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As filed with the Securities and Exchange Commission on December 24,
1998
Registration No. 333-65735
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
________________
PRENTISS PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 75-2261588
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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3890 W. NORTHWEST HIGHWAY, SUITE 400 J. KEVAN DILBECK
DALLAS, TEXAS 75220 PRENTISS PROPERTIES TRUST
(214) 654-0886 3890 W. NORTHWEST HIGHWAY, SUITE 400
(Address, including zip code, and telephone number, DALLAS, TEXAS 75220
including area code, of (214) 654-0886
registrant's principal executive offices) (Name, address, including zip code, and telephone
number, including area code, of agent for service)
</TABLE>
COPY TO:
MICHAEL E. DILLARD, P.C.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1700 PACIFIC AVENUE, SUITE 4100
DALLAS, TEXAS 75201
(214) 969-2800
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box: [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED DECEMBER 24, 1998
PROSPECTUS
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRENTISS PROPERTIES TRUST
3890 W. NORTHWEST HIGHWAY, SUITE 400
DALLAS, TEXAS 75220
(214) 654-0886
524,180 SHARES
COMMON SHARES OF BENEFICIAL INTEREST
This prospectus relates to 524,180 common shares of Beneficial Interest
which Prentiss Properties Trust or Prentiss Properties I, Inc., the general
partner of Prentiss Properties Acquisition Partners, L.P., may issue to the
holders of 524,180 units of limited partnership interest in Prentiss Properties
Acquisition Partners, L.P. upon redemption of such units.
The common shares trade on the New York Stock Exchange under the symbol
"PP."
____________________
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ______________, 199__.
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TABLE OF CONTENTS
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PAGE
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Risk Factors............................................................ 3
Forward-Looking Statements.............................................. 3
About this prospectus................................................... 4
The Company............................................................. 4
Use of Proceeds......................................................... 5
Description of Shares of Beneficial Interest............................ 5
Registration Rights..................................................... 7
Restrictions on Ownership and Transfer.................................. 8
Description of Partnership Units........................................ 10
Federal Income Tax Considerations....................................... 17
Plan of Distribution.................................................... 32
Legal Opinions.......................................................... 32
Experts................................................................. 32
Where You Can Find More Information..................................... 33
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RISK FACTORS
You should carefully consider the following information in conjunction with
the other information contained in this prospectus, any prospectus supplement
and the documents and risk factors incorporated by reference herein, before
making any investment decision relating to the common shares.
RISK THAT REDEEMING PARTNERSHIP UNITS FOR COMMON SHARES WILL BE A TAXABLE
TRANSACTION
If we exercise our right to acquire partnership units in exchange for cash
or common shares, your redemption of such partnership units will be treated for
tax purposes as a fully taxable sale of the partnership units. This means that
you would realize a gain in an amount equal to the sum of the cash received or
the value of the common shares received plus the amount of any operating
partnership liabilities allocable to the redeemed partnership units. The
following risks arise from the taxable nature of your redemption of partnership
units:
. The gain you recognize, or even the tax liability resulting from such
gain, could exceed the amount of cash and the value of the common
shares that the limited partner receives upon such disposition.
. Fluctuations in the market price of the common shares may limit your
ability to sell common shares in order to raise cash to pay tax
liabilities associated with the redemption of partnership units.
. The price you receive for such shares may not equal the value of the
partnership units you redeemed.
If we do not exercise our right to acquire partnership units tendered for
redemption for cash or common shares, and the operating partnership redeems such
partnership units for cash, the tax consequences may differ.
RISKS ASSOCIATED WITH THE REDEMPTION OF PARTNERSHIP UNITS IN EXCHANGE FOR CASH
OR COMMON SHARES
Upon redemption of all or a portion of your partnership units, you may
receive cash or, if we or the general partner elects, common shares in exchange
for your partnership units. The following are the effects of receiving cash from
us or the operating partnership:
. You will not have any interest in us or the operating partnership,
except to the extent that you retain partnership units.
. You would not benefit from any subsequent increases in the value of
common shares.
. You would not receive any future distributions from us or the
operating partnership unless you retain or acquire in the future
additional common shares or partnership units.
If you receive common shares, you will become one of our shareholders
rather than a holder of partnership units in the operating partnership. Becoming
one of our shareholders would expose you to normal risks of share ownership
including the risk of potential decline in the market value of your common
shares.
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"). When used in this prospectus, words such as "anticipate,"
"believe," "estimate," "expect," "intend," "predict," "project," and similar
expressions, as they relate to us or our management, identify forward-looking
statements. Such forward-looking statements are based on the beliefs of our
management as well as assumptions made by and information currently available to
us. These forward-looking statements are subject to certain risks, uncertainties
and assumptions, including risks, uncertainties and assumptions related to the
following:
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<S> <C>
. Our reliance on major tenants; . Conflicts of interest;
. The geographic concentration of our properties; . Change in our investment, financing and borrowing policies without
shareholder approval;
. Risks associated with our real estate acquisition, . Our dependence on key personnel such as Michael V.
redevelopment, development and construction Prentiss and Thomas F. August;
activities;
. Factors that could cause poor operating performance . Our third-party property management, leasing,
of our properties; development and construction business and related
services;
. Our incurrence of debt; . Effect of market interest rates on price of common
shares;
. Limited ability of shareholders to effect a change . Effect of shares available for future sale on price of
of control; common shares; and
. Our failure to qualify as a REIT; . Potential capital stock dilution or decrease of
liquidity in connection with settlement of forward
agreements.
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Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect our current views with respect to future events and are subject to these
and other risks, uncertainties and assumptions, relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. You should
specifically consider the various factors identified in this 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" in this prospectus and in our Exchange Act
filings.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission (the "SEC") utilizing a "shelf registration"
process. Under this shelf process, we may, from time to time, issue common
shares to the holders of 524,180 units of limited partnership interest in
Prentiss Properties Acquisition Partners, L.P. in exchange for any partnership
units the limited partners may tender for redemption. You should read both this
prospectus and any prospectus supplement together with additional information
described under the heading "Where You Can Find More Information."
Unless the context otherwise requires, all references in this prospectus to
"we," "us," or "our," mean Prentiss Properties Trust and its subsidiaries on a
combined basis, including (1) Prentiss Properties I, Inc., the general partner
of Prentiss Properties Acquisition Partners, L.P., (2) Prentiss Properties
Acquisition Partners, L.P., the operating partnership, and its subsidiaries, (3)
Prentiss Properties Limited, Inc. (the "Manager"), and (4) entities through
which the operating partnership owns interests in our properties. "You" refers
to the holders of 524,180 units of limited partnership interest in the operating
partnership to whom we or the general partner may issue common shares upon
redemption of such units. The "Predecessor Company" refers to our operations
from the period prior to our initial public offering of common shares and the
commencement of our intent to qualify as a real estate investment trust ("REIT")
on October 22, 1996.
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THE COMPANY
We are a self-administered and self-managed Maryland REIT that acquires,
owns, manages, leases, develops and builds office and industrial properties
throughout the United States. We are self-administered in that we provide our
own administrative services, such as accounting, tax and legal, internally
through our own employees. We are self-managed in that we internally provide all
the management and maintenance services that our properties require through our
own employees such as property managers, leasing professionals and engineers. As
of September 30, 1998, we owned interests in a diversified portfolio of 253
primarily suburban Class A office and suburban industrial properties, located in
20 major U.S. markets (the "Properties") as follows:
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Number of Net Rentable Number of
Buildings Square Feet Tenants Percent Leased
---------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Office Properties.......... 115 12.8 million 1,208 96%
Industrial Properties...... 124 8.9 million 349 96%
Office and Industrial
Development Projects...... 15* 1.9 million N/A N/A
--- ---------------- -----
TOTAL................... 254* 23.6 million 1,557
=== ================ =====
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___________________
* Includes one expansion project at an existing industrial property.
In addition to the Properties, we manage 258 office and industrial properties,
in 19 U.S. markets, that are owned by third parties. The managed properties
contain approximately 29.2 million net rentable square feet.
We operate principally through the operating partnership and its
subsidiaries and the Manager. Our regional management offices are located in Los
Angeles, Dallas, Chicago, Washington, D.C., Atlanta and Philadelphia. We have
approximately 700 employees with expertise in areas such as acquisitions,
development, facilities management, property management and leasing.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the common
shares to the limited partners but will acquire partnership units in exchange
for any common shares that we may issue to a redeeming limited partner. With
each such acquisition, our interest in the operating partnership will increase.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The following summary of the material terms of the common shares is subject
to the detailed provisions of the following:
. the Amended and Restated Declaration of Trust, as amended (the
"Declaration of Trust");
. the Amended and Restated Bylaws as currently in effect (the "Bylaws");
. the Articles Supplementary relating to our Series A Cumulative
Convertible Preferred Shares (the "Series A Preferred Shares") of
beneficial interest, $0.01 par value per share (the "Series A Articles
Supplementary");
. the Articles Supplementary relating to our Junior Participating
Cumulative Preferred Shares (the "Series B Junior Preferred Shares")
of beneficial interest, Series B, $0.01 par value per share (the
"Series B Junior Articles Supplementary"); and
. the Articles Supplementary relating to our 8.30% Series B Cumulative
Redeemable Perpetual Preferred Shares (the "Series B Preferred
Shares") of beneficial interest, $0.01 par value per share (the
"Series B Articles Supplementary"). The Series A Articles
Supplementary, Series B Articles Supplementary and the Series B Junior
Articles Supplementary are referred to as the "Articles
Supplementary".
The following summary does not purport to be complete or to give full effect to
the provisions of statutory or common law and should be read in conjunction with
the terms of the Declaration of Trust, Bylaws and Articles Supplementary.
The Declaration of Trust allows us to issue up to 100,000,000 common shares
and 20,000,000 preferred shares of beneficial interest, $0.01 par value per
share. As of September 30, 1998, there were 38,925,580 common shares, 3,773,585
Series A Preferred Shares, no Series B Junior Preferred Shares and no Series B
Preferred Shares issued by us and outstanding. As permitted by the provisions of
Title 8, as amended from time to time, of the Corporations and Associations
Article of the Annotated Code of Maryland (the "Maryland REIT Law"), the
Declaration of Trust allows the Board of Trustees, without any action by our
shareholders, to amend the Declaration of Trust to increase or decrease the
aggregate number of shares of beneficial interest or the number of shares of any
class of shares of beneficial interest that we may issue.
As a Maryland REIT, we are subject to the Maryland REIT Law and the
Maryland General Corporation Law, as amended from time to time (the "MGCL").
Both the Maryland REIT Law and the Declaration of Trust provide that you will
not be personally liable for any of our obligations solely as a result of your
status as our shareholder. The Bylaws further provide that we must indemnify you
against any claim or liability to which you may become subject by reason of your
being or having been a shareholder or former shareholder. In addition, we must
pay or reimburse you for all legal and other expenses reasonably incurred by you
in connection with any such claim or liability successfully defended. It is our
policy to include a clause in our contracts which provides that shareholders
will not be personally liable for obligations entered into on our behalf.
However, with respect to tort claims, contractual claims where shareholder
liability is not removed, claims for taxes and statutory liability, you may, in
some jurisdictions, be personally liable to the extent that we do not satisfy
such claims. Inasmuch as we carry public liability insurance that we consider
adequate, any risk of liability to you is limited to situations in which our
assets plus our insurance coverage would be insufficient to satisfy the claims
against us and our shareholders.
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COMMON SHARES
All common shares offered by this prospectus will be duly authorized, fully
paid and nonassessable, and the holders thereof will not have preemptive or
appraisal rights. As a holder of our common shares, you are entitled to the
following:
. To receive dividends if, as and when authorized and declared by the
Board of Trustees out of legally available assets. We intend to pay
quarterly dividends to the holders of our common shares.
. To share ratably in our assets legally available for distribution to
our shareholders in the event of our liquidation, dissolution or
winding-up after payment of, or adequate provision for, all of our
known debts and liabilities.
. To one vote per share on all matters voted on by shareholders,
including elections of trustees. The Declaration of Trust does not
allow cumulative voting in the election of trustees, which means the
holders of a majority of the outstanding common shares can elect all
of the trustees then standing for election.
Your rights to dividends and liquidation preferences are subject to the
preferential rights of any of our other shares or series of shares of beneficial
interest and to the provisions of the Declaration of Trust regarding Shares-in-
Trust. Your voting rights are subject to the provisions of the Declaration of
Trust regarding Shares-in-Trust.
Pursuant to the Maryland REIT Law, a REIT generally cannot amend its
declaration of trust or merge unless approved by the affirmative vote of
shareholders holding at least two-thirds of the shares entitled to vote on the
matter. A REIT may establish a lesser percentage, but not less than a majority
of all the votes entitled to be cast on the matter, in the REIT's declaration of
trust. Our 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 the following, each
of which requires the affirmative vote of the holders of two-thirds of the
outstanding voting shares:
. The removal of trustees.
. Any amendment to specific sections of the Declaration of Trust that
relate the Board of Trustees, restrictions on the transfer of Shares-
in-Trust, amendments, and our termination.
. Our termination.
The Board of Trustee may, by a two-thirds vote, amend the Declaration of Trust
from time to time to qualify as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), or the Maryland REIT Law without the affirmative vote
of the shareholders.
The Transfer Agent and Registrar for the common shares is First Chicago
Trust Company of New York. The common shares trade on the New York Stock
Exchange (the "NYSE") under the symbol "PP." We will apply to the NYSE to list
the additional common shares to be sold pursuant to any prospectus supplement,
and we anticipate that such shares will be so listed.
PREFERRED SHARE PURCHASE RIGHTS
On February 17, 1998, pursuant to the Rights Plan, dated February 6, 1998,
between us and First Chicago Trust Company of New York, as rights agent, we
distributed as a dividend one right ("Right") for each outstanding common share.
Each Right entitles the holder to buy one one-thousandth of a share (a
"Preferred Share Partnership Unit") of the Series B Junior Preferred Shares at
an exercise price of $85, subject to adjustment. Each Preferred Share
Partnership Unit of a Series B Junior Preferred Share is structured to be the
equivalent of one common share.
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The Rights will become exercisable in the following situations:
. If a person or group acquires, obtains the right to acquire or
announces a tender offer to acquire 10%, or 11% in the case of
Security Capital Preferred Growth Incorporated, a Maryland corporation
("Security Capital") and their affiliates, or more of the outstanding
common shares . Each Right would entitle its holder to acquire Series
B Junior Preferred Shares at the exercise price or, at our option,
common shares, cash, property or other securities, having a value
equal to twice the exercise price of the Right.
. If we are acquired in a merger or other business combination or if 50%
or more of our assets or earning power is transferred. Each Right
would then entitle its holder, other than the acquiring person, to
purchase securities of the surviving company having a market value
equal to twice the exercise price of the Right.
Until a person or group acquires or announces a tender offer to acquire 10%
or more of our common shares, the Rights will be evidenced by the common share
certificates and will be transferred with and only with such common share
certificates. The surrender or transfer of any certificate of common shares will
also constitute the transfer of the Rights associated with those common shares.
The Rights will expire on February 17, 2008. Also, we may redeem each Right at a
price of $0.001 at any time until ten days after an announcement that a 10%
position has been acquired.
The Rights may have anti-takeover effects. The Rights can cause substantial
dilution to a person or group that acquires more than 10%, or 11% in the case of
Securities Capital and its affiliates, of the outstanding common shares.
However, because the Rights are redeemable by the Board of Trustees, the Rights
should not interfere with any merger or other business combination approved by
the Board of Trustees.
PREFERRED SHARES
The Board of Trustees may issue preferred shares in one or more series,
without shareholder approval. The Board of Trustees may establish designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms and
conditions of redemption of our preferred shares. Thus, without shareholder
approval, the Board of Trustees could authorize the issuance of preferred shares
that could have the following effects:
. dilute the voting power and other rights of the holders of common
shares, and
. delay, defer or prevent a takeover or other transaction that 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.
As of September 30, 1998, the Board of Trustees had designated 3,773,585 Series
A Preferred Shares, all of which were outstanding, 1,900,000 Series B Preferred
Shares, none of which were outstanding, and 1,000,000 Series B Junior Preferred
Shares, none of which were outstanding.
REGISTRATION RIGHTS
This summary of the material terms of the Registration Rights Agreement,
dated as of October 22, 1997, between us, the operating partnership, the general
partner and the limited partners does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, all the provisions of the
registration rights agreement.
Pursuant to the registration rights agreement, we agreed to file with the
SEC a registration statement, of which this prospectus is a part, with respect
to our issuance of common shares to you upon redemption of your
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partnership units. In addition, we agreed to file such amendments and
supplements to the registration statement as may be necessary to keep the
registration statement effective until the earlier of the following:
. the date when all the common shares covered by this prospectus are
issued or sold,
. the date on which all of you agree to the withdrawal of this
registration statement, or
. the date on which all of the common shares covered by this prospectus
could be sold in any three month period pursuant to Rule 144 under the
Securities Act.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order to qualify as a REIT under the Code, we must satisfy requirements
concerning the ownership of our outstanding shares of beneficial interest.
Specifically, no more than 50% in value of our outstanding shares of beneficial
interest may be owned, directly or indirectly, by five or fewer individuals or
entities during the last half of a taxable year, other than its 1996 taxable
year, and we 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 our 1996 taxable year.
Because the Board of Trustees believes it is essential for us to continue
to qualify as a REIT, the Declaration of Trust provides that no person may own
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, or more than 9.8% of the number of outstanding preferred shares of any
series other than Security Capital, which may own all of the Series A Preferred
Shares (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 as low as 9.8% of the outstanding common shares 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 Board of Trustees may exempt a recipient of common shares from the
Ownership Limitation as long as we receive evidence that our REIT status will
not be lost as follows:
. receipt of a ruling from the Internal Revenue Service (the "IRS"),
. an opinion of counsel, or
. other evidence satisfactory to the Board of Trustees.
The Board of Trustees has exempted Security Capital from the Ownership
Limitation on the condition that Security Capital not own more than 11% of the
number of outstanding common shares. The Board of Trustees may monitor, modify,
suspend or revoke Security Capital's 11% ownership limitation as may be required
to maintain our REIT status. The Board of Trustees may not grant an exemption
from the Ownership Limitation to any proposed transferee if such exemption would
result in the termination of our status as a REIT.
Any transfer of common shares or preferred shares that causes any one of
the following conditions (the "Share Transfer Limitations") to exist will be
null and void, and the intended transferee will acquire no rights in such common
shares or preferred shares:
. any person owning, directly or indirectly, common shares or preferred
shares in excess of the Ownership Limitation;
. our outstanding shares being owned by fewer than 100 persons,
determined without reference to any rules of attribution;
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. our being "closely held" within the meaning of Section 856(h) of the
Code; or
. our owning, directly or constructively, 10% or more of the ownership
interests in one of our tenants or the operating partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code.
If any purported transfer of common shares or preferred shares results in any of
the four above conditions, the common shares or preferred shares in excess of
the applicable limitation 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 shares or preferred shares. The
record holder of the common shares or preferred shares that are designated as
Shares-in-Trust (the "Prohibited Owner") will be required to submit such number
of common shares or preferred shares to us for registration in the name of the
Share Trust. We will designate the Share Trustee, but the Share Trustee will not
be affiliated with us. We will name one or more charitable organizations as the
beneficiary of the Share Trust (the "Beneficiary").
Shares-in-Trust will remain issued and outstanding common shares 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 may transfer the Shares-in-
Trust, provided the transferee:
. purchases such Shares-in-Trust for valuable consideration, and
. acquires such Shares-in-Trust without such acquisition resulting in a
transfer to another Share Trust and resulting in the redesignation of
such common shares 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 that are
attributable to any Shares-in-Trust, and
. will generally receive from the Share Trustee the lower of (1) the
amount paid by the Prohibited Owner for the common shares designated
as Shares-in-Trust, or, in the case of a gift or devise, the Market
Price, as defined in the Declaration of Trust, per share on the date
of such transfer, or (2) the amount 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 us, or
our designee, at a price per share equal to the lesser of the following:
. 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
. the Market Price per share on the date that we, or our designee,
accepts such offer.
We will have the right to accept such offer for a period of 90 days after the
date of the purported transfer which resulted in such Shares-in-Trust.
Any person who acquires or attempts to acquire common shares or preferred
shares in violation of the foregoing restrictions, or any person who owned
common shares or preferred shares that were transferred to a Share Trust, is
required to immediately give written notice to us and to provide us such other
information as we may request in order to determine the effect, if any, of such
transfer on our status as a REIT.
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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 shares and preferred
shares, within 30 days after January 1 of each year, to provide us a written
statement or affidavit stating their name and address, the number of common
shares and preferred shares owned, and a description of how such shares are
held. In addition, each direct or indirect shareholder must provide us such
additional information as we may request in order to determine the effect, if
any, of such ownership on our status as a REIT and to ensure compliance with the
Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
common shares 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 IRS 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. However, the Board of Trustees may not grant an exemption from the
Ownership Limitation to any proposed transferee whose ownership, direct or
indirect, of our shares of beneficial interest in excess of the Ownership
Limitation would result in the termination of our status as a REIT. The
foregoing restrictions will continue to apply until the Board of Trustees
determines that it is no longer in our best interests to attempt to qualify, or
to continue to qualify, as a REIT and 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 our shareholders.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a transaction or a change in control that might involve a premium
price for our common shares or otherwise be in the best interest of our
shareholders. All certificates representing common shares or preferred shares
will bear a legend referring to the restrictions described above.
DESCRIPTION OF PARTNERSHIP UNITS
The description of partnership units set forth below does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Second Amended and Restated Agreement of Limited Partnership of the operating
partnership (the "Partnership Agreement"), which is incorporated herein by
reference as an exhibit to the registration statement of which this prospectus
is a part.
GENERAL
You, as a limited partner, may require the operating partnership to redeem
all or a portion of your partnership units (the "Exchange Right"). Upon
redemption, you will receive for each partnership unit redeemed cash in an
amount equal to the market value of a common share, subject to adjustments for
stock dividends, stock splits and distributions of options, warrants and
convertible securities. The market value of the common shares for purposes of
redeeming partnership units will be equal to the average, for the ten trading
days prior to the day on which the redemption notice was received by the
operating partnership, of (1) the sale price, as reported by the NYSE, of the
common shares, or (2) if no sale takes place on a particular day, the average of
the closing bid and ask prices, as reported by the NYSE.
We or the general partner may, by giving you notice within five business
days after receipt of your redemption notice, elect to acquire each partnership
unit presented to the operating partnership for redemption for cash or for one
common share, subject to adjustments in the event of stock dividends, stock
splits or reverse stock splits. We anticipate that we will elect to acquire, in
exchange for common shares, any partnership units presented to the operating
partnership for redemption by you. In order to protect our qualification as a
REIT, you cannot exercise the Exchange Right if our delivery of common shares to
you would result in any one of the Share Transfer Limitations. If you redeem
your partnership units, your right to receive distributions will cease. Upon the
receipt of common shares, you will have rights as a holder of common shares from
the time you acquire the common shares.
You must notify the operating partnership and the general partner of your
desire to redeem partnership units. In addition, you must request the redemption
of at least 1,000 partnership units or, if you hold less than 1,000 partnership
units, all of your partnership units. You may not deliver more than two notices
of redemption per calendar year. The date of the exchange is the first business
day of the month which is at least sixty business days
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after receipt of your notice of redemption. However, if we or the general
partner intend to pay cash for your partnership units, we or the general partner
may elect to delay the date of the exchange by up to 180 days to allow us to
issue additional common shares to fund such cash redemption. The operating
partnership may limit your ability to exercise your Exchange Rights if necessary
to ensure that none of the Ownership Limitations or Share Transfer Limitations
are triggered and to ensure that the operating partnership does not constitute a
"publicly traded partnership" under Section 7704 of the Code.
TAX CONSEQUENCES OF REDEMPTION
The following discussion summarizes material Federal income tax
considerations that may be relevant to a limited partner who exercises his right
to redeem his partnership units.
Tax Treatment of Exchange or Redemption of Partnership Units.
. If we elect to purchase partnership units tendered for redemption and
such purchase is treated as a sale of the partnership units to us, it
will be fully taxable to the limited partner. The limited partner will
be treated as realizing for tax purposes an amount equal to the sum of
the cash value or the value of the common shares received in the
exchange plus the amount of any operating partnership liabilities
allocable to the redeemed partnership units.
. If we do not elect to purchase a limited partner's partnership units
tendered for redemption, and the operating partnership redeems such
partnership units for cash that we contribute to the operating
partnership to effect such redemption, the redemption would also
arguably be treated for tax purposes as a sale of such partnership
units to us in a fully taxable transaction. In that event, the limited
partner would be treated as realizing an amount equal to the sum of
the cash received in the exchange plus the amount of any operating
partnership liabilities allocable to the redeemed partnership units.
. If we do not elect to purchase partnership units tendered for
redemption, and the operating partnership redeems a limited partner's
partnership units for cash that is not contributed by us to effect the
redemption, the tax consequences would be the same as described above,
except that, if the operating partnership redeems less than all of a
limited partner's partnership units, the limited partner would not be
permitted to recognize any loss occurring on the transaction and would
recognize taxable gain only to the extent that the cash, plus the
amount of any operating partnership liabilities allocable to the
redeemed partnership units, exceeded the limited partner's adjusted
basis in all of its partnership units immediately before the
redemption.
. The same tax consequences as above would result if we contributed cash
to the operating partnership to effect a redemption, and the
redemption transaction were treated as the redemption of a limited
partner's partnership units by the operating partnership rather than a
sale of partnership units to us.
Tax Treatment of Disposition of Partnership Units by a Limited Partner
Generally. If a partnership unit is disposed of in a manner that is treated as a
sale of the partnership unit, or a limited partner otherwise disposes of a
partnership unit other than in a transaction that is treated as a redemption of
the partnership unit, the determination of gain or loss from the sale or other
disposition will be based on the difference between the amount considered
realized for tax purposes and the adjusted tax basis in such partnership unit.
Upon the sale of a partnership unit, the "amount realized" will be measured by
the sum of the cash and fair market value of other property, such as common
shares, received plus the amount of any operating partnership liabilities
allocable to the partnership units sold. To the extent that the amount of cash
or property received plus the allocable share of any operating partnership
liabilities exceeds the limited partner's adjusted tax basis in the partnership
units disposed of, such limited partner will recognize gain. It is possible that
the amount of gain recognized or even the tax liability resulting from such gain
could exceed the amount of cash and/or the value of common shares received upon
such disposition.
Any gain or loss recognized upon a sale or other disposition of partnership
units will be treated as gain or loss attributable to the sale or disposition of
a capital asset. To the extent, however, that the amount realized upon
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the sale of a partnership unit attributable to a limited partner's share of
"unrealized receivables" of the operating partnership, as defined in Section 751
of the Code, exceeds the basis attributed to those assets, such excess will be
treated as ordinary income. It is possible that the amount of ordinary income
can exceed the net amount of gain realized on the sale, in which event, such
excess will be treated as a capital loss. Unrealized receivables include, to the
extent not previously included in operating partnership income, any rights to
payment for services rendered or to be rendered. Unrealized receivables also
include amounts that would be subject to recapture as ordinary income if the
operating partnership had sold its assets at their fair market value at the time
of the transfer of a partnership unit.
Basis of Partnership Units. In general, a limited partner that acquired its
partnership units by contribution of property and/or money to the operating
partnership had an initial tax basis in its partnership units ("Initial Basis")
equal to the following:
. the amount of money contributed, including the limited partner's
allocable share of recourse and nonrecourse liabilities of the
operating partnership, plus
. the limited partner's adjusted tax basis in any other property
contributed in exchange for such partnership units, less
. the amount of any money distributed and liabilities of the limited
partner assumed, or to which assets were taken subject to, by the
operating partnership, in connection with the acquisition of the
partnership units.
The Initial Basis of partnership units acquired by other means would have been
determined under the general rules of the Code, including the partnership
provisions, governing the determination of tax basis. Other rules, including the
"disguised sale" rules, also may affect Initial Basis, and limited partners are
urged to consult their own tax advisors regarding their Initial Basis.
Generally, a limited partner's Initial Tax Basis in his partnership units
is increased or decreased, but not below zero, on a going forward basis, as
follows:
<TABLE>
<CAPTION>
INCREASES IN INITIAL TAX BASIS DECREASES IN INITIAL TAX BASIS
------------------------------- ------------------------------
<S> <C>
. such limited partner's share of operating . such limited partner's share of operating
partnership taxable and tax-exempt income and partnership distributions,
. increases in such limited partner's allocable . decreases in such limited partner's allocable
share of liabilities of the operating share of liabilities of the operating partnership,
partnership.
. such limited partner's share of losses of the
operating partnership and
. such limited partner's share of nondeductible
expenditures of the operating partnership that are
not chargeable to his capital account.
</TABLE>
Potential Application of the Disguised Sale Regulations to a Redemption of
Partnership Units. There is a risk that a redemption by the operating
partnership of partnership units issued in exchange for a contribution of
property to the operating partnership may cause the original transfer of
property to the operating partnership in exchange for partnership units to be
treated as a "disguised sale" of property. Section 707 of the Code and the
Treasury Regulations thereunder (the "Disguised Sale Regulations") generally
provide that a partner's contribution of property to a partnership and a
simultaneous or subsequent transfer of money or other consideration, which may
include the assumption of or taking subject to a liability, from the partnership
to the partner will be presumed to be a sale, in whole or in part, of such
property by the partner to the partnership. Further, the Disguised Sale
Regulations
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provide generally that if money or other consideration is transferred by a
partnership to a partner within two years of the partner's contribution of
property, the transactions are presumed to be a sale of the contributed property
unless the facts and circumstances clearly establish that the transfers do not
constitute a sale. In addition, the Disguised Sale Regulations require that any
such transfer of money or other consideration within the two year period be
reported to the IRS. The Disguised Sale Regulations also provide that if two
years have passed between the transfer of money or other consideration and the
contribution of property, the transactions will be presumed not to be a sale
unless the facts and circumstances clearly establish that the transfers
constitute a sale.
Accordingly, if a partnership unit is redeemed by the operating partnership
for a limited partner who holds partnership units that were issued in exchange
for a contribution of property to the operating partnership, the Disguised Sale
Regulations may apply because the limited partner will thus receive cash
subsequent to a previous contribution of property to the operating partnership.
In that event, the IRS could contend that the contribution was taxable as a
disguised sale under the Disguised Sale Regulations. Any gain recognized thereby
may be eligible for installment reporting under Section 453 of the Code. In
addition, in such event, the Disguised Sale Regulations might apply to cause a
portion of the proceeds received by a redeeming limited partner to be
characterized as original issue discount on a deferred obligation which would be
taxable as interest income in accordance with the provisions of Section 1272 of
the Code. Each limited partner is advised to consult its own tax advisors to
determine whether redemption of its partnership units could be subject to the
Disguised Sale Regulations.
COMPARISON OF OWNERSHIP OF PARTNERSHIP UNITS AND COMMON SHARES
The nature of an investment in common shares is generally economically
equivalent to your investment in partnership units in the operating partnership.
There are, however, some differences between ownership of partnership units and
ownership of common shares, some of which may be material to you. The tabular
comparison below highlights a number of significant differences between the
operating partnership and us relating to, among other things, form of
organization, permitted investments, policies and restrictions, management
structure, distributions, investor rights and Federal income taxation. The table
below also compares material legal rights associated with the ownership of
partnership units and common shares. These comparisons are intended to assist
you, as a limited partner, in understanding how your investment will be changed
if your partnership units are redeemed for common shares. This discussion is
summary in nature and is not a complete discussion of these matters, and you
should carefully review the balance of this prospectus and the registration
statement of which this prospectus is a part for additional information about
us.
<TABLE>
<CAPTION>
PARTNERSHIP UNITS COMMON SHARES
----------------- -------------
<S> <C> <C>
Form of The operating partnership is organized as a We are a Maryland REIT organized under the
Organization Delaware limited partnership. You and other Maryland REIT Law. We operate principally
holders of partnership units, other than the through the operating partnership. We
general partner, hold a limited partnership currently have a 96.09% limited partnership
interest in the operating partnership. interest in the operating partnership.
Length of The operating partnership has a stated termination We have a perpetual term and intend to
Investment date of December 31, 2050, although it may be continue our operations for an indefinite
terminated earlier upon an event of bankruptcy, time period.
reorganization, insolvency, following the sale of
substantially all of the assets of the operating
partnership, the exchange of all limited
partnership interests or by election of the
general partner. The operating partnership has no
plans for disposition of its assets.
Purpose and The purpose of the operating partnership includes Under our Declaration of Trust, we may
Permitted the conduct of any business that may be lawfully invest in and acquire, hold, manage,
</TABLE>
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<TABLE>
<S> <C> <C>
Investments conducted by a limited partnership formed under administer, control and dispose of real
Delaware law. The business of the operating property and interests in real property,
partnership is to be conducted in such a manner including, engaging in business as a REIT
that will permit us to be classified as a REIT for under the Code.
Federal income tax purposes. The operating
partnership may, subject to the foregoing
limitation, invest or enter into partnerships,
joint ventures or similar arrangements and may own
interests in any other entity.
Capital The Partnership Agreement provides that if the The Board of Trustees may authorize the
Contribution operating partnership requires additional funds, issuance of shares of beneficial interest
we or the general partner may borrow such funds of any class, whether now or hereafter
from a financial institution or other lender and authorized, or securities or rights,
lend such funds to the operating partnership on convertible into shares of beneficial
the same terms and conditions as are applicable to interest, for such consideration as the
the general partner's or our borrowing of such Board of Trustees may deem advisable and in
funds. Moreover, the general partner is authorized accordance with the Bylaws. We are not
to cause the operating partnership to issue restricted under our governing instruments
partnership interests for less than fair market from borrowing. The issuance of additional
value if (1) we have concluded in good faith that common shares or other similar equity
such issuance is in our best interest and the best securities may result in the dilution of
interest of the operating partnership and (2) the your interest as a shareholder.
general partner makes a capital contribution in an
amount equal to the proceeds of such issuance.
The general partner generally is obligated to
contribute or cause us to contribute the proceeds
of our share offerings as additional capital to
the operating partnership. Upon such contribution,
we or the general partner, as applicable, will
receive additional partnership units, and our or
the general partner's percentage interest in the
operating partnership will increase. Conversely,
your percentage interests in the operating
partnership will decrease in the event of
additional capital contributions by us or the
general partner.
Potential You are subject to potential dilution of your As a shareholder you would be subject to
Dilution limited partnership interests with respect to cash potential dilution if the Board of
available for distribution if the general partner, Trustees, in its discretion, decides to
in its sole discretion, causes the operating issue additional common shares or other
partnership to issue additional partnership units equity securities.
or other equity securities.
Management The general partner, as the sole general partner The Board of Trustees has exclusive control
Control of the operating partnership, has full, exclusive over our business and affairs subject only
and complete responsibility and discretion in the to the restrictions in our Declaration of
management and control of the operating Trust and Bylaws. The Board of Trustees is
partnership. You generally have no authority as a classified into three classes. At each
limited partner to transact business for, or annual meeting of the shareholders, the
participate in the management activities or successors of the class of trustees whose
decisions of, the operating partnership. However, terms expire at that meeting will be
the consent of limited partners holding more than elected for a term of three years.
</TABLE>
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<TABLE>
<S> <C> <C>
50% of the limited partnership units held by such The Board of Trustees may alter or repeal the
partners is required for any amendment to the Bylaws without shareholder action.
Partnership Agreement that would:
. adversely affect your Exchange Rights,
. adversely affect your right to receive cash
distributions,
. alter the operating partnership's allocations
of income or loss, or
. impose any obligations on you to make
additional contributions to the capital of the
operating partnership.
Management The general partner will generally incur no As required by our Declaration of Trust,
Liability and liability to the operating partnership or any Bylaws and allowed by Maryland REIT Law, we
Indemnification limited partner for losses or liabilities incurred must indemnify any trustee, officer or
as a result of errors in judgment or of any act or shareholder against reasonable expenses
omission if the general partner acted in good incurred for such person's defense of a
faith. The Partnership Agreement also provides for proceeding related to such person's
the indemnification of us and the general partner capacity. We must also indemnify any
and our officers and directors from any and all trustee or officer against any claim or
losses, arising from any claims, suits or liability unless the following is involved:
proceedings that relate to the operations of the
operating partnership. . bad faith or deliberate dishonesty,
. receipt of an improper personal
benefit or
. reasonable cause to believe his act or
omission was unlawful.
Pursuant to a provision in our Declaration
of Trust, our trustees and officers will
not be liable to us or our shareholders for
money damages except for liability arising
from:
. actual receipt of an improper personal
benefit, or
. active and deliberate dishonesty
We may indemnify our employees and other
agents against liabilities incurred in
connection with their service in such
capacities.
Anti-takeover Because we hold a 96.09% limited partnership Our Declaration of Trust, Bylaws and the
Provisions interest in the operating partnership and own 100% MGCL contain a number of provisions that
of the general partner, the existence of may have the effect of delaying or
anti-takeover provisions is not a significant discouraging an unsolicited proposal for
consideration to the holders of partnership units. the acquisition of us or the removal of our
incumbent management. In addition,
preferred share purchase rights are
attached to the common shares which may
have anti-takeover effects.
</TABLE>
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<TABLE>
<S> <C> <C>
Voting Rights You do not have voting rights relating to the As a shareholder, you would be entitled to
operation and management of the operating one vote per share on all matters voted on
partnership except in connection with matters by shareholders, including trustee
involving the following: elections, a merger or sale of
substantially all of our assets, amendments
. amendments to the Partnership Agreement, to the Declaration of Trust and our
. a general assignment for the benefits of dissolution. We are managed and controlled
creditors or appointment of a custodian, by a Board of Trustees consisting of three
receiver or trustee, classes having staggered terms of office.
. entering any proceedings for bankruptcy, Each class is elected by our shareholders
. admittance of any successor general partner at their annual meetings. Each common share
. or dissolution of the operating partnership. has one vote. The Board of Trustees may
classify and issue preferred shares in one
or more series having voting power which
may differ from that of the common shares.
Amendment of the Any amendment to the Partnership Agreement . The Board of Trustees may amend the
Partnership requires the consent of the general partner. The Declaration of Trust to maintain REIT
Agreement or general partner may amend the Partnership qualification by a two-thirds vote without
the Declaration Agreement without your consent or the consent of any shareholder action.
of Trust any limited partner. However, limited partners . The Board of Trustees may amend the
holding more than 50% in interest in the operating Declaration of Trust to increase or
partnership must consent to any amendment that decrease the aggregate number of shares of
adversely affects the following rights you hold as beneficial interest or the number of shares
limited partner: of any class of beneficial interest that we
have authority to issue without any
. Your Exchange Rights, shareholder action.
. Your distribution rights, . Other amendments must generally be
. Allocations of profits and losses to you or approved by affirmative vote of the holders
. Your obligations to make additional capital of not less than a majority of the votes
contributions. entitled to be cast on the matter. However,
any amendment to specified sections of the
Declaration of Trust relating to the Board
of Trustees, share transfer restrictions,
amendments, and our duration requires the
affirmative vote of two-thirds of all the
votes entitled to be cast on the matter.
Vote Required to Under Delaware law, the operating partnership may Under the Declaration of Trust, the Board
Dissolve the be dissolved, other than in accordance with the of Trustees must obtain the approval of
Operating terms of the Partnership Agreement, only upon the holders of at least two-thirds of all of
Partnership or unanimous vote of the limited partners. our outstanding shares of beneficial
Us interest in order to dissolve us.
Distributions The operating partnership must distribute cash Subject to the preferential rights of any
from operations at least on a quarterly basis. other shares or series of shares of
Distributions can be made in amounts determined by beneficial interest and to the provisions
the general partner and are payable to the of the Declaration of Trust regarding
partners in accordance with their respective Shares-in-Trust, you, as a shareholder,
percentage interests in the operating partnership. would be entitled to receive dividends if,
as and when authorized and declared by the
Upon liquidation of the operating partnership, Board of Trustees out of legally available
after payment of or adequate provision for debts assets. You would also be entitled to share ratably
</TABLE>
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<TABLE>
<S> <C> <C>
and obligations of the operating partnership, any in our assets legally available for
remaining assets of the operating partnership will distribution to our shareholders in the
be distributed to all partners with positive event of our liquidation, dissolution or
capital accounts in accordance with their winding-up after payment of, or adequate
positive capital account balances. provision for, all of our known debts and
liabilities.
In order to qualify as a REIT, we must
distribute at least 95% of our taxable
income, excluding capital gains, and any
taxable income, including capital gains not
distributed, will be subject to corporate
income tax. We intend to pay quarterly
dividends to our shareholders.
Liability of Your liability for the operating partnership's As a shareholder, you would not be
Investors debts and obligations is generally limited to the personally liable for any of our
amount of your investments in the operating obligations solely as a result of your
partnership, together with your interest in the status as our shareholder. In addition, we
operating partnership's undistributed income, if must reimburse each shareholder or former
any. shareholder for all legal and other
expenses reasonably incurred by him in
connection with any claim or liability
successfully defended. In addition, it is
our policy to include a clause in our
contracts which provides that shareholders
will not be personally liable for
obligations entered into on our behalf.
However, with respect to tort claims,
contractual claims where shareholder
liability is not removed, claims for taxes
and statutory liability, the shareholders
may, in some jurisdictions, be personally
liable to the extent that we do not satisfy
such claims. Inasmuch as we carry public
liability insurance which we consider
adequate, any risk of your personal
liability is limited to situations in which
our assets plus our insurance coverage
would be insufficient to satisfy the claims
against us and our shareholders.
Liquidity You may transfer your interests in the operating The issuance of the common shares to you
partnership subject to the following limitations: will be registered under the Securities
Act, and the common shares will be freely
. Partnership units are not registered under transferable, subject to the Ownership
the Securities Act or any state securities laws Limits. The common shares are listed on the
and therefore may not be transferred unless they NYSE. The breadth and strength of the
are first registered under the Securities Act or secondary market will depend, among other
an exemption from registration is available. things, upon the number of shares
. You may not transfer your partnership units outstanding, our financial results and
if the transfer would adversely affect our status prospects, the general interest in our real
as a REIT. estate investments and our dividend yield
compared to that of other debt and equity
securities.
</TABLE>
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
considerations that may be relevant to a prospective holder of the common
shares. This discussion 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 shareholders such as 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.
This discussion is 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 IRS, 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. Akin, Gump, Strauss, Hauer & Feld, L.L.P.
has opined that this summary of the material federal income tax consequences
fairly summarizes the federal income tax considerations that are likely to be
material to a holder of the common shares.
BECAUSE YOUR INCOME TAX CONSIDERATIONS MAY VARY DEPENDING ON YOUR PERSONAL
INVESTMENT OR TAX CIRCUMSTANCES, WE RECOMMEND YOU CONSULT YOUR OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE COMMON SHARES AND OF OUR 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 PRENTISS PROPERTIES TRUST
We elected to be taxed as a REIT within the meaning of and under sections
856 through 860 of the Code, effective for its short taxable year beginning on
the day prior to the closing of its initial public offering and ending on
December 31, 1996. We believe that, commencing with such taxable year, we have
been organized and have operated in such a manner so as to qualify for taxation
as a REIT under the Code, and we intend to continue to operate in such a manner.
However, we can give no assurance that we have 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.
Qualification and taxation as a REIT depends upon our 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. No
assurance can be given that our actual results of operations for any particular
taxable year will satisfy such requirements.
As a REIT, we generally are not subject to federal corporate income tax on
our net income that is distributed currently to our 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, we will be subject to federal income tax in the following
circumstances:
. we will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains.
. we may be subject to the "alternative minimum tax" on our
undistributed items of tax preference, if any.
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. if we have (1) 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 (2) other nonqualifying income from
foreclosure property, we will be subject to tax at the highest
corporate rate on such income.
. if we have net income from prohibited transactions, which are, in
general, sales or other dispositions of property, other than
foreclosure property, held primarily for sale to customers in the
ordinary course of business, such income will be subject to a 100%
tax.
. if we fail to satisfy the 75% gross income test or the 95% gross
income test, as discussed below, and nonetheless have maintained our
qualification as a REIT because other requirements have been met, we
will be subject to a 100% tax on (1) the gross income attributable to
the greater of the amount by which we fail the 75% or 95% gross income
test multiplied by (2) a fraction intended to reflect our
profitability.
. if we fail to distribute during each calendar year at least the sum of
(1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT
capital gain net income for such year, and (3) any undistributed
taxable income from prior periods, we would be subject to a 4% excise
tax on the excess of such required distribution over the amounts
actually distributed. To the extent that we elect to retain and pay
income tax on the net long-term capital gain that we receive in a
taxable year, such retained amounts will be treated as having been
distributed for purposes of the 4% excise tax.
. if we acquire 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 our hands is determined by reference
to the basis of the asset, or any other asset, in the hands of the C
corporation and we recognize gain on the disposition of such asset
during the 10-year period beginning on the date on which we acquired
such asset, 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 our
acquisition 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 we will make an election
pursuant to IRS Notice 88-19 if we were to make any such
acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares,
or by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation, but for sections 856
through 860 of the Code;
(4) that is neither a financial institution referred to in section
582(c)(2) of the Code nor an insurance company to which subchapter L
of the Code applies;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) not more than 50% in value of the outstanding shares of which is
owned, directly or indirectly, by five or fewer individuals or
entities, during the last half of each taxable year (the "5/50
Rule");
(7) 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 IRS that must be met in
order to elect and maintain REIT status;
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(8) 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
(9) that meets the Code's income and asset tests.
The Code provides that conditions (1) through (4) must be met during the
entire taxable year and that condition (5) 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 (5) and (6) will not apply until after the
first taxable year for which an election is made by us to be taxed as a REIT.
Beginning with our 1998 taxable year, if we comply with the requirements for
ascertaining the ownership of our outstanding shares of beneficial interest and
do not know or have reason to know that we have violated the 5/50 Rule, we will
be deemed to satisfy the 5/50 Rule for the taxable year. We have issued
sufficient common shares with sufficient diversity of ownership to allow us to
satisfy requirements (5) and (6). In addition, the Declaration of Trust provides
for restrictions regarding transfer of our shares that are intended to assist us
in continuing to satisfy the share ownership requirements described in clauses
(5) and (6) above.
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 is generally considered an individual. A trust that is a qualified
trust under Code section 401(a), however, is generally 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.
We currently have three wholly-owned subsidiaries, the general partner, the
general partner of Prentiss Properties Real Estate Fund I, L.P. and the general
partner of Prentiss Austin Properties, L.P., and may have additional wholly-
owned 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
is owned by the REIT. In applying the requirements described herein, any of our
"qualified REIT subsidiaries" will be ignored, and all assets, liabilities, and
items of income, deduction, and credit of such subsidiaries will be treated as
our assets, liabilities, and items of income, deduction, and credit. All of our
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,
determined on the basis of the REIT's capital interest in the partnership, 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, our 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 our assets, liabilities, and items of income
for purposes of applying the requirements described herein.
INCOME TESTS
In order for us to qualify and to maintain our qualification as a REIT, two
requirements relating to our gross income must be satisfied annually. First, at
least 75% of our 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, interest
on obligations secured by mortgages on real property, or qualified temporary
investment income. Second, at least 95% of our 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.
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The rent we receive from our tenants ("Rent") will qualify as "rents from
real property" in satisfying the gross income requirements for a REIT described
above only if the following conditions are met:
. 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.
. The Rent received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if we, or a direct or
indirect owner of 10% or more of our shares of beneficial interest,
directly or constructively owns 10% or more of such tenant (a "Related
Party Tenant").
. 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."
. For the Rent to qualify as "rents from real property," we generally
must not operate or manage the Properties or furnish or render
services to the tenants of such Properties, other than through an
"independent contractor" who is adequately compensated and from whom
we derive no revenue.
The "independent contractor" requirement, however, does not apply to the extent
the services provided by us are "usually or customarily rendered" in connection
with the rental of space for occupancy only, e.g. furnishing water, heat, light,
and air conditioning and cleaning windows, public entrances, and lobbies, and
are not otherwise considered "rendered to the occupant," e.g. renting parking
spaces on a reserved basis to tenants. In addition, we may furnish or render a
de minimis amount of "noncustomary services" to the tenants of a Property other
than through an independent contractor as long as the amount that we receive for
such services does not exceed 1% of our total receipts from the Property. For
that purpose, the amount attributable to our noncustomary services will be at
least equal to 150% of our cost of providing the services.
We do 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, we expect that, with respect to other properties
that we may acquire in the future, we 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 our status
as a REIT. In addition, we currently do not receive any Rent from a Related
Party Tenant, and we expect that, to the extent that we receive Rent from a
Related Party Tenant in the future, such Rent will not cause us to fail to
satisfy either the 75% or 95% gross income test. We also currently do not
receive Rent attributable to personal property that is greater than 15% of the
Rent received under the applicable Lease. We expect that, in the future, we 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 us to fail to satisfy either the
75% or 95% gross income test.
Through the operating partnership and the Noncorporate Subsidiaries, none
of which constitutes a qualifying independent contractor, we provide and will
provide in the future real estate services to our tenants. We believe 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, we employ
and will continue to employ qualifying independent contractors to provide such
services. Furthermore, we expect that we will not provide noncustomary services
with respect to other properties that we acquire in the future, other than
through a qualifying independent contractor, to the extent that the provision of
such services would cause us 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
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income test. Thus, if the Rent attributable to such personal property, plus any
other income received by us during a taxable year that is not qualifying income
for purposes of the 95% gross income test, exceeds 5% of our gross income during
such year, we would likely lose our REIT status. If, however, any portion of the
Rent received under a lease does not qualify as "rents from real property"
because either the Rent is considered based on the income or profits of any
person or the tenant is a Related Party Tenant, none of the Rent received under
such lease would qualify as "rents from real property." In that case, if the
Rent we receives under such lease, plus any other income we receive during the
taxable year that is not qualifying income for purposes of the 95% gross income
test, exceeds 5% of our gross income for such year, we would likely lose our
REIT status. Finally, if any portion of the Rent does not qualify as "rents from
real property" because we furnish noncustomary services to the tenants of a
Property other than through a qualifying independent contractor, none of the
Rent we receive with respect to the related Property would qualify as "rents
from real property." In that case, if the Rent we receive with respect to the
related Property, plus any other income we receive during the taxable year that
is not qualifying income for purposes of the 95% gross income test, exceeds 5%
of our gross income for such year, we would lose our REIT status.
We, 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 fees for the
performance of 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
we receive 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. We believe
that the aggregate amount of any such nonqualifying income in any taxable year
has not caused and will not cause us 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
. 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,
. for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and
. for which such REIT makes a proper election to treat such property as
foreclosure property.
We do not anticipate that we will receive any income from foreclosure property
that is not qualifying income for purposes of the 75% gross income test, but, if
we do receive any such income, we 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%
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gross income test. We anticipate that any income we receive 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. We believe
that no asset owned by us 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 our 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, we 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 we 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."
It is possible that, from time to time, we or the operating partnership
will enter into hedging transactions with respect to one or more of our assets
or liabilities. Any such hedging transaction 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 we or the
operating partnership enters into an interest rate swap, cap agreement, option,
futures contract, forward rate agreement, or similar financial instrument to
reduce the interest rate risks with respect to indebtedness incurred or to be
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. To the extent
that we 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. We intend to structure any hedging
transactions in a manner that does not jeopardize its status as a REIT.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we nevertheless may qualify as a REIT for such year if we are
entitled to relief under the Code. Those relief provisions generally will be
available if our failure to meet such tests is due to reasonable cause and not
due to willful neglect, we attach a schedule of the sources of our income to our
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 we would be entitled to the benefit of those relief provisions,
Even if those relief provisions apply, a 100% tax would be imposed on (1) the
gross income attributable to the greater of the amount by which we fail the 75%
or 95% gross income test multiplied by (2) a fraction intended to reflect our
profitability.
ASSET TESTS
We, at the close of each quarter of each taxable year, also must satisfy
the following two tests relating to the nature of our assets:
. At least 75% of the value of our total assets must be represented by
cash or cash items, which generally include receivables, government
securities, "real estate assets," or, in cases where we raise 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 our receipt of such capital.
. Of the investments not included in the 75% asset class, the value of
any one issuer's securities we own may not exceed 5% of the value of
our total assets, and we 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, and any
qualified REIT subsidiary.
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 as of the date of the
REIT's loan commitment or, in the case of a purchase or a mortgage, the date of
the loan purchase commitment, and
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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.
For purposes of the asset tests, we are deemed to own our proportionate
share of the assets of the operating partnership and each Noncorporate
Subsidiary, rather than our interest in those entities. At least 75% of the
value of our total assets has been and will be represented by real estate
assets, cash and cash items including receivables, and government securities.
We, through the operating partnership, own 100% of the nonvoting stock of the
Manager and hold unsecured notes issued by the Manager. We do not own, directly
or indirectly, any of the voting stock of the Manager and believe that the value
of our ownership interest in the Manager does not exceed 5% of the value of our
total assets. In addition, we have not owned, and will not own securities of any
one issuer the value of which exceeds 5% of the value of our total assets or
more than 10% of any one issuer's outstanding voting securities, except for its
interests in the operating partnership, the Noncorporate Subsidiaries, and any
qualified REIT subsidiary. In addition, we 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 us to violate either asset test.
If we should fail to satisfy the asset tests at the end of a calendar
quarter, such a failure would not cause us to lose our REIT status if (1) we
satisfied the asset tests at the close of the preceding calendar quarter and (2)
the discrepancy between the value of our 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 (2) is not satisfied, we still could avoid disqualification
by eliminating any discrepancy within 30 days after the close of the calendar
quarter in which it arose.
DISTRIBUTION REQUIREMENTS
In order to avoid corporate income taxation of our earnings, we are
required to distribute each taxable year dividends, other than capital gain
dividends and retained capital gains, to our shareholders in an aggregate amount
at least equal to (1) the sum of (A) 95% of our "REIT taxable income," computed
without regard to the dividends paid deduction and our net capital gain, and (B)
95% of our after tax net income, if any, from foreclosure property, minus (2)
the sum of 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 we timely file our 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 we do not distribute all of our net capital gain or distribute at
least 95%, but less than 100%, of our "REIT taxable income," as adjusted, we
will be subject to tax thereon at regular corporate tax rates. Furthermore, if
we should fail to distribute during each calendar year at least the sum of (1)
85% of its REIT ordinary income for such year, (2) 95% of its REIT capital gain
income for such year, and (3) any undistributed taxable income from prior
periods, we would be subject to a 4% nondeductible excise tax on the excess of
such required distribution over the amounts actually distributed. We have made,
and intend to continue to make, timely distributions sufficient to satisfy the
annual distribution requirement. We may elect to retain and pay income tax on
our long-term capital gains. Any such retained amount will be treated as having
been distributed by us for purposes of the 4% excise tax described above.
It is possible that, from time to time, we may experience timing
differences between (1) the actual receipt of income and actual payment of
deductible expenses and (2) 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, we 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, we may have less cash than is necessary to
meet our annual 95% distribution requirement or to avoid corporate income tax or
the excise tax imposed on undistributed income. In such a situation, we 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.
We may be able to rectify a failure to meet the distribution requirement
for a year by paying "deficiency dividends" to our shareholders in a later year,
which may be included in our deduction for dividends paid for the
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earlier year. Although we may be able to avoid being taxed on amounts
distributed as deficiency dividends, we will be required to pay the IRS interest
based upon the amount of any deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, we must maintain records and
request on an annual basis information from our shareholders designed to
disclose the actual ownership of our outstanding shares. We have complied and
intend to continue to comply with such requirements in the future.
FAILURE TO QUALIFY
If we fail to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, we will be subject to tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. Distributions to our shareholders in any year in which we fail to qualify
will not be deductible nor will they be required to be made. In such event, to
the extent our current and accumulated earnings and profits, all distributions
to shareholders will be taxable as ordinary income, and corporate distributees
may be eligible for the dividends received deduction. Unless entitled to relief
under specific statutory provisions, we will also be disqualified from taxation
as a REIT for the four taxable years following the year during which we ceased
to qualify as a REIT. It is not possible to state whether in all circumstances
we would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as we qualify as a REIT, distributions made to our taxable U.S.
shareholders out of current or accumulated earnings and profits, and not
designated as capital gain dividends or retained capital gains, 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
our current or accumulated earnings and profits, our 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 common shares that
for U.S. federal income tax purposes is (1) a citizen or resident of the U.S.,
(2) a corporation, partnership, or other entity created or organized in or under
the laws of the U.S. or of any political subdivision thereof, (3) 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 (4) 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 generally will be taxed as long-
term capital gains to the extent they do not exceed our actual net capital gain
for the taxable year without regard to the period for which the shareholder has
held his common shares. However, corporate shareholders may be required under
section 291 of the Code to treat up to 20% of capital gain dividends as ordinary
income. We may elect to retain and pay income tax on our net long-term capital
gains. In that case, our shareholders would include in income their
proportionate share of our undistributed long-term capital gains. In addition,
the shareholders would be deemed to have paid their proportionate share of the
tax paid by us, 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 us.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's common shares, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions in excess
of current and accumulated earnings and profits exceed the adjusted basis of a
shareholder's common shares, such distributions will be included in income as
gains from the sale or exchange of a capital asset, assuming the common shares
are capital assets in the hands of the shareholder. In addition, any
distribution we declare 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 us and received by the shareholder on December 31 of
such year, provided that the distribution is actually paid by us during January
of the following calendar year.
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Shareholders may not include in their individual income tax returns any of
our net operating losses or capital losses. Instead, we would carry over such
losses for potential offset against its future income. Taxable distributions
from us and gain from the disposition of the common shares will not be treated
as passive activity income and, therefore, shareholders generally will not be
able to apply any "passive activity losses," such as losses from limited
partnerships which engage in passive activities in which a shareholder is a
limited partner, against such income. In addition, taxable distributions from us
generally will be treated as investment income for purposes of the investment
interest limitations. Capital gains from the disposition of common shares or
distributions treated as such, however, will be treated as investment income
only if the shareholder so elects, in which case such capital gains will be
taxed at ordinary income rates. We have notified and will continue to notify
shareholders after the close of our taxable year as to the portions of the
distributions attributable to that year that constitute ordinary income, return
of capital, and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, any gain or loss realized upon a taxable disposition of the
common shares by a shareholder who is not a dealer in securities will be treated
as capital gain or loss if the common shares have been held as a capital asset.
Such gain or loss will generally constitute long-term capital gain or loss and
will be taxable at a rate of 20% if the common shares have been held for more
than twelve months. Otherwise, such a gain will be taxed at the holder's regular
marginal tax rate. However, any loss upon a sale or exchange of common shares by
a shareholder who has held such shares for six months or less, after applying
holding period rules, will be treated as a long- term capital loss to the extent
of distributions from us required to be treated by such shareholder as long-term
capital gain. All or a portion of any loss realized upon a taxable disposition
of the common shares may be disallowed if other common shares are purchased
within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
The highest marginal individual income tax rate is 39.6%. The maximum tax
rate on net capital gains applicable to noncorporate taxpayers is 20% for sales
and exchanges of assets held for more than one year. The maximum tax rate on
long-term capital gain from the sale or exchange of "section 1250 property,"
i.e., depreciable real property, held for more than 18 months is 25% to the
extent that such gain would have been treated as ordinary income if the property
were "section 1245 property." With respect to distributions designated by us as
capital gain dividends and any retained capital gains that we are deemed to
distribute, we may designate, subject to limits, whether such a distribution is
taxable to its noncorporate stockholders at a 20%, or 25%. 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
We report and will continue to report to our U.S. shareholders and to the
IRS 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 is a corporation or is otherwise exempt
categories and, when required, demonstrates this fact or 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. If you are a shareholder, and do not provide us with
your correct taxpayer identification number, you may be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against income tax liability. In addition, we may be required to withhold a
portion of capital gain distributions to you if you fail to certify your
nonforeign status to us. The IRS has issued final regulations regarding the
backup withholding rules as applied to Non-U.S. Shareholders. Those regulations
alter the current system of backup withholding compliance and will be effective
for distributions made after December 31, 1998.
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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 IRS 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 us to Exempt Organizations generally should
not constitute UBTI. However, if an Exempt Organization finances its acquisition
of the common shares with debt, a portion of its income from us 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 us as UBTI. In addition, a pension trust that
owns more than 10% of our shares may be required to treat a percentage of the
dividends from us as UBTI (the "UBTI Percentage"). The UBTI Percentage is the
gross income derived by us from an unrelated trade or business, determined as if
we were a pension trust, divided by our gross income for the year in which the
dividends are paid. The UBTI rule applies to a pension trust holding more than
10% of our stock only if (1) the UBTI Percentage is at least 5%, (2) we qualify
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 our shares in
proportion to their actuarial interests in the pension trust, and (3) we are a
"pension-held" REIT, i.e., either (A) one pension trust owns more than 25% of
the value of our shares or (B) a group of pension trusts individually holding
more than 10% of the value of our shares collectively own more than 50% of the
value of our 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, we 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 COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
If you are a Non-U.S. Shareholder, distributions that are not attributable
to gain from our sales or exchanges of U.S. real property interests and that we
do not designate as capital gains dividends or retained capital gains will be
treated as dividends of ordinary income to the extent that they are made out of
our current or accumulated earnings and profits. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the common shares is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such distributions and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a non-U.S. corporation. We
expect 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 a lower treaty rate
applies and any required form evidencing eligibility for that reduced rate is
filed with us or the Non-U.S. Shareholder files an IRS Form 4224 with us
claiming that the distribution is effectively connected income. The IRS has
issued final regulations that modify the manner in which we comply with the
withholding requirements. Those regulations are effective for distributions made
after December 31, 1998. Distributions in excess of our current and accumulated
earnings and profits will not be taxable to a shareholder to the extent that
such distributions do not exceed the adjusted basis of the shareholder's common
shares, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Shareholder's common shares, such
distributions will give rise to tax liability if the Non-U.S. Shareholder would
otherwise be subject to tax on any gain from the sale or disposition of his
common shares, as described below. Because it generally cannot be determined
at
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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 our
current and accumulated earnings and profits.
We are required to withhold 10% of any distribution in excess of our
current and accumulated earnings and profits. Consequently, although we intend
to withhold at a rate of 30% on the entire amount of any distribution, to the
extent that we do 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 we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges by us 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. We are required to
withhold 35% of any distribution that is designated by us as a capital gains
dividend. The amount withheld is creditable against the Non-U.S. Shareholder's
FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his common shares
generally will not be taxed under FIRPTA if we are 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 common shares will be
publicly traded, no assurance can be given that we are 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 (1) investment in the common shares
is effectively connected with the Non-U.S. Shareholder's U.S. trade or business,
in which case the Non-U.S. Shareholder will be subject to the same treatment as
U.S. shareholders with respect to such gain, or (2) 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 other conditions apply, in which case the
nonresident alien individual will be subject to a 30% tax on the individual's
capital gains. If the gain on the sale of the common shares were to be subject
to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to the same
treatment as U.S. shareholders with respect to such gain, subject to applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals, and the possible application of the 30% branch
profits tax in the case of non-U.S. corporations.
POSSIBLE LEGISLATION OR OTHER ACTION AFFECTING TAX CONSEQUENCES
The rules dealing with Federal income taxation are constantly under review
by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department. Changes to the Federal laws and interpretations thereof
could adversely affect an investment in us. For example, a proposal issued by
President Clinton on February 2, 1998, if enacted into law, may adversely affect
our ability to expand the present activities of our management subsidiaries. We
cannot predict whether, when, in what forms, or with what effective dates, the
tax laws applicable to us or an investment in us will be changed.
OTHER TAX CONSEQUENCES
We, the general partner, the operating partnership, the Manager, a
Noncorporate Subsidiary, or our shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which we,
it or they own property, transact business, or reside. Such state and local tax
treatment may not conform to the
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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 us.
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. While we are organized as a Maryland real estate
investment trust and are therefore not subject to the Texas franchise tax, we
own, directly or indirectly, qualified REIT subsidiaries and limited liability
companies that are subject to the tax. The Texas franchise tax imposed on a
corporation doing business in Texas generally is equal to the greater of (1)
.25% of "taxable capital," generally, financial accounting net worth with
adjustments, apportioned to Texas; or (2) 4.5% of "taxable earned surplus,"
generally, federal taxable income with 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.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE NONCORPORATE SUBSIDIARIES
The following discussion summarizes material federal income tax
considerations applicable to our direct or indirect investment in the operating
partnership and the Noncorporate Subsidiaries (each of the operating partnership
and the Noncorporate Subsidiaries is referred to herein as a "Partnership"). The
discussion does not cover state or local tax laws or any federal tax laws other
than income tax laws.
CLASSIFICATION AS A PARTNERSHIP
We will be entitled to include in our income our distributive share of each
Partnership's income and to deduct our 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 is treated as a
partnership under Treasury regulations, effective January 1, 1997, relating to
entity classification (the "Check-the-Box Regulations") and 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 (1) the entity had a reasonable
basis for its claimed classification, (2) 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 (3) 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 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. We have represented that, to the best of our
knowledge, each Partnership will be treated as a "partnership" for federal
income tax purposes.
A publicly traded partnership is a partnership whose interests trade 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"). 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
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secondary market or the substantial equivalent thereof if all interests in the
partnership were issued in a transaction or transactions that was not required
to be registered under the Securities Act, and 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 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 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.
If for any reason one of the Partnerships are taxable as corporations,
rather than as partnerships, for federal income tax purposes, we would likely
not be able to qualify as a REIT. In addition, any change in a Partnership's
status for tax purposes might be treated as a taxable event, in which case we
might incur a tax liability without any related cash distribution. 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, we 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 our taxable year, without regard to whether we have 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 our 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
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under Code section 704(c), it is possible that we may be allocated lower amounts
of depreciation deductions for tax purposes with respect to contributed
Properties than would be allocated to us if such Properties were to have a tax
basis equal to their fair market value at the time of contribution and may be
allocated taxable gain in the event of a sale of such contributed Properties in
excess of the economic profit allocated to us as a result of such sale. These
allocations may cause us to recognize taxable income in excess of cash proceeds,
which might adversely affect our ability to comply with the REIT distribution
requirement, although we do not anticipate that this event will occur. The
foregoing principles also will affect the calculation of our earnings and
profits for purposes of determining which portion of our distributions is
taxable as a dividend. The allocations described in this paragraph may result in
a higher portion of our distributions being taxed as dividends than would have
occurred had we purchased the Properties for cash.
Basis in Operating Partnership Interest. Our adjusted tax basis in our
partnership interest in the operating partnership generally is equal to (1) the
amount of cash and the basis of any other property contributed to the operating
partnership by us, (2) increased by (A) our allocable share of the operating
partnership's income and (B) our allocable share of indebtedness of the
operating partnership, and (3) reduced, but not below zero, by (A) our allocable
share of the operating partnership's loss and (B) the amount of cash distributed
to us, including constructive cash distributions resulting from a reduction in
our share of indebtedness of the operating partnership.
If the allocation of our distributive share of the operating partnership's
loss would reduce the adjusted tax basis of our 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 our adjusted
tax basis below zero. To the extent that the operating partnership's
distributions, or any decrease in our share of the indebtedness of the operating
partnership, such decrease being considered a constructive cash distribution to
the partners, would reduce our adjusted tax basis below zero, such
distributions, including such constructive distributions, will constitute
taxable income to us. Such distributions and constructive distributions normally
will be characterized as capital gain, and if our partnership interest in the
operating partnership has been held for longer than the one-year long-term
capital gain holding period, the distributions and constructive distributions
will constitute long-term capital gain.
SALE OF THE OPERATING PARTNERSHIP'S OR A NONCORPORATE SUBSIDIARY'S PROPERTY
Generally, any gain realized by a Partnership on the sale of property held
for more than one year will be 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 provide
that any decision to sell any real estate asset in which a trustee, or officer,
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.
Our 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 our ability to satisfy the income tests for REIT status. We, however, do
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 our or the Partnership's trade or
business.
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MANAGER
The operating partnership owns 100% of the nonvoting stock of the Manager,
which stock represents in the aggregate a 95% economic interest in the Manager.
The operating partnership also holds notes issued by the Manager in the
aggregate initial principal amount of $34.75 million. By virtue of its ownership
of the operating partnership, we are considered to own its pro rata share of
such stock and notes.
As noted above, for us to qualify as a REIT the value of the equity and
debt securities of the Manager held, directly or indirectly, by us may not
exceed 5% of the total value of our assets. In addition, we may not own,
directly or indirectly, more than 10% of the voting stock of the Manager. We do
not own, directly or through the operating partnership, any of the voting
securities of the Manager. In addition, we believe that the value of the equity
and debt securities of the Manager is significantly less than 5% of the total
value of its assets. However, if the IRS were to successfully challenge these
determinations and conclude that the value of the equity and debt securities of
the Manager exceeded 5% of our total assets, we would likely 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 our shareholders.
PLAN OF DISTRIBUTION
This prospectus relates to our or the general partner's possible issuance
of up to 524,180 common shares to the following limited partners to the extent
that they tender the partnership units opposite their respective names to the
operating partnership for redemption:
<TABLE>
<CAPTION>
COMMON SHARES ISSUABLE UPON
---------------------------
REDEMPTION OF
-------------
LIMITED PARTNERS PARTNERSHIP UNITS HELD PARTNERSHIP UNITS
---------------- ---------------------- -----------------
<S> <C> <C>
Peter O. Hausmann 190,190 190,190
Henry C. Gulbrandsen, Jr. 131,956 131,956
Timothy J. Weber 131,956 131,956
Steven A. Stattner 70,078 70,078
------- -------
Total 524,180 524,180
======= =======
</TABLE>
Pursuant to the Partnership Agreement, Messrs. Hausmann, Gulbrandsen, Weber
and Stattner contributed interests in assets to the capital of the operating
partnership in exchange for the partnership units opposite their respective
names. Pursuant to the registration rights agreement, we agreed to file with the
SEC a registration statement, of which this prospectus is a part, with respect
to the issuance of common shares to the limited partners upon redemption of
their partnership units.
We will not receive any cash proceeds from the issuance of the common
shares to you but will acquire one partnership unit in exchange for each common
share that we issue. Consequently, with each redemption, our interest in the
operating partnership will increase. We will pay all costs, expenses and fees in
connection with the registration of the common shares.
LEGAL OPINIONS
The legality of the issuance of the common shares will be passed upon by
Akin, Gump, Strauss, Hauer & Feld, L.L.P., who will rely on Ballard Spahr
Andrews & Ingersoll, LLP, Baltimore, Maryland, as to matters of Maryland law.
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EXPERTS
Our consolidated and combined financial statements as of December 31, 1997
and 1996 and for the year ended December 31, 1997 and the period October 22,
1996, inception of operations, to December 31, 1996, and the Predecessor Company
for the period January 1, 1996 through October 21, 1996, and the year ended
December 31, 1995, included in our Annual Report on Form 10-K and 10-K/A for the
year ended December 31, 1997, and the combined statements of revenue and certain
operating expenses of the Silicon Valley Properties and the Newport National
Properties and the statement of revenue and certain operating expenses of the
Carrara Place Property included in our Current Reports on Form 8-K, filed
February 10, 1998, and the combined statement of revenues and certain operating
expenses of the Willow Oaks Properties and the statement of revenues and certain
operating expenses of the Ordway Property included in our Current Report on Form
8-K, filed October 9, 1998 and amended December 24, 1998, all incorporated by
reference in this prospectus, have been incorporated herein in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants given on the
authority of that firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
from our web site at http://www.pplinc.com or at the SEC's web site at
http://www.sec.gov.
We filed a registration statement on Form S-3 to register with the SEC the
common shares. This prospectus is a part of that registration statement. As
allowed by SEC rules, this prospectus does not contain all of the information
you can find in the registration statement or the exhibits to the registration
statement.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act from the date hereof until our
offering is completed.
1. Our Annual Report on Form 10-K and 10-K/A, File No. 001-14516, for the
year ended December 31, 1997.
2. Our Quarterly Reports on Form 10-Q and 10-Q/A, File No. 001-14516, for
the quarters ended March 31, June 30 and September 30, 1998.
3. Our Current Reports filed during the fiscal year ended December 31,
1998 as follows:
. Form 8-K, File No. 001-14516, filed on January 1, 1998;
. Form 8-K, File No. 001-14516, filed on January 15, 1998;
. Form 8-K, File No. 001-14516, filed on February 10, 1998;
. Form 8-K, File No. 001-14516, filed on February 17, 1998;
. Form 8-K, File No. 001-14516, filed on February 25, 1998;
. Form 8-K, File No. 001-14516, filed on July 1, 1998; and
. Form 8-K, File No. 001-14516, filed on October 9, 1998, as
amended by Form 8-K/A filed on December 24, 1998.
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4. In addition to the above Current Reports, the following include
statements of revenue and expenses for acquisitions during the fiscal
year ending December 31, 1997 which were individually significant or
significant in the aggregate:
. Form S-11, File No. 333-23989, filed on March 26, 1997, as
amended by Form S-11/A, File No. 333-23989, filed on April 16,
1997;
. Form 8-K, File No. 001-14516, filed on April 16, 1997 as amended
by Form 8-K/A, File No. 001-14156, filed on June 12, 1997;
and
. Form 8-K, File No. 001-14516, filed on November 3, 1997.
5. The description of the common shares contained in our registration
statement on Form 8-A, File No. 001-14516, filed on October 17, 1996,
under the Exchange Act, including any reports filed under the Exchange
Act for the purpose of updating such description.
6. The description of the Series B Junior Preferred Shares contained in
our registration statement on Form 8-A, File No. 000-23813, filed on
February 17, 1998, as amended by our registration statement of Form 8-
A, File No. 001-14516, filed on March 10, 1998, including any reports
filed under the Exchange Act for the purpose of updating such
description.
You may request a copy of these filings, at no cost, by writing or
telephoning:
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas
(214) 654-0886
You should rely on the information incorporated by reference or provided in
this prospectus or any prospectus supplement. We have authorized no one to
provide you different information. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus or Any prospectus supplement is accurate
as of any date other than the date on the front of the document.
35
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses, other than underwriting
discounts and commissions, in connection with the issuance and distribution of
the securities being registered hereby, all of which be paid for by Prentiss
Properties Trust (the "Company"):
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................................... $ 2,760
Accounting fees and expenses.......................................................... 10,000
Blue Sky fees and expenses............................................................ 1,000
Legal fees and expenses............................................................... 50,000
Printing.............................................................................. 10,000
Miscellaneous......................................................................... 1,240
--------
TOTAL............................................................................ $75,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of the Company contains such a provision which eliminates
such liability to the maximum extent permitted by the Maryland REIT Law.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a trustee, director, officer or partner of such real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his status as present
or former shareholder. The Bylaws of the Company obligate it, to the maximum
extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former Trustee or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Declaration of Trust and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any of
the capacities described above and to any employee or agent of the Company or a
predecessor of the Company. The Bylaws require the Company to indemnify a
Trustee or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as is permitted by the MGCL for directors
II-1
<PAGE>
and officers of Maryland corporations. The MGCL permits a corporation to
indemnify its present and former directors and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. However,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis that
a personal benefit was improperly received unless a court orders indemnification
and then only for expenses. In accordance with the MGCL, the Bylaws of the
Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the Trustee or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company as
authorized by the Bylaws and (b) a written undertaking by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER EXHIBITS
- ------- ---------
3.1 -- of Amended and Restated Declaration of Trust of the Company (filed as
Exhibit 3.1 to the Company's Registration Statement on Amendment No. 1
of Form S-11, File No. 333-09863, and incorporated by reference herein).
3.2 -- Articles Supplementary to the Amended and Restated Declaration of
Trust Classifying and Designating the Series A Preferred Shares (filed
as Exhibit 3.1 to the Company's Current Report on Form 8-K filed January
15, 1998 and incorporated by reference herein).
3.3 -- Articles Supplementary, dated February 17, 1998, Classifying and
Designating a Series of Preferred Shares of Beneficial Interest as
Junior Participating Cumulative Convertible Redeemable Preferred Shares
of Beneficial Interest, Series B, and Fixing Distribution and Other
Preferences and Rights of Such Shares (filed as Exhibit 3 to the
Company's Registration Statement on Form 8-A filed on February 17, 1998,
File No. 000-23813).
3.4 -- Articles Supplementary, dated June 25, 1998, Classifying and
Designating a Series of referred Shares of Beneficial Interest as Series
B Cumulative Redeemable Perpetual Preferred Shares of Beneficial
Interest and Fixing Distribution and Other Preferences and Rights of
Such Shares (filed as Exhibit 3.5 to the Company's Form 10-Q filed
August 12, 1998 and incorporated by reference herein).
3.5 -- Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Amendment No. 1 of Form S-11, File No. 333-
09863, and incorporated by reference herein).
4.1 -- Form of common shares Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Amendment No. 1 of Form S-11, File
No. 333-09863, and incorporated by reference herein).
4.2 -- Rights Agreement, dated February 6, 1998, between the Company and
First Chicago Trust Company of New York, as Rights Agent (filed as
Exhibit 4.1 to the Company's Registration Statement on Form 8-A filed on
February 17, 1998 and incorporated by reference herein).
4.4 -- Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
*5 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
II-2
<PAGE>
*8 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. regarding tax
matters.
**10.1 -- Registration Rights Agreement, dated October 22, 1997, between the
Prentiss Properties Trust, Prentiss Properties Acquisition Partners,
L.P., Prentiss Properties I, Inc., Peter O. Hausmann, Henry C.
Gulbrandsen, Jr., Timothy J. Weber and Steven A. Stattner.
10.2 -- Second Amended and Restated Agreement of limited partnership of
Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit 10.2 to
the Company's Annual Report on Form 10-K, filed March 25, 1997).
10.3 --First Amendment to the Second Amended and Restated Agreement of
limited partnership of Prentiss Properties Acquisition Partners, L.P.
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K, filed
January 15, 1998).
10.4 -- Second Amendment to the Second Amended and Restated Agreement of
limited partnership of Prentiss Properties Acquisition Partners, L.P.
(filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q,
filed August 12, 1998).
*23.1 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibits 5 and 8).
**23.2 -- Consent of Ballard Spahr Andrews & Ingersoll, LLP.
*23.3 -- Consent of PricewaterhouseCoopers LLP.
**24 -- Power of Attorney (included on the signature page of this
Registration Statement).
___________________________
* Filed herewith.
** Previously filed.
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement (notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the SEC pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement); and
II-3
<PAGE>
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that the undertakings set forth in subparagraphs (i) and (ii)
above do not apply if the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic reports filed
with or furnished to the SEC by the registrant pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in
this registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that the in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted against the registrant by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of their counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant further hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned thereunto duly
authorized, in the city of Dallas, state of Texas, on December 24, 1998.
PRENTISS PROPERTIES TRUST
By: /s/ THOMAS F. AUGUST
--------------------
Thomas F. August
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on December 24, 1998 by the
following persons in the capacities indicated.
<TABLE>
NAME TITLE
- ---- -----
<S> <C>
/s/ MICHAEL V. PRENTISS * Chairman of the Board and Chief Executive
- -------------------------
Michael V. Prentiss Officer
(Principal Executive Officer)
/s/ THOMAS F. AUGUST President, Chief Operating Officer and
- -------------------------
Thomas F. August Trustee
_________________________ Trustee
Thomas J. Hynes, Jr.
/s/ BARRY J.C. PARKER * Trustee
- -------------------------
Barry J.C. Parker
/s/ LEONARD M. RIGGS, JR. Trustee
- -------------------------
Leonard M. Riggs, Jr.
/s/ RONALD G. STEINHART * Trustee
- -------------------------
Ronald G. Steinhart
/s/ LAWRENCE A. WILSON * Trustee
- ------------------------
Lawrence A. Wilson
/s/ MARK R. DORAN * Executive Vice President, Chief Financial
- ------------------------
Mark R. Doran Officer
and Treasurer (Principal Financial Officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
/s/ RICHARD J. BARTEL * Executive Senior Vice President--Financial
- -----------------------
Richard J. Bartel Operations and Administration, and Chief
Administrative Officer
/s/ THOMAS P. SIMON * Vice President
- ---------------------
Thomas P. Simon (Chief Accounting Officer)
</TABLE>
* By: /s/ THOMAS F. AUGUST
---------------------
Thomas F. August
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBITS
- ------ --------
3.1 -- Form of Amended and Restated Declaration of Trust of the Company
(filed as Exhibit 3.1 to the Company's Registration Statement on
Amendment No. 1 of Form S-11, File No. 333-09863, and incorporated
by reference herein).
3.2 -- Articles Supplementary to the Amended and Restated Declaration of
Trust Classifying and Designating the Series A Preferred Shares
(filed as Exhibit 3.1 to the Company's Current Report on Form 8-K
filed January 15, 1998 and incorporated by reference herein).
3.3 -- Articles Supplementary, dated February 17, 1998, Classifying and
Designating a Series of Preferred Shares of Beneficial Interest as
Junior Participating Cumulative Convertible Redeemable Preferred
Shares of Beneficial Interest, Series B, and Fixing Distribution and
Other Preferences and Rights of Such Shares (filed as Exhibit 3 to
the Company's Registration Statement on Form 8-A filed on February
17, 1998, File No. 000-23813).
3.4 -- Articles Supplementary, dated June 25, 1998, Classifying and
Designating a Series of Preferred Shares of Beneficial Interest as
Series B Cumulative Redeemable Perpetual Preferred Shares of
Beneficial Interest and Fixing Distribution and Other Preferences
and Rights of Such Shares (filed as Exhibit 3.5 to the Company's
Form 10-Q filed August 12, 1998 and incorporated by reference
herein).
3.5 -- Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Amendment No. 1 of Form S-11, File
No. 333-09863, and incorporated by reference herein).
4.1 -- Form of common shares Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Amendment No. 1 of Form S-11,
File No. 333-09863, and incorporated by reference herein).
4.2 -- Rights Agreement, dated February 6, 1998, between the Company and
First Chicago Trust Company of New York, as Rights Agent (filed as
Exhibit 4.1 to the Company's Registration Statement on Form 8-A
filed on February 17, 1998 and incorporated by reference herein).
4.4 -- Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
*5 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
*8 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. regarding tax
matters.
**10.1 -- Registration Rights Agreement, dated October 22, 1997, between the
Prentiss Properties Trust, Prentiss Properties Acquisition Partners,
L.P., Prentiss Properties I, Inc., Peter O. Hausmann, Henry C.
Gulbrandsen, Jr., Timothy J. Weber and Steven A. Stattner.
10.2 -- Second Amended and Restated Agreement of limited partnership of
Prentiss Properties Acquisition Partners, L.P. (filed as Exhibit
10.2 to the Company's Annual Report on Form 10-K, filed March 25,
1997).
10.3 -- First Amendment to the Second Amended and Restated Agreement of
limited partnership of Prentiss Properties Acquisition Partners,
L.P. (filed as Exhibit 4.1 to the Company's Current Report on Form
8-K, filed January 15, 1998).
<PAGE>
10.4 -- Second Amendment to the Second Amended and Restated Agreement of
limited partnership of Prentiss Properties Acquisition Partners,
L.P. (filed as Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q, filed August 12, 1998).
*23.1 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibits 5 and 8).
**23.2 -- Consent of Ballard Spahr Andrews & Ingersoll, LLP.
*23.3 -- Consent of PricewaterhouseCoopers LLP.
**24 -- Power of Attorney (included on the signature page of this
Registration Statement).
__________________________
* Filed herewith.
** Previously filed.
<PAGE>
EXHIBIT 5
---------
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS HERE]
December 24, 1998
Prentiss Properties Trust
3890 West Northwest Highway, Suite 400
Dallas, Texas 75220
Re: Prentiss Properties Trust
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to Prentiss Properties Trust, a Maryland real
estate investment trust (the "Company"), in connection with the Registration
Statement on Form S-3 (the "Registration Statement"), filed by the Company under
the Securities Act of 1933, as amended, relating to the issuance from time to
time of up to an aggregate of 524,180 common shares of beneficial interest of
the Company, par value $0.01 per share (the "Common Shares"), that may be issued
to certain holders of 524,180 units of limited partnership interest (the
"Partnership Units") in Prentiss Properties Acquisition Partners, L.P. (the
"Operating Partnership") in exchange for and upon the tendering for redemption
of the Partnership Units by Peter O. Hausmann, Henry C. Gulbrandsen, Jr.,
Timothy J. Weber and Steven A. Stattner.
We have, as counsel, examined originals or copies, certified or otherwise
identified to our satisfaction, of such corporate records, agreements, documents
and other instruments, and such certificates or comparable documents of public
officials and of officers and representatives of the Company, and have made such
inquiries of such officers and representatives as we have deemed relevant and
necessary as a basis for the opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such latter documents. In
addition, we have assumed that the Common Shares will be issued for at least the
par value thereof. As to all questions of fact material to this opinion that
have not been independently established, we have relied upon certificates or
comparable documents of officers and representatives of the Company.
<PAGE>
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
Prentiss Properties Trust
December 24, 1998
Page 2
Based upon such examination and representations, we advise you that, in our
opinion, the Common Shares have been duly authorized and, upon issuance in
accordance with the terms of the Second Amended and Restated Agreement of
Limited Partnership of the Operating Partnership, such Common Shares will be
(assuming that upon any such issuance the total number of Common Shares issued
and outstanding will not exceed the total number of Common Shares that the
Company is then authorized to issue under the Amended and Restated Declaration
of Trust of the Company) validly issued, fully paid and nonassessable.
In rendering the foregoing opinion, we have relied solely upon the opinion
of Ballard Spahr Andrews and Ingersoll, LLP with respect to matters of Maryland
law, and our opinions are subject to the same assumptions, qualifications, and
limitations as those set forth in their opinion.
We consent to the filing of this opinion with the Commission as Exhibit 5.1
to the Registration Statement and the reference to this firm under the caption
"Legal Matters" in the Prospectus contained therein.
Very truly yours,
/s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
---------------------------------------------------
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE>
EXHIBIT 8
---------
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS HERE]
December 24, 1998
Prentiss Properties Trust
3890 W. Northwest Highway
Suite 400
Dallas, Texas 75220
Dear Sir or Madam:
You have requested our opinion that Prentiss Properties Trust ("PPT") was
organized and has operated in conformity with the requirements for qualification
as a "real estate investment trust" (a "REIT") under the Internal Revenue Code
of 1986, as amended (the "Code"), beginning with its taxable year ending
December 31, 1996 and through the date hereof and its current and proposed
method of operation will enable PPT to continue to qualify as a REIT. In
rendering our opinion, we have examined such documents as we have deemed
necessary. We have assumed the current and continued correctness of the
representations made to us by PPT and we have made no independent verification
as to the correctness of such representations. Where any such factual
representation is qualified to the best knowledge of a person, we have assumed
that the representation is correct without regard to such qualification.
Further, we assume that all representations by PPT as to value are correct and
we have made no independent verification as to such values.
Our opinion is based on the provisions of the Code, Treasury Regulations
promulgated under the Code, judicial authority and currently published revenue
rulings and procedures, all as of the date of this letter, and all of which may
change at any time. Any change in the relevant facts (including any assumptions
upon which this opinion is, in part, based) or law could change our conclusions
and would render our opinion inapplicable. This opinion represents our best
legal judgment and has no binding effect on the IRS. Accordingly, no assurance
can be given that the IRS or a court would concur with the conclusions reached
herein.
<PAGE>
Prentiss Properties Trust
Page 2
December 24, 1998
Based on the foregoing, assuming that the election and actions of PPT
represented to us are and will be observed and completed as applicable in a
timely fashion, we are of the opinion that (i) PPT was organized and has
operated in conformity with the requirements for qualification as a REIT under
the Code beginning with its taxable year ending December 31, 1996 and through
the date hereof and its current and proposed method of operation will enable PPT
to continue to qualify as a REIT and (ii) the descriptions of the law and the
legal conclusions discussed in the Form S-3 Registration Statement filed with
the SEC on December 24, 1998 (the "Registration Statement") under the caption
"Federal Income Tax Considerations" fairly summarize the federal income tax
considerations that are likely to be material to a holder of the Series A
Preferred Shares or Common Shares issuable upon the conversion of the Series A
Preferred Shares.
We express no opinion as to any other matter. No reference may be made to
this opinion letter in any financial statement, or document, nor may this
opinion letter be distributed in any manner without our prior written consent,
except (i) such opinion may be furnished to the IRS in connection with an
examination and (ii) we consent to the filing of this opinion as an Exhibit to
the Registration Statement.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
/s/ Akin, Gump, Strauss, Hauer & Feld, L.L.P.
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Amendment No. 1 to the
registration statement on Form S-3 of our reports dated (i) February 5, 1998,
except as to Note 23 for which the date is February 18, 1998, on our audits of
the consolidated and combined financial statements and financial statements
schedule of Prentiss Properties Trust and the Predecessor Company, (ii) October
20, 1997 on our audit of the combined statement of revenues and certain
operating expenses of the Silicon Valley Properties, (iii) February 6, 1998 on
our audits of the combined statement of revenues and certain operating expenses
of the Newport National Properties and the statement of revenues and certain
operating expenses of the Carrara Place Property, (iv) August 12, 1998 on our
audit of the statement of revenues and certain operating expenses of the Ordway
Property, and (v) September 30, 1998 on our audit of the combined statement of
revenues and certain operating expenses of the Willow Oaks Properties. We also
consent to the reference to our firm under the caption "Experts".
Dallas, Texas
December 24, 1998
/s/ PricewaterhouseCoopers LLP
