<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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)
3890 W. NORTHWEST HIGHWAY, SUITE 400
DALLAS, TEXAS 75220
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
MICHAEL V. PRENTISS
PRENTISS PROPERTIES TRUST
3890 W. NORTHWEST HIGHWAY, SUITE 400
DALLAS, TEXAS 75220
(214) 654-0886
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
RANDALL S. PARKS, ESQ. ROBERT E. KING, JR., ESQ.
HUNTON & WILLIAMS ROGERS & WELLS
951 EAST BYRD STREET 200 PARK AVENUE
RICHMOND, VIRGINIA 23219 NEW YORK, NEW YORK 10166
(804) 788-8200 (212) 878-8000
----------------
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>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED(/1/) PER SHARE(/2/) PRICE(/2/) FEE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, $.01 par
value................. 11,500,000 shares $27.5625 $316,968,750 $96,052
</TABLE>
(/1/Includes)1,500,000 shares that may be purchased pursuant to the over-
allotment option granted to the Underwriters.
(/2/Estimated)solely for the purpose of determining the registration fee in
accordance with Rule 457(c). Based on the average high and low prices for
the Common Shares as reported on the New York Stock Exchange on March 21,
1997.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
----------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(A) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
----------------------- ---------------------
<S> <C>
1.Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus...................... Outside Front Cover Page
2.Inside Front and Outside Back Inside Cover Page; Outside Back Cover
Cover Pages of Prospectus....... Page
3.Summary Information, Risk Factors
and Ratio of Earnings to Fixed Outside Front Cover Page; Prospectus
Charges......................... 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; Underwriting
5.Dilution.......................... Dilution
6.Selling Security Holders.......... Not Applicable
7.Plan of Distribution.............. Outside Front 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 Management's Discussion and Analysis
and Results of Operations....... of Financial Condition and Results of
Operations
11.General Information as to Prospectus Summary; The Company;
Registrant...................... Management; Properties and Business
12.Policy With Respect to Certain Prospectus Summary; Policies with
Activities...................... respect to Certain Activities; Certain
Provisions of Maryland Law and of the
Company's Declaration of Trust and
Bylaws
13.Investment Policies of Policies and Objectives with Respect
Registrant...................... to Certain Activities; Prospectus
Summary; Properties and Business
14.Description of Real Estate........ Prospectus Summary; Business and
Properties
15.Operating Data.................... Business and 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 Price Range of Common Shares and
Matters......................... Distribution History
18.Description of Registrant's Description of Shares of Beneficial
Securities...................... Interest
19.Legal Proceedings................. Properties--Legal Proceedings
20.Security Ownership of Certain
Beneficial Owners and
Management...................... Principal and Management Shareholders
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
----------------------- ---------------------
<S> <C>
21.Trustees and Executive Officers... Management
22.Executive Compensation............ Management
23.Certain Relationships and Related Prospectus Summary; Properties and
Transactions.................... Business; Management; Certain
Relationships and Transactions
24.Selection, Management and Custody
of Registrant's Investments..... Outside Front Cover Page; Prospectus
Summary; Properties and Business;
Management; Policies with Respect to
Certain Activities
25.Policies With Respect to Certain Risk Factors; Policies with Respect to
Transactions.................... Certain Activities
26.Limitations of Liability.......... Description of Shares of Beneficial
Interest
27.Financial Statements and Prospectus Summary; Selected Financial
Information..................... Information
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 , 1997
PROSPECTUS
10,000,000 SHARES LOGO
Prentiss Properties Trust
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 with national
office and industrial property acquisition, ownership, management, leasing,
development and construction businesses. As of March 18, 1997, the Company
owned interests in 97 office and industrial properties (the "Properties") with
approximately 10.4 million net rentable square feet. As of March 18, 1997, the
Company had agreements to acquire 29 office and industrial properties (the
"Pending Acquisitions") with approximately 3.5 million net rentable square
feet. Upon completion of the Offering and the Pending Acquisitions, the Company
will own 126 office and industrial properties with approximately 13.8 million
net rentable square feet, which were 95% leased as of December 31, 1996.
All of the 10,000,000 common shares of beneficial interest, par value $.01
per share ("Common Shares"), offered hereby are being offered by the Company.
The Company's Common Shares are listed on the New York Stock Exchange under
the symbol "PP." On March 24, 1997, the last reported sale price of the Common
Shares on the NYSE was $27.875 per share. To ensure that the Company qualifies
as a REIT, ownership of Common Shares by any single shareholder will be limited
to 9.8% of the number of Common Shares outstanding. See "Description of Common
Shares."
------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON SHARES.
------------
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............................... $ $ $
- --------------------------------------------------------------------------------
Total(/3/).............................. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(/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
$950,000.
(/3/The)Company has granted the Underwriters an option to purchase up to an
aggregate of 1,500,000 Common Shares to cover overallotments. If all of
such shares are purchased, the total Price to Public, Underwriting
Discounts and Commissions 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 , 1997.
------------
LEHMAN BROTHERS
ALEX. BROWN & SONS
INCORPORATED
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
PRINCIPAL FINANCIAL SECURITIES, INC. RAYMOND JAMES & ASSOCIATES, INC.
, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON SHARES PRIOR TO PRICING
OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON SHARES,
THE PURCHASE OF COMMON SHARES FOLLOWING THE PRICING OF THE OFFERING TO COVER A
SYNDICATE SHORT POSITION IN THE COMMON SHARES OR FOR THE PURPOSE OF
MAINTAINING THE PRICE OF THE COMMON SHARES, AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
[INSIDE COVER]
[PRENTISS PROPERTIES TRUST'S LOGO]
[MAP OF THE UNITED STATES OF AMERICA SHOWING THE LOCATION OF PRENTISS' MARKETS,
REGIONAL HEADQUARTERS AND NATIONAL HEADQUARTERS]
- -------------------------------------------------------------------------------
[THREE GRAPHS DEPICTING THE OWNED PORTFOLIO AND PENDING ACQUISITIONS BY SQUARE
FEET, ACQUISITIONS FROM THE IPO THROUGH MARCH 18, 1997 AND PENDING ACQUISITIONS
BY TOTAL ACQUISITION COST, AND 1996 PRO FORMA BASE RENT AFTER PENDING
ACQUISITIONS BY PERCENTAGE, OFFICE AND INDUSTRIAL. BULLET POINTS IDENTIFYING
CHARACTERISTICS OF PRENTISS' PROPERTIES BEFORE AND AFTER THE CLOSING OF THE
PENDING ACQUISITIONS.]
[GATEFOLD]
[EIGHT PHOTOGRAPHS DEPICTING OWNED PROPERTIES APPEAR HERE]
[INSIDE BACK COVER]
[FOUR PHOTOGRAPHS DEPICTING OWNED PROPERTIES]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 1
The Company.............................................................. 1
Risk Factors............................................................. 2
Recent Developments...................................................... 3
Business and Growth Strategies........................................... 5
Geographic Property Breakdown............................................ 6
Properties............................................................... 8
The Offering............................................................. 10
Distributions............................................................ 10
Tax Status of the Company................................................ 11
Summary Financial Information............................................ 12
RISK FACTORS.............................................................. 16
Risk that Pending Acquisitions Will Not Close............................ 16
Risks Associated with Rapid Growth; Risks Associated with the Acquisition
of Substantial New Properties; Lack of Operating History................ 16
Reliance on Major Tenants................................................ 16
Recently Organized Entity................................................ 17
Anti-takeover Effect of Ownership Limit, Staggered Board and Power to
Issue Additional Shares................................................. 17
Tax Risks................................................................ 18
Real Estate Financing Risks.............................................. 19
Geographic Concentrations in Dallas, Chicago, Los Angeles and Northern
Virginia................................................................ 20
Conflicts of Interests in the Formation Transactions and the Business of
the Company............................................................. 20
Changes in Policies Without Shareholder Approval; No Limitation on Debt.. 21
Dependence on Key Personnel.............................................. 21
Control of Management.................................................... 21
Risks Associated With Acquisition, Redevelopment, Development and
Construction............................................................ 22
Real Estate Investment Risks............................................. 22
Risks of Third-Party Property Management, Leasing, Development and
Construction Business and Related Services.............................. 25
Possible Adverse Effect of Market Interest Rates on Price of Common
Shares.................................................................. 26
Possible Adverse Effect of Shares Available for Future Sale on Price of
Common Shares........................................................... 26
THE COMPANY............................................................... 27
General.................................................................. 27
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Organization of the Company.............................................. 28
Structure of the Company................................................. 28
Business Strategy........................................................ 29
Geographic Property Breakdown............................................ 30
Growth Strategies........................................................ 30
Third-Party Management................................................... 33
Financing Strategies..................................................... 35
USE OF PROCEEDS........................................................... 36
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY...................... 37
CAPITALIZATION............................................................ 38
SELECTED FINANCIAL INFORMATION............................................ 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 43
Results of Operations.................................................... 43
Liquidity and Capital Resources.......................................... 44
Funds from Operations.................................................... 46
Inflation................................................................ 47
PROPERTIES................................................................ 48
General.................................................................. 48
Location of Properties and Pending Acquisitions.......................... 50
Overview of New Ownership Markets........................................ 51
Office Properties and Pending Office Acquisitions........................ 53
Industrial Properties and Pending Industrial Acquisitions................ 61
Development/Redevelopment Properties..................................... 68
Option Property.......................................................... 68
Development Parcels...................................................... 69
Historical Non-Incremental Revenue-Generating Capital Expenditures of
Properties and Pending Acquisitions..................................... 71
Historical Incremental Revenue-Generating Tenant Improvement Costs and
Leasing Commissions..................................................... 72
Prentiss Properties Service Business..................................... 72
Insurance................................................................ 72
Environmental Matters.................................................... 73
Depreciation of Significant Properties................................... 74
Real Estate Taxes on Significant Properties.............................. 75
Occupancy and Effective Rent at Significant Properties................... 75
Legal Proceedings........................................................ 75
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............................... 76
Investment Policies...................................................... 76
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financing Policies...................................................... 76
Conflict of Interest Policies........................................... 77
Policies with Respect to Other Activities............................... 79
Working Capital Reserves................................................ 79
MANAGEMENT............................................................... 80
Trustees and Executive Officers......................................... 80
Board of Trustees....................................................... 82
Committees of the Board of Trustees..................................... 83
Compensation of Trustees................................................ 83
Executive Compensation.................................................. 84
Compensation Committee Interlocks and Insider Participation on
Compensation Decisions................................................. 85
Employment Agreements................................................... 85
1996 Share Incentive Plan............................................... 86
Incentive Compensation.................................................. 87
The Trustees' Plan...................................................... 87
Savings Plan............................................................ 88
Share Purchase Plan..................................................... 89
Indemnification......................................................... 89
FORMATION TRANSACTIONS................................................... 90
CERTAIN RELATIONSHIPS AND TRANSACTIONS................................... 91
Benefits to Related Parties............................................. 91
Sharing of Offices and Employees........................................ 92
Transactions with Affiliates of Lehman.................................. 92
PRINCIPAL AND MANAGEMENT SHAREHOLDERS.................................... 93
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST............................. 94
General................................................................. 94
Common Shares........................................................... 94
Classification or Reclassification of Common Shares or Preferred
Shares................................................................. 95
Restrictions on Transfer................................................ 95
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION OF
TRUST AND BYLAWS........................................................ 99
Classification of the Board of Trustees................................. 99
Removal of Trustees..................................................... 99
Business Combinations................................................... 99
Control Share Acquisitions.............................................. 100
Amendment............................................................... 100
Limitation of Liability and Indemnification............................. 101
Operations.............................................................. 102
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Dissolution of the Company............................................... 102
Advance Notice of Trustee Nominations and New Business................... 102
Possible Anti-takeover Effect of Certain Provisions of Maryland Law and
of the Declaration of Trust and Bylaws.................................. 102
Maryland Asset Requirements.............................................. 102
Transfer Agent........................................................... 102
SHARES AVAILABLE FOR FUTURE SALE.......................................... 103
OPERATING PARTNERSHIP AGREEMENT........................................... 104
Management............................................................... 104
Transferability of Interests............................................. 104
Capital Contribution..................................................... 105
Exchange Rights.......................................................... 105
Registration Rights...................................................... 106
Operations............................................................... 106
Distributions............................................................ 106
Allocations.............................................................. 106
Term..................................................................... 106
Fiduciary Duty........................................................... 107
Tax Matters.............................................................. 107
FEDERAL INCOME TAX CONSIDERATIONS......................................... 107
Taxation of the Company.................................................. 107
Requirements for Qualification........................................... 108
Failure to Qualify....................................................... 114
Taxation of Taxable U.S. Shareholders.................................... 114
Taxation of Shareholders on the Disposition of the Common Shares......... 115
Capital Gains and Losses................................................. 115
Information Reporting Requirements and Backup Withholding................ 116
Taxation of Tax-Exempt Shareholders...................................... 116
Taxation of Non-U.S. Shareholders........................................ 116
Other Tax Consequences................................................... 118
Tax Aspects of the Operating Partnership and the Noncorporate
Subsidiaries............................................................ 119
Sale of the Operating Partnership's or a Noncorporate Subsidiary's
Property................................................................ 121
Manager.................................................................. 122
UNDERWRITING.............................................................. 123
LEGAL MATTERS............................................................. 125
EXPERTS................................................................... 125
ADDITIONAL INFORMATION.................................................... 125
GLOSSARY.................................................................. 126
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 the Underwriters'
overallotment option is not exercised and that the offering price for the
Common Shares offered hereby is $27.75. Unless the context otherwise requires,
all references in this Prospectus to the (i) "Company" shall mean Prentiss
Properties Trust and its subsidiaries on a combined basis, including (a)
Prentiss Properties I, Inc. (the "General Partner"), (b) Prentiss Properties
Acquisition Partners, L.P. (the "Operating Partnership") and its subsidiaries,
(c) Prentiss Properties Limited, Inc. and affiliates (collectively, the
"Manager"), and (d) entities through which the Operating Partnership owns
interests in certain of the Properties; and (ii) "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. This Prospectus contains statements that may be deemed to be
"forward-looking" within the meaning of Section 27A of the Securities Act of
1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company's actual
results could differ materially from those set forth in the forward-looking
statements. Certain factors that might cause such a difference are discussed in
the section entitled "Risk Factors" beginning on page 16 of this Prospectus.
THE COMPANY
The Company is a self-administered and self-managed real estate investment
trust ("REIT") that acquires, owns, manages, leases, develops and builds office
and industrial properties throughout the U.S. The Company owns interests in a
diversified portfolio of 97 office and industrial properties (the "Properties")
containing approximately 10.4 million net rentable square feet. The Properties
are located in 12 major U.S. markets and consist of 34 office buildings (the
"Office Properties") containing approximately 4.7 million net rentable square
feet and 63 industrial buildings (the "Industrial Properties") containing
approximately 5.6 million net rentable square feet. As of December 31, 1996,
the Office Properties were approximately 96% leased to 299 tenants, and the
Industrial Properties were approximately 97% leased to 123 tenants. The Company
manages approximately 42 million square feet in 352 office and industrial
properties that are owned by the Company and by third parties, and that are
leased to approximately 2,300 tenants. The Company also has two industrial
buildings under development which together contain approximately 420,000 net
rentable square feet, and has substantially completed an approximately 21,000
net rentable square foot addition to an existing Industrial Property.
The Company has capitalized on its national presence by acquiring and
developing properties in selected markets that the Company believes have strong
growth potential. Since its initial public offering in October 1996 (the
"IPO"), the Company has acquired six Office Properties with approximately
900,000 net rentable square feet and four Industrial Properties with
approximately 600,000 net rentable square feet for Total Acquisition Costs of
approximately $135.7 million (collectively, the "Acquired Properties"). As of
March 18, 1997, the Company had agreements to acquire 15 office buildings with
approximately 1.6 million net rentable square feet and 14 industrial buildings
with approximately 1.9 million net rentable square feet (collectively, the
"Pending Acquisitions") for Total Acquisition Costs of approximately $266.5
million. As of December 31, 1996, the Pending Acquisitions were 91% leased.
The Company believes that its national scope and depth of management has
enabled it to integrate the Acquired Properties into its portfolio while
continuing to pursue aggressively other opportunities, such as the Pending
Acquisitions. The Company operates from its Dallas, Texas headquarters and its
four other regional offices (Los Angeles, California; Chicago, Illinois;
Washington, D.C.; and Atlanta, Georgia). The Company is a full-service real
estate company with approximately 625 employees and in-house expertise in
acquisitions, development, property management, leasing, facilities management,
corporate services, finance, tax, construction, dispositions, marketing,
accounting and real estate law. The Company's nine senior executives have
<PAGE>
an average of 20 years of experience in the real estate industry and an average
tenure of 12 years with the Company and its predecessors. See "Management--
Trustees and Executive Officers." Upon completion of the Offering, management
will own in the aggregate 9.8% of the outstanding Common Shares and units of
limited partnership interest in the Operating Partnership ("Units").
The Company seeks to grow by acquiring additional office and industrial
properties and through development, primarily on a build-to-suit basis or where
pre-leasing is possible. The Company believes that its five regional offices,
presence in 21 markets throughout the U.S., diversified base of approximately
2,300 tenants and existing relationships with 46 management clients provide it
with a competitive advantage in identifying and competing for new office and
industrial acquisition and development opportunities nationally. Additionally,
the Company believes that the infrastructure from its extensive property
management operations has and will continue to allow it to grow in new and
existing markets without the substantial cost of opening new offices or hiring
and training new employees. All of the Acquired Properties and the Pending
Acquisitions are located in markets in which the Company previously owned or
managed properties. The Company also seeks to maximize the profitability of its
Properties by maintaining high occupancy rates, increasing rental rates and
reducing operating costs.
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 possibility that some of the Pending Acquisitions will not close and
that the Company will not find a use for excess proceeds after the
closing of the Offering;
. risks associated with the Company's rapid growth;
. risks associated with reliance on major tenants, of which the largest
accounted for approximately 17% of the Company's 1996 Base Rent from the
Properties owned at December 31, 1996, including the risk of any such
tenant's inability to make rent payments;
. the Company's limited experience in operating as a REIT;
. the anti-takeover effect of limiting ownership of the shares of
beneficial interest of the Company to no more than 9.8% of the number of
outstanding Common Shares (after the closing of the Offering) and
outstanding Preferred Shares of any series and of certain other
provisions contained in the organizational documents of the Company,
which could delay, defer or prevent a transaction that might involve a
premium price for the Common Shares or otherwise be in the best interests
of the holders of 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's debt service on variable rate indebtedness could increase, (ii)
the Company may not be able to refinance outstanding indebtedness upon
maturity or refinance such indebtedness on favorable terms and (iii) the
Company's properties may be foreclosed upon if it cannot make required
debt service payments;
. concentration of Properties and Pending Acquisitions providing 21%, 11%,
10% and 10% of the 1996 Base Rent from the Properties and Pending
Acquisitions in the Dallas, Chicago, Los Angeles and Northern Virginia
areas, respectively, which concentrations subject the Company to risks
associated with local market conditions;
. conflicts of interests between the Company and certain executive
officers, which conflicts of interest could result in decisions that do
not fully reflect the interests of all of the Company's shareholders;
2
<PAGE>
. 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 ownership, acquisition, development,
construction and management 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 termination of
management contracts; and
. 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.
RECENT DEVELOPMENTS
ACQUIRED PROPERTIES
From the closing of the IPO through March 18, 1997, the Company has acquired
six Office Properties and four Industrial Properties containing approximately
900,000 and 600,000 net rentable square feet, respectively, for Total
Acquisition Costs of approximately $135.7 million. The following table sets
forth certain data regarding the Acquired Properties:
<TABLE>
<CAPTION>
NET TOTAL
RENTABLE ACQUISITION
SQUARE COST(/1/)
PROPERTY NAME MARKET FEET (MILLIONS) DATE ACQUIRED
------------- ------ --------- ----------- -------------
<S> <C> <C> <C> <C>
Office Properties:
FHP Building.......... Denver, CO 198,370 $ 21.1 December 1996
O'Hare Plaza II....... Chicago, IL 233,650 26.8 December 1996
1717 Deerfield........ Chicago, IL 137,904 21.8 December 1996
2455 Horsepen Road.... Northern Virginia 104,150 41.1(/2/) December 1996
2411 Dulles Corner
Road................. Northern Virginia 176,522 (/2/) December 1996
4401 Fair Lakes
Court................ Northern Virginia 58,621 6.3 January 1997
Industrial Properties:
Chicago
Industrials(/3/)..... Chicago, IL 226,076 8.8 November 1996
5211 South 3rd
Street............... Milwaukee, WI 360,000 9.8 February 1997
--------- ------
Total..................................... 1,495,293 $135.7
========= ======
</TABLE>
- --------
(/1/"Total)Acquisition Cost" includes all purchase costs, closing costs and
anticipated initial capital expenditures during the first year of
ownership.
(/2/The)Company acquired the 2411 Dulles Corner Road and 2455 Horsepen Road
Properties from one seller for a Total Acquisition Cost of approximately
$41.1 million.
(/3/)Contains three Industrial Properties.
PENDING ACQUISITIONS
As of March 18, 1996, the Company had agreements to acquire 15 office
buildings containing approximately 1.6 million net rentable square feet and 14
industrial buildings containing approximately 1.9 million net rentable square
feet for Total Acquisition Costs of $266.5 million. The Company expects to
complete the Pending Acquisitions within 60 days after the closing of the
Offering; however, purchase of the Pending Acquisitions is subject to the
Company's completion of due diligence and the satisfaction of other customary
conditions to closing and there can be no assurance that all of the Pending
Acquisitions will be
3
<PAGE>
completed. The Company intends to use a portion of the net proceeds from the
Offering to complete the Pending Acquisitions. See "Risk Factors--Risk that
Pending Acquisitions Will Not Close." The following table sets forth data
regarding the Pending Acquisitions:
<TABLE>
<CAPTION>
TOTAL
ACQUISITION
NUMBER OF NET RENTABLE COST(/1/)
PROPERTY NAME BUILDINGS MARKET SQUARE FEET (MILLIONS)
------------- --------- ------ ------------ -----------
<S> <C> <C> <C> <C>
Office Buildings:
Natomas Corporate Cen-
ter.................. 6 Sacramento, CA 564,606 $ 81.7
Corporetum Office Cam-
pus.................. 5 Chicago, IL 323,728 51.8
Crescent Centre....... 1 Atlanta, GA 237,727 25.4
Pacific Gateway Office
Center............... 1 Los Angeles, CA 223,731 24.9
Seven Mile Crossing... 2 Suburban Detroit, MI 244,630 22.7
Industrial Buildings:
The Colonnade II...... 6 Los Angeles, CA 466,708 16.6
16801 South Exchange.. 1 Chicago, IL 455,858 11.7
Six Flags Distribution
Center(/2/).......... 2 Dallas, TX 237,344 8.9
Day Creek Industrial
Park................. 2 Los Angeles, CA 228,382 7.6
Route 100 Build-
ing(/2/)............. 1 Baltimore, MD 143,924 5.6
Bridgestone Distribu-
tion Center.......... 1 Houston, TX 215,000 4.9
8779 Greenwood Place.. 1 Baltimore, MD 142,140 4.7
--------- ------
Total.................................................. 3,483,778 $266.5
========= ======
</TABLE>
- --------
(/1/"Total)Acquisition Cost" includes all purchase costs, closing costs and
anticipated initial capital expenditures during the first year of
ownership.
(/2/)The Company has closed on these Pending Acquisitions.
DEVELOPMENT
Since the IPO, the Company has commenced development of two industrial
buildings that together contain approximately 420,000 net rentable square feet,
one of which is pre-leased, and has substantially completed an approximately
21,000 net rentable square foot addition to an existing Industrial Property.
The following table sets forth data regarding the property developments of the
Company since the IPO:
<TABLE>
<CAPTION>
TOTAL
DEVELOPMENT
COST(/1/)
NET RENTABLE (IN ESTIMATED MONTH
PROPERTY NAME MARKET SQUARE FEET MILLIONS) MONTH STARTED OF COMPLETION(/2/)
------------- ------ ------------ ----------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
Federal Express.............. Atlanta, GA 283,840 $18.3 December 1996 December 1997
Continental Executive Parke.. Chicago, IL 136,200 6.3 December 1996 July 1997
Milwaukee Industrials........ Milwaukee, WI 20,760 1.0 October 1996 May 1997
------- -----
Total...................................... 440,800 $25.6
======= =====
</TABLE>
- --------
(/1/"Total)Development Cost" includes all land costs, construction costs,
lease-up costs, and fees, permits and other miscellaneous expenses.
(/2/Current)estimated completion date, which could change due to a variety of
factors. See "Risk Factors--Real Estate Investment Risks--Risks Associated
with Acquisition, Redevelopment, Development and Construction."
INCREASED LINE OF CREDIT
On January 24, 1997, the Company increased the amount available under its
secured line of credit (the "Line of Credit") from $100 million to $150 million
and reduced the interest rate on borrowings under the Line of Credit from LIBOR
plus 200 basis points to LIBOR plus 175 basis points. As of March 18, 1997, the
Company had no amounts outstanding under the Line of Credit, and, as of the
closing of the Offering and the
4
<PAGE>
Pending Acquisitions, the Company expects to have no amounts outstanding under
the Line of Credit. The Company's total combined indebtedness plus its pro rata
share of indebtedness of unconsolidated investments ("Joint Venture Debt") on
March 26, 1997, represents 29.3% of the Company's total equity market
capitalization plus its combined indebtedness and pro rata share of Joint
Venture Debt ("Total Market Capitalization") based on a Common Share price of
$27.75 per share, and the ratio is expected to be 23.3% after the closing of
the Offering and the Pending Acquisitions.
FIXED RATE MORTGAGE LOAN
In February 1997, the Company closed on a ten-year fixed rate mortgage loan
with an initial outstanding balance of $180.1 million (the "Mortgage Loan").
The Mortgage Loan is secured by liens on 54 Properties. The Mortgage Loan was
obtained from an affiliate of Lehman Brothers Inc. ("Lehman"), the Managing
Underwriter of the Offering. Under the terms of the Mortgage Loan, the Company
pays interest only at a rate of approximately 7.57% until the Mortgage Loan's
maturity in February 2007. A portion of the proceeds of the Mortgage Loan were
used to (i) repay approximately $40.0 million of variable rate loans made by
the Mortgage Loan lender in connection with the IPO and (ii) repay
approximately $88.2 million of outstanding indebtedness under the Line of
Credit. The balance of the proceeds from the Mortgage Loan will be used to fund
a portion of the Total Acquisition Costs of the Pending Acquisitions and to pay
fees to the lender.
BUSINESS AND GROWTH STRATEGIES
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 external and internal growth. The Company initially has focused
its external growth activities in certain of its existing markets that the
Company believes exhibit particularly favorable investment environments. The
Company believes that its existing operations in its markets (a) provide a
competitive advantage in identifying acquisition and development opportunities
and (b) allow it to assimilate new properties into its portfolio with minimal
integration issues and without incurring significant incremental administrative
expenses. All of the Acquired Properties and the Pending Acquisitions are in
markets in which the Company previously owned or managed properties. The
following table sets forth the geographic distribution of the Properties, the
Pending Acquisitions and the Company's managed properties.
5
<PAGE>
GEOGRAPHIC PROPERTY BREAKDOWN
<TABLE>
<CAPTION>
NUMBER OF PROPERTIES NET RENTABLE SQUARE FEET (IN THOUSANDS)
---------------------------------------------- -------------------------------------------------
PENDING PENDING
MARKET OWNED ACQUISITIONS(/1/) MANAGED(/2/) TOTAL OWNED ACQUISITIONS(/1/) MANAGED(/2/) TOTAL
------ ----- ----------------- ------------ ----- ------ ----------------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WESTERN REGION:
Phoenix, Arizona....... -- -- 5 5 -- -- 522 522
Los Angeles, Califor-
nia................... 18 9(/3/) 105 132 1,253 919(/3/) 7,779 9,951
Oakland, California.... -- -- 16 16 -- -- 1,614 1,614
Sacramento, Califor-
nia................... -- 6 15 21 -- 565 1,510 2,075
San Francisco, Califor-
nia................... -- -- 8 8 -- -- 1,525 1,525
--- --- --- --- ------ ----- ------ ------
Subtotal Western
Region................ 18 15 149 182 1,253 1,484 12,950 15,687
SOUTHWEST REGION:
Denver, Colorado....... 1 -- 1 2 198 -- 190 388
Amarillo, Texas........ -- -- 3 3 -- -- 482 482
Austin, Texas.......... 7(/4/) -- 1 8 1,112(/4/) -- 389 1,501
Dallas, Texas.......... 15 2(/5/) 30 47 2,026 237(/5/) 6,010 8,273
Fort Worth, Texas...... -- -- 1 1 -- -- 1,008 1,008
Houston, Texas......... 5 1 4 10 75 215 955 1,245
--- --- --- --- ------ ----- ------ ------
Subtotal Southwest
Region................ 28 3 40 71 3,411 452 9,034 12,897
MIDWEST REGION:
Chicago, Illinois...... 5 6 5 16 598 780 392 1,770
Suburban Detroit, Mich-
igan.................. 1(/6/) 2(/7/) -- 3 242(/6/) 245(/7/) -- 487
Kansas City, Missouri.. 7 -- -- 7 1,342 -- -- 1,342
Milwaukee, Wisconsin... 18 -- -- 18 1,578 -- -- 1,578
--- --- --- --- ------ ----- ------ ------
Subtotal Midwest
Region................ 31 8 5 44 3,760 1,025 392 5,177
MID-ATLANTIC REGION:
Washington, D.C........ -- -- 6 6 -- -- 2,116 2,116
Baltimore, Maryland.... 6 2(/8/) -- 8 731 286(/8/) -- 1,017
Northern New Jersey.... -- -- 1 1 -- -- 263 263
Northern Virginia...... 5 -- 27 32 677 -- 3,482 4,159
--- --- --- --- ------ ----- ------ ------
Subtotal Mid-Atlantic
Region................ 11 2 34 47 1,408 286 5,861 7,555
SOUTHEAST REGION:
Orlando, Florida....... -- -- 4 4 -- -- 683 683
Atlanta, Georgia....... 9 1 23 33 530 238 2,861 3,629
--- --- --- --- ------ ----- ------ ------
Subtotal Southeast Re-
gion.................. 9 1 27 37 530 238 3,544 4,312
Total................. 97 29 255 381 10,362 3,485 31,781 45,628
=== === === === ====== ===== ====== ======
</TABLE>
- --------
(/1/)None of the Pending Acquisitions currently is managed by the Company.
(/2/)The data regarding managed properties is as of December 31, 1996.
(/3/)The Company closed on two of the Pending Acquisitions in this market on
March 25, 1997.
(/4/)The Company owns a non-controlling 49.9% interest in the general
partnership that owns a leasehold interest in the seven owned Broadmoor
Austin Properties in Austin, Texas.
(/5/)The Company closed on these Pending Acquisitions in this market on March
19, 1997.
(/6/)The Company owns 100% of a leasehold interest in the One Northwestern
Plaza Property in Southfield, Michigan.
(/7/)Upon acquisition, the Company would own a 100% leasehold interest in these
properties.
(/8/)The Company closed on one of the Pending Acquisitions in this market on
March 19, 1997.
GROWTH STRATEGIES
Internal Growth
The Company's internal growth strategy is to increase cash flow from the
Properties and any future properties, including the Pending Acquisitions,
primarily by (a) improving occupancy rates, (b) renewing or
6
<PAGE>
replacing expiring leases with new leases at higher rental rates, (c)
maintaining high lease renewal rates, and (d) applying its benchmarking and
best practices methodologies to identify and capitalize on cost reduction
opportunities.
External Growth
The Company pursues an external growth strategy to enable shareholders to
benefit from potential value to be realized from acquisitions, development,
redevelopment, and opportunities generated by the Company's property management
operations. The Company's external growth strategies include:
. acquiring office and industrial buildings priced lower than replacement
cost, with an emphasis on Class A suburban office 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 businesses.
The Company believes that its substantial experience in the real estate
business will enable it to address effectively the risks associated with its
external growth strategy, including the risks that investments in acquisitions,
development and redevelopment may fail to perform in accordance with
expectations and that management contracts may not be renewed upon expiration.
See "Risk Factors--Real Estate Investment Risks."
Acquisitions. The Company intends to continue its 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). From the IPO through March 18, 1997, the Company
has acquired six Office Properties containing approximately 900,000 net
rentable square feet and four Industrial Properties containing approximately
600,000 net rentable square feet. As of March 18, 1997, the Company had
agreements to acquire 29 office and industrial properties with approximately
3.5 million net rentable square feet. As of December 31, 1996, these Pending
Acquisitions were 91% leased. The Company believes that the Pending
Acquisitions will immediately contribute to its earnings and have favorable
growth prospects. See "Risk Factors--Real Estate Investment Risks."
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. Since the IPO, the Company has
commenced the development of two industrial buildings containing a total of
approximately 420,000 net rentable square feet, one of which is pre-leased, and
has substantially completed an approximately 21,000 net rentable square foot
addition to an existing Industrial Property for estimated Total Development
Costs of $25.6 million. See "Properties--Development/Redevelopment Properties."
Redevelopment. The Company will pursue selectively the redevelopment of its
Properties and of any other properties acquired as opportunities arise. The
Company has announced that, by the end of the third quarter of 1997, it intends
to begin redeveloping the Cumberland Office Park Properties with the
construction of a new office building that will contain 150,000 net rentable
square feet. See "Properties--Development/Redevelopment Properties."
Third-Party Management. As of December 31, 1996, the Company manages, in
addition to the Properties, approximately 32 million net rentable square feet
of office and industrial space owned by third parties. The managed properties
are located in 17 markets and contain over 1,900 tenants. In addition to
property management and leasing, the Company offers a full range of fee-based
services, including tenant construction, marketing, insurance, accounting, tax,
real estate law, acquisition, disposition, facilities management, corporate
services and
7
<PAGE>
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 its long-
term customer base will continue to provide a stable source of fee income and
opportunities to expand on existing relationships. See "Business Objectives--
Financing Strategies."
PROPERTIES
The Properties consist of the 34 Office Properties comprising approximately
4.7 million net rentable square feet and the 63 Industrial Properties
comprising approximately 5.6 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, and One
Northwestern Plaza, in which the Company owns a 100% leasehold interest. Since
the IPO, the Company has commenced development of two industrial buildings that
will contain a total of approximately 420,000 net rentable square feet and has
substantially completed an approximately 21,000 net rentable square foot
addition to an existing Industrial Property. See "Properties--
Development/Redevelopment Properties." The Company also owns six development
parcels, which can support approximately 1.3 million net rentable square feet
of development, and has options to acquire interests in (a) four development
parcels that can support approximately 975,000 net rentable square feet of
office space and (b) three development parcels that can support approximately
890,000 net rentable square feet of industrial space. See "Properties--
Development Parcels." As of March 18, 1997, the Company had agreements to
acquire 15 office buildings containing approximately 1.6 million net rentable
square feet and 14 industrial buildings containing approximately 1.9 million
net rentable square feet. Upon the acquisition of the Pending Acquisitions, the
Company will acquire interests in two development parcels that can support
570,000 net rentable square feet of office space and two development parcels
that can support 400,000 net rentable square feet of industrial space. There
can be no assurance that all of these Pending Acquisitions will be completed.
See "Risk Factors--Risk that Pending Acquisitions Will Not Close; Unallocated
Proceeds."
8
<PAGE>
The following chart contains certain information regarding the Properties and
the Pending Acquisitions:
<TABLE>
<CAPTION>
NET PERCENT
YEAR(S) NUMBER RENTABLE LEASED
BUILT/ OF SQUARE AS OF
PROPERTY NAME MARKET RENOVATED BUILDINGS FEET 12/31/96
- ------------- -------------------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
OFFICE PROPERTIES
INITIAL PROPERTIES:
Cumberland Office
Park................. Atlanta, GA 1972-1980 9 530,228 97%
One Northwestern Pla-
za(/1/).............. Suburban Detroit, MI 1989 1 241,751 96%
Broadmoor Aus-
tin(/2/)............. Austin, TX 1991 7 1,112,236 100%
Park West C2.......... Dallas, TX 1989 1 344,216 94%
Park West E1.......... Dallas, TX 1982 1 182,739 100%
Park West E2.......... Dallas, TX 1985 1 200,590 99%
5307 East Mocking-
bird................. Dallas, TX 1979/1993 1 118,316 88%
Walnut Glen Tower..... Dallas, TX 1985 1 464,289 93%
Cottonwood Office Cen-
ter.................. Dallas, TX 1986 3 164,111 100%
Plaza on Bachman
Creek................ Dallas, TX 1986 1 125,903 98%
3141 Fairview Park
Drive................ Northern Virginia 1988 1 192,108 88%
8521 Leesburg Pike.... Northern Virginia 1984/1993 1 145,257 100%
--- ---------- ---
Subtotal/Weighted Average for Initial Properties...... 28 3,821,744 97%
=== ========== ===
ACQUIRED PROPERTIES:
FHP Building.......... Denver, CO 1983 1 198,370 95%
O'Hare Plaza II....... Chicago, IL 1986 1 233,650 87%
1717 Deerfield........ Chicago, IL 1985 1 137,904 100%
2411 Dulles Corner
Road................. Northern Virginia 1990 1 176,522 100%
2455 Horsepen Road.... Northern Virginia 1989 1 104,150 100%
4401 Fair Lakes
Court................ Northern Virginia 1988 1 58,621 96%
--- ---------- ---
Subtotal/Weighted Average for Acquired Properties..... 6 909,217 95%
=== ========== ===
PENDING ACQUISITIONS:
Pacific Gateway Office
Center............... Los Angeles, CA 1982/1990 1 223,731 92%
Natomas Corporate Cen-
ter.................. Sacramento, CA 1984-1991 6 564,606 89%
Crescent Centre....... Atlanta, GA 1986 1 237,727 95%(/3/)
Corporetum Office Cam-
pus.................. Chicago, IL 1984-1987 5 323,728 97%
Seven Mile Cross-
ing(/4/)............. Suburban Detroit, MI 1988-1990 2 244,630 96%
--- ---------- ---
Subtotal/Weighted Average for Pending Acquisitions.... 15 1,594,422 93%
=== ========== ===
Subtotal/Weighted Average for Office Properties and
Pending Acquisitions................................. 49 6,325,383 96%
=== ========== ===
INDUSTRIAL PROPERTIES
INITIAL PROPERTIES:
Los Angeles Industrial
Properties........... Los Angeles, CA 1972-1984 18 1,252,708 100%
Baltimore Industrial
Properties........... Baltimore, MD 1986-1990 6 730,777 99%
Kansas City Industrial
Properties........... Kansas City, MO 1972-1978 7 1,341,880 100%
Dallas Industrial
Properties........... Dallas, TX 1970-1984 6 426,962 98%
Houston Industrial
Properties........... Houston, TX 1986 5 75,231 88%
Milwaukee Industrial
Properties........... Milwaukee, WI 1970-1987 17 1,218,324 87%
--- ---------- ---
Subtotal/Weighted Average for Initial Properties...... 59 5,045,882 96%
=== ========== ===
ACQUIRED PROPERTIES:
Chicago Industrial
Properties........... Chicago, IL 1988 3 226,076 100%
5211 South 3rd
Street............... Milwaukee, WI 1974 1 360,000 100%
--- ---------- ---
Subtotal/Weighted Average for Acquired Properties..... 4 586,076 100%
=== ========== ===
PENDING ACQUISITIONS:
The Colonnade II...... Los Angeles, CA 1968-1991 6 466,708 89%
Day Creek Industrial
Park(/5/)............ Los Angeles, CA 1997 2 228,382 35%
16801 South Exchange.. Chicago, IL 1987 1 455,858 100%
Route 100 Build-
ing(/6/)............. Baltimore, MD 1974/1995 1 143,924 100%
8779 Greenwood Place.. Baltimore, MD 1978/1992 1 142,140 100%
Six Flags Distribution
Center(/6/).......... Dallas, TX 1988 2 237,344 100%
Bridgestone Distribu-
tion Center.......... Houston, TX 1982 1 215,000 100%
--- ---------- ---
Subtotal/Weighted Average for Pending Acquisitions.... 14 1,889,356 89%
=== ========== ===
Subtotal/Weighted Average for Industrial Properties
and Pending Acquisitions............................. 77 7,521,314 95%
=== ========== ===
Consolidated Total/Weighted Average for All Proper-
ties................................................. 126 13,846,697 95%
=== ========== ===
</TABLE>
9
<PAGE>
- --------
(/1/The)Operating Partnership owns a 100% leasehold interest in this Property.
(/2/The)Operating Partnership owns a 49.9% interest in the general partnership
that owns a 100% leasehold interest in these Properties. The Company
accounts for its interest in this partnership under the equity method. The
net rentable square feet for these Properties reflects the entire area at
these Properties and the Base Rent data for the Properties reflects the
Company's receipt of 49.9% of such rent.
(/3/As)of March 18, 1997, this property was 87% leased.
(/4/Upon)acquisition, the Company would own a 100% leasehold interest in this
property.
(/5/This)property was recently completed and is in its initial lease-up phase.
Rent rate information assumes terms of the first year of lease. The Company
closed on this Pending Acquisition on March 25, 1997.
(/6/The)Company closed on these Pending Acquisitions on March 19, 1997.
THE OFFERING
All of the Common Shares offered hereby are being sold by the Company.
<TABLE>
<S> <C>
Common Shares Offered by the Company...... 10,000,000
Common Shares and Units Outstanding After
the Offering............................. 33,576,392(/1/)
Use of Proceeds........................... To acquire the Pending Acquisitions
and repay related indebtedness, and
for general corporate purposes.
New York Stock Exchange Symbol............ "PP"
</TABLE>
- --------
(/1/Includes)3,295,995 Units, but excludes 1,500,000 Common Shares issuable
upon exercise of the Underwriters' overallotment option and 1,651,938
Common Shares reserved for issuance upon exercise of options granted
pursuant to the 1996 Share Incentive Plan.
DISTRIBUTIONS
The Company currently pays regular quarterly distributions to the holders of
Common Shares. The first distribution, for the period from the closing of the
IPO through December 31, 1996, was $.31 per share, which is equivalent to a
quarterly distribution of $.40 per share and an annual distribution of $1.60
per share. On March 18, 1997, the Company declared a distribution of $.40 per
share for the first quarter of 1997 payable on April 17th to shareholders of
record on March 31, 1997. Future distributions by the Company will be at the
discretion of the Board of Trustees and will depend on the actual cash
available for distribution, 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." Distributions by the Company
to the extent of its current and accumulated earnings and profits for federal
income tax purposes generally will be taxable to stockholders as ordinary
income. Distributions in excess of current and accumulated earnings and profits
will be treated as a non-taxable reduction of the shareholder's basis in its
Common Shares to the extent thereof, and thereafter as taxable gain.
Distributions that are treated as a reduction of the shareholder's basis in its
Common Shares will have the effect of deferring taxation until the sale of the
shareholder's shares. The Company has determined that, for federal income tax
purposes, approximately $.18 (or approximately 57%) of the $.31 per share
distribution paid for the partial fourth quarter of 1996 represented return of
capital to shareholders. The Company believes that, in the future, the portion
of the distribution representing a return of capital will be lower and no
assurances can be given regarding what percent of future dividends will
constitute return of capital for federal income tax purposes.
10
<PAGE>
TAX STATUS OF THE COMPANY
The Company intends to continue 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 received at the closing of
the IPO and will receive at the closing of the Offering an opinion of its legal
counsel that the Company qualifies 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. Failure to qualify as a REIT would
subject the Company to tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates, and distributions to the
Company's shareholders in any such year would not be deductible by the Company.
The Company has adopted the calendar year as its taxable year. In connection
with the Company's election to be taxed as a REIT, the Company's Declaration of
Trust imposes restrictions on the transfer of the Common Shares. 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 consolidated historical financial
data for the Company as of December 31, 1996 and for the period October 22,
1996 to December 31, 1996, (ii) summary combined historical financial data for
the Predecessor Company (as defined herein) as of December 31, 1995 and 1994
and for the period January 1, 1996 to October 21, 1996 and the years ended
December 31, 1995 and 1994, and (iii) pro forma financial data for the Company
as of and for the year ended December 31, 1996. The combined financial
statements of the Predecessor Company include (i) 100% of the assets and
results of operations from 47 Properties owned by the Operating Partnership 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 in which the
Prentiss Group (as defined herein) owned the Property; (iii) 100% of the assets
and results of operations of the Plaza on Bachman Creek for the portion of the
periods in which the Prentiss Group owned the Property; (iv) a 25% equity
investment in the Broadmoor Austin Properties; (v) a 15% equity investment in
the Park West C2 Property for the portion of the periods in which the Prentiss
Group owned its 15% non-controlling interest; and (vi) results of operations of
the Prentiss Properties Service Business (conducted primarily by a
predecessor). The Properties owned by the Operating Partnership prior to the
IPO consisted of Cumberland Office Park, 5307 East Mockingbird, Walnut Glen
Tower, 8521 Leesburg Pike, all of the Industrial Properties in Baltimore,
Maryland except 9050 Junction Drive, and all of the Industrial Properties in
Kansas City, Missouri, Dallas, Texas and Milwaukee, Wisconsin.
The summary consolidated historical balance sheet and operating data of the
Company as of December 31, 1996 and for the period from October 22, 1996 to
December 31, 1996 and the summary combined historical balance sheet and
operating data of the Predecessor Company at December 31, 1995 and 1994 and for
the period January 1, 1996 to October 21, 1996 and for the years ended December
31, 1995 and 1994 have been derived from historical consolidated and combined
financial statements audited by Coopers & Lybrand L.L.P., whose reports with
respect thereto are included elsewhere in this Prospectus. The following data
should be read in conjunction with (i) the pro forma financial statements and
notes thereto of the Company; (ii) the historical consolidated and combined
financial statements and notes thereto for the Company and Predecessor Company;
and (iii) "Management's Discussion and Analysis of Financial Condition and
Results of Operations," each included elsewhere in this Prospectus.
Pro forma financial operational data is presented as if the IPO, the
Formation Transactions, the acquisition of the Acquired Properties, the
completion of the Offering, the closing of the Mortgage Loan and the
acquisition of the Pending Acquisitions had occurred on January 1, 1996 and the
pro forma balance sheet data is presented as if the acquisition of the
Properties acquired through March 18, 1997, the closing of the Mortgage Loan,
the completion of the Offering and the acquisition of the Pending Acquisitions
had occurred on December 31, 1996. 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 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. For instance,
the pro forma consolidated statement of income data does not include earnings
from the Company's cash and cash equivalents of approximately $71.5 million.
12
<PAGE>
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY HISTORICAL
--------------------------- ----------------------------------
PRO FORMA
YEAR ENDED HISTORICAL YEAR ENDED DEC. 31,
DECEMBER 31, OCT. 22, 1996- JAN. 1, 1996- --------------------
1996 DEC. 31, 1996 OCT. 21, 1996 1995 1994
------------ -------------- ------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Rental income........... $ 117,312 $ 13,485 $ 27,086 $ 29,423 $ 25,256
Mortgage interest....... 1,269 -- -- -- --
Fee and other in-
come(/1/).............. 3,265 302 17,510 25,741 26,702
---------- --------- --------- --------- ---------
Total revenues........ 121,846 13,787 44,596 55,164 51,958
Operating ex-
penses(/1/)............ 35,133 4,670 24,845 31,127 33,178
Real estate taxes....... 11,450 1,162 3,085 3,030 2,691
Interest expense........ 16,309 846 5,951 3,882 3,191
Depreciation and amorti-
zation................. 22,277 2,696 5,993 7,060 5,451
Other depreciation and
amortization........... -- -- -- 106 106
Equity in joint venture
and unconsolidated
subsidiaries(/1/)...... 5,926 1,427 18 11 13
---------- --------- --------- --------- ---------
Income before gain on
sale of property and
minority interest...... 42,603 5,840 4,740 9,970 7,354
Gain on sale of proper-
ty..................... -- -- 378 -- 1,718
Minority interest(/2/).. (4,263) (844) -- -- --
---------- --------- --------- --------- ---------
Net income (loss)..... $ 38,340 $ 4,996 $ 5,118 $ 9,970 $ 9,072
========== ========= ========= ========= =========
Net income per share.... $ 1.27 $ 0.25 -- -- --
========== =========
Weighted average number
of shares outstanding.. 30,280 20,002 -- -- --
========== =========
BALANCE SHEET DATA (END
OF PERIOD):
Real estate, before
accumulated
depreciation(/3/)...... $ 765,750 $ 501,035 -- $ 153,148 $ 151,673
Real estate, after
accumulated
depreciation(/3/)...... 747,243 482,528 -- 141,368 144,366
Cash and cash equiva-
lents.................. 71,452 7,226 -- 1,033 9,133
Total assets............ 878,135 531,026 -- 154,635 164,307
Debt on real es-
tate(/3/).............. 213,376 128,800 -- 46,442 46,732
Total liabilities....... 236,553 151,977 -- 50,769 51,713
Shareholders' equity.... 577,832 325,221 -- 103,866 112,594
OTHER DATA (END OF PERI-
OD):
EBITDA (Company's 90.2%
pro forma and 86.0%
historical
share)(/4/)............ $ 81,566 $ 9,843 $ 17,594 $ 22,106 $ 17,879
Funds from Operations
(Company's 90.2% pro
forma and 86.0%
historical
share)(/5/)............ 60,397 7,684 9,983 15,578 11,945
Cash flow from operating
activities............. (/6/) 10,275 12,268 16,238 13,059
Cash flow from investing
activities............. (/6/) (353,809) (32,985) (4,301) (40,909)
Cash flow from financing
activities............. (/6/) 350,759 21,283 (20,037) 35,378
PROPERTY DATA (END OF
PERIOD):(/7/)
Number of Properties.... 126 95 57 55 54
Total GLA in sq. ft..... 13,847,000 9,944,000 6,642,000 6,323,000 5,976,000
Occupancy %............. 95% 97% 95% 97% 96%
</TABLE>
13
<PAGE>
- --------
(/1/The)Manager's operations are combined with the property operations in the
historical statements of the Predecessor Company and are accounted for
under the equity method in the Company's historical and pro forma
statements; therefore, the historical statements of the Predecessor Company
include the Manager's revenues and expenses on a gross basis in the
respective income and expense line items and the Company's historical and
pro forma statements present the Manager's net operations in the line item
titled "Equity in joint venture and unconsolidated subsidiaries." Equity in
joint venture and unconsolidated subsidiaries includes the Company's 49.9%
interest in the partnership owning the Broadmoor Austin Properties (the
"Broadmoor Austin Partnership") on a historical and pro forma basis, and
the Predecessor Company's 25% interest in the Broadmoor Austin Partnership,
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 (6) in the footnotes to the consolidated
financial statements and combined financial statements of the Company and
Predecessor Company, respectively. Equity in joint venture and
unconsolidated subsidiaries on a historical basis also includes the
Predecessor Company's 15% general partnership interest in the Park West C2
Property. The operations and accounts are consolidated on a historical and
pro forma basis for the Company.
(/2/Represents)an approximate 9.8% and 14.0% interest in the Operating
Partnership which is applicable to the holders of Units on a pro forma and
historical basis respectively, and minority interests in other partnerships
majority-owned by the Operating Partnership.
(/3/In)accordance with generally accepted accounting principles ("GAAP"), the
pro forma balance sheet as of December 31, 1996 reflects the Company's
investment in the Broadmoor Austin Properties 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," "Real estate, after
accumulated depreciation" and "Debt on real estate." The following schedule
represents the Balance Sheet Data as of December 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 information purposes only:
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
12/31/96 FOR COMBINING PRO FORMA 12/31/96
BALANCE SHEET BROADMOOR'S BALANCE SHEET DATA
DATA AS PRESENTED 49.9% OWNERSHIP BROADMOOR COMBINED
----------------- --------------- ------------------
<S> <C> <C> <C>
Real estate, before
accumulated
depreciation........... $765,750 $69,781 $835,531
Real estate, after accu-
mulated depreciation... $747,243 $57,812 $805,055
Debt on real estate..... $213,376 $69,860 $283,236
</TABLE>
(/4/EBITDA)means operating income before mortgage and other interest, income
taxes, depreciation and amortization. The Company believes EBITDA is useful
to investors as an indicator of the Company's ability to service debt and
pay cash distributions. EBITDA, as calculated by the Company, may not be
comparable to EBITDA reported by other REITs that do not define EBITDA
exactly as the Company defines that term. EBITDA does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to operating income or net income as an
indicator of performance or as an alternative to cash flows from operating
activities as an indicator of liquidity. The Company's EBITDA for the
respective periods is calculated as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY HISTORICAL
---------------------------- -------------------------------------
YEAR ENDED
PRO FORMA HISTORICAL DEC. 31,
YEAR ENDED OCT. 22, 1996- JAN. 1, 1996- ----------------------
DEC. 31, 1996 DEC. 31, 1996 OCT. 21, 1996 1995 1994
------------- -------------- ------------------------- ----------
(IN THOUSAND, EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C>
EBITDA:
Net Income ............. $38,340 $ 4,996 $ 5,118 $ 9,970 $ 9,072
Add:
Interest expense....... 16,309 846 5,951 3,882 3,191
Real estate
depreciation and
amortization.......... 22,277 2,696 5,993 7,060 5,451
Other depreciation and
amortization.......... -- -- -- 106 106
EBITDA of
unconsolidated
subsidiaries.......... 5,859 1,700 -- -- --
EBITDA of
unconsolidated joint
venture............... 9,394 1,810 3,792 4,698 4,700
Minority interest in Op-
erating Partnership.... 4,175 824 -- -- --
Less:
Gain on sale of proper-
ty.................... -- -- (378) -- (1,718)
Equity in joint venture
and unconsolidated
subsidiaries.......... (5,926) (1,427) (18) (11) (13)
------- ------- ---------- ---------- ----------
EBITDA.................. $90,428 $11,445 $ 20,458 $ 25,705 $20,789
======= ======= ========== ========== ==========
EBITDA (Company's 90.2%
pro forma and 86.0%
historical share)...... $81,566 $ 9,843 $ 17,594 $ 22,106 $17,879
======= ======= ========== ========== ==========
</TABLE>
14
<PAGE>
(/5/The)Company generally considers funds from operations an appropriate
measure of liquidity of an equity REIT because industry analysts have
accepted it as a performance measure of equity REITs. "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's Funds from Operations may not be comparable to Funds from
Operations reported by other REITs that do not define that term using the
current NAREIT definition. 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 as presented in the audited consolidated and
combined financial statements and notes thereto of the Company and
Predecessor Company 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. The Company's and
Predecessor Company's Funds from Operations for the respective periods is
calculated as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY HISTORICAL
----------------------------- ------------------------------------
YEAR ENDED
PRO FORMA HISTORICAL DEC. 31,
YEAR ENDED OCT. 22, 1996- JAN. 1, 1996- ---------------------
DEC. 31, 1996 DEC. 31, 1996 OCT. 21, 1996 1995 1994
-------------- -------------- ------------------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
Net Income.............. $38,340 $4,996 $ 5,118 $ 9,970 $ 9,072
Add:
Real estate deprecia-
tion and amortiza-
tion.................. 22,277 2,696 5,993 7,060 5,451
Real estate
depreciation and
amortization of
unconsolidated joint
venture............... 2,167 419 875 1,084 1,084
Minority interest in
Operating Partner-
ship.................. 4,175 824 -- -- --
Less:
Gain on sale of proper-
ty.................... -- -- (378) -- (1,718)
------- ------ ---------- ---------- ----------
Funds from Operations.. $66,959 $8,935 $ 11,608 $ 18,114 $ 13,889
======= ====== ========== ========== ==========
Funds from Operations
(Company's 90.2% pro
forma and 86.0% his-
torical share)........ $60,397 $7,684 $ 9,983 $ 15,578 $ 11,945
======= ====== ========== ========== ==========
</TABLE>
(/6/Pro)forma information relating to cash flow from operating, investing and
financing activities has not been included because the Company believes
that the information would not be meaningful due to the number of
assumptions required in order to calculate this information.
(/7/With)respect to the Property Data of the Predecessor Company, the
information includes the Broadmoor Austin Properties, Park West C2, 3141
Fairview Park Drive and Plaza on Bachman Creek Properties only for the end
of the periods subsequent to the Prentiss Group's acquisition of an
ownership interest in the respective Properties.
15
<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.
RISK THAT PENDING ACQUISITIONS WILL NOT CLOSE; UNALLOCATED PROCEEDS
While the Operating Partnership has agreements to acquire the Pending
Acquisitions and has commenced its due diligence with respect to those
properties, the closing of the majority of Pending Acquisitions is scheduled
to occur within 60 days after the Offering. The acquisition contracts relating
to the Pending Acquisitions are subject to customary closing conditions.
Therefore, there can be no assurances that the Company will acquire all of the
Pending Acquisitions. If the Operating Partnership does not complete the
acquisition of any of the Pending Acquisitions, for whatever reason, following
the completion of the Offering, the net proceeds from the Offering designated
for the purchase of such Pending Acquisition or Pending Acquisitions will have
no specific designated use. In addition, the Company has not yet identified
uses for approximately $64.9 million of the net proceeds from this Offering.
There can be no assurance that the Company will be able to apply any such net
proceeds towards acquisitions that meet the Company's acquisition criteria. If
the Company is unable to close the acquisition of a significant number of the
Pending Acquisitions and to locate additional available acquisitions after the
Offering, the Company's ability to increase distributable cash flow per share
would be adversely affected.
RISKS ASSOCIATED WITH RAPID GROWTH; RISKS ASSOCIATED WITH THE ACQUISITION OF
SUBSTANTIAL NEW PROPERTIES; LACK OF OPERATING HISTORY
The Company has experienced and may continue to experience 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. Seventeen of the Properties have relatively short or no operating
history under management by the Company or affiliates of the Prentiss Group
prior to their acquisition by the Company. None of the Pending Acquisitions
are currently managed by the Company. The Company has had limited control over
the operation of these Properties and the Pending Acquisitions, 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.
RELIANCE ON MAJOR TENANTS
On a pro forma basis during the year ended December 31, 1996, the Company's
largest tenant, International Business Machines Corporation ("IBM"), accounted
for approximately 17% of the Company's 1996 Base Rent from the Properties
owned at December 31, 1996. The Company has two leases with IBM, one of which
expires in 1999 and the other in 2006. Although the Company is negotiating
with IBM for a new lease to replace the lease that expires in 1999, the
Company's cash flow would be adversely affected if such negotiations are
unsuccessful and another new tenant or tenants are not located to lease
substantially all of that space. Dr. Pepper/Cadbury North America, who
accounted for approximately 5% of the Company's 1996 Base Rent from the
Properties owned in 1996, has informed the Company that it will not renew its
lease at the Walnut Glen Tower Property when it expires in July 1998. Although
the Company is negotiating the terms of a lease with a new tenant for
substantially all of that space, the Company's cash flow would be adversely
affected if such negotiations are unsuccessful and another new tenant or
tenants are not located to lease that space. The Company would also be
adversely affected in the event of bankruptcy or insolvency of, or a downturn
in the business of, any major tenants which resulted in a failure or delay in
the tenants' rent payments. See the tables of the Company's largest tenants
and lease expirations under the captions "Properties--Office Properties and
Pending Office Acquisitions" and "--Industrial Properties--Pending Industrial
Acquisitions."
16
<PAGE>
RECENTLY ORGANIZED ENTITY
The Company has been recently organized and has a limited operating history.
Although the officers of the Company have experience in acquiring, owning,
managing, leasing, developing and constructing office and industrial
properties, they have limited experience in operating a REIT.
ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT, STAGGERED BOARD AND POWER TO ISSUE
ADDITIONAL SHARES
POTENTIAL EFFECTS OF OWNERSHIP LIMITATION. For the Company to maintain its
qualification as a REIT under the Code, no more than 50% in value of the
outstanding shares of beneficial interest of the Company may be owned,
directly or 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 9.8% of the number
of outstanding Common Shares (after the closing of the Offering) or of the
number of Preferred Shares of any series of Preferred Shares (the "Ownership
Limitation"). 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 shares of beneficial interest of the Company
in excess of the Ownership Limit would result in the termination of the
Company's status as a REIT. See "Description of Shares of Beneficial
Interest--Restrictions on Transfer." The foregoing restrictions on
transferability and ownership will continue to apply until (i) the Board of
Trustees determines that it is no longer in the best interests of the Company
to continue to qualify as a REIT and (ii) there is an affirmative vote of a
majority of the votes entitled to be cast on such matter at a regular or
special meeting of the shareholders of the Company.
The Ownership Limit 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 "Description of Shares of Beneficial Interest--
Restrictions on Transfer."
POTENTIAL EFFECTS OF 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."
POTENTIAL EFFECTS OF ISSUANCE OF ADDITIONAL SHARES. The Company's
Declaration of Trust authorizes the Board of Trustees to (i) amend the
Declaration of Trust, without shareholder approval, to increase or decrease
the aggregate number of shares of beneficial interest or the number of shares
of beneficial interest of any class, including Common Shares, 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." Although the Board of
Trustees has no such intention to do so at the present time, it could
establish a class or series of shares of beneficial interest 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
17
<PAGE>
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."
TAX RISKS
FAILURE TO QUALIFY AS A REIT. The Company has operated and intends to
continue 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 has qualified and will continue
to so qualify. 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. Because the Company has a
limited history of operating so as to qualify as a REIT, there can be no
assurance that the Company will do so successfully. 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 alternative 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 continue 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 avoid corporate income taxation of the earnings that it
distributes, the Company generally is 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 has made and intends to continue to make distributions to its
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. The Company's income consists primarily of its share
of the income of the Operating Partnership, and the cash available for
distribution by the Company to its shareholders consists 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.
18
<PAGE>
FAILURE OF THE OPERATING PARTNERSHIP TO BE CLASSIFIED AS A PARTNERSHIP FOR
FEDERAL INCOME TAX PURPOSES; NEGATIVE 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") have been and
will continue to 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 partnerships, and not as corporations or
associations taxable as corporations 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 such 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 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
RISING INTEREST RATES. The Line of Credit bears interest at a variable rate
equal to one-month LIBOR (approximately 5.66% per annum on March 24, 1997)
plus 175 basis points. 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."
DEBT FINANCING AND POTENTIAL ADVERSE EFFECTS ON CASH FLOWS AND
DISTRIBUTIONS. 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 the closing of
the Offering and the Pending Acquisitions, the Company expects to have
outstanding indebtedness, including the Company's pro rata share of Joint
Venture Debt (approximately $69.9 million), of approximately $283.2 million,
all of which will be secured by certain of the Properties, with maturities
ranging from 1998 to 2007, including approximately $91.9 million of
indebtedness due in 2001. If principal payments due at maturity cannot be
refinanced, extended or paid with proceeds of other capital transactions, such
as the issuance of 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.
CONSTRUCTION LOANS AND RISKS ASSOCIATED WITH SALE OR FORECLOSURE. 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.
19
<PAGE>
GEOGRAPHIC CONCENTRATIONS IN DALLAS, CHICAGO, LOS ANGELES AND NORTHERN
VIRGINIA
Properties and Pending Acquisitions that provide 21%, 11%, 10% and 10% of
the Company's 1996 Base Rent from the Properties and Pending Acquisitions are
located in the Dallas, Chicago, Los Angeles and Northern Virginia areas,
respectively. 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,
particularly sensitive to the economic conditions in Dallas, Chicago, Los
Angeles and Northern Virginia. The Company's revenues and the value of its
properties (including the Pending Acquisitions) 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).
CONFLICTS OF INTERESTS IN THE FORMATION TRANSACTIONS AND THE BUSINESS OF THE
COMPANY
FORMATION TRANSACTIONS NOT AT ARM'S LENGTH. The principal transactions in
connection with the formation of the Company (the transactions described
elsewhere in this Prospectus under the caption "Formation Transactions") and
by which the Company acquired 87 Properties in connection with the IPO were
not the result of arm's-length negotiations. Messrs. Prentiss, August and
DuBois (the "Prentiss Principals"), who are senior executive officers of the
Company, had pre-existing ownership interests in certain Properties, the
Prentiss Properties Service Business and certain of the other assets acquired
by the Company through their direct or indirect interests in the Predecessor
Company and affiliates (the "Prentiss Group"), and received, directly or
indirectly, units of limited partnership interests in the Operating
Partnership ("Units") in exchange for such interests in the Formation
Transactions. There was no independent valuation or appraisal of the interests
contributed to the Company by the Prentiss Group in connection with the
Formation Transactions. Accordingly, there can be no assurance that the price
paid by the Company for those assets did not exceed the value of the assets
acquired by the Company.
RISK OF LESS VIGOROUS ENFORCEMENT OF TERMS OF CONTRIBUTION AND OTHER
AGREEMENTS. The Prentiss Principals each, directly or indirectly, had
ownership interests in certain of the Properties and in the other assets
acquired by the Company in the Formation Transactions. The Company, under the
agreements relating to the contribution of such interests, is entitled to
indemnification and damages in the event of breaches of representations or
warranties. Each of the Prentiss Principals has 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.
RISK OF DIFFERING OBJECTIVES BETWEEN PRENTISS PRINCIPALS AND COMPANY UPON
SALE, REFINANCING OR PREPAYMENT OF INDEBTEDNESS OF PROPERTIES. The Prentiss
Principals and affiliates may have unrealized taxable gain associated with
their Units. Because the Prentiss Principals may suffer different and more
adverse tax consequences than the Company upon the sale or refinancing of the
Initial Properties that were contributed by the Prentiss Principals, the
Prentiss Principals and the Company may have different objectives regarding
the appropriate pricing and timing of any sale or refinancing of such Initial
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 and DuBois) may influence the Company not to sell, or
refinance or prepay the indebtedness associated with, certain Properties even
though such event might otherwise be financially advantageous to the Company,
or may influence the Company to refinance certain Properties with a high level
of debt. See "Policies With Respect to Certain Activities--Conflict of
Interest Policies." The Company has agreed
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that it will not dispose of The Plaza on Bachman Creek Property prior to
December 31, 1999, unless such disposition is structured as a tax-deferred
like-kind exchange under Section 1031 of the Code.
RISKS THAT POLICIES WITH RESPECT TO CONFLICTS OF INTERESTS MAY NOT ELIMINATE
INFLUENCE OF CONFLICTS. The Company has adopted certain policies intended to
minimize conflicts of interest, including 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 Trustees
of the Company that are not affiliated with any affiliate of the Company (the
"Independent Trustees") or by the holders of 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 includes a provision permitting each individual Trustee,
including each Independent Trustee, 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."
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 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."
DEPENDENCE ON KEY PERSONNEL
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. Each of
Messrs. Prentiss and August have entered into an employment agreement with the
Company. See "Management--Employment Agreements." Certain assets of the
Prentiss Group were not contributed to the Company in the Formation
Transactions 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.
CONTROL OF MANAGEMENT
None of the trustees or officers of the Company is selling any Common Shares
in the Offering. Upon completion of the Offering, management of the Company as
a group will beneficially own approximately 9.8% of the total issued and
outstanding Common Shares and Units (which will be exchangeable by the holders
for cash or, at the election of the General Partner, Common Shares on a one-
for-one basis beginning in October 1998). See "Principal and Management
Shareholders." The Company currently expects that the General Partner would
elect to exchange such Units for Common Shares. Mr. Prentiss serves as
Chairman and Chief Executive Officer of the Company. Mr. August serves as
President and Chief Operating Officer of the Company. Mr. DuBois serves as
Executive Vice President and Managing Director--Southwest Region of the
Company. In addition, Messrs. Prentiss and August serve as 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."
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RISKS ASSOCIATED WITH ACQUISITION, REDEVELOPMENT, 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--
Acquisitions." 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 redevelopment, development and construction
of office and industrial buildings in accordance with the Company's growth
policies. See "Business Objectives--Growth Strategies." Risks associated with
the Company's redevelopment, development and construction activities may
include: abandonment of redevelopment or development opportunities;
construction costs of a property exceeding original estimates, possibly making
the property uneconomical; occupancy rates and rents at a newly renovated or
completed property may not be sufficient to make the property profitable;
financing may not be available on favorable terms for redevelopment or
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 redevelopment or development
activities, regardless of whether they are ultimately successful, typically
require a substantial portion of management's time and attention.
Redevelopment or 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.
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 and any properties acquired in the future, including the Pending
Acquisitions, 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 is and will be derived from rental income on its 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 these properties failed to meet their lease
obligations. At any time, a tenant at any such property 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
22
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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 and the Pending Acquisitions are subject to
operating risks common to commercial real estate in general, any and all of
which may adversely affect occupancy or rental rates. These 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 tenants at these
properties 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 distributions to stockholders
could be adversely affected if operating expenses increase without a
corresponding increase in revenues.
RISKS OF NON-RENEWAL OF LEASES AND NON-RELETTING OF SPACE. The Company is
and will be subject to the risk that upon expiration of leases for space
located in the Properties and Pending Acquisitions, respectively, 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 8% and 17% of the
total net rentable square feet in the Properties and the Pending Acquisitions
will expire in 1997 and in 1998, respectively. See the tables of lease
expirations under the captions "Properties--Office Properties and Pending
Office Acquisitions" and "--Industrial Properties and Pending Industrial
Acquisitions." 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. If the Company were unable to relet promptly 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 and the Pending Acquisitions in attracting tenants to lease space.
Some of these competing properties are newer, better located or better
capitalized than the Company's Properties and the Pending Acquisitions.
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 and will
be obtained on all of the Pending Acquisitions prior to their acquisitions.
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
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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 ESAs 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 the Los Angeles Industrial Properties detected certain ground-water
contamination at the site. The Operating Partnership, the owner of the
Industrial Properties in Milwaukee, Wisconsin prior to the Formation
Transactions, and the prior owner of the Los Angeles Industrial Properties
prior to the Formation Transactions, have entered 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." The Pacific Gateway Office Center is located adjacent
to the Los Angeles Industrial Properties and may have similar groundwater
contamination. The Company is currently negotiating with a prior owner of the
site to obtain an arrangement similar to that obtained with regard to the Los
Angeles Industrial Properties. The Company believes that even without these
arrangements, the Company's effective share of any costs to remediate
contamination of any of these sites would not have a material adverse affect
on the Company's financial statements.
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 or
Pending Acquisitions 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 or Pending
Acquisitions after the related ESA report was completed of which the Company
is otherwise unaware.
EFFECT OF AMERICANS WITH DISABILITIES ACT COMPLIANCE ON CASH FLOW AND
DISTRIBUTIONS. 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 and the Pending Acquisitions 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 and the Pending Acquisitions 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 and the Pending Acquisitions 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 carries and will carry comprehensive liability,
fire, flood (where appropriate), extended coverage and rental loss insurance
with respect to the Properties and the Pending Acquisitions that it acquires,
respectively, with policy specifications and insured limits customarily
carried for similar properties. The Company intends to carry similar insurance
policies on the Pending Acquisitions. 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
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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. The Company, through the Operating Partnership, owns a 49.9% general
partnership interest in the Broadmoor Austin Partnership, which owns the
Broadmoor Austin Office Properties in Austin, Texas. Through this general
partnership interest, the Company acts as managing partner and has the sole
authority to conduct the business and affairs of the Broadmoor Austin
Partnership subject to certain limitations. The Prentiss Group owns a 0.1%
interest in the Broadmoor Austin Partnership, which the Company will have an
option to acquire beginning October 23, 1997. IBM, the tenant leasing 100% of
the space at the Property, owns the remaining 50% interest in the Broadmoor
Austin Partnership.
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 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.
RISKS ASSOCIATED WITH ILLIQUIDITY 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.
RISKS OF THIRD-PARTY PROPERTY MANAGEMENT, LEASING, DEVELOPMENT AND
CONSTRUCTION BUSINESS AND RELATED SERVICES
RISKS ASSOCIATED WITH TERMINATION OF MANAGEMENT AND LEASING CONTRACTS. The
Company, through the Operating Partnership and the Manager, engages in the
business of management, leasing, development and construction of properties
owned by third parties. Risks associated with these activities include the
risk that the related contracts (which are typically cancelable upon 30-days
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 is divided into two classes: voting
common stock, all of which is owned by a company wholly-
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owned by Michael V. Prentiss, and nonvoting common stock, all of which is 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, has the ability to elect
the directors of the Manager. The Company is not able to elect directors and,
therefore, is not 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."
POSSIBLE ADVERSE EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON SHARES
One of the factors that influences the market price of the Common Shares in
public markets is the annual distribution rate on the Common Shares and the
effective yield on an investment in the Common Shares. An increase in market
interest rates may lead prospective purchasers of the Common Shares to bid
down the market price of the Common Shares in order to increase the effective
yield from future distributions.
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 the Formation Transactions, the Company placed 1,879,897
Common Shares with certain former limited partners of the Operating
Partnership (the "Continuing Investors") and 3,295,995 Units with the Prentiss
Group. See "Formation Transactions." The Continuing Investors will not be
permitted to offer, sell, contract to sell or otherwise dispose of their
Common Shares, except in certain circumstances, until October 22, 1997 (the
first anniversary of the closing of the IPO). The Prentiss Principals will not
be permitted to offer, sell, contract to sell or otherwise dispose of Units,
except in certain circumstances, until October 22, 1998. See "Shares Available
for Future Sale." At the conclusion of such periods, the Common Shares held by
the Continuing Investors and upon the subsequent exchange of Units, the Common
Shares held by the Prentiss Principals received therefor may be sold in the
public market pursuant to shelf registration statements which the Company is
obligated to file on behalf of the Continuing Investors and the Prentiss
Principals, or pursuant to any available exemptions from registration.
Options to purchase a total of 1,651,938 Common Shares have been granted to
certain executive officers, employees and trustees of the Company. 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.
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THE COMPANY
GENERAL
The Company is a self-administered and self-managed real estate investment
trust ("REIT") that acquires, owns, manages, leases, develops and builds
office and industrial properties throughout the U.S. The Company owns
interests in a diversified portfolio of 97 office and industrial properties
(the "Properties") containing approximately 10.4 million net rentable square
feet. The Properties are located in 12 major U.S. markets and consist of 34
office buildings (the "Office Properties") containing approximately 4.7
million net rentable square feet and 63 industrial buildings (the "Industrial
Properties") containing approximately 5.6 million net rentable square feet. As
of December 31, 1996, the Office Properties were approximately 96% leased to
299 tenants, and the Industrial Properties were approximately 97% leased to
123 tenants. The Company manages approximately 42 million square feet in 352
office and industrial properties that are owned by the Company and by third
parties, and that are leased to approximately 2,300 tenants. The Company also
has two industrial buildings under development which together contain
approximately 420,000 net rentable square feet, and has substantially
completed an approximately 21,000 net rentable square foot addition to an
existing Industrial Property.
The Company has capitalized on its national presence by acquiring and
developing properties in selected markets that the Company believes have
strong growth potential. Since its initial public offering in October 1996
(the "IPO"), the Company has acquired six Office Properties with approximately
900,000 net rentable square feet and four Industrial Properties with
approximately 600,000 net rentable square feet for Total Acquisition Costs of
approximately $135.7 million (collectively, the "Acquired Properties"). As of
March 15, 1997, the Company had agreements to acquire 15 office buildings with
approximately 1.6 million net rentable square feet and 14 industrial buildings
with approximately 1.9 million net rentable square feet (collectively, the
"Pending Acquisitions") for Total Acquisition Costs of approximately $266.5
million. As of December 31, 1996, the Pending Acquisitions were 91% leased.
The Company believes that its national scope and depth of management has
enabled it to integrate the Acquired Properties into its portfolio while
continuing to pursue aggressively other opportunities, such as the Pending
Acquisitions. The Company operates from its Dallas, Texas headquarters and its
four other regional offices (Los Angeles, California; Chicago, Illinois;
Washington, D.C.; and Atlanta, Georgia). The Company is a full-service real
estate company with approximately 625 employees and in-house expertise in
acquisitions, development, property management, leasing, facilities
management, corporate services, finance, tax, construction, dispositions,
marketing, accounting and real estate law. The Company's nine senior
executives have an average of 20 years of experience in the real estate
industry and an average tenure of 12 years with the Company and its
predecessors. See "Management--Trustees and Executive Officers." Upon
completion of the Offering, management will own in the aggregate 9.8% of the
outstanding Common Shares and Units.
The Company seeks to grow by acquiring additional office and industrial
properties and through development, primarily on a build-to-suit basis or
where pre-leasing is possible. The Company believes that its five regional
offices, presence in 21 markets throughout the U.S., diversified base of
approximately 2,300 tenants and existing relationships with 46 management
clients provide it with a competitive advantage in identifying and competing
for new office and industrial acquisition and development opportunities
nationally. Additionally, the Company believes that the infrastructure from
its extensive property management operations has and will continue to allow it
to grow in new and existing markets without the substantial cost of opening
new offices or hiring and training new employees. All of the Acquired
Properties and the Pending Acquisitions are located in markets in which the
Company previously owned or managed properties. The Company also seeks to
maximize the profitability of its Properties by maintaining high occupancy
rates, increasing rental rates and reducing operating costs.
The Company is a Maryland real estate investment trust which expects to
continue to qualify as a REIT for federal income tax purposes, and is self-
administered and self-managed. See "Federal Income Tax
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Considerations." The Company's principal executive offices are located at 3890
W. Northwest Highway, Suite 400, Dallas, Texas 75220, and its telephone number
is (214) 654-0886.
ORGANIZATION OF THE COMPANY
The Company operates from its Dallas, Texas headquarters and its four other
regional offices (Los Angeles, California; Chicago, Illinois; Washington,
D.C.; and Atlanta, Georgia). Managing directors lead each of the Company's
regions, and each region has development, acquisition, property management,
construction and client development expertise. The Company's headquarters
supports the regional offices by providing numerous services including
accounting, information systems, financing, real estate law, insurance, human
resources, and training.
<TABLE>
<CAPTION>
NET RENTABLE
SQUARE FEET
(IN THOUSANDS)
NUMBER NUMBER -------------------
REGION MANAGING DIRECTOR OF STATES OF EMPLOYEES OWNED MANAGED(/1/)
- ------ ------------------- --------- ------------ ------ ------------
<S> <C> <C> <C> <C> <C>
West............ David C. Robertson 10 180 1,253 12,950
Southwest....... Dennis J. DuBois 6 194 3,411 9,034
Midwest......... Lawrence J. Krueger 14 24 3,760 392
Mid-Atlantic.... Robert K. Wiberg 13 86 1,408 5,861
Southeast....... James B. Meyer 7 48 530 3,544
Headquarters.... -- -- 96 -- --
--- --- ------ ------
Total......... 50 628 10,362 31,781
=== === ====== ======
</TABLE>
- --------
(/1/Managed)for third parties at December 31, 1996.
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 closing of the Offering.
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.............................. 100.0% 90.2%
Management(/1/)............................... -- 9.8%
</TABLE>
THE OPERATING PARTNERSHIP
<TABLE>
<CAPTION>
OWNERSHIP INTEREST OWNERSHIP INTEREST
BEFORE EXCHANGE AFTER EXCHANGE
OWNER OF UNITS OF UNITS
----- ------------------ ------------------
<S> <C> <C>
Company(/2/)........................... 90.2% 100.0%
Management(/1/)........................ 9.8% --
</TABLE>
THE MANAGER
<TABLE>
<CAPTION>
VOTING NON-VOTING
OWNER COMMON STOCK COMMON STOCK ECONOMIC INTEREST
----- ------------ ------------ -----------------
<S> <C> <C> <C>
Operating Partnership(/3/)...... -- 100.0% 95.0%
Michael V. Prentiss(/4/)........ 100.0% -- 5.0%
</TABLE>
- --------
(/1/Includes)entities wholly owned by one or more executive officers and
trusts for the benefit of their family members.
(/2/Includes)a 0.2% interest owned by the General Partner.
28
<PAGE>
(/3/The)Operating Partnership also owns promissory notes of the Manager with
initial aggregate principal balances of approximately $34.75 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.
See "Business Objectives--Third-Party Management."
(/4/The)voting common stock of the Manager is owned by a corporation that is
wholly owned by Michael V. Prentiss.
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 external and internal growth. The Company's external growth
strategy is designed to enable shareholders to benefit from potential value to
be realized from acquisitions, development, redevelopment, and opportunities
generated by the Company's property management operations. The Company's
external growth strategies are to (i) acquire existing industrial and office
buildings that meet its acquisition criteria and are available at discounts to
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's internal growth
strategy is to increase cash flow from the Properties and any future
properties primarily by (a) improving occupancy rates, (b) renewing or
replacing expiring leases with new leases at higher rental rates, (c)
maintaining high lease renewal rates, and (d) applying its benchmarking and
best practices methodologies to identify and capitalize on cost reduction
opportunities.
The Company initially has focused its external growth activities in certain
of its existing markets and in new markets that the Company believes exhibit
favorable investment environments. The Company believes that its existing
operations in its markets (a) provide a competitive advantage in identifying
acquisition and development opportunities in its markets and (b) allow it to
assimilate new properties into its portfolio with minimal integration issues
and without incurring significant incremental administrative expenses. All of
the Acquired Properties and the Pending Acquisitions are in markets in which
the Company previously owned or managed properties. The following table sets
forth the geographic distribution of the Properties, the Pending Acquisitions
and the Company's managed properties.
29
<PAGE>
GEOGRAPHIC PROPERTY BREAKDOWN
<TABLE>
<CAPTION>
NUMBER OF PROPERTIES NET RENTABLE SQUARE FEET
---------------------------------------------- -------------------------------------------------
PENDING PENDING
MARKET OWNED ACQUISITIONS(/1/) MANAGED(/2/) TOTAL OWNED ACQUISITIONS(/1/) MANAGED(/2/) TOTAL
- ------ ----- ----------------- ------------ ----- ------ ----------------- ------------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WESTERN REGION:
Phoenix, Arizona....... -- -- 5 5 -- -- 522 522
Los Angeles,
California............ 18 9(/3/) 105 132 1,253 919(/3/) 7,779 9,951
Oakland, California.... -- -- 16 16 -- -- 1,614 1,614
Sacramento,
California............ -- 6 15 21 -- 565 1,510 2,075
San Francisco,
California............ -- -- 8 8 -- -- 1,525 1,525
--- --- --- --- ------ ----- ------ ------
Subtotal Western
Region................ 18 15 149 182 1,253 1,484 12,950 15,687
SOUTHWEST REGION:
Denver, Colorado....... 1 -- 1 2 198 -- 190 388
Amarillo, Texas........ -- -- 3 3 -- -- 482 482
Austin, Texas.......... 7(/4/) -- 1 8 1,112(/4/) -- 389 1,501
Dallas, Texas.......... 15 2(/5/) 30 47 2,026 237(/5/) 6,010 8,273
Fort Worth, Texas...... -- -- 1 1 -- -- 1,008 1,008
Houston, Texas......... 5 1 4 10 75 215 955 1,245
--- --- --- --- ------ ----- ------ ------
Subtotal Southwest
Region................ 28 3 40 71 3,411 452 9,034 12,897
MIDWEST REGION:
Chicago, Illinois...... 5 6 5 16 598 780 392 1,770
Suburban Detroit,
Michigan.............. 1(/6/) 2(/7/) -- 3 242(/6/) 245(/7/) -- 487
Kansas City, Missouri.. 7 -- -- 7 1,342 -- -- 1,342
Milwaukee, Wisconsin... 18 -- -- 18 1,578 -- -- 1,578
--- --- --- --- ------ ----- ------ ------
Subtotal Midwest
Region................ 31 8 5 44 3,760 1,025 392 5,177
MID-ATLANTIC REGION:
Washington, D.C........ -- -- 6 6 -- -- 2,116 2,116
Baltimore, Maryland.... 6 2(/8/) -- 8 731 286(/8/) -- 1,017
Northern New Jersey.... -- -- 1 1 -- -- 263 263
Northern Virginia...... 5 -- 27 32 677 -- 3,482 4,159
--- --- --- --- ------ ----- ------ ------
Subtotal Mid-Atlantic
Region................ 11 2 34 47 1,408 286 5,861 7,555
SOUTHEAST REGION:
Orlando, Florida....... -- -- 4 4 -- -- 683 683
Atlanta, Georgia....... 9 1 23 33 530 238 2,861 3,629
--- --- --- --- ------ ----- ------ ------
Subtotal Southeast
Region................ 9 1 27 37 530 238 3,544 4,312
Total................. 97 29 255 381 10,362 3,485 31,781 45,628
=== === === === ====== ===== ====== ======
</TABLE>
- --------
(/1/None)of the Pending Acquisitions currently is managed by the Company.
(/2/The)data regarding managed properties is as of December 31, 1996.
(/3/The)Company closed on two of the Pending Acquisitions in this market on
March 25, 1997.
(/4/The)Company owns a non-controlling 49.9% interest in the general
partnership that owns a leasehold interest in the Broadmoor Austin
Properties in Austin, Texas.
(/5/The)Company closed on the Pending Acquisitions in this market on March 19,
1997.
(/6/The)Company owns 100% of a leasehold interest in the One Northwestern
Plaza Property in Southfield, Michigan.
(/7/Upon)acquisition, the Company would own a 100% leasehold interest in these
properties.
(8) The Company closed on one of the Pending Acquisitions in this market on
March 19, 1997.
GROWTH STRATEGIES
Internal Growth
The Company seeks to maximize the profitability of the Properties by
renewing leases, maintaining high occupancy rates, increasing rental rates,
and reducing operating costs. The Company seeks 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 also seeks to renew existing leases,
which reduces the cost of lease rollovers, reduces rental revenue fluctuations
and enhances long-term relationships with national tenants that may have space
needs in the Company's other markets.
The Company strives 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 benchmarking and best
30
<PAGE>
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.
Occupancy rates on the Properties acquired in the IPO increased from 95% in
1995 to 97% in 1996. In the same periods, effective rent increased from $10.22
per square foot to $11.14 per square foot, for the Office Properties acquired
in the IPO and effective rent increased from $3.04 per square foot to $3.07
per square foot, for the Industrial Properties acquired in the IPO.
Acquisitions
The Company employs a 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). From
the IPO through March 18, 1997, the Company has acquired six Office Properties
containing approximately 900,000 net rentable square feet and four Industrial
Properties containing approximately 600,000 net rentable square feet for Total
Acquisition Costs of $135.7 million. As of March 18, 1997, the Company had
agreements to acquire 29 office and industrial buildings with approximately
3.5 million net rentable square feet for Total Acquisition Costs of $266.5
million. As of December 31, 1996, these Pending Acquisitions were 91% leased.
The Company believes that the Pending Acquisitions will immediately
contribute to earnings and have favorable growth prospects. See "Risk
Factors--Real Estate Investment Risks." The Company believes that its five
regional offices, presence in 21 markets throughout the U.S., diversified base
of approximately 2,300 tenants and existing relationships with 46 different
management clients provides 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. All of the Properties
acquired since the IPO and all of the Pending Acquisitions are in markets in
which the Company previously owned or managed properties.
In evaluating potential acquisition opportunities, the Company relies 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 occupancy of and demand for
properties of a similar type in the same geographic market; (iii) the
construction quality and condition of the property; (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.
Development
In addition to acquisition and redevelopment opportunities, the Company
intends to continue to develop properties selectively in markets with
favorable supply/demand characteristics. The Company intends to develop
properties in which it controls all aspects of the development process,
including site selection, project concept,
31
<PAGE>
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 it will also consider selective
opportunities for speculative development. Since the IPO, the Company has
commenced the development of two industrial buildings containing a total of
approximately 420,000 net rentable square feet, one of which is pre-leased,
and has substantially completed an approximately 21,000 net rentable square
foot addition to an existing Industrial Property for estimated Total
Development Costs of $25.6 million. See "Properties--Development/Redevelopment
Properties."
The Company owns or has options to acquire the following 13 development
parcels, each of which is located either within an industrial park developed
by the Company or adjacent to one of the Company's Properties.
DEVELOPMENT PARCELS
<TABLE>
<CAPTION>
PARCEL MAXIMUM
ACREAGE ADJACENT PROPERTY/ DEVELOPMENT COMPANY'S
(APPROX.) GENERAL LOCATION MARKET (SQUARE FEET) INTEREST
--------- --------------------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C>
OFFICE:
1.6 Cumberland Office Park Atlanta 150,000 Fee
4.2 Walnut Glen Dallas, TX 500,000 Fee
2.0 Broadmoor Austin Austin, TX 200,000 Leasehold(/1/)
6.4 3141 Fairview Park Drive Northern Virginia 200,000 Option(/2/)
4.7 Park West Dallas, TX 350,000 Option(/2/)(/3/)
5.1 2411 Dulles Corner Road Northern Virginia 200,000 ROFR(/4/)
16.2 Continental Executive Parke Chicago, IL 225,000 Option(/2/)
---------- ---------
40.1 Office Total 1,825,000
---------- ---------
INDUSTRIAL:
3.6 Airworld Drive Kansas City, MO 100,000 Fee
11.0 Airport Properties Milwaukee, WI 300,000 Fee
4.0 Airport Properties Milwaukee, WI 50,000 Fee
15.2 Park West Commerce Center Dallas, TX 320,000 Fee
14.8 Park West Commerce Center Dallas, TX 320,000 Option
23.6 Continental Executive Parke Chicago, IL 250,000 Option
---------- ---------
72.2 Industrial Total 1,340,000
---------- ---------
102.2 Total 3,165,000
========== =========
</TABLE>
- --------
(/1/The)Company owns a 49.9% interest in the general partnership that owns the
leasehold interest in this parcel.
(/2/The)Company has exercised its option to acquire these parcels and is
currently negotiating the pricing or completing due diligence pursuant to
the terms of the related option agreements.
(/3/The)Company has an option to acquire a 50% partnership interest in the
partnership owning this parcel.
(/4/The)Company retains a right of first refusal to purchase the parcel
through June 1998.
32
<PAGE>
PENDING ACQUISITION DEVELOPMENT PARCELS
Upon the acquisition of the Pending Acquisitions, the Company will acquire
interests in the following four development parcels.
<TABLE>
<CAPTION>
COMPANY'S
PARCEL MAXIMUM INTEREST
ACREAGE DEVELOPMENT AFTER
(APPROX.) PENDING ACQUISITION MARKET (SQUARE FEET) CLOSING
--------- -------------------------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
OFFICE:
10.9 Natomas Corporate Center Sacramento 170,000 Fee
25.0 Natomas Corporate Center Sacramento 400,000 ROFR(/1/)
-------
35.9 Office Total 570,000
-------
INDUSTRIAL:
14.5 The Colonnade II Los Angeles 300,000 Fee(/2/)
8.8 16801 South Exchange Chicago 100,000 Fee
-------
23.3 Industrial Total 400,000
-------
59.2 Pending Acquisitions Total 970,000
=======
</TABLE>
- --------
(/1/The)Company has a right of first refusal to purchase the parcel for a
period of three years from the closing of the acquisition of the Natomas
Corporate Center properties.
(/2/This)parcel is currently utilized for a truck terminal. The Company
believes that this use is a significant underutilization of this site and
intends to redevelop the parcel into two newly constructed industrial
warehouse facilities as market conditions warrant.
Redevelopment
The Company will pursue selectively the redevelopment of its Properties and
of any other properties acquired as opportunities arise. The Company has
announced that, by the end of the third quarter of 1997, it intends to begin
redeveloping of the Cumberland Office Park Properties with the construction of
a new office building that will contain 150,000 net rentable square feet. See
"Properties--Development/Redevelopment Properties."
THIRD-PARTY MANAGEMENT
Business Profile
At December 31, 1996, the Company managed 255 office and industrial
properties for 46 third-party management clients. These properties are located
in 17 markets throughout the U.S., contain approximately 32 million net
rentable square feet and are leased to over 1,900 tenants.
The Company's management business serves a broad base of clients, including
major financial institutions and pension funds, large corporate users, real
estate advisory firms and real estate investment groups. The Company believes
it has successfully developed and maintained relationships with its clients,
having served its ten largest management clients (measured by total revenues)
for an average of 6.1 years. Since 1989, approximately 60% of new third-party
management business has been generated from existing clients.
33
<PAGE>
The following table sets forth the number of properties, total net rentable
square feet and occupancy for the properties managed by the Company as of
December 31, 1996 and managed by the Company or its predecessors for each of
the five years ended December 31, 1996:
MANAGED PROPERTIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
MANAGED OFFICE PROPERTIES
Number..................................... 119 113 69 117 83
Total Net Rentable Square Feet............. 22,982 18,650 15,951 23,232 16,862
Occupancy %................................ 87% 87% 82% 88% 88%
MANAGED INDUSTRIAL PROPERTIES
Number..................................... 136 148 155 164 144
Total Net Rentable Square Feet............. 8,799 10,361 9,888 11,158 10,322
Occupancy %................................ 95% 94% 94% 87% 87%
TOTAL MANAGED PROPERTIES
Number..................................... 255 261 224 281 227
Total Net Rentable Square Feet............. 31,781 29,011 25,839 34,390 27,184
Occupancy %................................ 90% 90% 87% 87% 88%
Number of Third-Party Owners............... 46 38 36 37 24
</TABLE>
In addition to property management and leasing, the Company offers its
clients a full range of fee-based services, including tenant construction,
marketing, insurance, accounting, tax, real estate law, acquisition,
disposition, facilities management, corporate services and asset management.
Third-Party Management Income of the Manager
In accordance with GAAP, the Company accounts for its investment in the
Manager on the equity method of accounting and therefore does not report the
Manager's separate revenues and expenses. The table below reflects the
separate revenues and expenses of the Manager for the pro forma year ended
December 31, 1996.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED
DEC. 31, 1996
-------------
<S> <C>
Revenues.................................................. $21,858
Expenses.................................................. 16,118
-------
Net Income of Manager..................................... 5,740
=======
Company's Portion (included in the Company's 1996 pro
forma statement of income)............................... $ 5,498
=======
</TABLE>
Accounting and Economics
Due to the Operating Partnership's ownership of a non-controlling, non-
voting interest in the Manager, the Manager is accounted for under the equity
method of accounting. Accordingly, the combined operating statements for the
Company reflect its 95% interest in the net profit from the Manager in the
"Equity in joint venture and unconsolidated subsidiaries" line item. This
financial line item also includes the Company's share of net income from its
49.9% interest in the Broadmoor Austin Partnership, which amount totaled
approximately $428,000 for the pro forma year ended December 31, 1996. The
gross revenues and gross expenses from the third-party management contracts at
the Operating Partnership level are included in the Company's combined
operating statements in the "Management fees," "Property operating and
maintenance," "General office and administration" and "Personnel costs, net"
line items. Through the Operating Partnership's ownership of (a) the non-
voting equity interests (representing 95% of the economics) and (b) debt
interests in the Manager, the Company receives most of the after-tax economic
benefits from the Manager's third-party management business.
34
<PAGE>
FINANCING STRATEGIES
The Company's Debt Limitation policy limits its total combined indebtedness
plus its pro rata share of Joint Venture Debt to 50% of the Company's Total
Market Capitalization. The Company's organizational documents, however, do not
limit the amount of indebtedness that the Company may incur. The Company
currently has outstanding total indebtedness, including its pro rata share of
Joint Venture Debt on March 26, 1997, of approximately $271.2 million, or
approximately 29.3% of Total Market Capitalization based on a Common Share
price of $27.75. At the closing of the Offering and the Pending Acquisitions,
the Company will have outstanding total indebtedness, including its pro rata
share of Joint Venture Debt, of approximately $283.2 million, or approximately
23.3% of Total Market Capitalization.
35
<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 $262.7 million (approximately $302.2 million if the
Underwriters' overallotment option is exercised in full). The Company intends
to use approximately $197.8 million of the net proceeds from the Offering to
fund the purchase of the Pending Acquisitions, including the repayment of
amounts outstanding under the Line of Credit expected to be incurred to
acquire certain of the Pending Acquisitions. The remaining approximately $64.9
million of net proceeds will be used for general corporate purposes including
the acquisition of properties in the future or for additional working capital.
To the extent the Underwriters' overallotment option to purchase up to
1,500,000 Common Shares is exercised in full, the Company expects to use the
additional net proceeds of up to approximately $39.5 million to fund the
acquisition of properties in the future or for additional working capital.
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 continuing to qualify for
taxation as a REIT. Such investments may include, for example, government and
government agency securities, certificates of deposit and interest-bearing
bank deposits.
The Line of Credit is scheduled to mature on October 14, 1999 and bears
interest at a floating rate equal to LIBOR plus 175 basis points. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
36
<PAGE>
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
The Common Shares began trading on the NYSE on October 17, 1996 under the
symbol "PP." On March 24, 1997, the last reported sales price per Common Share
on the NYSE was $27.875, and there were approximately 81 holders of record of
the Common Shares on March 14, 1997. The table below sets forth the quarterly
high and low closing sales price per Common Share reported on the NYSE and the
distributions paid by the Company with respect to each such period.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW DISTRIBUTION
- ------------- ------- ------- ------------
<S> <C> <C> <C>
December 31, 1996 (from October 17, 1996)........ $25.125 $20.50 $.31(/1/)
March 31, 1997 (through March 20, 1997).......... $28.25 $24.625 $.40(/2/)
</TABLE>
- --------
(/1/The)Company paid a distribution of $.31 per Common Share on January 17,
1997 for the period from October 22, 1996 (the closing of the IPO) through
December 31, 1996, which is approximately equivalent to a quarterly
distribution of $.40 and an annual distribution of $1.60 per Common Share.
(/2/On)March 18, 1997, the Company declared a distribution of $.40 per share
for the first quarter of 1997 payable on April 17, 1997 to shareholders of
record on March 31, 1997.
Distributions by the Company to the extent of its current and 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 has determined
that for federal income tax purposes, approximately $.18 per share (or
approximately 57%) of the $.31 per share distribution paid for the partial
fourth quarter of 1996 represented a return of capital to shareholders. The
Company believes that, in the future, the portion of the distribution
representing a return of capital will be lower. No assurances can be given
regarding what percent of future dividends will constitute return of capital
for federal income tax purposes. In order to avoid corporate income taxation
of the earnings that it distributes, 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. In such a case, 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.
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."
37
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 on a historical and a pro forma basis to give effect to (i)
all Property acquisitions completed between December 31, 1996 and March 18,
1997 and the current borrowings under the Mortgage Loan incurred in connection
therewith and (ii) completion of the Offering, the application of the assumed
net proceeds therefrom and the completion of the Pending Acquisitions. 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>
DECEMBER 31, 1996
--------------------
(IN THOUSANDS)
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
DEBT.................................................. $128,800 $213,376(/1/)
MINORITY INTEREST..................................... 53,828 63,750
SHAREHOLDERS' EQUITY:
Common Shares, $.01 par value per share; 100,000,000
authorized; 20,279,897 issued and outstanding on a
historical basis and 30,279,897 issued and
outstanding on a pro forma basis(/2/).............. 203 303
Preferred shares, $.01 par value per share,
20,000,000 authorized, no shares issued or
outstanding........................................ -- --
Additional paid-in capital............................ 326,309 578,962
Distribution in excess of accumulated earnings........ (1,291) (1,433)
-------- --------
Total shareholders' equity............................ 325,221 577,832
-------- --------
Total capitalization.................................. $507,849 $854,958
======== ========
</TABLE>
- --------
(/1/Excludes)the Company's pro rata share of $69.9 million of indebtedness of
the partnership that owns the Broadmoor Austin Properties. For more
detailed information on the operations and accounts of Broadmoor Austin,
refer to footnote (6) in the notes to the Company's and the Predecessor
Company's financial statements.
(/2/Does)not include Common Shares reserved for issuance upon (i) possible
exchange of 3,295,995 Units issued and outstanding and (ii) exercise of
1,651,938 options granted pursuant to the 1996 Share Incentive Plan. See
"Management--1996 Share Incentive Plan."
38
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth (i) selected consolidated historical
financial data for the Company as of December 31, 1996 and for the period
October 22, 1996 to December 31, 1996, (ii) selected combined historical
financial data for the Predecessor Company at December 31, 1995 and 1994 and
for the period January 1, 1996 to October 21, 1996 and the years ended
December 31, 1992 through 1995, and (iii) pro forma financial data for the
Company at and for the year ended December 31, 1996. The combined financial
statements of the Predecessor Company include (i) 100% of the assets and
results of operations from 47 Properties owned by the Operating Partnership
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 in
which the Prentiss Group owned the Property; (iii) 100% of the assets and
results of operations of the Plaza on Bachman Creek for the portion of the
periods in which the Prentiss Group owned the Property; (iv) a 25% equity
investment in the Broadmoor Austin Properties; (v) a 15% equity investment in
the Park West C2 Property for the portion of the periods in which the Prentiss
Group owned its 15% non-controlling interest; and (vi) results of operations
of the Prentiss Properties Service Business (conducted primarily by PPL). The
Properties owned by the Operating Partnership prior to the IPO consisted of
Cumberland Office Park, 5307 East Mockingbird, Walnut Glen Tower, 8521
Leesburg Pike, all of the Industrial Properties in Baltimore, Maryland except
9050 Junction Drive, and all of the Industrial Properties in Kansas City,
Missouri, Dallas, Texas and Milwaukee, Wisconsin.
The summary consolidated historical operating and balance sheet data of the
Company as of December 31, 1996 and for the period from October 22, 1996 to
December 31, 1996 and the summary combined historical operating and balance
sheet data of the Predecessor Company as of December 31, 1995 and 1994 and for
the period January 1, 1996 to October 21, 1996 and for the years ended
December 31, 1995 and 1994 have been derived from historical consolidated and
combined financial statements audited by Coopers & Lybrand L.L.P., whose
reports with respect thereto are included elsewhere in this Prospectus. The
following data should be read in conjunction with (i) the pro forma financial
statements and notes thereto of the Company; (ii) the historical consolidated
and combined financial statements and notes thereto for the Predecessor
Company; and (iii) "Management's Discussion and Analysis of Financial
Condition and Results of Operations," each included elsewhere in this
Prospectus.
Pro forma financial operational data is presented as if the IPO, the
Formation Transactions, the acquisition of the Acquired Properties, the
completion of the Offering, the closing of the Mortgage Loan and the
acquisition of the Pending Acquisitions had occurred on January 1, 1996 and
the pro forma balance sheet data is presented as if the acquisition of the
Properties acquired in 1997, the closing of the Mortgage Loan, the completion
of the Offering and the acquisition of the Pending Acquisitions had occurred
on December 31, 1996. 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 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. For instance,
the pro forma consolidated statement of income data does not include earnings
from the Company's cash and cash equivalents of approximately $71.5 million.
39
<PAGE>
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY HISTORICAL
------------------------- ----------------------------------------------------
HISTORICAL
YEAR ENDED DEC. 31,
PRO FORMA OCT. 22, 1996- JAN. 1, 1996- --------------------------------------
1996 DEC. 31, 1996 OCT. 21, 1996 1995 1994 1993 1992
--------- -------------- ------------- -------- -------- -------- --------
(IN THOUSAND, EXCEPT PER SHARE AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Rental income........... $ 117,312 $ 13,485 $ 27,086 $ 29,423 $ 25,256 $ 14,412 $ 8,169
Mortgage interest....... 1,269
Fee and other
income(/1/)............ 3,265 302 17,510 25,741 26,702 23,609 24,278
--------- --------- -------- -------- -------- -------- --------
Total revenues......... 121,846 13,787 44,596 55,164 51,958 38,021 32,447
Operating
expenses(/1/).......... 35,133 4,670 24,845 31,127 33,178 28,667 31,925
Real estate taxes....... 11,450 1,162 3,085 3,030 2,691 1,631 712
Interest expense........ 16,309 846 5,951 3,882 3,191 1,444 491
Real estate depreciation
and amortization....... 22,277 2,696 5,993 7,060 5,451 3,312 1,900
Other depreciation and
amortization........... -- -- -- 106 106 106 106
Equity in joint venture
and unconsolidated
subsidiaries(/1/)...... 5,926 1,427 18 11 13 (4) 2
--------- --------- -------- -------- -------- -------- --------
Income (loss) before
gain on sale of
property and minority
interest............... 42,603 5,840 4,740 9,970 7,354 2,857 (2,685)
Gain on sale of
property............... -- -- 378 -- 1,718 -- --
Minority interest(/2/).. (4,263) (844) -- -- -- -- --
--------- --------- -------- -------- -------- -------- --------
Net income (loss)...... $ 38,340 $ 4,996 $ 5,118 $ 9,970 $ 9,072 $ 2,857 $ (2,685)
========= ========= ======== ======== ======== ======== ========
Net income per share.... 1.27 .25 -- -- -- -- --
========= =========
Weighted average number
of shares outstanding.. 30,280 20,002 -- -- -- -- --
========= =========
BALANCE SHEET DATA (END
OF PERIOD):
Real Estate, before
accumulated
depreciation(/3/)...... $ 765,750 501,035 -- $153,148 $151,673 $ 89,116 $ 42,561
Real estate, after
accumulated
depreciation(/3/)...... 747,243 482,528 -- 141,368 144,366 85,549 41,182
Cash.................... 71,452 7,226 -- 1,033 9,133 1,605 8,004
Total assets............ 878,135 531,026 -- 154,635 164,307 117,819 53,327
Debt on real
estate(/3/)............ 213,376 128,800 -- 46,442 46,732 20,473 10,186
Total liabilities....... 236,553 151,977 -- 50,769 51,713 23,773 11,480
Shareholders' equity.... 577,832 325,221 -- 103,866 112,594 94,046 41,847
OTHER DATA (END OF
PERIOD):
EBITDA (Company's 90.2%
proforma and 86.0%
historical
share)(/4/)............ $ 81,566 $ 9,843 $ 17,594 $ 22,106 $ 17,879 $ 10,681 $ 3,879
Funds from Operations
(Company's 90.2%
proforma and 86.0%
historical
share)(/5/)............ $ 60,397 $ 7,684 $ 9,983 $ 15,578 $ 11,945 $ 6,238 $ 257
Cash flow from operating
activities............. (/6/) $ 10,275 $ 12,268 $ 16,238 $ 13,059 $ 6,115 $ (755)
Cash flow from investing
activities............. (/6/) $(353,809) $(32,985) $ (4,301) $(40,909) $(71,977) $(20,133)
Cash flow from financing
activities............. (/6/) $ 350,759 $ 21,283 $(20,037) $ 35,378 $ 59,463 $ 25,690
PROPERTY DATA (END OF
PERIOD):(/7/)
Number of Properties.... 126 95 57 55 54 47 23
Total GLA in sq. ft..... 13,847 9,944 6,642 6,323 5,976 4,793 2,733
Occupancy %............. 95% 97% 95% 97% 96% 95% 97%
</TABLE>
- --------
(/1/The)Manager's operations are combined with the property operations in the
historical statements of the Predecessor Company and are accounted for
under the equity method in the Company's historical and pro forma
statements; therefore, the historical statements of the Predecessor
Company include the Manager's revenues and expenses on a gross basis in
the respective income and expense line items and the Company's historical
and pro forma statements present the Manager's net operations in the line
item titled "Equity in joint venture and unconsolidated subsidiaries."
Equity in joint venture and unconsolidated subsidiaries includes the
Company's 49.9% interest in the Broadmoor Austin Partnership on a historical
and pro forma basis, and the Predecessor Company's 25% interest in the
Broadmoor Austin Partnership, 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 (6) in the
footnotes to the consolidated financial statements and combined financial
statements of the Company and Predecessor Company, respectively.
Equity in joint venture and unconsolidated subsidiaries on a historical
basis also includes the Predecessor Company's 15% general partnership
interest in the Park West C2 Property. The operations and accounts are
consolidated on a historical and pro forma basis for the Company.
40
<PAGE>
(/2/Represents)an approximate 9.8% and 14.0% interest in the Operating
Partnership which is applicable to the holders of Units on a pro forma and
historical basis, respectively, and minority interests in other
partnerships majority owned by the Operating Partnership.
(/3/In)accordance with GAAP, the pro forma balance sheet as of December 31,
1996 reflects the Company's investment in the Broadmoor Austin Properties
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," "Real estate, after accumulated depreciation" and "Debt on
real estate." The following schedule represents the Balance Sheet Data as
of December 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 information purposes only:
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
12/31/96 FOR COMBINING PRO FORMA 12/31/96
BALANCE SHEET BROADMOOR'S BALANCE SHEET DATA
DATA AS PRESENTED 49.9% OWNERSHIP BROADMOOR COMBINED
----------------- --------------- ------------------
<S> <C> <C> <C>
Real estate, before
accumulated
depreciation........... $765,750 $69,781 $835,531
Real estate, after
accumulated
depreciation........... $747,243 $57,812 $805,055
Debt on real estate..... $213,376 $69,860 $283,236
</TABLE>
(/4/EBITDA)means operating income before mortgage and other interest, income
taxes, depreciation and amortization. The Company believes EBITDA is
useful to investors as an indicator of the Company's ability to service
debt and pay cash distributions. EBITDA, as calculated by the Company, may
not be comparable to EBITDA reported by other REITs that do not define
EBITDA exactly as the Company defines that term. EBITDA does not represent
cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to operating income or net
income as an indicator of performance or as an alternative to cash flows
from operating activities as an indicator of liquidity. The Company's
EBITDA for the respective periods is calculated as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY
------------------------ -----------------------------------------------
HISTORICAL YEAR ENDED DEC. 31,
PRO FORMA OCT. 22, 1996- JAN. 1, 1996- ---------------------------------
1996 DEC. 31, 1996 OCT. 21, 1996 1995 1994 1993 1992
--------- -------------- ------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA:
Net Income (loss)....... $38,340 $ 4,996 $ 5,118 $ 9,970 $ 9,072 $ 2,857 $(2,685)
Add:
Interest expense....... 16,309 846 5,951 3,882 3,191 1,444 491
Real estate
depreciation and
amortization.......... 22,277 2,696 5,993 7,060 5,451 3,312 1,900
Other depreciation and
amortization.......... -- -- -- 106 106 106 106
EBITDA of
unconsolidated
subsidiaries.......... 5,859 1,700 -- -- -- -- --
EBITDA of
unconsolidated joint
venture............... 9,394 1,810 3,792 4,698 4,700 4,697 4,700
Minority interest in
Operating Partnership.. 4,175 824 -- -- -- -- --
Less:
Gain on sale of
property.............. -- -- (378) -- (1,718) -- --
Equity in joint venture
and unconsolidated
subsidiaries.......... (5,926) (1,427) (18) (11) (13) 4 (2)
------- ------- ------- ------- ------- ------- -------
EBITDA.................. $90,428 $11,445 $20,458 $25,705 $20,789 $12,420 $ 4,510
------- ------- ------- ------- ------- ------- -------
EBITDA (Company's 90.2%
and 86.0% pro forma and
historical share)...... $81,566 $ 9,843 $17,594 $22,106 $17,879 $10,681 $ 3,879
======= ======= ======= ======= ======= ======= =======
</TABLE>
41
<PAGE>
(/5/The)Company generally considers funds from operations an appropriate
measure of liquidity of an equity REIT because industry analysts have
accepted it as a performance measure of equity REITs. "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's Funds from Operations may not be comparable to Funds from
Operations reported by other REITs that do not define that term using the
current NAREIT definition. 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 consolidated and combined financial statements and notes
thereto of the Company and Predecessor Company 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. The Company's and Predecessor Company's Funds from
Operations for the respective periods is calculated as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANY HISTORICAL
------------------------ ----------------------------------------------
HISTORICAL YEAR ENDED DEC. 31,
PRO FORMA OCT. 22, 1996- JAN. 1, 1996- --------------------------------
1996 DEC. 31, 1996 OCT. 21, 1996 1995 1994 1993 1992
--------- -------------- ------------- ------- ------- ------ --------
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
Net Income (loss)...... $38,340 $4,996 $ 5,118 $ 9,970 $ 9,072 $2,857 $ (2,685)
Add:
Real estate
depreciation and
amortization.......... 22,277 2,696 5,993 7,060 5,451 3,312 1,900
Real estate
depreciation and
amortization of
unconsolidated joint
venture............... 2,167 419 875 1,084 1,084 1,084 1,084
Minority interest in
Operating
Partnership........... 4,175 824 -- -- -- -- --
Less:
Gain on sale of
property.............. -- -- (378) -- (1,718) -- --
------- ------ ------- ------- ------- ------ --------
Funds from Operations.. $66,959 $8,935 $11,608 $18,114 $13,889 $7,253 $ 299
------- ------ ------- ------- ------- ------ --------
Funds from Operations
(Company's 90.2% and
86.0% pro forma and
historical share)..... $60,397 $7,684 $ 9,983 $15,578 $11,945 $6,238 $ 257
======= ====== ======= ======= ======= ====== ========
</TABLE>
(/6/Pro)forma information relating to cash flow from operating, investing and
financing activities has not been included because the Company believes
that the information would not be meaningful due to the number of
assumptions required in order to calculate this information.
(/7/With)respect to the Property Data of the Predecessor Company, the
information includes the Broadmoor Austin Properties, Park West C2, 3141
Fairview Park Drive and Plaza on Bachman Creek Properties only for the end
of the periods subsequent to the Prentiss Group's acquisition of an
ownership interest in the respective Properties.
42
<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 consolidated and combined financial
statements and related notes thereto for the Company and the Predecessor
Company, respectively, appearing elsewhere in this Prospectus. The following
discussion is based primarily on the consolidated financial statements of the
Company for the period subsequent to formation of the Company and on the
combined financial statements of the Predecessor Company for the periods prior
to the 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) the results of operations of the Plaza on
Bachman Creek for the portion of the periods after a Prentiss Group member
acquired the property, (iv) a 25% equity interest in the Broadmoor Austin
properties, (v) a 15% equity interest in the Park West C2 property for the
portion of the periods in which the Prentiss Group owned a non-controlling
interest, and (vi) results of operations of the Prentiss Properties Service
Business conducted primarily by a member of the Prentiss Group in the period
presented. The Properties that were owned by the Operating Partnership prior
to the Formation Transactions are Cumberland Office Park, 5307 East
Mockingbird, Walnut Glen Tower, 8521 Leesburg Pike, all of the Industrial
Properties in Baltimore, Maryland except 9050 Junction Drive, and all of the
Industrial Properties in Kansas City, Missouri; Dallas, Texas; and Milwaukee,
Wisconsin.
Historical results set forth in the "Selected Financial Information," the
combined financial statements of the Predecessor Company, and the consolidated
financial statements of the Company should not be taken as an indication of
future performance of the Company. The financial information with respect to
the Company and the Predecessor Company may not be fully comparable due to the
differences between the operations of the Predecessor Company and the Company,
and between both of those entities and the prior owners of the Properties not
previously owned by the Predecessor Company.
RESULTS OF OPERATIONS
The Company's results of operations for the years ended December 31, 1995
and 1994 include the operations of the Predecessor Company. The results of
operations for the year ended December 31, 1996 include the operations of the
Predecessor Company for the period January 1, 1996 through October 21, 1996
and the operations of the Company from October 22, 1996 through December 31,
1996. Consequently, the comparison of the years ended December 31, 1996 and
1995 provides only limited information regarding the operations of the Company
as currently constituted.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Rental revenues increased by $11.1 million or 37.9%, due primarily to the
Properties acquired after December 31, 1995. Revenues for the Properties
acquired prior to December 31, 1995 increased by $0.6 million, or 2%, due
primarily to increases in rental income at the Cumberland Office Park Property
of $0.4 million, 5307 E. Mockingbird Property of $0.3 million, Walnut Glen
Property of $0.2 million and 8521 Leesburg Pike of $0.5 million, offset by
decreases of $0.4 million, $0.3 million and $0.1 million at the Kansas City
and Milwaukee Industrial Properties and other Properties, respectively. The
decreases at the Kansas City Industrial Properties resulted primarily from the
termination of a 200,000 square foot lease during the first half of 1996. 100%
of the Property has been leased and the Company will recognize rental income
on the lease beginning in February 1997. The decrease in the Milwaukee
Industrial Properties resulted primarily from the March 1996 bankruptcy of a
tenant previously occupying approximately 70,000 square feet. The Company is
currently marketing the space for lease.
With respect to Properties acquired prior to December 31, 1995, property
operating and maintenance expenses increased by $0.6 million for the year
ended December 31, 1996 from the year ended December 31, 1995, $0.3 million of
which relates to bad debt expense recognized on the above-mentioned bankrupt
tenant. The additional costs relates primarily to the properties with
increased rental income during 1996.
43
<PAGE>
Real estate taxes, on these Properties, increased by $0.3 million, resulting
primarily from increased property tax appraisals received on the Cumberland
Office Park and Walnut Glen Properties. The Company continues to contest these
increases.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Total Revenues increased by $3.2 million, or 6.2%, to $55.2 million for the
year ended December 31, 1995 from $52.0 million for the same period in 1994.
Rental revenues increased $4.2 million, or 16.5%, to $29.4 million from $25.3
million, primarily as a result of the Company's acquisition of certain
Industrial Properties in Baltimore, Maryland, and 8521 Leesburg Pike in late
1994 and two additional Industrial Properties in Kansas City, Missouri, in May
1994. These property additions accounted for approximately $2.9 million of the
increase in rental income; the remaining increase in rental income of
approximately $1.2 million was the result of increased rental rates and
occupancy rates in the existing portfolio which are estimated at $0.9 million
and $0.3 million, respectively. Fee and other income decreased $1.0 million,
or 3.6%, to $25.7 million from $26.7 million, primarily due to a decrease in
development fees of $5.1 million and a decrease in leasing and tenant services
fees of $1.9 million, offset by an increase in sale fees, other fees and other
income of $6.1 million. The decrease in development fees was primarily due to
the recognition of a significant fee in 1994 coupled with low development
activity during 1995. The leasing and tenant services fee decreases were due
to higher space rollover and leasing activity in 1994. Sale fees and other
fees increased due to property sales and fees received as a result of contract
termination payments.
Total Expenses increased by $0.6 million, or 1.3%, to $45.2 million for the
year ended December 31, 1995, from $44.6 million for the same period in 1994.
Operating expenses decreased by $0.1 million, or 0.2%, to $41.3 million from
$41.4 million. Operating expenses includes a decrease of $1.1 million in
compensation of the Manager's shareholders. Shareholder compensation was based
on earnings of the Manager and was a means of distributing those earnings to
the shareholders. The Manager had other decreases in operating expenses of
$1.8 million which primarily were related to personnel cost reductions.
Operating expenses of the Properties increased by $2.8 million. This increase
was comprised of an increase in property operating and maintenance expenses of
$0.9 million, an increase of $0.3 million in real estate taxes and an increase
of $1.6 million in depreciation and amortization. Approximately $2.0 of the
increase in property operating expense was attributable to the Property
additions discussed previously and the remainder of the increase, $0.9 million
was attributable to increased occupancy and an increase in amortization
expense. Mortgage interest expense increased $0.7 million, or 21.7%, to $3.9
million for the year ended December 31, 1995 from $3.2 million for 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.
Gains on sale of property for the year ended December 31, 1994, was $1.7
million. 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 $0.9 million,
or 9.9%, to $10.0 million from $9.1 million for 1994. As discussed above, the
increase in net income was the result of an increase in total revenues of $3.2
million, offset by an increase in total expenses of $0.6 million, and a
decrease in gains on sale of property of $1.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $7.2 million and $1.0 million at December 31,
1996 and December 31, 1995, respectively. The increase in cash and cash
equivalents is primarily a result of cash flows provided by operating and
financing activities exceeding cash flow used in investing activities. Net
cash provided by operating activities was $25.1 million for the year ended
December 31, 1996 compared to the $16.2 million for the year ended December
31, 1995. The increase is due primarily to the Formation Transactions and the
operations of the Company subsequent to the IPO.
44
<PAGE>
Net cash used in investing activities increased from $4.3 million for the
year ended December 31, 1995 to $395.4 million for the year ended December 31,
1996. This increase is due primarily to the Formation Transactions and
acquisition of Properties subsequent to the IPO.
Net cash provided by financing activities of $372.0 million for the year
ended December 31, 1996 increased from a cash use of $20.0 million for the
year ended December 31, 1995. This increase is primarily attributable to
transactions related to the IPO and mortgage loans and other indebtedness
incurred in the acquisition of real estate assets acquired subsequent to the
IPO.
Upon the closing of the Offering and the acquisition of the Pending
Acquisitions, the Company will have total outstanding indebtedness, including
the Company's pro rata share of Joint Venture Debt, of approximately $283.2
million, which will be secured by 64 Properties and an industrial building
being developed by the Company (the "Mortgage Debt"). Approximately $180.1
million of the Mortgage Debt consists of the Mortgage Loan, which the Company
obtained from an affiliate of Lehman in February 1997. The proceeds of this
loan were used (i) to refinance variable-rate debt incurred to fund a portion
of the Company's acquisition of interests in the Initial Properties and (ii)
to repay amounts outstanding under the Line of Credit. Approximately
$6.0 million of Mortgage Debt consists of debt assumed in connection with the
acquisition of the FHP Building Property after the IPO, and approximately
$12.0 million of the Mortgage Debt will be assumed by the Company if and when
it acquires Crescent Centre, which is one of the Pending Acquisitions. The
remainder of the Mortgage Debt consists of prior indebtedness of the Prentiss
Group that is secured by certain of the Properties. The following table sets
forth certain information regarding the Mortgage Debt that the Company expects
will be in place after the closing of the Pending Acquisitions.
MORTGAGE DEBT
<TABLE>
<CAPTION>
PRINCIPAL INTEREST ANNUAL
PROPERTY(IES) AMOUNT RATE AMORTIZATION MATURITY PAYMENT
------------- ------------ -------- ------------ ----------------- -----------
<S> <C> <C> <C> <C> <C>
Mortgage Loan........... $180,100,000(/1/) 7.57% None February 27, 2007 $13,633,570
FHP Building............ 6,000,000 7.30% None November 1, 2000 438,000
Crescent Centre(/2/).... 12,000,000 7.95% None February 28, 2001 954,000
Walnut Glen............. 10,000,000 7.50% None January 31, 2001 750,000
Broadmoor Austin(/3/)... 69,860,000 9.75% None April 1, 2001 6,811,350
Federal Express......... 5,276,000 7.51%(/4/) None June 30, 1998 396,228(/5/)
------------ ----- -----------
Total/Weighted Average.. $283,236,000 8.11% December 2004(/6/) $22,983,148
============ ===== ===========
</TABLE>
- --------
(/1/The)Mortgage Loan is secured by the following 54 Properties: Park West E1,
Park West E2, One Northwestern Plaza, 3141 Fairview Park Drive, O'Hare
Plaza II, 1717 Deerfield, 2411 Dulles Corner Road, 4401 Fair Lakes Court,
Kansas City Industrial Properties (seven Properties), Los Angeles
Industrial Properties (18 Properties), Milwaukee Industrial Properties (17
Properties), Chicago Industrial Properties (three Properties) and 5211
South 3rd Street.
(/2/Pending)Acquisition.
(/3/The)Company, through the Operating Partnership, owns 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.
(/4/Represents)a variable rate equal to LIBOR+1.85%; on March 24, 1997 LIBOR
was equal to 5.66%.
(/5/Interest)payments related to this construction loan will not be included
in interest expense as this will be capitalized as a cost of the project.
(/6/The)Company's Mortgage Debt will have a weighted average maturity of 7.9
years.
The Company currently has, and as of the closing of the Offering and the
Pending Acquisitions, the Company expects to have, no amounts outstanding
under its $150 million Line of Credit. The Company believes that the Line of
Credit is adequate for its needs in the immediate future. The Company intends
to use proceeds from the Line of Credit to fund future acquisitions and
development.
Pursuant to the Debt Limitation, the Company's policy is to limit combined
indebtedness plus its pro rata share of Joint Venture Debt so that at the time
such debt is incurred, it does not exceed 50% of the Company's Total Market
Capitalization. The Company currently has outstanding total indebtedness,
including its pro rata
45
<PAGE>
share of Joint Venture Debt, of approximately $271.2 million, or approximately
29.3% of Total Market Capitalization. At the closing of the Offering and the
Pending Acquisitions, the Company will have outstanding combined indebtedness,
together with its pro rata share of Joint Venture Debt, of approximately
$283.2 million, or approximately 23.3% of Total Market Capitalization, and
will have the approximate capacity to borrow up to an additional $648.5
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 Bylaws, 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 Properties require periodic investments of capital for tenant-
related capital expenditures and for general capital improvements. For the
years ended December 31, 1996, 1995 and 1994, the Properties and the Pending
Acquisitions, the Company's recurring non-incremental revenue generating
capital expenditures in its Properties have been $12,484,283, $14,685,125 and
$8,867,168, respectively. The average costs per square foot for the three year
period for Office Properties and Industrial Properties were $12.59 and $1.13,
respectively. The Company anticipates annual non-incremental revenue
generating capital expenditures on a per square foot basis to approximate
these historical amounts. See "Properties--Historical Non-Incremental Revenue-
Generating Capital Expenditures." Incremental revenue-generating tenant
improvement and leasing commissions for the years ended December 31, 1996,
1995 and 1994 were $2,354,409, $8,172,539 and $2,067,794, respectively. The
average costs per square foot for the three year period for incremental
revenue-generating tenant improvement costs and leasing commissions were
$15.55 for Office Properties and $3.71 for Industrial Properties. See
"Properties--Incremental Revenue-Generating Tenant Improvement Costs and
Leasing Commissions."
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 funded from
the Company's 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 is derived primarily from lease revenues from the
Properties and from the operations of the Manager. The Manager's sole source
of income is fees generated by its office and industrial real estate
management, leasing, development and construction businesses.
FUNDS FROM OPERATIONS
The Company generally considers Funds from Operations an appropriate measure
of liquidity of an equity REIT because industry analysts have accepted it as a
performance measure of equity REITs. "Funds from Operations" as defined by
NAREIT means net income (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring
and sales of property, plus depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. The Company
believes that in order to facilitate a clear understanding of its operating
results, Funds from Operations should be examined in conjunction with net
income (loss) as presented in the audited consolidated and combined financial
statements of the Company and Predecessor Company, respectively. Funds from
Operations does not
46
<PAGE>
represent cash generated from operating activities in accordance with
generally accepted accounting principles 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.
<TABLE>
<CAPTION>
HISTORICAL PREDECESSOR COMPANY HISTORICAL
-------------- ---------------------------------------------
YEAR ENDED DECEMBER 31,
OCT. 22, 1996- JAN. 1, 1996- -------------------------------
DEC. 31, 1996 OCT. 21, 1996 1995 1994 1993 1992
-------------- ------------- ------- ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FUNDS FROM OPERATIONS:
Net Income (loss)....... $4,996 $ 5,118 $ 9,970 $ 9,072 $2,857 $(2,685)
Add:
Real estate
depreciation and
amortization......... 2,696 5,993 7,060 5,451 3,312 1,900
Real estate
depreciation and
amortization of
unconsolidated joint
ventures............. 419 875 1,084 1,084 1,084 1,084
Minority interest in
Operating
Partnership.......... 824 -- -- -- --
Less:
Gain on sale of
property............. -- (378) -- (1,718) -- --
------ ------- ------- ------- ------ -------
Funds from Operations... $8,935 $11,608 $18,114 $13,889 $7,253 $ 299
====== ======= ======= ======= ====== =======
Funds from Operations
(Company's 86.0%
Share)................. $7,684 $ 9,983 $15,578 $11,945 $6,238 $ 257
====== ======= ======= ======= ====== =======
</TABLE>
The Company's share of Funds from Operations increased by $2.1 million for
the year ended December 31, 1996 from the year ended December 31, 1995, and
increased by $3.6 million for the year ended December 31, 1995, from the year
ended December 31, 1994 as a result of the factors discussed in the analysis
of operating results.
INFLATION
Most of the leases on the Properties and the Pending Acquisitions 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 terms from one month to 15
years, further reducing the impact on the Company of the adverse effects of
inflation.
47
<PAGE>
PROPERTIES
GENERAL
The Properties consist of the 34 Office Properties comprising approximately
4.7 million net rentable square feet and the 63 Industrial Properties
comprising approximately 5.6 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, and One
Northwestern Plaza, in which the Company owns a 100% leasehold interest. Since
the IPO, the Company has commenced development of two industrial buildings
that will contain a total of approximately 420,000 net rentable square feet
and has substantially completed an approximately 21,000 net rentable square
foot addition to an existing Industrial Property. See "--
Development/Redevelopment Properties." The Company also owns five development
parcels, which can support approximately 1.3 million net rentable square feet
of development and has options to acquire interests in (a) four development
parcels that can support approximately 975,000 net rentable square feet of
office space, and (b) three development parcels that can support approximately
890,000 net rentable square feet of industrial space. See "--Option Parcels."
As of March 18, 1997, the Company had agreements to acquire the Pending
Acquisitions, which consist of 15 office buildings containing approximately
1.6 million net rentable square feet and 14 industrial buildings containing
approximately 1.9 million net rentable square feet. Upon the acquisition of
the Pending Acquisitions, the Company will acquire interests in two
development parcels that can support 570,000 net rentable square feet of
office space and two development parcels that can support 400,000 net rentable
square feet of industrial space. There can be no assurance that all of these
Pending Acquisitions will be completed. See "Risk Factors--Risk that Pending
Acquisitions Will Not Close; Unallocated Proceeds."
48
<PAGE>
Set forth below is a summary of the Company's Properties and the Pending
Acquisitions. For additional information regarding the Office Properties and
Pending Acquisitions that are office buildings (the "Pending Office
Acquisitions") see "--Office Properties and Pending Acquisitions" and for
additional information regarding the Industrial Properties and Pending
Acquisitions that are industrial buildings (the "Pending Industrial
Acquisitions"), see "--Industrial Properties and Pending Acquisitions."
PROPERTY DATA
<TABLE>
<CAPTION>
TOTAL 1996 ANNUAL
BASE RENT BASE EFFECTIVE
NET PERCENT (000'S) PERCENT RENT RENT PER
YEAR(S) NUMBER RENTABLE LEASED FOR YEAR OF TOTAL PER LEASED
BUILT/ OF SQUARE AS OF ENDED BASE SQUARE SQUARE
PROPERTY NAME MARKET RENOVATED BUILDINGS FEET 12/31/96 12/31/96(/1/) RENT FOOT FOOT(/2/)
- ------------- ------ --------- --------- ---------- -------- ------------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE PROPERTIES
INITIAL
PROPERTIES:
Cumberland Office
Park Atlanta, GA 1972-1980 9 530,228 97% $ 6,282 6% $12.33 $ 4.45
One Northwestern
Plaza(/3/) Suburban Detroit, MI 1989 1 241,751 96 4,648 4 20.67 12.84
Broadmoor
Austin(/4/) Austin, TX 1991 7 1,112,236 100 8,824 8 15.87 15.16
Park West C2 Dallas, TX 1989 1 344,216 94 5,447 5 15.98 16.19
Park West E1 Dallas, TX 1982 1 182,739 100 2,956 3 16.17 11.20
Park West E2 Dallas, TX 1985 1 200,590 99 1,956 2 9.80 6.58
5307 East
Mockingbird Dallas, TX 1979/1993 1 118,316 88 938 1 9.82 2.57
Walnut Glen Tower Dallas, TX 1985 1 464,289 93 7,263 6 18.85 10.63
Cottonwood Office
Center Dallas, TX 1986 3 164,111 100 1,981 2 12.67 9.54
Plaza on Bachman
Creek Dallas, TX 1986 1 125,903 98 1,242 1 11.35 6.02
3141 Fairview Park
Drive Northern Virginia 1988 1 192,108 88 2,597 2 15.96 12.98
8521 Leesburg Pike Northern Virginia 1984/1993 1 145,257 100 2,177 2 16.41 8.52
--- ---------- --- -------- --- ------ ------
Subtotal/Weighted Average for Initial
Properties..................................... 28 3,821,744 97 46,311 41 15.30 11.14
=== ========== === ======== === ====== ======
ACQUIRED
PROPERTIES:
FHP Building Denver, CO 1983 1 198,370 95 2,816 2 15.85 9.87
O'Hare Plaza II Chicago, IL 1986 1 233,650 87 4,482 4 21.98 12.80
1717 Deerfield Chicago, IL 1985 1 137,904 100 2,299 2 16.67 16.23
2411 Dulles Corner
Road Northern Virginia 1990 1 176,522 100 3,859 3 21.86 16.06
2455 Horsepen Road Northern Virginia 1989 1 104,150 100 2,193 2 21.06 15.72
4401 Fair Lakes
Court Northern Virginia 1988 1 58,621 96 1,012 1 17.26 12.64
--- ---------- --- -------- --- ------ ------
Subtotal/Weighted Average for Acquired
Properties..................................... 6 909,217 95 16,661 15 19.40 13.64
=== ========== === ======== === ====== ======
PENDING
ACQUISITIONS:
Pacific Gateway
Office Center Los Angeles, CA 1982/1990 1 223,731 92 4,012 4 19.92 11.96
Natomas Corporate
Center Sacramento, CA 1984-1991 6 564,606 89 10,585 9 21.07 15.39
Crescent Centre Atlanta, GA 1986 1 237,727 95 3,502 3 16.01 11.55
Corporetum Office
Campus Chicago, IL 1984-1987 5 323,728 97 4,291 4 14.99 17.19
Seven Mile
Crossing(/5/) Suburban Detroit, MI 1988-1990 2 244,630 96 4,364 4 18.78 12.54
--- ---------- --- -------- --- ------ ------
Subtotal/Weighted Average for Pending
Acquisitions................................... 15 1,594,422 93 26,754 24 18.57 14.26
=== ========== === ======== === ====== ======
Subtotal/Weighted Average for Office Properties
and Pending Acquisitions....................... 49 6,325,383 96 89,726 79 16.71 12.28
=== ========== === ======== === ====== ======
INDUSTRIAL
PROPERTIES
INITIAL
PROPERTIES:
Los Angeles
Industrial
Properties Los Angeles, CA 1972-1984 18 1,252,708 100 5,053 4 4.21 4.22
Baltimore
Industrial
Properties Baltimore, MD 1986-1990 6 730,777 99 2,743 2 3.91 3.52
Kansas City
Industrial
Properties Kansas City, MO 1972-1978 7 1,341,880 100 2,896 3 2.48 1.86
Dallas Industrial
Properties Dallas, TX 1970-1984 6 426,962 98 1,206 1 2.97 2.42
Houston Industrial
Properties Houston, TX 1986 5 75,231 88 468 * 7.12 6.83
Milwaukee
Industrial
Properties Milwaukee, WI 1970-1987 17 1,218,324 87 3,723 3 3.20 2.94
--- ---------- --- -------- --- ------ ------
Subtotal/Weighted Average for Initial
Properties..................................... 59 5,045,882 96 16,089 14 3.40 3.07
=== ========== === ======== === ====== ======
ACQUIRED
PROPERTIES:
Chicago Industrial
Properties Chicago, IL 1988 3 226,076 100 926 1 4.11 4.13
5211 South 3rd
Street Milwaukee, WI 1974 1 360,000 100 963 1 2.68 2.68
--- ---------- --- -------- --- ------ ------
Subtotal/Weighted Average for Acquired
Properties..................................... 4 586,076 100 1,889 2 3.23 3.24
=== ========== === ======== === ====== ======
PENDING
ACQUISITIONS:
The Colonnade II Los Angeles, CA 1968-1991 6 466,708 89 2,070 2 5.00 3.45
Day Creek
Industrial
Park(/6/) Los Angeles, CA 1997 2 228,382 35 0 * 3.48 3.37
16801 South
Exchange Chicago, IL 1987 1 455,858 100 1,011 1 2.22 2.88
Route 100
Building(/7/) Baltimore, MD 1974/1995 1 143,924 100 500 * 4.23 4.14
8779 Greenwood
Place Baltimore, MD 1978/1992 1 142,140 100 498 * 3.50 3.28
Six Flags
Distribution
Center(/7/) Dallas, TX 1988 2 237,344 100 915 1 3.85 4.15
Bridgestone
Distribution
Center(/8/) Houston, TX 1982 1 215,000 100 720 1 3.35 2.77
--- ---------- --- -------- --- ------ ------
Subtotal/Weighted Average for Pending
Acquisitions................................... 14 1,889,356 89 5,714 5 3.66 3.35
=== ========== === ======== === ====== ======
Subtotal/Weighted Average for Industrial
Properties and Pending Acquisitions............ 77 7,521,314 95 23,692 21 $ 3.45 $ 3.15
=== ========== === ======== === ====== ======
Consolidated Total/Weighted Average for All
Properties..................................... 126 13,846,697 95% $113,418 100%
=== ========== === ======== ===
</TABLE>
49
<PAGE>
- --------
* Less than one percent
(1) "Base Rent" means the fixed base rental amount paid by a tenant under the
terms of the related lease agreement.
(2) "Effective Rent" is Base Rent net of any operating cost recovery portion,
less amortization of the related leasing costs, plus the effect of
straight-lining rent steps.
(3) The Operating Partnership owns a 100% leasehold interest in this Property.
(4) The Operating Partnership owns a 49.9% interest in the general partnership
that owns a 100% leasehold interest in these Properties. The Company
accounts for its interest in this partnership under the equity method. The
net rentable square feet for these Properties reflects the entire
Properties and the Base Rent data for the Properties reflects the
Company's receipt of 49.9% of such rent.
(5) Upon acquisition, the Company would own a 100% leasehold interest in this
Property.
(6) This property was recently completed and is in its initial lease-up phase.
Rent rate information assumes terms of the first year of lease. The
Company closed on this Pending Acquisition on March 25, 1997.
(7) The Company closed on these Pending Acquisitions on March 19, 1997.
(8) The current owner of this building is the sole tenant. Rent information
assumes proposed lease-back deal with the current owner.
LOCATION OF PROPERTIES AND PENDING ACQUISITIONS
The Properties and Pending Acquisitions are located in 13 major markets and
in every region of the U.S. The following tables indicate, by the net rentable
square feet and 1996 Base Rent, respectively, the Properties and Pending
Acquisitions by location and type of property at December 31, 1996:
NET RENTABLE SQUARE FEET OF PROPERTIES
AND PENDING ACQUISITIONS
BY LOCATION AND TYPE OF PROPERTY
<TABLE>
<CAPTION>
NET RENTABLE NET RENTABLE
SQUARE FEET SQUARE FEET
NUMBER OF OF OFFICE OF INDUSTRIAL PERCENT
PROPERTIES PROPERTIES PROPERTIES TOTAL OF TOTAL
AND PENDING AND PENDING AND PENDING NET RENTABLE NET RENTABLE
LOCATION ACQUISITIONS ACQUISITIONS ACQUISITIONS SQUARE FEET SQUARE FEET
-------- ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Los Angeles,
California............. 27 223,731 1,947,798 2,171,529 16%
Sacramento, California.. 6 564,606 -- 564,606 4
Denver, Colorado........ 1 198,370 -- 198,370 1
Atlanta, Georgia........ 10 767,955 -- 767,955 6
Chicago, Illinois....... 11 695,282 681,934 1,377,216 10
Baltimore, Maryland..... 8 -- 1,016,841 1,016,841 7
Suburban Detroit,
Michigan............... 3 486,381 -- 486,381 4
Kansas City, Missouri... 7 -- 1,341,880 1,341,880 10
Austin, Texas........... 7 1,112,236 -- 1,112,236 8
Dallas, Texas........... 17 1,600,164 664,306 2,264,470 16
Houston, Texas.......... 6 -- 290,231 290,231 2
Northern Virginia....... 5 676,658 -- 676,658 5
Milwaukee, Wisconsin.... 18 -- 1,578,324 1,578,324 11
--- --------- --------- ---------- ---
126 6,325,383 7,521,314 13,846,697 100%
=== ========= ========= ========== ===
</TABLE>
50
<PAGE>
The following table sets forth the 1996 annual Base Rent per leased square
foot and Effective Rent per leased square foot of the Properties and Pending
Acquisitions by location and type of property:
1996 BASE RENT PER LEASED SQUARE FOOT AND
EFFECTIVE RENT PER LEASED SQUARE FOOT OF PROPERTIES
AND PENDING ACQUISITIONS BY
LOCATION AND TYPE OF PROPERTY
<TABLE>
<CAPTION>
1996 BASE RENT 1996 EFFECTIVE RENT
1996 BASE RENT PER LEASED SQUARE FOOT PER LEASED SQUARE FOOT
---------------------------------------------- ------------------------- -------------------------
OFFICE INDUSTRIAL OFFICE INDUSTRIAL OFFICE INDUSTRIAL
PROPERTIES PROPERTIES PROPERTIES PROPERTIES PROPERTIES PROPERTIES
AND PENDING AND PENDING AND PENDING AND PENDING AND PENDING AND PENDING
OFFICE INDUSTRIAL PERCENT OFFICE INDUSTRIAL OFFICE INDUSTRIAL
LOCATION ACQUISITIONS ACQUISITIONS TOTAL OF TOTAL ACQUISITIONS ACQUISITIONS ACQUISITIONS ACQUISITIONS
-------- ------------ ------------ ---------- -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Los Angeles,
California........... $ 4,012 $ 7,123 $ 11,135 10% $19.92 $4.34 $11.96 $3.94
Sacramento,
California........... 10,585 -- 10,585 9 21.07 -- 15.39 --
Denver, Colorado...... 2,816 -- 2,816 2 15.85 -- 9.87 --
Atlanta, Georgia...... 9,784 -- 9,784 9 13.47 -- 6.65 --
Chicago, Illinois..... 11,072 1,937 13,009 11 17.67 2.84 15.52 3.30
Baltimore, Maryland... -- 3,741 3,741 3 -- 3.76 -- 3.57
Suburban Detroit,
Michigan............. 9,012 -- 9,012 8 19.72 -- 12.69 --
Kansas City,
Missouri............. -- 2,896 2,896 3 -- 2.48 -- 1.86
Austin, Texas(/1/).... 8,824 -- 8,824 8 15.87 -- 15.16 --
Dallas, Texas......... 21,783 2,121 23,904 21 14.90 3.29 10.31 3.04
Houston, Texas........ -- 1,188 1,188 1 -- 4.33 -- 3.82
Northern Virginia..... 11,838 -- 11,838 10 18.49 -- 13.22 --
Milwaukee, Wisconsin.. -- 4,686 4,686 4 -- 3.08 -- 2.88
--------- --------- ---------- --- ------ ----- ------ -----
$89,726 $23,692 $113,418 100% $16.71 $3.45 $12.28 $3.15
========= ========= ========== === ====== ===== ====== =====
Percent of Total...... 79% 21% 100%
========= ========= ==========
Net Rentable Square
Feet................. 6,325,383 7,521,314 13,846,697
========= ========= ==========
Number of properties.. 49 77 126
========= ========= ==========
</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.
OVERVIEW OF NEW OWNERSHIP MARKETS
General
From the IPO through March 18, 1997, the Company has acquired properties in
two markets in which it had previously only managed properties: Denver,
Colorado and Chicago, Illinois. Upon the closing of the Pending Acquisitions,
the Company will own office buildings in Sacramento, California, where it had
previously only managed properties. The market data discussed below was
obtained from industry sources believed reliable by the Company. The data
includes forward-looking statements with respect to trends in absorption,
rental rates and other matters of significance to the Company's business.
Those trends may not be realized as expected for a variety of reasons
including changes in the national or local economies, government action such
as changes in zoning ordinances or development plans and changes in
development activity. Failure of those trends to be realized in one or more
markets could materially and adversely affect the Company's results of
operations. See, "Risk Factors--Geographic Concentrations in Dallas, Chicago,
Los Angeles and Northern Virginia," "--Risks Associated with Acquisition,
Redevelopment and Construction," and "--Real Estate Investment Risks."
Sacramento, California
As the capital of the state of California, Sacramento has benefitted from an
expanding state government, which has pushed many private sector tenants into
the suburbs. The suburban markets are also benefiting from an increased influx
of high-tech firms moving out of the Silicon Valley. Sacramento enjoys
amenities such as a major international airport, a deep water port,
transcontinental rail lines and interstate freeway access. Job growth for the
12 months ended December 31, 1996 was 1.9%. The unemployment rate was 5.0% for
this same period.
51
<PAGE>
The vacancy rate of office buildings in the Sacramento market that contain
over 4,600 square feet is 9.8% overall, and 6.1% for Class A buildings. Total
absorption for 1996 was over 500,000 square feet, and total absorption is
expected to continue to increase in 1997. Large tenant leases (over 100,000+
square feet) increased in 1996, as well as large owner-user construction.
Rents are expected to increase as demand continues to outpace supply. Net
office absorption in the fourth quarter of 1996 was 77,293 square feet. The
downtown district has been experiencing negative absorption as companies
continue to move to the suburbs. South Natomas, where the Natomas Pending
Acquisition is located, topped all submarkets in Sacramento with 94,496 square
feet of positive net absorption in the last three months of 1996 and ended the
year with 87,980 square feet of positive net absorption.
South Natomas is a suburban submarket with many of the benefits of a central
business district. South Natomas is five minutes from downtown as well as the
Sacramento International Airport. The primary tenants in this submarket are
high-tech, consisting of telecommunications, engineering and consulting firms.
The submarket has 2,533,321 square feet of net rentable area, which is roughly
6.7% of the total Sacramento office market and 9% of the suburban office
market. South Natomas holds 1,666,204 square feet of office product over 4,600
square feet and the vacancy rate for space of this size product is 7.3% or
121,633 square feet. The average market lease rate is $19.44 per square foot,
which is the second highest in the Sacramento metropolitan area.
Sources: National Real Estate Index, Vol. 11, Colliers International
Sacramento Office Market Report and CB Commercial Sacramento Office Market
Report.
Denver, Colorado
Denver has experienced positive job growth every year since 1990. For the 12
months ending June 1996, Denver's job growth rate was 3%. The unemployment
rate in June 1996 was 4.2%. Total metropolitan population growth from 1990 to
the middle of 1995 was 12.8%. Denver's population was 2.2 million as of June
30, 1995. The telecommunications industry presence has grown significantly in
the Denver area for the past five years. Denver also contains a significant
portion of the nation's petroleum industry, making it one of the largest
suppliers in the country. Mining remains a profitable industry providing
consistent demand for office and industrial space with activity in copper,
coal, silver and gold. Denver's office market is experiencing its lowest
vacancy rate in 15 years at 10.5%. As a result, rents are increasing and
limited construction activity has resumed. Absorption for year end 1996 was
664,252 square feet.
The Southeast suburban submarket, where the Company's FHP Building is
located, is a prominent major office submarket in Denver. With boundaries of
Hampden on the north and Broadway on the west, this 19 million square foot
submarket is the second largest in Denver, comprising 25% of the total market.
The Southeast suburban submarket is conveniently located 20 minutes from the
central business district and has close proximity to the Denver International
Airport. This submarket has a high concentration of telecommunication firms in
the United States. The majority of the buildings in this submarket are Class A
and B, including the Denver Technology Center and Greenwood Plaza, two office
parks with a combined inventory of almost 12 million square feet. The average
rental rate for the submarket is $18.16 per square foot. A total of 329,000
square feet was absorbed in the submarket in 1995, and in 1996, 269,872 square
feet were absorbed. The vacancy rate for the submarket at year end 1996 was
8.2%.
Sources: National Real Estate Index, Vol. 10 and Cushman & Wakefield of
Colorado, Inc.
Chicago, Illinois
With a population of 7.7 million as of June 30, 1995, metropolitan Chicago
is ranked as the third largest city in the nation. The metropolitan growth
rate has been 4.2% for the period from 1990 through June 1995. Chicago has
also experienced excellent job growth of 1.8% and net new jobs of 70,200 (from
January 1, 1996 to September 30, 1996) by the third quarter of 1996, this
reflects the fourth largest gain in the nation. As of September 1996, the
unemployment rate for Chicago was 4.7%.
52
<PAGE>
The suburban Chicago office markets have maintained a positive leasing trend
since 1990. Net absorption was 1.8 million square feet in 1996. Overall
vacancy in the fourth quarter of 1996 was 11.2%.. This downward trend in
vacancy rates together with steady absorption are pushing rental rates upward,
especially in the O'Hare and Northwest submarkets. Class A rates have
increased as much as 25% in the past 18 to 24 months.
The O'Hare office submarket, where the Company's O'Hare Plaza II Property is
located, contains approximately 10 million square feet of office space or 17%
of the total Chicago suburban market. The O'Hare submarket grew up around
O'Hare Airport and was Chicago's first significant suburban office market.
O'Hare Airport is one of the world's busiest passenger and cargo airports. The
airport provides approximately 45,000 local jobs. Commercial development is
centered around the confluence of Chicago's major highways (I-90, I-294, I-88
and I-55) which provide access to the airport, downtown and all suburban
residential areas. Over the past 21 months, overall vacancy rates for the
O'Hare submarket have declined significantly, particularly in Class A
buildings. As a result of this, rental rates are beginning to climb steadily
upward. Within this submarket are many larger Class A properties,
comprehensive amenities and immediate access to Chicago's O'Hare International
Airport. A number of major corporations have corporate headquarters in the
O'Hare office market. The area also houses many Fortune 500 regional and
district sales offices that are attracted to the immediate access to O'Hare
International Airport. The fourth quarter 1996 vacancy rate was 14.8%.
Absorption in 1996 in the total O'Hare submarket was 242,000 square feet, with
an asking rent range of $18 to $27 per square foot.
The North suburban submarket, where the Company's 1717 Deerfield Property is
located, is centered around the Tri-State North Corridor (Interstate 294)
primarily within Lake County, Illinois. I-294 is the major north/south artery
in metropolitan Chicago. The primary office developments straddle the east and
west sides of I-294. The North suburban submarket contains 12,536,000 square
feet of office space or 21% of the total Chicago office market. This market
has a large presence of pharmaceutical companies and medical-related firms.
The vacancy rate for the North suburban submarket was 11.2% at year end 1996.
Absorption for 1996 was 58,000 square feet with an average market rent range
of $18 to $24 per square foot.
Sources: National Real Estate Index, Vol. 11 and Grubb and Ellis 1996 Year
End Report.
OFFICE PROPERTIES AND PENDING OFFICE ACQUISITIONS
General
The Company's 34 Office Properties comprise approximately 4.7 million net
rentable square feet and are located in seven major markets: Denver, Colorado;
Atlanta, Georgia; Chicago, Illinois; Suburban Detroit, Michigan; Austin,
Texas; Dallas, Texas; and Northern Virginia. The 15 Pending Office
Acquisitions comprise approximately 1.6 million net rentable square feet and
are located in five major markets: Los Angeles, California; Sacramento,
California; Atlanta, Georgia; Chicago, Illinois; and Suburban Detroit,
Michigan. Eleven of the 34 Office Properties were developed by the Prentiss
Group. Twenty-eight of the Office Properties were managed by the Company prior
to their acquisition. None of the Pending Office Acquisitions are currently
managed by the Company, but the Company intends to assume the management of
the Pending Acquisitions after they have been acquired. The weighted average
age of the Office Properties and Pending Office Acquisitions is 11 years. As
of December 31, 1996, the Office Properties and Pending Office Acquisitions
were 96% leased to 470 tenants. The total 1996 Base Rent of the Office
Properties and Pending Office Acquisitions was approximately $90 million, and
the average 1996 Base Rent per leased square foot was $16.71. 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. The Company intends to own the entire fee interest in the Pending
Office Acquisitions except for Seven Mile Crossing in which it intends to
acquire a 100% leasehold interest.
The space leases on the Office Properties and Pending Office Acquisitions
generally have original lease terms ranging from one 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
53
<PAGE>
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 the Company since
1992.
OFFICE PROPERTIES MANAGED BY THE COMPANY SINCE 1992 HISTORICAL OCCUPANCY AND
RENTAL RATES
<TABLE>
<CAPTION>
TOTAL NET PERCENTAGE AVERAGE ANNUAL
RENTABLE LEASED AT BASE RENT PER
DATE SQUARE FEET PERIOD END LEASED SQUARE FOOT(/1/)(/2/)
---- -------------- ---------- ----------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
December 31, 1996....... 4,672 97% $ 15.67
December 31, 1995....... 3,414 96 14.58
December 31, 1994....... 3,337 94 14.55
December 31, 1993....... 2,687 94 14.18
December 31, 1992....... 2,569 93 14.25
</TABLE>
- --------
(/1/Calculated)as total Base Rent for the previous 12 months divided by the
average leased square feet during the period.
(/2/The)above calculation includes the Company's 49.9% interest in the
Broadmoor Austin Properties.
Lease Expirations
The following table sets forth a schedule of the lease expirations for the
Office Properties and Pending Acquisitions for leases in place as of December
31, 1996, assuming that none of the tenants exercises renewal options or
termination rights, if any:
OFFICE PROPERTIES AND PENDING OFFICE ACQUISITIONS LEASE EXPIRATIONS
<TABLE>
<CAPTION>
2006 AND
PROPERTY 1997 1998 1999 2000 2001 2002 2003 2004 2005 THEREAFTER
- -------- ------ ------ ------ ------ ------ ------ ---- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL PROPERTIES
Cumberland
Office Park
Square Feet Expiring
(000's)................ 84 160 107 126 35 -- -- -- -- --
Square Feet as a % of
NRA.................... 16% 30% 20% 24% 7% -- -- -- -- --
Annualized Base Rent in
Expiring Year (000's).. $978 $1,820 $1,498 $1,908 $562 -- -- -- -- --
Annualized Base Rent PSF
in Expiring Year....... $11.64 $11.38 $14.00 $15.14 $16.06 -- -- -- -- --
Number of Leases
Expiring............... 24 22 17 7 4 -- -- -- -- --
One Northwestern
Plaza
Square Feet Expiring
(000's)................ 14 34 10 29 66 17 -- 63 -- --
Square Feet as a % of
NRA.................... 6% 14% 4% 12% 27% 7% -- 26% -- --
Annualized Base Rent in
Expiring Year (000's).. $303 $470 $198 $564 $1,224 $400 -- $1,709 -- --
Annualized Base Rent PSF
in Expiring Year....... $21.64 $13.82 $19.80 $19.45 $18.55 $23.53 -- $27.13 -- --
Number of Leases
Expiring............... 5 4 4 5 12 2 -- 1 -- --
Broadmoor
Austin(/1/)
Square Feet Expiring
(000's)................ -- -- -- -- -- -- -- -- -- 1,112
Square Feet as a % of
NRA.................... -- -- -- -- -- -- -- -- -- 100%
Annualized Base Rent in
Expiring Year (000's).. -- -- -- -- -- -- -- -- -- $22,056
Annualized Base Rent PSF
in Expiring Year....... -- -- -- -- -- -- -- -- -- $19.83
Number of Leases
Expiring............... -- -- -- -- -- -- -- -- -- 1
Park West C2
Square Feet Expiring
(000's)................ 1 6 288 6 7 13 -- -- -- --
Square Feet as a % of
NRA.................... -- 2% 84% 2% 2% 4% -- -- -- --
Annualized Base Rent in
Expiring Year (000's).. $10 $66 $5,033 $71 $72 $147 -- -- -- --
Annualized Base Rent PSF
in Expiring Year....... $10.00 $11.00 $17.48 $11.83 $10.29 $11.31 -- -- -- --
Number of Leases
Expiring............... 2 1 3 1 1 1 -- -- -- --
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
2006 AND
PROPERTY 1997 1998 1999 2000 2001 2002 2003 2004 2005 THEREAFTER
- -------- ------ ------ ------ ------ ------ ------ ---- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Park West E1
Square Feet Expiring
(000's)................ -- -- -- -- -- -- -- -- -- 183
Square Feet as a % of
NRA.................... -- -- -- -- -- -- -- -- -- 100%
Annualized Base Rent in
Expiring Year (000's).. -- -- -- -- -- -- -- -- -- $3,472
Annualized Base Rent PSF
in Expiring Year....... -- -- -- -- -- -- -- -- -- $18.97
Number of Leases
Expiring............... -- -- -- -- -- -- -- -- -- 1
Park West E2
Square Feet Expiring
(000's)................ 4 31 19 5 2 7 -- 126 -- 6
Square Feet as a % of
NRA.................... 2% 15% 9% 2% 1% 3% -- 63% -- 3%
Annualized Base Rent in
Expiring Year (000's).. $75 $362 $312 $98 $35 $67 -- $1,764 -- $79
Annualized Base Rent PSF
in Expiring Year....... $18.75 $11.68 $16.42 $19.60 $17.50 $9.57 -- $14.00 -- $13.17
Number of Leases
Expiring............... 1 3 1 1 1 2 -- 1 -- 2
5307 East
Mockingbird
Square Feet Expiring
(000's)................ 19 22 37 13 5 7 -- -- -- --
Square Feet as a % of
NRA.................... 16% 19% 31% 11% 4% 6% -- -- -- --
Annualized Base Rent in
Expiring Year (000's).. $176 $226 $402 $154 $60 $92 -- -- -- --
Annualized Base Rent PSF
in Expiring Year....... $9.26 $10.27 $10.86 $11.85 $12.00 $13.14 -- -- -- --
Number of Leases
Expiring............... 9 8 12 4 2 1 -- -- -- --
Walnut Glen
Tower
Square Feet Expiring
(000's)................ 38 238 38 11 73 23 -- -- 10 --
Square Feet as a % of
NRA.................... 8% 51% 8% 2% 16% 5% -- -- 2% --
Annualized Base Rent in
Expiring Year (000's).. $562 $5,323 $538 $154 $1,178 $385 -- -- $143 --
Annualized Base Rent PSF
in Expiring Year....... $14.79 $22.37 $14.16 $14.00 $16.14 $16.74 -- -- $14.30 --
Number of Leases
Expiring............... 5 3 10 3 7 4 -- -- 1 --
Cottonwood Office Center
Square Feet Expiring
(000's)................ 8 8 -- 57 8 -- -- 84 -- --
Square Feet as a % of
NRA.................... 5% 5% -- 35% 5% -- -- 51% -- --
Annualized Base Rent in
Expiring Year (000's).. $107 $89 -- $785 $126 -- -- $1,187 -- --
Annualized Base Rent PSF
in Expiring Year....... $13.38 $11.13 -- $13.77 $15.75 -- -- $14.13 -- --
Number of Leases
Expiring............... 1 2 -- 4 1 -- -- 1 -- --
Plaza on Bachman
Creek
Square Feet Expiring
(000's)................ 4 -- 8 45 37 29 -- -- -- --
Square Feet as a % of
NRA.................... 3% -- 6% 36% 29% 23% -- -- -- --
Annualized Base Rent in
Expiring Year (000's).. $53 -- $109 $593 $561 $389 -- -- -- --
Annualized Base Rent PSF
in Expiring Year....... $13.25 -- $13.63 $13.18 $15.16 $13.41 -- -- -- --
Number of Leases
Expiring............... 1 -- 3 2 1 1 -- -- -- --
3141 Fairview Park Drive
Square Feet Expiring
(000's)................ 10 15 48 16 42 17 -- -- 1 19
Square Feet as a % of
NRA.................... 5% 8% 25% 8% 22% 9% -- -- 1% 10%
Annualized Base Rent in
Expiring Year (000's).. $124 $150 $750 $308 $543 $248 -- -- $10 $341
Annualized Base Rent PSF
in Expiring Year....... $12.40 $10.00 $15.63 $19.25 $12.93 $14.59 -- -- $10.00 $17.95
Number of Leases
Expiring............... 4 3 9 3 9 1 -- -- 1 2
8521 Leesburg Pike
Square Feet Expiring
(000's)................. 8 -- 22 106 9 -- -- -- -- --
Square Feet as a % of
NRA.................... 6% -- 15% 73% 6% -- -- -- -- --
Annualized Base Rent in
Expiring Year (000's).. $129 -- $423 $2,008 $156 -- -- -- -- --
Annualized Base Rent PSF
in Expiring Year....... $16.13 -- $19.23 $18.94 $17.33 -- -- -- -- --
Number of Leases
Expiring............... 2 -- 4 4 1 -- -- -- -- --
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
2006 AND
PROPERTY 1997 1998 1999 2000 2001 2002 2003 2004 2005 THEREAFTER
- -------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ACQUIRED
PROPERTIES
FHP Building
Square Feet Expiring
(000's)................ 22 -- -- 27 7 -- -- -- 134 --
Square Feet as a % of
NRA.................... 11% -- -- 14% 4% -- -- -- 68% --
Annualized Base Rent in
Expiring Year (000's).. $377 -- -- $543 $115 -- -- -- $2,172 --
Annualized Base Rent PSF
in Expiring Year....... $17.14 -- -- $20.11 $16.43 -- -- -- $16.21 --
Number of Leases
Expiring............... 1 -- -- 3 2 -- -- -- 1 --
O'Hare Plaza II
Square Feet Expiring
(000's)................ 2 2 43 13 17 86 -- -- 21 18
Square Feet as a % of
NRA.................... 1% 1% 18% 6% 7% 37% -- -- 9% 8%
Annualized Base Rent in
Expiring Year (000's).. $27 $22 $1,016 $300 $394 $2,465 -- -- $468 $535
Annualized Base Rent PSF
in Expiring Year....... $13.50 $11.00 $23.63 $23.08 $23.18 $28.66 -- -- $22.29 $29.72
Number of Leases
Expiring............... 1 1 2 1 1 3 -- -- 2 1
1717 Deerfield
Square Feet Expiring
(000's)................ -- -- -- -- -- -- 138 -- -- --
Square Feet as a % of
NRA.................... -- -- -- -- -- -- 100% -- -- --
Annualized Base Rent in
Expiring Year (000's).. -- -- -- -- -- -- $2,573 -- -- --
Annualized Base Rent PSF
in Expiring Year....... -- -- -- -- -- -- $18.64 -- -- --
Number of Leases
Expiring............... -- -- -- -- -- -- 2 -- -- --
2411 Dulles
Corner Park
Square Feet Expiring
(000's)................ 21 4 24 33 92 3 -- -- -- --
Square Feet as a % of
NRA.................... 12% 2% 14% 19% 52% 2% -- -- -- --
Annualized Base Rent in
Expiring Year (000's).. $396 $62 $590 $673 $1,716 $54 -- -- -- --
Annualized Base Rent PSF
in Expiring Year....... $18.86 $15.50 $24.58 $20.39 $18.65 $18.00 -- -- -- --
Number of Leases
Expiring............... 2 1 1 3 2 1 -- -- -- --
2455 Horsepen
Road
Square Feet Expiring
(000's)................ -- -- 58 -- -- 46 -- -- -- --
Square Feet as a % of
NRA.................... -- -- 56% -- -- 44% -- -- -- --
Annualized Base Rent in
Expiring Year (000's).. -- -- $1,381 -- -- $962 -- -- -- --
Annualized Base Rent PSF
in Expiring Year....... -- -- $23.81 -- -- $20.91 -- -- -- --
Number of Leases
Expiring............... -- -- 1 -- -- 1 -- -- -- --
4401 Fair Lakes
Court
Square Feet Expiring
(000's)................ 6 -- 13 6 31 -- -- -- -- --
Square Feet as a % of
NRA.................... 10% -- 22% 10% 53% -- -- -- -- --
Annualized Base Rent in
Expiring Year (000's).. $106 -- $228 $108 $684 -- -- -- -- --
Annualized Base Rent PSF
in Expiring Year....... $17.67 -- $17.54 $18.00 $22.06 -- -- -- -- --
Number of Leases
Expiring............... 1 -- 2 1 3 -- -- -- -- --
PENDING
ACQUISITIONS
Pacific Gateway
Office Center
Square Feet Expiring
(000's)................ 54 8 7 33 56 2 3 45 -- --
Square Feet as a % of
NRA.................... 24% 4% 3% 15% 25% 1% 1% 20% -- --
Annualized Base Rent in
Expiring Year (000's).. $1,095 $144 $106 $510 $1,034 $35 $77 $778 -- --
Annualized Base Rent PSF
in Expiring Year....... $20.28 $18.00 $15.14 $15.45 $18.46 $17.50 $25.67 $17.29 -- --
Number of Leases
Expiring............... 6 5 4 7 9 1 1 2 -- --
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
2006 AND
PROPERTY 1997 1998 1999 2000 2001 2002 2003 2004 2005 THEREAFTER
- -------- ------ ------- ------- ------- ------- ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Natomas Corporate Center
Square Feet Expiring
(000's)................ 94 12 66 38 214 27 28 23 -- --
Square Feet as a % of
NRA.................... 17% 2% 12% 7% 38% 5% 5% 4% -- --
Annualized Base Rent in
Expiring Year (000's).. $1,930 $234 $1,500 $819 $4,935 $599 $559 $446 -- --
Annualized Base Rent PSF
in Expiring Year....... $20.53 $19.50 $22.73 $21.55 $23.06 $22.19 $19.96 $19.39 -- --
Number of Leases
Expiring............... 8 3 7 4 7 2 1 1 -- --
Crescent Centre
Square Feet Expiring
(000's)................ 38 59 7 -- 20 10 83 9 -- --
Square Feet as a % of
NRA.................... 16% 24% 3% -- 8% 4% 34% 4% -- --
Annualized Base Rent in
Expiring Year (000's).. $654 $1,014 $120 -- $413 $190 $1,460 $184 -- --
Annualized Base Rent PSF
in Expiring Year....... $17.21 $17.19 $17.14 -- $20.65 $19.00 $17.59 $20.44 -- --
Number of Leases
Expiring............... 12 9 4 -- 4 3 2 1 -- --
Corporetum Office Campus
Square Feet Expiring
(000's)................ 6 53 11 2 5 73 164 -- -- --
Square Feet as a % of
NRA.................... 2% 16% 3% 1% 1% 22% 49% -- -- --
Annualized Base Rent in
Expiring Year (000's).. $27 $1,049 $211 $48 $92 $1,297 $3,585 -- $1 --
Annualized Base Rent PSF
in Expiring Year....... $4.50 $19.79 $19.18 $24.00 $18.40 $17.77 $21.86 -- $12.00 --
Number of Leases
Expiring............... 2 4 3 1 1 2 1 -- 1 --
Seven Mile
Crossing
Square Feet Expiring
(000's)................ 62 16 34 39 66 3 -- 5 -- 11
Square Feet as a % of
NRA.................... 24% 6% 13% 15% 25% 1% -- 2% -- 4%
Annualized Base Rent in
Expiring Year (000's).. $1,136 $275 $490 $733 $1,199 $60 -- $92 -- $230
Annualized Base Rent PSF
in Expiring Year....... $18.32 $17.19 $14.41 $18.79 $18.17 $20.00 -- $18.40 -- $20.91
Number of Leases
Expiring............... 10 7 9 10 11 4 -- 1 -- 1
Total Office Properties
and Pending
Acquisitions
Square Feet Expiring
(000's)................ 495 668 840 605 792 363 416 355 166 1,349
Square Feet as a % of
NRA.................... 8% 11% 13% 10% 13% 6% 7% 6% 3% 21%
Annualized Base Rent in
Expiring Year (000's).. $8,265 $11,306 $14,905 $10,377 $15,099 $7,390 $8,254 $6,160 $2,794 $26,713
Annualized Base Rent PSF
in Expiring Year....... $16.70 $16.93 $17.74 $17.15 $19.06 $20.36 $19.84 $17.35 $16.83 $19.80
Number of Leases
Expiring............... 97 76 96 64 79 29 7 8 6 8
</TABLE>
- --------
(/1/The)Operating Partnership owns a 49.9% interest in the Broadmoor Austin
Properties. Base Rent data represents 49.9% of the Base Rent from the
Broadmoor Austin Property. Data regarding square feet expiring and leases
expiring is for the entire Broadmoor Austin Properties.
Tenant Information
The Office Properties and Pending Office Acquisitions are leased to 470
tenants which engage in a variety of businesses including computer services,
telecommunications, insurance and food and beverage services. During the year
ended 1996, the largest tenant in the Office Properties and Pending Office
Acquisitions, IBM, accounted for approximately 11% of the annualized December
1996 Base Rent for the Properties and Pending Acquisitions. Sixty-four percent
of IBM's annualized December 1996 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 remaining
36% of IBM's annualized December 1996 Base Rent is derived from a lease at the
Park West C2 Property, which expires in 1999. The following table sets forth
the annualized December 1996 Base Rent of the Properties and Pending
Acquisitions derived from the 20 largest tenants at the Office Properties and
Pending Office Acquisitions.
57
<PAGE>
OFFICE PROPERTIES AND PENDING ACQUISITIONS
20 LARGEST TENANTS BY ANNUALIZED DECEMBER 1996 BASE RENT(/1/)
<TABLE>
<CAPTION>
AS A
APPROXIMATE PERCENT OF
TOTAL NET ANNUALIZED MONTHS
RENTABLE ANNUALIZED DECEMBER REMAINING
SQUARE FEET BASE RENT (/1/) 1996 AFTER
TENANT PROPERTY (IN THOUSANDS) (IN THOUSANDS) BASE RENT 12/31/96
- ------ -------- -------------- --------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
IBM Broadmoor Austin......................... 1,112 $ 8,824(/2/) 7.1% 111
IBM Park West C2............................. 270 4,884 3.9 33
Dr. Pepper/Cadbury Walnut Glen Tower(/3/)................... 215 4,248 3.4 19
MCI Natomas Corporate Center(/4/)............ 151 3,470 2.8 52
Hoechst Celanese Park West E1............................. 183 3,060 2.4 127
Platinum Technologies Corporetum Office Campus(/4/)............ 164 2,265 1.8 73
FHP International Corp. FHP Building............................. 140 1,923 1.5 66
CIGNA O'Hare Plaza II.......................... 67 1,692 1.4 67
Premark International,
Inc. 1717 Deerfield........................... 92 1,668 1.3 76
Grumman Data Systems
Corp. 2411 Dulles Corner Road.................. 91 1,524 1.2 51
The Wyatt Company One Northwestern Plaza................... 63 1,452 1.2 88
Medaphis Corp. Cumberland Office Park................... 107 1,404 1.1 38
MCI 8521 Leesburg Pike....................... 88 1,380 1.1 40
Radian 2455 Horsepen Road....................... 58 1,319 1.1 35
Sprint Park West E2............................. 126 1,260 1.0 91
Liberty Mutual Life
Insurance Cottonwood Office Center................. 91 1,140 0.9 91
Affordable Health Care Natomas Corporate Center(/4/)............ 48 1,131 0.9 35
Ralph's Grocery Company Pacific Gateway Office Center(/4/)(/5/).. 48 1,003 0.8 12
Sybase O'Hare Plaza II.......................... 41 996 0.8 35
St. Paul Insurance Crescent Centre(/4/)..................... 67 985 0.8 82
----- ------- ----
Total Office Properties and Pending Acquisitions................. 3,222 $45,628 36.5%
===== ======= ====
</TABLE>
- --------
(/1/Represents)annualized Base Rent for December 1996 or for initial month if
lease starts after December 31, 1996.
(/2/Reflects)the Company's 49.9% interest in the total annualized December
1996 Base Rent of Broadmoor Austin.
(/3/Dr.)Pepper will not renew its lease at the Walnut Glen Tower Property when
it expires in July 1998. The Company is currently negotiating with a new
tenant to lease substantially all of this space. See "Risk Factors--
Reliance on Major Tenants."
(/4/Pending)Office Acquisitions. There can be no assurances that the Company
will acquire any of the Pending Acquisitions. See "Risk Factors--Risk
Pending Acquisitions Will Not Close."
(/5/Ralph's)Grocery Company has notified the current owner of this property
that it will not renew its lease.
Description of the Office Acquired Properties
FHP Building (Denver, Colorado). The FHP Building is a ten-story, Class A
suburban office building located on 5.73 acres of land. The Property was
developed in 1983 and contains 198,370 net rentable square feet. The parking
is provided through a subterranean parking garage, a detached parking
structure and surface parking. The building structure is precast spandrel
panels with a white quartz aggregate surface and inset double pane solar gray
thermal windows set in black window mullions. An added exterior feature is a
semi-circular column of reflecting gold glass rising from the first floor over
the main entrance to the penthouse of the Property. Excellent mountain views
are provided from the west side of the Property. The Property is located at
the southwestern edge of the Denver Tech Center.
As of December 31, 1996, the Property was 95% leased, and the average 1996
Base Rent per square foot was $15.85. The major tenants of the building are
FHP Health Care (approximately 140,000 net rentable square feet), Information
Handling Services (approximately 21,500 net rentable square feet) and Seimens
Rolm (approximately 12,800 net rentable square feet) under leases that expire
in 2005, 1997 and 2000, respectively.
58
<PAGE>
The aggregate net rentable square footage of leases expiring in 1997, 1998 and
1999 represent 11%, 0% and 0% of the Property's net rentable square footage,
respectively.
O'Hare Plaza II (Chicago, Illinois). O'Hare Plaza II is an eleven-story,
Class A suburban office building. The Property was developed in 1986 and
contains 233,650 net rentable square feet. The Property is part of a five-
building complex with approximately 941,632 total square feet. All five office
buildings are connected and have common architectural attributes. The exterior
of the Property is white pre-cast panels and tinted windows in metal frames.
The Property is located in The O'Hare Airport suburban submarket, which is one
of Chicago's suburban office property communities. The O'Hare Airport
submarket is the area where Chicago's major highway systems (I-90/94 and I-
294) converge, and is central to all suburban residential neighborhoods and
downtown Chicago. As of December 31, 1996, the Property was 87% leased, and
the average 1996 Base Rent per square foot was $21.98. The Property's major
tenants include CIGNA (approximately 67,000 net rentable square feet), Sybase,
Inc. (approximately 33,000 net rentable square feet), and Compuserve
(approximately 19,000 net rentable square feet) under leases that expire in
2002, 1999 and 2006, respectively. The aggregate net rentable square footage
of leases expiring in 1997, 1998 and 1999 represent 1%, 1% and 18%,
respectively, of the Property's net rentable square footage.
1717 Deerfield (Chicago, Illinois). 1717 Deerfield is a three-story, Class A
suburban office building. The Property was constructed in 1985 and contains
137,904 square feet. The exterior of the building is comprised of Tudor brick
and glass in a classic architectural style that is carried from the exterior
into the building lobbies and the three-story atrium. Iron spot brick pavers,
marble and custom lighting further enhance the tailored look of the structure.
As of December 31, 1996, the Property was 100% leased, and the average 1996
Base Rent per square foot was $16.67. The Property's two tenants are Premark
with 91,800 square feet expiring in 2003, and Dade International with 46,100
square feet also expiring in 2003.
2411 Dulles Corner Road (Northern Virginia). 2411 Dulles Corner Road is an
eight-story, Class A suburban office building. The Property was developed in
1990 and contains approximately 176,522 rentable square feet. Parking is
provided in a precast structure attached to the building with covered access
on floors one and two. The exterior is composed of a combination of Finnish
red granite and reflective blue glass windows. The lobby level arcade facade
is granite/marble and glass. The two-story lobby has a white marble floor
accented with a combination of red and green marble. A clear view to a
landscaped park is provided from the first floor and the second floor balcony.
There are two covered loading and delivery bays provided at the rear of the
building. The building is part of a one hundred acre office park known as
Dulles Corner. The office park currently consists of four office buildings and
a Hyatt Hotel, totaling approximately 1 million square feet. Dulles Corner is
located at the western edge of Fairfax County, Virginia in the town of
Herndon. This area is well known for the rapid development of office
properties in the 1980's.
As of December 31, 1996, the Property was 100% leased, and the average 1996
Base Rent per square foot was $21.86. The Property's major tenants include
Grumman (90,460 rentable square feet), Noell, Inc. (17,437 square feet) and
Scitor (13,985 rentable square feet) under leases that expire in 2001, 2000
and 1999, respectively. The aggregate net rentable square footage of leases
expiring in 1997, 1998 and 1999 represent 12%, 2% and 14% of the Property's
net rentable square footage, respectively.
2455 Horsepen Road (Northern Virginia). 2455 Horsepen Road is a two-story,
Class A suburban office building. The Property was developed in 1989 and
contains 104,150 net rentable square feet. The exterior of the building is a
limestone-like glass fiber-reinforced concrete with travertine marble and
ceramic tile accents and green reflective glass windows. The lobby is a two-
story atrium with a skylight, a multi-colored terrazzo floor and travertine
marble wainscoting at the walls. The elevator is built in a freestanding glass
block enclosure. There are five stairways, including a central grand
staircase. The building is part of a one hundred acre office park known as
Dulles Corner, along with 2411 Dulles Corner described above.
As of December 31, 1996, the Property was 100% leased, and the average 1996
Base Rent per square foot was $21.06. The Property's tenants are Radian Corp.
(58,089 rentable square feet) and Zenith (45,892 rentable
59
<PAGE>
square feet) under leases that expire in 1999 and 2002, respectively. The
aggregate net rentable square footage of leases expiring in 1997, 1998 and
1999 represent 0%, 0% and 56%, respectively, of the Property's net rentable
square footage.
4401 Fair Lakes Court (Northern Virginia). 4401 Fair Lakes Court is a four-
story, Class A suburban office building. The Property was developed in 1988
and contains 58,621 rentable square feet. The exterior of the building is
constructed of polished granite and dual-pane glass. The building is
surrounded on three sides by dense stands of oak, maple and poplar trees. The
lobby is a four-story atrium with a feature staircase. The interior finishes
are accented by polished granite and lacquered cherry. The Property is within
the Fair Lakes office park, located in Fairfax, Virginia. The park is
approximately twenty miles west of Washington, DC and contains approximately
1.5 million square feet of office space and 800,000 square feet of retail
space.
As of December 31, 1996, the Property was 96% leased, and the average 1996
Base Rent per square foot was $17.26. The Property's major tenants include CC
Pace (15,170 rentable square feet), Cort Furniture (8,099 rentable square
feet) and Lee Technologies (8,807 rentable square feet) under leases that
expire in 2001, 1999 and 2001, respectively. The aggregate net rentable square
footage of leases expiring in 1997, 1998 and 1999 represent 10%, 0% and 22%,
respectively, of the Property's net rentable square footage.
Description of the Pending Office Acquisitions
Pacific Gateway Office Center (Los Angeles, California). Pacific Gateway
Office Center is a 223,731 square foot, 10-story, Class A Office Building
located in suburban Los Angeles, California. The building's exterior is
precast concrete panels and reflective dual-pane glass. The building was built
in 1982. It was completely renovated into a multi-tenant facility in 1990.
This property is located in Torrance in the 190th Street submarket of the
South Bay suburban office market. Pacific Gateway Office Center, one of six
Class A buildings in this submarket, is in the heart of the market at the
intersection of Vermont Avenue and 190th Street.
Pacific Gateway Office Center was 92% leased at December 31, 1996, and the
average 1996 Base Rent per square foot was $19.92. Major tenants include
Health Care Partners with 42,092 square feet expiring in March 2004, Ralph's
Grocery with 46,416 square feet expiring in December 1997 and First Integrated
with 18,847 square feet expiring in April 2001. The aggregate net rentable
square footage of leases expiring in 1997, 1998 and 1999 is 24%, 4% and 3%,
respectively, of the buildings total net rentable square footage.
Natomas Corporate Center (Sacramento, California). Natomas Corporate Center
is a 120 acre master planned office park. It is considered by many to be the
pre-eminent suburban office park in Sacramento. The six building office park
is situated on 32 acres and contains 564,606 rentable square feet. Natomas
Corporate Center has won many awards. The six-story twin towers (2485-2495
Natomas Park Drive) won the 1994 BOMA Office Park award for Excellence in
Office Building Design and Impact on the Community. Natomas Corporate Center
is located 2 miles from the state capital and has excellent freeway access and
visibility along Interstate 5, California's main North-South artery.
The Natomas properties were 89% leased as of December 31, 1996, and the
average 1996 Base Rent per square foot was $21.07. Tenants include MCI
(approximately 151,350 net rentable square feet, expiring in 2001), CH2M Hill
(approximately 48,170 net rentable square feet, expiring in 1999), Affordable
Health Care (approximately 55,940 net rentable square feet, expiring in 1999),
University of Phoenix (approximately 28,160 net rentable square feet, expiring
in 2002), River City Bank (approximately 24,300 net rentable square feet,
expiring in 2002), and Honeywell (22,500 net rentable square feet, expiring in
2004). The aggregate net rentable square footage of leases expiring in 1997,
1998 and 1999 represent 17%, 2%, and 12%, respectively, of Natomas' aggregate
net rentable square footage.
Crescent Centre (Atlanta, Georgia). Crescent Centre is a 12-story, 237,727
square foot, Class A office building with an attached 4-level, 917-space
parking deck located in the Northeast suburban submarket of Atlanta, Georgia,
known as Northlakes. The building is constructed of steel reinforced concrete
beams clad with
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silver and blue reflective glass in polished metal frames. The building is a
functional center core design with a two-story atrium lobby entrance.
Amenities on-site include a health club, conference rooms and a sandwich shop.
The building is located in the Northlake Office Park less than a mile from the
Northlake Mall, I-85 and LaVista Road. Northlake Office Park contains 900,000
square feet of Class A office property or 44% of the submarket's Class A
inventory. Crescent Center is 95% leased at December 31, 1996 and the average
1996 Base Rent per square foot was $16.01. Major tenants include St. Paul
Insurance (67,027 square feet, expiring in 2003), Massachusetts Mutual (13,728
square feet, expiring in 1998), Southern Heritage (11,924 square feet,
expiring in 2003). The aggregate net rentable area of leases expiring in 1997,
1998 and 1999 is 16%, 24% and 3%, respectively, of the net rentable area.
Corporetum Office Park (Chicago, Illinois). Corporetum Office Park is an
office park containing three buildings, which range from two to five stories
and contain approximately 323,728 net rentable square feet. Covering a total
18.5 acres, the Properties have 1,045 surface parking spaces. White granite
precast aggregate skin and gray-black semi-reflective window banks compliment
the strong horizontal lines of the Properties to give them a sleek, high-tech
look. The Properties are located within the seventy-five acre Corporetum
Office Campus which can accommodate up to six additional office buildings
totaling one million square feet. The Properties are adjacent to the East-West
Tollway (I-88) which links it to downtown Chicago and other western suburban
areas, as well as to the Tri-State Tollway (I-294) which provides direct
access to the northern suburbs and to Indiana to the south.
As of December 31, 1996, Corporetum Office Park was 97% leased and the
average 1996 Base Rent per square foot was $14.99. Platinum Technologies
leases 163,857 square feet expiring in 2003, or 49% of Corporetum Office
Park's net rentable area. Other major tenants include the John Sexton Company
(54,445 square feet, expiring in 2002), Asea, Brown, Boveri (30,738 square
feet, expiring in 1998) and Chrysler (18,663 square feet, expiring in 1998).
The aggregate net rentable area of leases expiring in 1997, 1998 and 1999
represent 2%, 16% and 3%, respectively of the net rentable area.
Seven Mile Crossing (Suburban Detroit, MI). Seven Mile Crossing consists of
two 4-story buildings totaling 244,630 square feet. The buildings are
constructed with a structural steel framework with a precast panel exterior
and thermal insulated glass. Building A totals 113,066 square feet and was
completed in 1988. Building B totals 131,564 square feet and was completed in
1990. Seven Mile Crossing also contains a .84 acre pad site which is ground
leased to a Cooker Restaurant through May 2057 for $60,000 per year plus
recoveries and percentage of rent. Upon acquisition, the Company will own a
100% leasehold interest in Seven Mile Crossing.
The Company is currently negotiating the terms of an agreement to acquire an
option to obtain a ground lease of a 3.98 acre parcel of land adjacent to
Seven Mile Crossing. The Company expects that the option will be for a term
expiring in March 2002. This parcel can be developed into an office building
or hotel provided that such development complies with zoning regulations and
other laws or regulations. The Company expects to pay approximately $10,000
per annum for this option. Under the terms of this option agreement, the
ground lease term would extend through 2078 and the annual Base Rent would be
approximately $51,000 if the Company exercises its option.
At December 31, 1996, Seven Mile Crossing is 96% leased and the average 1996
Base Rent per square foot was $18.78. Major tenants include Amoco Oil (11,842
square feet, expiring 2001), Lake State Insurance (10,858 square feet,
expiring 2001) and EDS Unigraphics (13,183 square feet, expiring 2001). The
aggregate net rentable area of leases expiring in 1997, 1998 and 1999 is 24%,
6% and 13%, respectively, of the total net rentable area.
INDUSTRIAL PROPERTIES AND PENDING INDUSTRIAL ACQUISITIONS
General
The 63 Industrial Properties comprise approximately 5.6 million square feet
of net rentable area and are located in seven major markets: Los Angeles,
California; Baltimore, Maryland; Chicago, Illinois; Kansas City, Missouri;
Dallas, Texas; Houston, Texas; and Milwaukee, Wisconsin. The 14 Pending
Industrial Acquisitions
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comprise 1.9 million square feet of net rentable area and are located in five
major markets: Los Angeles, California; Chicago, Illinois; Baltimore,
Maryland; Dallas, Texas; and Houston, Texas. As of December 31, 1996, the
Industrial Properties and Pending Acquisitions were 95% leased to 149 tenants.
The total 1996 Base Rent of the Industrial Properties and Pending Acquisitions
was approximately $24 million and average 1996 Base Rent per leased square
foot of the Industrial Properties was $3.45. The Company owns 100% of the
Industrial Properties and will own 100% of the Pending Industrial Acquisitions
upon the completion of the Pending Acquisitions.
The current leases on the Industrial Properties and Pending Acquisitions
generally have original lease terms ranging from one 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.
Historical Occupancy and Rental Information
The following table sets forth certain information regarding those
Industrial Properties that have been managed by the Company since 1992.
INDUSTRIAL PROPERTIES MANAGED BY THE COMPANY SINCE 1992
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>
December 31, 1996............. 5,271 97% $3.45
December 31, 1995............. 5,163 96 3.35
December 31, 1994............. 5,088 94 3.17
December 31, 1993............. 4,258 91 3.41
December 31, 1992............. 2,560 83 4.19
</TABLE>
- --------
(/1/)Calculated as total annualized Base Rent for the previous twelve months
divided by the total leased square feet at period end.
Lease Expirations
The following table sets forth a schedule of the lease expirations for the
Industrial Properties and Pending Industrial Acquisitions for leases in place
as of December 31, 1996 assuming that none of the tenants exercises renewal
options or termination rights, if any:
INDUSTRIAL PROPERTIES AND PENDING INDUSTRIAL ACQUISITIONS LEASE EXPIRATIONS
<TABLE>
<CAPTION>
2006 AND
PROPERTY 1997 1998 1999 2000 2001 2002 2003 2004 2005 THEREAFTER
- -------- ----- ----- ----- ------ ----- ----- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Properties
Los Angeles Industrial
Properties
Square Feet Expiring
(000's)............... 134 112 130 534 197 -- 51 40 54 --
Square Feet as a % of
NRA................... 11% 9% 10% 43% 16% -- 4% 3% 4% --
Annualized Base Rent in
Expiring Year
(000's)............... $718 $514 $576 $2,215 $876 -- $291 $212 $321 --
Annualized Base Rent
PSF in Expiring Year.. $5.36 $4.59 $4.43 $4.15 $4.45 -- $5.71 $5.30 $5.94 --
Number of Leases
Expiring.............. 3 2 3 8 2 -- 1 1 1 --
Baltimore Industrial
Properties
Square Feet Expiring
(000's)............... -- 104 110 332 51 17 -- -- 108 --
Square Feet as a % of
NRA................... -- 14% 15% 45% 7% 2% -- -- 15% --
Annualized Base Rent in
Expiring Year
(000's)............... -- $368 $492 $1,330 $223 $88 -- -- $566 --
Annualized Base Rent
PSF in Expiring Year.. -- $3.54 $4.47 $4.01 $4.37 $5.18 -- -- $5.24 --
Number of Leases
Expiring.............. -- 2 5 5 2 1 -- -- 1 --
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
2006 AND
PROPERTY 1997 1998 1999 2000 2001 2002 2003 2004 2005 THEREAFTER
- -------- ----- ------ ----- ----- ----- ----- ---- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kansas City Industrial
Properties
Square Feet Expiring
(000's)............... 29 416 192 327 179 200 -- -- -- --
Square Feet as a % of
NRA................... 2% 31% 14% 24% 13% 15% -- -- -- --
Annualized Base Rent in
Expiring Year
(000's)............... $101 $1,075 $513 $841 $549 $550 -- -- -- --
Annualized Base Rent
PSF in Expiring Year.. $3.48 $2.58 $2.67 $2.57 $3.07 $2.75 -- -- -- --
Number of Leases
Expiring.............. 3 4 6 4 3 1 -- -- -- --
Dallas Industrial
Properties
Square Feet Expiring
(000's)............... 13 106 82 57 160 -- -- -- -- --
Square Feet as a % of
NRA................... 3% 25% 19% 13% 37% -- -- -- -- --
Annualized Base Rent in
Expiring Year
(000's)............... $65 $258 $319 $201 $458 -- -- -- -- --
Annualized Base Rent
PSF in Expiring Year.. $5.00 $2.43 $3.89 $3.53 $2.86 -- -- -- -- --
Number of Leases
Expiring.............. 2 2 6 3 3 -- -- -- -- --
Houston Industrial
Properties
Square Feet Expiring
(000's)............... 17 -- 18 12 -- -- -- -- 20 --
Square Feet as a % of
NRA................... 23% -- 24% 16% -- -- -- -- 27% --
Annualized Base Rent in
Expiring Year
(000's)............... $130 -- $118 $65 -- -- -- -- $198 --
Annualized Base Rent
PSF in Expiring Year.. $7.65 -- $6.56 $5.42 -- -- -- -- $9.90 --
Number of Leases
Expiring.............. 4 -- 4 1 -- -- -- -- 1 --
Milwaukee Industrial
Properties
Square Feet Expiring
(000's)............... 153 216 263 169 70 38 -- 55 -- 100
Square Feet as a % of
NRA................... 13% 18% 22% 14% 6% 3% -- 5% -- 8%
Annualized Base Rent in
Expiring Year
(000's)............... $513 $693 $911 $514 $294 $197 -- $195 -- $441
Annualized Base Rent
PSF in Expiring Year.. $3.35 $3.21 $3.46 $3.04 $4.20 $5.18 -- $3.55 -- $4.41
Number of Leases
Expiring.............. 4 8 10 2 4 1 -- 1 -- 1
ACQUIRED PROPERTIES
Chicago Industrial
Properties
Square Feet Expiring
(000's)............... 25 15 13 12 -- 25 -- 136 -- --
Square Feet as a % of
NRA................... 11% 7% 6% 5% -- 11% -- 60% -- --
Annualized Base Rent in
Expiring Year
(000's)............... $121 $78 $64 $59 -- $117 -- $534 -- --
Annualized Base Rent
PSF in Expiring Year.. $4.84 $5.20 $4.92 $4.92 -- $4.68 -- $3.93 -- --
Number of Leases
Expiring.............. 1 1 1 1 -- 1 -- 1 -- --
5211 South Third Street
Square Feet Expiring
(000's)............... -- 330 -- -- 30 -- -- -- -- --
Square Feet as a % of
NRA................... -- 92% -- -- 8% -- -- -- -- --
Annualized Base Rent in
Expiring Year
(000's)............... -- $858 -- -- $105 -- -- -- -- --
Annualized Base Rent
PSF in Expiring Year.. -- $2.60 -- -- $3.50 -- -- -- -- --
Number of Leases
Expiring.............. -- 1 -- -- 1 -- -- -- -- --
PENDING
ACQUISITIONS
The Colonnade II
Square Feet Expiring
(000's)............... 111 76 90 56 61 -- -- -- -- --
Square Feet as a % of
NRA................... 24% 16% 19% 12% 13% -- -- -- -- --
Annualized Base Rent in
Expiring Year
(000's)............... $435 $325 $537 $253 $212 -- -- -- -- --
Annualized Base Rent
PSF in Expiring Year.. $3.92 $4.28 $5.97 $4.52 $3.48 -- -- -- -- --
Number of Leases
Expiring.............. 4 4 5 2 1 -- -- -- -- --
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
2006 AND
PROPERTY 1997 1998 1999 2000 2001 2002 2003 2004 2005 THEREAFTER
- -------- ------ ------ ------ ------ ------ ------ ----- ----- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Day Creek Industrial
Park
Square Feet Expiring
(000's)............... -- -- -- -- -- 81 -- -- -- --
Square Feet as a % of
NRA................... -- -- -- -- -- 36% -- -- -- --
Annualized Base Rent in
Expiring Year
(000's)............... -- -- -- -- -- $311 -- -- -- --
Annualized Base Rent
PSF in Expiring Year.. -- -- -- -- -- $3.84 -- -- -- --
Number of Leases
Expiring.............. -- -- -- -- -- 1 -- -- -- --
16801 South Exchange
Square Feet Expiring
(000's)............... -- 189 -- -- -- -- -- -- -- 267
Square Feet as a % of
NRA................... -- 41% -- -- -- -- -- -- -- 59%
Annualized Base Rent in
Expiring Year
(000's)............... -- $472 -- -- -- -- -- -- -- $988
Annualized Base Rent
PSF in Expiring Year.. -- $2.50 -- -- -- -- -- -- -- $3.70
Number of Leases
Expiring.............. -- 1 -- -- -- -- -- -- -- 1
Route 100 Building
Square Feet Expiring
(000's)............... -- -- -- 144 -- -- -- -- -- --
Square Feet as a % of
NRA................... -- -- -- 100% -- -- -- -- -- --
Annualized Base Rent in
Expiring Year
(000's)............... -- -- -- $651 -- -- -- -- -- --
Annualized Base Rent
PSF in Expiring Year.. -- -- -- $4.52 -- -- -- -- -- --
Number of Leases
Expiring.............. -- -- -- 1 -- -- -- -- -- --
8779 Greenwood Place
Square Feet Expiring
(000's)............... -- 61 -- -- -- 81 -- -- -- --
Square Feet as a % of
NRA................... -- 43% -- -- -- 57% -- -- -- --
Annualized Base Rent in
Expiring Year
(000's)............... -- $235 -- -- -- $349 -- -- -- --
Annualized Base Rent
PSF in Expiring Year.. -- $3.85 -- -- -- $4.31 -- -- -- --
Number of Leases
Expiring.............. -- 1 -- -- -- 1 -- -- -- --
Six Flags Distribution
Center
Square Feet Expiring
(000's)............... -- -- -- -- -- 186 51 -- -- --
Square Feet as a % of
NRA................... -- -- -- -- -- 78% 22% -- -- --
Annualized Base Rent in
Expiring Year
(000's)............... -- -- -- -- -- $725 $325 -- -- --
Annualized Base Rent
PSF in Expiring Year.. -- -- -- -- -- $3.90 $6.37 -- -- --
Number of Leases
Expiring.............. -- -- -- -- -- 1 1 -- -- --
Bridgestone Distribution
Center
Square Feet Expiring
(000's)............... 110 105 -- -- -- -- -- -- -- --
Square Feet as a % of
NRA................... 51% 49% -- -- -- -- -- -- -- --
Annualized Base Rent in
Expiring Year
(000's)............... $360 $360 -- -- -- -- -- -- -- --
Annualized Base Rent
PSF in Expiring Year.. $3.27 $3.43 -- -- -- -- -- -- -- --
Number of Leases
Expiring.............. 1 1 -- -- -- -- -- -- -- --
Total Industrial
Properties and Pending
Acquisitions
Square Feet Expiring
(000's)............... 592 1,730 898 1,643 748 628 102 231 182 367
Square Feet as a % of
NRA................... 8% 23% 12% 22% 10% 8% 1% 3% 2% 5%
Annualized Base Rent in
Expiring Year
(000's)............... $2,443 $5,236 $3,530 $6,129 $2,717 $2,337 $616 $941 $1,085 $1,429
Annualized Base Rent
PSF in Expiring Year.. $4.13 $3.03 $3.93 $3.73 $3.63 $3.72 $6.04 $4.07 $5.96 $3.89
Number of Leases
Expiring.............. 22 27 40 27 16 7 2 3 3 2
</TABLE>
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<PAGE>
Tenant Information
The Industrial Properties and Pending Industrial Acquisitions are leased to
149 tenants which engage in a variety of businesses including electronics,
tire manufacturing and food systems. The following table sets forth the
annualized December 1996 Base Rent of the Properties and Pending Acquisitions
derived from the 20 largest tenants at the Industrial Properties and Pending
Industrial Acquisitions.
INDUSTRIAL PROPERTIES AND PENDING INDUSTRIAL ACQUISITIONS
20 LARGEST TENANTS BY ANNUALIZED DECEMBER 1996 BASE RENT
<TABLE>
<CAPTION>
DECEMBER AS A
TOTAL NET 1996 PERCENT OF
RENTABLE ANNUALIZED DECEMBER 1996 MONTHS
SQUARE FEET BASE RENT (/1/) ANNUALIZED REMAINING
TENANT PROPERTY (IN THOUSANDS) (IN THOUSANDS) BASE RENT AFTER 12/31/96
- ------------------------ ------------------------- -------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Nippon Express USA...... Los Angeles Industrial 499 $ 1,915 1.5% 48
Properties
Wickes Furniture Six Flags 237 915 0.7 71
Company................ Distribution Center (/2/)
C&H Distributors Inc.... 5211 South Third Street 330 858 0.7 20
Bridgestone (/3/)....... Bridgestone Distribution 215 720 0.6 18
Center (/2/)
Constar Plastics, Inc... Baltimore Industrial 178 696 0.6 40
Properties
Best Buy................ Route 100 Building (/2/) 144 610 0.5 37
Reliable Services....... 16801 South Exchange 267 540 0.4 134
(/2/)
Dunlop Tire Kansas City Industrial 230 526 0.4 43
Corporation............ Properties
Office Depot............ 16801 South Exchange 189 472 0.4 20
(/2/)
Professional Mailing and Baltimore Industrial 108 428 0.3 102
Distribution........... Properties
American West BMD....... The Colonnade II (/2/) 60 421 0.3 28
Distribution Services... Kansas City Industrial 158 385 0.3 12
Properties
Michelin Tire Chicago Industrial 110 385 0.3 96
Corporation............ Buildings
King's Hawaiian Bakery.. Los Angeles Industrial 72 370 0.3 39
Properties
US Postal Service....... Kansas City Industrial 132 365 0.3 23
Properties
Midland Brake, Inc...... Kansas City Industrial 200 360 0.3 61
Properties
Pepsico Food Systems.... Milwaukee Industrial 120 354 0.3 12
Properties
Elite Spice, Inc........ Baltimore Industrial 88 336 0.3 40
Properties
Distribution Milwaukee Industrial 112 330 0.3 11
Specialists............ Properties
Ambrosia Chocolate Co... Milwaukee Industrial 101 318 0.3 34
Properties
----- ------- ---
3,550 $11,304 9.0%
===== ======= ===
</TABLE>
- --------
(/1/Represents)annualized base rent for December 1996 or for initial month if
lease starts after December 31, 1996.
(/2/Pending)Acquisitions; there can be no assurances that the Company will
close on all of the Pending Acquisitions. See "Risk Factors--Risk that the
Pending Acquisitions Will Not Close."
(/3/Represents)rental terms under the proposed lease-back.
Description of the Industrial Acquired Properties
Chicago Industrial Properties (Chicago, Illinois). The Chicago Industrial
Properties consist of the industrial, distribution, warehouse and servicing
buildings developed by the Prentiss Group containing an aggregate of 226,076
net rentable square feet. Two of the buildings, Wood Dale 1 and 2 contain a
total of 116,076 net rentable square feet, are part of a single complex
located in Wood Dale (DuPage County, Illinois) and are 100% leased. The major
tenants at Wood Dale 1 building are Vacumette Corporation (24,923 net rentable
square feet expiring in 1997) and Sun Chemical (24,923 net rentable square
feet expiring in 2002). The major tenants at Wood Dale 2 are RS Express
(26,424 net rentable square feet expiring in 2004) and General Electric
(14,826 net rentable square feet expiring in 1998). The other building, 155
Alexandra Way, is a 110,000 net rentable square foot warehouse located in
Carol Stream (DuPage) County and is 100% leased by Michelin Tire Corporation
through December 2004.
5211 South 3rd Street (Milwaukee, Wisconsin). 5211 South 3rd Street is a
360,000 square foot industrial warehouse located in the middle of the
Company's 12 building Airport Industrial Park in Milwaukee, Wisconsin. The
Property includes 5.1 acres of vacant land immediately adjacent to one of the
Company's development parcels. The building is 100% leased to C&H
Distributors, Inc. (330,000 square feet expiring in 1998) and the
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American Society of Quality Control (30,000 square feet expiring in 2001). The
average 1996 Base Rent per square foot was $2.68.
Description of the Pending Industrial Acquisitions
The Colonnade II (Los Angeles, California). The Colonnade II properties
consist of four industrial buildings ranging in size from 52,387 to 79,680
square feet, a research and development building totaling 23,313 square feet
and a 168,000 square foot truck terminal, aggregating a total of 466,708
square feet. The total acreage is approximately 29 acres, divided into 12
separate parcels and all buildings are on separate parcels providing maximum
flexibility. The Properties were 89% leased at December 31, 1996. Major
tenants include Russell & Miller (60,000 net rentable square feet expiring
2001), American West BMD (51,840 net rentable square feet expiring 1999) and
Larson Juhl, Inc. (32,963 net rentable square feet expiring 2000). The average
1996 Base Rent per square foot was $5.00. The aggregate net rentable square
footage of leases expiring in 1997, 1998 and 1999 represent 24%, 16% and 19%,
respectively, of these properties' total net rentable square footage.
The Company has contracted to purchase, at a substantial discount, a non-
recourse promissory note secured by the property. The note has a principal
balance of $18.7 million and bears interest at either LIBOR plus 1.25%, Fed
Funds plus 1.28% or Prime plus .25% at the election of the Company. The
outstanding balance of the note is prepayable without penalty at any time with
proper notice. The Company is negotiating a deed-in-lieu of foreclosure
transaction with the maker of the note. However, there can be no assurance
that this will be successful.
A truck terminal accommodating 196 cross-decked loading bays sits on 14.46
acres of land. The Company believes this land is significantly under-utilized
in its current form and can be redeveloped into approximately 300,000 square
feet of new industrial space.
The Colonnade II is located in southeast suburban Los Angeles in the city of
Santa Fe Springs near the intersection of I-5 and I-605. The location has
distribution access to the Los Angeles Freeway System and serves both Los
Angeles and Orange Counties. Also, the property is generally located between
the Company's Pacific Gateway Industrial Properties in Torrance, California,
and the Day Creek Industrial Park Pending Acquisition in Ontario, California.
Day Creek Industrial Park (Los Angeles, California). The Day Creek
Industrial Properties consists of two newly constructed warehouse/distribution
facilities containing an aggregate of 228,382 net rentable square feet located
in Ontario, California. Building 1 contains 147,319 square feet with a 30'
ceiling clear height, 34 dock-high doors and 159 parking spaces. Building 2
contains 81,063 square feet with a 26' ceiling clear height, 13 dock-high
doors and 110 parking spaces. Building 2 is leased to Lanier Worldwide, Inc.
for five years, beginning July 1997 at an average Base Rent per square foot of
$3.44. No leases have been signed for Building 1. The Company closed on this
Pending Acquisition on March 25, 1997.
Day Creek Industrial Park is part of the Inland Empire West submarket. The
property is located in the City of Ontario, just east of the Ontario
International Airport. The Inland Empire West submarket encompasses the cities
of Ontario, Chino, Fontana, Montclair, Upland, Mira Loma and Rancho Cucamonga.
This was the first area to attract large warehousing and distribution users
and correspondingly excessive speculative development. The primary attractions
to this area are its superior location for distribution of goods to West Coast
population centers, "state-of-the-art" buildings that are much more efficient
than comparable buildings 10 to 30 years old in Los Angeles and Orange
Counties and an excellent labor base resulting from the relatively low cost of
housing compared to other areas of Southern California.
16801 South Exchange (Chicago, Illinois). 16801 South Exchange is a 455,858
rentable square foot building situated on approximately 32 acres of land with
26' clear ceilings. The office area comprises approximately 8% of the total
building. The property also includes an 8.75 acre parcel of land that can be
developed into approximately 100,000 net rentable square feet of new
industrial space. The property is 100%
66
<PAGE>
leased. Boise Cascade leases 267,082 square feet, or 59% of the building,
through February 2008. Office Depot leases 188,766 square feet, or 41% of the
building, through August 1998. The average 1996 Base Rent per square foot was
$2.22.
The property is located in the heart of the emerging South Suburban/1-80
corridor industrial market--one mile north of the four-way interchange at
Torrence Avenue (Route 83) and I-80 and just 22 miles east of the intersection
of I-355 and I-80, currently under construction. The South Suburban/I-80
Corridor is an increasingly active industrial submarket recognized for its
access to the national interstate system.
Route 100 Building (Baltimore, Maryland). The Route 100 Building contains
143,924 net rentable square feet with a 21' ceiling clear height and 19 dock-
high loading bays. The property was completed in 1974. Best Buy leases 100% of
the building through January 2000. The average 1996 Base Rent per square foot
was $4.23. The Property is located in the Route 100 Industrial Park in Howard
County, Maryland in the center of the Baltimore/Washington Industrial
Corridor. The Route 100 Industrial Park, located one mile east of the
Route 100/I-95 interchange, is a 180-acre industrial park which presently
encompasses 20 industrial buildings totaling 1.6 million square feet. Located
15 miles southwest of Baltimore, the park has direct access via the newly
constructed Route 100 extension to the beltway surrounding Baltimore (I-695),
the Port of Baltimore, and I-95 North leading to Philadelphia and New York.
Washington, D.C. via I-95 is about 25 minutes to the southwest. The Baltimore-
Washington International airport is located 8 miles northeast of the property.
The Company closed on this Pending Acquisition on March 19, 1997.
8779 Greenwood Place (Baltimore, Maryland). 8779 Greenwood Place is a
142,140 net rentable square foot, concrete tilt wall, industrial warehouse
building located near the 8869 Greenwood building of the Company's Baltimore
Industrial Properties in the Corridor Industrial Park in suburban Baltimore,
Maryland. 8779 Greenwood Place was constructed in 1979 and has a 22' ceiling
clear height with 18 dock-high loading bays. The Property is 100% leased to
Alling & Cory (80,640 square feet, expiring 2002) and Ingram & Company (61,500
square feet, expiring 1998). The average 1996 Base Rent per square foot was
$3.50.
Corridor Industrial Park is situated in the heart of the
Baltimore/Washington Corridor at the intersection of Maryland's Route 32 and
Route 1 in Howard County. The Park contains eleven industrial buildings
totaling 1.4 million square feet. The Park is also adjacent to Junction
Industrial Park where the Company's 9050 Junction Property is located.
Six Flags Distribution Center (Dallas, Texas). Six Flags Distribution Center
consists of a 186,344 net rentable square foot tilt wall distribution
warehouse building and a 51,000 square foot tilt wall office/showroom building
located in Six Flags Business Park, Arlington, Texas. The property has a total
of 238 parking spaces and a total land area of 12.27 acres. Both buildings are
100% leased to Wickes Furniture Company, Inc. The distribution building lease
expires in 2002 and the 1996 Base Rent per square foot was $3.39. The showroom
building lease expires in 2003 and the 1996 Base Rent per square foot was
$5.55. Six Flags Business Park is located in the heart of the Great Southwest
industrial submarket, where the Avenue T building of the Company's Dallas
Industrial Properties is also located. The Company closed on this Pending
Acquisition on March 19, 1997.
Bridgestone Distribution Center (Houston, Texas). The Bridgestone
Distribution Center is a 215,000 net rentable square foot industrial warehouse
located in the Southwestern suburbs of Houston. This concrete, tilt wall
building was built in 1982. The office area totals approximately 7,500 square
feet or 3.5% of the total rentable square feet. Bridgestone Corporation leases
100% of the Property under a master lease which expires 12 months from the
closing of the acquisition of this property with regard to 110,000 square feet
and 18 months from the closing of the acquisition of this property with regard
to the remaining 105,000 square feet. The Base Rent per square foot is $3.35.
The property is located in the Southwest Industrial submarket just south of
the intersection of I-10 and Highway 6. This submarket contains approximately
55 million square feet of inventory with a December 1996 vacancy rate of
12.4%. Absorption in 1996 totaled 1.0 million square feet.
67
<PAGE>
DEVELOPMENT/REDEVELOPMENT PROPERTIES
Since the IPO, the Company has commenced development of two industrial
buildings that will contain a total of approximately 420,000 net rental square
feet and has substantially completed an approximately 21,000 net rentable
square foot addition to the Milwaukee Industrial Properties. In addition, the
Company has announced that, in the second or third quarter of 1997, it intends
to commence construction of a new office building on its Cumberland Office
Park Properties that will contain approximately 150,000 net rentable square
feet. The table below sets forth certain information regarding these four
buildings.
<TABLE>
<CAPTION>
PROJECTED PROJECTED ESTIMATED
TYPE OF NET RENTABLE TOTAL COST COST PER MONTH MONTH OF
BUILDING NAME MARKET PROPERTY SQUARE FEET (IN MILLIONS) SQUARE FOOT STARTED COMPLETION
------------- ------------- ---------- ------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Federal Express......... Atlanta, GA Industrial 283,840 $18.3 $ 63.38 December 1996 December 1997
Continental Executive
Parke.................. Chicago, IL Industrial 136,200 6.3 46.26 December 1996 July 1997
Milwaukee Industrial.... Milwaukee, WI Industrial 20,760 1.0 48.17 October 1996 May 1997
Cumberland Office Park.. Atlanta, GA Office 150,000 20.0 $133.33 N/A N/A
------- -----
Total................... 590,800 $45.6
======= =====
</TABLE>
OPTION PROPERTY
The Company has an option to acquire from the Prentiss Group a 67% interest
in World Savings Center, a 17-story office building containing 271,055 square
feet located adjacent to Lake Merritt in downtown Oakland, California, for $1.
The building was completed in 1985 and was 96% occupied as of December 31,
1996. World Savings and Loan leases 147,174 net rentable square feet, or 54%
of the net rentable area, through November 2000. Larson, Burnham and Trutnen
leases 69,081 net rentable square feet, or 26% of the net rentable area,
through December 31, 1999. The Company believes that the debt outstanding on
the property exceeds the value of the property and the Company will seek a
debt restructuring before or in conjunction with exercising its option. In
addition, any transaction must preserve World Savings and Loan's tax position
in the partnership.
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<PAGE>
DEVELOPMENT PARCELS
The Company owns or has options to acquire the following 13 development
parcels, each of which is located either within an industrial park developed
by the Prentiss Group or adjacent to one of the Company's Properties.
<TABLE>
<CAPTION>
PARCEL MAXIMUM
ACREAGE ADJACENT PROPERTY/ DEVELOPMENT COMPANY'S
(APPROX.) GENERAL LOCATION MARKET (SQUARE FEET) INTEREST
--------- ---------------------------------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C>
OFFICE:
1.6 Cumberland Office Park Atlanta 150,000 Fee
4.2 Walnut Glen Dallas, TX 500,000 Fee
2.0 Broadmoor Austin Austin, TX 200,000 Leasehold(/1/)
6.4 3141 Fairview Park Drive Northern Virginia 200,000 Option(/2/)
4.7 Park West Office Park Dallas, TX 350,000 Option(/2/)(/3/)
5.1 2411 Dulles Corner Road Northern Virginia 200,000 ROFR(/4/)
16.2 Continental Executive Parke Chicago, IL 225,000 Option(/2/)
----------- ---------
40.1 Office Total 1,825,000
----------- ---------
INDUSTRIAL:
3.6 Kansas City Industrials Kansas City, MO 100,000 Fee
11.0 Milwaukee Industrials Milwaukee, WI 300,000 Fee
4.0 Milwaukee Industrials Airport Properties Milwaukee, WI 50,000 Fee
15.2 Park West Commerce Center Dallas, TX 320,000 Fee
14.8 Park West Commerce Center Dallas, TX 320,000 Option
23.6 Continental Executive Parke Chicago, IL 250,000 Option
----------- ---------
72.2 Industrial Total 1,340,000
----------- ---------
102.2 Total 3,165,000
=========== =========
</TABLE>
- --------
(/1/The)Company owns a 49.9% interest in the general partnership that owns the
leasehold interest in this parcel.
(/2/The)Company has exercised its option to acquire these parcels and is
currently negotiating the pricing and completing due diligence pursuant to
the related option agreements.
(/3/The)Company owns a 50% partnership interest in the partnership owning this
parcel.
(/4/The)Company retains a right of first refusal to purchase the parcel
through June 1998.
The Company has options to purchase all of the parcels described below. The
Company will exercise an option, if at all, by submitting a price offer to the
owner. If the owner rejects the offer, the price at which the Company can
exercise the option will be determined by appraisal. The Company expects that
any such pricing process could take several months from the date the Company
makes its initial price offer. Once the purchase price is determined, the
Company has 30 days to decide whether to purchase the parcel.
The Company has submitted an offer to purchase the 6.4 acre parcel located
adjacent to the Company's 3141 Fairview Park Drive Property. The Company and
the seller have agreed on a purchase price, but the Company has not completed
its due diligence.
The Company also holds an option to purchase three parcels of development
land totaling approximately 23.6 acres in Continental Executive Parke ("CEP")
in Vernon Hills (near Chicago). The parcels consist of four separate lots, are
zoned for industrial use and can support a total of 250,000 net rentable
square feet of development. Each parcel may be purchased in increments. The
option period expires on February 15, 1998. In addition, the Company has
submitted a price offer to purchase two additional parcels totaling
approximately 16.2 acres in CEP. The parcels are zoned for industrial or
office use and can support an additional 225,000 square feet of development.
The seller is in the process of obtaining an appraisal which will determine
the purchase price.
69
<PAGE>
The Company has submitted a price offer to acquire a 50% interest in Park
West C1, a 4.7 acre tract of land located in the Park West Office Park in
Dallas, Texas adjacent to the Company's Park West Properties. The tract is
zoned for office use and can support up to 350,000 net rentable square feet of
development. The Company and the seller of the interest in this tract have
agreed on a purchase price, but the Company has not completed its due
diligence. The Company is pursuing the acquisition of the other 50% interest
in this tract.
Upon the acquisition of the Pending Acquisitions, the Company will acquire
interests in the following four development parcels.
<TABLE>
<CAPTION>
COMPANY'S
PARCEL MAXIMUM INTEREST
ACREAGE DEVELOPMENT AFTER
(APPROX.) PENDING ACQUISITION MARKET (SQUARE FEET) CLOSING
--------- --------------------------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
10.9 Natomas Corporate Center Sacramento 170,000 Fee
25.0 Natomas Corporate Center Sacramento 400,000 ROFR(/1/)
-------
35.9 Office Total 570,000
-------
14.5 The Colonnade II Los Angeles 300,000 Fee(/2/)
8.8 16801 South Exchange Chicago 100,000 Fee
-------
23.3 Industrial Total 400,000
-------
59.2 Pending Acquisitions Total 970,000
=======
</TABLE>
- --------
(/1/The)Company has a right of first refusal to purchase the parcel for a
period of three years from the closing of the acquisition of the Natomas
Corporate Center properties.
(/2/This)parcel is currently utilized for a truck terminal. The Company
believes that this use is a significant underutilization of this site and
intends to redevelop the parcel into two newly constructed industrial
warehouse facilities as market conditions warrant.
70
<PAGE>
HISTORICAL NON-INCREMENTAL REVENUE-GENERATING CAPITAL EXPENDITURES OF
PROPERTIES AND PENDING ACQUISITIONS
The following table sets forth annual and per square foot recurring, non-
incremental revenue-generating capital improvements and non-incremental
revenue-generating tenant improvement costs and leasing commissions to retain
revenues attributable to existing leased space for the period 1994 through
1996 for the Office Properties and Pending Office Acquisitions and the
Industrial Properties and Pending Industrial Acquisitions. 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>
1996-1994
1996 1995 1994 AVERAGE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NON-INCREMENTAL REVENUE-
GENERATING CAPITAL
IMPROVEMENTS
Office Properties and Pending
Acquisitions
Annual.................... $ 647,441 $ 959,331 $ 787,035 $ 797,936
Per Square Foot........... 0.10 0.15 0.12 0.13
Industrial Properties and
Pending Acquisitions
Annual.................... $ 1,226,990 $ 937,217 $ 664,852 $ 943,020
Per Square Foot........... 0.17 0.13 0.09 0.13
NON-INCREMENTAL REVENUE-
GENERATING TENANT IMPROVEMENT
COSTS AND LEASING COMMISSIONS
Office Properties and Pending
Acquisitions
Annual tenant improvement
costs.................... $ 6,585,649 $ 7,636,573 $ 4,598,131 $ 6,273,451
Annual leasing
commissions.............. 3,223,317 3,297,330 2,254,131 2,924,926
Per square foot improved.. 7.49 10.19 7.85 8.50
Per square foot leased.... 3.67 4.40 3.85 3.96
----------- ----------- ----------- -----------
Total per square foot
improved/leased......... $ 11.16 $ 14.59 $ 11.70 $ 12.46
</TABLE>
<TABLE>
<CAPTION>
1996-1994
1996 1995 1994 AVERAGE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Industrial Properties and
Pending Acquisitions
Annual tenant improvement
costs.................... $ 492,230 $ 904,648 $ 286,092 $ 560,990
Annual leasing
commissions.............. 308,656 950,026 276,927 511,870
Per square foot improved.. 0.60 0.51 0.46 0.52
Per square foot leased.... 0.38 0.53 0.44 0.48
----------- ----------- ----------- -----------
Total per square foot
improved/leased......... $ 0.98 $ 1.04 $ 0.90 $ 1.00
TOTAL NON-INCREMENTAL REVENUE-
GENERATING CAPITAL
EXPENDITURES
Office Properties and Pending
Acquisitions................. $10,456,407 $11,893,234 $ 7,639,297 $ 9,996,313
Industrial Properties and
Pending Acquisitions......... 2,027,876 2,791,891 1,227,871 2,015,879
----------- ----------- ----------- -----------
Total.................... $12,484,283 $14,685,125 $ 8,867,168 $12,012,192
</TABLE>
71
<PAGE>
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 1994 through 1996 for the Office Properties and Pending Office
Acquisitions and the Industrial Properties and Pending Industrial
Acquisitions. 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 and Pending Acquisitions. 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>
1996-1994
1996 1995 1994 AVERAGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INCREMENTAL REVENUE-GENERATING TENANT
IMPROVEMENT COSTS AND LEASING COMMISSIONS
Office Properties and Pending Ac-
quisitions
Annual tenant improvements..... $1,389,939 $4,676,589 $1,210,271 $2,425,600
Annual leasing commissions..... 517,410 1,547,200 386,790 817,133
Per square foot improved....... 9.00 12.81 11.38 11.63
Per square foot leased......... 3.35 4.24 3.64 3.92
---------- ---------- ---------- ----------
Total per square foot
Improved/leased.............. $ 12.35 $ 17.05 $ 15.02 $ 15.55
Industrial Properties and Pending
Acquisitions
Annual tenant improvements..... $ 308,613 $1,570,343 $ 344,880 $ 741,279
Annual leasing commissions..... 138,447 378,407 125,853 214,236
Per square foot improved....... 2.34 3.37 1.99 2.88
Per square foot leased......... 1.05 0.81 0.73 0.83
---------- ---------- ---------- ----------
Total per square foot
Improved/leased.............. $ 3.39 $ 4.18 $ 2.72 $ 3.71
</TABLE>
PRENTISS PROPERTIES SERVICE BUSINESS
The Company manages 255 office and industrial properties owned by third
parties with approximately 32 million net rentable square feet leased to over
1,900 tenants. These properties are owned by over 46 different clients and are
located in 17 markets throughout the U.S. In addition to property management
and leasing, the Company offers its clients a full range of related services
including construction, marketing, insurance, accounting, tax, real estate
law, acquisition, disposition, facilities management, corporate services and
asset management. See "Business Objectives--Third-Party 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 the Prentiss Group invested in a managing general
agency which is a leading insurance broker. Through the MgmtPlus+ Preferred
Risk Real Estate Insurance Program sponsored by such
72
<PAGE>
affiliate of the Prentiss Group, the agency has offered its clients insurance
cost savings, better asset protection, higher limits and improved claims
handling through insurance coverage specifically designed for real estate. In
connection with the Formation Transactions, a subsidiary of the Operating
Partnership acquired the Prentiss Group's 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 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 and will be
obtained on all of the Pending Acquisitions prior to their acquisition to
identify potential sources of contamination for which the Properties or
Pending Acquisitions may be responsible and to assess the status of
environmental regulatory compliance. The Phase I ESAs include historical
reviews of the related 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 do 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 for the Properties 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 the Los Angeles Industrial
Properties, 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 the Properties (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 Properties, 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. The Pacific Gateway Office Center, which is a
Pending Acquisition, is also located on the site of the Plant and the Company
is currently negotiating with Shell to extend the indemnity to cover the
Pacific Gateway Office Center, although there can be no assurance that such an
arrangement can be agreed upon.
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 be listed on the National Priorities List ("NPL") of Superfund sites.
Comments were submitted to the EPA challenging the proposal, and 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. At this time, the Company cannot predict
whether the EPA will promulgate the proposed listing of the Plant Site
Affected Area. In addition, the Los Angeles Industrial Properties and the
Pacific Gateway Office Center are located less than one mile east of an
existing Superfund site, the Montrose Chemical Superfund Site. Contaminants
associated with this site have been detected in the groundwater in the
vicinity of the Los Angeles Industrial Properties. Contamination also has been
found in groundwater to the south of the Plant Site Affected Area (the "Study
Area"). According to reports prepared by or on behalf of Shell and Dow, this
contamination appears to be associated with leaks from pipelines located in
that area.
73
<PAGE>
All past and present owners of the land underlying the Los Angeles
Industrial Properties, including the United States Government, Dow, Shell and
the current owner, in which a Prentiss Group affiliate is a general partner,
are Potentially Responsible Parties for the investigation and remediation of
the Plant Site. The current owner executed an indemnification agreement with
Shell. Shell agrees to (i) 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.
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.
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. 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. 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. A settlement of the lawsuit has been entered into under which (i)
the Company has transferred 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 agreed to assume all responsibility for the remediation of
the contaminated soil. The court has entered a finding that the Company was
not in the chain of ownership of the Milwaukee Affected Areas. Based on all
available information, the Company does not believe that it will incur any
liability with respect to this contamination.
In addition to these matters, it is possible that the ESAs related to any
one of the Properties or Pending Acquisitions 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.
Except as noted above, the Company believes that the Properties and the
Pending Acquisitions on which it has completed its due diligence investigation
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 Pending Acquisitions 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 SIGNIFICANT PROPERTIES
For federal income tax purposes, the basis, net of accumulated depreciation,
in the Properties of the Company and the Operating Partnership was
approximately $416.6 million at December 31, 1996. The real
74
<PAGE>
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 30 to 40 years. The federal tax basis
of the Park West C2 Property as of December 31, 1996 was approximately $8.5
million for the land and approximately $27.4 million for the building. The
federal tax basis of the Natomas Corporate Center Properties as of December
31, 1996 was approximately $14.3 million for the land and approximately $63.9
million for the building. The federal tax basis of the Corporetum Office
Campus as of December 31, 1996 was approximately $7.7 million for the land and
approximately $43.5 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. 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 was responsible for the
payment of 49.9%. The Austin real estate tax was 2.378% of assessed value. The
1996 annual real estate taxes paid on the Natomas Corporate Center Properties
were $964,945. The Sacramento real estate tax rate was 1.241% of assessed
value. The 1996 annual real estate taxes paid on Park West C2 were $670,077.
The Farmers Branch (suburban Dallas) real estate tax rate was 2.682% of
assessed value. The 1996 annual real estate taxes paid on Corporetum Office
Campus were $674,811. The Chicago real estate tax rate was .0696% of assessed
value.
OCCUPANCY AND EFFECTIVE RENT AT SIGNIFICANT PROPERTIES
The following table sets forth year end occupancy of and effective rent at
the Companies significant Properties for 1992 through 1996.
<TABLE>
<CAPTION>
OCCUPANCY AT DECEMBER 31, ANNUAL EFFECTIVE RENT
----------------------------- ----------------------------------
1996 1995 1994 1993 1992 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Broadmoor Austin........ 100% 100% 100% 100% 100% $15.16 $15.16 $15.16 $15.16 $15.16
Park West C2............ 98% 98% 100% 98% 97% $16.19 $10.27 $10.21 $10.80 $10.70
Natomas Corporate
Center................. 89% 94% 91% 87% 89% $13.33 $12.52 $12.51 $12.69 (/1/)
Corporetum
Office Campus.......... 97% 99% 95% 95% 92% $ 7.10 (/1/) (/1/) (/1/) (/1/)
</TABLE>
- --------
(/1/)Data not available.
LEGAL PROCEEDINGS
The Company, the General Partner and the Manager have limited operating
histories 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.
75
<PAGE>
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 of the Operating Partnership (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 a majority 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 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
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<PAGE>
Company's Total Market Capitalization. Upon completion of the Offering and the
Pending Acquisitions, the Company's combined indebtedness will be
approximately $283.2 million or approximately 23.3% of the Company's Total
Market Capitalization. The ratio, which is based, in part, upon the aggregate
market value of the outstanding Common Shares and Units, will fluctuate with
changes in the price of the Common Shares (and the issuance of additional
Common Shares, Units 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.
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 two-thirds of all of the votes
entitled to be cast on the matter outstanding shares of the Company entitled
to vote. In addition, the Company's Bylaws provide that any transaction
involving the Company, including the
77
<PAGE>
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 Declaration of Trust also includes a provision permitting each
Trustee, including 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. These provisions are
subject to any non-competition agreements that may exist. See "Management--
Employment Agreements."
Employment Agreements
Michael V. Prentiss and Thomas F. August have each entered 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, 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 contract
or 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 (a) the common directorship or interest, (b) the presence of the
Trustee at the meeting of the Board or a committee of the Board that
authorizes or approves or ratifies the contract or transaction or (c) the
counting of the vote of the Trustee for the authorization, approval or
ratification of the contract or transaction if (i) after disclosure of the
interest, the transaction is authorized, approved or ratified, by the
affirmative vote of a majority of the disinterested Trustees, or by the
affirmative vote of a majority of the votes 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.
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<PAGE>
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 may
issue Preferred Shares from time to time, in one or more series, as authorized
by the Board of Trustees without the need for shareholder approvals. See
"Description of Shares of Beneficial Interest--Preferred Shares." 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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<PAGE>
MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
The following table sets forth certain current information with respect to
the Trustees and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------- --- ----------------------------------------------
<C> <C> <S>
Michael V. Prentiss........ 53 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 in 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, Jr... 54 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........... 51 Executive Vice President and Managing
Director, Southwest Region
Richard J. Bartel.......... 46 Executive Vice President--Financial Operations
and Administration, and Chief Administrative
Officer
Mark R. Doran.............. 42 Executive Vice President and Chief Financial
Officer
Lawrence J. Krueger........ 41 Executive Vice President and Managing
Director, Midwest Region
James B. Meyer............. 37 Senior Vice President and Managing Director,
Southeast Region
David Robertson............ 40 Senior Vice President and Managing Director,
Western Region
Robert K. Wiberg........... 41 Senior Vice President and Managing Director,
Mid-Atlantic Region
</TABLE>
The following are biographical summaries of the Trustees and executive
officers of the Company:
Michael V. Prentiss serves as Chairman of the Board and Chief Executive
Officer of the Company. Mr. Prentiss, the founder and majority owner of
Prentiss Properties Limited, Inc. ("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
Fairview Urban Development, Inc. ("Cadillac Urban"), Executive Vice President
and member of the Board of Trustees of The Cadillac Fairview Corporation
Limited ("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 a Trustee
of the Company. Prior to the IPO, Mr. August 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.
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.
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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 750 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, Commercial Banking Group,
Banc One Corporation 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 also 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 and Managing Director,
Southwest Region of the Company. Prior to the IPO, 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 J. Bartel serves as Executive Vice President--Financial Operations
and Administration and Chief Administrative Officer. Mr. Bartel served in
similar capacities for PPL since 1995, overseeing the operating aspects of its
property management business, including quality control, management training
and day-to-day operations. He directed 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.
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<PAGE>
Mark R. Doran serves as Executive Vice President and Chief Financial Officer
of the Company. Mr. Doran is responsible for the investment and financing
activities of the Company. Prior to the IPO, he served in similar capacities
for PPL. 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 and the National
Association of Real Estate Investment Trusts.
Lawrence J. Krueger serves as Executive Vice President and the Managing
Director of the Company's Midwest region. Prior to the IPO, Mr. Krueger 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.
James B. Meyer serves as Senior Vice President and the Managing Director of
the Company's Southeast region. Prior to the IPO, he served in similar
capacities for 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 the Managing Director of
the Company's Western region. Prior to the IPO, he served in similar
capacities for PPL, since 1995, a Vice 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 the Managing Director
of the Company's Mid-Atlantic region. Prior to the IPO, Mr. Wiberg served in a
similar capacity to 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 Caldwell 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 are managed under the direction of
the Board of Trustees, which has seven members, five of whom are Independent
Trustees.
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<PAGE>
Pursuant to the terms of the Company's Declaration of Trust, the Trustees
are divided into three classes. One class holds office initially for a term
expiring at the annual meeting of shareholders to be held in 1997, a second
class holds office initially for a term expiring at the annual meeting of
shareholders to be held in 1998, and a third class holds 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 IPO (October 22, 1997), 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. The Board of Trustees of the Company has established an
Audit Committee consisting of two Independent Trustees--Messrs. Parker and
Riggs. The Audit Committee makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public
accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of the Company's internal
accounting controls.
Executive Compensation Committee. The Board of Trustees established a
Compensation Committee (the "Compensation Committee") consisting of three of
the Independent Trustees (Messrs. Hynes, Riggs and Wilson) to determine
compensation for the Company's executive officers and to implement the
Company's 1996 Share Incentive Plan.
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 pays its Trustees who are not officers of the Company fees for
their services as trustees. Each such Trustee receives 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 $500 for each committee
meeting attended. In addition, each such Trustee has received options under
the 1996 Trustees' Share Incentive Plan (the "Trustees' Plan") to purchase
10,000 Common Shares at an exercise price equal to the Offering Price, which
options will vest in equal installments over a four-year period on the
anniversary of the date of grant. Officers of the Company who are Trustees
will not be paid any trustee fees.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the base compensation to be awarded to the
Company's Chief Executive Officer and the other five most highly compensated
executive officers of the Company during the fiscal year ending December 31,
1996 (collectively the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ------------------------------------------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($)(/1/) BONUS($) COMPENSATION($) AWARDS($) SARS(#) COMPENSATION($)(/2/)
- --------------------------- ---- -------------- -------- --------------- ---------- ---------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael V. Prentiss
Chairman of the Board of
Trustees and CEO........ 1996 35,014 N/A 5,283 None 386,762 None
Thomas F. August
President and COO....... 1996 34,041 N/A None None 173,944 None
Richard J. Bartel
Executive Vice
President............... 1996 31,123 N/A None None 85,000 None
Mark R. Doran,
Executive Vice President
and CFO................. 1996 29,178 N/A None None 75,000 None
Dennis J. DuBois
Executive Vice
President............... 1996 29,178 N/A None None 64,366 None
Lawrence J. Krueger,
Executive Vice
President............... 1996 31,123 N/A None None 125,000 None
</TABLE>
- --------
(/1/Salaries)presented represent the amounts paid to the respective executive
officers for the period October 22, 1996 (inception of operations) through
December 31, 1996.
(/2/The)executive officers, receive health and disability insurance benefits
which do not exceed 10% of their respective salaries. These benefits are
also provided to all other employees of the Company.
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<PAGE>
The following table sets forth the stock options granted to the Named
Executive Officers during the fiscal year ended December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATE OF SHARE
INDIVIDUAL GRANTS PRICE APPRECIATION FOR OPTION
----------------------------------------------------------------------- -------------------------------
NUMBER OF
SECURITIES OPTIONS MARKET PRICE
UNDERLYING % OF GRANTED TO EXERCISE OR ON DATE OF
OPTIONS OPTIONS EMPLOYEE IN BASE PRICE GRANT EXPIRATION
NAME GRANTED(#) GRANTED(/1/) FISCAL YEAR ($/SHARE) ($/SHARE) DATE 0%($) 5%($) 10%($)
---- ---------- ------------ ----------- ----------- ------------ ---------- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Michael V.
Prentiss....... 386,762 23.4% 386,762 $ 20.00 $ 20.00 10/16/06 0 $ 4,864,615 $ 12,327,961
Thomas F.
August......... 173,944 10.5% 173,944 $ 20.00 $ 20.00 10/16/06 0 2,187,833 5,544,430
Richard J.
Bartel......... 75,000 4.5% 75,000 $ 20.00 $ 20.00 10/16/06 0 943,335 2,390,610
Richard J.
Bartel......... 10,000 .6% 10,000 $23.375 $23.375 12/17/06 0 147,003 372,537
Mark R. Doran .. 50,000 3.0% 50,000 $ 20.00 $ 20.00 10/16/06 0 628,890 1,593,740
Mark R. Doran .. 25,000 1.5% 25,000 $23.375 $23.375 12/17/06 0 367,508 931,342
Dennis J.
DuBois......... 39,366 2.4% 39,366 $ 20.00 $ 20.00 10/16/06 0 495,138 1,254,783
Dennis J.
DuBois......... 25,000 1.5% 25,000 $23.375 $23.375 12/17/06 0 367,508 931,342
Lawrence J.
Krueger........ 75,000 4.5% 75,000 $ 20.00 $ 20.00 10/16/06 0 943,335 2,390,610
Lawrence J.
Krueger........ 50,000 3.0% 50,000 $23.375 $23.375 12/17/06 0 735,015 1,862,684
</TABLE>
- --------
(/1/Represents)the percentage of options granted to all employees during the
year.
The following table sets forth the information with respect to the
exercisability of the stock options held by the Named Executive Officers
during the year ended December 31, 1996. None of the Options granted by the
Company were exercisable in 1996.
AGGREGATED YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING UNEXERCISED
NAME OPTIONS AT YEAR END VALUE OF UNEXERCISED OPTIONS AT YEAR END
---- ------------------------------------------- ----------------------------------------
<S> <C> <C>
Michael V. Prentiss..... 386,762 $1,933,810
Thomas F. August........ 173,944 869,720
Richard J. Bartel....... 85,000 391,250
Mark R. Doran........... 75,000 290,625
Dennis J. DuBois........ 64,360 237,455
Lawrence J. Krueger..... 125,000 456,250
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION ON COMPENSATION
DECISIONS
During 1996, the Company's Compensation Committee of the Board of Trustees
consisted of three Independent Trustees (Messrs. Hynes, Riggs and Wilson),
none of whom was, prior to or during 1996, an officer or employee of the
Company. None of such persons had any relationships requiring disclosure under
applicable rules and regulations. The Company did not have a policy during
1996 prohibiting its executive officers from participating in deliberations of
the Board of Trustees regarding executive compensation. Consequently,
Messrs. Prentiss and August, who are also trustees of the Company, were
present during deliberations of the Board of Trustees regarding executive
compensation during 1996. Messrs. Prentiss and August, in their capacities as
trustees.
EMPLOYMENT AGREEMENTS
Messrs. Prentiss and August have entered into employment agreements with the
Company. Each agreement is for an initial term of three years, which will be
automatically renewed for successive one-year periods unless otherwise
terminated. The agreements provide for base annual compensation (as set forth
in "--Executive Compensation" above) and incentive compensation to be
determined by the Compensation Committee (within
85
<PAGE>
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.
Mr. DuBois entered into a noncompetition agreement with the Company that,
subject to certain limited exceptions, prohibit him from engaging, directly or
indirectly, in Competitive Activities in the Southwestern U.S., during the
Noncompetition Period. In the event of an involuntary termination of Mr.
Dubois' employment, this agreement does not prohibit him from engaging in
Competitive Activities, but, during the Noncompetition Period, do prohibit him
from (1) soliciting any employee of the Company to leave his job and (ii)
soliciting any client or identified potential client of the Company during the
Noncompetition Period.
1996 SHARE INCENTIVE PLAN
Prior to IPO, the Board of Trustees adopted, and the then sole shareholder
of the Company approved, the 1996 Plan for the purpose of attracting and
retaining executive officers, directors and employees. The 1996 Plan is
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.
Officers and other employees of the Company and any Affiliate generally are
eligible to participate in the 1996 Plan. The term "Affiliate" means any
entity under common control with the Company within the meaning of Code
section 414(b) or (c) and any subsidiary or parent corporation within the
meaning of Code section 424. The Administrator selects the individuals who
will participate in the 1996 Plan ("Participants"). 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 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 2,030,000 Common Shares. 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) Restricted
Shares, which are 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 to vest or for Performance Shares to vest and incentive
awards to be earned. The Plan also allows for the issuance of shares upon the
exercise of an option or SAR or the vesting or settlement of a restricted
share award or performance share award granted to employees of the Company's
subsidiaries, Prentiss Properties Limited, Inc.; Prentiss Properties Limited
II, Inc.; or Prentiss Properties Management, L.P. under compensation plans
maintained by such employers; provided that the Company itself receives
payment of the purchase price. The purchase price must equal the market value
of the shares issued; the difference between what the employee pays and that
price will be paid by the subsidiary employer.
86
<PAGE>
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 Participant. 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.
SARs may be awarded independently or in relation to an option. SARs entitle
the Participant to receive, with respect to each Common Share encompassed by
the exercise of such SAR, an amount determined by the Administrator. In the
absence of such a determination, the Participant will be entitled to receive
the excess of the fair market value of a Common Share on the date of exercise
over the Initial Value. "Initial Value" means, for purposes of SARs granted
independently of options, the fair market value of one Common Share on the
date the SAR was granted. With respect to SARs awarded in relation to an
option, "Initial Value" means the option price per share of the related
option.
To date, the Company has granted options for 1,651,938 Common Shares to
employees and officers, including the officers named in "--Executive
Compensation" above.
No option, SAR, 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 IPO, the Board of Trustees also adopted, and the Company's then
sole shareholder approved, 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 or a subsidiary of the Company is eligible to participate in
the Trustees' Plan.
87
<PAGE>
The Trustees' Plan provides that each Independent Trustee who was a member
of the Board of Trustees on the effective date of the IPO (a "Founding
Trustee") was granted an option for 10,000 Common Shares. 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 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
Award Date. The term "Award Date" means the date of the first Board meeting
after each annual meeting of the Company's shareholders during the term of the
Plan. 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 January 1, April 1, July 1 and October 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. An amendment will not become effective without
shareholder approval if the amendment materially changes the eligibility
requirements, increases the aggregate number of Common Shares that may be
issued under the Trustee Plan 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 has assumed and continued, and the Operating Partnership and
designated subsidiaries, including the Manager (each, a "Participating
Employer"), have adopted, the Employee Savings Plan & Trust (the "401(k)
Plan") of a member of the Prentiss Group which was originally adopted in 1987.
Prior service with such Prentiss Group Member is 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.
88
<PAGE>
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.
SHARE PURCHASE PLAN
The Company has adopted a "Share Purchase Plan." Under the Share Purchase
Plan, employees of the Company and the Company's subsidiaries are able to
purchase Common Shares directly from the Company at a 15% discount to the
lesser of the market value at the date of purchase or the market value at the
date the option to purchase the shares was granted. Purchases may be made by
any employee with more than one full year of continuous employment on the last
business day each of June and December. 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 $25,000. The maximum number of Common Shares
that may be purchased under the Share Purchase Plan is 500,000. Common Shares
may be issued under the Share Purchase Plan to employees of the Company's
subsidiaries upon the exercise of an option granted by any of such
subsidiaries and upon payment of the purchase price to the Company. The
purchase price per Common Share for Common Shares issued to employees of the
Company's subsidiaries will be the fair market value on the day preceding the
date the Common Shares are issued; the difference between what the employee
pays and that price will be paid by the subsidiary employer. Employees who
participate in the plan described in the preceding sentence will recognize
income, and the Company will be allowed a business expense deduction, 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."
89
<PAGE>
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 87 of the Properties. Prior to or simultaneous with
the closing of the IPO, the Company engaged in the Formation Transactions
described below, which were designed to consolidate the ownership of the
Properties and the Prentiss Properties Service Business in the Company, to
facilitate the IPO and to enable the Company to qualify as a REIT commencing
with its short taxable year ending December 31, 1996.
The Formation Transactions included the following, which occurred in
connection with the closing of the IPO:
. The Company sold to the public 16,000,000 Common Shares and issued
1,879,897 Common Shares to the Continuing Investors in exchange for a
portion of their interests in the Operating Partnership. The Company
transferred (i) approximately 29.7% of the net proceeds of the IPO to the
former limited partners of the Operating Partnership, which include the
Continuing Investors, in exchange for the remaining portion of their
interests in the Operating Partnership, (ii) 70.1% directly to the
Operating Partnership in exchange for Units, and (iii) approximately .2%
of the net proceeds of the IPO to the General Partner, which the General
Partner contributed to the Operating Partnership in exchange for a 0.2%
general partnership interest in the Operating Partnership.
. The Operating Partnership was an affiliate of the Prentiss Group. The
Prentiss Group members who collectively serve as the limited partners of
the Operating Partnership contributed to the Operating Partnership all of
their interests in the Properties and certain management contracts of PPL
in exchange for 3,295,995 Units. The various Prentiss Group interests
were accounted for at their historical cost with any excess paid recorded
as a distribution.
. The interests of the pre-IPO limited partners of the Operating
Partnership were acquired by the Company in exchange for Common Shares
and cash. The pre-IPO limited partners received $87.4 million in cash and
1,879,897 Common Shares for their interests. The acquisition of the
Continuing Investors' interests were accounted for using purchase
accounting based on the cash paid and the value of the Common Shares
issued to them, resulting in an incremental increase in the basis of the
Predecessor Company's real estate.
. The Prentiss Group member that served as general partner of the Operating
Partnership prior to the IPO converted its interest into a limited
partnership interest and distributed the Units representing such interest
to its partners, all of whom are members of the Prentiss Group and are
limited partners of the Operating Partnership.
. The Units received by the Prentiss Group in connection with the Formation
Transactions had a total value of approximately $65.9 million based on
the IPO offering price of $20 per Common Share and are redeemable for
cash or Common Shares on a one for one basis, no earlier than two years
after the closing date of the IPO.
. A corporation wholly owned by Michael Prentiss, the Chairman and Chief
Executive Officer of the Company, contributed cash in an amount equal to
5% of the equity value of the Manager in exchange for all of the voting
common stock of the Manager, which stock represents 5% of the ownership
interest in such company. The Manager recorded the receipt of cash and
the 5% voting interest. The Manager is included in the financial
information under the equity method of accounting due to the Operating
Partnership's ownership of a non-controlling, non-voting interest in the
Manager.
. The Operating Partnership contributed 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 represents 95% of the ownership
interest in such company, and promissory notes in the aggregate principal
amount of $34.75 million, bearing interest at an annual rate of 13%.
Accrued interest on the outstanding principal balance of the notes is
paid monthly. No principal on the notes is due in the first three years,
after which time 10% of the initial principal balance
90
<PAGE>
will be repaid each year for 10 years. Due to the affiliation of the
Manager and the Operating Partnership, the Notes have 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 Operating Partnership borrowed $56.2 million from an affiliate of
Lehman to fund the acquisition of a portion of the Initial Properties.
. The Operating Partnership used approximately $55.0 million of the net
proceeds of the IPO to acquire interests in certain Properties from an
affiliate of Lehman, and used approximately $62.9 million of the net
proceeds of the IPO to repay mortgage loans made by an affiliate of
Lehman and secured by certain of such Properties.
. The Operating Partnership used approximately $147.2 million of the net
proceeds of the IPO (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 used approximately $36.2 million of the net
proceeds of the IPO to repay indebtedness secured by certain Properties
held by the Operating Partnership prior to the IPO or acquired from the
Prentiss Group. "Certain Relationships and Transactions."
. The Operating Partnership used approximately $33.3 million of the net
proceeds of the IPO (and the proceeds from the loans from an affiliate of
Lehman) to acquire certain Properties from a third party.
. The Operating Partnership used approximately $1.3 million of the net
proceeds of the IPO to pay prepayment penalties associated with all of
the debt to be repaid in the Formation Transactions. The accounting
treatment for the prepayment penalties will be a charge to equity.
. The Company sold an additional 2,400,000 Common Shares to cover the IPO
underwriter's over-allotments. The Company used the net proceeds of
approximately $44.6 million of the sale of these Common Shares to repay
indebtedness incurred in connection with the acquisition of certain
Properties.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
See "Formation Transactions" for a summary of certain related party
transactions that were consummated prior to or simultaneously with the closing
of the IPO.
BENEFITS TO RELATED PARTIES
The Prentiss Group, including the Prentiss Principals, realized certain
benefits as a result of the IPO and the Formation Transactions, including the
following:
Receipt of Units by the Prentiss Group. Members of the Prentiss Group
received a total of 3,295,995 Units in consideration for their interests in
certain and the Prentiss Properties Service Business in connection with the
Formation Transactions. These Units (currently representing approximately
14.0% of the equity interests in the Company on a consolidated basis) had a
total value of approximately $65.9 million based on the IPO offering price,
compared to a net tangible book value of the assets contributed to the
Operating Partnership by the Prentiss Group of approximately $5.2 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), was less
than the aggregate current market value of such assets. Any time after two
years following the closing of the IPO, 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. The
Units 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.
91
<PAGE>
Increase in Prentiss Group's Net Tangible Investment. Members of the
Prentiss Group realized an immediate increase of $45.3 million in the net
tangible book value of their original $5.2 million investment in the Company.
The immediate increase was derived from the difference between the net
tangible assets per share before and after the Formation Transactions
multiplied by the 3,295,995 Units received as consideration.
Messrs. Prentiss and August Employment Agreements. Messrs. Prentiss and
August entered into employment agreements with the Company. See "Management--
Employment Agreements."
Options Granted. The Company granted to the Prentiss Principals, 70
employees of the Company and the Independent Trustees, options to purchase an
aggregate of 1,651,938 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."
Maintenance of Debt for Benefit of Prentiss Principals. The Company agreed
to maintain at least $1.3 million of indebtedness secured by certain of the
Properties outstanding for three years and to permit certain Prentiss Group
members to guaranty such debt through December 31, 1998 in order to defer
certain tax consequences associated with the Formation Transactions.
Restriction on Certain Transfers of The Plaza on Bachman Creek. The Company
agreed that it will not dispose of The Plaza on Bachman Creek prior to
December 31, 1999, unless such disposition is structured as a tax-deferred
like-kind exchange under Section 1031 of the Code, in order to defer certain
tax consequences associated with the transfer of the Property to the Company
by the Prentiss Group.
SHARING OF OFFICES AND EMPLOYEES
The Company shares the executive offices and certain employees with the
Manager. Each company bears its share of costs including allocable portions of
rent, salaries, office expenses, employee benefits and various fixtures and
equipment. To the extent that services are provided between the companies,
such services are charged at cost plus a mark up of 15%. The total of these
charges paid by the Company from October 22, 1996 through December 31, 1996
totalled approximately $198,000.
TRANSACTIONS WITH AFFILIATES OF LEHMAN
In connection with the IPO, (i) affiliates of Lehman received $55.0 million
of the net proceeds as consideration for the sale of such affiliates'
interests in certain of the Initial Properties to the Company in the Formation
Transactions, (ii) an affiliate of Lehman was repaid mortgage loans in the
principal amount of approximately $62.9 million made by it to certain
affiliates of the Company prior to the IPO and (iii) an affiliate of Lehman
made two mortgage loans to the Company in the aggregate principal amount of
$56.2 million. In February 1997, an affiliate of Lehman made a mortgage loan
to the Company in the aggregate principal amount of $180.1 million, a portion
of which proceeds were used to pay outstanding indebtedness of the Company,
including the indebtedness to that affiliate of Lehman, incurred by the
Company in the Formation Transactions. See "Underwriting" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Results."
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<PAGE>
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 holds plus the number of shares for which Units 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
hold Common Shares as opposed to Units is set forth in the notes.
<TABLE>
<CAPTION>
NUMBER OF SHARES
AND UNITS BENEFICIALLY
OWNED AFTER THE PERCENT OF ALL COMMON PERCENT OF ALL
NAME OF BENEFICIAL OWNER OFFERING SHARES AND UNITS(/1/) COMMON SHARES(/2/)
- ------------------------ ---------------------- --------------------- ------------------
<S> <C> <C> <C>
Cohen & Steers Capital
Management............ 2,551,900 10.82% 12.58%
757 Third Avenue
New York, New York
10017
TRUSTEES AND EXECUTIVE
OFFICERS
Michael V.
Prentiss(/3/)(/4/).... 2,583,698 10.96% 11.30%
Thomas F.
August(/3/)(/5/)...... 342,423 1.45% 1.66%
Thomas J. Hynes(/6/)... 1,100 * *
Barry J.C.
Parker(/6/)........... 5,100 * *
Dr. Leonard Riggs,
Jr.(/6/).............. 7,600 * *
Ronald G.
Steinhart(/6/)........ 5,100 * *
Lawrence A.
Wilson(/6/)........... 100 * *
Dennis J.
DuBois(/3/)(/7/)...... 210,582 .89% 1.03%
Richard J.
Bartel(/8/)........... 1,100 * *
Mark R. Doran(/9/)..... 400 * *
Lawrence J.
Krueger(/10/)......... 1,000 * *
James B.
Meyer(/11/)........... 700 * *
David C.
Robertson(/11/)....... 10,000 * *
Robert K.
Wiberg(/11/).......... 1,000 * *
--------- ----- -----
All Trustees and
executive officers (14
persons).............. 3,169,903 13.45% 13.45%
========= ===== =====
</TABLE>
- --------
* Less than 1%.
(/1/) The total number of Common Shares outstanding used in calculating the
percentage of all Common Shares and Units assumes that all of the Units
are redeemed for Common Shares.
(/2/) The total number of Common Shares outstanding used in calculating the
percentage of all Common Shares assumes that only Units held by the
person are redeemed for Common Shares.
(/3/) Includes the principal's allocable share of Units held by PPL and various
other Prentiss Group entities (including the trust discussed in 3 below)
which received units in the Formation Transactions, in exchange for
interests in Properties or the Prentiss Properties Service Business.
(/4/) 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. Includes Units
redeemable for 336,000 Common Shares which are held in a trust of which
Mr. Prentiss is a trustee, and in which Mr. Prentiss disclaims beneficial
ownership.
(/5/) 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.
(/6/) The Independent Trustees receive a fee of $10,000 per year payable
quarterly in Common Shares. The table includes the shares that have been
issued in 1997. Excludes 10,000 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.
(/7/) Excludes 39,366 and 25,000 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.
(/8/) Excludes 75,000 and 10,000 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 and 25,000 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.
(/10/) Excludes 75,000 and 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.
(/11/) Excludes 150,000 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, 30,280,397 Common Shares will be
issued and outstanding (31,780,397 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 as trusts (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. The Company believes that this power provides
the Company with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs that might arise. The
additional shares of beneficial interest, including possibly Common Shares,
will be available for issuance without further action by the Company's
shareholders, unless action by the shareholders is required by applicable law
or the rules of any stock exchange or automated quotation system on which the
Company's securities may be listed or traded. Although the Board of Trustees
currently has no intention of doing so, it could authorize the Company to
issue a class or series that could, depending on the terms of such class or
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 and might
otherwise be in the best interests of the shareholders.
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
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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.
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 the holders of a majority 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 two-thirds of the outstanding shares of
beneficial interest of the Company entitled to vote generally in the election
of trustees); (d) the amendment or repeal of the Independent Trustee provision
in the Declaration of Trust (which requires the affirmative vote the holders
of 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). As allowed under the Maryland REIT Law, the Company's Declaration of
Trust permits 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 approval of the shareholders. 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.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR 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.
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, no more than 50% in value of the
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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 9.8% of the
number of Common Shares outstanding after the Offering (the "Ownership
Limitation"). 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 Operating 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 for 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 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.
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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 on the Nasdaq National Market 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. However, the Board may not
grant an exemption from the Ownership Limit to any proposed transferee whose
ownership, direct or indirect, of shares of beneficial interest of the Company
in excess of the Ownership Limit would result in the termination of the
Company's status as a REIT. The foregoing restrictions will continue to apply
until (i) 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 and (ii) there is an affirmative vote of a majority of the votes
entitled to be cast on such matter at a regular or special meeting of the
shareholders of the Company.
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The Ownership Limitation 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 the Common Shares or otherwise be in the best
interest of the shareholders of the Company.
All certificates representing Common Shares or Preferred Shares will bear a
legend referring to the restrictions described above.
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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. There are currently 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.
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 the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting stock of the Trust (an "Interested Shareholder") or an
affiliate of such an Interested Shareholder 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
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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. The Company's Board of Trustees intends to
resolve to opt out of the business combination provisions of the MGCL.
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.
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
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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 each 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
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
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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 REIT.
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 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. Also, if the
resolution of the Board of Trustees opting out of the business combination
statute or the provisions of the Bylaws electing not to be governed by the
control share acquisition statute are rescinded, such statutes could have a
similar effect.
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 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 the
First Chicago Trust Company of New York.
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SHARES AVAILABLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have 30,280,397 Common
Shares issued and outstanding (31,780,397 Common Shares if the Underwriter's
overallotment option is exercised in full), 3,295,995 Common Shares are
reserved for issuance upon redemption of Units and 2,030,000 Common Shares are
reserved for issuance under the 1996 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 October 22, 1998,
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 issued to the Continuing Investors and 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 one year has 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 two 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 (i) October 22,
1997, a registration statement with the Commission for the purpose of
registering the sale of the 1,879,897 Common Shares placed with Continuing
Investors, and (ii) October 22, 1998, a registration statement with the
Commission for the purpose of registering the sale of the 3,295,995 Common
Shares 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, 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.
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 material terms 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 Second 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.
The Company may not engage in any transaction resulting in a change of
control of the Company (a "Transaction") unless in connection with the
Transaction the Limited Partners receive or have the right to receive cash or
other property equal to the product of the number of shares of Common Stock
into which each Unit is then exchangeable and the greatest amount of cash,
securities or other property paid in the Transaction to the holder of one
Common Share in consideration of one Common Share. If, in connection with the
Transaction, a purchase, tender or exchange offer shall have been made to and
accepted by the holders of more than fifty (50%) of the outstanding Common
Shares, each holder of Units will receive, or will have the right to elect to
receive, the greatest amount of cash, securities, or other property which such
holder would have received had it exercised its right to redemption and
received shares of Common Stock in exchange for its Units immediately prior to
the expiration of such purchase, tender or exchange offer and had thereupon
accepted such purchase, tender or exchange offer.
Notwithstanding the foregoing paragraph, the Company may merge, or otherwise
combine its assets, with another entity if, immediately after such merger or
other combination, substantially all of the assets of the surviving entity,
other than Units held by the Company, are contributed to the Operating
Partnership as a capital contribution in exchange for Units with a fair market
value, as reasonably determined by the Company, equal to the agreed value of
the assets so contributed.
In respect of any Transaction described in the preceding two paragraphs, the
Company is required to use its commercially reasonable efforts to structure
such Transaction to avoid causing the Limited Partners to recognize
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gain for federal income tax purposes by virtue of the occurrence of or their
participation in such Transaction, provided such efforts are consistent with
the exercise of the Board of Trustees' fiduciary duty under applicable law.
CAPITAL CONTRIBUTION
After the completion of the Offering, the Company will have issued a total
of 30,280,397 Common Shares and will own, either directly or through the
General Partner, 3,295,995 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), who are members of the Prentiss Group, including the
Prentiss Principals, will collectively own approximately 9.8% 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 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 one year from the date they acquired such Units, provided that each
Limited Partner may make not more than two exchanges 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
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Limited Partner. See "Federal Income Tax Considerations--Tax Aspects of the
Operating Partnership." As of March 18, 1997, the aggregate number of Common
Shares issuable upon exercise of the Exchange Rights was 3,295,995. 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 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.
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.
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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.
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 revoked its election to be taxed as a pass-through entity under
Subchapter S of the Code on the day prior to the closing of the IPO. 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
date of revocation of its S election and ending on December 31, 1996. The
Company believes that, commencing with such taxable year, it has been
organized and has operated in such a manner so 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 has or will remain so
qualified.
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.
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Hunton & Williams has acted as counsel to the Company in connection with the
IPO, 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 has qualified for
taxation as a REIT for its short taxable year ended December 31, 1996, and the
Company's organization and proposed method of operation will enable it to
continue to qualify to be taxed as a REIT for its taxable year ending December
31, 1997, and 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 income tax opinion that
will be delivered by Hunton & Williams at the closing of the Offering.
Moreover, such qualification and taxation as a REIT depend 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."
As a REIT, the Company generally is not 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 an
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 undistributed
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
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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
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. The
Company has issued sufficient Common Shares with sufficient diversity of
ownership 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."
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.
The Company currently has two corporate subsidiaries, the General Partner
and Prentiss Properties II, Inc. ("PPII"), and may have additional corporate
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 and PPII are
"qualified REIT subsidiaries." The General Partner and PPII, therefore, will
not be subject to federal corporate income taxation, although they 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.
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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 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 Rent
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 a 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 charge 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 currently does not receive 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
currently does not receive Rent attributable to personal property that is
greater than 15% of the Rent received under the applicable 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 provides and will provide in the future certain services to its
tenants. The Company believes (and has represented to Hunton & Williams) that
all such services are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise "rendered to the
occupant," so that the provision of such services does 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 employs and will continue 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.
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If any portion of the Rent does not qualify as "rents from real property"
because such Rent is attributable to personal property and exceeds 15% of the
total Rent received under the applicable lease, the portion of the Rent that
is attributable to the personal property will not be qualifying income for
purposes of either the 75% or 95% gross income test. Thus, if the Rent
attributable to such 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 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 to the tenants of 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 other 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 has received and in the future will receive indirectly
certain fees for the performance of certain services by a Noncorporate
Subsidiary 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, both an
interest in such Properties and an interest in the Noncorporate Subsidiary
providing the services, such fees should be disregarded for purposes of the
75% and 95% gross income tests. However, the remainder of such fees received
by the Operating Partnership (i.e., any portion of the fees that is
attributable to a third party's ownership interest in the Properties) will be
nonqualifying income for purposes of the 75% and 95% gross income tests. In
addition, any fees received, directly or indirectly, by the Operating
Partnership in exchange for providing services with respect to properties
owned by unrelated third parties 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 has not caused and 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.
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Based on the foregoing, Hunton & Williams is of the opinion that the Rent
has qualified and will continue to qualify as "rents from real property" for
purposes of 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.
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, PPII and any other qualified REIT
subsidiary).
For purposes of the asset tests, the Company is 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
Company has represented that (i) at least 75% of the value of its total assets
has been and will be represented by real estate assets, has been and cash and
cash items (including receivables), and government securities and (ii) it has
not owned, and 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, PPII 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 has satisfied and will
continue to 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 test requirements arose from
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changes in the market values of its assets and was not wholly or partly caused
by an acquisition of nonqualifying 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.
Distribution Requirements
The Company, in order to avoid corporate income taxation of the earnings
that it distributes, 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 has made, and intends to
continue to make, timely distributions sufficient to satisfy the annual
distribution requirement.
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 requirement, 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 has complied and
intends to continue to comply with such requirements in the future.
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
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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 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 described 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 or a Noncorporate Subsidiary 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
the Company's 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, (iii) an
estate whose income from sources without the United States is includible in
gross income for U.S. federal income tax purposes regardless of its connection
with the conduct of a trade or business within the United States, or (iv) any
trust with respect to which (A) a U.S. court is able to exercise primary
supervision over the administration of such trust and (B) one or more U.S.
fiduciaries have the authority to
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control all substantial decisions of the trust. 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
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 has notified and will continue to
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.
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INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company reports and will continue to 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 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 and are proposed to be effective for
distributions made after December 31, 1997. 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.
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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
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. Amounts so withheld,
however, 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.
In August 1996, the U.S. Congress passed the Small Business Job Protection
Act of 1996, which requires the Company to withhold 10% of any distribution in
excess of the Company's current and accumulated earnings and profits. That
statute is effective for distributions made after August 20, 1996.
Consequently, although the Company intends to withhold at a rate of 30% on the
entire amount of any distribution, to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
will be subject to withholding at a rate of 10%.
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. The Company believes that it is 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 continue to be a "domestically controlled REIT." Furthermore, gain not
subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i) investment
in
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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, PPII, 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. Such state and local tax treatment 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 on a
corporation doing business in Texas generally is equal to the greater of (i)
.25% of "taxable capital" (generally, financial accounting net worth with
certain adjustments) apportioned to Texas; or (ii) 4.5% of "taxable earned
surplus" (generally, 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.
The Company has received 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 will not expand the scope of
the Texas franchise tax to apply to trusts such as the Company or entities
such as the Operating Partnership and the Noncorporate Subsidiaries that are
organized as partnerships. In that regard, legislation has been introduced in
Texas that would subject noncorporate businesses (including trusts and
partnerships) to a business tax. It cannot be predicted whether or in what
term such legislation (or any other legislation) ultimately will be enacted.
It is possible, however, that the Company, the Operating Partnership and/or
any Noncorporate Subsidiary could become subject to tax in Texas as a result
of future legislation.
Both the General Partner and the Manager are organized as corporations.
Furthermore, the General Partner is the general partner of a partnership doing
business in Texas (i.e., the Operating Partnership) and has registered in the
State of Texas as a foreign corporation qualified to transact business in
Texas. Similarly, the Manager conducts business in Texas and has registered in
the State of Texas as a foreign corporation qualified to transact business in
Texas. Accordingly, both the General Partner and the Manager are subject to
the Texas franchise tax. Finally, one of the Noncorporate Subsidiaries,
Riverside Industrial, LLC, is organized as a limited liability company,
conducts business in Texas, and has registered in the State of Texas as a
foreign limited liability company qualified to transact business in Texas.
Accordingly, that Noncorporate Subsidiary also is 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
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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 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 entity will be classified as a partnership rather
than as a corporation for federal income tax purposes if the entity (i) is
treated as a partnership under Treasury regulations, effective January 1,
1997, relating to entity classification (the "Check-the-Box Regulations") and
(ii) is not a "publicly traded" partnership.
In general, under the Check-the-Box Regulations, an unincorporated entity
with at least two members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity fails to make
an election, it generally will be treated as a partnership for federal income
tax purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Partnerships, will be
respected for all periods prior to January 1, 1997 if (i) the entity had a
reasonable basis for its claimed classification, (ii) the entity and all
members of the entity recognized the federal tax consequences of any changes
in the entity's classification within the 60 months prior to January 1, 1997,
and (iii) neither the entity nor any of its members were notified in writing
on or before May 8, 1996 that the classification of the entity was under
examination. Each Partnership in existence on January 1, 1997 reasonably
claimed partnership classification under the prior Treasury Regulations
relating to entity classification in effect prior to January 1, 1997 and such
classification should be respected for federal income tax purposes. The
Partnerships intend to continue to be classified as partnerships and the
Company has represented that each Partnership will elect to be treated as a
partnership under the Check-the-Box Regulations.
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 has 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, 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
flow-through entity is to permit the partnership to satisfy the 100-partner
limitation. Each Partnership qualifies for the Private Placement Exclusion. If
a Partnership is considered a
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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 has been and will continue to be treated for federal income tax
purposes as a partnership and not as a corporation or an association taxable
as a corporation or as 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 a Partnership as a
partnership for federal income tax purposes. If such challenge were sustained
by a court, such Partnership would be treated as a corporation for federal
income tax purposes, as described below. 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
likely 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 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 generally has elected to use the traditional method for allocating
Code section 704(c) items with respect to the Properties it acquires in
exchange for Units.
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Under the Operating Partnership Agreement, depreciation or amortization
deductions of the Operating Partnership generally are 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 in
exchange for Units will be specially allocated to the contributor 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 requirement,
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.
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 a Partnership 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 a Partnership on the disposition of the Properties
contributed to the Partnership in exchange for partnership interests therein
will be allocated first to the contributor under section 704(c) of the Code to
the extent of the contributor's "built-in gain" on those Properties for
federal income tax purposes. The contributors' "built-in gain" on the
Properties sold will equal the excess of the contributors' proportionate share
of the book value of those Properties over the contributors' tax basis
allocable to those Properties at the time of the sale. Any remaining gain
recognized by a Partnership on the disposition of the contributed Properties,
and any gain recognized upon the disposition of the Properties acquired by a
Partnership for cash, will be allocated among the partners in accordance with
their respective percentage interests in the Partnership. 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
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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 a Partnership on the sale of any
property held by the Partnership as inventory or other property held primarily
for sale to customers in the ordinary course of the Partnership'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 acquire or hold or to allow a Partnership 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 or the Partnership's
trade or business.
MANAGER
The Operating Partnership owns 100% of the nonvoting stock of each Manager.
Such stock represents in the aggregate a 95% economic interest in each
Manager. The Operating Partnership also holds notes issued by each Manager in
the aggregate initial principal amount of $34.75 million. By virtue of its
ownership of the Operating Partnership, the Company is considered to own its
pro rata share of such stock and notes.
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 each
Manager held by the Operating Partnership may not exceed 5% of the total value
of the Company's assets. In addition, the Company may not own more than 10% of
the voting stock of either Manager. The Company does not own, directly or
through the Operating Partnership, any of the voting securities of either
Manager. In addition, the Company believes its proportionate share of the
value of the equity and debt securities of each 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"), 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
UNDERWRITERS OF 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. ............................
Raymond James & Associates, Inc. ................................
----------
Total.......................................................... 10,000,000
==========
</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 Underwriters.
The Company has granted to the Underwriters an option to purchase up to an
additional 1,500,000 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
offered hereby, shares issued pursuant to the 1996 Share Incentive Plan and
any Units or Common Shares that may be issued in connection with any
acquisition of a property), or sell or grant options, rights or warrants with
respect to any Common Shares (other than the grant of options pursuant to the
1996 Share Incentive Plan), for a period of six months after the consummation
of the Offering. Each of the officers, Trustees and affiliates of the Company
who 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 October 22, 1998 without the consent of the Company
and Lehman Brothers Inc. Each of the Continuing Investors (The American
Airlines, Inc. Master Fixed Benefit Trust, the Ameritech Pension Trust and the
Public Employee Retirement System of Idaho) has agreed that, subject to
certain exceptions, it will not sell any Common Shares prior to October 22,
1997.
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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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 they received customary
compensation. In February 1997, an affiliate of Lehman made a mortgage loan to
the Company in the aggregate principal amount of $180.1 million for which the
Company paid fees of approximately $1.5 million. In connection with the IPO,
(i) Lehman received a fee equal to 0.5% of the gross proceeds of the IPO for
advisory services in connection with the evaluation, analysis and structuring
of the Company's formation as a REIT, (ii) affiliates of Lehman received $55.0
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, (iii) an affiliate of Lehman was repaid mortgage loans in the
principal amount of approximately $62.9 million made by it to certain
affiliates of the Company prior to the IPO and (iv) an affiliate of Lehman
made two mortgage loans to the Company in the aggregate principal amount of
$56.2 million.
Principal Mutual Life Insurance Company ("Principal Mutual"), an affiliate
of Principal Financial Securities, Inc., received approximately $18.4 million
of the net proceeds of the IPO as consideration for the sale of Principal
Mutual's interests in two Properties in the Formation Transactions. In
addition, as of December 31, 1996, Principal Mutual occupied approximately
6,653 square feet of the Company's One Northwestern Plaza Property
(approximately 3% of the net rentable square feet) pursuant to leases which
expire June 30, 2002. Total annual Base Rent under Principal Mutual's leases
was approximately $129,747 as of December 31, 1996. As of December 31, 1996,
The Prudential Insurance Company of America occupied approximately 7,650
square feet of One Northwestern Plaza (approximately 3% of the net rentable
square feet) pursuant to a lease which expires December 31, 2001. Total annual
Base Rent under The Prudential Insurance Company of America's lease was
approximately $141,525 as of December 31, 1996. A.G. Edwards & Sons, Inc.
occupied approximately 5,659 square feet of the Crescent Centre Pending
Acquisition (approximately 2% of the net rentable square feet) pursuant to a
lease which expires March 31, 1998. Total annual Base Rent under this lease
was approximately $102,367 as of December 31, 1996.
Until the distribution of the Common Shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase Common Shares. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Shares. Such transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offering, (i.e., if they sell more Common Shares than are
set forth on the cover page of this Prospectus), the Underwriters may reduce
that short position by purchasing Common Shares in the open market. The
Underwriters also may elect to reduce any short position by exercising all or
part of the over-allotment option described herein.
The Underwriters also may impose a penalty bid on certain Underwriters and
selling group members. This means that if the Underwriters purchase Common
Shares in the open market to reduce the Underwriters' short position or to
stabilize the price of the Common Shares, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Shares. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Common Shares are listed on the NYSE under the symbol "PP."
124
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Hunton &
Williams, Richmond, Virginia 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 consolidated balance sheet and financial statement schedule of Prentiss
Properties Trust as of December 31, 1996, the related consolidated statements
of income, shareholders' equity and cash flows for the period from October 22,
1996 (inception of operations) to December 31, 1996, the combined balance
sheet of the Predecessor Company as of December 31, 1995 and the related
combined statements of income, owners' equity, and cash flows for the period
January 1, 1996 to October 21, 1996 and the years ended December 31, 1995 and
1994, the combined statements of revenues and certain operating expenses of
the Dulles Properties, the Chicago Office Properties, the Natomas Properties,
and the Selected 1997 Pending Acquisitions for the year ended December 31,
1996, as listed on the Index to Financial Statements on page 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. The Commission maintains a Website at http:/www.sec.gov, and
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission (including the
Company) can be obtained from that site.
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 is 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.
125
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus.
"1996 Base Rent" means the Base Rent on a property for the year 1996.
"1996 Plan" means the Company's 1996 Share Incentive Plan.
"401(k) Plan" means the Employee Savings Plan & Trust of a Prentiss Group
Member that has been 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.
"Acquired Properties" means the six Office Properties and four Industrial
Properties acquired by the Company between the IPO and March 18, 1997.
"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.
"Base Rent" means the fixed base rental amount paid by a tenant under the
terms of the related lease agreement.
"Beneficiary" means the beneficiary of the Share Trust.
"Broadmoor Austin Partnership" means the partnership owning the Broadmoor
Austin Properties in which the Company owns a 49.9% interest.
"Bylaws" means the Company's Bylaws.
126
<PAGE>
"Cadillac Fairview" means The Cadillac Fairview Corporation Limited and its
subsidiaries, including Cadillac Urban.
"Cadillac Urban" means Cadillac Fairview Urban Development, Inc. the largest
business unit of Cadillac Fairview, responsible for all of its office, mixed-
use and suburban office park development in the United States and Canada.
"CEP" means Continental Executive Parke.
"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 on The Nasdaq National Market 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, $.01 par value
per share, of the Company.
"Company" means Prentiss Properties Trust and, where applicable, 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 three Independent
Trustees established by the Board of Trustees to determine compensation for
the Company's executive officers and to implement the 1996 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 American Airlines, Inc. Master Fixed
Benefit Trust, the Ameritech Pension Trust and the Public Employee Retirement
System of Idaho each of whom received Common Shares in the Formation
Transactions in exchange for a portion their limited partnership interests in
the Operating Partnership.
"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.
127
<PAGE>
"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.
"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.
"Effective Rent" is Base Rent net of any operating cost recovery portion,
less amortization of the related leasing costs, plus the effect of straight-
lining rent steps.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"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 certain of the
Properties by the Operating Partnership.
"Founding Trustee" means an Independent Trustee at the closing of the IPO.
"GAAP" means generally accepted accounting principles.
"General Partner" means Prentiss Properties I, 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 63 industrial buildings that the Company
currently owns.
"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.
"IPO" means the Company's initial public offering of Common Shares,
including the underwriters' overallotment option, which closed in October
1996.
"Joint Venture Debt" means indebtedness of unconsolidated investments.
"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.
128
<PAGE>
"Line of Credit" means the Company's $150 million line of credit.
"MACRS" means the modified accelerated cost recovery system of depreciation.
"Manager" means Prentiss Properties Limited, Inc. and affiliates.
"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 $283.2 million of indebtedness
secured by 54 Properties that the Company currently has outstanding.
"Mortgage Loan" means the $180.1 million principal balance mortgage loan
that the Company obtained from an affiliate of Lehman in February 1997.
"Named Executive Officers" means the Chief Executive Officer and other four
most highly compensated executive officers of the Company during the fiscal
year ended December 31, 1996.
"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.
"Noncorporate Subsidiaries" means the noncorporate subsidiaries of the
Operating Partnership.
"NPL" means the National Priorities List of Superfund sites.
"NYSE" means the New York Stock Exchange.
"Offering" means the offering of Common Shares hereby.
"Offering Price" means $ .
"Office Properties" means the 34 office buildings that the Company currently
owns.
"Operating Partnership" means Prentiss Properties Acquisition Partners, L.P.
"Operating Partnership Agreement" means the partnership agreement of the
Operating Partnership.
"Ownership Limitation" means the ownership of more than 9.8% of the number
of the outstanding Common Shares after the Offering or 9.8% of the number of
outstanding Preferred Shares.
129
<PAGE>
"Participating Employers" means the Operating Partnership and its
subsidiaries that have adopted the 401(k) Plan.
"Participants" means the individuals who are participating or will
participate in the 1996 Plan.
"Partnership" means each of the Operating Partnership and the Noncorporate
Subsidiaries.
"Partnership Provisions" means partnership provisions of the Code.
"Pending Acquisitions" means the 15 office buildings and 14 industrial
buildings that the Company may acquire within 60 days of the closing of the
Offering.
"Pending Industrial Acquisitions" means the 14 Pending Acquisitions that are
industrial buildings.
"Pending Office Acquisitions" means the 15 Pending Acquisitions that are
office buildings.
"Plan Participant" means an employee of the Company participating in the
401(k) Plan.
"Plant" means the former synthetic rubber manufacturing plant owned by the
United States government located at the Plant Site.
"Plant Site" means the land underlying the Los Angeles Industrial
Properties.
"Plant Site Affected Area" means the area south of the Plant Site on which
wastes from the Operation of the Plant was disposed.
"PPII" means Prentiss Properties II, Inc.
"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) 100%
of the assets and results of operations of the Plaza on Bachman Creek for the
portion of the periods in which the Prentiss Group owned the Property, (iv)
49.9% of the assets and results of operations of the Broadmoor Austin
Properties; (v) 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, and (vi) results of operations of the Prentiss
Properties Service Businesses conducted primarily by the Prentiss Group in the
periods presented.
"Preferred Shares" means the preferred shares of beneficial interest, $.01
par value per share, of the Company.
"Prentiss Group" means the companies and partnerships affiliated with the
Predecessor Company.
"Prentiss Principals" means Michael V. Prentiss, Thomas F. August and Dennis
J. DuBois.
"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.
130
<PAGE>
"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.
"Quarterly Award Date" means the quarterly dates on which Independent
Trustees receive Common Shares under the Trustees' Plan.
"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.
"Restricted Shares" means Common Shares of the Company issued pursuant to
the 1996 Plan which are subject to certain vesting requirements.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"SARs" means share appreciation rights issued under the 1996 Plan.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the U.S. Internal Revenue Service.
"Share Purchase Plan" means the plan under which employees of the Company
and the Company's subsidiaries are able to purchase Common Shares directly
from the Company at a 15% discount to the lesser of the market value at the
date of purchase or the market value at the date the option to purchase shares
was granted.
"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.
"Total Acquisition Cost" means all purchase costs, closing costs and
anticipated initial capital expenditures during the first year of ownership of
a property.
"Total Development Cost" means all land costs, construction costs, lease-up
costs, and fees, permits and other miscellaneous expenses associated with a
property.
"Total Market Capitalization" means the Company's combined equity market
capitalization (Common Shares and Units) 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.
"Trustees' Plan" means the Company's 1996 Trustees' Share Incentive Plan.
"UBTI" means unrelated business taxable income.
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<PAGE>
"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.
"Underwriting Agreement" means the underwriting agreement between the Company
and the Underwriters.
"Underwriters" means the Underwriters named in this Prospectus.
"Units" means units of limited partnership interest in the Operating
Partnership.
"WDNR" means the Wisconsin Department of Natural Resources.
132
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Pro Forma Consolidated Balance Sheet as of December 31, 1996............ F-2
Notes to Pro Forma Consolidated Balance Sheet........................... F-3
Pro Forma Consolidated Statement of Income for the Year Ended December
31, 1996............................................................... F-5
Notes to the Pro Forma Consolidated Statement of Income................. F-6
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
Report of Independent Accountants....................................... F-12
Consolidated Balance Sheet of Prentiss Properties Trust (the "Company")
as of December 31, 1996 and Combined Balance Sheet of the Predecessor
Company as of December 31, 1995........................................ F-13
Consolidated Statement of Income of the Company for the Period October
22, 1996
(inception of operations) to December 31, 1996 and Combined Statements
of Income for the Predecessor Company for the Period January 1, 1996 to
October 21, 1996 and the Years Ended December 31, 1995 and 1994........ F-14
Consolidated Statement of Changes in Shareholders' Equity of the Company
for the Period October 22, 1996 (inception of operations) to December
31, 1996 and Combined Statements of Changes in Equity of the
Predecessor Company for the Period January 1, 1996 to October 21, 1996
and the Years Ended December 31, 1995 and 1994 ........................ F-15
Consolidated Statement of Cash Flows of the Company for the Period
October 22, 1996
(inception of operations) to December 31, 1996 and Combined Statements
of Cash Flows of the Predecessor Company for the Period January 1, 1996
to October 21, 1996 and the Years Ended December 31, 1995 and 1994..... F-16
Notes to Consolidated and Combined Financial Statements................. F-17
Schedule III: Real Estate and Accumulated Depreciation as of December
31, 1996............................................................... F-30
The following represents certain of the properties acquired by the Company
subsequent to the IPO and certain of the Pending Acquisitions.
SELECTED 1997 PENDING ACQUISITIONS:
The Natomas Properties
Report of Independent Accountants....................................... F-32
Combined Statement of Revenues and Certain Operating Expenses for the
Year Ended
December 31, 1996...................................................... F-33
Notes to Combined Statement of Revenues and Certain Operating Expenses.. F-34
Selected 1997 Pending Acquisitions
Report of Independent Accountants....................................... F-35
Combined Statement of Revenues and Certain Operating Expenses for the
Year Ended
December 31, 1996...................................................... F-36
Notes to Combined Statement of Revenues and Certain Operating Expenses.. F-37
SELECTED 1996 ACQUIRED PROPERTIES:
The Dulles Properties
Report of Independent Accountants....................................... F-39
Combined Statement of Revenues and Certain Operating Expenses for the
Year Ended
December 31, 1996...................................................... F-40
Notes to Combined Statement of Revenues and Certain Operating Expenses.. F-41
The Chicago Office Properties
Report of Independent Accountants....................................... F-42
Combined Statement of Revenues and Certain Operating Expenses for the
Year Ended
December 31, 1996...................................................... F-43
Notes to Combined Statement of Revenues and Certain Operating Expenses.. F-44
</TABLE>
F-1
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
The following unaudited pro forma consolidated balance sheet is presented as
if the following transactions had been consummated on December 31, 1996: (i)
the acquisition of the 1997 Acquired Properties (ii) the acquisition of the
Pending Acquisitions (iii) the closing of the Mortgage Loan and (iv) the
completion of the Offering. This pro forma consolidated balance sheet should
be read in conjunction with the pro forma consolidated statement of income of
the Company for the year ended December 31, 1996 and the historical
consolidated and combined financial statements and notes thereto of the
Company and the Predecessor Company included elsewhere in this Prospectus.
The pro forma consolidated balance sheet is not necessarily indicative of
what the actual financial position would have been had the Company completed
the transactions described above, nor does it purport to represent the future
financial position of the Company.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
----------------------------------------------------- PRENTISS
PRENTISS 1997 PROPERTIES
PROPERTIES ACQUIRED PENDING OTHER TRUST
TRUST PROPERTIES ACQUISITIONS OFFERING ADJUSTMENTS PRO FORMA
---------- ---------- ------------ -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Real estate, net....... $482,528 $16,104 (A) $243,335 (A) $ 5,276 (A) $747,243
Mortgage note
receivable............ 16,510 (A) 16,510
Deferred charges and
other assets, net..... 11,747 1,658 (B) 13,405
Receivables, net....... 5,356 5,356
Cash and cash
equivalents........... 7,226 (704)(C) (247,845)(C) $262,675 (C) 50,100 (C) 71,452
Escrowed cash.......... 867 867
Other receivables
(affiliates).......... 1,346 1,346
Investments in joint
venture and
unconsolidated
subsidiaries.......... 21,956 21,956
-------- ------- -------- -------- ------- --------
Total Assets.......... $531,026 $15,400 $ 12,000 $262,675 $57,034 $878,135
======== ======= ======== ======== ======= ========
Liabilities:
Debt on real estate.... $128,800 $15,400 (D) $ 12,000 (D) $57,176 (D) $213,376
Accounts payable and
other liabilities..... 15,868 15,868
Distributions payable.. 7,309 7,309
-------- ------- -------- -------- ------- --------
Total Liabilities..... 151,977 15,400 12,000 57,176 236,553
-------- ------- -------- -------- ------- --------
Minority interest....... 53,828 9,922 (F) 63,750
-------- ------- -------- -------- ------- --------
Shareholders' Equity:
Common shares.......... 203 $ 100 (E) 303
Additional paid-in
capital............... 326,309 252,653 (F) 578,962
Distributions in excess
of accumulated
earnings.............. (1,291) (142)(B) (1,433)
-------- ------- -------- -------- ------- --------
Total Shareholders'
Equity............... 325,221 252,753 (142) 577,832
-------- ------- -------- -------- ------- --------
Total Liabilities and
Shareholders'
Equity............... $531,026 $15,400 $ 12,000 $262,675 $57,034 $878,135
======== ======= ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
balance sheet.
F-2
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS)
PRO FORMA ADJUSTMENTS
(A) Represents the purchase prices (including estimated closing costs) of
properties acquired by the Company subsequent to December 31, 1996 (the "1997
Acquired Properties") and the properties that the Company intends to acquire
concurrent with the Offering (the "Pending Acquisitions") as follows:
<TABLE>
<CAPTION>
1997 ACQUIRED PROPERTIES PURCHASE PRICE
------------------------ --------------
<S> <C>
4401 Fair Lakes Court..................................... $ 6,256
5211 South 3rd Street..................................... 9,848
---------
$ 16,104
=========
<CAPTION>
PENDING ACQUISITIONS
--------------------
<S> <C>
Properties:
Natomas Corporate Center.................................. $ 78,156
Corporetum Office Campus.................................. 51,229
Seven Mile Crossing....................................... 22,148
Crescent Centre(1)........................................ 25,146
Pacific Gateway Office Center............................. 24,486
16801 South Exchange...................................... 11,684
Baltimore Industrials(2).................................. 10,039
Six Flags Distribution Center............................. 8,865
Bridgestone Distribution Center........................... 4,470
Day Creek Industrial Park................................. 7,112
---------
243,335
Mortgage Note:
The Colonnade II.......................................... 16,510
---------
Total Pending Acquisitions................................ $ 259,845
=========
<CAPTION>
CONSTRUCTION IN PROGRESS
------------------------
<S> <C>
Federal Express(3)........................................ $ 5,276
=========
(1) The purchase price of Crescent Centre will be comprised of a
payment of cash of $13,146 and assumption of debt of $12,000.
(2) The Baltimore Industrials include 8779 Greenwood Place and the
Route 100 Building.
(3) From January 1, 1997 to March 31, 1997, the Company incurred
indebtedness to fund construction in progress for the development
of an industrial building for Federal Express.
(B) Represents $1.8 million of financing costs incurred in connection with
$180.1 million of mortgage debt borrowed from an affiliate of Lehman Brothers
Inc., offset by $142 of unamortized deferred financing costs written-off as a
result of the repayment of the related mortgage indebtedness. As discussed in
Note (D), a portion of the proceeds of the debt will be utilized to pay-off
the borrowings under the Company's line of credit and other mortgage
indebtedness. The remaining proceeds will be utilized to fund property
acquisitions. The financing costs will be amortized over the 10 year term of
the mortgage debt.
(C) Represents the cash transactions as follows:
Working capital used to acquire the 1997 Acquired Proper-
ties..................................................... $ (704)
Cash to be used to acquire the Pending Acquisitions....... (247,845)
Net cash proceeds of the Offering described in Note (F)... 262,675
Net increase in cash from the borrowings described in Note
(D)...................................................... 51,900
Financing costs incurred in connection with the borrowings
described in Note (B).................................... (1,800)
---------
$ 64,226
=========
</TABLE>
F-3
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET--(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(D) Represents the debt transactions as follows:
<TABLE>
<S> <C>
Increase in borrowing under the line of credit to fund the
acquisition of the 1997 Acquired Properties.................. $ 15,400
Debt assumed in connection with the acquisition of the Pending
Acquisitions................................................. 12,000
Proceeds from borrowings on the Federal Express construction
loan......................................................... 5,276
Proceeds from borrowings from an affiliate of Lehman Brothers
Inc. ........................................................ 180,100
Repayment of borrowings on the line of credit................. (88,200)
Repayment of other borrowings from an affiliate of Lehman
Brothers Inc. ............................................... (40,000)
--------
Net increase in debt on real estate........................... $ 84,576
========
</TABLE>
Following such debt transactions, debt outstanding is comprised of the
following:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST
AMOUNT RATE
--------- --------
<S> <C> <C>
Mortgage debt with an affiliate of Lehman
Brothers Inc.(1)................................ $180,100 7.57%
Mortgage debt on Crescent Centre................. 12,000 7.95%
Mortgage debt on Walnut Glen..................... 10,000 7.50%
Mortgage debt on FHP Building.................... 6,000 7.30%
Construction loan for Federal Express............ 5,276 7.35%(/2/)
--------
$213,376
========
</TABLE>
(1) The Company entered into a loan agreement with an affiliate of
Lehman Brothers Inc., whereby the Company had the ability to borrow
up to the maximum of $180.1 million by March 26, 1997. In an effort
to maximize the amount available for future acquisitions, the
Company exercised the option to maximize the borrowings under the
loan agreement.
(2) This loan has a variable interest rate of LIBOR + 1.85%. LIBOR was
5.5% at December 31, 1996.
(E) Represents the issuance of 10 million ($.01 par value per share) common
shares in the Offering.
(F) Represents the net proceeds obtained from the issuance of 10 million
common shares in the Offering as follows:
<TABLE>
<S> <C>
Gross proceeds from the Offering................................. $277,500
Underwriters' discount........................................... (13,875)
Other offering expenses.......................................... (950)
--------
Net cash proceeds................................................ 262,675
Allocation to minority interest(/1/)............................. (9,922)
Par value of common shares as described in Note (E).............. (100)
--------
$252,653
========
</TABLE>
(1) Represents the minority interest holders' 9.8% interest in the
Operating Partnership subsequent to the Offering.
F-4
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following unaudited pro forma consolidated statement of income is
presented as if (i) the consummation of the IPO, the Offering and related
Formation Transactions, (ii) the closing of the Mortgage Loan, (iii) the
acquisition of the Acquired Properties, and (iv) the acquisition of the
Pending Acquisitions had occurred on January 1, 1996.
This pro forma consolidated statement of income should be read in
conjunction with the pro forma consolidated balance sheet of the Company and
the historical consolidated and combined financial statements and notes
thereto of the Company and the Predecessor Company included elsewhere in the
Prospectus.
The pro forma consolidated statement of income is not necessarily indicative
of what actual results would have been had the previously described
transactions actually occurred as of January 1, 1996 nor does it purport to
represent the operations of the Company for future periods. For instance, the
pro forma consolidated statement of income does not include earnings from the
Company's pro forma cash and cash equivalents of approximately $71.5 million.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS PRO FORMA ADJUSTMENTS
COMPANY PREDECESSOR ----------------------- ------------------------
HISTORICAL COMPANY FORMATION PRENTISS
OCT. 22, 1996 JAN. 1, 1996 TRANSACTIONS PROPERTIES
THROUGH THROUGH ACQUIRED AND OTHER PENDING OTHER TRUST
DEC. 31, 1996 OCT. 21, 1996 PROPERTIES ADJUSTMENTS SUBTOTAL ACQUISITIONS ADJUSTMENTS PRO FORMA
------------- ------------- ---------- ------------ -------- ------------ ----------- ----------
(A) (B) (C) (D)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income......... $13,485 $27,086 $18,379 $ 24,599 $83,549 $33,763 $117,312
Mortgage interest..... 1,269 1,269
Management fees....... 192 7,903 (7,127) 968 968
Development, leasing,
sale and other fees.. 110 9,607 242 (8,451) 1,508 789 2,297
------- ------- ------- -------- ------- ------- ------- --------
Total revenues........ 13,787 44,596 18,621 9,021 86,025 35,821 121,846
------- ------- ------- -------- ------- ------- ------- --------
Expenses:
Property operating and
maintenance.......... 3,618 7,550 4,351 6,294 21,813 9,284 $ (761) 30,336
Real estate taxes..... 1,162 3,085 2,512 1,432 8,191 3,259 11,450
General and
administrative....... 547 5,304 (3,390) 2,461 52 2,513
Personnel costs, net.. 505 11,991 (10,427) 2,069 215 2,284
Interest expense...... 759 4,549 6,015 11,323 4,453 15,776
Amortization of
deferred financing
costs................ 87 1,402 (1,019) 470 63 533
Depreciation and
amortization......... 2,696 5,993 8,181 16,870 5,407 22,277
------- ------- ------- -------- ------- ------- ------- --------
Total expenses........ 9,374 39,874 6,863 7,086 63,197 12,543 9,429 85,169
------- ------- ------- -------- ------- ------- ------- --------
Equity in joint venture
and unconsolidated
subsidiaries.......... 1,427 18 3,291 4,736 1,190 5,926
------- ------- ------- -------- ------- ------- ------- --------
Income before minority
interest and gain on
sale of property...... 5,840 4,740 11,758 5,226 27,564 23,278 (8,239) 42,603
Minority interest...... (844) (3,098) (3,942) (321) (4,263)
------- ------- ------- -------- ------- ------- ------- --------
Income before gain on
sale of property...... 4,996 4,740 11,758 2,128 23,622 23,278 (8,560) 38,340
Gain on sale of
property.............. 378 (378)
------- ------- ------- -------- ------- ------- ------- --------
Net income............. $ 4,996 $ 5,118 $11,758 $ 1,750 $23,622 $23,278 $(8,560) $ 38,340
======= ======= ======= ======== ======= ======= ======= ========
Net income per common
share................. $ 0.25 $ 1.16 $ 1.27
======= ======= ========
Weighted average number
of common shares
outstanding........... 20,002 20,280 30,280
======= ======= ========
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
statement of income.
F-5
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ADJUSTMENTS
(A) Represents the 1996 historical revenues in excess of certain operating
expenses of the properties acquired by the Company subsequent to the IPO for
the period prior to acquisition by the Company. Eight properties, five office
and three industrial were acquired subsequent to the IPO from October 22, 1996
through December 31, 1996 (the "1996 Acquired Properties"). Two properties,
one office and one industrial property, were acquired by the Company
subsequent to December 31, 1996 (the "1997 Acquired Properties"). The 1996
Acquired Properties include 1717 Deerfield Road and O'Hare Plaza II
(collectively, the "Chicago Office Properties"); FHP Building; 2411 Dulles
Corner Park and 2455 Horsepen Road (collectively, the "Dulles Properties");
155 Alexandra Way and Wood Dale 1 & 2 (collectively, the "Chicago Industrial
Properties"). The 1997 Acquired Properties include 4401 Fair Lakes Court and
5211 South 3rd Street.
The expenses excluded from the operations of the Acquired Properties are
interest and depreciation and amortization.
<TABLE>
<CAPTION>
1996 ACQUIRED PROPERTIES 1997 ACQUIRED PROPERTIES
--------------------------------------------- --------------------------------
CHICAGO CHICAGO 4401 TOTAL
OFFICE FHP DULLES INDUSTRIAL FAIR LAKES 5211 SOUTH ACQUIRED
PROPERTIES(1) DENVER PROPERTIES(2) PROPERTIES COURT 3RD STREET PROPERTIES
------------- ------ ------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental income........... $6,796 $2,920 $5,947 $1,104 $862 $750 $18,379
Other income............ 143 61 14 24 242
------ ------ ------ ------ ---- ---- -------
Total revenues......... 6,939 2,981 5,961 1,128 862 750 18,621
------ ------ ------ ------ ---- ---- -------
Property operating and
maintenance............ 1,236 928 1,628 184 331 44 4,351
Real estate taxes....... 1,578 218 336 175 58 147 2,512
------ ------ ------ ------ ---- ---- -------
Total expenses......... 2,814 1,146 1,964 359 389 191 6,863
------ ------ ------ ------ ---- ---- -------
Revenues in excess of
certain operating
expenses............... $4,125 $1,835 $3,997 $ 769 $473 $559 $11,758
====== ====== ====== ====== ==== ==== =======
</TABLE>
(1) The acquisition of the Chicago Office Properties occurred on December 11,
1996 through December 13, 1996. The operations presented above reflect the
1996 revenues in excess of certain operating expenses for the period prior
to acquisition. The Combined Statement of Revenues and Certain Operating
Expenses for the Chicago Office Properties included elsewhere in this
prospectus include the historical revenues in excess of certain operating
expenses for the entire year ended December 31, 1996.
(2) The acquisition of the Dulles Properties occurred on December 31, 1996.
The Combined Statement of Revenues and Certain Operating Expenses for the
Dulles Properties are included elsewhere in this prospectus.
(B) Represents pro forma adjustments made to reflect the ownership by the
Company of all properties acquired concurrent with the IPO and certain other
Formation Transactions as if these transactions occurred on January 1, 1996.
The column totals reflect the net adjustments presented on the Company's Pro
Forma Consolidated Statement of Income for the year ended December 31, 1996.
The following table should be read in conjunction with the notes that follow.
F-6
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AMORT
PROPERTY REAL PER- OF
PRO FORMA RENTAL MGMT OTHER OPERATING ESTATE GEN & SONNEL INTEREST DEF FIN DEPR & INVEST MINORITY
ADJUSTMENT INCOME FEES FEES & MAINT. TAXES ADMIN COSTS EXPENSE COSTS AMORT INCOME INTEREST
---------- ------- ------- ------- --------- ------ ------- -------- -------- ------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(1) Acquisition
of properties
concurrent with
IPO............ $24,599 $ 131 $7,241 $1,432
(2) Assignment of
contracts........ $(6,529) (7,549) $(2,597) $ (8,628)
(3) Equity
investment
income........... $2,934
(4) Management of
REIT
properties..... (598) (598)
(5) Acquisition
and management
of REIT
properties..... (349)
(6) Other fees
and recoveries... (1,033)
(7) Advisory
fees............. (717)
(8) Prop mgmt g&a
and salaries... (121) (1,622)
(9) Special
compensation..... (177)
(10) Mortgage
interest......... $6,015
(11) Amortization
of deferred
financing
costs.......... $(1,019)
(12) Depreciation
expense.......... $8,181
(13) Consolidation
of Austex........ 45 357
(14) Minority
ownership
interest......... $(3,098)
(15) Gain on sale
of property......
------- ------- ------- ------ ------ ------- -------- ------ ------- ------ ------ -------
Total........... $24,599 $(7,127) $(8,451) $6,294 $1,432 $(3,390) $(10,427) $6,015 $(1,019) $8,181 $3,291 $(3,098)
======= ======= ======= ====== ====== ======= ======== ====== ======= ====== ====== =======
<CAPTION>
PRO FORMA GAIN
ADJUSTMENT ON SALE
---------- -------
<S> <C>
(1) Acquisition
of properties
concurrent with
IPO............
(2) Assignment of
contracts........
(3) Equity
investment
income...........
(4) Management of
REIT
properties.....
(5) Acquisition
and management
of REIT
properties.....
(6) Other fees
and recoveries...
(7) Advisory
fees.............
(8) Prop mgmt g&a
and salaries...
(9) Special
compensation.....
(10) Mortgage
interest.........
(11) Amortization
of deferred
financing
costs..........
(12) Depreciation
expense..........
(13) Consolidation
of Austex........
(14) Minority
ownership
interest.........
(15) Gain on sale
of property...... $(378)
-------
Total........... $(378)
=======
</TABLE>
(1) Concurrent with the IPO, the Company acquired certain properties
including Park West C2, the Los Angeles Industrial Properties, One
Northwestern Plaza, Cottonwood, 9050 Junction, Westloop Business Park, Park
West E1, Park West E2, 3141 Fairview Park and the Plaza on Bachman Creek. The
historical results of operations of each property are presented below for the
period in 1996 which the property was not included in the results of
operations of the Predecessor Company. With respect to the 3141 Fairview Park
Drive and the Plaza on Bachman Creek properties, the information below
includes the results of operations for the period January 1, 1996 through
February 22, 1996 and January 1, 1996 through August 18, 1996, respectively,
which reflects the period prior to the acquisition of the property by the
Predecessor Company.
<TABLE>
<CAPTION>
LOS ONE
PARK ANGELES NORTH- WESTLOOP 3141 PLAZA ON
WEST INDUSTRIAL WESTERN COTTON- 9050 BUSINESS PARK PARK FAIRVIEW BACHMAN
C2 PROPERTIES PLAZA WOOD JUNCTION PARK WEST E1 WEST E2 PARK CREEK TOTAL
------ ---------- ------- ------- -------- -------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Rental income......... $6,954 $4,744 $4,158 $1,833 $383 $494 $2,387 $2,215 $489 $942 $24,599
Other income.......... 68 46 7 1 2 2 2 3 131
------ ------ ------ ------ ---- ---- ------ ------ ---- ---- -------
Total Revenue......... 7,022 4,790 4,165 1,834 383 494 2,389 2,217 491 945 24,730
Expenses:
Property operating and
maintenance.......... 1,666 1,179 1,173 699 40 110 880 939 216 339 7,241
Real estate taxes..... 525 141 370 219 60 1 33 83 1,432
------ ------ ------ ------ ---- ---- ------ ------ ---- ---- -------
Total expenses........ 2,191 1,320 1,543 918 40 170 880 940 249 422 8,673
------ ------ ------ ------ ---- ---- ------ ------ ---- ---- -------
Revenue in excess of
certain operating
expenses.............. $4,831 $3,470 $2,622 $ 916 $343 $324 $1,509 $1,277 $242 $523 $16,057
====== ====== ====== ====== ==== ==== ====== ====== ==== ==== =======
</TABLE>
F-7
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(2) In connection with the Formation Transactions, certain third-party
management contracts were assigned to the Manager. 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>
<S> <C>
Management fees................................................... $ 6,529
Other fees and recoveries......................................... 7,549
General and administrative........................................ (2,597)
Personnel cost, net............................................... (8,628)
-------
Manager contract income........................................... $ 2,853
=======
</TABLE>
In addition to the above, the Manager will benefit from a reduction in
occupancy cost of approximately $235, resulting in net income to the Manager
of $3,088.
(3) Represents the equity interest of $2,934 on the $3,088 net income of the
Manager as the Operating Partnership owns a 95% economic interest in the
Manager.
(4) Represents the intercompany elimination of management fee revenues and
expenses (property operating and maintenance) of $598 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 $349 previously paid to a third party.
Subsequent to the acquisition of these properties, the properties are managed
by the Company.
(6) Represents a reduction of $1,033 in recovery revenues, received from
property owners, as a result of certain tax and legal services performed in
the operations of the Predecessor Company that are not now performed by the
Company.
(7) Represents the decrease of $717 in fees formerly paid by the Predecessor
Company to an affiliate for acquisition and advisory services performed.
(8) Reflects a decrease of $121 and $1,622 in general and administration
expense and personnel costs, net, respectively. The decrease in general and
administration expenses results from an adjustment to reflect the estimated
additional costs of operating as a public company ($850), net of a reduction
in costs primarily attributable to certain services performed historically
that are not now being performed by the Company ($971). The decrease in
personnel costs, net, results from a reduction in base salary being earned by
the Prentiss Principals subsequent to the IPO ($800) as well as a reduction in
salary expense resulting from the staffing changes made concurrent with the
Company's formation ($822).
(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.
This compensation is not paid by the Company.
F-8
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(10) Pro forma interest expense prior to the Offering and the acquisition of
the Pending Acquisitions is computed as follows (Interest expense related to
the Federal Express construction loan is not included as this interest will be
capitalized as a cost of the project.):
<TABLE>
<CAPTION>
ANNUAL
PRINCIPAL INTEREST INTEREST
AMOUNT RATE EXPENSE
--------- -------- --------
<S> <C> <C> <C>
Mortgage debt with an affiliate of Lehman
Brothers Inc............................... $96,100 7.57% $ 7,275
Mortgage debt with an affiliate of Lehman
Brothers Inc............................... 40,000 7.15%(1) 2,860
Mortgage debt on Walnut Glen Tower.......... 10,000 7.50% 750
Mortgage debt on FHP Building............... 6,000 7.30% 438
-------
Pro forma annual interest expense......... 11,323
Interest expense included in historical
columns.................................. 5,308
-------
Pro forma interest expense adjustment..... $ 6,015
=======
</TABLE>
(1) This loan has a variable interest rate of LIBOR + 1.65%. LIBOR was 5.50%
at December 31, 1996.
(11) Represents the net decrease of $1,019 in amortization of deferred
financing costs as a result of an increase in amortization of deferred
financing resulting from financing fees incurred on the Line of Credit ($270)
and other borrowings ($103) less a reduction in amortization of deferred
financing costs resulting from costs written-off concurrent with the IPO
($1,392).
(12) Represents the net increase in depreciation and amortization expense as
a result of the acquisition of properties concurrent with the IPO.
Depreciation on newly acquired buildings is provided under the straight-line
method over an estimated useful life of 40 years for office buildings and 30
years for industrial buildings.
(13) Represents the net investment income and general and administration
expenses of $357 and $45, respectively, as a result of the consolidation of
Austex.
(14) Represents net income attributable to the minority investors interest
in the Operating Partnership, before the Offering. The Company, through its
wholly owned subsidiary, is the sole general partner and currently owns
approximately 86.0% of the Operating Partnership before the Offering. The
minority investors own in the aggregate approximately 14.0% of the Operating
Partnership before the Offering. Also includes an immaterial minority interest
in other partnerships.
(15) Represents a gain on sale of a parcel of land totaling $378, completed
by the Predecessor Company prior to the formation of the Company.
(C) Represents the 1996 historical revenues in excess of certain operating
expenses of the properties to be acquired concurrent with the Offering. The
Pending Acquisitions include the Natomas Corporate Center ("the Natomas
Properties"); the Corporetum Office Campus; Seven Mile Crossing; Crescent
Centre; Pacific Gateway Office Center; 16801 South Exchange; Route 100
Building and 8779 Greenwood (collectively, the "Baltimore Industrials"); The
Colonnade II; Six Flags Distribution Center (the "Six Flags Distribution");
and Bridgestone Distribution Center (the "Bridgestone Distribution"). The
Company is purchasing a note, collateralized by the Colonnade II building, and
intends to foreclose on the property during 1997, thus mortgage interest is
included rather than the historical revenues in excess of certain operating
expenses. Also included in the Pending Acquisitions are the Day Creek
Properties, two industrial properties containing 228,382 square feet. The
F-9
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
properties were under construction during 1996 and therefore, there were no
1996 historical operations. The Pro Forma Consolidated Statement of Income for
the year ended December 31, 1996 does not include any earnings from these
properties.
The expenses excluded from the operations of the Acquired Properties are
interest and depreciation and amortization.
<TABLE>
<CAPTION>
PACIFIC
SEVEN GATEWAY 16801 SIX
NATOMAS CORPORETUM MILE CRESCENT OFFICE SOUTH BALTIMORE COLONNADE FLAGS BRIDGESTONE
PROPERTIES(1) PROPERTIES(2) CROSSING(2) CENTRE(2) CENTER EXCHANGE INDUSTRIALS II DIST. DIST.
------------- ------------- ----------- --------- ------- -------- ----------- --------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Rental income.... $11,037 $6,710 $4,406 $3,547 $3,594 $1,766 $1,068 $915 $720
Mortgage
interest........ $1,269
Other income..... 128 431 6 12 189 11 1 11
------- ------ ------ ------ ------ ------ ------ ------ ---- ----
Total Revenue... 11,165 7,141 4,412 3,559 3,783 1,777 1,069 1,269 926 720
------- ------ ------ ------ ------ ------ ------ ------ ---- ----
Expenses:
Property
operating and
maintenance..... 2,974 1,784 1,426 1,283 1,271 164 119 138 125
Real estate
taxes........... 993 675 377 304 115 692 103
------- ------ ------ ------ ------ ------ ------ ------ ---- ----
Total expenses.. 3,967 2,459 1,803 1,587 1,386 856 222 138 125
------- ------ ------ ------ ------ ------ ------ ------ ---- ----
Revenue in excess
of certain
operating
expenses........ $ 7,198 $4,682 $2,609 $1,972 $2,397 $ 921 $ 847 $1,269 $788 $595
======= ====== ====== ====== ====== ====== ====== ====== ==== ====
<CAPTION>
TOTAL
-------
<S> <C>
Revenue:
Rental income.... $33,763
Mortgage
interest........ 1,269
Other income..... 789
-------
Total Revenue... 35,821
-------
Expenses:
Property
operating and
maintenance..... 9,284
Real estate
taxes........... 3,259
-------
Total expenses.. 12,543
-------
Revenue in excess
of certain
operating
expenses........ $23,278
=======
</TABLE>
(1) The Combined Statement of Revenues and Certain Operating Expenses for the
Natomas Properties are included elsewhere in this prospectus.
(2) The Corporetum Properties, Seven Mile Crossing, and Crescent Centre
comprise the Combined Statement of Revenues and Certain Operating Expenses
of the Selected 1997 Pending Acquisitions included elsewhere in this
prospectus.
(D) Represents other adjustments to the Pending Acquisitions as follows:
(1) Represents a reduction in property management fee (property operating
and maintenance) of $997, offset by an estimated increase of $236 in other
property management expenses to be incurred by the Company. The decrease in
property management fee results from elimination of the management fees paid
to third-party managers. Subsequent to acquisition, the properties will be
managed by the Company.
(2) The increase of $52 and $215 in general and administrative and personnel
costs, net, represents an estimated increase in staffing and related costs
related to the properties to be acquired.
F-10
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME--(CONTINUED)
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(3) Pro forma interest expense following the Offering is computed as follows
(Interest expense related to the Federal Express construction loan is not
included as this interest will be capitalized as a cost of the project.):
<TABLE>
<CAPTION>
PRINCIPAL INTEREST
AMOUNT RATE INTEREST
--------- -------- --------
<S> <C> <C> <C>
Mortgage debt with an affiliate of Lehman Brothers
Inc.............................................. $180,100 7.57% $13,634
Mortgage debt on Crescent Centre.................. 12,000 7.95% 954
Mortgage debt on Walnut Glen Tower................ 10,000 7.50% 750
Mortgage debt on FHP Building..................... 6,000 7.30% 438
-------
Pro forma annual interest expense............... 15,776
Interest expense included in previous columns... 11,323
-------
Pro forma interest expense adjustment........... $ 4,453
=======
</TABLE>
(4) Represents an increase of $180 in annual amortization of deferred
financing costs resulting from an estimated $1.8 million of costs incurred in
connection with the new mortgage obtained from an affiliate of Lehman Brothers
Inc., offset by a reduction of $117 in annual amortization of deferred
financing costs that were written-off as a result of the repayment of certain
outstanding indebtedness with proceeds of the Offering and indebtedness.
(5) Reflects the net increase in depreciation and amortization expense of
$5,407 as a result of the acquisition of the properties. Depreciation on
buildings is provided under the straight-line method of over an estimated
useful life of 40 years for office buildings, and 30 years for industrial
buildings. The estimated purchase price of the Pending Acquisition properties
(including estimated closing costs) is as follows:
<TABLE>
<CAPTION>
TOTAL
ALLOC. TO PURCHASE
PROPERTY TYPE LAND BUILDINGS PRICE
-------- ---------- ------- --------- --------
<S> <C> <C> <C> <C>
Natomas Corporate Center................. Office $14,273 $ 63,883 $ 78,156
Corporetum Office Campus................. Office 7,684 43,545 51,229
Seven Mile Crossing...................... Office 3,322 18,826 22,148
Crescent Centre.......................... Office 3,772 21,374 25,146
Pacific Gateway Office Center............ Office 3,673 20,813 24,486
16801 South Exchange..................... Industrial 1,753 9,931 11,684
Baltimore Industrials.................... Industrial 1,506 8,533 10,039
Six Flags Distribution................... Industrial 1,330 7,535 8,865
Bridgestone Distribution................. Industrial 671 3,799 4,470
Day Creek Industrial Park................ Industrial 1,067 6,045 7,112
------- -------- --------
$39,051 $204,284 $243,335
======= ======== ========
</TABLE>
(6) Reflects the increase in equity in earnings from the Operating
Partnerships 95% economic interest in the Manager, resulting from the
capitalization of certain acquisition costs.
(7) Reflects the adjustment to minority interest to reflect the minority
investors interest in the Operating Partnership of approximately 9.8%
following the Offering. Also includes an immaterial minority interest in other
partnerships.
F-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
of Prentiss Properties Trust
We have audited the accompanying consolidated and combined financial
statements and the financial statement schedule of Prentiss Properties Trust
(the "Company") and the Predecessor Company as listed on page F-1 of this
Prospectus. These consolidated and combined financial statements and the
financial statement schedule are the responsibility of the Company's
management. 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 consolidated and combined financial statements referred
to above present fairly, in all material respects, the consolidated and
combined financial position of Prentiss Properties Trust as of December 31,
1996 and the Predecessor Company as of December 31, 1995, and the consolidated
and combined results of operations and cash flows for the periods October 22,
1996 through December 31, 1996 and January 1, 1996 through October 21, 1996,
and the years ended December 31, 1995 and 1994, respectively, 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.
Dallas, Texas
February 12, 1997, except as to Note 18
for which the date is February 20, 1997
F-12
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
CONSOLIDATED AND COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
THE COMPANY COMPANY
------------ ------------
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Assets
Real estate.......................................... $501,035 $153,148
Less: accumulated depreciation..................... (18,507) (11,780)
-------- --------
482,528 141,368
Deferred charges and other assets, net............... 11,747 7,135
Receivables, net..................................... 5,356 2,755
Cash and cash equivalents............................ 7,226 1,033
Escrowed cash........................................ 867 1,294
Other receivables (affiliates)....................... 1,346
Investments in joint venture and unconsolidated
subsidiaries........................................ 21,956 1,050
-------- --------
Total assets....................................... $531,026 $154,635
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debt on real estate................................ $128,800 $46,442
Accounts payable and other liabilities............. 15,868 3,622
Distributions payable.............................. 7,309
Other liabilities (affiliates)..................... 705
-------- --------
Total liabilities................................ 151,977 50,769
-------- --------
Minority interest in Operating Partnership........... 52,857
-------- --------
Minority interest in partnerships.................... 971
-------- --------
Commitments and contingencies (Note 16)
Shareholders' equity:
Common shares $.01 par value, 100,000,000 shares
authorized, 20,279,897 shares issued and
outstanding....................................... 203
Additional paid-in capital......................... 326,309
Predecessor Company equity......................... 103,866
Distributions in excess of accumulated earnings.... (1,291)
-------- --------
Total shareholders' equity....................... 325,221 103,866
-------- --------
Total liabilities and shareholders' equity....... $531,026 $154,635
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF INCOME
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR COMPANY
------------- -----------------------------------
OCT. 22, 1996 JAN. 1, 1996 YEARS ENDED DEC. 31,
THROUGH THROUGH ---------------------
DEC. 31, 1996 OCT. 21, 1996 1995 1994
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income............. $13,485 $27,086 $ 29,423 $ 25,256
Management fees........... 192 7,903 9,979 9,810
Development, leasing, sale
and other fees........... 110 9,607 15,762 16,892
------- ------- ---------- ----------
Total revenues.......... 13,787 44,596 55,164 51,958
------- ------- ---------- ----------
Expenses:
Property operating and
maintenance.............. 3,618 7,550 7,696 7,040
Real estate taxes......... 1,162 3,085 3,030 2,691
General and
administrative........... 547 5,304 6,293 5,323
Personnel costs, net...... 505 11,991 17,138 20,815
Interest expense.......... 759 4,549 3,783 3,120
Amortization of deferred
financing costs.......... 87 1,402 99 71
Depreciation and
amortization............. 2,696 5,993 7,166 5,557
------- ------- ---------- ----------
Total expenses.......... 9,374 39,874 45,205 44,617
------- ------- ---------- ----------
Equity in joint venture
and unconsolidated
subsidiaries............. 1,427 18 11 13
------- ------- ---------- ----------
Income before minority
interest and gain on sale
of property................ 5,840 4,740 9,970 7,354
Minority interest........... (844)
------- ------- ---------- ----------
Income before gain on sale
of property................ 4,996 4,740 9,970 7,354
Gain on sale of property.... 378 1,718
------- ------- ---------- ----------
Net income.................. $ 4,996 $ 5,118 $ 9,970 $ 9,072
======= ------- ---------- ----------
Net income per common
share...................... $ .25
=======
Weighted average number of
common shares outstanding.. 20,002
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-14
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANYCONSOLIDATED AND COMBINED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY THE COMPANY--SHAREHOLDERS' EQUITY
----------- -----------------------------------
ADD'L. PAID-
NET COMMON IN DIST. IN EXCESS
TOTAL EQUITY SHARES CAPITAL ACCUM. EARNINGS
-------- ----------- ------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1993................... $ 94,046 $94,046
Net income............ 9,072 9,072
Contributions......... 12,139 12,139
Distributions of PPL
income............... (2,663) (2,663)
-------- ------- ---- -------- -------
Balance at December 31,
1994................... 112,594 112,594
Net income............ 9,970 9,970
Distributions......... (15,250) (15,250)
Distributions of PPL
income............... (4,498) (4,498)
Equity on purchase of
Park West C2......... 1,050 1,050
-------- ------- ---- -------- -------
Balance at December 31,
1995................... 103,866 103,866
Net income............ 5,118 5,118
Distributions......... (6,375) (6,375)
Distributions of PPL
income............... (2,395) (2,395)
Equity on purchase of
Plaza on Bachman
Creek................ 3,314 3,314
-------- ------- ---- -------- -------
Balance at October 21,
1996................... 103,528 103,528
Acquisition of
Predecessor Company's
interest............. (98,316) (98,316)
Contribution of
Predecessor Company's
interest............. (5,212) $ 5,212
Net proceeds from
issuance of common
shares (20,279,897
common shares)....... 321,300 $203 321,097
Distributions declared
($.31 per share)..... (6,287) $(6,287)
Net income............ 4,996 4,996
-------- ------- ---- -------- -------
Balance at December 31,
1996................... $325,221 $ $203 $326,309 $(1,291)
======== ======= ==== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
THE COMPANY COMPANY YEARS ENDED DEC. 31,
------------- ------------- ----------------------
OCT. 22, 1996 JAN. 1, 1996
THROUGH THROUGH
DEC. 31, 1996 OCT. 21, 1996 1995 1994
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income............... $ 4,996 $ 5,118 $ 9,970 $ 9,072
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Minority interest...... 844
Gain on sale of proper-
ty.................... (378) (1,718)
Depreciation and amor-
tization.............. 2,696 5,993 7,166 5,557
Amortization of de-
ferred financing...... 87 1,402 99 71
Equity income in joint
venture and unconsoli-
dated subsidiaries.... (1,427) (18) (11) (13)
Changes in assets and
liabilities:
Provision for doubtful
accounts.............. 201 (120) (150) 310
Receivables............ (2,377) (497) (265) (654)
Other assets........... (712) (199) 176 (549)
Escrowed cash.......... 1,325 (898) (93) (698)
Accounts payable and
other liabilities..... 6,166 2,392 (756) 1,557
Amounts due to/from af-
filiates.............. (1,524) (527) 102 124
--------- -------- ---------- ----------
Net cash provided by op-
erating activities...... 10,275 12,268 16,238 13,059
--------- -------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of and additions
to investment in real
estate.................. (335,689) (33,544) (4,669) (71,856)
Proceeds from sale of
real estate............. 559 7,894
Investment in joint
venture and
unconsolidated
subsidiaries............ (20,902)
Distribution received
from joint venture...... 373
Cash from contributed as-
sets.................... 2,409
Decrease in escrowed
cash.................... 368 23,053
--------- -------- ---------- ----------
Net cash used in invest-
ing activities.......... (353,809) (32,985) (4,301) (40,909)
--------- -------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from sale of
common shares........... 337,604
Partner's Contributions.. 3,314 12,139
Contributions from minor-
ity interest holders.... 950
Distributions............ (6,375) (15,250)
Proceeds from debt on
real estate............. 112,800 29,000 27,100
Repayments of debt on
real estate............. (99,462) (261) (289) (841)
Deferred financing
costs................... (1,133) (2,000) (357)
Distribution of PPL in-
come.................... (2,395) (4,498) (2,663)
--------- -------- ---------- ----------
Net cash provided by fi-
nancing activities...... 350,759 21,283 (20,037) 35,378
--------- -------- ---------- ----------
Net increase in cash and
cash equivalents........ 7,225 566 (8,100) 7,528
Cash and cash equiva-
lents, beginning of pe-
riods................... 1 1,033 9,133 1,605
--------- -------- ---------- ----------
Cash and cash equiva-
lents, end of periods... $ 7,226 $ 1,599 $ 1,033 $ 9,133
--------- -------- ---------- ----------
SUPPLEMENTAL CASH FLOW IN-
FORMATION:
Cash paid for interest... $ 983 $ 4,720 $ 3,786 $ 2,946
========= ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
Prentiss Properties Trust (the "Company") was formed under the laws of the
state of Maryland on July 12, 1996, to be a self-administered and self-managed
real estate investment trust ("REIT"). The Company acquired a sole general
partnership interest in Prentiss Properties Acquisition Partners, L.P. (the
"Operating Partnership") through the Company's wholly-owned subsidiary
Prentiss Properties I, Inc., a Delaware corporation and owns an approximate
86.0% limited partnership interest in the Operating Partnership.
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 "Prentiss Group"). The acquisition,
property management, leasing, development and construction businesses will be
carried out by the Operating Partnership and the Company's majority-owned
affiliates, Prentiss Properties Limited, Inc. and Prentiss Properties Limited
II, Inc. (collectively, the "Manager").
On October 22, 1996, the Company commenced operations after completing an
initial public offering of 16,000,000 common shares. The Company issued an
additional 2,400,000 common shares on November 1, 1996 pursuant to the
exercise of the underwriters' over-allotment option. The combined 18,400,000
common shares were issued at a price per share of $20.00 (the "Offering"). The
Company used approximately $87.4 million of the net proceeds of the Offering
and issued 1,879,897 common shares of the Company for a total consideration of
approximately $125.0 million to purchase certain limited partners' interests
in the Operating Partnership. The Company contributed the remaining net
proceeds of the Offering to the Operating Partnership. Subsequent to these
transactions, the Company held an approximate 86.0% interest in the Operating
Partnership.
The Prentiss Group members, who, prior to the Offering, collectively served
as the general partner of the Operating Partnership, contributed to the
Operating Partnership all of its interests in the Properties (as defined
below) and certain management contracts of PPL (the "Contracts") in exchange
for 3,295,995 limited partnership units in the Operating Partnership
("Units").
Upon completion of the Offering and certain related transactions
(collectively, the "Formation Transactions"), the Company owned 87 properties,
28 office and 59 industrial containing 8.9 million net rentable square feet
including 57 properties totaling approximately 6.6 million square feet
acquired from the Predecessor Company (defined below). Subsequent to the
Offering, through December 31, 1996, the Company acquired eight additional
properties, (collectively, the "Acquired Properties"). The Acquired Properties
consist of five Class "A" suburban office properties totaling approximately
850,000 square feet and three suburban industrial properties totaling
approximately 226,000 square feet. The office properties are located in the
Chicago, Illinois; Denver, Colorado; and Northern Virginia markets. The
industrial properties are located in the Chicago, Illinois market. The
purchase price of the Acquired Properties totaled approximately $116.6
million, which was funded principally with borrowings under the Line of Credit
totaling $72.8 million, other indebtedness incurred or assumed directly by the
Company totaling $35.0 million and approximately $8.8 million of cash
reserves. As of December 31, 1996, the Company owned 95 properties, 33 office
and 62 industrial (the "Properties") representing 9.9 million square feet in
12 major markets throughout the U.S.
The accompanying combined financial statements of the Predecessor Company
include the accounts of Prentiss Properties Acquisition Partners, L.P.; the
operations of Prentiss Properties Limited, Inc.; 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 October 21,
1996, the accounts of the Plaza on Bachman Creek from August 19, 1996 through
October 21, 1996; and a 15% equity investment in Park West C2 Associates
("Park West C2") from September 5, 1995 through October 21, 1996. The accounts
are presented on a combined basis, as the above properties were under the
control of the Prentiss Group, have common management and were part of the
formation of the Company. The Predecessor Company's 50% investment in Austex,
which held a 50% investment in Broadmoor Austin, and its investment in Park
West C2 were accounted for using the equity method of accounting.
F-17
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
All significant intercompany transactions have been eliminated in the
combined financial statements.
The following summarizes the Company's interests in the Properties at
December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF COMPANY COMPANY
PROPERTIES OWNERSHIP % LOCATION NOTES
---------- ----------- --------------- -------
<S> <C> <C> <C> <C>
OFFICE PROPERTIES
FHP Building.................. 1 100% Denver, CO (C)
Cumberland Office Park........ 9 100% Atlanta, GA (A)
1717 Deerfield................ 1 100% Chicago, IL (C)
O'Hare Plaza II............... 1 100% Chicago, IL (C)
One Northwestern Plaza........ 1 100% Southfield, MI (B)
Broadmoor Austin.............. 7 50% Austin, TX (A), (D)
Park West C2.................. 1 100% Dallas, TX (A)
Park West E1.................. 1 100% Dallas, TX (B)
Park West E2.................. 1 100% Dallas, TX (B)
5307 East Mockingbird......... 1 100% Dallas, TX (A)
Walnut Glen Tower............. 1 100% Dallas, TX (A)
Cottonwood Office Center...... 3 100% Dallas, TX (B)
Plaza on Bachman Creek........ 1 100% Dallas, TX (A)
3141 Fairview Park Drive...... 1 100% Northern VA (A)
8521 Leesburg Pike............ 1 100% Northern VA (A)
2411 Dulles Corner Park....... 1 100% Northern VA (C)
2455 Horsepen Road............ 1 100% Northern VA (C)
---
Total Office Properties..... 33
---
INDUSTRIAL PROPERTIES
Los Angeles Industrial
Properties................... 18 100% Los Angeles, CA (B)
155 Alexandra Way............. 1 100% Chicago, IL (C)
Wood Dale 1 & 2............... 2 100% Chicago, IL (C)
8869 Greenwood................ 1 100% Baltimore, MD (A)
1329 Western Avenue........... 1 99% Baltimore, MD (A), (E)
Deep Run 1 & 2................ 2 99% Baltimore, MD (A), (E)
4611 Mercedes Drive........... 1 98% Baltimore, MD (A), (E)
9050 Junction Drive........... 1 100% Baltimore, MD (B)
Northland Park................ 4 100% Kansas City, MO (A)
North Topping Street.......... 1 100% Kansas City, MO (A)
Airworld Drive................ 1 100% Kansas City, MO (A)
107th Terrace................. 1 100% Kansas City, MO (A)
Nicholson III................. 3 100% Dallas, TX (A)
13425 Branchview.............. 1 100% Dallas, TX (A)
1002 Avenue T................. 1 100% Dallas, TX (A)
1625 Vantage Drive............ 1 100% Dallas, TX (A)
West Loop Business Park....... 5 100% Houston, TX (B)
Airport Properties............ 12 100% Milwaukee, WI (A)
Oak Creek Properties.......... 2 100% Milwaukee, WI (A)
North West Properties......... 3 100% Milwaukee, WI (A)
---
Total Industrial
Properties................. 62
---
Total Properties.............. 95
===
</TABLE>
F-18
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
- --------
(A) As previously discussed, the Predecessor Company had an interest in 57 of
the Company's properties prior to the formation of the Company.
(B) In connection with the Formation Transactions, the Company purchased 30
properties.
(C) Subsequent to the formation of the Company, through December 31, 1996, the
Company purchased eight properties.
(D) The Company holds a non-controlling 49.9% 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 Company accounts for its interest using the equity method
of accounting.
(E) Four of the Baltimore industrial properties are owned by three
partnerships. The Company holds the majority general partnership interest
of each of the Partnerships and consolidates the accounts and operations
of the partnerships.
With the exception of the Broadmoor Austin properties, all Properties are
majority-owned by the Company and the accounts and operations are
consolidated. The Company owns a 49.9% interest in Broadmoor Austin and
accounts for its interest using the equity method of accounting. The Company
also owns a 95% non-voting economic interest in the Manager. The Manager
conducts the majority of the Company's third-party management operations and,
due to the non-voting nature of the Company's ownership interest in the
Manager, the Company accounts for its interest using the equity method of
accounting.
(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 Operating
Partnership will record impairment losses on long-lived assets used in
operations 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. The Company
periodically reviews its properties to determine if its carrying costs will be
recovered from future operating cash flows. In cases where the Company does
not expect to recover its carrying costs, the Company recognizes an impairment
loss. 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 30 to 50 years for office
buildings and 25 to 30 years for industrial buildings.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. 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 (loss).
Deferred Charges
Deferred financing costs are recorded at cost and are being amortized over
the life of the related debt. 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and investments with
maturities of three months or less when purchased.
F-19
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Escrowed Cash
Escrowed funds as of December 31, 1996 and 1995 are comprised of funds held
for the payment of real estate taxes.
Income Taxes
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 ended 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. 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. The Manager consists of
legal entities subject to federal income tax on their taxable income at
regular corporate rates.
Leases
The Company and Predecessor Company, each as lessor, has retained
substantially all of the risks and benefits of ownership and accounts for its
leases as operating leases.
Revenue Recognition
Rental income is recognized over the terms of the leases as it is earned.
Management company income, principally management fees and recoveries of the
Manager, is recognized as earned. Other income consists of (i) development
fees, which are recognized ratably over each project's development period, as
defined; (ii) leasing fees, which 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; (iii) sale fees, which are recognized upon completion of the
asset sale; and (iv) termination fees, which are recognized when earned.
Net Income Per Common Share
Net income per common share has been computed by dividing net income
applicable to common shareholders by the weighted average number of common
shares outstanding. For the period from October 22, 1996 through December 31,
1996, the outstanding common share options had an immaterial dilutive effect.
Distributions
The Company pays regular quarterly distributions which are dependent on
receipt of distributions from the Operating Partnership.
Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from income reported for financial reporting
purposes due to the differences for federal tax purposes primarily in the
estimated useful lives used to compute depreciation. Distributions declared in
1996 represent an approximate 57% return of capital for federal income tax
purposes.
Minority Interest
Minority interest in the Operating Partnership represents the limited
partners' proportionate share of the equity in the Operating Partnership.
Income is allocated to minority interest based on the weighted average
F-20
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
percentage ownership through the year. Minority interest in partnerships
represents the limited partners' proportionate share of the equity in
partnerships, of which the Operating Partnership has a majority ownership
interest and the accounts of which are consolidated into the Operating
Partnership.
Concentration of Credit Risk
The Company places cash deposits at major banks. Management believes that
through its cash investment policy the credit risk related to these deposits
is minimal.
Distributions of PPL Income
PPL has retained certain assets and liabilities which were not transferred
to the Operating Partnership pursuant to the formation of the Company. 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 that were contributed to the Operating Partnership
upon formation are reflected in the accompanying financial statements. The
Combined Statements of Changes in Shareholders' Equity and the Combined
Statements of Cash Flows for the Predecessor Company reflect the distributions
of the PPL income, as the benefit of each period's net income from these
contracts has been distributed to the principals of PPL.
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.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," effective for years ending after December 15,
1992, requires disclosures about the fair value of financial instruments
whether or not such instruments are recognizable in the balance sheet. The
Company's financial instruments include short-term investments, tenant
accounts receivable, accounts payable, other accrued expenses and mortgage
loans payable. The fair values of these financial instruments were not
materially different from their carrying or contract values.
(3) REAL ESTATE
Real estate consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land..................................................... $ 86,711 $ 32,061
Buildings and improvements............................... 409,060 121,087
Construction in progress................................. 5,264
-------- --------
Total.................................................. 501,035 153,148
Less: Accumulated depreciation........................... (18,507) (11,780)
-------- --------
$482,528 $141,368
======== ========
</TABLE>
F-21
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(4) DEFERRED CHARGES AND OTHER ASSETS, NET
Deferred charges and other assets consisted of the following at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Deferred leasing and tenant charges....................... $ 18,919 $12,183
Deferred financing costs.................................. 1,219 693
Organization costs........................................ 525
Prepaid and other assets.................................. 1,704 854
Less: Accumulated amortization.......................... (10,095) (7,120)
-------- -------
$ 11,747 $ 7,135
======== =======
</TABLE>
(5) RECEIVABLES, NET
Receivables consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Rents and services........................................... $2,858 $1,697
Accruable rental income...................................... 1,749 1,327
Other........................................................ 1,195 95
------ ------
Total...................................................... 5,802 3,119
Less: Allowance for doubtful accounts........................ (446) (364)
------ ------
$5,356 $2,755
====== ======
</TABLE>
Accruable rental income represents rental income earned in excess of rent
payments received pursuant to the terms of the individual lease agreements.
(6) INVESTMENT IN JOINT VENTURE AND UNCONSOLIDATED SUBSIDIARIES
Included in Investments in joint venture and unconsolidated subsidiaries are
the Company's investment in the Broadmoor Austin Associates Joint Venture
("Broadmoor Austin") and the Company's investment in the Manager. The Company
accounts for its 49.9% investment in Broadmoor Austin and its 95% investment
in the Manager using the equity method of accounting, and thus reports its
share of income and losses based on its ownership interest in the respective
entities. At December 31, 1996, the carrying value of the Company's interest
in Broadmoor Austin and the Manager is $16.6 million and $5.3 million,
respectively. The difference between the carrying value of the Company's
interest in Broadmoor Austin and the book value of the underlying equity is
being amortized over 40 years.
The following is summarized financial information for 100% of Broadmoor
Austin at December 31, 1996 and 1995 and for the years then ended:
<TABLE>
<CAPTION>
BALANCE SHEET: 1996 1995
-------------- -------- --------
<S> <C> <C>
Real estate and deferred charges, net................... $115,856 $120,189
Total assets............................................ $129,513 $132,471
Mortgage note payable (A)............................... $140,000 $140,000
Venturers' deficit...................................... $(14,097) $(11,059)
</TABLE>
- --------
(A) The Company, along with the other venture partner in Broadmoor Austin, has
guaranteed the borrowings under the mortgage note payable.
F-22
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
INCOME STATEMENT: 1996 1995
----------------- ------- -------
<S> <C> <C>
Rental income............................................... $19,776 $19,776
Interest expense............................................ $13,527 $13,529
Depreciation and amortization............................... $ 4,333 $ 4,333
Net income.................................................. $ 927 $ 928
</TABLE>
The following is summarized financial information for 100% of the Manager at
December 31, 1996 and for the period from October 22, 1996 through December
31, 1996:
<TABLE>
<CAPTION>
BALANCE SHEET: 1996
-------------- -------
<S> <C>
Total assets......................................................... $10,826
Total liabilities.................................................... $ 5,270
Owners' equity....................................................... $ 5,556
</TABLE>
<TABLE>
<CAPTION>
INCOME STATEMENT: 1996
----------------- ------
<S> <C>
Fee income........................................................... $5,418
Personnel costs, net................................................. $2,579
General office and administrative.................................... $1,059
Net income........................................................... $1,401
</TABLE>
(7) DEBT ON REAL ESTATE
Debt on real estate consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Office properties' debt................................... $ 16,000 $19,719
Industrial properties' debt............................... 26,723
Line of Credit............................................ 72,800
Mortgage debt payable to an affiliate of Lehman Brothers
Inc...................................................... 40,000
-------- -------
$128,800 $46,442
======== =======
</TABLE>
Upon the closing of the Offering, the Operating Partnership closed a three-
year revolving credit facility (the "Line of Credit") with two financial
institutions, initially in the amount of $100 million and subsequently
increased to $150 million. Borrowings under the Line of Credit bear interest
at 30-day, 60-day or 90-day LIBOR, at the option of the Company, plus 2.00%
initially per annum, which has subsequently been reduced to 1.75% (7.25% at
December 31, 1996). Borrowings outstanding at December 31, 1996 under the Line
of Credit totaled $72.8 million. The Line of Credit is secured by 33 of the
Company's properties, including 16 office properties. Interest is payable
monthly through October 1999, at which time all unpaid principal and interest
are due. The Line of Credit agreement requires the Company to maintain certain
debt and interest coverage ratios (1.75 to 1.00) and (2.25 to 1.00),
respectively, with which the Company was in compliance at December 31, 1996.
Mortgage debt which is payable to an affiliate of Lehman Brothers Inc. and
is collateralized by 24 of the industrial properties owned by the Company and
bears interest at 30-day, 60-day or 90-day LIBOR, at the option of the
Company, plus 1.65% (7.15% at December 31, 1996). Interest is payable monthly
through November 1999, at which time all unpaid principal and interest are
due.
The remaining debt at December 31, 1996 is collateralized by two office
buildings, bears interest ranging from 7.3% to 7.5% per annum, and matures in
November 2000 and January 2001.
F-23
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Debt on real estate outstanding at December 31, 1995, aggregated
approximately $46.4 million and was collateralized by two office buildings and
various industrial properties. The debt had interest ranging from 8.125% to
8.5%. All but $10.0 million of the debt was repaid with the proceeds from the
Offering.
Principal repayments of debt on real estate at December 31, 1996, are due
approximately as follows:
<TABLE>
<S> <C>
Years ending December 31:
1999............................................................. $112,800
2000............................................................. 6,000
Thereafter....................................................... 10,000
--------
$128,800
========
</TABLE>
(8) ACCOUNTS PAYABLE AND OTHER LIABILITIES
Accounts payable and other liabilities consisted of the following at
December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Accounts payable and other liabilities..................... $ 7,517 $ 824
Advance rent and deposits.................................. 2,528 1,141
Accrued real estate taxes.................................. 5,823 1,657
------- ------
$15,868 $3,622
======= ======
</TABLE>
(9) DISTRIBUTIONS PAYABLE
On December 17, 1996, the Company declared a distribution equal to $.31 per
common share and limited partnership unit outstanding at December 31, 1996.
The common shares and limited partnership unit outstanding at December 31,
1996, totaled 20,279,897 and 3,295,995, respectively.
(10) LEASING ACTIVITIES
The future minimum lease payments to be received by the Company as of
December 31, 1996, under non-cancelable operating leases, which expire on
various dates through 2013, are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1997........................................................... $ 71,396
1998........................................................... 66,831
1999........................................................... 57,195
2000........................................................... 40,159
2001........................................................... 30,101
Thereafter..................................................... 83,557
--------
$349,239
========
</TABLE>
F-24
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The geographic concentration of the future minimum lease payments to be
received is detailed as follows:
<TABLE>
<CAPTION>
LOCATION AMOUNT
-------- --------
<S> <C>
Milwaukee, WI..................................................... $ 15,675
Dallas, TX........................................................ 112,845
Kansas City, MO................................................... 11,178
Atlanta, GA....................................................... 42,286
Northern VA....................................................... 40,803
Baltimore, MD..................................................... 11,770
Los Angeles, CA................................................... 20,835
Southfield, MI.................................................... 22,745
Chicago, IL....................................................... 47,481
Houston, TX....................................................... 2,264
Denver, CO........................................................ 21,357
--------
$349,239
========
</TABLE>
One major tenant represented 10.0% of the Company's total rental income for
the period from October 22, 1996 through December 31, 1996.
(11) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the Formation Transactions, Units valued at $65.9 million
were issued in exchange for the Prentiss Group's interest in the Predecessor
Company's properties and Contracts of PPL. The net assets assumed in the
exchange totaled approximately $5.2 million. In addition, 1,879,897 common
shares valued at $20.00 per share were issued in exchange for certain limited
partners' interests in the Operating Partnership. Additional paid-in capital
was reduced by $.9 million of unamortized financing costs related to debt
repaid with proceeds from the Offering. In 1996, $52 million of the net
proceeds of the Company's Offering was allocated to minority interest. The
remainder of the net proceeds increased common shares and additional paid-in
capital.
In addition to the above transactions, the Company also acquired the
remaining 85% interest in the Park West C2 property. The fair value of the
assets acquired totaled $43 million and liabilities assumed totaled
approximately $35 million and the resulting cash paid totaled, approximately
$8 million. On December 17, 1996, the Company declared a distribution totaling
$7.3 million which was paid on January 17, 1997.
During the period from October 22, 1996 through December 31, 1996, the
Company acquired eight properties (described in Note 1) and assumed certain
assets and liabilities in the transactions. The acquisitions were recorded
under the purchase method of accounting. The fair values of the acquired
assets and liabilities recorded at the date of acquisition are as follows:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Assets acquired.................................................. $121,834
Mortgage debt assumed............................................ (6,000)
Other liabilities assumed........................................ (2,599)
Other acquisition credits........................................ (511)
--------
Net cash paid.................................................. $112,724
========
</TABLE>
F-25
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(12) RELATED PARTY TRANSACTIONS
The Company owns a 95% economic interest in the Manager which is not
consolidated in these financial statements. The Manager incurs certain
personnel and other overhead-related expenses on behalf of the Company which
is subsequently reimbursed to the Manager. Such expenses totaled $1,418 for
the period October 22, 1996 through December 31, 1996. In addition, the
Company funded certain costs of the Manager totaling approximately $2,566
during the period. The net unreimbursed cost has been included in Other
receivables (affiliates) on the balance sheet and is detailed below:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
Capital funding to affiliates...................................... $2,566
Acquisition fees due to affiliates................................. (761)
Payroll and staff benefits due to affiliates....................... (257)
Other amounts due to affiliates.................................... (202)
------
$1,346
======
</TABLE>
(13) EMPLOYEE BENEFIT 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. Upon formation, the Company
adopted the Plan and the terms of the Plan.
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 Company. The Company matches 25% of the first $500
contributed by its employees. There was no cost to the Company for this
matching for the period October 22, 1996 through December 31, 1996. The cost
to the Predecessor Company totaled $35,000 for the period January 1, 1996
through October 21, 1996 and $36,000 and $41,000 for the years ended December
31, 1995 and 1994, respectively. In addition, the Predecessor Company elected
to match employee contributions with a discretionary match for the year ended
December 31, 1994, which totaled $76,000.
Participants are immediately vested in their pre-tax and after-tax
contributions, the Predecessor Company's matching contributions and earnings
thereon.
On January 24, 1997, the Company filed a Form S-8 registering 500,000 common
shares in connection with the Company's Share Purchase Plan. The share
purchase plan enables eligible employees to purchase shares, subject certain
restrictions, of the Company at a 15% discount to fair market value. No shares
were issued pursuant to the plan during the period October 22, 1996 through
December 31, 1996.
(14) SHARE INCENTIVE PLAN
Under the Company's 1996 Share Incentive Plan, the Company granted options
in October 1996 to purchase 1,219,438 common shares at an exercise price of
$20.00 per share (the IPO price), in November 1996 to purchase an additional
37,500 shares at an exercise price of $20.625 per share (the then current
market price) and in December 1996 to purchase an additional 395,000 shares at
an exercise price of $23.375 per share (the then current market price). The
options vest and are exercisable ratably over three and four years.
F-26
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Share-Based Compensation Plans
The Company sponsors the Prentiss Properties Trust Trustees' Share Incentive
Plan and the Prentiss Properties Trust 1996 Share Incentive Plan (the
"Plans"), which are share-based incentive compensation plans as described
below. The Company applies APB Opinion 25 and related Interpretations in
accounting for the Plans. In 1995, the FASB issued Statement of Financial
Accounting Standards Statement No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") which, if fully adopted by the Company, would
change the methods the Company applies in recognizing the cost of its Plans.
Adoption of the cost recognition provisions of SFAS 123 is optional and the
Company has decided not to elect these provisions of SFAS 123. However, pro
forma disclosures as if the Company adopted the cost recognition provisions of
SFAS 123 in 1996 are required by SFAS 123 and are presented below.
Under the Plans, the Company is authorized to issue common shares pursuant
to "Awards" granted in the form of incentive share options (intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended)
and non-qualified share options. Awards may be granted to selected employees
and trustees of the Company or any subsidiary. In 1996, the Company granted
both incentive share options and non-qualified stock options under the Plans.
Share Options
Under the 1996 Share Incentive Plan, the Company is authorized to issue up
to 2,030,000 common shares pursuant to "Awards" granted to officers, key
employees and directors in the form of incentive share options qualified under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and
non-qualified share options not qualified under Section 422 of the Code. These
share options vest ratably over a three or four year period on a graded basis.
A summary of the status of the Company's share options as of December 31,
1996, and the changes during the period ended on December 31, 1996 is
presented below:
<TABLE>
<CAPTION>
1996
---------------------------
# SHARES OF WEIGHTED
UNDERLYING AVERAGE
OPTIONS EXERCISE PRICES
----------- ---------------
<S> <C> <C>
Outstanding at beginning of the year.............
Granted.......................................... 1,651,938 $20.82
Exercised........................................
Forfeited........................................
Expired..........................................
---------
Outstanding at end of year....................... 1,651,938 $20.82
---------
Exercisable at end of year.......................
---------
Weighted-average fair value.................... $ 1.62
------
</TABLE>
The fair value of each share option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996: dividend yield of 8.00%;
different risk-free interest rates for each grant ranging from 6.05% to 6.26%;
options with expected lives of five years; and volatility of 20% for all
grants.
As of December 31, 1996, there were 1,651,938 options outstanding with a
weighted-average remaining contractual life of 9.83 years and a weighted-
average exercise price of $20.82. None of these options were exercisable at
that time.
F-27
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Had the compensation cost for the Company's share-based compensation plans
been determined consistent with SFAS 123, the Company's net income and net
income per common share for 1996 would approximate the pro forma amounts
below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
12/31/96 12/31/96
----------- ---------
<S> <C> <C>
SFAS 123 charge........................................ $ 145
Net income............................................. $4,996 $4,851
------ ------
Net income per common share............................ $ .25 $ .24
====== ======
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995,
and the Company anticipates making awards in the future under its share-based
compensation plans.
(15) CAPITAL SHARES
The Board of Trustees is authorized to provide for the issuance of
20,000,000 preferred shares in one or more series, to establish the number of
shares in each series and to fix the designation, powers, preferences, and
rights of each such series and the qualifications, limitations or restrictions
thereof. As of December 31, 1996 no preferred shares were issued.
The outstanding Units are redeemable at the option of the holder for a like
number of common shares, or at the option of the Company, the cash equivalent
thereof. Total Units outstanding at December 31, 1996, were 3,295,995. The
total market value of these Units at December 31, 1996, based on the last
reported sale price of the common shares on the New York Stock Exchange of
$25.00, was approximately $82.4 million.
(16) COMMITMENTS AND CONTINGENCIES
Legal Matters
The 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 Company.
Environmental Matters
The Company obtained Phase I 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 located between the
two buildings and the development parcel. The dumping occurred prior to the
acquisition of the Milwaukee industrials by the Predecessor Company. Upon
discovery of the unauthorized dumping, the Predecessor 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. During
1996, a settlement to the lawsuit was finalized and was approved by the court.
In accordance with the Settlement, (i) the Operating Partnership transferred
the affected areas ( a total of approximately 1.2 acres) to the owner of the
vacant lot in
F-28
<PAGE>
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
exchange for $100,000 and (ii) the owner of the vacant lot and the generators
of the contaminated soil agreed to assume all responsibility for the
remediation of the contaminated soil. The court has entered a finding that the
Operating Partnership was not in the chain of title of the contaminated area.
It is management's opinion that any future outcome of this environmental
matter will not have a material impact on the financial statements.
(17) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Due to the impact of the Offering, related formation transactions, and the
eight properties acquired subsequent to the Offering, the historical results
of operations are not indicative of future results of operations. The
following Pro Forma Condensed Statements of Income for the years ended
December 31, 1996 and 1995 are presented as if the Offering and related
formation transactions and property acquisitions had occurred at January 1,
1995, and therefore include pro forma information. The pro forma information
is based upon historical information and does not purport to present what
actual results would have been had such transactions, in fact, occurred at
January 1, 1995, or to project results for any future period.
PRO FORMA CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
FOR PER SHARE DATA)
<S> <C> <C>
Total revenues..................................... $ 84,413 $ 80,569
Property operating and maintenance................. 21,438 20,809
Real estate taxes.................................. 7,986 7,984
General and administrative......................... 2,461 2,012
Personnel costs, net............................... 2,069 1,782
Interest expense................................... 9,326 9,326
Amortization of deferred financing costs........... 470 470
Depreciation and amortization...................... 16,392 15,806
Equity in joint venture and unconsolidated
subsidiaries...................................... 4,736 7,307
---------- ----------
Income before minority interest.................... 29,007 29,687
Minority interest.................................. (4,055) (4,150)
---------- ----------
Net income......................................... $ 24,952 $ 25,537
---------- ----------
Net income per share............................... $ 1.23 $ 1.26
========== ==========
</TABLE>
(18) SUBSEQUENT EVENTS
On January 14, 1997, the Company purchased a four-story, Class "A" suburban
office building located in Fairfax County, Virginia, totaling approximately
59,000 square feet. The purchase price of this property totaled approximately
$6.1 million.
On February 20, 1997, the Company purchased an industrial building in
Milwaukee, Wisconsin, totaling approximately 360,000 square feet. The purchase
price of this property totaled approximately $9.8 million.
F-29
<PAGE>
SCHEDULE III
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT
INITIAL COST COSTS CARRIED AT CLOSE OF PERIOD
--------------------- CAPITALIZED ----------------------------------
BUILDINGS 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
PROPERTIES:
Cumberland
Office Park..... Atlanta, GA $ -- $10,987 $ 13,226 $ 4,019 $11,020 $ 17,212 $ 28,232
5307 East
Mockingbird..... Dallas, TX -- 870 1,976 1,069 875 3,040 3,915
Walnut Glen
Tower........... Dallas, TX 10,000 5,400 32,669 3,471 6,710 34,830 41,540
Park West C2.... Dallas, TX -- 8,360 29,640 6,238 9,696 34,542 44,238
Plaza on Bachman
Creek........... Dallas, TX -- 1,305 8,773 -- 1,305 8,773 10,078
Cottonwood
Office Center... Dallas, TX -- 1,735 9,865 -- 1,735 9,865 11,600
Park West E1.... Dallas, TX -- 2,857 16,499 -- 2,857 16,499 19,356
Park West E2.... Dallas, TX -- 2,079 11,863 -- 2,079 11,863 13,942
FHP Building.... Denver, CO 6,000 3,043 17,448 -- 3,043 17,448 20,491
8521 Leesburg
Pike............ Northern VA -- 2,130 5,955 4,425 2,259 10,251 12,510
3141 Fairview
Park Drive...... Northern VA -- 4,000 15,980 373 4,000 16,353 20,353
2411 Dulles
Corner Park..... Northern VA -- 3,971 22,501 -- 3,971 22,501 26,472
2455 Horsepen
Road............ Northern VA -- 2,098 11,888 -- 2,098 11,888 13,986
One Northwestern
Plaza........... Southfield, MI -- 4,113 23,335 1 4,113 23,336 27,449
1717 Deerfield.. Chicago, IL -- 3,237 18,556 -- 3,237 18,556 21,793
O'Hare Plaza
II.............. Chicago, IL -- 3,861 22,131 -- 3,861 22,131 25,992
INDUSTRIAL
PROPERTIES:
Federal
Express......... Atlanta, GA -- 5,015 -- 249 5,015 249 5,264
8869 Greenwood.. Baltimore, MD -- 425 1,701 433 425 2,134 2,559
1329 Western
Avenue.......... Baltimore, MD -- 800 4,854 216 836 5,034 5,870
Deep Run 1&2.... Baltimore, MD -- 1,400 3,947 727 1,400 4,674 6,074
4611 Mercedes
Drive........... Baltimore, MD -- 865 4,600 652 898 5,219 6,117
9050 Junction
Drive........... Baltimore, MD -- 690 3,908 -- 690 3,908 4,598
Northland Park.. Kansas City, MO -- 2,710 12,677 2,514 2,979 14,922 17,901
North Topping
Street.......... Kansas City, MO -- 425 1,505 429 425 1,934 2,359
Airworld Drive.. Kansas City, MO -- 722 2,736 172 830 2,800 3,630
107th Terrace... Kansas City, MO -- 276 1,728 392 336 2,060 2,396
Nicholson III... Dallas, TX -- 700 1,758 1,124 700 2,882 3,582
1002 Avenue T... Dallas, TX -- 300 1,831 482 349 2,264 2,613
13425
Branchview...... Dallas, TX -- 310 1,795 411 353 2,163 2,516
1625 Vantage.... Dallas, TX -- 145 1,067 362 208 1,366 1,574
Westloop
Business Park... Houston, TX -- 496 2,813 -- 496 2,813 3,309
Airport
Properties...... Milwaukee, WI -- 1,649 11,783 5,676 2,918 16,190 19,108
Oakcreek
Properties...... Milwaukee, WI -- 494 3,795 2,175 835 5,629 6,464
Northwest
Properties...... Milwaukee, WI -- 1,030 8,357 2,135 1,444 10,078 11,522
155 Alexandra... Chicago, IL -- 585 3,357 -- 585 3,357 3,942
Wood Dale 1&2... Chicago, IL -- 716 4,109 -- 716 4,109 4,825
Los Angeles
Industrial
Properties...... Los Angeles, CA -- 6,429 36,431 5 6,429 36,436 42,865
------- ------- -------- ------- ------- -------- --------
$16,000 $86,228 $377,057 $37,750 $91,726 $409,309 $501,035
======= ======= ======== ======= ======= ======== ========
<CAPTION>
DEPRECIABLE
ACCUMULATED DATE OF DATE LIVES
PROPERTY NAME DEPRECIATION CONSTRUCTION ACQUIRED (YEARS)
------------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
OFFICE
PROPERTIES:
Cumberland
Office Park..... $ 2,795 1972-1980 01/16/91 (1)
5307 East
Mockingbird..... 299 1979 01/28/93 (1)
Walnut Glen
Tower........... 3,336 1985 01/01/94 (1)
Park West C2.... 975 1989 09/05/95 (1)
Plaza on Bachman
Creek........... 62 1986 08/20/96 (1)
Cottonwood
Office Center... 62 1986 10/24/96 (1)
Park West E1.... 76 1982 10/23/96 (1)
Park West E2.... 56 1985 10/23/96 (1)
FHP Building.... 13 1983 12/20/96 (1)
8521 Leesburg
Pike............ 510 1984 08/17/94 (1)
3141 Fairview
Park Drive...... 318 1988 02/22/96 (1)
2411 Dulles
Corner Park..... -- 1990 12/31/96 (1)
2455 Horsepen
Road............ -- 1989 12/31/96 (1)
One Northwestern
Plaza........... 110 1989 10/23/96 (1)
1717 Deerfield.. -- 1985 12/11/96 (1)
O'Hare Plaza
II.............. -- 1986 12/13/96 (1)
INDUSTRIAL
PROPERTIES:
Federal
Express......... -- 1997 10/31/96 (1)
8869 Greenwood.. 237 1986-1987 12/27/93 (1)
1329 Western
Avenue.......... 452 1988 09/19/94 (1)
Deep Run 1&2.... 389 1988 09/01/94 (1)
4611 Mercedes
Drive........... 379 1990 12/27/94 (1)
9050 Junction
Drive........... 25 1989 10/22/96 (1)
Northland Park.. 2,552 1975-1980 01/23/92 (1)
North Topping
Street.......... 238 1975-1980 02/01/93 (1)
Airworld Drive.. 288 1975-1980 05/16/94 (1)
107th Terrace... 184 1975-1980 05/16/94 (1)
Nicholson III... 324 1981 09/16/92 (1)
1002 Avenue T... 292 1981 05/05/93 (1)
13425
Branchview...... 252 1970 07/23/93 (1)
1625 Vantage.... 150 1984 07/26/93 (1)
Westloop
Business Park... 18 1986 10/22/96 (1)
Airport
Properties...... 1,910 1970-1980 02/11/93 (1)
Oakcreek
Properties...... 614 1970-1979 02/11/93 (1)
Northwest
Properties...... 1,336 1973-1987 02/11/93 (1)
155 Alexandra... 9 1988 11/25/96 (1)
Wood Dale 1&2... 11 1988 11/25/96 (1)
Los Angeles
Industrial
Properties...... 235 1972-1984 10/22/96 (1)
------------
$18,507
============
</TABLE>
- ----
(1) Buildings & improvements--25 to 40 years
(2) The aggregate cost for federal income tax purposes was approximately $
458,010.
F-30
<PAGE>
PRENTISS PROPERTIES TRUST AND 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>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Real estate:
Balance at beginning of year...................... $153,148 $151,673 $ 89,116
Additions to and improvement of real estate..... 347,887 1,475 68,650
Disposition of real estate...................... -- -- (6,093)
-------- -------- --------
Balance at end of years......................... $501,035 $153,148 $151,673
-------- -------- --------
Accumulated depreciation:
Balance at beginning of year.................... 11,780 7,307 3,567
Depreciation expense............................ 6,727 4,473 4,008
Accumulated depreciation on real estate sold.... -- -- (268)
-------- -------- --------
Balance at end of years........................... $ 18,507 $ 11,780 $ 7,307
======== ======== ========
</TABLE>
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of Prentiss Properties Trust
We have audited the accompanying combined statement of revenues and certain
operating expenses of the Natomas Properties (the "Natomas Properties") for
the year ended December 31, 1996. The combined statement of revenues and
certain operating expenses is the responsibility of the Natomas Properties'
owners. Our responsibility is to express an opinion on the combined 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 combined 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 combined 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 combined statement of revenues and certain operating
expenses. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying combined statement of revenues and certain operating
expenses was prepared for the purpose of complying with rules and regulations
of the Securities and Exchange Commission, as described in Note 1, and is not
intended to be a complete presentation of the Natomas Properties' revenues and
expenses and may not be comparable to results from proposed future operations
of the Natomas Properties.
In our opinion, the combined 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 for the year ended
December 31, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
March 12, 1997
Dallas, Texas
F-32
<PAGE>
THE NATOMAS PROPERTIES
COMBINED STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Revenues:
Rental income........................................................ $11,037
Other income......................................................... 128
-------
11,165
Certain operating expenses:
Real estate taxes.................................................... 993
Repairs and maintenance.............................................. 1,115
Property management.................................................. 638
Utilities............................................................ 1,040
Insurance............................................................ 181
-------
3,967
-------
Revenues in excess of certain operating expenses....................... $ 7,198
=======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-33
<PAGE>
THE NATOMAS PROPERTIES
NOTES TO COMBINED STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION:
The combined statement of revenues and certain operating expenses for the
year ended December 31, 1996 relate to the operations of the Natomas
Properties (the "Natomas Properties"), which are currently under contract to
be acquired by Prentiss Properties Trust from an unaffiliated third-party for
an aggregate purchase price of $78.2 million (including estimated closing
costs and $3 million for adjacent land). The Natomas Properties consist of six
Class "A" suburban office buildings in Sacramento, California. The Natomas
Properties consist of office buildings totaling approximately 564,606 net
rentable square feet.
The accompanying combined statement excludes 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 statement 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.
During the year ended December 31, 1996, rents attributable to one tenant
represented 24% of total base rental income.
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, 1996, are
approximately as follows:
<TABLE>
<S> <C>
1997............................................................. $ 9,740
1998............................................................. 9,201
1999............................................................. 8,755
2000............................................................. 7,309
2001............................................................. 4,638
Thereafter....................................................... 2,405
-------
$42,048
=======
</TABLE>
Office space in the Natomas Properties is generally leased to tenants under
lease terms which provide for tenants to pay for increases in operating
expenses in excess of specified amounts.
Use of Estimates
The preparation of the combined statement 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:
Certain of the owners hold an interest in the management company of the
Properties. Fees incurred under this management agreement were $379,802 for
the year ended December 31, 1996.
F-34
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Prentiss Properties Trust
We have audited the accompanying combined statement of revenues and certain
operating expenses of the Selected 1997 Pending Acquisitions for the year
ended December 31, 1996. The statement of revenues and certain operating
expenses is the responsibility of the Selected 1997 Pending Acquisitions'
owners. Our responsibility is to express an opinion on the combined 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 combined 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 combined 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 combined statement of revenues and certain operating
expenses. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying combined statement of revenues and certain operating
expenses was prepared for the purpose of complying with rules and regulations
of the Securities and Exchange Commission, as described in Note 1, and is not
intended to be a complete presentation of the Selected 1997 Pending
Acquisitions' revenues and expenses and may not be comparable to results from
proposed future operations of the Selected 1997 Pending Acquisitions.
In our opinion, the combined 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 for the year ended
December 31, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
March 17, 1997
Dallas, Texas
F-35
<PAGE>
SELECTED 1997 PENDING ACQUISITIONS
COMBINED STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Revenues:
Rental income........................................................ $14,663
Other income......................................................... 449
-------
15,112
-------
Certain operating expenses:
Real estate taxes.................................................... 1,356
Repairs and maintenance.............................................. 2,031
Property management.................................................. 1,019
Utilities............................................................ 1,349
Insurance............................................................ 94
-------
5,849
-------
Revenues in excess of certain operating expenses....................... $ 9,263
=======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-36
<PAGE>
SELECTED 1997 PENDING ACQUISITIONS
NOTES TO COMBINED STATEMENT OF REVENUES
AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION:
The combined statement of revenues and certain operating expenses for the
year ended December 31, 1996 relate to the operations of the Selected 1997
Pending Acquisitions which are currently under contract to be acquired by
Prentiss Properties Trust from unaffiliated third-parties for an aggregate
purchase price of $98.5 million (including estimated closing costs). The
Selected 1997 Pending Acquisitions include the Corporetum Properties, the
Seven Mile Crossing Property, and the Crescent Property. The Corporetum
Properties consist of two Class "A" suburban office buildings in Lisle,
Illinois totaling approximately 323,728 net rentable square feet. The Seven
Mile Crossing Property consists of a Class "A" suburban office building in
Livonia, Michigan totaling approximately 244,630 net rentable square feet. The
Crescent Property consists of a Class "A" suburban office building in Atlanta,
Georgia totaling approximately 237,727 net rentable square feet.
The accompanying combined statement excludes 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 statement 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.
During the year ended December 31, 1996, four separate tenants of the
Corporetum Properties represented 46%, 17%, 15%, and 10%, respectively, of
total base rental income. One major tenant represented 12% of the total base
rental income of the Seven Mile Crossing Property and one major tenant
represented 32% of the total base rental income of the Crescent Property.
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, 1996, are
approximately as follows:
<TABLE>
<S> <C>
1997............................................................. $10,288
1998............................................................. 10,023
1999............................................................. 9,447
2000............................................................. 8,756
2001............................................................. 7,626
Thereafter....................................................... 10,173
-------
$56,313
=======
</TABLE>
Office space in the Selected 1997 Properties is generally leased to tenants
under lease terms which provide for tenants to pay for increases in operating
expenses in excess of specified amounts.
F-37
<PAGE>
Use of Estimates
The preparation of the combined statement 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
The Corporetum Properties paid $134,124 in management fees to an affiliate
of the owner for the year ended December 31, 1996.
Certain of the owners of the Crescent Property hold an interest in the
management company of the Property. Fees incurred under this management
agreement were $141,985 for the year ended December 31, 1996. Additionally,
the general partner or an affiliate of the general partner is entitled to
specific fees for performance of services related to office leasing
arrangements and mortgage placement. Fees paid related to these services were
$60,000 for the year ended December 31, 1996.
The Seven Mile Property paid $126,643 in management fees to an affiliate of
the owner for the year ended December 31, 1996.
F-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Prentiss Properties Trust
We have audited the accompanying combined statement of revenues and certain
operating expenses of the Dulles Properties (the "Dulles Properties") for the
year ended December 31, 1996. The combined statement of revenues and certain
operating expenses is the responsibility of the Dulles Properties' owners. Our
responsibility is to express an opinion on the combined 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 combined 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 combined 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 combined statement of revenues and certain operating
expenses. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying combined statement of revenues and certain operating
expenses was prepared for the purpose of complying with rules and regulations
of the Securities and Exchange Commission, as described in Note 1, and is not
intended to be a complete presentation of the Dulles Properties' revenues and
expenses and may not be comparable to results from proposed future operations
of the Dulles Properties.
In our opinion, the combined 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 for the year ended
December 31, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
March 12, 1997
Dallas, Texas
F-39
<PAGE>
THE DULLES PROPERTIES
COMBINED STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Revenues:
Rental income......................................................... $5,947
Other income.......................................................... 14
------
5,961
------
Certain operating expenses:
Real estate taxes..................................................... 336
Repairs and maintenance............................................... 746
Property management................................................... 293
Utilities............................................................. 562
Insurance............................................................. 27
------
1,964
------
Revenues in excess of certain operating expenses........................ $3,997
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-40
<PAGE>
THE DULLES 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
year ended December 31, 1996 relate to the operations of 2411 Dulles Corner
Park and 2455 Horsepen Road (collectively, the "Dulles Properties"), which
were acquired by Prentiss Properties Trust from an unaffiliated third-party
for an aggregate purchase price of $40.5 million. The Properties consist of
two Class "A" suburban office buildings in Herndon, Virginia. The 2411 Dulles
Corner Park property is an eight-story office building totaling approximately
176,522 net rentable square feet. The 2455 Horsepen Road property is a two-
story office building totaling approximately 104,150 net rentable square feet.
The accompanying combined statement excludes 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 statement 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.
During the year ended December 31, 1996, rents attributable to three
separate tenants represented 26%, 23% and 15% of total rental income,
respectively.
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, 1996, are
approximately as follows:
<TABLE>
<S> <C>
1997............................................................. $5,255
1998............................................................. 5,226
1999............................................................. 5,008
2000............................................................. 3,172
2001............................................................. 1,426
Thereafter....................................................... 999
-------
$21,086
=======
</TABLE>
Office space in Dulles Properties is generally leased to tenants under lease
terms which provide for tenants to pay for increases in operating expenses in
excess of specified amounts.
Use of Estimates
The preparation of the combined statement 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.
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Prentiss Properties Trust
We have audited the accompanying combined statement of revenues and certain
operating expenses of the Chicago Office Properties (the "Chicago Office
Properties") for the year ended December 31, 1996. The combined statement of
revenues and certain operating expenses is the responsibility of the Chicago
Office Properties' owners. Our responsibility is to express an opinion on the
combined 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 combined 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 combined 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 combined statement of revenues and certain operating
expenses. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying combined statement of revenues and certain operating
expenses was prepared for the purpose of complying with rules and regulations
of the Securities and Exchange Commission, as described in Note 1, and is not
intended to be a complete presentation of the Chicago Office Properties'
revenues and expenses and may not be comparable to results from proposed
future operations of the Chicago Office Properties.
In our opinion, the combined 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 for the year ended
December 31, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
March 12, 1997
Dallas, Texas
F-42
<PAGE>
THE CHICAGO OFFICE PROPERTIES
COMBINED STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Revenues:
Rental income......................................................... $7,181
Other income.......................................................... 139
------
7,320
------
Certain operating expenses:
Real estate taxes..................................................... 1,649
Repairs and maintenance............................................... 692
Property management................................................... 395
Utilities............................................................. 250
Insurance............................................................. 64
------
3,050
------
Revenues in excess of certain operating expenses........................ $4,270
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-43
<PAGE>
THE CHICAGO OFFICE PROPERTIES
NOTES TO COMBINED STATEMENT OF REVENUES
AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION:
The combined statements of revenues and certain operating expenses for the
year ended December 31, 1996 relate to the operations of 1717 Deerfield and
O'Hare Plaza II (collectively, the "Chicago Office Properties"), which were
acquired by Prentiss Properties Trust from an unaffiliated third-party for an
aggregate purchase price of approximately $47.1 million. The Properties
consist of two Class "A" suburban office buildings in Deerfield and Chicago,
Illinois. The 1717 Deerfield property is a three-story office building
totaling approximately 137,904 net rentable square feet. The O'Hare Plaza II
property is an eleven-story office building totaling approximately 233,650 net
rentable square feet.
The accompanying combined statement excludes 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 statement 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.
During the year ended December 31, 1996, one tenant represented 100% of the
total base rental income of the 1717 Deerfield property. Two major tenants of
the O'Hare Plaza II property represented 42% and 19%, respectively, of total
base rental income.
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, 1996, are
approximately as follows:
<TABLE>
<S> <C>
1997............................................................. $ 6,495
1998............................................................. 6,316
1999............................................................. 6,329
2000............................................................. 5,276
2001............................................................. 5,165
Thereafter....................................................... 6,998
-------
$36,579
=======
</TABLE>
Office space in the Chicago Office Properties is generally leased to tenants
under lease terms which provide for tenants to pay for increases in operating
expenses in excess of specified amounts.
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 terms of the management agreement, the O'Hare Plaza II property paid
$106,798 in fees to an affiliate of the owner.
F-44
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION 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 PRO-
SPECTUS 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 UN-
LAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION CON-
TAINED 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............................................................. 16
The Company.............................................................. 27
Use of Proceeds.......................................................... 36
Price Range of Common Stock and Distribution History..................... 37
Capitalization........................................................... 38
Selected Financial Information........................................... 39
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 43
Properties............................................................... 48
Policies with Respect to Certain Activities.............................. 76
Management............................................................... 80
Formation Transactions................................................... 90
Certain Relationships and Transactions................................... 91
Principal and Management Shareholders.................................... 93
Description of Shares of Beneficial Interest............................. 94
Certain Provisions of Maryland Law and of the Company's Declaration of
Trust and Bylaws........................................................ 99
Shares Available for Future Sale......................................... 103
Operating Partnership Agreement.......................................... 104
Federal Income Tax Considerations........................................ 107
Underwriting............................................................. 123
Legal Matters............................................................ 125
Experts.................................................................. 125
Additional Information................................................... 125
Glossary................................................................. 126
Financial Statements..................................................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10,000,000 SHARES
LOGO
Prentiss Properties Trust
COMMON SHARES OF
BENEFICIAL INTEREST
-----------------
PROSPECTUS
, 1997
-----------------
LEHMAN BROTHERS
ALEX. BROWN & SONS
INCORPORATED
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
PRINCIPAL FINANCIAL SECURITIES, INC.
RAYMOND JAMES & ASSOCIATES, 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............. $ 96,052
NASD filing fee.................................................. 30,500
New York Stock Exchange listing fee.............................. 25,650
Printing and mailing............................................. 285,000
Accountant's fees and expenses................................... 175,000
Blue Sky fees and expenses....................................... 5,000
Counsel fees and expenses........................................ $175,000
Miscellaneous.................................................... 157,798
--------
Total.......................................................... 950,000
========
</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 total acquisition of $20 per share for
an aggregate total acquisition 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.
On October 22, 1996, the Company privately placed an aggregate of 1,879,897
Common Shares with three institutional investors, in exchange for a portion of
such investors' interests in the Operating Partnership. The Common Shares were
acquired for investment and the transaction occurred in connection with the
Company's formation and initial public offering. The Company issued these
Common Shares in reliance upon 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 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 or partner of such real estate investment trust,
corporation, partnership, joint venture, trust, employee
II-1
<PAGE>
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. 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 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 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>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Pro Forma Consolidated Balance Sheet as of December 31, 1996............ F-2
Notes to Pro Forma Consolidated Balance Sheet........................... F-3
Pro Forma Consolidated Statement of Income for the Year Ended December
31, 1996............................................................... F-5
Notes to the Pro Forma Consolidated Statement of Income................. F-6
PRENTISS PROPERTIES TRUST AND PREDECESSOR COMPANY CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
Report of Independent Accountants....................................... F-11
Consolidated Balance Sheet of Prentiss Properties Trust (the "Company")
as of December 31, 1996 and Combined Balance Sheet of the Predecessor
Company as of December 31, 1995........................................ F-12
Consolidated Statement of Income of the Company for the Period October
22, 1996
(inception of operations) to December 31, 1996 and Combined Statements
of Income for the Predecessor Company for the Period January 1, 1996 to
October 21, 1996 and the Years Ended December 31, 1995 and 1994........ F-13
Consolidated Statement of Changes in Shareholders' Equity of the Company
for the Period October 22, 1996 (inception of operations) to December
31, 1996 and Combined Statements of Changes in Equity of the
Predecessor Company for the Period January 1, 1996 to October 21, 1996
and the Years Ended December 31, 1995 and 1994 ........................ F-14
Consolidated Statement of Cash Flows of the Company for the Period
October 22, 1996
(inception of operations) to December 31, 1996 and Combined Statements
of Cash Flows of the Predecessor Company for the Period January 1, 1996
to October 21, 1996 and the Years Ended December 31, 1995 and 1994..... F-15
Notes to Consolidated and Combined Financial Statements................. F-16
Schedule III: Real Estate and Accumulated Depreciation as of December
31, 1996............................................................... F-29
The following represent certain of the properties acquired by the Company
subsequent to the IPO and certain of the Pending Acquisitions
SELECTED 1997 PENDING ACQUISITIONS:
The Natomas Properties
Report of Independent Accountants....................................... F-31
Combined Statement of Revenues and Certain Operating Expenses for the
Year Ended December 31, 1996........................................... F-32
Notes to Combined Statement of Revenues and Certain Operating Expenses.. F-33
Selected 1997 Pending Acquisitions
Report of Independent Accountants....................................... F-34
Combined Statement of Revenues and Certain Operating Expenses for the
Year Ended
December 31, 1996...................................................... F-35
Notes to Combined Statement of Revenues and Certain Operating Expenses.. F-36
SELECTED 1996 ACQUIRED PROPERTIES:
The Dulles Properties
Report of Independent Accountants....................................... F-37
Combined Statement of Revenues and Certain Operating Expenses for the
Year Ended
December 31, 1996...................................................... F-38
Notes to Combined Statement of Revenues and Certain Operating Expenses.. F-39
The Chicago Office Properties
Report of Independent Accountants....................................... F-40
Combined Statement of Revenues and Certain Operating Expenses for the
Year Ended
December 31, 1996...................................................... F-41
Notes to Combined Statement of Revenues and Certain Operating Expenses.. F-42
</TABLE>
II-3
<PAGE>
ITEM 16. EXHIBITS
Exhibits
<TABLE>
<C> <S>
1.1 --Form of Underwriting Agreement
3.1 --Amended and Restated Declaration of Trust of the Registrant(1)
3.2 --Bylaws of the Registrant(2)
4.1 --Form of Common Share certificate(2)
5.1 --Opinion of Hunton & Williams
8.1 --Form of Opinion of Hunton & Williams as to Tax Matters
8.2 --Final Opinion of Hunton & Williams as to Tax Matters*
8.3 --Opinion of Coopers & Lybrand L.L.P. as to Tax Matters*
10.1 --Form of Second Amendment to First Amended and Restated Agreement of
Limited Partnership of Prentiss Properties Acquisition Partnership,
L.P.(2)
10.2 --Second Amendment to First Amended and Restated Agreement of Limited
Partnership of Prentiss Properties Acquisition Partnership, L.P.(4)
10.3 --Employment Agreement for Michael V. Prentiss(2)
10.4 --Employment Agreement for Thomas F. August(2)
10.5 --Credit Agreement among Prentiss Properties Acquisition Partners,
L.P. and Bank One, Texas, N.A., and NationsBank of Texas, N.A.(4)
10.6 --Modification, Amendment, and Increase of Credit Agreement and Other
Loan Documents(4)
10.7 --Contribution Agreement by and between the Operating Partnership and
Prentiss Properties Holdings, Inc. (f/k/a Prentiss Properties
Limited, Inc.)(2)
10.8 --Agreement of Purchase and Sale of Partnership Interest by and Among
Prentiss Properties Austin, L.P. and Prentiss Properties Holdings,
Inc. (f/k/a Prentiss Properties Limited, Inc.)(2)
10.9 --Agreement of Purchase and Sale of Partnership Interests by and Among
Prentiss Properties Burnett, Inc., Prentiss Properties Burnett II,
Inc. and Prentiss Properties Holdings, Inc. (f/k/a Prentiss
Properties Limited, Inc.)(2)
10.10 --Agreement of Purchase and Sale of Partnership Interest and Option
Agreement by and Between 11,000 Burnett Road Corporation and Prentiss
Properties Holdings, Inc. (f/k/a Prentiss Properties Limited, Inc.)(2)
10.11 --Agreement of Purchase and Sale of Partnership Interests by and Among
Fairview Eleven, Inc., Michael V. Prentiss, Thomas F. August, Dennis
J. DuBois, Richard B. Bradshaw, Jr. and Prentiss Properties Holdings,
Inc. (f/k/a Prentiss Properties Limited, Inc.)(2)
10.12 --Agreement of Purchase and Sale of Partnership Interest by and
Between Prentiss Properties Itasca, L.P. and Prentiss Properties
Holdings, Inc. (f/k/a Prentiss Properties Limited, Inc.)(2)
10.13 --Agreement of Purchase and Sale of Partnership Interests by and
Between Prentiss O'Hare Illinois, Inc., Prentiss O'Hare Illinois II,
Inc. and Prentiss Properties Holdings, Inc. (f/k/a Prentiss
Properties Limited, Inc.)(2)
10.14 --Agreement of Purchase and Sale of Partnership Interests by and
Between Prentiss Properties C-2 Investors, L.P. and Prentiss
Properties Holdings, Inc. (f/k/a Prentiss Properties Limited,
Inc.)(2)
10.15 --Agreement of Sale of Partnership Interest by and Among New York Life
Insurance Company, Prentiss Properties Austin, L.P. and Prentiss
Properties Holdings, Inc. (f/k/a Prentiss Properties Limited,
Inc.)(2)
10.16 --Purchase Agreement by and Between the Operating Partnership and
Prentiss Properties Holdings, Inc. (f/k/a Prentiss Properties
Limited, Inc.)(2)
10.17 --Agreement of Purchase and Sale and Joint Escrow Instructions by and
Between LAPCO Industrial Parks and Prentiss Properties Holdings, Inc.
(f/k/a Prentiss Properties Limited, Inc.)(2)
10.18 --First Amendment to Agreement of Purchase and Sale and Joint Escrow
Instructions by and Between LAPCO Industrial Parks and Prentiss
Properties Holdings, Inc. (f/k/a Prentiss Properties Limited,
Inc.)(2)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.19 --Agreement of Purchase and Sale of Partnership Interests by and Among
LW-RTC, Inc., LW-LP, Inc., NP Investment VI Co. and Prentiss
Properties Holdings, Inc. (f/k/a Prentiss Properties Limited,
Inc.)(2)
10.20 --Agreement of Sale (Real Property) by and Between Property Asset
Management Inc. and Prentiss Properties Holdings, Inc. (f/k/a
Prentiss Properties Limited, Inc.) (Annapolis, Maryland)(2)
10.21 --Agreement of Sale (Real Property) by and Between Property Asset
Management Inc. and Prentiss Properties Holdings, Inc. (f/k/a
Prentiss Properties Limited, Inc.)
(Irving, Texas)(2)
10.22 --Agreement of Sale (Real Property) by and Between Property Asset
Management Inc. and Prentiss Properties Holdings, Inc. (f/k/a
Prentiss Properties Limited, Inc.)
(Houston, Texas)(2)
10.23 --Letter Agreement dated as of August 5, 1996 from PPL to LW-LP, Inc.,
LW-RTC, Inc. and NP Investment VI Co.(2)
10.24 --Real Estate Purchase and Sale Agreement by and Between Principal
Mutual Life Insurance Company and Prentiss Properties Investors, Inc.
10.25 --1996 Share Incentive Plan(2)
10.26 --Trustees' Share Incentive Plan(2)
10.27 --First Amendment to Real Estate Purchase and Sale Agreement by and
Between Principal Mutual Life Insurance Company and Prentiss
Properties Investors, Inc.
10.28 --Partnership Interests Purchase Agreement among Prentiss Properties
Holdings, Inc. (f/k/a Prentiss Properties Limited, Inc.), the
Operating Partnership and the partners of the Operating
Partnership(2)
10.29 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and RREEF American LLC*
10.30 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and Deerfield Road Associates Limited
Partnership*
10.31 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and 1740 Creekside Oaks Investors*
10.32 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and 1750 Creekside Oaks Investors*
10.33 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and 1760 Creekside Oaks Investors*
10.34 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and 2525 Natomas Investors*
10.35 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and Rivercity Bank*
10.36 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and 2495 Natomas Investors*
10.37 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and Bannon Investors*
10.38 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and The Rreef Funds*
10.39 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and Duke Realty Limited Partnership*
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
10.40 --Agreement of Sale (Real Property) by and between Prentiss Properties
Acquisition Partners L.P. and CC Office Associates, L.P.*
10.41 --Form of Agreement Not to Compete for Dennis J. DuBois(4)
10.42 --Agreement of Purchase and Sale By and Between Dulles Corner
Properties II Limited Partnership and the Operating Partnership dated
December 27, 1996(3)
10.43 --Loan Agreement Between Prentiss Properties Real Estate Fund I, L.P.
as Borrower and Lehman Brother Realty Corporation as Lender(4)
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.
24.1 --Powers of Attorney (included on signature page)
27.1 --Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference from the Company's Registration Statement on
Form S-8.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-11, File No. 333-9863.
(3) Incorporated by reference from the Company's Current Report on Form 8-K
(filed January 15, 1997) as amended by Form 8-K/A (filed March 14, 1997).
(4) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (filed March 25, 1997).
* 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.
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-6
<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 26th day of March,
1997.
Prentiss Properties Trust, a
Maryland real estate investment
trust (Registrant)
/s/ Michael V. Prentiss
By: _________________________________
MICHAEL V. PRENTISS
CHAIRMAN OF THE BOARD PRESIDENT
AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Michael V. Prentiss, Thomas F. August, Gregory S. Imhoff 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, to sign any Registration Statements filed
pursuant to Rule 462(b) of the Securities Act of 1933 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 26th day of March, 1997 by
the following persons in the capacities indicated.
SIGNATURE TITLE
/s/ Michael V. Prentiss Chairman of the Board and Chief
- ------------------------------------- Executive Officer
MICHAEL V. PRENTISS
/s/ Thomas F. August President, Chief Operating
- ------------------------------------- Officer and Trustee
THOMAS F. AUGUST
/s/ Thomas J. Hynes Trustee
- -------------------------------------
THOMAS J. HYNES
/s/ Barry J.C. Parker Trustee
- -------------------------------------
BARRY J.C. PARKER
II-7
<PAGE>
SIGNATURE TITLE
/s/ Leonard Riggs, Jr. Trustee
- -------------------------------------
LEONARD RIGGS, JR.
/s/ Ronald G. Steinhart Trustee
- -------------------------------------
RONALD G. STEINHART
/s/ Lawrence A. Wilson Trustee
- -------------------------------------
LAWRENCE A. WILSON
/s/ Mark R. Doran Executive Vice President, Chief
- ------------------------------------- Financial Officer and Treasurer
MARK R. DORAN (principal financial officer)
/s/ Thomas P. Simon Senior Vice President (principal
- ------------------------------------- accounting officer)
THOMAS P. SIMON
II-8
<PAGE>
Exhibit 1.1
[Form of Underwriting Agreement]
10,000,000
PRENTISS PROPERTIES TRUST
Common Shares of Beneficial Interest
UNDERWRITING AGREEMENT
----------------------
[ ], 1997
Lehman Brothers Inc.,
As Representative of the several
Underwriters named in Schedule 1,
Three World Financial Center
New York, New York 10285
Dear Sirs:
Prentiss Properties Trust, a Maryland real estate investment trust
(the "Company"), Prentiss Properties Acquisition Partners, L.P., a Delaware
limited partnership (the "Operating Partnership"), Prentiss Properties I, Inc.,
a Delaware corporation (the "General Partner"), and Prentiss Properties Run
Deep, Inc. and Prentiss Properties Limited II, Inc., each a Delaware corporation
(the "Managers" and together with the Company, the Operating Partnership and the
General Partner, the "Transaction Entities") each wish to confirm as follows its
agreement with the Underwriters named in Schedule 1 hereto (the "Underwriters,"
which term shall also include any underwriter substituted as hereinafter
provided in Section 9 of this Agreement) for whom Lehman Brothers Inc., Alex.
Brown & Sons Incorporated, A.G. Edwards & Sons, Inc., Prudential Securities
Incorporated, Smith Barney Inc., Principal Financial Securities, Inc. and
Raymond James & Associates, Inc. are acting as representatives (the
"Representatives"), with respect to the sale by the Company and the purchase by
the Underwriters, acting severally and not jointly, of an aggregate of
10,000,000 shares (the "Firm Shares") of the Company's common shares of
beneficial interest, par value $.01 per share (the "Common Shares"). In
addition, the Company proposes to grant to the Underwriters an option to
purchase up to an additional 1,500,000 Common Shares on the terms and for the
purposes set forth in Section 2 (the "Option Shares"). The Firm Shares and the
Option Shares, if purchased, are hereinafter collectively called the "Shares."
Capitalized terms used but not otherwise defined herein shall have the
meanings given to those terms in the Prospectus (as herein defined).
<PAGE>
1. Representations, Warranties and Agreements of the Transaction
Entities. Each of the Transaction Entities, jointly and severally, represents,
warrants and agrees that, as of the date hereof:
(a) A registration statement on Form S-11 (No. [ ], and any
amendments thereto, with respect to the Shares has (i) been
prepared by the Company in conformity with the requirements of the
United States Securities Act of 1933, as amended (the "Securities
Act") and the rules and regulations (the "Rules and Regulations")
of the United States Securities and Exchange Commission (the
"Commission") thereunder, (ii) been filed with the Commission
under the Securities Act and (iii) become effective under the
Securities Act. Copies of such registration statement and any
amendments thereto have been delivered by the Company to you as
the Representatives of the Underwriters. As used in this
Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent post-
effective amendment thereto, if any, was declared effective by the
Commission; "Effective Date" means the date of the Effective Time;
"Preliminary Prospectus" means each prospectus included in such
registration statement, or amendments thereto, before it became
effective under the Securities Act and any prospectus filed with
the Commission by the Company with the consent of the
Representatives pursuant to Rule 424(a) of the Rules and
Regulations; "Registration Statement" means such registration
statement, as amended at the Effective Time, including all
information contained in the final prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations
and deemed to be a part of the registration statement as of the
Effective Time pursuant to paragraph (b) of Rule 430A of the Rules
and Regulations; and "Prospectus" means such final prospectus, as
first filed with the Commission pursuant to paragraph (1) or (4)
of Rule 424(b) of the Rules and Regulations. Any registration
statement (including any amendment or supplement thereto or
information which is deemed to be a part thereof) filed by the
Company to register additional Common Shares under rule 462(b) of
the Rules and Regulations ("Rule 462(b) Registration Statement")
shall be deemed a part of the Registration Statement. Any
prospectus (including any amendment or supplement thereto or
information which is deemed to be a part thereof) included in a
Rule 462(b) Registration Statement shall be deemed to be part of
the Prospectus.
(b) The Registration Statement and each Preliminary Prospectus
conforms, and the Prospectus and any further amendments or
supplements to the Registration Statement or the Prospectus will,
when they become effective or are filed with the Commission, as
the case may be, conform in all respects to the requirements of
the Securities Act and the Rules and Regulations, and do not and
will not, as of the applicable Effective Date (as to the
Registration Statement and any amendment thereto) and as of the
applicable filing date and at the First Delivery Date (as to the
Prospectus and any amendment or supplement thereto) contain an
untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading (with respect to the Prospectus,
in light of the circumstances under which they were made);
provided that no representation or warranty is made as to
information contained in or omitted from the Registration
Statement or the Prospectus in reliance upon and in conformity
with written information furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically
for inclusion therein.
2
<PAGE>
(c) No stop order suspending the effectiveness of the
Registration Statement or any part thereof has been issued and no
proceeding for that purpose has been instituted or, to the
knowledge of any of the Transaction Entities, threatened by the
Commission or by the state securities authority of any
jurisdiction. No order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus has been issued and no
proceeding for that purpose has been instituted or, to the
knowledge of any of the Transaction Entities, after due inquiry of
the Commission, threatened by the Commission or by the state
securities authority of any jurisdiction.
(d) The Company has been duly formed and is validly existing
as a real estate investment trust in good standing under the laws
of the State of Maryland, is duly qualified to do business and is
in good standing in each jurisdiction in which its ownership or
lease of property or the conduct of its business requires such
qualification, and has all power and authority necessary to own or
hold its properties, to conduct the business in which it is
engaged and to enter into and perform its obligations under this
Agreement. None of the subsidiaries of the Company (other than the
Operating Partnership, the General Partner, each Manager and
Broadmoor Austin Associates) is a "significant subsidiary," as
such term is defined in Rule 405 of the Rules and Regulations.
Except as described in the Prospectus and other than the Property
Affiliates (as defined herein) and the other Transaction Entities,
the Company owns no direct or indirect equity interest in any
entity.
(e) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of beneficial
interest of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and conform to the
description thereof contained in the Prospectus. Except as
disclosed in the Prospectus, no shares of beneficial interest of
the Company are reserved for any purpose and except for the equity
interests in the Operating Partnership ("Units"), there are no
outstanding securities convertible into or exchangeable for any
shares of beneficial interest of the Company, and no outstanding
options, rights (preemptive or otherwise) or warrants to purchase
or subscribe for shares of beneficial interest or any other
securities of the Company.
(f) The Operating Partnership has been duly formed and is
validly existing as a limited partnership under the laws of the
State of Delaware, is duly qualified to do business as a foreign
limited partnership in each jurisdiction in which its ownership or
lease of property or the conduct of its business requires such
qualification, and has all partnership power and authority
necessary to own or hold its properties, to conduct the business
in which it is engaged and to enter into and perform its
obligations under this Agreement. The General Partner is the sole
general partner of the Operating Partnership. The Agreement of
Limited Partnership of the Operating Partnership (the "Operating
Partnership Agreement") is in full force and effect, and the
aggregate percentage interests of the Company, the General Partner
and the limited partners in the Operating Partnership are as set
forth in the Prospectus; provided that to the extent any portion
of the over-allotment option described in Section 2 hereof is
exercised at the First Delivery Date, the percentage interest of
such partners in the Operating Partnership will be adjusted
accordingly. Additionally, to the extent any portion of such over-
allotment option is exercised subsequent to the First Delivery
Date, the Company will contribute the proceeds
3
<PAGE>
from the sale of the Option Shares to the Operating Partnership in
exchange for a number of Units equal to the number of Option
Shares issued.
(g) The General Partner has been duly formed and is validly
existing as a corporation in good standing under the laws of the
State of Delaware, is duly qualified to do business and is in good
standing in each jurisdiction in which its ownership or lease of
property or the conduct of its business requires such
qualification, and has all corporate power and authority necessary
to own or hold its properties, to conduct the business in which it
is engaged and to enter into and perform its obligations under
this Agreement. All of the issued and outstanding capital stock of
the General Partner has been duly authorized and validly issued
and is fully paid and non-assessable, is owned by the Company free
and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim, restriction or equities and has been offered
and sold in compliance with all applicable laws (including,
without limitation, federal or state securities laws). No shares
of capital stock of the General Partner are reserved for any
purpose, and there are no outstanding securities convertible into
or exchangeable for any capital stock of the General Partner, and
no outstanding options, rights (preemptive or otherwise) or
warrants to purchase or to subscribe for shares of such capital
stock or any other securities of the General Partner.
(h) Each Manager has been duly formed and is validly existing
as a corporation in good standing under the laws of the State of
Delaware, is duly qualified to do business and is in good standing
as a foreign corporation in each jurisdiction in which its
ownership or lease of property or the conduct of its business
requires such qualification, and has all corporate power and
authority necessary to own or hold its properties, to conduct the
business in which it is engaged and to enter into and perform its
obligations under this Agreement. All of the issued and
outstanding capital stock of each Manager has been duly authorized
and validly issued and is fully paid and non-assessable, has been
offered and sold in compliance with all applicable laws
(including, without limitation, federal or state securities laws),
and all of such capital stock owned by the Operating Partnership
(100% of the nonvoting common stock) is owned free and clear of
any security interest, mortgage, pledge, lien, encumbrance, claim,
restriction or equities. The Operating Partnership owns a 95%
economic interest in each Manager. No shares of capital stock of
either Manager are reserved for any purpose, and there are no
outstanding securities convertible into or exchangeable for any
capital stock of either Manager and no outstanding options, rights
(preemptive or otherwise) or warrants to purchase or to subscribe
for shares of such capital stock or any other securities of either
Manager.
(i) Run Deep, L.P., Western Avenue Associates, L.P., Riverside
Investors, L.P., Broadmoor Austin Associates, PL Properties
Associates, L.P. and Fairview Eleven Investors, L.P. [add others]
(the "Property Affiliates") are the only entities other than the
Operating Partnership through which the Company and the Operating
Partnership own interests in the Properties. Each of the Property
Affiliates has been duly organized and is validly existing as a
partnership or corporation, as the case may be, in good standing
(if a corporation) under the laws of its respective jurisdiction
of formation, is duly qualified to do business and (if a
corporation) is in good standing as a foreign corporation in each
jurisdiction in which its ownership or lease of
4
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property or the conduct of its business requires such
qualification, and has all power and authority necessary to own or
hold its properties and to conduct the business in which it is
engaged. Except as set forth in the Prospectus, all of the issued
shares of capital stock or partnership interests of each Property
Affiliate have been duly and validly authorized and issued, are
fully paid and non-assessable and are owned directly or indirectly
by the Company and the Operating Partnership, free and clear of
any security interest, mortgage, pledge, lien, encumbrance, claim,
restriction or equities.
(j) The Shares have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein,
will be duly and validly issued, fully paid and non-assessable.
Upon payment of the purchase price and delivery of the Shares in
accordance herewith, each of the Underwriters will receive good,
valid and marketable title to the Shares, free and clear of all
security interests, mortgages, pledges, liens, encumbrances,
claims, restrictions and equities. The terms of the Shares conform
in substance to all statements and descriptions related thereto
contained in the Prospectus. The form of the certificates to be
used to evidence the Shares will at the First Delivery Date be in
due and proper form and will comply with all applicable legal
requirements. The issuance of the Shares is not subject to any
preemptive or other similar rights.
(k) (A) This Agreement has been duly and validly authorized,
executed and delivered by the each of the Transaction Entities,
and assuming due authorization, execution and delivery by the
Representatives, is a valid and binding agreement of each of the
Transaction Entities, enforceable against the Transaction Entities
in accordance with its terms; and (B) the Operating Partnership
Agreement and the partnership agreement or joint venture agreement
of each Property Affiliate, has been duly and validly authorized,
executed and delivered by the parties thereto and is a valid and
binding agreement of the parties thereto, enforceable against such
parties in accordance with its terms;
(l) The execution, delivery and performance of this Agreement
by each of the Transaction Entities and the consummation of the
transactions contemplated hereby will not conflict with or result
in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which
any of the Transaction Entities is a party or by which any of the
Transaction Entities is bound or to which any of the Properties or
other assets of any of the Transaction Entities is subject, nor
will such actions result in any violation of the provisions of the
charter, by-laws, certificate of limited partnership or agreement
of limited partnership of any of the Transaction Entities, or any
statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over any of the
Transaction Entities or any of their properties or assets; and
except for the registration of the Shares under the Securities Act
and such consents, approvals, authorizations, registrations or
qualifications as may be required under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and applicable state
securities laws in connection with the purchase and distribution
of the Shares by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any
such court or governmental agency or body is required for the
execution, delivery and performance
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<PAGE>
of this Agreement by the Transaction Entities and the consummation
of the transactions contemplated hereby.
(m) Other than as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and
any person granting such person the right to require the Company
to file a registration statement under the Securities Act with
respect to any securities of the Company owned or to be owned by
such person or to require the Company to include such securities
in the securities registered pursuant to the Registration
Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the
Securities Act.
(n) Except as described in the Prospectus, no Transaction
Entity has sold or issued any securities during the six-month
period preceding the date of the Prospectus, including any sales
pursuant to Rule 144A under, or Regulations D or S of, the
Securities Act.
(o) None of the Transaction Entities nor any of the Properties
has sustained, since the date of the latest audited financial
statements included in the Prospectus, any material loss or
interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree,
other than as set forth or contemplated in the Prospectus; and,
since such date, there has not been any change in the capital
stock or long-term debt of any of the Transaction Entities or any
material adverse change, or any development involving a
prospective material adverse change, in or affecting any of the
Properties or the general affairs, management, financial position,
stockholders' equity or results of operations of any of the
Transaction Entities, other than as set forth or contemplated in
the Prospectus.
(p) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement
or included in the Prospectus present fairly the financial
condition and results of operations of the entities purported to
be shown thereby, at the dates and for the periods indicated, and
have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the
periods involved. Pro forma financial information included in the
Prospectus has been prepared in accordance with the applicable
requirements of the Securities Act, the Rules and Regulations and
AICPA guidelines with respect to pro forma financial information
and includes all adjustments necessary to present fairly the pro
forma financial position of the Company at the respective dates
indicated and the results of operations for the respective periods
specified.
(q) Coopers & Lybrand L.L.P., who have certified certain
financial statements of the Company, whose reports appear in the
Prospectus and who have delivered the initial letter referred to
in Section 7(f) hereof, are independent public accountants as
required by the Securities Act and the Rules and Regulations.
(r) (A) The Operating Partnership and the Property Affiliates
have good and marketable title to each of the Properties and the
other assets not located in
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Texas, and have good and indefeasible title to each of the
Properties and the other assets located in Texas, in each case
free and clear of all liens, encumbrances, claims, security
interests and defects, other than those referred to in the
Prospectus or those which are not material in amount or those
which would not have a material adverse effect on the business,
operations, use or value of any of the Properties; (B) all liens,
charges, encumbrances, claims or restrictions on or affecting any
of the Properties and the assets of any Transaction Entity which
are required to be disclosed in the Prospectus are disclosed
therein; (C) except as otherwise described in the Prospectus,
neither any Transaction Entity nor any 10% or greater (in terms of
square footage or base rent) tenant of any of the Properties is in
default under (i) any space leases (as lessor or lessee, as the
case may be) relating to the Properties, or (ii) any of the
mortgages or other security documents or other agreements
encumbering or otherwise recorded against the Properties, in each
case which default would have a material adverse effect on the
applicable Property, and no Transaction Entity knows of any event
which, but for the passage of time or the giving of notice, or
both, would constitute a default under any of such documents or
agreements; (D) no tenant under any of the leases at the
Properties has a right of first refusal to purchase the premises
demised under such lease; (E) each of the Properties complies with
all applicable codes, laws and regulations (including, without
limitation, building and zoning codes, laws and regulations and
laws relating to access to the Properties), except for such
failures to comply that would not have a material adverse effect
on the business operations, use or value of such Property; and (F)
no Transaction Entity has knowledge of any pending or threatened
condemnation proceedings, zoning change or other proceeding or
action that will in any material manner affect the size of, use
of, improvements on, construction on or access to the Properties.
(s) The mortgages and deeds of trust which encumber the
Properties are not convertible into equity securities of the
entity owning such Property and said mortgages and deeds of trust
are not cross-defaulted or cross-collateralized with any property
other than other Properties.
(t) The Operating Partnership and the Property Affiliates have
obtained title insurance on the fee or leasehold interests in each
of the Properties, in an amount at least equal to the greater of
(A) the mortgage indebtedness of each such Property or (B) the
purchase price of each such Property.
(u) Except as disclosed in the Prospectus; (A) to the
knowledge of the Transaction Entities, the operations of the
Company, the Operating Partnership, the General Partner, each
Manager, and the Properties are materially in compliance with all
Environmental Laws (as defined below) and all requirements of
applicable permits, licenses, approvals and other authorizations
issued pursuant to Environmental Laws; (B) to the knowledge of the
Transaction Entities, after due inquiry, none of the Transaction
Entities or any Property has caused or suffered to occur any
Release (as defined below) of any Hazardous Substance (as defined
below) into the Environment (as defined below) on, in, under or
from any Property, and no condition exists on, in, under or
adjacent to any Property that could result in the incurrence of
liabilities under, or any violations of, any Environmental Law or
give rise to the imposition of any Lien (as defined below), under
any Environmental Law, except such as in each case would not have
a material adverse effect on any Property
7
<PAGE>
or Transaction Entity; (C) none of the Transaction Entities has
received any written notice of a claim under or pursuant to any
Environmental Law or under common law pertaining to Hazardous
Substances on, in, under or originating from any Property; (D)
none of the Transaction Entities has actual knowledge of, or
received any written notice from any Governmental Authority (as
defined below) claiming, any violation of any Environmental Law or
a determination to undertake and/or request the investigation,
remediation, clean-up or removal of any Hazardous Substance
released into the Environment on, in, under or from any Property;
and (E) no Property is included or, to the knowledge of the
Transaction Entities, after due inquiry, proposed for inclusion on
the National Priorities List issued pursuant to CERCLA (as defined
below) by the United States Environmental Protection Agency (the
"EPA") or on the Comprehensive Environmental Response,
Compensation, and Liability Information System database maintained
by the EPA, and none of the Transaction Entities has actual
knowledge that any Property has otherwise been identified in a
published writing by the EPA as a potential CERCLA removal,
remedial or response site or, to the knowledge of the Transaction
Entities, is included on any similar list of potentially
contaminated sites pursuant to any other Environmental Law.
As used herein, "Hazardous Substance" shall include any hazardous
substance, hazardous waste, toxic substance, pollutant or
hazardous material, including, without limitation, oil, petroleum
or any petroleum-derived substance or waste, asbestos or asbestos-
containing materials, PCBs, pesticides, explosives, radioactive
materials, dioxins, urea formaldehyde insulation or any
constituent of any such substance, pollutant or waste which is
subject to regulation under any Environmental Law (including,
without limitation, materials listed in the United States
Department of Transportation Optional Hazardous Material Table, 49
C.F.R. (S) 172.101, or in the EPA's List of Hazardous Substances
and Reportable Quantities, 40 C.F.R. Part 302); "Environment"
shall mean any surface water, drinking water, ground water, land
surface, subsurface strata, river sediment, buildings, structures,
and ambient, workplace and indoor and outdoor air; "Environmental
Law" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. (S)
9601 et seq.) ("CERCLA"), the Resource Conservation and Recovery
Act of 1976, as amended (42 U.S.C. (S) 6901, et seq.), the Clean
Air Act, as amended (42 U.S.C. (S) 7401, et seq.), the Clean Water
Act, as amended (33 U.S.C. (S) 1251, et seq.), the Toxic
Substances Control Act, as amended (15 U.S.C. (S) 2601, et seq.),
the Occupational Safety and Health Act of 1970, as amended (29
U.S.C. (S) 651, et seq.), the Hazardous Materials Transportation
Act, as amended (49 U.S.C. (S) 1801, et seq.), and all other
federal, state and local laws, ordinances, regulations, rules and
orders relating to the protection of the environments or of human
health from environmental effects; "Governmental Authority" shall
mean any federal, state or local governmental office, agency or
authority having the duty or authority to promulgate, implement or
enforce any Environmental Law; "Lien" shall mean, with respect to
any Property, any mortgage, deed of trust, pledge, security
interest, lien, encumbrance, penalty, fine, charge, assessment,
judgment or other liability in, on or affecting such Property; and
"Release" shall mean any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching,
dumping, emanating or disposing of any Hazardous Substance into
the Environment, including, without limitation, the abandonment or
discard of barrels, containers, tanks
8
<PAGE>
(including, without limitation, underground storage tanks) or
other receptacles containing or previously containing any
Hazardous Substance.
(v) Each Transaction Entity and Property carries, or is
covered by, insurance in such amounts and covering such risks as
is adequate for the conduct of its business and the value of such
Property and as is customary for companies engaged in similar
businesses in similar industries.
(w) Each Transaction Entity owns or possesses adequate rights
to use all material patents, patent applications, trademarks,
service marks, trade names, trademark registrations, service mark
registrations, copyrights and licenses necessary for the conduct
of its business and has no reason to believe that the conduct of
its business will conflict with, and has not received any notice
of any claim of conflict with, any such rights of others.
(x) Except as described in the Prospectus, there are no legal
or governmental proceedings pending to which any Transaction
Entity is a party or of which any property or assets of any
Transaction Entity is the subject which, if determined adversely
to such Transaction Entity, could reasonably be expected to have a
material adverse effect on the consolidated financial position,
shareholders' equity, results of operations, business or prospects
of the Company; and to the best knowledge of the Transaction
Entities, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others.
(y) There are no contracts or other documents which are
required to be described in the Prospectus or filed as exhibits to
the Registration Statement by the Securities Act or by the Rules
and Regulations which have not been described in the Prospectus or
filed as exhibits to the Registration Statement or incorporated
therein by reference as permitted by the Rules and Regulations.
(z) No relationship, direct or indirect, exists between or
among any of the Transaction Entities on the one hand, and the
directors, officers, stockholders, customers or suppliers of the
Transaction Entities on the other hand, which is required to be
described in the Prospectus which is not so described.
(aa) No labor disturbance by the employees of any Transaction
Entity exists or, to the knowledge of the Transaction Entities, is
imminent which might be expected to have a material adverse effect
on the consolidated financial position, stockholders' equity,
results of operations, business or prospects of such Transaction
Entity.
(bb) Each Transaction Entity is in compliance in all material
respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"); no
"reportable event" (as defined in ERISA) has occurred with respect
to any "pension plan" (as defined in ERISA) for which any
Transaction Entity would have any liability; no Transaction Entity
has incurred or expects to incur liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any
"pension plan" or (ii) sections 412 or 4971 of the Internal
9
<PAGE>
Revenue Code of 1986, as amended (the "Code"); and each "pension
plan" for which any Transaction Entity would have any liability
that is intended to be qualified under section 401(a) of the Code
is so qualified in all material respects and nothing has occurred,
whether by action or by failure to act, which would cause the loss
of such qualification.
(cc) Each Transaction Entity has filed all federal, state and
local income and franchise tax returns required to be filed
through the date hereof and has paid all taxes due thereon, and no
tax deficiency has been determined adversely to any Transaction
Entity which has had (nor does any Transaction Entity have any
knowledge of any tax deficiency which, if determined adversely to
it might have) a material adverse effect on the financial
position, stockholders' equity, results of operations, business or
prospects of such Transaction Entity.
(dd) At all times since October 22, 1996, the Company, the
Operating Partnership, the General Partner, and the Managers have
been and upon the sale of the Shares will continue to be,
organized and operated in conformity with the requirements for
qualification of the Company as a real estate investment trust
under the Code and the proposed method of operation of the
Company, the Operating Partnership, the General Partner and the
Managers will enable the Company to continue to meet the
requirements for qualification and taxation as a real estate
investment trust under the Code.
(ee) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, no Transaction Entity has (i) issued
or granted any securities, (ii) incurred any liability or
obligation, direct or contingent, other than liabilities and
obligations which were incurred in the ordinary course of
business, (iii) entered into any transaction not in the ordinary
course of business or (iv) declared or paid any dividend on its
capital stock.
(ff) Each Transaction Entity (i) makes and keeps accurate
books and records and (ii) maintains internal accounting controls
which provide reasonable assurance that (A) transactions are
executed in accordance with management's authorization, (B)
transactions are recorded as necessary to permit preparation of
its financial statements and to maintain accountability for its
assets, (C) access to its assets is permitted only in accordance
with management's authorization and (D) the reported
accountability for its assets is compared with existing assets at
reasonable intervals.
(gg) No Transaction Entity or Property Affiliate (i) is in
violation of its charter, by-laws, certificate of limited
partnership, agreement of limited partnership or other similar
organizational document, (ii) is in default in any material
respect, and no event has occurred which, with notice or lapse of
time or both, would constitute such a default, in the due
performance or observance of any term, covenant or condition
contained in any material indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which it is a party
or by which it is bound or to which any of the Properties or any
of its other properties or assets is subject or (iii) is in
violation in any material respect of any law, ordinance,
10
<PAGE>
governmental rule, regulation or court decree to which it or the
Properties or any of its other properties or assets may be subject
or has failed to obtain any material license, permit, certificate,
franchise or other governmental authorization or permit necessary
to the ownership of the Properties or any of its other properties
or assets or to the conduct of its business.
(hh) No Transaction Entity, nor any director, officer, agent,
employee or other person associated with or acting on behalf of
any Transaction Entity, has used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful
expense relating to political activity; made any direct or
indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds; violated or is in
violation of any provision of the Foreign Corrupt Practices Act of
1977; or made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment.
(ii) No Transaction Entity is an "investment company" within
the meaning of such term under the Investment Company Act of 1940
and the rules and regulations of the Commission thereunder.
(jj) The Common Shares are listed on the New York Stock
Exchange.
(kk) Other than this Agreement and as set forth in the
Prospectus under the heading "Underwriting," there are no
contracts, agreements or understandings between any Transaction
Entity and any person that would give rise to a valid claim
against any Transaction Entity or any Underwriter for a brokerage
commission, finder's fee or other like payment with respect to the
consummation of the transactions contemplated by this Agreement.
(ll) Each Transaction Entity has complied with all provisions
of Florida Statutes (S) 517.075, relating to issuers doing
business with Cuba.
2. Purchase of the Shares by the Underwriters. On the basis of
the representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell the [10,000,000] Firm
Shares, to the several Underwriters and each of the Underwriters, severally and
not jointly, agrees to purchase the number of Firm Shares set forth opposite
that Underwriter's name in Schedule 1 hereto. The respective purchase
obligations of the Underwriters with respect to the Firm Shares shall be rounded
among the Underwriters to avoid fractional shares, as the Representatives may
determine.
In addition, the Company grants to the Underwriters an option to
purchase up to [1,500,000] Option Shares. Such option is granted solely for the
purpose of covering over-allotments in the sale of Firm Shares and is
exercisable as provided in Section 4 hereof. Option Shares shall be purchased
severally for the account of the Underwriters in proportion to the number of
Firm Shares set forth opposite the names of such Underwriters in Schedule 1
hereto. The respective purchase obligations of each Underwriter with respect to
the Option Shares shall be adjusted by the Representatives so that no
Underwriter shall be obligated to purchase Option Shares other than in 100-share
amounts. The price of both the Firm Shares and any Option Shares shall be $[ ]
per share.
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The Company shall not be obligated to deliver any of the Shares to
be delivered on the First Delivery Date or the Second Delivery Date (as
hereinafter defined), as the case may be, except upon payment for all the Shares
to be purchased on such Delivery Date as provided herein.
3. Offering of Shares by the Underwriters. Upon authorization by
the Representatives of the release of the Firm Shares, the several Underwriters
propose to offer the Firm Shares for sale upon the terms and conditions set
forth in the Prospectus.
4. Delivery of and Payment for the Shares. Delivery of and
payment for the Firm Shares shall be made at the office of Rogers & Wells, 200
Park Avenue, New York, New York 10166, at 10:00 A.M., New York City time, on the
third full business day following the date of this Agreement or on the fourth
full business day if this Agreement is executed after the daily closing time of
the New York Stock Exchange (unless postponed in accordance with the provisions
of Section 9 hereof), or at such other date or place as shall be determined by
agreement between the Representatives and the Company. This date and time are
sometimes referred to as the "First Delivery Date." On the First Delivery Date,
the Company shall deliver or cause to be delivered certificates representing the
Firm Shares to the Representatives for the account of each Underwriter against
payment to or upon the order of the Company of the purchase price by certified
or official bank check or checks payable in same day funds. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Firm Shares shall be registered in such names and in such
denominations as the Representatives shall request in writing not less than two
full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the Firm Shares,
the Company shall make the certificates representing the Firm Shares available
for inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement, the option granted in Section 2 may be exercised by written notice
being given to the Company by the Representatives. Such notice shall set forth
the aggregate number of Option Shares as to which the option is being exercised,
the names in which the Option Shares are to be registered, the denominations in
which the Option Shares are to be issued and the date and time, as determined by
the Representatives, when the Option Shares are to be delivered; provided,
however, that this date and time shall not be earlier than the First Delivery
Date nor earlier than the second business day after the date on which the option
shall have been exercised nor later than the fifth business day after the date
on which the option shall have been exercised. The date and time the Option
Shares are delivered are sometimes referred to as the "Second Delivery Date" and
the First Delivery Date and the Second Delivery Date are sometimes each referred
to as a "Delivery Date."
Delivery of and payment for the Option Shares shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company shall deliver or
cause to be delivered the certificates representing the Option Shares to the
Representative for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by certified or official bank
check or checks payable in same day funds. Time shall be of the essence, and
delivery at the time and place specified pursuant to this Agreement is a further
condition of the obligation of each Underwriter hereunder. Upon delivery, the
Option Shares shall be registered in such names and in such denominations as the
Representatives shall request in the
12
<PAGE>
aforesaid written notice. For the purpose of expediting the checking and
packaging of the certificates for the Option Shares, the Company shall make the
certificates representing the Option Shares available for inspection by the
Representatives in New York, New York, not later than 2:00 P.M., New York City
time, on the business day prior to the Second Delivery Date.
5. Further Agreements of the Transaction Entities. Each of the
Transaction Entities jointly and severally agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule
424(b) under the Securities Act not later than the Commission's
close of business on the second business day following the
execution and delivery of this Agreement or, if applicable, such
earlier time as may be required by Rule 430A(a)(3) under the
Securities Act; to make no further amendment or any supplement to
the Registration Statement or to the Prospectus except as
permitted herein; to advise the Representatives, promptly after it
receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been
filed and to furnish the Representatives with copies thereof; to
advise the Representatives, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or of
any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus, of the suspension of the
qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding
for any such purpose, or of any request by the Commission for the
amending or supplementing of the Registration Statement or the
Prospectus or for additional information; and, in the event of the
issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus
or suspending any such qualification, to use promptly its best
efforts to obtain its withdrawal;
(b) To furnish promptly to the Representatives and to counsel
for the Underwriters five signed or conformed copies of the
Registration Statement as originally filed with the Commission,
and each amendment thereto filed with the Commission, including
all consents and exhibits filed therewith, and will also furnish
to the Representatives and their counsel such number of conformed
copies of the Registration Statement as originally filed and of
each amendment thereto, as the Representatives may request;
(c) To deliver promptly to the Representatives such number of
the following documents as the Representatives shall reasonably
request: (i) conformed copies of the Registration Statement as
originally filed with the Commission and each amendment thereto
(in each case excluding exhibits other than this Agreement) and
(ii) each Preliminary Prospectus, the Prospectus and any amended
or supplemented Prospectus; and, if the delivery of a prospectus
is required at any time after the Effective Time in connection
with the offering or sale of the Shares or any other securities
relating thereto and if at such time any events shall have
occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made when such Prospectus is delivered, not misleading,
or, if for any
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<PAGE>
other reason it shall be necessary to amend or supplement the
Prospectus in order to comply with the Securities Act or the
Exchange Act, to notify the Representatives and, upon their
request, to file such document and to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many
copies as the Representatives may from time to time reasonably
request of an amended or supplemented Prospectus which will
correct such statement or omission or effect such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested by
the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to
furnish a copy thereof to the Representatives and counsel for the
Underwriters and obtain the consent of the Representatives to the
filing;
(f) The Company will make generally available to its security
holders as soon as practicable but no later than 60 days after the
close of the period covered thereby an earnings statement (in form
complying with the provisions of Section 11(a) of the Securities
Act and Rule 158 of the Rules and Regulations), which need not be
certified by independent certified public accountants unless
required by the Securities Act or the Rules and Regulations,
covering a twelve-month period commencing after the "effective
date" (as defined in said Rule 158) of the Registration Statement;
(g) The Company will furnish to each Underwriter, from time to
time during the period when the Prospectus is required to be
delivered under the Securities Act or the Exchange Act, such
number of copies of the Prospectus (as amended or supplemented) as
such Underwriter may reasonably request for the purposes
contemplated by the Securities Act or the Exchange Act or the
respective applicable rules and regulations of the Commission
thereunder.
(h) For a period of five years following the Effective Date,
to furnish to the Representatives copies of all materials
furnished by the Company to its shareholders and all public
reports and all reports and financial statements furnished by the
Company to the principal national securities exchange upon which
the Common Shares may be listed pursuant to requirements of or
agreements with such exchange or to the Commission pursuant to the
Exchange Act or any rule or regulation of the Commission
thereunder;
(i) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Shares for
offering and sale under the securities, real estate syndication or
Blue Sky laws of such jurisdictions as the Representatives may
request and to comply with such laws so as to permit the
continuance of sales and dealings therein in such jurisdictions
for as long as may be necessary to complete the distribution of
the Shares;
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(j) For a period of 180 days from the First Delivery Date, the
Company will not, directly or indirectly, offer for sale, contract
to sell, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected
to, result in the disposition by any person at any time in the
future of) any Common Shares or securities convertible into or
exercisable or exchangeable for Common Shares (other than the
Shares and shares issued pursuant to employee benefit plans,
qualified stock option plans, share purchase plans or other
employee compensation plans described in the Prospectus and any
Units or shares that may be issued in connection with any
acquisition of a property), or sell or grant options, rights or
warrants with respect to any Common Shares (other than the grant
of options pursuant to option plans existing on the date hereof),
without the prior written consent of Lehman Brothers Inc.; and to
cause each officer, trustee and affiliate of the Company who owns
Units or Common Shares, and use its best efforts to cause each of
The American Airlines, Inc. Master Fixed Benefit Trust, the
Ameritech Pension Trust and the Public Employee Retirement System
of Idaho (the "Continuing Investors") to furnish to the
Representatives, prior to the First Delivery Date, a letter or
letters, in form and substance satisfactory to counsel for the
Underwriters, pursuant to which each such person shall agree not
to, directly or indirectly, offer for sale, sell, contract to
sell, pledge or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected
to, result in the disposition by any person at any time in the
future of) any (i) in the case of such officers, trustees and
affiliates of the Company, Units or Common Shares for a period of
two years from the First Delivery Date and (ii) in the case of the
Continuing Investors, Common Shares for a period of one year from
the First Delivery Date, without the prior written consent of
Lehman Brothers Inc. in each case;
(k) To maintain the listing of the Common Shares on the New
York Stock Exchange, Inc.;
(l) Prior to filing with the Commission any reports on Form SR
pursuant to Rule 463 of the Rules and Regulations, to furnish a
copy thereof to the counsel for the Underwriters and receive and
consider its comments thereon, and to deliver promptly to the
Representatives a signed copy of each report on Form SR filed by
it with the Commission;
(m) To apply the net proceeds from the sale of the Shares
being sold by the Company in accordance with the description set
forth in the Prospectus under the caption "Use of Proceeds";
(n) To take such steps as shall be necessary to ensure that
none of the Transaction Entities shall become an "investment
company" within the meaning of such term under the Investment
Company Act of 1940 and the rules and regulations of the
Commission thereunder;
(o) Except as stated in this Agreement and in the Preliminary
Prospectus and Prospectus, no Transaction Entity has taken, nor
will take, directly or indirectly, any action designed to or that
might reasonably be expected to cause or result in stabilization
or manipulation of the price of the Common Shares to facilitate
the sale or resale of the Shares;
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(p) The Company will use its best efforts to continue to meet
the requirements to qualify as a "real estate investment trust"
under the Code; and
(q) If this Agreement shall be terminated by the Underwriters
because of any failure or refusal on the part of the Transaction
Entities to comply with the terms or fulfill any of the conditions
of this Agreement, the Transaction Entities jointly and severally
agree to reimburse the Representatives for all reasonable out-of-
pocket expenses (including fees and expenses of counsel for the
Underwriters) incurred by the Representatives in connection
herewith.
6. Expenses. The Transaction Entities jointly and severally agree
to pay (a) the costs incident to the authorization, issuance, sale and delivery
of the Shares and any taxes payable in that connection; (b) the costs incident
to the preparation, printing and filing under the Securities Act of the
Registration Statement and any amendments and exhibits thereto; (c) the costs of
distributing the Registration Statement as originally filed and each amendment
thereto and any post-effective amendments thereof (including, in each case,
exhibits), any Preliminary Prospectus, the Prospectus and any amendment or
supplement to the Prospectus, all as provided in this Agreement; (d) the costs
of producing and distributing this Agreement and any other related documents in
connection with the offering, purchase, sale and delivery of the Shares; (f) the
filing fees incident to securing any required review by the National Association
of Securities Dealers, Inc. of the terms of sale of the Shares; (g) any
applicable listing or other fees; (h) the fees and expenses of qualifying the
Shares under the securities laws of the several jurisdictions as provided in
Section 5(i) and of preparing, printing and distributing a Blue Sky Memorandum
(including related fees and expenses of counsel to the Underwriters); (j) [all
expenses of the Independent Underwriter incurred in connection with its actions
as the Independent Underwriter;] and (k) all other costs and expenses incident
to the performance of the obligations of the Transaction Entities under this
Agreement; provided that, except as provided in this Section 6 and in Section 12
the Underwriters shall pay their own costs and expenses, including the costs and
expenses of their counsel, any transfer taxes on the Shares which they may sell
and the expenses of advertising any offering of the Shares made by the
Underwriters.
7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the
Transaction Entities contained herein, to the performance by each Transaction
Entity of its obligations hereunder, and to each of the following additional
terms and conditions:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the Registration Statement or a post-effective
amendment thereto to be declared effective before the offering of
the Shares may commence, the Registration Statement or such post-
effective amendment shall have become effective not later than
5:30 P.M., New York City time, on the date hereof, or at such
later date and time as shall be consented to in writing by you,
and all filings, if any, required by Rules 424 and 430A under the
Rules and Regulations shall have been timely made; no stop order
suspending the effectiveness of the Registration Statement shall
have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Transaction Entities
or any Underwriter, threatened by the Commission, and any request
of the Commission for additional information (to be
16
<PAGE>
included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of
the Representatives.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change, or any development
involving a prospective change, in or affecting the condition,
financial or otherwise, business, properties, net worth, or
results of operations of any Transaction Entity, any of their
subsidiaries or any Property not contemplated by the Prospectus,
which in the opinion of the Representatives, would materially
adversely affect the market for the Shares, or (ii) any event or
development relating to or involving any Transaction Entity, or
any partner, officer, director or trustee of any Transaction
Entity, which makes any statement of a material fact made in the
Prospectus untrue or which, in the opinion of the Company and its
counsel or the Underwriters and their counsel, requires the making
of any addition to or change in the Prospectus in order to state a
material fact required by the Securities Act or any other law to
be stated therein or necessary in order to make the statements
therein not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your
opinion, adversely affect the market for the Shares.
(c) All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the
Shares, the Registration Statement and the Prospectus, and all
other legal matters relating to this Agreement and the
transactions contemplated hereby shall be reasonably satisfactory
in all material respects to counsel for the Underwriters, and the
Company shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to
pass upon such matters.
(d) Hunton & Williams shall have furnished to the
Representatives its written opinion, as counsel to the Company,
addressed to the Underwriters and dated such Delivery Date, in
form and substance reasonably satisfactory to the Representatives,
to the effect that:
(i) The Company has been duly formed and is validly
existing as a real estate investment trust in good standing
under and by virtue of the laws of the State of Maryland, is
in good standing with the State Department of Assessments and
Taxation of Maryland and as a foreign trust or corporation in
those jurisdictions listed in such opinion, and has all trust
power and authority necessary to own or hold its properties
and to conduct the business in which it is engaged as
described in the Registration Statement and the Prospectus,
and to enter into and perform its obligations under this
Agreement.
(ii) The Company has an authorized capitalization as set
forth in the Prospectus under the caption "Capitalization,"
and all of the issued shares of beneficial interest of the
Company (other than the Shares) have been duly and validly
authorized and issued, are fully paid and non-assessable and
conform in all material respects to the description thereof
contained in the Prospectus.
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<PAGE>
(iii) The Operating Partnership has been duly formed and
is validly existing as a limited partnership under the laws of
the State of Delaware, is duly qualified to do business as a
foreign limited partnership in [Texas, Missouri, Maryland,
Georgia, Virginia, California, Michigan and Wisconsin], and
has all partnership power and authority necessary to own or
hold its properties, to conduct the business in which it is
engaged as described in the Registration Statement and the
Prospectus, and to enter into and perform its obligations
under this Agreement. The General Partner is the sole general
partner of the Operating Partnership. The Operating
Partnership Agreement is in full force and effect, and the
aggregate percentage interests of the Company, the General
Partner and the limited partners in the Operating Partnership
are as set forth in the Prospectus.
(iv) The General Partner has been duly formed and is
validly existing as a corporation in good standing under the
laws of the State of Delaware, is duly qualified to do
business and is in good standing as a foreign corporation in
[Texas, Missouri, Maryland, Georgia, Virginia, California,
Michigan and Wisconsin], and has all corporate power and
authority necessary to own or hold its properties, to conduct
the business in which it is engaged as described in the
Registration Statement and the Prospectus, and to enter into
and perform its obligations under this Agreement. All of the
issued and outstanding capital stock of the General Partner
has been duly authorized and validly issued and is fully paid
and non-assessable, is owned by the Company free and clear of
any security interest, mortgage, pledge, lien, encumbrance,
claim, restriction or equities and has been offered and sold
in compliance with all applicable laws (including, without
limitation, federal or state securities laws).
(v) Each Manager has been duly formed and is validly
existing as a corporation in good standing under the laws of
the State of Delaware, is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction
in which its ownership or lease of property or the conduct of
its business requires such qualification, and has all
corporate and authority necessary to own or hold its
properties, to conduct the business in which it is engaged as
described in the Registration Statement and the Prospectus,
and to enter into and perform its obligations under this
Agreement. All of the issued and outstanding capital stock of
each of the Managers has been duly authorized and validly
issued and is fully paid and non-assessable, has been offered
and sold in compliance with all applicable laws (including,
without limitation, federal or state securities laws) and, all
of such capital stock that is owned by the Operating
Partnership (100% of the nonvoting common stock) is owned free
and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim, restriction or equities.
(vi) Each of the Property Affiliates has been duly
organized and is validly existing as a partnership or
corporation, as the case may be, in good standing (if a
corporation) under the laws of its respective jurisdiction of
formation, is duly qualified to do business and is in good
standing (if a
18
<PAGE>
corporation) in each jurisdiction in which its ownership or
lease of property or the conduct of its business requires such
qualification, and has all corporate or partnership power and
authority necessary to own or hold its properties and to
conduct the business in which it is engaged. Except as set
forth in the Prospectus, all of the issued shares of capital
stock or partnership interests of each Property Affiliate have
been duly and validly authorized and issued, are fully paid
and non-assessable and are owned directly or indirectly by the
Company and the Operating Partnership, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim,
restriction or equities.
(vii) The Shares have been duly and validly authorized
and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued, fully paid
and non-assessable. Upon payment of the purchase price and
delivery of the Shares in accordance herewith, each of the
Underwriters will receive good, valid and marketable title to
the Shares, free and clear of all security interests,
mortgages, pledges, liens, encumbrances, claims, restrictions
and equities. The terms of the Shares conform in all material
respects to all statements and descriptions related thereto
contained in the Prospectus. The form of the certificates to
be used to evidence the Shares are in due and proper form and
comply with all applicable legal requirements. The issuance of
the Shares is not subject to any preemptive or other similar
rights arising under the Declaration of Trust or by-laws of
the Company, Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended, or any
agreement or other instrument to which the Company is a party
known to such counsel.
(viii) (A) This Agreement has been duly and validly
authorized, executed and delivered by the each of the
Transaction Entities, and assuming due authorization,
execution and delivery by the Representatives, is a valid and
binding agreement of each of the Transaction Entities; and (B)
the Operating Partnership Agreement and the partnership
agreement or joint venture agreement of each Property
Affiliate, have been duly and validly authorized, executed and
delivered by each Transaction Entity and Prentiss Group member
party thereto and are valid and binding agreements of the
parties thereto, enforceable against such parties in
accordance with their terms.
(ix) The execution, delivery and performance of this
Agreement by each of the Transaction Entities and the
consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which any of the Transaction
Entities is a party or by which any of the Transaction
Entities is bound or to which any of the Properties or other
assets of any of the Transaction Entities is subject, nor will
such actions result in any violation of the provisions of the
charter, by-laws, certificate of limited partnership or
agreement of limited partnership of any of the Transaction
Entities, or any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction
over any of the
19
<PAGE>
Transaction Entities or any of their properties or assets; and
except for the registration of the Shares under the Securities
Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Shares by
the Underwriters, no consent, approval, authorization or order
of, or filing or registration with, any such court or
governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Transaction
Entities and the consummation of the transactions contemplated
hereby.
(x) To such counsel's knowledge, other than as set forth
in the Prospectus, there are no contracts, agreements or
understandings between the Company and any person granting
such person the right to require the Company to file a
registration statement under the Securities Act with respect
to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in
the securities registered pursuant to the Registration
Statement or in any securities being registered pursuant to
any other registration statement filed by the Company under
the Securities Act.
(xi) To the best knowledge of such counsel, there are no
legal or governmental proceedings pending to which any
Transaction Entity is a party or of which any property or
assets of any Transaction Entity is the subject which are not
disclosed in the Prospectus and which, if determined adversely
to such Transaction Entity, might reasonably be expected to
have a material adverse effect on the consolidated financial
position, stockholders' equity, results of operations,
business or prospects of the Company; and to the best
knowledge of such counsel no such proceedings are threatened
or contemplated by governmental authorities or threatened by
others.
(xii) There are no contracts or other documents which are
required to be described in the Prospectus or filed as
exhibits to the Registration Statement by the Securities Act
or by the Rules and Regulations which have not been described
in the Prospectus or filed as exhibits to the Registration
Statement or incorporated therein by reference as permitted by
the Rules and Regulations.
(xiii) To the best knowledge of such counsel, no
relationship, direct or indirect, exists between or among any
of the Transaction Entities on the one hand, and the
directors, officers, stockholders, customers or suppliers of
the Transaction Entities on the other hand, which is required
to be described in the Prospectus which is not so described.
(xiv) No Transaction Entity or, to the best knowledge of
such counsel, Property Affiliate (i) is in violation of its
charter, by-laws, certificate of limited partnership,
agreement of limited partnership or other similar
organizational document or (ii) is in default in any material
respect, and no event has occurred which, with notice or lapse
of time or both, would constitute such a default, in the due
performance or observance of any term,
20
<PAGE>
covenant or condition contained in any material indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which it is a party or by which it is bound or
to which any of the Properties or any of its other properties
or assets is subject and which was filed as an exhibit to the
Registration Statement.
(xv) No consent, approval, authorization or other order
of, or registration or filing with, any court, regulatory
body, administrative agency or other governmental body,
agency, or official is required on the part of the Company
(except as have been obtained under the Securities Act and the
Exchange Act or such as may be required under state
securities, real estate syndication or Blue Sky laws governing
the purchase and distribution of the Shares) for the valid
issuance and sale of the Shares to the Underwriters as
contemplated by this Agreement.
(xvi) No Transaction Entity is an "investment company"
within the meaning of such term under the Investment Company
Act of 1940 and the rules and regulations of the Commission
thereunder. The Shares have been approved for listing on the
New York Stock Exchange upon notice of issuance.
(xvii) The Registration Statement was declared effective
under the Securities Act as of the date and time specified in
such opinion, the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the Rules and
Regulations specified in such opinion on the date specified
therein and, to the best knowledge of such counsel, no stop
order suspending the effectiveness of the Registration
Statement has been issued and, to the best knowledge of such
counsel, no proceeding for that purpose is pending or
threatened by the Commission.
(xviii) The Registration Statement and the Prospectus and
any further amendments or supplements thereto made by the
Company prior to such Delivery Date (other than the financial
statements and related schedules and other financial data
included therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and
Regulations.
(xix) The statements contained in the Prospectus under the
captions "Risk Factors," "Properties," "Policies with Respect
to Certain Activities," "Management," "Description of Shares
of Beneficial Interest," "Certain Provisions of Maryland Law
and of the Company's Declaration of Trust and Bylaws," "Shares
Available for Future Sale," "Operating Partnership Agreement,"
and "Federal Income Tax Considerations," insofar as those
statements are descriptions of contracts, agreements or other
legal documents, or they describe federal statutes, rules and
regulations, and except to the extent such statements are
statistics or calculations constitute a fair summary thereof,
and the opinion of such counsel filed as Exhibit 8 to the
Registration Statement is confirmed and the Underwriters may
rely upon such opinion as if it were addressed to them.
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<PAGE>
In rendering such opinion, such counsel may (i) state that its
opinion is limited to matters governed by the Federal laws of the
United States of America; (ii) rely (to the extent such counsel
deems proper and specifies in their opinion), as to matters
involving the application of the laws of the States of Maryland,
Texas and Delaware upon the opinion of other counsel of good
standing, provided that such other counsel is satisfactory to
counsel for the Underwriters and furnishes a copy of its opinion
to the Representatives; (iii) in giving each of the opinions
referred to in Section 7(d)(iv), (v), and (vii), state that such
opinion is based upon an examination of the statutes and
regulations of certain States referenced in such opinion in the
latest unofficial compilations, and that such opinion is subject
to the broad discretionary powers of securities commissioners or
other authorized officials to, among other things, withdraw or
deny the exempt status accorded by statute to particular classes
of securities or transactions, to impose additional requirements,
to require additional information, and to issue stop orders or to
deny, withdraw, revoke or suspend permits or registrations where
such have been granted; and (iv) in giving the opinion referred to
in subclause (B) in Section 7(d)(viii), state that such opinion
with respect to the enforceability of such documents may be
limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium, and other laws relating to or
affecting creditors' rights generally and by general equitable
principles; provided that such counsel shall state that it
believes that both the Underwriters and it are justified in
relying upon such opinions of local counsel. Such counsel shall
also have furnished to the Representatives a written statement,
addressed to the Underwriters and dated such Delivery Date, in
form and substance satisfactory to the Representatives, to the
effect that (x) such counsel has acted as counsel to the Company
in connection with the preparation of the Registration Statement
and the Prospectus, and (y) based on the foregoing, no facts have
come to the attention of such counsel which lead it to believe
that the Registration Statement, as of the Effective Date,
contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading, or that
the Prospectus contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The
foregoing opinion and statement may be qualified by a statement to
the effect that such counsel does not assume any responsibility
for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus except
for the statements made in the Prospectus under the captions
"Description of Shares of Beneficial Interest" and "Federal Income
Tax Considerations" insofar as such statements relate to the
Shares and concern legal matters, and may state that such counsel
expresses no belief with respect to the financial statements and
notes thereto and other financial data included in the
Registration Statement or the Prospectus.
(e) The Representatives shall have received from Rogers &
Wells, counsel for the Underwriters, such opinion or opinions,
dated such Delivery Date, with respect to the issuance and sale of
the Shares, the Registration Statement, the Prospectus and other
related matters as the Representatives may reasonably require, and
the Company shall have furnished to such counsel such documents as
they reasonably request for the purpose of enabling them to pass
upon such matters.
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<PAGE>
(f) At the time of execution of this Agreement, the
Representatives shall have received from Coopers & Lybrand L.L.P.
a letter, in form and substance satisfactory to the
Representatives, addressed to the Underwriters and dated the date
hereof (i) confirming that they are independent public accountants
within the meaning of the Securities Act and are in compliance
with the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission,
and (ii) stating, as of the date hereof (or, with respect to
matters involving changes or developments since the respective
dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date
hereof), the conclusions and findings of such firm with respect to
the financial information and other matters ordinarily covered by
accountants' "comfort letters" to underwriters in connection with
registered public offerings.
(g) With respect to the letter of Coopers & Lybrand L.L.P.
referred to in the preceding paragraph and delivered to the
Representatives concurrently with the execution of this Agreement
(the "initial letter"), the Company shall have furnished to the
Representatives a letter (the "bring-down letter") of such
accountants, addressed to the Underwriters and dated such Delivery
Date (i) confirming that they are independent public accountants
within the meaning of the Securities Act and are in compliance
with the applicable requirements relating to the qualification of
accountants under Rule 2-01 of Regulation S-X of the Commission,
(ii) stating, as of the date of the bring-down letter (or, with
respect to matters involving changes or developments since the
respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than five days
prior to the date of the bring-down letter), the conclusions and
findings of such firm with respect to the financial information
and other matters covered by the initial letter and (iii)
confirming in all material respects the conclusions and findings
set forth in the initial letter.
(h) Each Transaction Entity shall have furnished to the
Representatives a certificate, dated such Delivery Date, of its
Chairman of the Board, its President or a Vice President and its
chief financial officer stating that:
(i) The representations, warranties and agreements of
the Transaction Entities in Section 1 are true and correct as
of such Delivery Date; the Transaction Entities complied with
all of their agreements contained herein; and the conditions
set forth in Sections 7(a) and 7(i) have been fulfilled; and
(ii) They have carefully examined the Registration
Statement and the Prospectus and, in their opinion (A) as of
the Effective Date, the Registration Statement and Prospectus
did not include any untrue statement of a material fact and
did not omit to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading (with respect to the Prospectus, in light of the
circumstances in which they were made), and (B) since the
Effective Date no event has occurred which should have been
set forth in a supplement or amendment to the Registration
Statement or the Prospectus.
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(i) (i) None of the Transaction Entities or any Property shall
have sustained since the date of the latest audited financial
statements included in the Prospectus any loss or interference
with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as
set forth or contemplated in the Prospectus or (ii) since such
date there shall not have been any change in the capital stock or
long-term debt of any Transaction Entity or any change, or any
development involving a prospective change, in or affecting any
Property or the general affairs, management, financial position,
stockholders' equity or results of operations of any Transaction
Entity, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in
clause (i) or (ii), is, in the judgment of the Representatives, so
material and adverse as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Shares
being delivered on such Delivery Date on the terms and in the
manner contemplated in the Prospectus.
(j) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the
American Stock Exchange or in the over-the-counter market, or
trading in any securities of the Company on any exchange or in the
over-the-counter market, shall have been suspended or minimum
prices shall have been established on any such exchange or such
market by the Commission, by such exchange or by any other
regulatory body or governmental authority having jurisdiction,
(ii) a banking moratorium shall have been declared by Federal or
state authorities, (iii) the United States shall have become
engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a
declaration of a national emergency or war by the United States or
(iv) there shall have occurred such a material adverse change in
general economic, political or financial conditions (or the effect
of international conditions on the financial markets in the United
States shall be such) as to make it, in the judgment of a majority
in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the
Shares being delivered on such Delivery Date on the terms and in
the manner contemplated in the Prospectus.
(k) The Common Shares shall be listed on the New York Stock
Exchange, Inc.
(l) The Transaction Entities shall not have failed at or prior
to such Delivery Date to have performed or complied with any of
their agreements herein contained and required to be performed or
complied with by them hereunder at or prior to such Delivery Date.
(m) On the First Delivery Date, counsel for the Underwriters
shall have been furnished with such documents and opinions as they
may require for the purpose of enabling them to pass upon the
issuance and sale of the Shares as herein contemplated and related
proceedings, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the
Transaction Entities in connection with
24
<PAGE>
the issuance and sale of the Shares as herein contemplated shall
be satisfactory in form and substance to the Representatives and
counsel for the Underwriters.
(n) You shall have been furnished with the written agreements
referred to in Section 5(j) hereof.
(o) The Company shall have furnished or caused to be furnished
to you such further certificates and documents as the
Representatives shall have reasonably requested.
(p) In the event that the Underwriters exercise their option
provided in Section 2(b) hereof to purchase all or any portion of
the Option Shares, the representations and warranties of the
Transaction Entities contained herein and the statements in any
certificates furnished by the Transaction Entities hereunder shall
be true and correct as of each Date of Delivery and, at the
relevant Date of Delivery, the Representatives shall have
received:
(i) A certificate, dated such Date of Delivery, of the
President or a Vice President of each Transaction Entity and
of the chief financial or chief accounting officer of each
Transaction Entity confirming that the certificate delivered
on the First Delivery Date pursuant to Section 7(h) hereof
remains true and correct as of such Date of Delivery.
(ii) The favorable opinion of Hunton & Williams, counsel
for the Transaction Entities, in form and substance
satisfactory to counsel for the Underwriters, dated such Date
of Delivery, relating to the Option Shares to be purchased on
such Date of Delivery and otherwise to the same effect as the
opinions required by Section 7(d) hereof.
(iii) The favorable opinion of Rogers & Wells, counsel for
the Underwriters, dated such Date of Delivery, relating to the
Option Shares to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by
Section (e) hereof.
(iv) A letter from Coopers & Lybrand L.L.P., in form and
substance satisfactory to the Representatives and dated such
Date of Delivery, substantially the same in form and substance
as the letters furnished to the Representatives pursuant to
Section 7(f) hereof.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Underwriters.
25
<PAGE>
Any certificate or document signed by any officer of the Transaction
Entities and delivered to the Underwriters, or to counsel for the Underwriters,
shall be deemed a representation and warranty by the Transaction Entities to
each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase Option Shares
hereunder are subject to the satisfaction on and as of any Date of Delivery of
the conditions set forth in this Section 7, except that, if any Date of Delivery
is other than the First Delivery Date, the certificates, opinions and letters
referred to in Sections 7(d) through 7(h) hereof shall be dated the Date of
Delivery in question and the opinions called for by Sections 7(d) and 7(e)
hereof shall be revised to reflect the sale of Option Shares.
8. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
Registration Statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the Registration Statement or such post-effective amendment
has been released by the Commission.
9. Default by One or More of the Underwriters. If, on either Delivery
Date, any Underwriter defaults in the performance of its obligations under this
Agreement, the remaining non-defaulting Underwriters shall be obligated to
purchase the Shares which the defaulting Underwriter agreed but failed to
purchase on such Delivery Date in the respective proportions which the number of
Firm Shares set forth opposite the name of each remaining non-defaulting
Underwriter in Schedule 1 hereto bears to the total number of Firm Shares set
forth opposite the names of all the remaining non-defaulting Underwriters in
Schedule 1 hereto; provided, however, that the remaining non-defaulting
Underwriters shall not be obligated to purchase any of the Shares on such
Delivery Date if the total number of Shares which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such date exceeds 9.09% of the
total number of Shares to be purchased on such Delivery Date, and any remaining
non-defaulting Underwriter shall not be obligated to purchase more than 110% of
the number of Shares which it agreed to purchase on such Delivery Date pursuant
to the terms of Section 2. If the foregoing maximums are exceeded, the remaining
non-defaulting Underwriters, or those other underwriters satisfactory to the
Representatives who so agree, shall have the right, but shall not be obligated,
to purchase, in such proportion as may be agreed upon among them, all the Shares
to be purchased on such Delivery Date. If the remaining Underwriters or other
underwriters satisfactory to the Representatives do not elect to purchase the
Shares which the defaulting Underwriter or Underwriters agreed but failed to
purchase on such Delivery Date, this Agreement (or, with respect to the Second
Delivery Date, the obligation of the Underwriters to purchase, and of the
Company to sell, the Option Shares) shall terminate without liability on the
part of any non-defaulting Underwriter or the Transaction Entities, except that
the Transaction Entities will continue to be liable for the payment of expenses
to the extent set forth in Sections 6 and 12. As used in this Agreement, the
term "Underwriter" includes, for all purposes of this Agreement unless the
context requires otherwise, any party not listed in Schedule 1 hereto who,
pursuant to this Section 9, purchases Initial Shares which a defaulting
Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Transaction Entities for damages caused by its
default. If other underwriters are obligated or agree to purchase the Shares of
a defaulting or withdrawing Underwriter, either the Representatives or the
Company may postpone the Delivery Date for up to seven full business days
26
<PAGE>
in order to effect any changes that in the opinion of counsel for the Company or
counsel for the Underwriters may be necessary in the Registration Statement, the
Prospectus or in any other document or arrangement.
10. Indemnification and Contribution.
(a) The Transaction Entities jointly and severally, shall indemnify
and hold harmless each Underwriter, its officers and employees and each person,
if any, who controls any Underwriter within the meaning of the Securities Act,
from and against any loss, claim, damage or liability, joint or several, or any
action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to purchases and sales of Shares), to which
that Underwriter, officer, employee or controlling person may become subject,
under the Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained (A) in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any amendment or
supplement thereto or (B) in any blue sky application or other document prepared
or executed by the Company (or based upon any written information furnished by
the Company) specifically for the purpose of qualifying any or all of the Shares
under the securities laws of any state or other jurisdiction (any such
application, document or information being hereinafter called a "Blue Sky
Application"), (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact required to
be stated therein or necessary to make the statements therein not misleading
(with respect to the Prospectus, in light of the circumstances under which they
were made), or (iii) any act or failure to act or any alleged act or failure to
act by any Underwriter in connection with, or relating in any manner to, the
Shares or the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out of or
based upon matters covered by clause (i) or (ii) above (provided that the
Transaction Entities shall not be liable under this clause (iii) to the extent
that it is determined in a final judgment by a court of competent jurisdiction
that such loss, claim, damage, liability or action resulted directly from any
such acts or failures to act undertaken or omitted to be taken by such
Underwriter through its gross negligence or willful misconduct), and shall
reimburse each Underwriter and each such officer, employee or controlling person
promptly upon demand for any legal or other expenses reasonably incurred by that
Underwriter, officer, employee or controlling person in connection with
investigating or defending or preparing to defend against any such loss, claim,
damage, liability or action as such expenses are incurred; provided, however,
that the Transaction Entities shall not be liable in any such case to the extent
that any such loss, claim, damage, liability or action arises out of, or is
based upon, any untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus, or in any such amendment or supplement, or in any Blue Sky
Application, in reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion therein. The
foregoing indemnity agreement is in addition to any liability which the
Transaction Entities may otherwise have to any Underwriter or to any officer,
employee or controlling person of that Underwriter.
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless each Transaction Entity, its officers and employees, each of its
directors, and each person, if any, who controls each Transaction Entity within
the meaning of the Securities Act, from and against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which
27
<PAGE>
each Transaction Entity or any such director, officer or controlling person may
become subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of, or is based upon, (i) any
untrue statement or alleged untrue statement of a material fact contained (A) in
any Preliminary Prospectus, the Registration Statement or the Prospectus or in
any amendment or supplement thereto, or (B) in any Blue Sky Application or (ii)
the omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact required to be stated
therein or necessary to make the statements therein not misleading, but in each
case only to the extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of that Underwriter specifically for
inclusion therein, and shall reimburse each Transaction Entity and any such
director, officer or controlling person for any legal or other expenses
reasonably incurred by each Transaction Entity or any such director, officer or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred. The foregoing indemnity agreement is in addition to any
liability which any Underwriter may otherwise have to each Transaction Entity or
any such director, officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this Section
10 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 10 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 10.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 10 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Underwriters
against the Transaction Entities under this Section 10 if, in the reasonable
judgment of the Representatives, it is advisable for the Representatives and
those Underwriters, officers, employees and controlling persons to be jointly
represented by separate counsel, and in that event the fees and expenses of such
separate counsel shall be paid by the indemnifying party. No indemnifying party
shall (i) without the prior written consent of the indemnified parties (which
consent shall not be unreasonably withheld), settle or compromise or consent to
the entry of any judgment with respect to any pending or threatened claim,
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding, or (ii) be
liable for any settlement of any such action effected without its written
consent
28
<PAGE>
(which consent shall not be unreasonably withheld), but if settled with the
consent of the indemnifying party or if there be a final judgment of the
plaintiff in any such action, the indemnifying party agrees to indemnify and
hold harmless any indemnified party from and against any loss or liability by
reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 10 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 10(a) or 10(c) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Transaction Entities on the one hand and the Underwriters on the
other from the offering of the Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Transaction Entities on the one hand
and the Underwriters on the other with respect to the statements or omissions
which resulted in such loss, claim, damage or liability, or action in respect
thereof, as well as any other relevant equitable considerations. The relative
benefits received by the Transaction Entities on the one hand and the
Underwriters on the other with respect to such offering shall be deemed to be in
the same proportion as the total net proceeds from the offering of the Shares
purchased under this Agreement (before deducting expenses) received by the
Transaction Entities, on the one hand, and the total underwriting discounts and
commissions received by the Underwriters with respect to the Shares purchased
under this Agreement, on the other hand, bear to the total gross proceeds from
the offering of the Shares under this Agreement, in each case as set forth in
the table on the cover page of the Prospectus. The relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Transaction Entities or the Underwriters, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Transaction
Entities and the Underwriters agree that it would not be just and equitable if
contributions pursuant to this Section were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, damage or liability, or
action in respect thereof, referred to above in this Section shall be deemed to
include, for purposes of this Section 10(d), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 10(d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public was offered to the public exceeds the amount
of any damages which such Underwriter has otherwise paid or become liable to pay
by reason of any untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 10(d) are
several in proportion to their respective underwriting obligations and not
joint.
(e) The Underwriters severally confirm and each Transaction Entity
acknowledges that (i) the statements with respect to the public offering of the
Shares by the Underwriters set forth on the cover page of, (ii) the legend
concerning over-allotments on the inside front cover page of, and (iii) the
names of the Underwriters and the number of Shares which they are
29
<PAGE>
each purchasing, the concession and reallowance figures and the information
contained in the seventh, ninth and tenth paragraphs and the first sentence of
the eleventh paragraph, in each case appearing under the caption "Underwriting"
in, the Prospectus are correct and constitute the only information concerning
such Underwriters furnished in writing to the Company by or on behalf of the
Underwriters specifically for inclusion in the Registration Statement and the
Prospectus.
11. Termination. The obligations of the Underwriters hereunder may be
terminated by the Representatives by notice given to and received by the Company
prior to delivery of and payment for the Firm Shares if, prior to that time, any
of the events described in Sections 7(i), 7(j) or 7(l), shall have occurred or
if the Underwriters shall decline to purchase the Shares for any reason
permitted under this Agreement.
12. Reimbursement of Underwriters' Expenses. If the Company shall
fail to tender the Shares for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Transaction Entities to perform
any agreement on their part to be performed, or because any other condition of
the Underwriters' obligations hereunder required to be fulfilled by the
Transaction Entities is not fulfilled (other than the condition set forth in
Section 7(j) herein), the Transaction Entities will reimburse the Underwriters
for all reasonable out-of-pocket expenses (including fees and disbursements of
counsel) incurred by the Underwriters in connection with this Agreement and the
proposed purchase of the Shares, and upon demand the Transaction Entities shall
pay the full amount thereof to the Representatives. IF THIS AGREEMENT IS
TERMINATED PURSUANT TO SECTION 9 BY REASON OF THE DEFAULT OF ONE OR MORE
UNDERWRITERS, THE TRANSACTION ENTITIES SHALL NOT BE OBLIGATED TO REIMBURSE ANY
DEFAULTING UNDERWRITER ON ACCOUNT OF THOSE EXPENSES.
13. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers Inc.,
Three World Financial Center, New York, New York 10285, Attention:
Syndicate Department (Fax: 212-526-6588), with a copy, in the case
of any notice pursuant to Section 10(c), to the Director of
Litigation, Office of the General Counsel, Lehman Brothers Inc., 3
World Financial Center, 10th Floor, New York, NY 10285;
(b) if to the Transaction Entities shall be delivered or sent
by mail, telex or facsimile transmission to the Company, 1717 Main
Street, Suite 5000, Dallas, Texas 75201, Attention: Michael V.
Prentiss (Fax: 214-761-5083);
provided, however, that any notice to an Underwriter pursuant to Section 10(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Transaction
Entities shall be entitled to act and rely upon any request, consent, notice or
agreement given or made on behalf of the Underwriters by Lehman Brothers Inc.
14. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Transaction
Entities and their respective
30
<PAGE>
personal representatives and successors. This Agreement and the terms and
provisions hereof are for the sole benefit of only those persons, except that
(A) the representations, warranties, indemnities and agreements of the
Transaction Entities contained in this Agreement shall also be deemed to be for
the benefit of the person or persons, if any, who control any Underwriter within
the meaning of Section 15 of the Securities Act and (B) the indemnity agreement
of the Underwriters contained in Section 10(b) of this Agreement shall be deemed
to be for the benefit of directors of the Transaction Entities, officers of the
Company who have signed the Registration Statement and any person controlling
the Transaction Entities within the meaning of section 15 of the Securities Act.
Nothing in this Agreement is intended or shall be construed to give any person,
other than the persons referred to in this Section 14, any legal or equitable
right, remedy or claim under or in respect of this Agreement or any provision
contained herein.
15. Survival. The respective indemnities, representations, warranties
and agreements of the Transaction Entities and the Underwriters contained in
this Agreement or made by or on behalf on them, respectively, pursuant to this
Agreement, shall survive the delivery of and payment for the Shares and shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
16. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
17. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of New York.
18. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
31
<PAGE>
19. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
If the foregoing correctly sets forth the agreement between the
Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
PRENTISS PROPERTIES TRUST
By
----------------------------
Name:
Title:
PRENTISS PROPERTIES ACQUISITION
PARTNERS, L.P.
By: Prentiss Properties Trust, its general
partner
By
------------------------
Name:
Title:
PRENTISS PROPERTIES I, INC.
By
------------------------------
Name:
Title:
PRENTISS PROPERTIES RUN DEEP, INC.
By
------------------------------
Name:
Title:
32
<PAGE>
PRENTISS PROPERTIES LIMITED II, INC.
By
-------------------------------
Name:
Title:
Accepted:
Lehman Brothers Inc.
By
-------------------------------
Authorized Representatives
For itself and as Representatives
of the several Underwriters named
in Schedule 1 hereto
33
<PAGE>
SCHEDULE 1
<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................
Raymond James & Associates, Inc....................
Total......................................... 10,000,000
==========
</TABLE>
34
<PAGE>
[LETTERHEAD OF HUNTON & WILLIAMS]
EXHIBIT 5.1
March 26, 1997
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
1,150,000 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 ben validly authorized and, when
issued and sold as described in the Registration Statement, the Common Shares
will be legally issued, fully paid and non-assessable.
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>
FORM OF TAX OPINION
-------------------
March __, 1997
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
Prentiss Properties Trust
-------------------------
Qualification as
----------------
Real Estate Investment Trust
----------------------------
Ladies and Gentlemen:
We have acted as counsel to Prentiss Properties Trust, a Maryland real
estate investment trust (the "Trust"), in connection with the preparation of a
Form S-11 registration statement (the "Registration Statement") filed with the
Securities and Exchange Commission on March 26, 1997 (No. _________), as amended
through the date hereof, with respect to the offering and sale (the "Offering")
of 10,000,000 common shares of beneficial interest, par value $0.01 per share,
of the Trust (the "Common Shares"), and the Trust's contribution of (i) a
portion of the net proceeds of the Offering to its wholly-owned subsidiary,
Prentiss Properties I, Inc., a Delaware corporation ("PP I"), and PP I's
contribution of such proceeds to Prentiss Properties Acquisition Partners, L.P.,
a Delaware limited partnership (the "Operating Partnership"), in exchange for an
additional general partnership interest in the Operating Partnership and (ii) a
portion of the net proceeds of the Offering to the Operating Partnership in
exchange for an additional limited partnership interest in the Operating
Partnership. You have requested our opinion regarding certain U.S. federal
income tax matters in connection with the Offering.
The Operating Partnership owns, directly or indirectly, equity
interests in 97 office and industrial properties (the "Existing Properties") and
has contracted to acquire 29 additional office and industrial properties
<PAGE>
Prentiss Properties Trust
March __, 1997
Page 2
(the "Acquisition Properties," and together with the Existing Properties, the
"Properties"). The Operating Partnership owns and will own interests in certain
Properties through the following entities: (i) Run Deep Limited Partnership, a
Maryland limited partnership ("Run Deep LP"), (ii) Western Avenue Associates
Limited Partnership, a Maryland limited partnership ("Western LP"), (iii)
Riverside Investors, a Maryland general partnership ("Riverside"), (iv) PL
Properties Associates, L.P., a Delaware limited partnership ("PL LP"), (v)
Fairview Eleven Investors, L.P., a Delaware limited partnership ("Fairview LP"),
(vi) Broadmoor Austin Associates, a Texas general partnership ("Broadmoor"), and
(vii) Prentiss Properties Real Estate Fund I, L.P., a Delaware limited
partnership ("PP Fund I LP"). The Operating Partnership also owns interests in
(a) Prentiss Properties Management, L.P., a Texas limited partnership ("PPM
LP"), and (b) Riverside Industrial, LLC, a Delaware limited liability company
("Riverside LLC"). The nine entities described in this paragraph will be
referred to collectively herein as the "Noncorporate Subsidiaries."
The Operating Partnership owns all of the nonvoting stock of Prentiss
Properties Limited, Inc., a Delaware corporation formerly named Prentiss
Properties Run Deep, Inc. ("PPL"), representing 95% of the economic interests
therein. All of the voting stock of PPL, representing 5% of the economic
interests therein, is owned by a corporation wholly owned by Michael V.
Prentiss. The Operating Partnership also owns all of the nonvoting stock of
Prentiss Properties Limited II, Inc., a Delaware corporation ("PPL II"),
representing 95% of the economic interests therein. All of the voting stock of
PPL II, representing 5% of the economic interests therein, is owned by a
corporation wholly owned by Michael V. Prentiss.
In giving this opinion letter, we have examined the following:
1. the Trust's Amended and Restated Declaration of Trust, as duly
filed with the Department of Assessments and Taxation of the State of Maryland
on October 16, 1996;
2. the Trust's Bylaws;
<PAGE>
Prentiss Properties Trust
March __, 1997
Page 3
3. the Registration Statement, including the prospectus contained as
part of the Registration Statement (the "Prospectus");
4. the Second Amended and Restated Agreement of Limited Partnership
of the Operating Partnership, dated October 22, 1996 (the "Operating Partnership
Agreement"), among PP I, as general partner, and several limited partners;
5. the Third Amended and Restated Certificate of Limited Partnership
of Run Deep LP, dated October 22, 1996, between Run Deep Inc. and the Operating
Partnership;
6. the Agreement of Limited Partnership of Western LP, dated June
16, 1988, as amended on October 22, 1996, between the Operating Partnership, as
general partner, and Run Deep Inc., as limited partner;
7. the Partnership Agreement of Riverside, dated October 10, 1989,
as amended on October 22, 1996, between the Operating Partnership and PPL;
8. the Amended and Restated Limited Partnership Agreement of PL LP,
dated October 22, 1996, between the Operating Partnership, as general partner,
and PPL, as limited partner;
9. the Amended and Restated Limited Partnership Agreement of
Fairview LP, dated October 22, 1996, between the Operating Partnership, as
general partner, and PPL, as limited partner;
10. the Amended and Restated Joint Venture Agreement of Broadmoor,
dated May 9, 1990, as amended on September 20, 1990, September 10, 1996, and
October 22, 1996, among International Business Machines Corporation, the
Operating Partnership, and 11,000 Burnet Road Corporation;
11. the Amended and Restated Limited Partnership Agreement of PP Fund
I LP, between Prentiss Properties II, Inc., as general partner, and the
Operating Partnership, as limited partner;
<PAGE>
Prentiss Properties Trust
March __, 1997
Page 4
12. the Agreement of Limited Partnership of PPM LP, dated October 22,
1996, between the Operating Partner ship, as general partner, and PPL, as
limited partner;
13. the Limited Liability Company Operating Agreement of Riverside
LLC, dated December 21, 1994, between the Operating Partnership and Run Deep
Inc.;
14. the Articles of Incorporation and Bylaws of PPL;
15. the Articles of Incorporation and Bylaws of PPL II; and
16. such other documents as we have deemed neces sary or appropriate
for purposes of this opinion.
In connection with the opinions rendered below, we have assumed, with
your consent, that:
1. each of the documents referred to above has been duly authorized,
executed, and delivered; is authentic, if an original, or is accurate, if a
copy; and has not been amended;
2. during its taxable year ending December 31, 1997 and future
taxable years, the Trust has operated and will continue to operate in a manner
that makes and will continue to make the representations contained in a certifi-
cate, dated the date hereof and executed by a duly appointed officer of the
Trust (the "Officer's Certificate"), true for such years;
3. the Trust will not make any amendments to its organizational
documents, PP I's organizational documents, the Operating Partnership Agreement,
the partnership agreement or operating agreement of any Noncorporate Subsidiary
(together with the Operating Partnership Agreement, the "Partnership
Agreements"), PPL's organizational documents, or PPL II's organizational
documents after the date of this opinion that would affect its qualification as
a real estate investment trust (a "REIT") for any taxable year;
<PAGE>
Prentiss Properties Trust
March __, 1997
Page 5
4. each partner or member of the Operating Partnership and the
Noncorporate Subsidiaries (each, a "Partner") that is a corporation or other
entity has a valid legal existence;
5. each Partner has full power, authority, and legal right to enter
into and to perform the terms of the applicable Partnership Agreement and the
transactions contemplated thereby; and
6. no action will be taken by the Trust, the Operating Partnership,
the Noncorporate Subsidiaries, the Partners, PPL, or PPL II after the date
hereof that would have the effect of altering the facts upon which the opinions
set forth below are based.
In connection with the opinions rendered below, we also have relied
upon the correctness of the representations contained in the Officer's
Certificate. After reasonable inquiry, no facts have come to our attention that
would cause us to question the accuracy and completeness of the facts contained
in the documents and assumptions set forth above, the representations set forth
in the Officer's Certificate, or the Prospectus in a material way. In addition,
to the extent that any of the representations provided to us in the Officer's
Certificate are with respect to matters set forth in the Internal Revenue Code
of 1986, as amended (the "Code"), or the Treasury regulations thereunder (the
"Regulations"), we have reviewed with the individuals making such
representations the relevant portion of the Code and the applicable Regulations.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussion in
the Prospectus under the caption "Federal Income Tax Considerations" (which is
incorporated herein by reference), we are of the opinion that:
(a) the Trust qualified to be taxed as a REIT pursuant to sections 856
through 860 of the Code for its taxable year ended December 31, 1996, and
the Trust's organization and proposed method of operation will enable it to
continue to qualify as a REIT for its taxable year ending December 31, 1997
and in the future;
<PAGE>
Prentiss Properties Trust
March __, 1997
Page 6
(b) the descriptions of the law and the legal conclusions contained in
the Prospectus under the caption "Federal Income Tax Considerations" are
correct in all material respects, and the discussion thereunder fairly
summarizes the federal income tax considerations that are likely to be
material to a holder of the Common Shares; and
(c) the Operating Partnership and each Noncorporate Subsidiary will be
treated for federal income tax purposes as partnerships and not as
corporations or associations taxable as corporations or as publicly traded
partnerships.
We will not review on a continuing basis the Trust's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Trust's operations for any given taxable year will satisfy
the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code
and the Regulations, published administrative interpretations thereof, and
published court decisions. The Internal Revenue Service has not issued
Regulations or administrative interpretations with respect to various provisions
of the Code relating to REIT qualification. No assurance can be given that the
law will not change in a way that will prevent the Trust from qualifying as a
REIT, or the Operating Partnership or the Noncorporate Subsidiaries from being
classified as partnerships for federal income tax purposes.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Hunton & Williams
under the caption "Federal Income Tax Considerations" in the Prospectus. In
giving this consent, we do not admit that we are in the category of persons
whose consent is required by Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations promulgated thereunder by the Securities
and Exchange Commission.
<PAGE>
Prentiss Properties Trust
March __, 1997
Page 7
The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter. This opinion letter
is solely for the information and use of the addressee, and it may not be
distributed, relied upon for any purpose by any other person, quoted in whole
or in part or otherwise reproduced in any document, or filed with any
governmental agency without our express written consent.
Very truly yours,
<PAGE>
EXHIBIT 21
LIST OF SIGNIFICANT SUBSIDIARIES
--------------------------------
1. Prentiss Properties Acquisition Partners, L.P., a Delaware limited
partnership
2. Prentiss Properties I, Inc., a Delaware corporation
3. Prentiss Properties Limited II, Inc. a Texas corporation
4. Prentiss Properties Limited, Inc., a Delaware corporation
5. Prentiss Properties II, Inc., a Delaware corporation
6. Prentiss Properties Real Estate Fund, L.P., a Delaware limited partnership
7. Prentiss Properties Management, L.P., a Texas limited partnership
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-11
(File No. 33- ) of our reports dated (i) February 12, 1997 on our audits of
the consolidated and combined financial statements and financial statement
schedule of Prentiss Properties Trust and the Predecessor Company, (ii) March
12, 1997 on our audits of the combined statement of revenues and certain
operating expenses of the Dulles Properties, the Chicago Office Properties,
and the Natomas Properties and (iii) March 17, 1997 on our audit of the
combined statement of revenues and certain operating expenses of the Selected
1997 Pending Acquisitions. We also consent to the reference to our firm under
the caption "Experts."
Coopers & Lybrand L.L.P.
Dallas, Texas
March 26, 1997
