 50% interest in Austex
Associates, L.P. which owns a non-controlling 50% interest in the general
partnership that owns a leasehold interest in the Broadmoor Austin Associates
Joint Venture. The Broadmoor Austin Associates Joint Venture owns and operates
an office complex in Austin, Texas, consisting of seven properties. The
Predecessor Company accounts for its 50% investment in Austex Associates, L.P.
using the equity method of accounting.
F-28
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(B) The Predecessor Company holds a non-controlling 15% general partnership
interest and accounts for the investment using the equity method of
accounting.
(C) Four of the five Baltimore Industrial properties are owned by three
partnerships which are wholly owned by the Predecessor Company.
(D) The Predecessor Company holds a non-controlling 25% general partnership
interest and accounts for the investment using the equity method of
accounting.
All significant intercompany transactions have been eliminated in the
combined financial statements.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate
Real estate and leasehold improvements are stated at the lower of
depreciated cost or net realizable value. In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," the
Partnership will record impairment losses on long-lived assets used in
operation, when events and circumstances indicate that the assets might be
impaired and the estimated undiscounted cash flows to be generated by those
assets are less than the carrying amounts of those assets. No such impairment
losses have been recognized to date.
Depreciation on buildings and improvements is provided under the straight-
line method over an estimated useful life of thirty to fifty years for office
buildings and twenty-five years for industrial buildings.
Leasing commissions and leasehold improvements are deferred and amortized
over the terms of the related leases. Other deferred charges are amortized
over terms applicable to the expenditure.
When assets are sold or retired, their costs and related accumulated
depreciation are removed from the accounts with the resulting gains or losses
reflected in net income or (loss).
Deferred Financing Costs
Deferred financing costs are recorded at cost and are being amortized over
the life of the related debt.
Organization Costs
Organization costs are recorded at cost and are being amortized over five
years using the straight-line method.
Income Taxes
No provision for income taxes is necessary in the financial statements of
the Predecessor Company since the Predecessor Company's statements combine the
operations and balances of partnerships and an S-corporation neither of which
is directly subject to income tax. The tax effect of its activities accrues to
the individual partners and or principals of the respective entity.
Leases
The Predecessor Company, as lessor, has retained substantially all of the
risks and benefits of ownership and accounts for its leases as operating
leases.
F-29
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and investments with
maturities of three months or less when purchased.
Revenue Recognition
Rental income is recognized over the terms of the leases as it is earned.
Management company income, principally Management fees and Recoveries, are
recognized as earned. Other income, including (1) development fees are
recognized ratably over each project's development period, as defined; (2)
leasing fees are generally recognized upon tenant occupancy of the leased
premises unless such fees are irrevocably due and payable upon lease
execution, in which case recognition occurs on the lease execution date; (3)
sales fees are recognized upon completion of the asset sale; and (4)
termination fees are recognized when earned.
Deemed Distributions of PPL Income
PPL will retain certain assets and liabilities which will not be transferred
to the Operating Partnership pursuant to the expected formation of the Trust.
These assets and liabilities are inconsistent with the Company's investment
objectives or are not continuing businesses. All revenues and expenses related
to the management contracts to be contributed to the Operating Partnership
upon formation, are reflected in the accompanying financial statements. The
Combined Statements of Owners' Equity and the Combined Statements of Cash
Flows reflect the deemed distributions of the PPL income, as the benefit of
each period's net income from these contracts is not reflected in the related
periods balance sheet.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Statements
The combined financial statements as of March 31, 1996 and for the three
months ended March 31, 1996 and 1995 are unaudited. In the opinion of
management, all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of such combined financial
statements have been included. The results of operations for the three months
ended March 31, 1996 are not necessarily indicative of the Predecessor
Company's future results of operations for the full year ending December 31,
1996.
(3) REAL ESTATE
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Land.................................... $ 35,724 $ 32,061 $ 31,661
Buildings and improvements.............. 135,307 121,087 120,012
Deferred leasing and other charges...... 14,969 12,183 8,989
-------- -------- --------
Total................................. 186,000 165,331 160,662
Less: Accumulated depreciation and
amortization........................... (19,935) (18,157) (11,094)
-------- -------- --------
$166,065 $147,174 $149,568
======== ======== ========
</TABLE>
Depreciation expense on Real estate for the three-month periods ended March
31, 1996 and 1995 and the years ended December 31, 1995, 1994 and 1993 was
$1,778, $1,712, $7,063, $5,451 and $3,312, respectively.
F-30
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
On February 23, 1996, the Predecessor Company acquired the 3141 Fairview
Park Drive Property located in Northern Virginia at a purchase price of
$22,500 from an affiliate of the Prentiss Group.
(4) RECEIVABLES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Rents and services....................... $1,852 $1,697 $1,775
Accruable rental income.................. 1,308 1,327 989
Other.................................... 82 95 90
------ ------ ------
Total................................ 3,242 3,119 2,854
Less: Allowance for doubtful accounts.... (545) (364) (514)
------ ------ ------
$2,697 $2,755 $2,340
====== ====== ======
</TABLE>
Accruable rental income represents rental income earned in excess of rent
payments received pursuant to the terms of the individual lease agreements.
(5) DEFERRED FINANCING COSTS, ORGANIZATION COSTS AND OTHER ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred financing costs................. $2,693 $ 693 $ 693
Less: Accumulated amortization......... (455) (222) (124)
------ ----- ------
Deferred financing costs, net.......... $2,238 $ 471 $ 569
====== ===== ======
Organization costs....................... $ 525 $ 525 $ 525
Prepaid and other assets................. 591 709 967
------ ----- ------
1,116 1,234 1,492
Less: Accumulated amortization......... (525) (521) (415)
------ ----- ------
Organization costs and other assets,
net................................... $ 591 $ 713 $1,077
====== ===== ======
</TABLE>
(6) ESCROWED FUNDS
Escrowed funds as of March 31, 1996 and December 31, 1995 are comprised of
funds held for the payment of real estate taxes. Escrowed funds as of December
31, 1994 consist of funds held for the payment of real estate taxes and for
the purchase of an industrial building in Milwaukee, Wisconsin, totalling
$1,319 and $250, respectively. As the acquisition of the industrial building
did not occur, the Escrowed funds related thereto were reimbursed to the
Predecessor Company in February 1995.
F-31
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(7) DEBT ON REAL ESTATE
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
OFFICE PROPERTIES
Walnut Glen Tower......................... $14,539 $14,599 $14,824
3141 Fairview Park Drive
Note (1)................................. 19,000 -- --
Note (2)................................. 3,500 -- --
8521 Leesburg Pike........................ 5,102 5,120 5,185
INDUSTRIAL PROPERTIES
Kansas City Industrials
Insurance Company(1)..................... 8,000 8,000 8,000
Insurance Company(2)..................... 1,500 1,500 1,500
Kansas City/Dallas Industrials............ 6,900 6,900 6,900
Milwaukee................................. 10,323 10,323 10,323
------- ------- -------
$68,864 $46,442 $46,732
======= ======= =======
</TABLE>
Walnut Glen Tower--The loan, which is payable to an insurance company and
collateralized by certain of the Predecessor Company's real estate, bears
interest at 7.5% per annum. Principal and interest, based on a 25-year
amortization schedule, are payable on the first day of each month through
January 31, 2001, at which time all unpaid principal and interest are due. The
loan is prepayable at any time upon payment of a penalty.
3141 Fairview Park Drive--On February 23, 1996, the Prentiss Group acquired
the 3141 Fairview Park Drive property. Pursuant to the purchase, the Prentiss
Group executed two notes with an affiliate of Lehman Brothers Inc. to finance
the transaction. The first note (Note [1]) calls for interest only payments of
LIBOR plus 3.5% until maturity on February 21, 1999. The second note (Note
[2]) calls for payments defined as the net operating cash flows of the
property until maturity on February 21, 1997.
8521 Leesburg Pike--The note, which is payable to a mortgage company and
collateralized by certain of the Predecessor Company's real estate, bears
interest at 8.5% per annum. Principal and interest, based on a 25-year
amortization schedule, are payable on the first day of each month through
September 1, 1999, at which time all unpaid principal and interest are due.
The loan is prepayable in full with no penalty.
Kansas City Industrials--The Predecessor Company entered into a nonrecourse
loan agreement with two insurance companies, totalling $9,500. Interest only
is payable monthly at 8.75% per annum until July 1, 1999, at which time the
principal balance is due and payable. The loan, which is collateralized by
certain of the Predecessor Company's real estate located in Kansas City,
Missouri, is prepayable at any time upon payment of a penalty.
Kansas City/Dallas Industrials--The Predecessor Company is also indebted in
connection with a nonrecourse loan agreement entered into on September 13,
1994, totalling $7,500. The loan is payable to an insurance company. A total
of $6,900 was drawn under the agreement and the remaining commitment was
canceled. Interest only is payable at 8.3% per annum until October 1, 2001, at
which time the principal balance is due and payable. The loan, which is
collateralized by certain of the Predecessor Company's real estate located in
Dallas, Texas, and Kansas City, Missouri, is prepayable at any time upon
payment of a penalty.
Milwaukee--On April 8, 1993, the Predecessor Company entered into two
nonrecourse loan agreements with an insurance company, totalling $10,950. A
total of $10,323 was drawn under these agreements and the
F-32
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
remaining commitments were canceled. Interest only is payable monthly at
8.125% per annum until May 1, 2000, at which time the principal balance is due
and payable. The loans, which are collateralized by certain of the Predecessor
Company's real estate located in Milwaukee, Wisconsin, are prepayable at any
time upon payment of a penalty.
Cumberland--On March 31, 1994, the Predecessor Company repaid a nonrecourse
loan assumed in connection with the January 1991 acquisition of Cumberland
Office Park. The note was collateralized by a portion of the real estate
located in the park. The note, which was payable to an insurance company, bore
interest at 8.5% per annum. Principal and interest, based on a twenty-year
amortization schedule, was payable on the first day of each month through
April 1, 1994, at which time a balloon payment of $640 was due.
Principal repayments of Debt on real estate at December 31, 1995, are due
approximately as follows:
<TABLE>
<S> <C>
Years ending December 31:
1996.............................................................. $ 313
1997.............................................................. 339
1998.............................................................. 366
1999.............................................................. 14,696
2000.............................................................. 10,652
Thereafter........................................................ 20,076
-------
$46,442
=======
</TABLE>
(8) ACCOUNTS PAYABLE AND OTHER LIABILITIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable and other liabilities... $1,878 $2,481 $3,296
Advance rent and deposits................ 1,351 1,141 1,082
------ ------ ------
$3,229 $3,622 $4,378
====== ====== ======
</TABLE>
(9) LEASING ACTIVITIES
The future minimum lease payments to be received by the Predecessor Company
and its three wholly-owned partnerships as of December 31, 1995 under
noncancelable operating leases, which expire on various dates through 2013,
are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1996.............................................................. $25,836
1997.............................................................. 22,831
1998.............................................................. 17,848
1999.............................................................. 11,734
2000.............................................................. 5,442
Thereafter........................................................ 4,323
-------
$88,014
=======
</TABLE>
F-33
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Predecessor Company leases certain office space from an insurance
company. The lease commenced on May 14, 1988. On December 9, 1992, the
Predecessor Company signed an amendment to the original lease effective May 1,
1993, whereby modifying the rental rate to match current market rental rates
for the area. The Predecessor Company has the right to terminate the lease
upon thirty days written notice. If the Predecessor Company elects to
terminate the lease during the year ended December 31, 1996, a termination
penalty expected to range from approximately $108 to $174 will be payable to
the landlord. The Predecessor Company has a dispute, with the landlord, as to
the calculation of the termination penalty. The dispute has not been resolved
and the Predecessor Company has elected to disclose the maximum range of
termination penalty it considers to be payable under the lease agreement. The
future minimum lease payments which are due under this operating lease, which
has been amended to expire on April 30, 1998, are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1996............................................................... $ 452
1997............................................................... 445
1998............................................................... 148
------
$1,045
======
</TABLE>
The lease described above contains no renewal options and requires that the
Predecessor Company pay its pro rata share of operating costs and utilities.
Under the terms of this lease, rental expense, including operating costs and
utilities, incurred during the three months ended March 31, 1996 and 1995 and
years ended December 31, 1995, 1994 and 1993, was approximately $214, $194,
$801, $797 and $900, respectively.
The Predecessor Company also occupies office space in certain properties it
manages. The costs of operating these property management offices are borne
entirely by the respective owners.
(10) RELATED PARTY TRANSACTIONS
Prentiss Properties Investors, Inc., an affiliate of the Predecessor
Company, provides acquisition and other advisory services to the Predecessor
Company pursuant to an asset management agreement. Asset management fees
charged to the Predecessor Company during the three-month periods ended March
31, 1996 and 1995 and the years ended December 31, 1995, 1994 and 1993,
totalled $221, $217, $858, $699 and $594, respectively.
Under the terms of various management and development agreements, the
Predecessor Company receives cost reimbursements and property management,
development, leasing and tenant service fees from certain affiliates in which
the Prentiss Group have ownership interests. Cost reimbursements are comprised
primarily of salary and employee benefit recoveries and reimbursements of
certain administrative costs. During the three months ended March 31, 1996 and
1995 and the years ended December 31, 1995, 1994 and 1993, fees and cost
reimbursements derived from these agreements totalled $4,326, $8,913, $21,590,
$23,345, $21,362, respectively.
Amounts due to affiliates at March 31, 1996, December 31, 1995 and 1994,
consisted primarily of asset management fees and property management and
leasing fees due to PPL and other affiliates of the Predecessor Company.
The financing for the acquisition of the 3141 Fairview Park Drive property
was provided by an affiliate of Lehman Brothers Inc., an affiliate of the
Predecessor Company. The financing provided for an additional $2,000
representing financing costs to be repaid pursuant to the terms of the loan.
In 1987, a Prentiss Group affiliate and a third party formed The
Prentiss/Copley Investment Group ("PCIG") to acquire substantially all of the
U.S. office and industrial assets of Cadillac Fairview. PCIG has been in the
process of liquidating its remaining assets for the past several years. PPL
manages the PCIG
F-34
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
properties under contractual management agreements. Fees are payable to PPL
upon early termination of the management agreements. In 1995, PPL recognized
$6,384 in termination fee revenue related to these contracts. Benefits of any
future termination fees will be retained by the Prentiss Group.
(11) INVESTMENT IN LIMITED PARTNERSHIP AND JOINT VENTURE
The Predecessor Company accounts for its 25% investment in Broadmoor Austin
Associates Joint Venture, 15% investment in Park West and 25% investment in
Prentiss/Copley Itasca Associates, using the equity method of accounting and
thus, reports its share of income and losses based on its ownership interest
in the respective entities. Losses in excess of investments are not recorded
where the Predecessor Company has not guaranteed nor intends to provide any
future financial support to the respective entities.
Presented below are the financial statements of Broadmoor Austin Associates
Joint Venture, a significant unconsolidated subsidiary:
BROADMOOR AUSTIN ASSOCIATES JOINT VENTURE
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Income-producing property................................... $120,189 $124,522
Accruable rental income..................................... 8,744 7,444
Cash and cash equivalents................................... 3,538 3,541
-------- --------
Total assets.............................................. $132,471 $135,507
======== ========
LIABILITIES AND VENTURERS' DEFICIT
Debt on income property..................................... $140,000 $140,000
Accounts payable and other liabilities...................... 3,444 3,454
Amounts due to venturers and affiliates..................... 86 34
-------- --------
Total liabilities......................................... 143,530 143,488
Venturers' deficit.......................................... (11,059) (7,981)
-------- --------
Total liabilities and venturers' deficit.................. $132,471 $135,507
======== ========
</TABLE>
BROADMOOR AUSTIN ASSOCIATES JOINT VENTURE
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Rental operations:
Rental income........................................ $19,776 $19,789 $19,811
Property operating expenses.......................... 836 845 875
------- ------- -------
18,940 18,944 18,936
Interest expense, net.................................. 13,529 13,559 13,577
Ground rent............................................ 150 150 150
Depreciation and amortization.......................... 4,333 4,332 4,332
------- ------- -------
Net income......................................... $ 928 $ 903 $ 877
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
BROADMOOR AUSTIN ASSOCIATES JOINT VENTURE
STATEMENTS OF VENTURERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AALP IBM TOTAL
------- ------- --------
<S> <C> <C> <C>
Venturers' deficit, January 1, 1993................ (958) (958) (1,916)
Distributions to venturers......................... (1,957) (1,957) (3,914)
Net Income......................................... 439 439 878
------- ------- --------
Venturers' deficit, December 31, 1993.............. $(2,476) $(2,476) $ (4,952)
Distributions to venturers......................... (1,966) (1,966) (3,932)
Net income......................................... 451 452 903
------- ------- --------
Venturers' deficit, December 31, 1994.............. (3,991) (3,990) (7,981)
Distributions to venturers......................... (2,003) (2,003) (4,006)
Net income......................................... 464 464 928
------- ------- --------
Venturers' deficit, December 31, 1995.............. $(5,530) $(5,529) $(11,059)
======= ======= ========
</TABLE>
BROADMOOR AUSTIN ASSOCIATES JOINT VENTURE
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 928 $ 903 $ 877
Charge not requiring current cash outlay:
Depreciation and amortization................... 4,333 4,332 4,332
Increase in accruable rental income............... (1,300) (1,305) (1,302)
(Increase) decrease in other assets............... (2) 2 3
(Decrease) increase in accounts payable and other
liabilities...................................... (10) 3 (1,557)
Increase (decrease) in amounts due to venturers
and affiliates................................... 52 (26) (20)
------- ------- -------
Net cash provided by operating activities....... 4,001 3,909 2,333
------- ------- -------
Cash flows from financing activities:
Distributions to venturers........................ (4,006) (3,933) (3,913)
------- ------- -------
Net cash used in financing activities........... (4,006) (3,933) (3,913)
------- ------- -------
Net decrease in cash and cash equivalents......... (5) (24) (1,580)
Cash and cash equivalents, beginning of year...... 3,529 3,553 5,133
------- ------- -------
Cash and cash equivalents, end of year............ $ 3,524 $ 3,529 $ 3,553
======= ======= =======
Supplemental information:
Interest paid................................... $13,650 $13,650 $13,641
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
BROADMOOR AUSTIN ASSOCIATES JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
I.ORGANIZATION AND ACCOUNTING POLICIES:
Broadmoor Austin Associates Joint Venture (the "Venture"), a joint
venture between Austex Associates Limited Partnership ("AALP"), as managing
venturer, and International Business Machines Corporation ("IBM"), was
formed for the purpose of owning, constructing and operating an office
complex in Austin, Texas. The significant accounting policies of the
Venture are as follows:
Venture formation:
The Venture was formed effective April 26, 1990, pursuant to a joint
venture agreement between IBM (99%) and 11,000 Burnet Road Corporation
("Burnet") (1%), a wholly-owned subsidiary of IBM.
On May 9, 1990, the joint venture agreement was amended and restated,
whereby AALP purchased from IBM a 49% interest in the Venture and all the
outstanding shares of stock in Burnet. Pursuant to the terms of this
agreement, AALP and IBM each now effectively hold a 50% interest in the
Venture.
Income-producing property:
The Income-producing property, which became operational on various dates
between April 1, 1991 and August 19, 1991, is recorded at cost.
Depreciation on buildings and improvements is provided under the straight-
line method over an estimated useful life of 50 years. The Venture analyzes
potential impairment of the Income-producing property by using recent
appraisals, other indicators of current market conditions or undiscounted
cash flows.
Leasing charges are deferred and amortized over the term of the related
lease. Other deferred charges are amortized over terms appropriate to the
expenditure.
Income taxes:
No provision for income taxes is necessary in the financial statements of
the Venture because, as a venture, it is not subject to income tax and the
tax effect of its activities accrues to the individual venturers.
Leases:
The Venture, as a lessor, has retained substantially all of the risks and
benefits of ownership and accounts for its lease as an operating lease.
Rental income is recognized over the term of the lease as it is earned.
Accruable rental income represents rental income earned in excess of rent
payments received pursuant to the terms of the lease agreement.
Assets held for leasing purposes are classified as Income-producing
property.
As a lessee, the Venture accounts for its lease as an operating lease
(Note VI).
Cash and cash equivalents:
For purposes of reporting cash flows, cash and cash equivalents consist
of cash on hand and investments with maturities of three months or less.
F-37
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
II.INCOME PRODUCING PROPERTY:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Land................................................ $ 425 $ 425
Buildings and improvements.......................... 107,800 107,800
Deferred leasing and other charges.................. 31,616 31,616
----------- -----------
139,841 139,841
Accumulated depreciation and amortization........... 19,652 15,319
----------- -----------
$ 120,189 $ 124,522
=========== ===========
III.CASH AND CASH EQUIVALENTS:
<CAPTION>
1995 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Cash and short-term deposits........................ $ 3,524 $ 3,529
Other assets........................................ 14 12
----------- -----------
$ 3,538 $ 3,541
=========== ===========
IV.DEBT ON INCOME PROPERTY:
The Venture entered into a loan agreement with a Texas financial
institution totalling $140,000. Advances under the agreement are secured by
the Real estate and bear interest at 9.75%, which is payable quarterly.
Borrowings under the agreement, which are repayable on or before April 1,
2001, are guaranteed by AALP and IBM.
V.ACCOUNTS PAYABLE AND OTHER LIABILITIES:
<CAPTION>
1995 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Accounts payable and other liabilities.............. $ 3 $ 13
Accrued interest.................................... 3,441 3,441
----------- -----------
$ 3,444 $ 3,454
=========== ===========
</TABLE>
F-38
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
VI.LEASING ACTIVITIES:
The future minimum lease payments to be received by the Venture under the
noncancellable operating lease (Note VII), which expires in 2006, are as
follows:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Year ending December
1996............................................ $ 17,648
1997............................................ 17,648
1998............................................ 17,648
1999............................................ 17,648
2000............................................ 17,648
Subsequent to 2000.............................. 114,712
-------- ---
$202,952
======== ===
As a lessee, the Venture is obligated to IBM under a noncancellable
operating ground lease which expires on March 31, 2015. The future minimum
lease payments are due as follows:
<CAPTION>
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Year ending December
1996............................................ $ 150
1997............................................ 150
1998............................................ 150
1999............................................ 150
2000............................................ 150
Subsequent to 2000.............................. 3,638
--------
$ 4,388
========
</TABLE>
VII.RELATED PARTY TRANSACTIONS
IBM is the sole lessee of the Real estate under a 15-year lease. The
lease commenced on various dates between April 1, 1991 and August 19, 1991.
Rental income for the years ended December 31, 1995, 1994 and 1993, and
accruable rental income receivable at December 31, 1995 and 1994, were
derived solely from this lease.
The management agreement provides for the payment of management fees to
an affiliate of AALP. During the years ended December 31, 1995, 1994 and
1993, management fees charged to the Venture totalled $407 each year.
Amounts due to venturers and affiliates at December 31, 1995 and 1994,
consisted of operating cost recoveries payable to IBM and management fees
payable to an affiliate of AALP.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," requires disclosure about the fair value of
all financial assets and liabilities for which it is practicable to estimate.
Cash and short-term deposits, accounts receivable, accounts payable and other
liabilities are carried at amounts that reasonably approximate their fair
values. There is no quoted market value available for any of the Predecessor
Company's financial instruments. The mortgage notes payable of the Predecessor
Company are at fixed rates of interest or fixed rates plus LIBOR which
approximate current market rates. Management believes that the carrying amount
of the Predecessor Company's financial instruments at March 31, 1996 and
December 31, 1995 and 1994 approximates fair value.
F-39
<PAGE>
PREDECESSOR COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(13) SAVINGS PLAN (IN WHOLE DOLLARS)
Effective October 16, 1987, the Predecessor Company adopted a 401(k) Savings
Plan (the "Plan") for its employees. Under the Plan, as amended, employees,
age 21 and older, are eligible to participate in the Plan after they have
completed one year and 1,000 hours of service.
Wages eligible for contribution to the Plan include bonuses, overtime pay
and commissions. Participants who have authorized a pre-tax contribution of 2%
or more may also elect to make an after-tax contribution of up to 8% of their
wages.
The Plan provides that matching employer contributions are to be determined
at the discretion of the Predecessor Company. The Predecessor Company matches
25% of the first $500 contributed by its employees. The cost to the
Predecessor Company of this matching for the three months ended March 31, 1996
and 1995 and the years ended December 31, 1995, 1994 and 1993 were $26,000,
$27,000, $36,000, $41,000 and $50,000, respectively. In addition the
Predecessor Company elected to match employee contributions with a
discretionary match. The discretionary matching contributions for the three
months ended March 31, 1996 and 1995 and the years ended December 31, 1995,
1994 and 1993 were $0, $0, $0, $76,000 and $127,000, respectively.
Participants are immediately vested in their pre-tax and after-tax
contributions, the Predecessor Company's matching contributions and earnings
thereon.
(14) COMMITMENTS AND CONTINGENCIES
Legal Matters
The Predecessor Company is subject to various legal proceedings and claims
that arise in the ordinary course of business. These matters are generally
covered by insurance. Management believes that the final outcome of such
matters will not have a material adverse effect on the financial position,
results of operations or liquidity of the Predecessor Company.
Environmental Matters
The Company has obtained Phase I and Phase II environmental site assessments
("ESAs") for all properties involved in the offering. The ESAs for the
Industrial Properties located in Milwaukee, Wisconsin, revealed lead
contamination near the property lines of two of the buildings and the
development parcel adjacent to the site. The ESA states that the contamination
is probably the result of unauthorized dumping of contaminated soil by the
owner of a vacant lot that is located between the two buildings and the
development parcel. The dumping occurred prior to the acquisition of the
Milwaukee Industrials by the Prentiss group affiliate which currently owns the
properties. Upon discovery of the unauthorized dumping, the Prentiss group
affiliate brought suit against the owner of the vacant lot, the generators of
the contaminated soil and the prior owner of the properties. The contaminated
soil consists of foundry sand which was found to contain lead in excess of
acceptable trace levels. According to the ESA, the contamination does not
affect the groundwater and is not likely to migrate or leech into adjoining
land. A settlement to the lawsuit has been negotiated under which (i) the
Company will transfer the affected areas (a total of approximately 1.2 acres)
to the owner of the vacant lot in exchange for $100,000 and (ii) the owner of
the vacant lot and the generators of the contaminated soil agree to assume all
responsibility for the remediation of the contaminated soil. The settlement
must be approved by the court. The estimated cost to remediate the
contaminated soil will be approximately $100,000, according to the remediation
plan to be filed by the defendants in the suit with the Wisconsin Department
of Natural Resources. Management believes any costs to remediate will not have
a material adverse affect on the financial statements of the Company.
F-40
<PAGE>
SCHEDULE III
PREDECESSOR COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST GROSS AMOUNT
-------------------- COSTS CARRIED AT CLOSE OF PERIOD
BUILDINGS CAPITALIZED ----------------------------------
AND SUBSEQUENT LAND AND BUILDING AND
PROPERTY NAME LOCATION ENCUMBRANCES LAND IMPROVEMENTS TO ACQUISITION IMPROVEMENTS IMPROVEMENTS TOTAL
------------- ----------------- ------------ ------- ------------ -------------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office Prop-
erties:
Cumberland
Office Park..... Atlanta, GA $ -- $10,987 $ 13,226 $ 6,936 $11,020 $ 20,129 $ 31,149
5307 East
Mockingbird..... Dallas, TX -- 870 1,976 1,011 874 2,983 3,857
Walnut Glen
Tower........... Dallas, TX 14,599 5,400 32,669 1,571 5,400 34,240 39,640
8521 Leesburg
Pike............ Tysons Corner, VA 5,120 2,130 5,955 1,937 2,130 7,892 10,022
Industrial Prop-
erties:
8869 Greenwood.. Baltimore, MD -- 425 1,701 195 425 1,896 2,321
1329 Western
Avenue.......... Baltimore, MD -- 800 4,854 107 800 4,961 5,761
Deep Run 1&2.... Baltimore, MD -- 1,400 3,947 147 1,400 4,094 5,494
4611 Mercedes
Drive........... Baltimore, MD -- 865 4,600 137 865 4,737 5,602
Northland Park.. Kansas City, MO 9,500 2,710 12,677 927 2,710 13,604 16,314
North Topping
Street.......... Kansas City, MO 986 425 1,505 45 425 1,550 1,975
Airworld Drive.. Kansas City, MO 1,413 722 2,736 -- 722 2,736 3,458
107th Terrace... Kansas City, MO 1,037 276 1,729 -- 276 1,729 2,005
Nicholson III... Dallas, TX 1,500 700 1,758 273 700 2,031 2,731
13425
Branchview...... Dallas, TX 954 310 1,795 7 310 1,802 2,112
1002 Avenue T... Dallas, TX 1,010 300 1,831 177 300 2,008 2,308
1625 Vantage.... Dallas, TX -- 145 1,067 9 145 1,076 1,221
Airport
Properties...... Milwaukee, WI 10,323 1,649 11,783 1,307 2,036 12,703 14,739
Oakcreek
Properties...... Milwaukee, WI -- 494 3,795 236 493 4,031 4,524
North West
Properties...... Milwaukee, WI -- 1,030 8,357 710 1,030 9,068 10,098
----------------- ------- ------- -------- ------- ------- -------- --------
$46,442 $31,638 $117,961 $15,732 $32,061 $133,270 $165,331
======= ======= ======== ======= ======= ======== ========
<CAPTION>
DEPRECIABLE
ACCUMULATED DATE OF DATE LIVES
PROPERTY NAME DEPRECIATION CONSTRUCTION ACQUIRED (YEARS)
------------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
Office Proper-
ties:
Cumberland (1)
Office Park..... $ 6,662 1972-1980 01/16/91
5307 East (1)
Mockingbird..... 422 1979 01/28/93
Walnut Glen (1)
Tower........... 2,669 1985 01/01/94
8521 Leesburg (1)
Pike............ 497 1984 08/17/94
Industrial Prop-
erties:
8869 Greenwood.. 160 1986-1987 12/27/93 (1)
1329 Western (1)
Avenue.......... 270 1988 09/19/94
Deep Run 1&2.... 217 1988 09/01/94 (1)
4611 Mercedes (1)
Drive........... 198 1990 12/27/94
Northland Park.. 2,466 1975-1980 01/23/92 (1)
North Topping (1)
Street.......... 190 1975-1980 02/01/93
Airworld Drive.. 212 1975-1980 05/16/94 (1)
107th Terrace... 138 1975-1980 05/16/94 (1)
Nicholson III... 304 1981 09/16/92 (1)
13425 (1)
Branchview...... 175 1970 07/23/93
1002 Avenue T... 209 1981 05/05/93 (1)
1625 Vantage.... 106 1984 07/26/93 (1)
Airport (1)
Properties...... 1,671 1970-1980 02/11/93
Oakcreek (1)
Properties...... 576 1970-1979 02/11/93
North West (1)
Properties...... 1,015 1973-1987 02/11/93
------------
$18,157
============
</TABLE>
- ----
(/1/Buildings)and improvements--25 to 40 years; tenant improvements over terms
of related leases.
(/2/The)aggregate cost for federal income tax purposes was approximately
$155,761.
F-41
<PAGE>
PREDECESSOR COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
(DOLLARS IN THOUSANDS)
A summary of activity for Real estate and Accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Real estate:
Balance at beginning of year....................... $160,662 $ 95,083 $46,556
Improvements..................................... 4,669 3,742 2,995
Acquisition of Real estate....................... -- 68,070 45,532
Disposition of Real estate....................... -- (6,233) --
-------- -------- -------
Balance at end of year........................... $165,331 $160,662 $95,083
======== ======== =======
Accumulated depreciation:
Balance at beginning of year..................... 11,094 5,933 2,619
Depreciation expense............................. 7,063 5,451 3,314
Accumulated depreciation on Real estate sold..... -- (290) --
-------- -------- -------
Balance at end of year........................... $ 18,157 $ 11,094 $ 5,933
======== ======== =======
</TABLE>
F-42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Prentiss Properties Trust
We have audited the accompanying combined statements of revenues and certain
operating expenses of The Prentiss Group Acquisition Properties for each of
the three years in the period ended December 31, 1995. These statements of
revenues and certain operating expenses are the responsibility of The Prentiss
Group Acquisition Properties' owners. Our responsibility is to express an
opinion on the statements of revenues and certain operating expenses based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of revenues and
certain operating expenses are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statements of revenues and certain operating expenses. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation
of the statements of revenues and certain expense. We believe that our audits
provide a reasonable basis for our opinion.
The accompanying statements of revenues and certain operating expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in the registration
statement on Form S-11 of Prentiss Properties Trust), as described in Note 1,
and are not intended to be a complete presentation of the Properties' revenues
and expenses.
In our opinion, the statements of revenues and certain operating expenses
referred to above present fairly, in all material respects, the revenues and
certain operating expenses described in Note 1 of The Prentiss Group
Acquisition Properties for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
July 15, 1996
Dallas, Texas
F-43
<PAGE>
THE PRENTISS GROUP ACQUISITION PROPERTIES
COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
THREE MONTHS ENDED --------------------------
MARCH 31, 1996 1995 1994 1993
------------------ -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Rental income................. $4,074 $ 17,563 $ 16,359 $ 18,270
Other income.................. 18 36 29 26
------ -------- -------- --------
Total revenues.............. 4,092 17,599 16,388 18,296
Certain operating expenses:
Real estate taxes............. 250 912 1,020 969
Repairs and maintenance....... 337 1,929 1,727 1,650
Property management........... 307 1,997 1,499 1,516
Utilities..................... 256 1,446 1,404 1,529
Insurance..................... 46 174 132 111
Other......................... 5 -- -- --
------ -------- -------- --------
Total certain operating ex-
penses..................... 1,201 6,458 5,782 5,775
Revenues in excess of certain
operating expenses............. $2,891 $ 11,141 $ 10,606 $ 12,521
====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-44
<PAGE>
THE PRENTISS GROUP AQUISITION PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION:
The combined statements of revenues and certain operating expenses for the
three months ended March 31, 1996 and for the years ended December 31, 1995,
1994 and 1993 relate to the operations of the Fairview Eleven Investors L.P.
("3141 Fairview Park Drive"), Park West C-2 Associates ("Park West") and the
Pacific Gateway Center ("PGC") properties, owned by an affiliate of the
Prentiss Group and managed by the Prentiss Group for a period of time during
the period for which information is presented. The Prentiss Group acquired
3141 Fairview Park Drive from the affiliate on February 23, 1996 and a 15%
non-controlling interest in Park West in September 1995. The Prentiss Group
currently holds no ownership interest in Pacific Gateway Center. These
properties are to be acquired by Prentiss Properties Trust concurrent with the
consummation of the Offering for an aggregate purchase price, (including
closing cost and the assumption and repayment of debt), of $109,215 in cash
and the disbursement of Operating Partnership Units for the Prentiss Group's
15% ownership in the Park West property. For the property acquired between
January 1, 1996 and March 31, 1996 and the properties for which a controlling
interest was not owned at March 31, 1996, operations prior to the date of
acquisition are presented as part of the Prentiss Group Acquisition Properties
and operations subsequent to the acquisition are presented as part of the
Predecessor Company, as shown below in the table.
<TABLE>
<CAPTION>
COMBINED OPERATIONS
------------------------------------------------------
TOTAL FOR THE
THREE MONTHS ENDED PERIOD SUBSEQUENT PERIOD PRIOR
MARCH 31, 1996 TO ACQUISITION(1) TO ACQUISITION(2)
------------------ ----------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental income......... $4,387 $313 $4,074
Other income.......... 21 3 18
------ ---- ------
Total revenues...... 4,408 316 4,092
Certain operating ex-
penses:
Real estate taxes..... 294 44 250
Repairs and mainte-
nance................ 407 70 337
Property management... 360 53 307
Utilities............. 306 50 256
Insurance............. 49 3 46
Other................. 5 -- 5
------ ---- ------
Total certain oper-
ating expenses..... 1,421 220 1,201
Revenues in excess of
certain operating ex-
penses................. $2,987 $ 96 $2,891
====== ==== ======
</TABLE>
- --------
(/1/Included)in the Predecessor Company.
(/2/Included)in the Prentiss Group Acquisition Properties.
The accompanying combined statements exclude certain expenses such as
interest, depreciation and amortization and other costs not directly related
to the future operations of these properties that may not be comparable to the
expenses expected to be incurred in the proposed future operations of these
properties. Management is not aware of any material factors relating to these
properties which would cause the reported financial information not to be
necessarily indicative of future operating results.
Revenue and Expense Recognition
The combined statements of revenues and certain expenses have been prepared
on the accrual basis of accounting.
F-45
<PAGE>
THE PRENTISS GROUP ACQUISITION PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
Rental income is recorded when due from tenants. The effects of scheduled
rent increases and rental concessions, if any, are recognized on a straight-
line basis over the term of the tenant's lease.
Future Rental Revenues
The properties are leased to tenants under net operating leases. Minimum
lease payments receivable, excluding tenant reimbursements of expenses, under
noncancellable operating leases in effect as of December 31, 1995 are
approximately as follows:
<TABLE>
<S> <C>
1996................................................................. $12,441
1997................................................................. 11,035
1998................................................................. 10,240
1999................................................................. 8,242
2000................................................................. 2,916
Thereafter........................................................... 3,447
-------
$48,321
=======
</TABLE>
Use of Estimates
The preparation of the combined statements of revenues and certain operating
expenses requires management to make estimates and assumptions that affect the
reported amounts, revenues and certain operating expenses during the reporting
period. Actual results could differ from those estimates.
2. RELATED PARTY TRANSACTIONS:
Under the terms of management and development agreements, the Prentiss Group
Acquisition Properties pay management and certain other fees to the
Predecessor Company. During the three months ended March 31, 1996 and 1995 and
the years ended December 31, 1995, 1994, and 1993, fees incurred under these
agreements totalled $123, $128, $528, $545 and $563, respectively.
3. ENVIRONMENTAL MATTERS:
The area where PGC is now located (the "Plant Site") was formerly the site
of a synthetic rubber manufacturing plant owned by the United States
Government and subsequently owned or operated by Shell Oil Company and Dow
Chemical Company. During the operation of the plant, wastes were disposed of
in pits and ponds just to the south of what is now PGC. Environmental studies
have detected groundwater contamination. Also, limited soil contamination
around and in certain other areas of PGC has been detected, including parcels
that will be owned by the Company. The EPA has named as Potentially
Responsible Parties ("PRPs") for the investigation and remediation of the
Plant Site, all owners of the land underlying PGC, including the United States
Government, Dow, Shell, and the current owner, a Prentiss Group affiliate.
The Prentiss Group is close to the execution of a settlement agreement with
Shell that will indemnify and hold harmless the current owner and successors
from liability or clean up or remediation, and third party tort claims for
injury to person or damage to property, but not claims for diminution in value
or consequential damages relating to remediation.
Management believes that its share of any costs to remediate the Plant Site
will not have a material adverse affect on the Company. The Company believes
that despite its possible technical liability as an owner of contaminated
property, existing evidence indicates that contamination of concern to the
regulatory agencies did not result from the present use of the site. Further,
the Company believes that any indemnification from Shell and a potential
future settlement with the EPA will protect the Company against any future
costs of a material nature.
F-46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTS
To the Board of Directors
Prentiss Properties Trust
We have audited the accompanying combined statement of revenues and certain
operating expenses of The Other Acquisition Properties for the year ended
December 31, 1995. The statement of revenues and certain operating expenses is
the responsibility of The Other Acquisition Properties' owners. Our
responsibility is to express an opinion on the statement of revenues and
certain operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenues and
certain operating expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statements of revenues and certain operating expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
statement of revenues and certain operating expenses. We believe that our
audit provides a reasonable basis for our opinion.
The accompanying statement of revenues and certain operating expenses was
prepared for the purpose of complying with rules and regulations of the
Securities and Exchange Commission (for inclusion in the registration
statement on Form S-11 of Prentiss Properties Trust), as described in Note 1,
and is not intended to be a complete presentation of the Properties' revenues
and expenses and may not be comparable to results from proposed future
operations of the Properties.
In our opinion, the statement of revenues and certain operating expenses
referred to above presents fairly, in all material respects, the revenues and
certain operating expenses described in Note 1 of The Other Acquisition
Properties for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
July 15, 1996
Dallas, Texas
F-47
<PAGE>
THE OTHER ACQUISITION PROPERTIES
COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
THREE MONTHS ENDED ---------------------------
MARCH 31, 1996 1995 1994
------------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental income............... $1,846 $ 8,211 $ 7,148
Other income................ 1 60 55
------ ------------ ------------
Total revenues............ 1,847 8,271 7,203
Certain operating expenses:
Real estate taxes........... 114 659 734
Repairs and maintenance..... 27 335 379
Property management......... 370 1,169 1,121
Utilities................... 186 857 868
Insurance................... 12 59 48
------ ------------ ------------
Total certain operating
expenses................. 709 3,079 3,150
Revenues in excess of certain
operating expenses........... $1,138 $ 5,192 $ 4,053
====== ============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-48
<PAGE>
THE OTHER ACQUISITION PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION:
The combined statements of revenues and certain operating expenses for the
three months ended March 31, 1996 and for the years ended December 31, 1995
and 1994 relate to the operations of One Northwestern, Cottonwood and 9050
Junction, which are to be acquired by Prentiss Properties Trust from an
affiliate of Lehman Brothers Inc. concurrent with the consummation of the
Offering for an aggregate purchase price, including closing costs, of $43,251.
The accompanying combined statements exclude certain expenses such as
interest, depreciation and amortization and other costs not directly related
to the future operations of these properties that may not be comparable to the
expenses expected to be incurred in the proposed future operations of these
properties. Management is not aware of any material factors relating to these
properties which would cause the reported financial information not to be
necessarily indicative of future operating results.
The combined statements of revenues and certain operating expenses have been
prepared on the accrual basis of accounting.
Revenue and Expense Recognition
Rental income is recorded when due from tenants. The effects of scheduled
rent increases and rental concessions, if any, are recognized on a straight-
line basis over the term of the tenant's lease.
Future Rental Revenues
The properties are leased to tenants under net operating leases. Minimum
lease payments receivable, excluding tenant reimbursement of expenses, under
noncancellable operating leases in effect as of December 31, 1995, are
approximately as follows:
<TABLE>
<S> <C>
1996................................................................. $ 5,818
1997................................................................. 5,457
1998................................................................. 4,453
1999................................................................. 4,113
2000................................................................. 3,408
Thereafter........................................................... 8,739
-------
$31,988
=======
</TABLE>
Use of Estimates
The preparation of the combined statements of revenues and certain operating
expenses requires management to make estimates and assumptions that affect the
reported amounts, revenues and certain operating expenses during the reporting
period. Actual results could differ from those estimates.
2. RELATED PARTY TRANSACTIONS:
PPL assumed management of the One Northwestern and Cottonwood properties on
March 1, 1996. Under the terms of the management and development agreements,
the properties pay management and certain other fees to the Predecessor
Company. During the three months ended March 31, 1996, fees incurred under
these agreements totalled $14.
F-49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors Prentiss Properties Trust
We have audited the accompanying statement of revenues and certain operating
expenses of Bachman Creek for the year ended December 31, 1995. This statement
of revenues and certain operating expenses is the responsibility of the
Bachman Creek owners. Our responsibility is to express an opinion on the
statement of revenues and certain operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of revenues and
certain operating expenses are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the statement of revenues and certain operating expenses. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation
of the statement of revenues and certain operating expenses. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statement of revenues and certain operating expenses was
prepared for the purpose of complying with rules and regulations of the
Securities and Exchange Commission (for inclusion in the registration Form S-
11 of Prentiss Properties Trust), as described in Note 1, and is not intended
to be a complete presentation of the Property's revenues and expenses and may
not be comparable to results from proposed future operations of the
Properties.
In our opinion, the statement of revenues and certain operating expenses
referred to above presents fairly, in all material respects, the revenues and
certain operating expenses described in Note 1 of Bachman Creek for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
July 15, 1996
Dallas, Texas
F-50
<PAGE>
BACHMAN CREEK
STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, 1996 1995
------------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Rental income............................... $384 $1,182
Other income................................ 1 2
---- ------
Total revenues............................ 385 1,184
Certain operating expenses:
Real estate taxes........................... 33 123
Repairs and maintenance..................... 21 92
Property management......................... 54 250
Utilities................................... 37 182
Insurance................................... 3 12
---- ------
Total certain operating expenses.......... 148 659
Revenues in excess of certain operating ex-
penses....................................... $237 $ 525
==== ======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-51
<PAGE>
BACHMAN CREEK
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION:
The statements of revenues and certain operating expenses for the three
months ended March 31, 1996 and for the year ended December 31, 1995 relate to
the operations of the Bachman Creek property which is to be acquired by
Prentiss Properties Trust concurrent with the consummation of the Offering for
an aggregate purchase price, including closing costs, of $6,527 in cash and the
assumption and repayment of debt and Operating Partnership Units for the equity
interest of the Prentiss Group in the property.
The accompanying combined statements exclude certain expenses such as
interest, depreciation and amortization and other costs not directly related to
the future operations of this property that may not be comparable to the
expenses expected to be incurred in the proposed future operations of this
property. Management is not aware of any material factors relating to this
property which would cause the reported financial information not to be
necessarily indicative of future operating results.
Revenue and Expense Recognition
The statements of revenues and certain operating expenses have been prepared
on the accrual basis of accounting.
Rental income is recorded when due from tenants. The effects of scheduled
rent increases and rental concessions, if any, are recognized on a straight-
line basis over the term of the tenant's lease.
Future Rental Revenues
The property is leased to tenants under net operating leases. Minimum lease
payments receivable, excluding tenant reimbursement of expenses, under
noncancellable operating leases in effect as of December 31, 1995, are
approximately as follows:
<TABLE>
<S> <C>
1996.................................................................. $1,420
1997.................................................................. 1,299
1998.................................................................. 1,195
1999.................................................................. 1,029
2000.................................................................. 535
Thereafter............................................................ 649
------
$6,127
======
</TABLE>
Use of Estimates
The preparation of the combined statements of revenues and certain operating
expenses requires management to make estimates and assumptions that affect the
reported amounts, revenues and certain operating expenses during the reporting
period. Actual results could differ from those estimates.
2. RELATED PARTY TRANSACTIONS:
Under the terms of management and development agreements, Bachman Creek pays
management and certain other fees to the Predecessor Company. During the three
months ended March 31, 1996 and the year ended December 31, 1995, fees incurred
under these agreements totalled $54 and $250, respectively.
F-52
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 15
The Company.............................................................. 27
Business Objectives...................................................... 30
Use of Proceeds.......................................................... 37
Distribution Policy...................................................... 39
Capitalization........................................................... 42
Dilution................................................................. 43
Selected Financial Information........................................... 44
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 47
Properties............................................................... 52
Policies with Respect to Certain Activities.............................. 93
Management............................................................... 97
Formation Transactions................................................... 106
Certain Relationships and Transactions................................... 110
Principal and Management Shareholders.................................... 111
Description of Shares of Beneficial Interest............................. 113
Certain Provisions of Maryland Law and of the Company's Declaration of
Trust and Bylaws........................................................ 117
Shares Available for Future Sale......................................... 120
Operating Partnership Agreement.......................................... 122
Federal Income Tax Considerations........................................ 125
Underwriting............................................................. 140
Legal Matters............................................................ 142
Experts.................................................................. 142
Additional Information................................................... 142
Glossary................................................................. 143
Financial Statements.....................................................
</TABLE>
-----------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE-
QUIREMENT IS IN ADDITION TO THE OBLIGATION OF THE DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
14,250,000 SHARES
PRENTISS PROPERTIES TRUST
COMMON SHARES OF
BENEFICIAL INTEREST
-----------------
PROSPECTUS
, 1996
-----------------
LEHMAN BROTHERS
Alex. Brown & Sons
INCORPORATED
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
PRINCIPAL FINANCIAL SECURITIES, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting commissions and discounts) payable by the
Registrant in connection with the issuance and distribution of the Shares.
<TABLE>
<S> <C>
Securities and Exchange Commission, registration fee................ $ 126,072
NASD filing fee..................................................... 30,500
New York Stock Exchange listing fee................................. 138,612
Printing and mailing................................................ 280,000
Accountant's fees and expenses...................................... 300,000
Blue Sky fees and expenses.......................................... 40,000
Counsel fees and expenses........................................... 1,000,000
Miscellaneous....................................................... 84,816
----------
Total............................................................... 2,000,000
==========
</TABLE>
ITEM 31. SALES TO SPECIAL PARTIES
See Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
On July 24, 1996, the Company was capitalized with the issuance to Michael
V. Prentiss of 50 Common Shares for a purchase price of $20 per share for an
aggregate purchase price of $1,000. The common Shares were purchased for
investment and for the purpose of organizing the Company. The Company issued
these Common Shares in reliance on an exemption from registration under
Section 4(2) of the Securities Act.
ITEM 33. INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit
or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. The Declaration of Trust of the Company contains such a provision
which eliminates such liability to the maximum extent permitted by the
Maryland REIT Law.
The Declaration of Trust of the Company authorities it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay
or reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any present or former Trustee or officer or (b) any
individual who, while a Trustee of the Company and at the request of the
Company, serves or has served another real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer or partner of such real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. The Bylaws of the Company obligate
it, to the maximum extent permitted by Maryland law, to indemnify and to pay
or reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any present or former Trustee or officer who is made a party
to the proceeding by reason of his service in that capacity or (b) any
individual who, while a Trustee of the Company and at the request of the
Company, serves or has served another real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a trustee, director, officer or partner of such real
estate investment trust, corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Declaration of Trust
and Bylaws
II-1
<PAGE>
also permit the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities described above
and to any employee or agent of the Company or a predecessor of the Company.
The Bylaws require the Company to indemnify a Trustee or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as is permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnity its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (i) was committed in bad faith or (ii) was
the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In accordance with the MGCL, the Bylaws of
the Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the Trustee or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company
as authorized by the Bylaws and (b) a written statement by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met.
ITEM 34. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
None.
II-2
<PAGE>
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
Index to Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Pro Forma Combined Financial Information F-2
Pro Forma Combined Balance Sheet as of March 31, 1996................... F-2
Pro Forma Combined Statement of Income for the three months ended March
31, 1996............................................................... F-3
Pro Forma Combined Statement of Income for the year ended December 31,
1995................................................................... F-4
Notes and Management's Assumptions to the Pro Forma Combined Financial
Information............................................................ F-5
Prentiss Properties Trust
Report of Independent Accountants....................................... F-18
Balance Sheet as of July 12, 1996....................................... F-19
Notes to Balance Sheet.................................................. F-20
Predecessor Company
Report of Independent Accountants....................................... F-23
Combined Balance Sheets as of March 31, 1996 (unaudited) and as of
December 31, 1995 and 1994............................................. F-24
Combined Statements of Income for the three-month periods ended March
31, 1996 and 1995 (unaudited) and for the years ended December 31,
1995, 1994 and 1993.................................................... F-25
Combined Statements of Owners' Equity for the three-month period ended
March 31, 1996 (unaudited) and for the years ended December 31, 1995,
1994 and 1993.......................................................... F-26
Combined Statements of Cash Flows for the three-month periods ended
March 31, 1996 and 1995 (unaudited) and for the years ended December
31, 1995, 1994 and 1993................................................ F-27
Notes to Combined Financial Statements.................................. F-28
Schedule III: Real Estate and Accumulated Depreciations of December 31,
1995................................................................... F-41
Prentiss Group Acquisition Properties
Report of Independent Accountants....................................... F-43
Combined Statements of Revenues and Certain Operating Expenses for the
three-month period ended March 31, 1996 (unaudited) and for the years
ended December 31, 1995, 1994 and 1993................................. F-44
Notes to Combined Statements of Revenues and Certain Operating
Expenses............................................................... F-45
Other Acquisition Properties
Report of Independent Accountants....................................... F-47
Combined Statements of Revenues and Certain Operating Expenses for the
three-month period ended March 31, 1996 (unaudited) and for the years
ended December 31, 199 and 1994 (unaudited)........................... F-48
Notes to Combined Statements of Revenues and Certain Operating
Expenses............................................................... F-49
Bachman Creek
Report of Independent Accountants....................................... F-50
Statements of Revenues and Certain Operating Expenses for the three-
month period ended March 31, 1996 (unaudited) and for the year ended
December 31, 1995...................................................... F-51
Notes to Statements of Revenue and Certain Operating Expenses........... F-52
</TABLE>
II-3
<PAGE>
ITEM 16. EXHIBITS
EXHIBITS
<TABLE>
<C> <S>
1.1* -- Form of Underwriting Agreement
3.1* -- Form of Amended and Restated Declaration of Trust of the
Registrant
3.2* -- Bylaws of the Registrant
4.1* -- Form of Common Share certificate
5.1 -- Opinion of Hunton & Williams
8.1* -- Form of Opinion of Hunton & Williams as to Tax Matters
8.2 -- Form of Opinion of Coopers & Lybrand L.L.P. as to Franchise Tax
Matters
10.1* -- Form of First Amendment to First Amended and Restated Agreement
of Limited Partnership of Prentiss Properties Acquisition
Partnership, L.P.
10.2* -- Form of Purchase/Contribution Agreements
10.3* -- Commitment Letter dated from Line of Credit Lender to the
Company
10.4* -- 1996 Share Incentive Plan
10.5* -- Trustees' Plan
10.6* -- Employment Agreement for Michael V. Prentiss
10.7* -- Employment Agreement for Thomas F. August
10.8* -- Commitment Letter from Lehman Brothers Inc.
21 * -- List of Subsidiaries of Registrant
23.1 -- Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1)
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Coopers & Lybrand L.L.P. to Inclusion of Opinion on
Franchise Tax Matters
(included in Exhibit 8.2)
24.1 -- Powers of Attorney (included on signature page)
27.1 -- Financial Data Schedule
99.1 -- Consent of Thomas J. Hynes to being named as a Trustee
99.2 -- Consent of Barry J. C. Parker to being named as a Trustee
99.3 -- Consent of Dr. Leonard Riggs, Jr. to being named as a Trustee
99.4 -- Consent of Ronald G. Steinhart, to being named as a Trustee
99.5 -- Consent of Lawrence A. Wilson, to being named as a Trustee
</TABLE>
- --------
* To be filed by amendment.
ITEM 36. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 33 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a trustee, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
trustee, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question as to whether such indemnification by it
is against public policy as expressed in the Act, and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY
AUTHORIZED, IN THE CITY OF DALLAS, STATE OF TEXAS, ON THE 9TH DAY OF AUGUST
1996.
Prentiss Properties Trust, a
Maryland real estate investment
trust (Registrant)
/s/ Michael V. Prentiss
By: _________________________________
MICHAEL V. PRENTISS CHAIRMAN OF
THE BOARD AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Michael V. Prentiss and Thomas F. August, or either of them, his true and
lawful attorney-in-fact, for him and in his name, place and stead, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement or any additional Registration Statement filed pursuant to Rule 462
and to cause the same to be filed with the Securities and Exchange Commission,
hereby granting to said attorneys-in-fact full power and authority to do and
perform all and every act and thing whatsoever requisite or desirable to be
done in and about the premises as fully to all intents and purposes as the
undersigned might or could do in person, hereby ratifying and confirming all
acts and things that said attorneys-in-fact may do or cause to be done by
virtue of these presents.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON THE 9TH DAY OF AUGUST 1996 BY
THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
/s/ Michael V. Prentiss Chairman of the
- ------------------------------------- Board and Chief
MICHAEL V. PRENTISS Executive Officer
/s/ Thomas F. August President, Chief
- ------------------------------------- Operating Officer
THOMAS F. AUGUST and Trustee
/s/ Richard J. Bartel Executive Vice
- ------------------------------------- President--
RICHARD J. BARTEL Financial
Operations and
Administration and
Chief Operating
Officer--Property
Management
(principal
accounting and
financial officer)
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
-------- ----------- ----
<C> <S> <C>
1.1* -- Form of Underwriting Agreement
3.1* -- Form of Amended and Restated Declaration of Trust of the
Registrant
3.2* -- Bylaws of the Registrant
4.1* -- Form of Common Share certificate
5.1 -- Opinion of Hunton & Williams
8.1* -- Form of Opinion of Hunton & Williams as to Tax Matters
8.2 -- Form of Opinion of Coopers & Lybrand L.L.P. as to Franchise
Tax Matters
10.1* -- Form of First Amendment to First Amended and Restated
Agreement of Limited Partnership of Prentiss Properties
Acquisition Partnership, L.P.
10.2* -- Form of Purchase/Contribution Agreements
10.3* -- Commitment Letter dated from Line of Credit Lender
to the Company
10.4* -- 1996 Share Incentive Plan
10.5* -- Trustees' Plan
10.6* -- Employment Agreement for Michael V. Prentiss
10.7* -- Employment Agreement for Thomas F. August
10.8* -- Commitment Letter from Lehman Brothers Inc.
21 * -- List of Subsidiaries of Registrant
23.1 -- Consent of Hunton & Williams (included in Exhibits 5.1 and
8.1)
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Coopers & Lybrand L.L.P. to Inclusion of Opinion
on Franchise Tax Matters
(included in Exhibit 8.2)
24.1 -- Powers of Attorney (included on signature page)
27.1 -- Financial Data Schedule
99.1 -- Consent of Thomas J. Hynes to being named as a Trustee
99.2 -- Consent of Barry J. C. Parker to being named as a Trustee
99.3 -- Consent of Dr. Leonard Riggs, Jr. to being named as a
Trustee
99.4 -- Consent of Ronald G. Steinhart, to being named as a Trustee
99.5 -- Consent of Lawrence A. Wilson, to being named as a Trustee
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
[LETTERHEAD OF HUNTON & WILLIAMS APPEARS HERE}
August 9, 1996
EXHIBIT 5.1
Board of Trustees
Prentiss Properties Trust
1717 Main Street, Suite 5000
Dallas, TX 75201
Prentiss Properties Trust
Registration Statement on Form S-11
-----------------------------------
Gentlemen:
We have acted as counsel to Prentiss Properties Trust, a Maryland real
investment trust (the "Company"), in connection with the Registration Statement
on Form S-11, that is being filed on the date hereof with the Securities and
Exchange Commission (the "Registration Statement"), with respect to up to
18,280,485 shares of the Company's common shares of beneficial interest, $.01
par value (the "Common Shares"), which are proposed to be offered and sold as
described in the Registration Statement.
In rendering this opinion, we have relied upon, among other things, our
examination of such records of the Company and certificates of its officers and
of public officials as we have deemed necessary.
Based upon the foregoing and having regard for such legal considerations
as we have deemed relevant, we are of the opinion that the issuance of the
Shares as described in the Registration Statement has been validly authorized
and, when issued and sold as described in the Registration Statement, the Common
Shares will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
statement made in reference to this firm under the caption "Legal Matters" in
the Registration Statement.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11 (File
No. 333- ) of our reports dated July 15, 1996, on our audits of the balance
sheet of Prentiss Property Trust, the financial statements and financial
statement schedule of the Predecessor Company, the combined statements of
revenues and certain operating expenses of the Prentiss Group Acquisition
Properties, the combined statements of revenues and certain operating expenses
of the Other Acquisition Properties, and the statement of revenues and certain
operating expenses of Bachman Creek. We also consent to the reference to our
firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Dallas, Texas
August 9, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PREDECESSOR COMPANY FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C> <C>
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<PERIOD-END> MAR-31-1996 DEC-31-1995
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0 0
0 0
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</TABLE>
<PAGE>
EXHIBIT 99.1
CONSENT
The Undersigned hereby consents to being named as a Trustee of Prentiss
Properties Trust (the "Trust") in the Form S-11 of the Trust to be filed with
the Securities and Exchange Commission.
/s/ Thomas J. Hynes
Date: July 22, 1996
<PAGE>
EXHIBIT 99.2
CONSENT
The Undersigned hereby consents to being named as a Trustee of Prentiss
Properties Trust (the "Trust") in the Form S-11 of the Trust to be filed with
the Securities and Exchange Commission.
/s/ Barry J. C. Parker
Date: July 22, 1996
<PAGE>
EXHIBIT 99.3
CONSENT
The Undersigned hereby consents to being named as a Trustee of Prentiss
Properties Trust (the "Trust") in the Form S-11 of the Trust to be filed with
the Securities and Exchange Commission.
/s/ Dr. Leonard Riggs, Jr.
Date: July 22, 1996
<PAGE>
EXHIBIT 99.4
CONSENT
The Undersigned hereby consents to being named as a Trustee of Prentiss
Properties Trust (the "Trust") in the Form S-11 of the Trust to be filed with
the Securities and Exchange Commission.
/s/ Ronald G. Steinhart
Date: July 22, 1996
<PAGE>
EXHIBIT 99.5
CONSENT
The Undersigned hereby consents to being named as a Trustee of Prentiss
Properties Trust (the "Trust") in the Form S-11 of the Trust to be filed with
the Securities and Exchange Commission.
/s/ Lawrence A. Wilson
Date: July 22, 1996
