<PAGE>
Filed Pursuant To Rule 424(b)(5)
Registration No. 333-38079
PROSPECTUS SUPPLEMENT
(to Prospectus dated October 24, 1997)
6,000,000 SHARES
PRENTISS PROPERTIES TRUST [LOGO OF PRENTISS
PROPERTIES TRUST
COMMON SHARES OF BENEFICIAL INTEREST APPEARS HERE]
-----------------
Prentiss Properties Trust (together with its subsidiaries, 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 United States. As of November 18, 1997,
the Company owned interests in 154 office and industrial properties (the
"Properties") with approximately 15.7 million net rentable square feet. On
October 22, 1997, the Company acquired 15 office properties with 904,207 net
rentable square feet and a related office property management company that
were controlled by Terramics Property Associates ("Terramics").
All of the 6,000,000 common shares of beneficial interest of the Company,
par value $.01 per share (the "Common Shares"), offered hereby are being
offered by the Company (the "Offering"). The Common Shares are listed on the
New York Stock Exchange (the "NYSE") under the symbol "PP." On November 18,
1997, the last reported sale price of the Common Shares on the NYSE was $26.75
per share. See "Price Range of Common Stock and Distribution History." To
ensure that the Company qualifies as a REIT, ownership of Common Shares by any
single shareholder is limited to 8.5% of the number of Common Shares
outstanding. See "Description of Shares of Beneficial Interest" in the
accompanying Prospectus.
-----------------
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"RISK FACTORS" BEGINNING ON PAGE 3 IN THE ACCOMPANYING PROSPECTUS.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------
Lehman Brothers Inc. (the "Underwriter") has agreed to purchase from the
Company 6,000,000 Common Shares for an aggregate purchase price $150.0
million. The Company has granted the Underwriter an option for 30 days to
purchase up to 900,000 additional Common Shares, solely to cover over-
allotments, if any. If such option is exercised in full, the total proceeds to
the Company will be $172.5 million, before deducting expenses payable by the
Company, estimated to be approximately $900,000.
The Underwriter proposes to offer the 6,000,000 Common Shares included in
the Offering from time to time for sale in one or more transactions on the
NYSE, in the over-the-counter market or otherwise, at market prices prevailing
at the time of sale, at prices related to prevailing market prices or at
negotiated prices, subject to prior sale when, as and if delivered to and
accepted by the Underwriter. See "Underwriting."
The Company and the Operating Partnership have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
-----------------
The Common Shares offered by this Prospectus Supplement are offered by the
Underwriter, subject to prior sale, when, as and if delivered to and accepted
by the Underwriter and subject to its right to reject orders in whole or in
part. 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
November 24, 1997.
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LEHMAN BROTHERS
November 18, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS 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 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 "PLAN OF DISTRIBUTION" IN THE
ACCOMPANYING PROSPECTUS.
S-2
<PAGE>
The following information is qualified in its entirety by the more detailed
information appearing in the accompanying Prospectus or incorporated herein
and therein by reference. Unless the context otherwise requires, all
references in this Prospectus Supplement to the "Company" shall mean Prentiss
Properties Trust and its subsidiaries on a combined basis, including (a)
Prentiss Properties I, Inc., (b) Prentiss Properties Acquisition Partners,
L.P. (the "Operating Partnership") and its subsidiaries, (c) Prentiss
Properties Limited, Inc. and its affiliates, and (d) entities through which
the Operating Partnership owns interests in certain of the properties.
This Prospectus Supplement 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 Company's actual results or experiences
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 3 of the accompanying
Prospectus.
THE COMPANY
The Company is a self-administered and self-managed REIT that acquires,
owns, manages, leases, develops and builds office and industrial properties
throughout the United States. As of November 18, 1997, the Company owned
interests in a diversified portfolio of 154 primarily suburban Class A office
and suburban industrial properties containing approximately 15.7 million net
rentable square feet. The Properties are located in 18 major U.S. markets and
consist of 79 office buildings (the "Office Properties") containing
approximately 8.5 million net rentable square feet and 75 industrial buildings
(the "Industrial Properties") containing approximately 7.2 million net
rentable square feet. As of September 30, 1997, the Office Properties
(including properties acquired on October 22 and November 13, 1997) were
approximately 95% leased to 676 tenants, and the Industrial Properties were
approximately 95% leased to 151 tenants. The Company manages approximately
46.8 million net rentable square feet in 411 office and industrial properties
that are owned by the Company and by third parties and that are leased to
approximately 2,800 tenants. The Company also has five office properties and
five industrial properties under development, which together will contain
approximately 1.6 million net rentable square feet.
RECENT DEVELOPMENTS
RECENT AND PENDING ACQUISITIONS
During the third quarter ended September 30 1997, the Company acquired 13
Office Properties with a total of approximately 1.4 million net rentable
square feet for total acquisition costs of approximately $165.2 million.
On October 22, 1997, the Company acquired 15 office properties in suburban
Philadelphia containing approximately 904,207 square feet, rights to acquire
additional land that can accommodate approximately 1.1 million square feet of
future office development, and the management infrastructure and personnel of
the seller, Terramics (the "Terramics Portfolio"). Under the terms of the
acquisition agreement, the Company acquired all of the outstanding ownership
interests in Terramics and its affiliated entities for an aggregate purchase
price, including closing costs, of approximately $134.4 million, including
$13.8 million in assumed debt, $106.3 million in cash, and $14.3 million in
units of limited partnership interest in the Operating Partnership ("Units").
On November 13, 1997, the Company acquired two office properties in San
Diego, California containing 89,755 net rentable square feet for total
acquisition costs of $14.5 million, and an adjacent development parcel that
can support approximately 41,000 net rentable square feet of office
development.
The Company also has agreements to acquire three additional office
properties in Los Angeles, California and Denver, Colorado, with an aggregate
of 279,460 net rentable square feet for total acquisition costs of $38.7
million, and six industrial properties in San Jose, California with an
aggregate of 382,234 net rentable square feet for total acquisition costs of
$27.0 million. The Company anticipates financing these acquisitions with
borrowings under its line of credit or other credit facilities.
S-3
<PAGE>
FINANCING ACTIVITIES
The Company has received a preliminary indication of terms to modify its
existing $150.0 million line of credit to increase the aggregate borrowing
limit to $300.0 million, convert the facility from a collateralized to an
unsecured loan and reduce the interest rate from LIBOR plus 175 basis points
to LIBOR plus 137.5 basis points, with further decreases available upon
achievement of certain credit ratings. These preliminary terms also indicate
that the maturity date on the modified line of credit will be extended from
October 1999 to three years from closing of the proposed modification.
On July 29, 1997, the Company closed on a secured credit facility with an
affiliate of Lehman Brothers Inc. ("Lehman") providing for collateralized
financing of up to $120.0 million (the "New Acquisition Loan") to fund the
acquisition of properties and to repay amounts outstanding under the Company's
existing $150.0 million line of credit. The New Acquisition Loan currently is
collateralized by sixteen properties, bears interest at a rate of LIBOR plus
125 basis points and will mature on August 29, 1998. As of September 30, 1997,
the Company had drawn the entire $120.0 million available under the New
Acquisition Loan. The Company has received a non-binding indication of terms
from an affiliate of Lehman to convert a substantial portion of the New
Acquisition Loan to a seven year permanent loan. In anticipation of converting
the New Acquisition Loan into a permanent credit facility, the Company has
entered into two interest rate hedge agreements in the aggregate notional
amount of $110.0 million. Pursuant to these hedge agreements, the Company has
fixed its base cost of seven year funds at an average of 6.25% (before adding
the applicable spread).
On October 6, 1997, the Company closed on a $133.0 million credit facility
(the "Terramics Bridge Loan"), primarily to fund the acquisition of the
Terramics Portfolio. The Terramics Bridge Loan is unsecured, bears interest at
LIBOR plus 175 basis points and will mature in April 1998. The Company has an
option to extend the Terramics Bridge Loan until April 1999, under certain
circumstances. As of October 22, 1997, the entire loan amount had been funded.
The Company expects to repay the Terramics Bridge Loan in part from proceeds
of this Offering and in part from a $60.0 million loan it anticipates
receiving from Connecticut General Life Insurance Company ("CIGNA"), which
would be collateralized by 11 of the Terramics Portfolio properties. The
Company has received a commitment from CIGNA for a six year loan at a rate of
6.80% and anticipates closing the loan from CIGNA on or about November 30,
1997.
While the Company expects that its existing line of credit will be modified,
that it will close the CIGNA loan and that the New Acquisition Loan will be
converted into a permanent credit facility, there can be no assurances as to
whether or when these financings will occur. See "Risk Factors--Real Estate
Financing Risks" in the accompanying Prospectus.
USE OF PROCEEDS
The net cash proceeds to the Company from the sale of the Common Shares
offered hereby are estimated to be approximately $149.1 million (approximately
$171.6 million if the Underwriter's over-allotment option is exercised in
full), after deducting the estimated expenses of $900,000 payable by the
Company. The Company intends to contribute or otherwise transfer the net
proceeds of the sale of the Common Shares offered hereby to the Operating
Partnership in exchange for an equal number of Units. The Operating
Partnership will use the proceeds to repay indebtedness incurred in connection
with the acquisitions of certain properties under its $150 million line of
credit, which currently matures in October 1999, and the Terramics Bridge
Loan, which currently matures in April 1998. As of October 31, 1997, these
borrowings had a weighted average annual interest rate of 7.41%. Pending such
application, the Company may invest the net proceeds in short-term investments
such as commercial paper, government securities or money market funds that
invest in government securities.
S-4
<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 November 18, 1997, the last reported sales price per Common
Share on the NYSE was $26.75. There were approximately 200 holders of record
of the Common Shares on November 18, 1997. The table below sets forth the
quarterly high and low sales price per Common Share reported on the NYSE and
the distributions declared by the Company with respect to each such period.
<TABLE>
<CAPTION>
DISTRIBUTION
PER COMMON
QUARTER ENDED HIGH LOW SHARE
------------- ------- -------- ------------
<S> <C> <C> <C>
December 31, 1996 (from October 17, 1996).... $25 1/8 $20 1/2 $.31(1)
March 31, 1997............................... $28 1/4 $24 5/8 $.40
June 30, 1997................................ $26 3/8 $23 $.40
September 30, 1997........................... $29 3/4 $24 3/16 $.40
December 31, 1997 (through November 18,
1997)....................................... $29 5/8 $25 3/8 (2)
</TABLE>
- --------
(1) The Company made a distribution of $.31 per Common Share on January 17,
1997 for the period from October 22, 1996 (the closing of the Company's
initial public offering) 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) The Company anticipates that the record date for the fourth quarter
dividend will be December 16, 1997.
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 and capital requirements, the annual
distribution requirements under the REIT provisions of the Internal Revenue
Code of 1986, as amended, (the "Code") and such other factors as the Board of
Trustees deems relevant. See "Risk Factors--Changes in Policies Without
Shareholder Approval" in the accompanying Prospectus.
S-5
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, on an historical and as adjusted basis to give effect to
(i) all Property acquisitions completed subsequent to September 30, 1997, and
the current borrowings under the Mortgage Loan and the New Acquisition 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 incorporated herein by reference.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
(IN THOUSANDS)
------------------------
HISTORICAL AS ADJUSTED
---------- -----------
<S> <C> <C>
DEBT................................................ $432,641(1) $ 478,973(1)
MINORITY INTEREST................................... 57,955 72,484
SHAREHOLDERS' EQUITY:
Common Shares, $.01 par value per share;
100,000,000 authorized; 26,289,053 issued and
outstanding on a historical basis and 32,289,053
issued and outstanding as adjusted(2)............ 263 323
Preferred Shares, $.01 par value per share,
20,000,000 authorized, no shares issued or
outstanding...................................... -- --
Additional paid-in capital........................ 457,892 606,748
Distribution in excess of accumulated earnings.... (4,087) (4,087)
-------- ----------
Total shareholders' equity...................... 454,068 602,984
-------- ----------
Total capitalization............................ $944,664 $1,154,441
======== ==========
</TABLE>
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(1) Excludes the Company's pro rata share of $140.0 million of indebtedness of
the partnership that leases the Broadmoor Austin Properties. For more
detailed information on the operations and accounts of Broadmoor Austin,
refer to Note 6 to the Company's and the Predecessor Company's financial
statements incorporated by reference herein.
(2) Outstanding Common Shares do not include Common Shares reserved for
issuance upon (i) the possible exchange of 3,295,995 and 3,826,057 Units
issued and outstanding on an historical and as adjusted basis,
respectively and (ii) the exercise of 2,250,937 options granted pursuant
to the 1996 Share Incentive Plan.
S-6
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
This discussion supplements the discussion set forth in the accompanying
Prospectus under the heading "Federal Income Tax Considerations." In the
opinion of Hunton & Williams, the Company 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 Company's organization and proposed method of
operation will enable it 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 Internal Revenue
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 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 stock ownership, the various
qualification tests imposed under the Code. 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 the failure to qualify as a REIT, see
"Federal Income Tax Considerations--Failure to Qualify" in the accompanying
Prospectus.
UNDERWRITING
Subject to the terms and conditions contained in an Underwriting Agreement
(the "Underwriting Agreement") the Company has agreed to sell to Lehman
Brothers Inc., and Lehman Brothers Inc. has agreed to purchase from the
Company, 6,000,000 Common Shares.
Under the terms and conditions of the Underwriting Agreement, the
Underwriter is committed to take and pay for all of the Common Shares offered
hereby, if any are taken.
The Underwriter proposes to offer the 6,000,000 Common Shares included in
the Offering from time to time for sale in one or more transactions on the
NYSE, in the over-the-counter market or otherwise, at market prices prevailing
at the time of sale, at prices related to prevailing market prices or at
negotiated prices, subject to prior sale when, as and if delivered to and
accepted by the Underwriter. In connection with the sale of the 6,000,000
Common Shares included in the Offering, the Underwriter may be deemed to have
received compensation from the Company in the form of underwriting discounts.
The Underwriter may effect such transactions by selling Common Shares to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the Underwriter and/or the
purchasers of such Common Shares for whom they may act as agents or to whom
they may sell as principal.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus Supplement, to purchase up to an
additional 900,000 Common Shares, solely to cover over-allotments, if any.
The Company has agreed that, for a period of 90 days from the date of this
Prospectus Supplement, it will not, directly or indirectly, offer for sale,
contract to sell, sell or otherwise dispose of any Common Shares or securities
convertible into or exercisable or exchangeable for Common Shares in an
underwritten offering to the public (other than the shares offered hereby and
any Units or Common Shares that may be issued in connection with any
acquisition of a property or business), or sell or grant options, rights or
warrants with respect to any Common Shares (except pursuant to a customary
compensation arrangements and employee benefit plans) without the prior
written consent of the Underwriter. Each of the officers, Trustees and
affiliates of the Company who acquired Units in connection with the
organization of the Company and related transactions has entered into
agreements with the Underwriter 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.
S-7
<PAGE>
The Company and the Operating Partnership have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriter may be required
to make in respect thereof.
The Underwriter and certain of its affiliates have from time to time
performed, and may continue to perform in the future, various investment
banking and commercial 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 $1.8 million. In
April 1997, the Company reached an agreement with an affiliate of Lehman to
provide the New Acquisition Loan, with an aggregate principal balance of up to
$120 million. On July 29, 1997, the Company closed on the New Acquisition Loan
with initial borrowings of $51.9 million and has since drawn the full $120
million.
The Common Shares are listed on the NYSE under the symbol "PP."
LEGAL MATTERS
The legality of the Common Shares offered hereby 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 Roger & Wells will
rely on Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland, as to certain
matters of Maryland law.
EXPERTS
The consolidated and combined financial statements of the Company as of
December 31, 1996, and the period from October 22, 1996 (inception of
operations) through December 31, 1996, and the Company's predecessors as of
December 31, 1995, and for the period January 1, 1996 through October 21,
1996, and the years ended December 31, 1995 and 1994, incorporated by
reference in its annual report on Form 10-K for the year ended December 31,
1996, and the combined statements of revenue and certain operating expenses
included in the Company's Current Reports on Form 8-K/A, dated December 31,
1996 and April 2, 1997, and the Company's Current Report on Form 8-K dated
October 22, 1997, and the Company's Registration Statement on Form S-11, dated
April 29, 1997, have been audited by Coopers & Lybrand, L.L.P., independent
accountants, as set forth in their reports thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such reports given upon the authority of
such firms as experts in accounting and auditing.
S-8
<PAGE>
PROSPECTUS
PRENTISS PROPERTIES TRUST
$550,000,000
COMMON SHARES OF BENEFICIAL INTEREST
PREFERRED SHARES OF BENEFICIAL INTEREST
------------------
Prentiss Properties Trust (together with its subsidiaries, the "Company")
may offer from time to time in one or more series hereunder (i) its Common
Shares of Beneficial Interest, $.01 par value per share ("Common Shares"), and
(ii) its Preferred Shares of Beneficial Interest, $.01 par value per share
("Preferred Shares") having an aggregate public offering price not to exceed
$550,000,000, on terms to be determined at the time of sale. The number of
Preferred Shares and Common Shares offered hereby (collectively, the "Offered
Securities") may be offered, separately or as units with other Offered
Securities, in separate series and in amounts, at prices and on terms to be
determined at the time of sale and set forth in the applicable Prospectus
Supplement. The Company's Common Shares are listed on the New York Stock
Exchange ("NYSE") under the symbol "PP."
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, (i) in the case of Common
Shares, the aggregate number of shares offered, the initial public offering
price and other terms thereof; (ii) in the case of Preferred Shares, the
specific designation and stated value, the number of shares or fractional
interests therein, any dividend, liquidation preference, redemption, sinking
fund, voting and other rights, the terms for conversion into or exchange for
other securities, if any, including terms of any securities into or for which
they are convertible or exchangeable, and other terms thereof, the initial
public offering price and any securities exchange listings; and (iii) in the
case of all Offered Securities, whether such Offered Securities will be
offered separately or as a unit with other Offered Securities. In addition,
such specific terms may include limitations on direct or beneficial ownership
and restrictions on transfer of the Offered Securities.
The applicable Prospectus Supplement will also contain information, where
applicable, concerning material United States federal income tax
considerations and information relating to the listing on a securities
exchange of the Offered Securities covered thereby.
See "Risk Factors" beginning on page 3 for certain factors relevant to an
investment in the Offered Securities.
The Offered Securities may be offered directly, through agents designated
from time to time by the Company, or to or through underwriters or dealers. If
any designated agents or any underwriters are involved in the sale of Offered
Securities, they will be identified and their compensation will be described
in the applicable Prospectus Supplement. See "Plan of Distribution." No
Offered Securities may be sold without delivery of the applicable Prospectus
Supplement describing such Offered Securities and the method and terms of the
offering thereof.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIESAND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HASTHE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------
THE DATE OF THIS PROSPECTUS IS OCTOBER 24, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE SECURITIES OFFERINGS MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
OFFERED SECURITIES, INCLUDING PURCHASES OF THE OFFERED SECURITIES TO STABILIZE
THEIR MARKET PRICES, PURCHASES OF THE OFFERED SECURITIES TO COVER SOME OR ALL
OF SHORT POSITIONS IN THE OFFERED SECURITIES MAINTAINED BY THE RESPECTIVE
UNDERWRITERS OF THE SECURITIES OFFERINGS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
FORWARD-LOOKING STATEMENTS
This Prospectus, any Prospectus Supplement and the documents incorporated by
reference herein may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including, without limitation, statements containing the
words "believes," "anticipates," "expects" and words of similar import. Such
forward-looking statements relate to future events, the future financial
performance of the company, and involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of the company or industry to be materially different from any
future results, performance or achievements expressed or implied by such
forward looking statements. Prospective investors should specifically consider
the various factors identified in the Prospectus, any Prospectus Supplement,
and the documents incorporated by reference herein, which could cause actual
results to differ, including particularly those discussed in the section
entitled "Risk Factors." The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
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 United States. The Company
operates through Prentiss Properties Acquisition Partners, L.P. (the
"Operating Partnership"), of which a subsidiary of the Company is the sole
general partner and in which it owns an approximately 89% interest, and
through Prentiss Properties Limited, Inc., and its affiliates (the "Manager").
As of October 16, 1997 the Company owned interests in a diversified
portfolio of 137 office and industrial properties (the "Properties")
containing approximately 14.7 million net rentable square feet. The Properties
are located in 15 major U.S. markets and consist of 62 office buildings
containing approximately 7.5 million net rentable square feet and 75
industrial buildings containing approximately 7.2 million net rentable square
feet. As of September 30, 1997, the Office Properties were approximately 95%
leased to 556 tenants, and the Industrial Properties were approximately 95%
leased to 151 tenants. The Company manages approximately 45.8 million square
feet in 389 office and industrial properties that are owned by the Company and
by third parties, and that are leased to approximately 2,700 tenants.
The Company is a Maryland real estate investment trust. Its executive
offices are located at 3890 W. Northwest Highway, Suite 400, Dallas, Texas
75220, and its telephone number is (214) 654-0886.
2
<PAGE>
RISK FACTORS
An investment in the Offered Securities 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 the Offered Securities.
RELIANCE ON MAJOR TENANT
On a pro forma basis for the year ended December 31, 1996, the Company's
largest tenant, International Business Machines Corporation ("IBM"), accounted
for approximately 10.6% of the total base rent (the "Total Base Rent") in
1996, from the Properties owned at September 30, 1997 (assuming such
properties were owned by the Company since January 1, 1996). The Company has
two leases with IBM, one of which expires in 2009 and the other in 2006. The
Company would be adversely affected in the event of bankruptcy or insolvency
of, or a downturn in the business of, any major tenant which resulted in a
failure or delay in the tenant's rent payments.
GEOGRAPHIC CONCENTRATIONS
Properties and properties which the Company currently has plans to acquire
that provide 16%, 10% and 10% of the Company's 1996 Total Base Rent are
located in the Dallas, Texas, suburban Maryland and suburban Philadelphia
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 these markets.
The Company's revenues and the value of its properties (including the
properties to be acquired) 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).
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. 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. 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 acquisition or
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.
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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 or any properties acquired in the future 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 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, including properties to be acquired in the
future, are and will be 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 shareholders 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, including properties that may be acquired, the
leases may not be renewed, the space may not be relet or the terms of renewal
or reletting (including the costs of required renovations) may be less
favorable than current lease terms. Leases on a total of approximately 3% and
16% of the total net rentable square feet in the Properties and properties
which the Company currently has plans to acquire will expire in the remainder
of 1997 and in 1998, respectively. The Company has established
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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 a particular property or
properties, if the rental rates upon such renewal or reletting were
significantly lower than expected rates or if its reserves for these purposes
proved inadequate, then the Company's cash flow and ability to make expected
distributions to shareholders may be adversely affected.
Competition. Numerous office and industrial properties compete with the
Properties in attracting tenants to lease space. Some of these competing
properties are newer or better located than the Company's Properties and the
owners of those properties may be better capitalized and have access to
greater financial resources than the Company.
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 or diminish the value of that
property. 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 properties acquired in the future, prior to their acquisition. The purpose
of Phase I ESAs is to identify potential sources of contamination for which
the Company may be responsible and to assess the status of environmental
regulatory compliance. For a number of the Properties, the Phase I ESAs
referenced prior Phase II 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.
Certain land (the "Plant Site") in the vicinity of and 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 south of the
Properties (the "Plant Site Affected Area").
On September 25, 1997, the Company was notified that an undefined area,
which may or may not include the Los Angeles Industrial Properties, associated
with the operation of the Plant will be listed on the National Priorities List
(the "NPL") effective October 27, 1997. At this time, the EPA has not
indicated the precise boundaries of the NPL site. The Company is currently
evaluating the legal basis for challenging the listing. All past and present
owners of the land underlying the Los Angeles Industrial Properties, including
the United States Government, Dow, Shell and the former owner, LAPCO
Industrial Parks ("LAPCO"), from whom the Company purchased the Los Angeles
Industrial Properties, are Potentially Responsible Parties for the
investigation and remediation of the Plant Site. Shell has agreed to (i)
indemnify and hold harmless any successor of LAPCO, 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 Plant Site, and (ii) indemnify and hold harmless LAPCO and
any successor of LAPCO, including the Company, from any liability arising out
of any third party tort claims for personal injury or property damage.
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Except as noted above, the ESAs have not revealed any environmental
condition, liability or compliance concern that the Company believes could
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
the properties to be acquired do not reveal all environmental conditions,
liabilities or compliance concerns or that there are material environmental
conditions, liabilities or compliance concerns that arose at such property
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 properties it has contracted to acquire are
substantially in compliance with these requirements, a determination that the
Company is not in compliance with the ADA could result in the imposition of
fines or an award of damages to private litigants. If the Company were
required to make unanticipated expenditures to comply with the ADA, the
Company's cash flow and the amounts available for distributions to its
shareholders may be adversely affected.
Changes in Laws. Because increases in income, service or transfer taxes are
generally not passed through to tenants under leases, such increases may
adversely affect the Company's cash flow and its ability to make distributions
to shareholders. The Properties also are subject to various federal, state and
local regulatory requirements and to state and local fire and life-safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties and the properties
it currently has plans to acquire are now 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 properties that it will acquire with
policy specifications and insured limits customarily carried for similar
properties. The Company intends to carry similar insurance policies on the
properties it acquires in the future. There are, however, certain types of
losses (such as from wars or earthquakes in properties located outside of
California) that may be either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, the
Company could lose both its capital invested in a property, as well as the
anticipated future revenue from such property, and would continue to be
obligated on any mortgagee indebtedness or other obligations related to the
property. Any such loss could adversely affect the business of the Company,
its financial condition and its 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 leases 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. Affiliates of the Company's
predecessors own 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
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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 Internal Revenue Code of
1986, as amended (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 shareholders.
REAL ESTATE FINANCING RISKS
Variable Rate Debt. The Company has incurred and may incur in the future
indebtedness that 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 has entered into two interest
rate hedge agreements covering $110 million of its outstanding indebtedness.
Pursuant to these hedge agreements, the Company has fixed its cost of seven
year funds (before adding the spread) at an average of 6.25%.
Debt Financing and Potential Adverse Effects on Cash Flows and
Distributions. The Company is 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. 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, Bridge Loans and Risks Associated with Sale or
Foreclosure. If new developments are financed through construction loans or if
acquisitions are financed with short-term bridge loans in anticipation of
later, permanent financing, there is a risk that upon completion of
construction or the maturity of the bridge loans, permanent financing 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 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.
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RISK THAT PENDING ACQUISITIONS WILL NOT CLOSE
The Company's acquisition contracts generally are subject to customary
closing conditions and may be subject to other conditions as well. Therefore,
there can be no assurances that the Company will complete a contemplated
acquisition. To the extent that the Company plans to use the proceeds from the
sale of Offered Securities to fund an acquisition, and the Company does not
complete the contemplated acquisition for whatever reason, the net proceeds
from the offering designated for the completion of such acquisition will have
no specific designated use. 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 contemplated acquisitions and is unable
to locate additional available acquisitions, the Company's ability to increase
distributable cash flow per share would be adversely affected.
RISKS ASSOCIATED WITH THE ACQUISITION OF SUBSTANTIAL NEW PROPERTIES AND LACK
OF OPERATING HISTORY
The Company's ability to manage its growth effectively will require it to
integrate successfully its new acquisitions into its existing management
structure. Many of the Properties have relatively short or no operating
history under management by the Company or the Company's predecessors and
their affiliates prior to their acquisition by the Company. The Company has
had limited control over the operation of these buildings and buildings that
will be acquired in the future, and such properties may have characteristics
or deficiencies unknown to the Company affecting their valuation or revenue
potential. The operating performance of acquired properties may decline under
the Company's management.
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 8.5% of the number
of outstanding Common Shares, other than Michael V. Prentiss, who currently
may own up to 15% of the number of outstanding Common Shares, and no more than
9.8% of the number of outstanding Preferred Shares of any series (the
"Ownership Limitation"). The Board of Trustees may, but is not required to,
decrease the ownership limit applicable to Mr. Prentiss' ownership of Common
Shares to a minimum of 9.8% upon an increase in the number of outstanding
Common Shares or a reduction of the number of Common Shares owned, directly or
indirectly, by Mr. Prentiss. Upon any such adjustment, the Ownership
Limitation applicable to other shareholders with respect to the Common Shares
will be increased proportionately to a maximum of 9.8% of the number of
outstanding Common Shares. The Company's Board of Trustees, upon receipt of a
ruling from the Internal Revenue Service (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
Ownership and 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, inhibiting 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
interests of the shareholders. See "Description of Shares of Beneficial
Interest--Restrictions on Transfer."
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Potential Effects of Staggered Board. The Company's Board of Trustees is
divided into three classes, with only a portion of the Board standing for
election at each annual meeting. 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.
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 that the Company has the authority to
issue, (ii) cause the Company to issue additional authorized but unissued
Preferred or Common Shares and (iii) classify or reclassify any unissued
Common or 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 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.
TAX RISKS
Failure to Qualify as a REIT. The Company has operated and intends to
continue to operate so as to continue 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 sale of Offered Securities made pursuant to this
Prospectus 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.
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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.
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 sale of Offered
Securities made pursuant to this Prospectus 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 Noncorporate Subsidiaries."
CONFLICTS OF INTERESTS IN THE BUSINESS OF THE COMPANY
Risk of Differing Objectives Between Prentiss Principals and the Company
Upon Sale, Refinancing or Prepayment of Indebtedness of Properties. Messrs.
Prentiss, August and DuBois (the "Prentiss Principals"), who are senior
executive officers of the Company, and their 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 certain properties that were contributed to the
Operating Partnership 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 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., the Prentiss Principals) 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. The Company has agreed
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
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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.
CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL; NO LIMITATION ON DEBT
The investment, financing, borrowing and distribution policies, 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 Board of Trustees has adopted 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 (the "Debt
Limitation"), 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 Offered
Securities.
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. Certain assets of the Company's predecessors 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 Offered
Securities in the offerings made pursuant to this prospectus. As of September
30, 1997, management of the Company as a group beneficially owned
approximately 11% of the total issued and outstanding Common Shares and Units
(which, except under certain circumstances, will not be exchangeable by the
holders for cash or, at the election of the General Partner, Common Shares on
a one-for-one basis until October 23, 1998). 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 "Risk Factors--Conflicts of Interests in the Formation
Transactions and the Business of the Company."
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.
11
<PAGE>
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 Mr. 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. Mr. Prentiss, as the
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.
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 certain
companies and partnerships affiliated with the Company's predecessors. The
Continuing Investors are not 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 are not permitted to offer, sell, contract to sell or
otherwise dispose of Units, except in certain circumstances, until October 22,
1998. 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 2,038,438 Common Shares have been granted to
certain executive officers, employees and trustees of the Company. 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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<PAGE>
USE OF PROCEEDS
The Company will contribute the net proceeds of any sale of Offered
Securities to the Operating Partnership in exchange for additional Units of
partnership interest. Unless otherwise set forth in the applicable Prospectus
Supplement, such net proceeds will be used by the Company and the Operating
Partnership for general corporate purposes, which may include the acquisition
of additional properties, portfolios of properties, or management companies,
repayment of indebtedness, and making improvements to properties.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's (or the Company's
predecessors') consolidated ratios of earnings to combined fixed charges and
preferred stock dividends for the six months ended June 30, 1997, and for each
of the last five fiscal years. There were no Preferred Shares outstanding for
any of the periods shown below. Accordingly, the ratio of earnings to fixed
charges and Preferred Share dividends is identical to the ratio of earnings to
fixed charges. The Company data from the period prior to the IPO and the
commencement of its intent to qualify as a REIT on October 22, 1996, reflects
the operations of the Company's predecessors.
<TABLE>
<CAPTION>
THE COMPANY PREDECESSOR COMPANY
--------------------------------- ------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------
SIX MONTHS
ENDED OCTOBER 22, 1996 TO JANUARY 1, 1996 TO
JUNE 30, 1997 DECEMBER 31, 1996 OCTOBER 21, 1996 1995 1994 1993 1992
------------- ------------------- ------------------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
fixed charges.......... 3.19x 7.90x 1.80x 3.57x 3.30x 2.98x (1)
</TABLE>
- --------
(1) For the year ended December 31, 1992, the Company's predecessors' earnings
were inadequate to cover fixed charges by $3,176,000.
The consolidated ratio of earnings to fixed charges was computed by dividing
earnings by fixed charges. Fixed charges consist of interest costs, whether
expensed or capitalized, and amortization of line of credit fees and loan
commitment fees.
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<PAGE>
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
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. At September
30, 1997, there were 26,289,053 Common Shares issued and outstanding and no
Preferred Shares issued and outstanding.
The following information with respect to the shares of beneficial interest
of the Company is subject to the detailed provisions of the Company's
Declaration of Trust and Amended and Restated Bylaws as currently in effect.
These statements do not purport to be complete, or to give full effect to the
provisions of statutory or common law, and are subject to, and are qualified
in their entirety by reference to, the terms of such Declaration of Trust and
Bylaws.
As a Maryland REIT, the Company is subject to various provisions of the
Maryland General Corporation Law (the "MGCL") and Title 8, as amended from
time to time, of the Corporations and Associations Article of the Annotated
Code of Maryland (the "Maryland REIT Law"). 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 such claim or
liability. In addition, it is the Company's policy to include a clause in its
contracts which provides that shareholders assume no personal liability for
obligations entered into on behalf of the Company. However, with respect to
tort claims, contractual claims where shareholder liability is not so negated,
claims for taxes and certain statutory liability, the shareholders may, in
some jurisdictions, be personally liable to the extent that such claims are
not satisfied by the Company. 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 shares of beneficial interest and to the provisions of the Company's
Declaration of Trust regarding Shares-in-Trust (as defined below), holders of
Common Shares are entitled to receive dividends 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. The Company intends to
pay quarterly dividends to its shareholders.
The holders of Common Shares are entitled to one vote per share on all
matters voted on by shareholders, including elections of directors. Except as
otherwise required by law or provided in any resolution adopted by the Board
of Directors with respect to any series of Preferred Shares, the holders of
such Common Shares exclusively possess all voting power. The Declaration of
Trust does not provide for cumulative voting in the election of directors.
Subject to any preferential rights of any outstanding series of Preferred
Shares, the holders of Common Shares are entitled to such distributions as may
be declared from time to time by the Board of Trustees from funds available
therefor, and upon liquidation are entitled to receive pro rata all assets of
the Company available for distribution to such holders. All shares of
beneficial interest issued will be fully paid and nonassessable, and the
holders thereof will not have preemptive rights.
Pursuant to the Maryland REIT Law, a REIT 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
14
<PAGE>
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 REIT'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 removal of trustees (which requires the affirmative vote
of the holders of two-thirds of the outstanding voting shares of the Company);
(b) 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 (c) the termination of the Company (which requires
the affirmative vote of two-thirds of all the votes entitled to be cast on the
matter). A declaration of trust may permit the trustees by a two-thirds vote
to amend the declaration of trust from time to time to qualify as a REIT under
the Code or the Maryland REIT Law without the affirmative vote or written
consent of the shareholders. The Company's Declaration of Trust permits such
action by the Board of Trustees.
The Transfer Agent for the Common Shares is First Chicago Trust Company of
New York. The Common Shares are traded on the NYSE under the symbol "PP." The
Company will apply to the NYSE to list the additional shares of Common Shares
to be sold pursuant to any Prospectus Supplement, and the Company anticipates
that such shares will be so listed.
PREFERRED SHARES
Preferred Shares may be issued 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 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 Shares-in-Trust, 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 series. The Board could authorize the issuance of
Preferred Shares with terms and conditions that could have the effect of
delaying, deferring or preventing a takeover or other transaction which
holders of some, or a majority, of the Common Shares might believe to be in
their best interests or in which holders of some, or a majority, of the Common
Shares might receive a premium for their Common Shares over the then-market-
price of such Common Shares.
The Preferred Shares will have the dividend, liquidation, redemption,
conversion and voting rights set forth below unless otherwise provided in the
Prospectus Supplement relating to a particular series of Preferred Shares.
Reference is made to the Prospectus Supplement relating to the particular
series of Preferred Shares offered thereby for specific terms, including: (i)
the title and liquidation preference per share of such Preferred Shares and
the number of shares offered; (ii) the price at which such shares will be
issued; (iii) the dividend rate (or method of calculation), the dates on which
dividends shall be payable and the dates from which dividends shall commence
to accumulate; (iv) any redemption or sinking fund provisions of such series;
(v) any conversion provisions of such series; and (vi) any additional
dividend, liquidation, redemption, sinking fund and other rights, preferences,
privileges, limitations and restrictions of such series.
The Preferred Shares will, when issued, be fully paid and nonassessable.
Unless otherwise specified in the Prospectus Supplement relating to a
particular series of Preferred Shares, each series will rank on a parity as to
dividends and distributions in the event of a liquidation with each other
series of Preferred Shares and, in all cases, will be senior to the Common
Shares.
Dividend Rights. Holders of Preferred Shares of each series will be entitled
to receive, when, as and if declared by the Board of Directors, out of assets
of the Company legally available therefor, cash dividends at such rates and on
such dates as are set forth in the Prospectus Supplement relating to such
series of Preferred Shares. Such rate may be fixed or variable or both and may
be cumulative, noncumulative or partially cumulative.
15
<PAGE>
If the applicable Prospectus Supplement so provides, as long as any
Preferred Shares are outstanding, no dividends will be declared or paid nor
will any distributions be made on the Common Shares, other than a dividend
payable in Common Shares, unless the accrued dividends on each series of
Preferred Shares have been fully paid or declared and set apart for payment
and the Company shall have set apart all amounts, if any, required to be set
apart for all sinking funds, if any, for each series of Preferred Shares.
If the applicable Prospectus Supplement so provides, when dividends are not
paid in full upon any series of Preferred Shares and any other series of
Preferred Shares ranking on a parity as to dividends with such series of
Preferred Shares, all dividends declared upon such series of Preferred Shares
and any other series of Preferred Shares ranking on a parity as to dividends
will be declared pro rata so that the amount of dividends declared per share
on such series of Preferred Shares and such other series will in all cases
bear to each other the same ratio that accrued dividends per share on such
series of Preferred Shares and such other series bear to each other.
Each series of Preferred Shares will be entitled to dividends as described
in the Prospectus Supplement relating to such series, which may be based upon
one or more methods of determination. Different series of Preferred Shares may
be entitled to dividends at different dividend rates or based upon different
methods of determination. Except as provided in the applicable Prospectus
Supplement, no series of Preferred Shares will be entitled to participate in
the earnings or assets of the Company.
Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of each
series of Preferred Shares will be entitled to receive out of the assets of
the Company available for distribution to shareholders the amount stated or
determined on the basis set forth in the Prospectus Supplement relating to
such series, which may include accrued dividends if such liquidation,
dissolution or winding up is involuntary, or may equal the current redemption
price per share (otherwise than for the sinking fund, if any provided for such
series) provided for such series set forth in such Prospectus Supplement, if
such liquidation, dissolution or winding up is voluntary, and on such
preferential basis as is set forth in such Prospectus Supplement. If, upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the amounts payable with respect to Preferred Shares of any series
and any other shares of beneficial interest of the Company ranking as to any
such distribution on a parity with such series of Preferred Shares are not
paid in full, the holders of Preferred Shares of such series and of such other
shares will share ratably in any such distribution of assets of the Company in
proportion to the full respective preferential amounts to which they are
entitled or on such other basis as is set forth in the applicable Prospectus
Supplement. The rights, if any, of the holders of any series of Preferred
Shares to participate in the assets of the Company remaining after the holders
of other series of Preferred Shares have been paid their respective specified
liquidation preferences upon any liquidation, dissolution or winding up of the
Company will be described in the Prospectus Supplement relating to such
series.
Redemption. A series of Preferred Shares may be redeemable, in whole or in
part, at the option of the Company, and may be subject to mandatory redemption
pursuant to a sinking fund, in each case upon terms, at the times, at the
redemption prices and for the types of consideration set forth in the
Prospectus Supplement relating to such series. The Prospectus Supplement
relating to a series of Preferred Shares which is subject to mandatory
redemption shall specify the number of shares of such series that shall be
redeemed by the Company in each year commencing after a date to be specified,
at a redemption price per share to be specified together with an amount equal
to any accrued and unpaid dividends thereon to the date of redemption.
If, after giving notice of redemption to the holders of a series of
Preferred Shares, the Company deposits with a designated bank funds sufficient
to redeem such Preferred Shares, then from and after such deposit, all shares
called for redemption will no longer be outstanding for any purpose, other
than the right to receive the redemption price and the right to convert such
shares into other classes of stock of the Company. The redemption price will
be stated in the Prospectus Supplement relating to a particular series of
Preferred Shares.
Except as indicated in the applicable Prospectus Supplement, the Preferred
Shares are not subject to any mandatory redemption at the option of the
holder.
16
<PAGE>
Sinking Fund. The Prospectus Supplement for any series of Preferred Shares
will state the terms, if any, of a sinking fund for the purchase or redemption
of that series.
Conversion Rights. The Prospectus Supplement for any series of Preferred
Shares will state the terms, if any, on which shares of that series are
convertible into Common Shares or another series of Preferred Shares. The
Preferred Shares will have no preemptive rights.
Voting Rights. Except as indicated in the Prospectus Supplement relating to
a particular series of Preferred Shares, or except as expressly required by
Maryland law, a holder of Preferred Shares will not be entitled to vote.
Except as indicated in the Prospectus Supplement relating to a particular
series of Preferred Shares, in the event the Company issues full shares of any
series of Preferred Shares, each such share will be entitled to one vote on
matters on which holders of such series of Preferred Shares are entitled to
vote.
Transfer Agent and Registrar. The transfer agent, registrar and dividend
disbursement agent for a series of Preferred Shares will be selected by the
Company and be described in the applicable Prospectus Supplement. The
registrar for shares of Preferred Shares will send notices to shareholders of
any meetings at which holders of Preferred Shares have the right to vote on
any matter.
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. 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 Shares-in-Trust, 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 OWNERSHIP AND 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 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 (other than its 1996 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 (other than its 1996 taxable year). See "Federal Income
Tax Considerations--Requirements for Qualification."
Because the Board of Trustees believes it is essential for the Company to
continue to qualify as a REIT, the Declaration of Trust, subject to certain
exceptions described below, provides that no person may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than 8.5% of the
number of outstanding Common Shares (other than Mr. Prentiss, who currently
may own up to 15% of the number of outstanding Common Shares) or more than
9.8% of the number of outstanding Preferred Shares of any series (the
"Ownership Limitation"). The Board of Trustees may, but is not required to,
decrease the ownership limit applicable to Mr. Prentiss' ownership of Common
Shares to a minimum of 9.8% upon (i) an increase in the number of outstanding
Common Shares or (ii) a reduction of the number of Common Shares owned,
directly or indirectly, by Mr. Prentiss. Upon any such adjustment, the
Ownership Limitation applicable to other shareholders with respect to the
Common Shares will be increased proportionately to a maximum of 9.8% of the
number of outstanding Common Shares. Any transfer of Common or Preferred
Shares that would (i) result in any person
17
<PAGE>
owning, directly or indirectly, Common or Preferred Shares in excess of the
Ownership Limitation, (ii) result in the Company's outstanding 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
(each, a "Prohibited Transfer").
Subject to certain exceptions described below, Common or Preferred Shares
that are the subject of a Prohibited Transfer 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.
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
18
<PAGE>
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, is 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.
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.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of the Offered Securities. 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 (except to the extent described below),
financial institutions or broker-dealers, foreign corporations, and persons
who are not citizens or residents of the United States (except to the extent
described below) subject to special treatment under the federal income tax
laws.
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The statements in this discussion 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 SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
OFFERED SECURITIES 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 its IPO. The
Company elected 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 ended 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.
Hunton & Williams has acted as counsel to the Company in connection with the
IPO, the preparation of this Registration Statement and Prospectus, and the
Company's election to be taxed as a REIT. Prior to issuing Offered Securities,
the Company expects to obtain an opinion of Hunton & Williams that the Company
qualified for taxation as a REIT for its short taxable year ended December 31,
1996, and that 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. 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. 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
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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 (i) the gross income
attributable to the greater of the amount by which the Company fails the 75%
or 95% gross income test multiplied by (ii) a fraction intended to reflect the
Company's profitability. Sixth, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such
year, and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, beginning with
its 1998 taxable year, the Company may elect to retain and pay income tax on
its net long-term capital gains. Finally, if the Company acquires any asset
from a C corporation (i.e., a corporation generally subject to full corporate-
level tax) in a transaction in which the basis of the asset in the Company's
hands is determined by reference to the basis of the asset (or any other
asset) in the hands of the C corporation and the Company recognizes gain on
the disposition of such asset during the 10-year period beginning on the date
on which such asset was acquired by the Company, then to the extent of such
asset's "built-in-gain" (i.e., the excess of the fair market value of such
asset at the time of acquisition by the Company over the adjusted basis in
such asset at such time), such gain will be subject to tax at the highest
regular corporate rate applicable (as provided in Treasury Regulations that
have not yet been promulgated). The results described above with respect to
the recognition of "built-in-gain" assume that the Company will make an
election pursuant to IRS Notice 88-19 if it were to make any such acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100 or more persons;
(vi) not more than 50% in value of the outstanding shares of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of each taxable year (the
"5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the Service that must be met
in order to elect and maintain REIT status; (viii) that uses a calendar year
for federal income tax purposes and complies with the recordkeeping
requirements of the Code and Treasury Regulations promulgated thereunder; and
(ix) that meets certain other tests, described below, regarding the nature of
its income and assets. The Code provides that 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. Beginning with its 1998
taxable year, if the Company complies with the requirements for ascertaining
the ownership of its outstanding shares of beneficial interest and does not
know or have reason to know that it has violated the 5/50 Rule, it will be
deemed to satisfy the 5/50 Rule for the taxable year. 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 its 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 "Restrictions on Ownership and 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.
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The Company currently has two corporate subsidiaries, the General Partner
and the general partner of Prentiss Properties Real Estate Fund I, L.P., 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. Beginning with the Company's 1998 taxable year,
a "qualified REIT subsidiary" will be defined as any corporation wholly-owned
by the Company, regardless of whether the Company has always owned all of its
capital stock. Thus, in applying the requirements described herein, any
"qualified REIT subsidiary" 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. Both of the Company's corporate subsidiaries are
"qualified REIT subsidiaries." Those subsidiaries, 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. 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). Beginning with its 1998 taxable year, the
Company no longer will be subject to the 30% gross income test. 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
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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." Beginning with its 1998 taxable year,
the Company may furnish or render a de minimus amount of "noncustomary
services" to the tenants of a Property other than through an independent
contractor as long as the amount that the Company receives that is
attributable to such services does not exceed 1% of its total receipts from
the Property. For that purpose, the amount attributable to the Company's
noncustomary services will be at least equal to 150% of the Company's cost of
providing the services.
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 or
sales, as described above). Furthermore, the Company expects 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 expects 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 expects 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 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 expects that it will not provide noncustomary
services with respect to other properties that it acquires in the future
(other than through a qualifying independent contractor) to the extent that
the provision of such services would cause the Company to fail to satisfy
either the 75% or 95% gross income test.
If any portion of the Rent does not qualify as "rents from real property"
because 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
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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.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is
defined as any real property (including interests in real property) and any
personal property incident to such real property (i) that is acquired by a
REIT as the result of such REIT having bid on such property at foreclosure, or
having otherwise reduced such property to ownership or possession by agreement
or process of law, after there was a default (or default was imminent) on a
lease of such property or on an indebtedness owed to the REIT that such
property secured, (ii) for which the related loan was acquired by the REIT at
a time when default was not imminent or anticipated, and (iii) for which such
REIT makes a proper election to treat such property as foreclosure property.
The Company does not anticipate that it will receive any income from
foreclosure property that is not qualifying income for purposes of the 75%
gross income test, but, if the Company does receive any such income, the
Company will make an election to treat the related property as foreclosure
property.
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes
of the 75% or 95% gross income test. The Company anticipates that any income
it receives with respect to Ineligible Property will be qualifying income for
purposes of the 75% and 95% gross income tests.
The net income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held
primarily for sale to customers in the ordinary course of a trade or business.
The Company believes that no asset owned by the Company or the Operating
Partnership will be held for sale to customers and that a sale of any such
asset will not be in the ordinary course of the Company's or the Operating
Partnership's business. Whether an asset is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those
related to a particular asset. Nevertheless, the Company will attempt to
comply with the terms of safe-harbor provisions in the Code prescribing when
asset sales will not be characterized as prohibited transactions. Complete
assurance cannot be given, however, that the Company can comply with the safe-
harbor provisions of the Code or avoid owning property that may be
characterized as property held "primarily for sale to customers in the
ordinary course of a trade or business."
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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. Beginning with the Company's 1998 taxable
year, periodic income and gain from interest swap and cap agreements, options,
futures contracts, forward rate agreements, and similar financial instruments
entered into by the Company to reduce the interest rate risks with respect to
indebtedness incurred to acquire or carry real estate assets will be
qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test.
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 (i) the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% gross income test multiplied by (ii) a fraction
intended to reflect the Company's profitability. No such relief is available
for violations of the 30% income test. Beginning with its 1998 taxable year,
the Company no longer will be subject to the 30% gross 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 two corporate subsidiaries, 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, 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
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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 two corporate subsidiaries, 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.
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 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. Beginning with its 1998 taxable year, the Company
may elect to retain and pay income tax on its long-term capital gains. In that
case, the Company's shareholders would include in income their proportionate
share of the Company's undistributed long-term capital gain. In addition, the
shareholders would be deemed to have paid their proportionate share of the tax
paid by the Company, which would be credited or refunded to the shareholders.
Each shareholder's basis in his shares would be increased by the amount of the
undistributed long-term capital gain included in the shareholder's income,
less the shareholder's share of the tax paid by the Company. Such amount would
be treated as having been distributed by the Company for purposes of the 4%
excise tax described above.
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 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.
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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. Beginning
with the Company's 1998 taxable year, the Company will not lose its REIT
status if it fails to request information from its shareholders with respect
to the actual ownership of its outstanding shares in any taxable year, but
instead will incur a monetary penalty.
PARTNERSHIP ANTI-ABUSE RULE
The U.S. Treasury Department has issued a final regulation (the "Anti-Abuse
Rule") under the partnership provisions of the Code (the "Partnership
Provisions") that authorizes the Service, in certain "abusive" transactions
involving partnerships, to disregard the form of the transaction and recast it
for federal tax purposes as the Service deems appropriate. The Anti-Abuse Rule
applies where a partnership is formed or utilized in connection with a
transaction (or series of related transactions) with a principal purpose of
substantially reducing the present value of the partners' aggregate federal
tax liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible economic arrangement that accurately reflects
the partners' economic agreement and clearly reflects the partners' income
without incurring any entity-level tax. The purposes for structuring a
transaction involving a partnership are determined based on all of the facts
and circumstances, including a comparison of the purported business purpose
for a transaction and the claimed tax benefits resulting from the transaction.
A reduction in the present value of the 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. The Company believes that the Anti-Abuse Rule will not have any
adverse impact on its 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
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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. For
purposes of determining whether distributions are made out of the Company's
current or accumulated earnings and profits, the Company's earnings and
profits will be allocated first to the Preferred Shares and then to the Common
Shares. As used herein, the term "U.S. shareholder" means a holder of Offered
Securities 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 control all substantial
decisions of the trust. Distributions that are designated as capital gain
dividends will be taxed as gains from the sale or exchange of a capital asset
held for more than one year (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 Offered Securities. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Beginning with its 1998 taxable year, the
Company may elect to retain and pay income tax on its net long-term capital
gains. In that case, the Company's shareholders would include in income their
proportionate share of the Company's undistributed long-term capital gains. In
addition, the shareholders would be deemed to have paid their proportionate
share of the tax paid by the Company, which would be credited or refunded to
the shareholders. Each shareholder's basis in his shares would be increased by
the amount of the undistributed long-term capital gain included in the
shareholder's income, less the shareholder's share of the tax paid by the
Company.
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 Offered Securities, 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 Offered Securities, such distributions will be
included in income as gains from the sale or exchange of a capital asset,
assuming the Offered Securities 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 Offered Securities 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 Offered Securities (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.
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TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, any gain or loss realized upon a taxable disposition of the
Offered Securities by a shareholder who is not a dealer in securities will be
treated as capital gain or loss if the Offered Securities have been held as a
capital asset. Such gain or loss will generally constitute either short-term,
mid-term or long-term capital gain or loss depending on the length of time the
shareholder holds the securities. However, any loss upon a sale or exchange of
Offered Securities 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 Offered Securities may be
disallowed if other Offered Securities are purchased within 30 days before or
after the disposition.
CAPITAL GAINS AND LOSSES
The highest marginal individual income tax rate is 39.6%. The maximum tax
rate on net capital gains applicable to noncorporate taxpayers is 28% for
sales and exchanges of assets held for more than one year but not more than 18
months (mid-term capital gain), and 20% for sales and exchanges of assets held
for more than 18 months (long-term capital gain). The maximum tax rate on
long-term capital gain from the sale or exchange of "section 1250 property"
(i.e., depreciable real property) is 25% to the extent that such gain would
have been treated as ordinary income if the property were "section 1245
property." Thus, the tax rate differential between capital gain and ordinary
income for noncorporate taxpayers 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 a noncorporate taxpayer's ordinary income only up to a maximum annual
amount of $3,000. Unused capital losses may be carried forward. All net
capital gain of a corporate taxpayer is subject to tax at ordinary corporate
rates. A corporate taxpayer can deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company 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 United States Treasury has recently
issued final regulations (the "Final Regulations") which affect the backup
withholding rules as applied to Non-U.S. Shareholders. The Final Regulations
are generally effective for payments made on or after January 1, 1999, subject
to certain transition rules. Prospective purchasers of Offered Securities
should consult their own tax advisors concerning the adoption of the Final
Regulations and the potential effect on their ownership of Offered Securities.
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 Offered Securities with debt, a portion of its
income from the
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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) the Company is a "pension-held" REIT (i.e., 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). Because the Ownership Limitation prohibits any pension trust from
owning more than 8.5% of the Common Shares or more than 9.8% of any class or
series of the Preferred Shares, the Company should not be a "pension-held"
REIT.
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 OFFERED SECURITIES, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current
or accumulated earnings and profits of the Company. Such distributions
ordinarily will be subject to a withholding tax equal to 30% of the gross
amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Offered
Securities 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 United States
Treasury has recently issued final regulations which affect the procedures to
be followed by a Non-U.S. Shareholder regarding the withholding and
information reporting rules discussed above. In general, the final regulations
do not alter the substantive withholding and information reporting
requirements but unify current certification procedures and modify reliance
standards. 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 Offered
Securities, 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 Offered Securities, 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.
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The Small Business Job Protection Act of 1996 requires the Company to
withhold 10% of any distribution in excess of the Company's current and
accumulated earnings and profits. 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 Offered
Securities 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. However, because the
Offered Securities will be publicly traded, no assurance can be given that the
Company is or will continue to be a "domestically controlled REIT." In
addition, a Non-U.S. Shareholder that owned, actually or constructively, 5% or
less of the Common Shares or Preferred Shares at all times during a specified
testing period will not be subject to tax under FIRPTA if the Common or
Preferred Shares, as applicable, are "regularly traded" on an established
securities market. Furthermore, gain not subject to FIRPTA will be taxable to
a Non-U.S. Shareholder if (i) investment in the Offered Securities 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 Offered
Securities were to be subject to taxation under FIRPTA, the Non-U.S.
Shareholder would be subject to the same treatment as U.S. shareholders with
respect to such gain (subject to applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals, and the
possible application of the 30% branch profits tax in the case of non-U.S.
corporations).
OTHER TAX CONSEQUENCES
The Company, the General Partner, the Operating Partnership, the Manager, a
Noncorporate Subsidiary, or the Company's shareholders may be subject to state
or local taxation in various state or local jurisdictions, including those in
which it or they own property, transact business, or reside. 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.
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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 its 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 was notified in writing by
a taxing authority 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 Treasury Regulations
relating to entity classification in effect prior to January 1, 1997, and such
classification should be respected for federal income tax purposes. In
addition, no Partnership was notified by a taxing authority on or before May
8, 1996 that its classification was under examination. The Partnerships intend
to continue to be classified as partnerships and the Company has represented
that no Partnership will elect to be treated as an association taxable as a
corporation for federal income tax purposes 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 (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 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.
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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 has 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.
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
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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 but not more than 18 months will be mid-term capital
gain, and any gain realized on the sale of property held for more than 18
months 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 majority of the Trustees including a
majority of the Independent Trustees.
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.
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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 value of the equity
and debt securities of each Manager held, directly or indirectly, by the
Company may not exceed 5% of the total value of the Company's assets. In
addition, the Company may not own, directly or indirectly, 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 that the value of the equity and
debt securities of each Manager that it owns does not exceed 5% of the total
value of its assets. If the Service were to successfully challenge these
determinations, however, the Company likely would fail to qualify as a REIT.
The Manager is organized as a corporation and pays federal, state and local
income taxes on its taxable income at normal corporate rates. Any such taxes
reduce amounts available for distribution by the Manager, which in turn reduce
amounts available for distribution to the Company's shareholders.
PLAN OF DISTRIBUTION
The Company may sell Offered Securities in or outside the United States to
or through underwriters or may sell Offered Securities to investors directly
or through designated agents. Any such underwriter or agent involved in the
offer and sale of the Offered Securities will be named in the applicable
Prospectus Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices, which may be changed, or from time to time at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Company also may, from time to time, authorize
underwriters acting as agents to offer and sell the Offered Securities upon
the terms and conditions set forth in any Prospectus Supplement. Underwriters
may sell Offered Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions
(which may be changed from time to time) from the underwriters and/or from the
purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Offered Securities and any discounts,
concessions or commissions allowed by underwriters to participating dealers
will be set forth in the applicable Prospectus Supplement. Underwriters,
dealers and agents participating in the distribution of the Offered Securities
may be deemed to be underwriters, and any discounts and commissions received
by them from the Company or from purchasers of Offered Securities and any
profit realized by them on resale of the Offered Securities may be deemed to
be underwriting discounts and commissions under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts (the "Contracts") providing for payment and delivery on the
date or dates stated in such Prospectus Supplement. Each Contract will be for
an amount not less than, and the principal amount of Offered Securities sold
pursuant to Contracts shall not be less nor more than, the respective amounts
stated in such Prospectus Supplement. Institutions with which Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and other institutions, but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions
except (i) the purchase by an institution of the Offered Securities covered by
its Contract shall not at
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the time of delivery be prohibited under the laws of any jurisdiction in the
United States to which such institution is subject and (ii) the Company shall
have sold to such underwriters the total principal amount of the Offered
Securities less the principal amount thereof covered by Contracts. A
commission indicated in the Prospectus Supplement will be paid to agents and
underwriters soliciting purchases of Offered Securities pursuant to Contracts
accepted by the Company. Agents and underwriters shall have no responsibility
in respect of the delivery or performance of Contracts.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with, and perform services for, the Company in the ordinary
course of business.
If a dealer is utilized in the sale of the Offered Securities in respect of
which this Prospectus is delivered, the Company will sell such Offered
Securities to the dealer, as principal. The dealer may then resell such
Offered Securities to the public at varying prices to be determined by such
dealer at the time of resale.
Certain of the underwriters, dealers or agents utilized by the Company in
any offering hereby may be customers of, including borrowers from, engage in
transactions with, and perform services for, the Company or one or more of its
respective affiliates in the ordinary course of business. Underwriters,
dealers, agents and other persons may be entitled, under agreements which may
be entered into with the Company to indemnification against certain civil
liabilities, including liabilities under the Securities Act.
Until the distribution of the Offered Securities is completed, rules of the
Commission may limit the ability of the underwriters and certain selling group
members, if any, to bid for and purchase the Offered Securities. As an
exception to these rules, the representatives of the underwriters, if any, are
permitted to engage in certain transactions that stabilizes the price of the
Offered Securities. Such transactions may consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Offered Securities.
If underwriters create a short position in the Offered Securities in
connection with the offering thereof, (i.e., if they sell more Offered
Securities than are set forth on the cover page of the applicable Prospectus
Supplement), the representatives of such underwriters may reduce that short
position by purchasing Offered Securities in the open market. Any such
representatives also may elect to reduce any short position by exercising all
or part of the over-allotment option described in the applicable Prospectus
Supplement.
Any such representatives also may impose a penalty bid on certain
underwriters and selling group members. This means that if the representatives
purchase Offered Securities in the open market to reduce the underwriters'
short position or to stabilize the price of the Offered Securities, 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 thereof.
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 an Offered
Security to the extent that it were to discourage resales of the Offered
Security by purchasers in the offering.
Neither the Company nor any of the underwriters, if any, 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 Securities.
In addition, neither the Company nor any of the underwriters, if any, makes
any representation that the representatives of the underwriters, if any, will
engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy statements and other information filed by the Company with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its Regional Offices at Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661 and Suite 1300, 7
World Trade Center, New York, New York 10048, and can also be inspected and
copied at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of the prescribed fees or from the Commission's site
on the World Wide Web at http://www.sec.gov.
This Prospectus is part of a registration statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") filed
by the Company with the Commission under the Securities Act. This Prospectus
does not contain all the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules of the
Commission. For further information, reference is made to the Registration
Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (Commission
File No. 001-14516) under the Exchange Act are hereby incorporated by
reference in this Prospectus:
(1)the Company's Annual Report on Form 10-K for the year ended December
31, 1996, filed March 25, 1997;
(2)the Company's Quarterly Reports on Form 10-Q, for the quarter ended
March 31, 1997, filed May 14, 1997, and for the quarter ended June 30,
1997, filed August 13, 1997;
(3)the Company's Current Report on Form 8-K, filed on January 15, 1997,
as amended by Form 8-K/A, filed March 14, 1997, the Company's Current
Report on Form 8-K, filed on April 16, 1997, as amended by Form 8-K/A,
filed on June 12, 1997, and the Company's Current Report on Form 8-K, filed
on October 16, 1997;
(4)the Combined Statements of Revenues and Certain Operating Expenses of
the Chicago Office Properties and the Selected 1997 Pending Acquisitions,
included on pages F-35 through F-37 and F-42 through F-44 of the Company's
Registration Statement on Form S-11, dated April 29, 1997 (Commission File
No. 333-23989); and
(5)the description of the Common Shares contained in the Company's
Registration Statement on Form 8-A, filed on October 17, 1996, under the
Exchange Act, including any reports filed under the Exchange Act for the
purpose of updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act prior to the termination of the offering of all of
the Offered Securities shall be deemed to be incorporated by reference herein.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein, in any accompanying Prospectus Supplement relating to a specific
offering of any Offered Securities or in any other subsequently filed
document, as the case may be, which also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus or any accompanying
Prospectus Supplement.
The Company will provide on request and without charge to each person to
whom this Prospectus is delivered a copy (without exhibits) of any or all
documents incorporated by reference into this Prospectus. Requests for such
copies should be directed to Prentiss Properties Trust, 3890 W. Northwest
Highway, Suite 400, Dallas, Texas, Attention: Secretary (telephone (214) 654-
0886).
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LEGAL MATTERS
The validity of the Securities will be passed upon for the Company by Hunton
& Williams, Richmond, Virginia, who will rely on the opinion of Ballard Spahr
Andrews & Ingersoll, Baltimore, Maryland, as to certain matters of Maryland
law.
EXPERTS
The consolidated and combined financial statements of the Company and the
Company's predecessors as of December 31, 1995, and for the period January 1,
1996 through October 21, 1996, and the years ended December 31, 1995 and 1994,
incorporated by reference in its annual report on Form 10-K for the year ended
December 31, 1996, and the combined statements of revenue and certain
operating expenses included in the Company's Current Reports on Form 8-K/A,
dated March 14, 1997, and June 12, 1997, and the Company's Registration
Statement on Form S-11, dated April 29, 1997, have been audited by Coopers &
Lybrand, L.L.P., independent accountants, as set forth in their reports
thereon included therein and incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon such reports
given upon the authority of such firms as experts in accounting and auditing.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFOR-
MATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANY-
ING PROSPECTUS DO NOT CONSTITUTE AN OFFER OF SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANY-
ING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<S> <C>
The Company................................................................. S-3
Recent Developments......................................................... S-3
Use of Proceeds............................................................. S-4
Price Range of Common Stock and Distribution History........................ S-5
Capitalization.............................................................. S-6
Certain Federal Income Tax Considerations................................... S-7
Underwriting................................................................ S-7
Legal Matters............................................................... S-8
Experts..................................................................... S-8
Prospectus
Forward-Looking Statements.................................................. 2
The Company................................................................. 2
Risk Factors................................................................ 3
Use of Proceeds............................................................. 13
Ratio of Earnings to Fixed Charges.......................................... 13
Description of Shares of Beneficial Interest................................ 14
Federal Income Tax Considerations........................................... 19
Plan of Distribution........................................................ 35
Available Information....................................................... 37
Incorporation of Certain Documents by Reference............................. 37
Legal Matters............................................................... 38
Experts..................................................................... 38
</TABLE>
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6,000,000 SHARES
[LOGO OF PRENTISS PROPERTIES TRUST APPEARS HERE]
PRENTISS
PROPERTIES TRUST
COMMON SHARES OF
BENEFICIAL INTEREST
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PROSPECTUS SUPPLEMENT
November 18, 1997
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LEHMAN BROTHERS
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