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As filed with the Securities and Exchange Commission on April 3, 1998
Registration No. 333-_____
_____________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
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
incorporation or organization) (I.R.S. Employer Identification No)
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
(214) 654-0886
(Address, including zip code, and telephone number,
including area code, of
registrant's principal executive offices)
J. Kevan Dilbeck
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
(214) 654-0886
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copy to:
Randall S. Parks
Hunton & Williams
Riverfront Plaza, East Tower
951 East Byrd Street
Richmond, Virginia 23219-4074
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement in light of market
conditions and other factors.
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:[_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Aggregate Amount Offering Price Per Aggregate Offering Amount of
Securities to be Registered to be Registered(2) Unit(3) Price(3) Registration Fee(4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of Beneficial Interest,
$.01 par value, per share, and $716,561,172.12 (6) $716,561,172.12 $211,385.55
Preferred Share Purchase Rights (5)
Preferred Shares of Beneficial Interest,
$.01 par value, per share
====================================================================================================================================
</TABLE>
(1) This Registration Statement also covers delayed delivery contracts that may
be issued by the Registrants under which the party purchasing such
contracts may be required to purchase Common Shares or Preferred Shares.
Such contracts may be issued together with the specific securities to which
they relate. In addition, securities registered hereunder may be sold
either separately or as units comprising more than one type of security
registered hereunder.
(2) Not specified as to each class of the above-referenced securities
(collectively, the "Offered Securities") to be registered, pursuant to
General Instruction II.D of Form S-3. In no event will the aggregate
initial offering price of the Offered Securities registered hereby exceed
$716,561,172.12
(3) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1993. The proposed maximum
offering price per unit will be determined from time to time by the
Registrant in connection with the issuance by the Registrant of the
securities registered hereby. No separate consideration will be received
for Common Shares or Preferred Shares as may be issued from time to time
upon conversion of Preferred Shares.
(4) Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus
included in this Registration Statement also relates to $283,438,827.88
aggregate offering price of Common Shares of Beneficial Interest (and
attached Rights) and Preferred Shares of Beneficial Interest registered
under its Registration Statement on Form S-3 (File No. 333-38079).
Registrant previously paid a registration fee of $166,667 in connection
with such Registration Statement, which originally covered $550,000,000
aggregate offering price of securities.
(5) The Rights to Purchase Junior Participating Cumulative Preferred Shares of
Beneficial Interest, Series B, are attached to and trade with the
Common Shares.
(6) Omitted pursuant to General Instruction II.D of Form S-3 under the
Securities Act of 1933, as amended.
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.
Pursuant to Rule 429 under the Securities Act, the combined Prospectus included
in this Registration Statement also relates to Common Shares of Beneficial
Interest (and attached Rights) and Preferred Shares of Beneficial Interest
covered in Registrants' Registration Statement on Form S-3 (File No. 333-38079).
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to the securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED APRIL 3, 1998
PROSPECTUS
PRENTISS PROPERTIES TRUST
$1,000,000,000
COMMON SHARES OF BENEFICIAL INTEREST
PREFERRED SHARES OF BENEFICIAL INTEREST
Prentiss Properties Trust (together with its subsidiaries, the
"Company") may offer from time to time in one or more series hereunder (i) its
Common Shares of Beneficial Interest, $.01 par value per share ("Common
Shares"), and (ii) its Preferred Shares of Beneficial Interest, $.01 par value
per share ("Preferred Shares") having an aggregate public offering price not to
exceed $1,000,000,000, on terms to be determined at the time of sale. The number
of Preferred Shares and Common Shares offered hereby (collectively, the "Offered
Securities") may be offered, separately or as units with other Offered
Securities, in separate series and in amounts, at prices and on terms to be
determined at the time of sale and set forth in the applicable Prospectus
Supplement. The Company's Common Shares are listed on the New York Stock
Exchange ("NYSE") under the symbol "PP."
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable, (i) in the case of Common Shares,
the aggregate number of shares offered, the initial public offering price and
other terms thereof; (ii) in the case of Preferred Shares, the specific
designation and stated value, the number of shares or fractional interests
therein, any dividend, liquidation preference, redemption, sinking fund, voting
and other rights, the terms for conversion into or exchange for other
securities, if any, including terms of any securities into or for which they are
convertible or exchangeable, and other terms thereof, the initial public
offering price and any securities exchange listings; and (iii) in the case of
all Offered Securities, whether such Offered Securities will be offered
separately or as a unit with other Offered Securities. In addition, such
specific terms may include limitations on direct or beneficial ownership and
restrictions on transfer of the Offered Securities, in each case as may be
appropriate to preserve the status of the Company as a real estate investment
trust ("REIT") for federal income tax purposes.
The applicable Prospectus Supplement will also contain information,
where applicable, concerning material United States federal income tax
considerations relating to the Offered Securities covered thereby.
The Offered Securities may be offered directly, through agents
designated from time to time by the Company, or to or through underwriters or
dealers. If any designated agents or any underwriters are involved in the sale
of Offered Securities, they will be identified and their compensation will be
described in the applicable Prospectus Supplement. See "Plan of Distribution."
No Offered Securities may be sold without delivery of the applicable Prospectus
Supplement describing such Offered Securities and the method and terms of the
offering thereof.
____________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
____________
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE SECURITIES OFFERINGS MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
OFFERED SECURITIES, INCLUDING PURCHASES OF THE OFFERED SECURITIES TO STABILIZE
THEIR MARKET PRICES, PURCHASES OF THE OFFERED SECURITIES TO COVER SOME OR ALL OF
SHORT POSITIONS IN THE OFFERED SECURITIES MAINTAINED BY THE RESPECTIVE
UNDERWRITERS OF THE SECURITIES OFFERINGS AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
FORWARD-LOOKING STATEMENTS
This Prospectus, any Prospectus Supplement and the documents incorporated
by reference herein may contain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), including, without limitation,
statements containing the words "believes," "anticipates," "expects" and words
of similar import. Such forward-looking statements relate to future events, the
future financial performance of the Company, and involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the company or industry to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements. Prospective investors should
specifically consider the various factors identified in 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 the Company's most recent Annual Report
on Form 10-K. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any forward-looking
statements to reflect future events or developments.
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THE COMPANY
The Company is a self-administered and self-managed REIT that acquires,
owns, manages, leases, develops and builds office and industrial properties
throughout the United States. The Company operates principally through Prentiss
Properties Acquisition Partners, L.P. and its subsidiaries (the "Operating
Partnership") and Prentiss Properties Limited, Inc. (the "Manager"). As of
April 1, 1998, the Company owned interests in a diversified portfolio of 229
primarily suburban Class A office and suburban industrial properties containing
approximately 19.9 million net rentable square feet. The properties are located
in 18 major U.S. markets and consist of 98 office buildings (the "Office
Properties") containing approximately 10.4 million net rentable square feet and
131 industrial buildings (the "Industrial Properties" and together with the
Office Properties, the "Properties") containing approximately 9.4 million net
rentable square feet. As of March 1, 1998, the Office Properties were
approximately 96% leased to approximately 850 tenants and the Industrial
Properties were approximately 94% leased to approximately 400 tenants. The
Company manages approximately 48.7 million net rentable square feet in 485
office and industrial properties in 23 U.S. markets that are owned by the
Company and by third parties and that are leased to approximately 3,000 tenants.
The Company also has six office properties and four industrial properties under
development, which together will contain approximately 1.3 million net rentable
square feet.
The Company is a full service real estate company with regional management
offices in Los Angeles, Dallas, Chicago, Washington, D.C., Atlanta and
Philadelphia. The Company has approximately 800 employees and benefits from its
in-house expertise in areas such as acquisitions, development, facilities
management, property management and leasing.
The Company is a Maryland real estate investment trust. Its executive
offices are located at 3890 W. Northwest Highway, Suite 400, Dallas, Texas
75220, and its telephone number is (214) 654-0886.
USE OF PROCEEDS
The Company will contribute the net proceeds of any sale of Offered
Securities to the Operating Partnership in exchange for additional units of
limited partnership interest in the Operating Partnership ("Units"). Unless
otherwise set forth in the applicable Prospectus Supplement, such net proceeds
will be used by the Company and the Operating Partnership for general corporate
purposes, which may include the acquisition of additional properties, portfolios
of properties, or management companies, repayment of indebtedness, and making
improvements to properties.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's (or Predecessor Company's)
consolidated ratios of earnings to combined fixed charges and preferred share
dividends for the year ended December 31, 1997, and for each of the last five
fiscal years. There were no significant dividends paid on the Company's
outstanding Preferred Shares in 1997. Accordingly, the ratio of earnings to
fixed charges and Preferred Share dividends is identical to the ratio of
earnings to fixed charges. The Company data from the period prior to the
Company's initial public offering ("IPO") of its Common Shares and the
commencement of its intent to qualify as a REIT on October 22, 1996, reflects
the operations of the Predecessor Company. The consolidated ratio of earnings to
fixed charges was computed by dividing earnings by fixed charges. Fixed charges
consist of interest costs, whether expensed or capitalized, and amortization of
line of credit fees and loan commitment fees.
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<TABLE>
<CAPTION>
The Company Predecessor Company
-------------------------------------- ----------------------------------------------
Year Ended December 31,
------------------------
Year Ended October 22, 1996 to January 1, 1996 to
December 31, 1997 December 31, 1996 October 21, 1996 1995 1994 1993
----------------- ------------------- ------------------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to 2.68 7.90 1.80 3.57 3.30 2.98
fixed charges
</TABLE>
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The Declaration of Trust of the Company provides that the Company may issue
up to 100,000,000 Common Shares and 20,000,000 Preferred Shares. At April 1,
1998, there were 39,501,270 Common Shares and 3,773,585 Participating Cumulative
Redeemable Preferred Shares, Series A, (the "Series A Preferred Shares") issued
and outstanding. As permitted by the Maryland REIT Law (as defined below), the
Declaration of Trust contains a provision permitting the Board of Trustees,
without any action by the shareholders of the Company, to amend the Declaration
of Trust to increase or decrease the aggregate number of shares of beneficial
interest or the number of shares of any class of shares of beneficial interest
that the Company has authority to issue.
The following information with respect to the shares of beneficial interest
of the Company is subject to the detailed provisions of the Company's
Declaration of Trust, as amended, and the Amended and Restated Bylaws as
currently in effect (the "Bylaws"). These statements do not purport to be
complete, or to give full effect to the provisions of statutory or common law,
and are subject to, and are qualified in their entirety by reference to, the
terms of such Declaration of Trust and Bylaws.
As a Maryland REIT, the Company is subject to various provisions of Title
8, as amended from time to time, of the Corporations and Associations Article of
the Annotated Code of Maryland (the "Maryland REIT Law") and the Maryland
General Corporation Law (the "MGCL"). Both the Maryland REIT Law and the
Company's Declaration of Trust provide that no shareholder of the Company will
be personally liable for any obligation of the Company solely as a result of his
status as a shareholder of the Company. The Company's Bylaws further provide
that the Company shall indemnify each shareholder against any claim or liability
to which the shareholder may become subject by reason of his being or having
been a shareholder or former shareholder and that the Company shall pay or
reimburse each shareholder or former shareholder for all legal and other
expenses reasonably incurred by him in connection with any such claim or
liability. In addition, it is the Company's policy to include a clause in its
contracts which provides that shareholders assume no personal liability for
obligations entered into on behalf of the Company. However, with respect to
tort claims, contractual claims where shareholder liability is not so negated,
claims for taxes and certain statutory liability, the shareholders may, in some
jurisdictions, be personally liable to the extent that such claims are not
satisfied by the Company. Inasmuch as the Company carries public liability
insurance which it considers adequate, any risk of personal liability to
shareholders is limited to situations in which the Company's assets plus its
insurance coverage would be insufficient to satisfy the claims against the
Company and its shareholders.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of shares of beneficial interest and to the provisions of the Company's
Declaration of Trust regarding Shares-in-Trust (as defined below), holders of
Common Shares are entitled to receive dividends if, as and when authorized and
declared by the Board of Trustees of the Company out
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of assets legally available therefor and to share ratably in the assets of the
Company legally available for distribution to its shareholders in the event of
its liquidation, dissolution or winding-up after payment of, or adequate
provision for, all known debts and liabilities of the Company. The Company
intends to pay quarterly dividends to its shareholders.
The holders of Common Shares are entitled to one vote per share on all
matters voted on by shareholders, including elections of trustees. Except as
otherwise required by law or provided in any Articles Supplementary approved by
resolution of the Board of Trustees and filed with and accepted for record by
the State Department of Assessments and Taxation of Maryland setting the
preferences, rights, and other terms of any series of Preferred Shares, the
holders of such Common Shares exclusively possess all voting power. The
Declaration of Trust does not provide for cumulative voting in the election of
trustees. Subject to any preferential rights of any outstanding series of
Preferred Shares, the holders of Common Shares are entitled to such
distributions as may be declared from time to time by the Board of Trustees from
funds available therefore, and upon liquidation are entitled to receive pro rata
all assets of the Company available for distribution to such holders. All
shares of beneficial interest issued will be fully paid and nonassessable, and
the holders thereof will not have preemptive rights.
Pursuant to the Maryland REIT Law, a REIT generally cannot amend its
declaration of trust or merge unless approved by the affirmative vote of
shareholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage (but not less than a majority of all the votes
entitled to be cast on the matter) is set forth in the REIT's declaration of
trust. The Company's Declaration of Trust provides for approval by a majority
of all the votes entitled to be cast on the matter in all situations permitting
or requiring action by the shareholders except with respect to: (a) the removal
of trustees (which requires the affirmative vote of the holders of two-thirds
of the outstanding voting shares of the Company); (b) the amendment of the
Declaration of Trust by shareholders (which requires the affirmative vote of a
majority of votes entitled to be cast on the matter, except under certain
circumstances specified in the Declaration of Trust which require the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter); and (c) the termination of the Company (which requires the affirmative
vote of two-thirds of all the votes entitled to be cast on the matter). A
declaration of trust may permit the trustees by a two-thirds vote to amend the
declaration of trust from time to time to qualify as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code") or the Maryland REIT Law without
the affirmative vote or written consent of the shareholders. The Company's
Declaration of Trust permits such action by the Board of Trustees.
The Transfer Agent for the Common Shares is First Chicago Trust Company of
New York. The Common Shares are traded on the NYSE under the symbol "PP." The
Company will apply to the NYSE to list the additional Common Shares to be sold
pursuant to any Prospectus Supplement, and the Company anticipates that such
shares will be so listed.
PREFERRED SHARE PURCHASE RIGHTS
On February 17, 1998, pursuant to the Company's Rights Plan, the Company
distributed as a dividend one Right for each outstanding share of Common Stock.
Each Right entitles the holder to buy one one-thousandth of a share (a
"Preferred Share Unit") of the Company's Junior Participating Cumulative
Preferred Shares of Beneficial Interest, Series B, par value $.01 per share (the
"Series B Preferred Shares") at an exercise price of $85, subject to adjustment.
Each Preferred Share Unit of a Series B Preferred Share is structured to be the
equivalent of one Common Share.
The Rights will become exercisable only if a person or group acquires,
obtains the right to acquire or announces a tender offer to acquire 10% (or, in
the case of Security Capital Preferred Growth Incorporated ("SCPG") (the holder
of all of the Company Series A Preferred Shares) and its affiliates, 11%) or
more of the outstanding Common Shares. When exercisable, each Right entitles the
holder, upon payment of the exercise price, to acquire Series B Preferred Shares
or, at the option of the Company, Common Shares (or in certain circumstances,
cash, property or other securities), having a value equal to twice the Right's
exercise price. If the Company is acquired in a merger or other business
combination or if 50% or more of the Company's assets or earning power is
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transferred, each Right will entitle the 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 such time as a person or group acquires or announces a tender offer
to acquire 10% or more of the Common Shares, (i) the Rights will be evidenced by
the Common Share certificates and will be transferred with and only with such
Common Share certificates, and (ii) the surrender for transfer of any
certificate for Common Shares will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate. The Rights
will expire on February 17, 2008, and may be redeemed by the Company at a price
of $.001 per Right at any time prior to the tenth day after an announcement that
a 10% position has been acquired.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that acquires more than 10% (or, in
the case of SCPG, 11%) of the outstanding Common Shares of the Company if
certain events thereafter occur without the Rights having been redeemed.
However, because the Rights are redeemable by the Board of Trustees in certain
circumstances, the Rights should not interfere with any merger or other business
combination approved by the Board.
PREFERRED SHARES
Preferred Shares may be issued from time to time, in one or more series, as
authorized by the Board of Trustees. Prior to issuance of shares of each series,
the Board is required by the Maryland REIT Law and the Company's Declaration of
Trust to set for each such series, subject to the provisions of the Company's
Declaration of Trust regarding Shares-in-Trust, the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
series. The Board could authorize the issuance of Preferred Shares with terms
and conditions that could have the effect of delaying, deferring or preventing a
takeover or other transaction which holders of some, or a majority, of the
Common Shares might believe to be in their best interests or in which holders of
some, or a majority, of the Common Shares might receive a premium for their
Common Shares over the then-market-price of such Common Shares.
The Preferred Shares will have the dividend, liquidation, redemption,
conversion and voting rights set forth below unless otherwise provided in the
Prospectus Supplement relating to a particular series of Preferred Shares.
Reference is made to the Prospectus Supplement relating to the particular series
of Preferred Shares offered thereby for specific terms, including: (i) the title
and liquidation preference per share of such Preferred Shares and the number of
shares offered; (ii) the price at which such shares will be issued; (iii) the
dividend rate (or method of calculation), the dates on which dividends shall be
payable and the dates from which dividends shall commence to accumulate; (iv)
any redemption or sinking fund provisions of such series; (v) any conversion
provisions of such series; and (vi) any additional dividend, liquidation,
redemption, sinking fund and other rights, preferences, privileges, limitations
and restrictions of such series.
The Preferred Shares will, when issued, be fully paid and nonassessable.
Unless otherwise specified in the Prospectus Supplement relating to a particular
series of Preferred Shares, each series will rank on a parity as to dividends
and distributions in the event of a liquidation with each other series of
Preferred Shares and, in all cases, will be senior to the Common Shares.
Dividend Rights. Holders of Preferred Shares of each series will be
entitled to receive, when, as and if declared by the Board of Directors, out of
assets of the Company legally available therefor, cash dividends at such rates
and on such dates as are set forth in the Prospectus Supplement relating to such
series of Preferred Shares. Such rate may be fixed or variable or both and may
be cumulative, noncumulative or partially cumulative.
If the applicable Prospectus Supplement so provides, as long as any
Preferred Shares are outstanding, no dividends will be declared or paid nor will
any distributions be made on the Common Shares, other than a dividend payable in
Common Shares, unless the accrued dividends on each series of Preferred Shares
have been fully paid or declared and set apart for payment and the Company shall
have set apart all amounts, if any, required to be set apart for all sinking
funds, if any, for each series of Preferred Shares.
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If the applicable Prospectus Supplement so provides, when dividends are not
paid in full upon any series of Preferred Shares and any other series of
Preferred Shares ranking on a parity as to dividends with such series of
Preferred Shares, all dividends declared upon such series of Preferred Shares
and any other series of Preferred Shares ranking on a parity as to dividends
will be declared pro rata so that the amount of dividends declared per share on
such series of Preferred Shares and such other series will in all cases bear to
each other the same ratio that accrued dividends per share on such series of
Preferred Shares and such other series bear to each other.
Each series of Preferred Shares will be entitled to dividends as described
in the Prospectus Supplement relating to such series, which may be based upon
one or more methods of determination. Different series of Preferred Shares may
be entitled to dividends at different dividend rates or based upon different
methods of determination. Except as provided in the applicable Prospectus
Supplement, no series of Preferred Shares will be entitled to participate in the
earnings or assets of the Company.
Rights Upon Liquidation. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of each
series of Preferred Shares will be entitled to receive out of the assets of the
Company available for distribution to shareholders the amount stated or
determined on the basis set forth in the Prospectus Supplement relating to such
series, which may include accrued dividends if such liquidation, dissolution or
winding up is involuntary, or may equal the current redemption price per share
(otherwise than for the sinking fund, if any provided for such series) provided
for such series set forth in such Prospectus Supplement, if such liquidation,
dissolution or winding up is voluntary, and on such preferential basis as is set
forth in such Prospectus Supplement. If, upon any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the amounts payable with
respect to Preferred Shares of any series and any other shares of beneficial
interest of the Company ranking as to any such distribution on a parity with
such series of Preferred Shares are not paid in full, the holders of Preferred
Shares of such series and of such other shares will share ratably in any such
distribution of assets of the Company in proportion to the full respective
preferential amounts to which they are entitled or on such other basis as is set
forth in the applicable Prospectus Supplement. The rights, if any, of the
holders of any series of Preferred Shares to participate in the assets of the
Company remaining after the holders of other series of Preferred Shares have
been paid their respective specified liquidation preferences upon any
liquidation, dissolution or winding up of the Company will be described in the
Prospectus Supplement relating to such series. Unless provided otherwise in the
Prospectus Supplement relating to a series of Preferred Shares, in determining
whether a distribution (by dividend, redemption or other acquisition of shares
or otherwise) to shareholders of the Company whose rights on dissolution are
junior to those of such series of Preferred Shares is permitted under Maryland
law, no effect shall be given to the amounts that would be needed, if the
Company were to be dissolved at the time of the distribution, to satisfy the
preferential rights upon dissolution of the shareholders of such series of
Preferred Shares.
Redemption. A series of Preferred Shares may be redeemable, in whole or in
part, at the option of the Company, and may be subject to mandatory redemption
pursuant to a sinking fund, in each case upon terms, at the times, at the
redemption prices and for the types of consideration set forth in the Prospectus
Supplement relating to such series. The Prospectus Supplement relating to a
series of Preferred Shares which is subject to mandatory redemption shall
specify the number of shares of such series that shall be redeemed by the
Company in each year commencing after a date to be specified, at a redemption
price per share to be specified together with an amount equal to any accrued and
unpaid dividends thereon to the date of redemption.
If, after giving notice of redemption to the holders of a series of
Preferred Shares, the Company deposits with a designated bank funds sufficient
to redeem such Preferred Shares, then from and after such deposit, all shares
called for redemption will no longer be outstanding for any purpose, other than
the right to receive the redemption price and the right to convert such shares
into other classes of stock of the Company. The redemption price will be stated
in the Prospectus Supplement relating to a particular series of Preferred
Shares.
Except as indicated in the applicable Prospectus Supplement, the Preferred
Shares are not subject to any mandatory redemption at the option of the holder.
Sinking Fund. The Prospectus Supplement for any series of Preferred Shares
will state the terms, if any, of a sinking fund for the purchase or redemption
of that series.
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Conversion Rights. The Prospectus Supplement for any series of Preferred
Shares will state the terms, if any, on which shares of that series are
convertible into Common Shares or another series of Preferred Shares. The
Preferred Shares will have no preemptive rights.
Voting Rights. Except as indicated in the Prospectus Supplement relating
to a particular series of Preferred Shares, a holder of Preferred Shares will
not be entitled to vote. Except as indicated in the Prospectus Supplement
relating to a particular series of Preferred Shares, in the event the Company
issues full shares of any series of Preferred Shares, each such share will be
entitled to one vote on matters on which holders of such series of Preferred
Shares are entitled to vote.
Transfer Agent and Registrar. The transfer agent, registrar and dividend
disbursement agent for a series of Preferred Shares will be selected by the
Company and be described in the applicable Prospectus Supplement. The registrar
for shares of Preferred Shares will send notices to shareholders of any meetings
at which holders of Preferred Shares have the right to vote on any matter.
SERIES A PREFERRED SHARES
As of March 31, 1998, there were 3,773,585 Series A Preferred Shares issued
and outstanding. The holders of the Series A Preferred Shares have no preemptive
rights with respect to any shares of the capital stock of the Company or any
other securities of the Company convertible into or carrying rights or options
to purchase any such shares. The Series A Preferred Shares are not subject to
any sinking fund or other similar obligation of the Company.
The Company currently acts as Transfer Agent for the Company's Series A
Preferred Shares.
Dividends. Holders of the Series A Preferred Shares will be entitled to
receive, when and as declared by the Board of Trustees, out of funds legally
available for the payment of dividends, cumulative preferential cash dividends
in an amount per share equal to the greater of (i) an annual dividend of $1.60
or (ii) the regular cash dividend on the Common Shares, or portion thereof, into
which the Series A Preferred Shares are convertible. See "--Conversion." Such
dividends are cumulative from the date of original issue and payable
quarterly in arrears on a date to be determined by the Board of Trustees (each,
a "Dividend Payment Date") which shall be no later than the thirteenth day after
the last day of each March, June, September and December.
Dividends on Series A Preferred Shares will accrue whether or not the
Company has earnings, whether or not there are funds legally available for the
payment of such dividends and whether or not such dividends are declared. No
interest, or sum of money in lieu of interest, will be payable in respect of any
dividend payment or payments on the Series A Preferred Shares that may be in
arrears. Holders of Series A Preferred Shares will not be entitled to any
dividends, whether payable in cash, property or shares of stock, in excess of
the full cumulative dividends, as described herein, on the Series A Preferred
Shares.
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Except as provided in the next sentence, no dividends will be declared or
paid on any class or shares of beneficial interest of the Company ranking, as to
the payment of dividends and as to distributions of assets upon liquidation,
dissolution or winding up, on a parity with the Series A Preferred Shares
("Parity Shares"), unless full cumulative dividends have been declared and paid
or are contemporaneously declared and funds sufficient for the payment thereof
set aside for such payment on the Series A Preferred Shares for all prior
dividend periods. If accrued dividends on the Series A Preferred Shares for all
prior dividend periods have not been paid in full, then any dividend declared on
the Series A Preferred Shares and on any Parity Shares for any dividend period
will be declared ratably in proportion to accrued and unpaid dividends on the
Series A Preferred Shares and such Parity Shares.
The Company will not (i) declare, pay or set apart funds for the payment of
any dividend or other distribution with respect to any Junior Shares (as defined
below) or (ii) redeem, purchase or otherwise acquire for consideration any
Junior Shares through a sinking fund or otherwise (other than a redemption or
purchase or other acquisition of Common Shares made for purposes of any
employee, incentive or benefit plan of the Company or any subsidiary), unless
(a) all cumulative dividends with respect to the Series A Preferred Shares and
any Parity Shares at the time such dividends are payable have been paid or
declared and funds have been set apart for payment of such dividends and (b)
sufficient funds have been paid or declared and set apart for the payment of the
dividend for the current dividend period with respect to the Series A Preferred
Shares and any Parity Shares.
As used herein, (i) the term "dividend" does not include dividends or other
distributions payable solely in Fully Junior Shares, or in options, warrants or
rights to subscribe for or purchase any Fully Junior Shares, (ii) the term
"Junior Shares" means the Common Shares and any other class or series of shares
of capital stock of the Company now or hereafter issued and outstanding that
ranks junior to the Series A Preferred Shares as to the payment of dividends or
in the distribution of assets or amounts upon liquidation, dissolution and
winding up and (iii) the term "Fully Junior Shares" means Junior Shares that
rank junior to the Series A Preferred Shares both as to the payment of dividends
and distribution of assets upon liquidation, dissolution and winding up.
Liquidation Rights. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series A Preferred
Shares will be entitled to receive out of assets of the Company legally
available for distribution to shareholders a liquidation preference of $26.50
per Series A Preferred Share, plus an amount per Series A Preferred Share equal
to all dividends (whether or not earned or declared) accrued and unpaid thereon
to the date of final distribution to such holders, and no more.
Until the holders of Series A Preferred Shares and Parity Shares have been
paid their liquidation preference in full, no payment will be made to any holder
of Junior Shares upon the liquidation, dissolution or winding up of the Company.
If upon any liquidation, dissolution or winding up of the Company, the assets of
the Company, or proceeds thereof, distributable among the holders of the Series
A Preferred Shares are insufficient to pay in full the amount payable upon
liquidation with respect to the Series A Preferred Shares and any other Parity
Shares, then such assets, or the proceeds thereof, will be distributed among the
holders of Series A Preferred Shares and any such Parity Shares ratably in
accordance with the respective amounts which would be payable on such Series A
Preferred Shares and any such Parity Shares if all amounts payable thereon were
paid in full. Neither a consolidation or merger of the Company with another
entity, a statutory share exchange by the Company nor a sale, lease or transfer
of all or substantially all of the Company's assets will be considered a
liquidation, dissolution or winding up, voluntary or involuntary, of the
Company.
In determining whether a distribution (by dividend, redemption or other
acquisition of shares or otherwise) to shareholders of the Company whose rights
on dissolution are junior to those of holders of Series A Preferred Shares is
permitted under Maryland law, no effect shall be given to the amounts that would
be needed, if the Company were to be dissolved at the time of the distribution,
to satisfy the preferential rights upon dissolution of holders of Series A
Preferred Shares.
Redemption at the Option of the Company. Except as may be required under
the Ownership Limitation (as defined below), the Series A Preferred Shares are
not redeemable by the Company prior to December 29, 2004. On and after December
29, 2004, the Company, at its option, upon not less than 30 or more than 90 days
written notice,
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may redeem the Series A Preferred Shares, in whole or in part, at any time or
from time to time, for cash out of funds legally available therefor, at a
redemption price of $26.50 per share, plus accumulated, accrued and unpaid
dividends thereon to the date fixed for redemption, without interest.
Conversion. Beginning on January 1, 1999, holders of the Series A Preferred
Shares shall have the right, on sixty days written notice of its intent to
convert, to convert all or any portion of such shares into a number of Common
Shares based on a conversion price of $26.50 per Common Share, subject to
adjustment (the "Conversion Price"). Such conversion may occur earlier than
January 1, 1999, in the event of a change of control of the Company or the
termination of the Company's status as a REIT, or as otherwise determined by the
Company. The right to convert Series A Preferred Shares called for redemption
will terminate at the close of business on the fifth business day prior to the
redemption date for such Series A Preferred Shares.
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Limitation on Issuance of Additional Preferred Shares and Indebtedness.
Without the written consent of a holders of a majority of the issued and
outstanding Series A Preferred Shares, neither the Company nor the Operating
Partnership may authorize or create any class of preferred securities or incur
any indebtedness if immediately following such issuance and after giving effect
to such issuance and the application of the net proceeds therefrom, the
Company's ratio of consolidated net income (excluding extraordinary income and
gains) to consolidated fixed charges for the four fiscal quarters immediately
preceding such issuance would be less than 1.75 to 1.0.
Ranking. With respect to payment of dividends and amounts upon liquidation,
dissolution or winding up, the Series A Preferred Shares will rank (i) senior to
the Company's Common Shares and any other class or series of shares of
beneficial interest of the Company over which the Preferred Shares have
preference or priority in the payment of dividend or distributions upon
liquidation, dissolution or winding up of the Company; (ii) on a parity with all
equity securities issued by the Company the terms of which provide that the
holders of such class or series and the holders of Series A Preferred Shares
shall be entitled to the receipt of dividends and amounts distributable upon
liquidation, dissolution or winding up in proportion to their respective amounts
of accrued and unpaid dividends per share or liquidation preference, without the
preference or priority of one over the other; and (iii) junior to all existing
and future indebtedness of the Company and equity securities of the Company the
terms of which provide that the holders thereof are entitled to receipt of
dividends or amounts distributable upon liquidation, dissolution or winding up,
as the case may be, in preference or priority to the holders of the Series A
Preferred Shares. The term "equity securities" does not include convertible debt
securities, which will rank senior to the Series A Preferred Stock prior to
conversion.
Voting Rights. Except as indicated below, or except as otherwise from time
to time required by applicable law, the holders of Series A Preferred Shares
will have no voting rights.
If for two consecutive quarterly periods, (i) dividends payable on the
Series A Preferred Shares are in arrears, whether or not earned or declared,
(ii) the Company fails to pay dividends on the Common Shares of at least $.38
per share (subject to adjustment), or (iii) the Company fails to maintain a
ratio of consolidated EBITDA to consolidated fixed charges of at least 1.75,
then the number of Trustees then constituting the Board of Trustees of the
Company will be increased by two, and the holders of Series A Preferred Shares,
voting together as a single class, will have the right to elect two additional
Trustees to serve on the Company's Board of Trustees at any annual meeting of
shareholders or a properly called special meeting of the holders of the Series A
Preferred Shares. Whenever, as the case may be, (i) all such dividends and
dividends for the current quarterly period on the Series A Preferred Shares have
been declared and paid or set aside for payment, (ii) the Company has paid
dividends on the Common Shares of at least $.38 per share (subject to
adjustment) for two consecutive quarters, or (iii) the Company maintains a ratio
of consolidated EBITDA to consolidated fixed charges of at least 1.75 for two
consecutive quarters, then such voting rights will terminate, and the number of
Trustees on the Board of Trustees shall be reduced accordingly. The term of
office of all Trustees so elected will terminate with the termination of such
voting rights.
The approval of at least 51% of holders of the outstanding Series A
Preferred Shares, voting as a single class, is required in order to (i) amend,
alter or repeal the Company's Declaration of Trust (including the Articles
Supplementary) to affect materially and adversely the rights, preferences or
voting power of the holders of the Series A Preferred Shares (provided however
that the amendment of the Declaration of Trust to create, authorize or increase
the authorized number of any Parity Shares, Junior Shares or Fully Junior Shares
shall not be deemed to materially and adversely affect the holders of the Series
A Preferred Shares); (ii) enter into a share exchange that affects the Series A
Preferred Shares, or consolidate with or merge with another entity, or
consolidate or merge another entity with and into the Company, unless in each
such case each Series A Preferred Share remains outstanding without a material
and adverse change to its terms and rights or is converted into or exchanged for
convertible preferred shares of the surviving entity having preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption thereof
identical to that of the Series A Preferred Shares (except for changes that do
not materially and adversely affect the holders of Series A Preferred Shares).
However, no such vote of the holders of the Series A Preferred Shares shall be
required if, at or prior to the time that an amendment, alteration or repeal is
to take effect, or when the issuance of any such
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prior shares or convertible security is to be made, as the case may be,
provision is made for the redemption of all Series A Preferred Shares at the
time outstanding to the extent such redemption is authorized by the Articles
Supplementary and the Declaration of Trust.
Except as provided above and as required by applicable law, the holders of
Series A Preferred Shares are not entitled to vote on any merger or
consolidation involving the Company, on any share exchange or on a sale of all
or substantially all of the assets of the Company.
SERIES B PREFERRED SHARES
In connection with its Shareholder Rights Plan, the Company designated
1,000,000 preferred shares of beneficial interest as Junior Participating
Cumulative Preferred Shares of Beneficial Interest, Series B (the "Series B
Preferred Shares"), which, under certain circumstances, may be issued to holders
of Preferred Share Purchase Rights if such Rights become exercisable. See "--
Preferred Share Purchase Rights." As of April 1, 1998, no Series B Preferred
Shares were issued or outstanding.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of beneficial
interest. Specifically, no more than 50% in value of the Company's outstanding
shares of beneficial interest may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year (other than its 1996 taxable year), and the
Company must be beneficially owned by 100 or more persons during at least 335
days of a taxable year of 12 months or during a proportionate part of a shorter
taxable year (other than its 1996 taxable year). See "Federal Income Tax
Considerations--Requirements for Qualification."
Because the Board of Trustees believes it is essential for the Company to
continue to qualify as a REIT, the Declaration of Trust, subject to certain
exceptions described below, provides that no person may own, or be deemed to own
by virtue of the attribution provisions of the Code, more than 8.5% of the
number of outstanding Common Shares (other than Michael V. Prentiss, who
currently may own up to 15% of the number of outstanding Common Shares and SCPG,
which may own up to 11% of the number of outstanding Common Shares) or more than
9.8% of the number of outstanding Preferred Shares of any series (other than
SCPG, 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 Michael V. Prentiss' ownership of Common Shares to
9.8% (but not less than 9.8%) of the outstanding Common Shares upon (i) an
increase in the number of outstanding Common Shares or (ii) a reduction of the
number of Common Shares owned, directly or indirectly, by Michael V. Prentiss.
Upon any such adjustment, the Ownership Limitation applicable to other
shareholders with respect to the Common Shares will be increased
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proportionately to a maximum of 9.8% of the number of outstanding Common Shares.
Any transfer of Common or Preferred Shares that would (i) result in any person
owning, directly or indirectly, Common or Preferred Shares in excess of the
Ownership Limitation, (ii) result in the Company's outstanding shares being
owned by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code, or (iv) cause the Company to own,
directly or constructively, 10% or more of the ownership interests in a tenant
of the Company's or the Operating Partnership's real property, within the
meaning of Section 856(d)(2)(B) of the Code, shall be null and void, and the
intended transferee will acquire no rights in such Common or Preferred Shares.
Subject to certain exceptions described below, if any purported transfer of
Common or Preferred Shares would (i) result in any person owning, directly or
indirectly, Common or Preferred Shares in excess of the Ownership Limitation,
(ii) result in the Company's outstanding shares being owned by fewer than 100
persons (determined without reference to any rules of attribution), (iii) result
in the Company being "closely held" within the meaning of Section 856(h) of the
Code, or (iv) cause the Company to own, directly or constructively, 10% or more
of the ownership interests in a tenant of the Company's or the Operating
Partnership's real property, within the meaning of Section 856(d)(2)(B) of the
Code, the Common or Preferred Shares will be designated as "Shares-in-Trust" and
transferred automatically to a trust (the "Share Trust") effective on the day
before the purported transfer of such Common or Preferred Shares. The record
holder of the Common or Preferred Shares that are designated as Shares-in-Trust
(the "Prohibited Owner") will be required to submit such number of Common or
Preferred Shares to the Company for registration in the name of the Share Trust.
The Share Trustee will be designated by the Company, but will not be affiliated
with the Company. The beneficiary of the Share Trust (the "Beneficiary") will
be one or more charitable organizations that are named by the Company.
Shares-in-Trust will remain issued and outstanding Common or Preferred
Shares and will be entitled to the same rights and privileges as all other
shares of the same class or series. The Share Trust will receive all dividends
and distributions on the Shares-in-Trust and will hold such dividends and
distributions in trust for the benefit of the Beneficiary. The Share Trustee
will vote all Shares-in-Trust. The Share Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Share Trust and resulting in the redesignation of such Common or Preferred
Shares as Shares-in-Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Share Trust the amount of any dividends or distributions received
by the Prohibited Owner (i) that are attributable to any Shares-in-Trust and
(ii) the record date for which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Share
Trustee the lesser of (i) the price per share such Prohibited Owner paid for the
Common or Preferred Shares that were designated as Shares-in-Trust (or, in the
case of a gift or devise, the Market Price (as defined below) per share on the
date of such transfer) and (ii) the price per share received by the Share
Trustee from the sale of such Shares-in-Trust. Any amounts received by the
Share Trustee in excess of the amounts to be paid to the Prohibited Owner will
be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
purported transfer which resulted in such Shares-in-Trust and (ii) the date the
Company determines in good faith that a transfer resulting in such Shares-in-
Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect
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to securities listed or admitted to trading on the NYSE or, if the Common or
Preferred Shares are not listed or admitted to trading on the NYSE, as reported
in the principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on which the
Common or Preferred Shares are listed or admitted to trading or, if the Common
or Preferred Shares are not listed or admitted to trading on any national
securities exchange, the last quoted price, or if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market, as reported on
The Nasdaq National Market or, if such system is no longer in use, the principal
automated quotations system that may then be in use or, if the Common or
Preferred Shares are not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in the Common or Preferred Shares selected by the Board of Trustees.
"Trading Day" shall mean a day on which the principal national securities
exchange on which the Common or Preferred Shares are listed or admitted to
trading is open for the transaction of business or, if the Common or Preferred
Shares are not listed or admitted to trading on any national securities
exchange, shall mean any day other than a Saturday, a Sunday or a day on which
banking institutions in the State of New York are authorized or obligated by law
or executive order to close.
Any person who acquires or attempts to acquire Common or Preferred Shares
in violation of the foregoing restrictions, or any person who owned Common or
Preferred Shares that were transferred to a Share Trust, is required (i) to give
immediately written notice to the Company of such event and (ii) to provide to
the Company such other information as the Company may request in order to
determine the effect, if any, of such transfer on the Company's status as a
REIT.
The Declaration of Trust requires all persons who own, directly or
indirectly, more than 5% (or such lower percentages as required pursuant to
regulations under the Code) of the outstanding Common and Preferred Shares,
within 30 days after January 1 of each year, to provide to the Company a written
statement or affidavit stating the name and address of such direct or indirect
owner, the number of Common and Preferred Shares owned directly or indirectly,
and a description of how such shares are held. In addition, each direct or
indirect shareholder shall provide to the Company such additional information as
the Company may request in order to determine the effect, if any, of such
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
Common or Preferred Shares by an underwriter that participates in a public
offering of such shares. In addition, the Board of Trustees, upon receipt of a
ruling from the Service or an opinion of counsel and upon such other conditions
as the Board of Trustees may direct, may exempt a person from the Ownership
Limitation under certain circumstances. However, the Board may not grant an
exemption from the Ownership Limitation to any proposed transferee whose
ownership, direct or indirect, of shares of beneficial interest of the Company
in excess of the Ownership Limitation would result in the termination of the
Company's status as a REIT. The foregoing restrictions will continue to apply
until (i) the Board of Trustees determines that it is no longer in the best
interests of the Company to attempt to qualify, or to continue to qualify, as a
REIT and (ii) there is an affirmative vote of a majority of the votes entitled
to be cast on such matter at a regular or special meeting of the shareholders of
the Company.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for the Common Shares or otherwise be in the best
interest of the shareholders of the Company.
All certificates representing Common Shares or Preferred Shares will bear a
legend referring to the restrictions described above.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of the Offered Securities. The
discussion contained herein does not address all aspects of taxation that may be
relevant to particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations (except to the extent described below),
financial institutions or broker-dealers, foreign corporations, and persons who
are not citizens or
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residents of the United States (except to the extent described below) subject to
special treatment under the federal income tax laws.
The statements in this discussion are based on current provisions of the
Code, existing, temporary, and currently proposed Treasury Regulations
promulgated under the Code, the legislative history of the Code, existing
administrative rulings and practices of the Internal Revenue Service (the
"Service"), and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
OFFERED SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
The Company elected to be taxed as a REIT under sections 856 through 860 of
the Code, effective for its short taxable year beginning on the day prior to the
closing of its IPO and ending on December 31, 1996. The Company believes that,
commencing with such taxable year, it has been organized and has operated in
such a manner so as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner, but no assurance can be
given that the Company has or will remain so qualified.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
Qualification and taxation as a REIT depend upon the Company's ability to
meet on a continuing basis, through actual annual operating results,
distribution levels, and share ownership, the various qualification tests
imposed under the Code discussed below. No assurance can be given that the
actual results of the Company's operations for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "Failure to Qualify."
As a REIT, the Company generally is not subject to federal corporate income
tax on its net income that is distributed currently to its shareholders. That
treatment substantially eliminates the "double taxation" (i.e., taxation at both
the corporate and shareholder levels) that generally results from an investment
in a corporation. However, the Company will be subject to federal income tax in
the following circumstances. First, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its undistributed
items of tax preference, if any. Third, if the Company has (i) net income from
the sale or other disposition of "foreclosure property" that is held primarily
for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and
nonetheless has maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on (i) the gross
income attributable to the greater of the amount by which the Company fails the
75% or 95% gross income test multiplied by (ii) a fraction intended to reflect
the Company's profitability. Sixth, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95%
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of its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed. To the extent that the Company elects to retain and pay income tax
on the net long-term capital gain that it receives in a taxable year, such
retained amounts will be treated as having been distributed for purposes of the
4% excise tax. Finally, if the Company acquires any asset from a C corporation
(i.e., a corporation generally subject to full corporate-level tax) in a
transaction in which the basis of the asset in the Company's hands is determined
by reference to the basis of the asset (or any other asset) in the hands of the
C corporation and the Company recognizes gain on the disposition of such asset
during the 10-year period beginning on the date on which such asset was acquired
by the Company, then to the extent of such asset's "built-in-gain" (i.e., the
excess of the fair market value of such asset at the time of acquisition by the
Company over the adjusted basis in such asset at such time), such gain will be
subject to tax at the highest regular corporate rate applicable (as provided in
Treasury Regulations that have not yet been promulgated). The results described
above with respect to the recognition of "built-in-gain" assume that the Company
will make an election pursuant to IRS Notice 88-19 if it were to make any such
acquisition. See "Proposed Tax Legislation."
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and maintain REIT status; (viii) that uses a calendar year for federal
income tax purposes and complies with the recordkeeping requirements of the Code
and Treasury Regulations promulgated thereunder; and (ix) that meets certain
other tests, described below, regarding the nature of its income and assets.
The Code provides that conditions (i) to (iv), inclusive, must be met during the
entire taxable year and that condition (v) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable year
of less than 12 months. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made by the Company to be taxed as a
REIT. Beginning with its 1998 taxable year, if the Company complies with the
requirements for ascertaining the ownership of its outstanding shares of
beneficial interest and does not know or have reason to know that it has
violated the 5/50 Rule, it will be deemed to satisfy the 5/50 Rule for the
taxable year. The Company has issued sufficient Common Shares with sufficient
diversity of ownership to allow it to satisfy requirements (v) and (vi). In
addition, the Company's Declaration of Trust provides for restrictions regarding
transfer of its shares that are intended to assist the Company in continuing to
satisfy the share ownership requirements described in clauses (v) and (vi)
above. Such transfer restrictions are described in "Restrictions on Ownership
and Transfer."
For purposes of determining stock ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code section 401(a), however, generally is not considered an
individual and beneficiaries of such trust are treated as holding shares of a
REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.
The Company currently has 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
"qualified REIT subsidiaries" of the Company will be ignored, and all assets,
liabilities, and items of income, deduction, and credit of such
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subsidiaries will be treated as assets, liabilities, and items of income,
deduction, and credit of the Company. All of the Company's corporate
subsidiaries are "qualified REIT subsidiaries." Those subsidiaries, therefore,
will not be subject to federal corporate income taxation, although they may be
subject to state and local taxation.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. Thus, the Company's proportionate
share of the assets, liabilities, and items of income of the Operating
Partnership and the noncorporate subsidiaries of the Operating Partnership (the
"Noncorporate Subsidiaries") will be treated as assets, liabilities, and items
of income of the Company for purposes of applying the requirements described
herein.
INCOME TESTS
In order for the Company to qualify and to maintain its qualification as a
REIT, two requirements relating to the Company's gross income must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing. The specific application of these tests to
the Company is discussed below.
The rent received by the Company from its tenants ("Rent") will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
Rent must not be based, in whole or in part, on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Rent received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the Company, or a direct or indirect owner of 10% or more
of the Company, directly or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if Rent attributable to personal property,
leased in connection with a lease of a Property, is greater than 15% of the
total Rent received under the lease, then the portion of Rent attributable to
such personal property will not qualify as "rents from real property." Finally,
for the Rent to qualify as "rents from real property," the Company generally
must not operate or manage the Properties or furnish or render services to the
tenants of such Properties, other than through an "independent contractor" who
is adequately compensated and from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent the
services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant." In addition, the Company 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
the Company receives that is attributable to such services does not exceed 1% of
its total receipts from the Property. For that purpose, the amount attributable
to the Company's noncustomary services will be at least equal to 150% of the
Company's cost of providing the services.
The Company does not charge Rent for any portion of any Property that is
based, in whole or in part, on the income or profits of any person (except by
reason of being based on a fixed percentage or percentages of receipts or sales,
as described above). Furthermore, the Company expects that, with respect to
other properties that it may acquire in the future, it will not charge Rent for
any portion of any property that is based, in whole or in part, on the income or
profits of any person to the extent that the receipt of such Rent would
jeopardize the Company's status as a REIT. In addition, the Company currently
does not receive any Rent from a Related Party Tenant, and the Company expects
that, to the extent that it receives Rent from a Related Party Tenant in the
future, such Rent will not cause the Company to fail to satisfy either the 75%
or 95% gross income test. The Company also currently does not receive Rent
attributable to personal property that is greater than 15% of the Rent received
under the
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applicable Lease. The Company expects that, in the future, it will not allow the
Rent attributable to personal property leased in connection with any lease of
real property to exceed 15% of the total Rent received under the lease, if the
receipt of such Rent would cause the Company to fail to satisfy either the 75%
or 95% gross income test.
Through the Operating Partnership and the Noncorporate Subsidiaries, none
of which constitutes a qualifying independent contractor, the Company provides
and will provide in the future certain services to its tenants. The Company
believes that all such services are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
"rendered to the occupant," so that the provision of such services does not
jeopardize the qualification of the Rent as "rents from real property." In the
case of any services that are not "usual and customary" under the foregoing
rules, the Company employs and will continue to employ qualifying independent
contractors to provide such services. Furthermore, the Company expects that it
will not provide noncustomary services with respect to other properties that it
acquires in the future (other than through a qualifying independent contractor)
to the extent that the provision of such services would cause the Company to
fail to satisfy either the 75% or 95% gross income test.
If any portion of the Rent does not qualify as "rents from real property"
because such Rent is attributable to personal property and exceeds 15% of the
total Rent received under the applicable lease, the portion of the Rent that is
attributable to the personal property will not be qualifying income for purposes
of either the 75% or 95% gross income test. Thus, if the Rent attributable to
such personal property, plus any other income received by the Company during a
taxable year that is not qualifying income for purposes of the 95% gross income
test, exceeds 5% of the Company's gross income during such year, the Company
likely would lose its REIT status. If, however, any portion of the Rent
received under a lease does not qualify as "rents from real property" because
either (i) the Rent is considered based on the income or profits of any person
or (ii) the tenant is a Related Party Tenant, none of the Rent received by the
Company under such lease would qualify as "rents from real property." In that
case, if the Rent received by the Company under such lease, plus any other
income received by the Company during the taxable year that is not qualifying
income for purposes of the 95% gross income test, exceeds 5% of the Company's
gross income for such year, the Company likely would lose its REIT status.
Finally, if any portion of the Rent does not qualify as "rents from real
property" because the Company furnishes noncustomary services to the tenants of
a Property other than through a qualifying independent contractor, none of the
Rent received by the Company with respect to the related Property would qualify
as "rents from real property." In that case, if the Rent received by the
Company with respect to the related Property, plus any other income received by
the Company during the taxable year that is not qualifying income for purposes
of the 95% gross income test, exceeds 5% of the Company's gross income for such
year, the Company would lose its REIT status.
The Company, through the Operating Partnership, may receive other types of
income that will not qualify for purposes of the 75% or 95% gross income test.
In particular, dividends paid with respect to the stock of the Manager owned by
the Operating Partnership will be qualifying income for purposes of the 95%
gross income test, but not the 75% gross income test. In addition, the
Operating Partnership has received and in the future will receive indirectly
certain fees for the performance of certain services by a Noncorporate
Subsidiary with respect to Properties that are owned, directly or indirectly, by
the Operating Partnership. Although the law is not entirely clear, to the
extent that the Operating Partnership owns, directly or indirectly, both an
interest in such Properties and an interest in the Noncorporate Subsidiary
providing the services, such fees should be disregarded for purposes of the 75%
and 95% gross income tests. However, the remainder of such fees received by the
Operating Partnership (i.e., any portion of the fees that is attributable to a
third party's ownership interest in the Properties) will be nonqualifying income
for purposes of the 75% and 95% gross income tests. In addition, any fees
received, directly or indirectly, by the Operating Partnership in exchange for
providing services with respect to properties owned by unrelated third parties
will not be qualifying income for purposes of the 75% and 95% gross income
tests. Furthermore, to the extent that the Company receives interest that is
accrued on the late payment of the Rent, such amounts will not qualify as "rents
from real property" and, thus, will not be qualifying income for purposes of the
75% gross income test, but instead will be treated as interest that qualifies
for the 95% gross income test. The Company believes that the aggregate amount
of any such nonqualifying income in any taxable year has not caused and will not
cause the Company to fail to satisfy either the 75% or 95% gross income test.
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REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid on such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and (iii) for which such REIT makes a
proper election to treat such property as foreclosure property. The Company
does not anticipate that it will receive any income from foreclosure property
that is not qualifying income for purposes of the 75% gross income test, but, if
the Company does receive any such income, the Company will make an election to
treat the related property as foreclosure property.
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes of
the 75% or 95% gross income test. The Company anticipates that any income it
receives with respect to Ineligible Property will be qualifying income for
purposes of the 75% and 95% gross income tests.
The net income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. The
Company believes that no asset owned by the Company or the Operating Partnership
will be held for sale to customers and that a sale of any such asset will not be
in the ordinary course of the Company's or the Operating Partnership's business.
Whether an asset is held "primarily for sale to customers in the ordinary course
of a trade or business" depends, however, on the facts and circumstances in
effect from time to time, including those related to a particular asset.
Nevertheless, the Company will attempt to comply with the terms of safe-harbor
provisions in the Code prescribing when asset sales will not be characterized as
prohibited transactions. Complete assurance cannot be given, however, that the
Company can comply with the safe-harbor provisions of the Code or avoid owning
property that may be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business."
It is possible that, from time to time, the Company or the Operating
Partnership will enter into hedging transactions with respect to one or more of
its assets or liabilities. Any such hedging transactions could take a variety
of forms, including interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts, and options. To the extent that the
Company or the Operating Partnership enters into an interest rate swap, 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 the Company or the Operating Partnership
hedges with other types of financial instruments or in other situations, it may
not be entirely clear how the income from those transactions will be treated for
purposes of the various income tests that apply to REITs under the Code. The
Company intends to structure any hedging transactions in a manner that does not
jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations--Taxation of the Company,"
even if those relief provisions apply, a 100% tax would be imposed on (i) the
gross income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test multiplied by (ii) a fraction intended to
reflect the Company's profitability.
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ASSET TESTS
The Company, at the close of each quarter of each taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the principal
balance of a mortgage does not exceed the value of the associated real property,
and shares of other REITs. For purposes of the 75% asset test, the term
"interest in real property" includes an interest in land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold of real property, and an option to acquire real property (or a
leasehold of real property). Second, of the investments not included in the 75%
asset class, the value of any one issuer's securities owned by the Company may
not exceed 5% of the value of the Company's total assets and the Company may not
own more than 10% of any one issuer's outstanding voting securities (except for
its interests in the Operating Partnership, the Noncorporate Subsidiaries, and
any qualified REIT subsidiary). See "Proposed Tax Legislation."
For purposes of the asset tests, the Company is deemed to own its
proportionate share of the assets of the Operating Partnership and each
Noncorporate Subsidiary, rather than its interests in those entities. The
Company has represented that at least 75% of the value of its total assets has
been and will be represented by real estate assets, cash and cash items
(including receivables), and government securities. The Company, through the
Operating Partnership, owns 100% of the nonvoting stock of the Manager and
holds certain unsecured notes issued by the Manager. The Company does not own,
directly or indirectly, any of the voting stock of the Manager and believes
that the value of its ownership interest in the Manager does not exceed 5% of
the value of its total assets. In addition, the Company has represented that it
has not owned, and will not own (A) securities of any one issuer the value of
which exceeds 5% of the value of the Company's total assets or (B) more than 10%
of any one issuer's outstanding voting securities (except for its interests in
the Operating Partnership, the Noncorporate Subsidiaries, and any qualified REIT
subsidiary). In addition, the Company has represented that it will not acquire
or dispose, or cause the Operating Partnership to acquire or dispose, of assets
in the future in a way that would cause it to violate either asset test.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused by an acquisition of nonqualifying assets. If the
condition described in clause (ii) of the preceding sentence were not satisfied,
the Company still could avoid disqualification by eliminating any discrepancy
within 30 days after the close of the calendar quarter in which it arose.
DISTRIBUTION REQUIREMENTS
The Company, in order to avoid corporate income taxation of the earnings
that it distributes, is required to distribute with respect to each taxable year
dividends (other than capital gain dividends and retained capital gains) to its
shareholders in an aggregate amount at least equal to (i) the sum of (A) 95% of
its "REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain) and (B) 95% of the net income (after tax),
if any, from foreclosure property, minus (ii) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before the Company
timely files its federal income tax return for such year and if paid on or
before the first regular dividend payment date after such declaration. To the
extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital
gains corporate tax rates. Furthermore, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain income for such
year, and (iii) any undistributed taxable income from prior periods,
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the Company would be subject to a 4% nondeductible excise tax on the excess of
such required distribution over the amounts actually distributed. The Company
has made, and intends to continue to make, timely distributions sufficient to
satisfy the annual distribution requirement. The Company may elect to retain and
pay income tax on its long-term capital gains. Any such retained amount will be
treated as having been distributed by the Company for purposes of the 4% excise
tax described above.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. Further, it is possible that,
from time to time, the Company may be allocated a share of net capital gain
attributable to the sale of depreciated property that exceeds its allocable
share of cash attributable to that sale. Therefore, the Company may have less
cash than is necessary to meet its annual 95% distribution requirement or to
avoid corporate income tax or the excise tax imposed on certain undistributed
income. In such a situation, the Company may find it necessary to arrange for
short-term (or possibly long-term) borrowings or to raise funds through the
issuance of Preferred Shares or Common Shares.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement, for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, the Company must maintain
certain records and request on an annual basis certain information from its
shareholders designed to disclose the actual ownership of its outstanding
shares. The Company has complied and intends to continue to comply with such
requirements in the future.
PARTNERSHIP ANTI-ABUSE RULE
The U.S. Treasury Department has issued a final regulation (the "Anti-
Abuse Rule") under the partnership provisions of the Code (the "Partnership
Provisions") that authorizes the Service, in certain "abusive" transactions
involving partnerships, to disregard the form of the transaction and recast it
for federal tax purposes as the Service deems appropriate. The Anti-Abuse Rule
applies where a partnership is formed or utilized in connection with a
transaction (or series of related transactions) with a principal purpose of
substantially reducing the present value of the partners' aggregate federal tax
liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible economic arrangement that accurately reflects the
partners' economic agreement and clearly reflects the partners' income without
incurring any entity-level tax. The purposes for structuring a transaction
involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership interest.
The limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the REIT's option) equal to the fair market value of their respective
interests in the partnership at the time of the redemption. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the Service. The
Company believes that the Anti-Abuse Rule will not have any adverse impact on
its ability to qualify as a REIT. However, the Exchange Rights do not conform
in all respects to the redemption rights described in the
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foregoing example. Moreover, the Anti-Abuse Rule is extraordinarily broad in
scope and is applied based on an analysis of all of the facts and circumstances.
As a result, there can be no assurance that the Service will not attempt to
apply the Anti-Abuse Rule to the Company. If the conditions of the Anti-Abuse
Rule are met, the Service is authorized to take appropriate enforcement action,
including disregarding the Operating Partnership or a Noncorporate Subsidiary
for federal tax purposes or treating one or more of its partners as nonpartners.
Any such action potentially could jeopardize the Company's status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's shareholders in any
year in which the Company fails to qualify will not be deductible by the Company
nor will they be required to be made. In such event, to the extent of the
Company's current and accumulated earnings and profits, all distributions to
shareholders will be taxable as ordinary income and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as a
REIT for the four taxable years following the year during which the Company
ceased to qualify as a REIT. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends 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
the Company's current or accumulated earnings and profits, the Company's
earnings and profits will be allocated first to the Preferred Shares and then to
the Common Shares. As used herein, the term "U.S. shareholder" means a holder
of Offered Securities that for U.S. federal income tax purposes is (i) a citizen
or resident of the U.S., (ii) a corporation, partnership, or other entity
created or organized in or under the laws of the U.S. or of any political
subdivision thereof, (iii) an estate whose income from sources without the
United States is includible in gross income for U.S. federal income tax purposes
regardless of its connection with the conduct of a trade or business within the
United States, or (iv) any trust with respect to which (A) a U.S. court is able
to exercise primary supervision over the administration of such trust and (B)
one or more U.S. fiduciaries have the authority to control all substantial
decisions of the trust. Distributions that are designated as capital gain
dividends will be taxed as gains from the sale or exchange of a capital asset
held for more than one year (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the shareholder has held his Offered Securities. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. The Company may elect to retain and pay income
tax on its net long-term capital gains. In that case, the Company's
shareholders would include in income their proportionate share of the Company's
undistributed long-term capital gains. In addition, the shareholders would be
deemed to have paid their proportionate share of the tax paid by the Company,
which would be credited or refunded to the shareholders. Each shareholder's
basis in his shares would be increased by the amount of the undistributed long-
term capital gain included in the shareholder's income, less the shareholder's
share of the tax paid by the Company.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Offered Securities, but rather will reduce
the adjusted basis of such shares. To the extent that such distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a shareholder's Offered Securities, such distributions will be included in
income as gains from the sale or exchange of a capital asset, assuming the
Offered Securities are capital assets in the hands of the shareholder. In
addition, any distribution declared by the Company in October, November, or
December of any year and payable to a shareholder of record on a specified date
in any such month
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shall be treated as both paid by the Company and received by the shareholder on
December 31 of such year, provided that the distribution is actually paid by the
Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Offered Securities will not be treated as
passive activity income and, therefore, shareholders generally will not be able
to apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which a shareholder is a limited partner) against such
income. In addition, taxable distributions from the Company generally will be
treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Offered Securities (or
distributions treated as such), however, will be treated as investment income
only if the shareholder so elects, in which case such capital gains will be
taxed at ordinary income rates. The Company has notified and will continue to
notify shareholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income, return of capital, and capital gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, any gain or loss realized upon a taxable disposition of the
Offered Securities by a shareholder who is not a dealer in securities will be
treated as capital gain or loss if the Offered Securities have been held as a
capital asset. Such gain or loss will generally constitute either short-term,
mid-term or long-term capital gain or loss depending on the length of time the
shareholder holds the securities. However, any loss upon a sale or exchange of
Offered Securities by a shareholder who has held such shares for six months or
less (after applying certain holding period rules), will be treated as a long-
term capital loss to the extent of distributions from the Company required to be
treated by such shareholder as long-term capital gain. All or a portion of any
loss realized upon a taxable disposition of the Offered Securities may be
disallowed if other Offered Securities are purchased within 30 days before or
after the disposition.
CAPITAL GAINS AND LOSSES
The highest marginal individual income tax rate is 39.6%. The maximum tax
rate on net capital gains applicable to noncorporate taxpayers is 28% for sales
and exchanges of assets held for more than one year but not more than 18 months,
and 20% for sales and exchanges of assets held for more than 18 months. 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 the Company as capital gain dividends and any retained capital
gains that the Company is deemed to distribute, the Company may designate
(subject to certain limits) whether such a distribution is taxable to its
noncorporate stockholders at a 20%, 25%, or 28% rate. Thus, the tax rate
differential between capital gain and ordinary income for noncorporate taxpayers
may be significant. In addition, the characterization of income as capital or
ordinary may affect the deductibility of capital losses. Capital losses not
offset by capital gains may be deducted against a noncorporate taxpayer's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company reports and will continue to report to its U.S. shareholders
and to the Service the amount of distributions paid during each calendar year,
and the amount of tax withheld, if any. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 31% with respect
to distributions paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with the applicable
requirements of the backup withholding rules. A
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shareholder who does not provide the Company with his correct taxpayer
identification number also may be subject to penalties imposed by the Service.
Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, the Company may be required to
withhold a portion of capital gain distributions to any shareholders who fail to
certify their nonforeign status to the Company. The Service 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.
See "--Taxation of Non-U.S. Shareholders."
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by the Company to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the Offered Securities with debt, a
portion of its income from the Company will constitute UBTI pursuant to the
"debt-financed property" rules. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17), and (20), respectively, of Code section 501(c) are subject to
different UBTI rules, which generally will require them to characterize
distributions from the Company as UBTI. In addition, in certain circumstances,
a pension trust that owns more than 10% of the Company's shares is required to
treat a percentage of the dividends from the Company as UBTI (the "UBTI
Percentage"). The UBTI Percentage is the gross income derived by the Company
from an unrelated trade or business (determined as if the Company were a pension
trust) divided by the gross income of the Company for the year in which the
dividends are paid. The UBTI rule applies to a pension trust holding more than
10% of the Company's stock only if (i) the UBTI Percentage is at least 5%, (ii)
the Company qualifies as a REIT by reason of the modification of the 5/50 Rule
that allows the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interests in the pension
trust, and (iii) the Company is a "pension-held" REIT (i.e., either (A) one
pension trust owns more than 25% of the value of the Company's shares or (B) a
group of pension trusts individually holding more than 10% of the value of the
Company's shares collectively owns more than 50% of the value of the Company's
shares). Because the Ownership Limitation prohibits any pension trust from
owning more than 8.5% of the Common Shares or more than 9.8% of any class or
series of the Preferred Shares, the Company should not be a "pension-held" REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE OFFERED SECURITIES, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends or retained capital
gains will be treated as dividends of ordinary income to the extent that they
are made out of current or accumulated earnings and profits of the Company.
Such distributions ordinarily will be subject to a withholding tax equal to 30%
of the gross amount of the distribution unless an applicable tax treaty reduces
or eliminates that tax. However, if income from the investment in the Offered
Securities is treated as effectively connected with the Non-U.S. Shareholder's
conduct of a U.S. trade or business, the Non-U.S. Shareholder generally will be
subject to federal income tax at graduated rates, in the same manner as U.S.
shareholders are taxed with respect to such distributions (and also may be
subject to the 30% branch profits tax in the case of a Non-U.S. Shareholder that
is a
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non-U.S. corporation). The Company expects to withhold U.S. income tax at the
rate of 30% on the gross amount of any such distributions made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies and any required form
evidencing eligibility for that reduced rate is filed with the Company or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that
the distribution is effectively connected income. The Service has issued final
regulations that modify the manner in which the Company complies with the
withholding requirements. Those regulations are effective for distributions made
after December 31, 1998. Distributions in excess of current and accumulated
earnings and profits of the Company will not be taxable to a shareholder to the
extent that such distributions do not exceed the adjusted basis of the
shareholder's Common Shares, but rather will reduce the adjusted basis of such
shares. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted basis of a Non-U.S. Shareholder's
Offered Securities, such distributions will give rise to tax liability if the
Non-U.S. Shareholder would otherwise be subject to tax on any gain from the sale
or disposition of his Offered Securities, as described below. Because it
generally cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. Amounts so withheld, however, are
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of current and accumulated earnings and profits of the
Company.
The Company is required to withhold 10% of any distribution in excess of
the Company's current and accumulated earnings and profits. Consequently,
although the Company intends to withhold at a rate of 30% on the entire amount
of any distribution, to the extent that the Company does not do so, any portion
of a distribution not subject to withholding at a rate of 30% will be subject to
withholding at a rate of 10%.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under the provisions
of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under
FIRPTA, distributions attributable to gain from sales of U.S. real property
interests are taxed to a Non-U.S. Shareholder as if such gain were effectively
connected with a U.S. business. Non-U.S. Shareholders thus would be taxed at
the normal capital gain rates applicable to U.S. shareholders (subject to
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to the 30% branch profits tax in the hands of a non-U.S.
corporate shareholder not entitled to treaty relief or exemption. The Company
is required to withhold 35% of any distribution that is designated by the
Company as a capital gains dividend. The amount withheld is creditable against
the Non-U.S. Shareholder's FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his Common Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled REIT," defined generally as a REIT in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by non-U.S. persons. However, because the Offered Securities will
be publicly traded, no assurance can be given that the Company is or will
continue to be a "domestically controlled REIT." In addition, a Non-U.S.
Shareholder that owned, actually or constructively, 5% or less of the Common
Shares or Preferred Shares at all times during a specified testing period will
not be subject to tax under FIRPTA if the Common or Preferred Shares, as
applicable, are "regularly traded" on an established securities market.
Furthermore, gain not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if (i) investment in the Offered Securities is effectively connected
with the Non-U.S. Shareholder's U.S. trade or business, in which case the Non-
U.S. Shareholder will be subject to the same treatment as U.S. shareholders
with respect to such gain, or (ii) the Non-U.S. Shareholder is a nonresident
alien individual who was present in the U.S. for 183 days or more during the
taxable year and certain other conditions apply, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's capital gains.
If the gain on the sale of the Offered Securities were to be subject to taxation
under FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as
U.S. shareholders with respect to such gain (subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations).
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PROPOSED TAX LEGISLATION
On February 2, 1998, President Clinton released his budget proposal for
fiscal year 1999 (the "Proposal"). Two provisions contained in the Proposal
potentially could affect the Company if enacted in final form as presently
proposed. First, the Proposal would prohibit a REIT from owning, directly or
indirectly, more than 10% of the voting power or value of all classes of a C
--
corporation's stock (other than the stock of a qualified REIT subsidiary).
Currently, a REIT may own no more than 10% of the voting stock of a C
corporation (other than the stock of a qualified REIT subsidiary), but its
ownership of the nonvoting stock of a C corporation is not limited (other than
by the rule that the value of a REIT's combined equity and debt interest in a C
corporation may not exceed 5% of the value of a REIT's total assets). That
provision is proposed to be effective with respect to stock in a C corporation
acquired by a REIT on or after the date of "first committee action" (i.e., first
- -
action by the House Ways and Means Committee with respect to the provision)
("First Committee Action"). A REIT that owns stock in a C corporation in excess
of the new ownership limit prior to First Committee Action would be
"grandfathered," but only to the extent that the corporation does not engage in
a new trade or business or acquire substantial new assets on or after the date
of First Committee Action. The Company, through the Operating Partnership,
currently owns 100% of the nonvoting stock of the Manager. See "--Manager." If
enacted as presently written, that provision could prevent the Manager from
expanding its current operations and would significantly limit the Company's
ability to use other taxable subsidiaries to conduct businesses the income from
which would be nonqualifying income if received directly by the Company.
Second, the Proposal would require recognition of any built-in gain
associated with the assets of a "large" C corporation (i.e., a C corporation
whose stock has a fair market value of more than $5 million) upon its conversion
to REIT status or merger into a REIT. That provision is proposed to be
effective for conversions to REIT status effective for taxable years beginning
after January 1, 1999 and mergers of C corporations into REITs that occur after
December 31, 1998. This provision would require immediate recognition of any
"built-in gain" of an acquired C corporation that is determined to be "large"
if, at any time after December 31, 1998, such corporation merges into the
Company.
On March 26, 1998, Representative Archer and Senator Roth introduced bills
in the U.S. House of Representatives and U.S. Senate relating to the Proposal;
however, such bills did not address either the ownership of a nonqualified REIT
subsidiary or the recognition of built-in gain by a C corporation converting
into or merging into a REIT. If legislation relating to the ownership of
nonqualified REIT subsidiaries or the recognition of built-in gain is introduced
and eventually enacted, it may be effective as of First Committee Action, March
26, 1998.
OTHER TAX CONSEQUENCES
The Company, the General Partner, the Operating Partnership, the Manager, a
Noncorporate Subsidiary, or the Company's shareholders may be subject to state
or local taxation in various state or local jurisdictions, including those in
which it or they own property, transact business, or reside. Such state and
local tax treatment may not conform to the federal income tax consequences
discussed above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN
INVESTMENT IN THE COMPANY.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas, including REITs that
are organized as corporations. While the Trust is organized as a Maryland real
estate investment trust and is therefor not subject to the Texas franchise tax,
it owns, directly or indirectly, certain 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
(i) .25% of "taxable capital" (generally, financial accounting net worth with
certain adjustments) apportioned to Texas; or (ii) 4.5% of "taxable earned
surplus" (generally, federal taxable income with certain adjustments)
apportioned to Texas. A corporation's taxable capital and taxable earned surplus
are apportioned to Texas based upon a fraction, the numerator of which is the
corporation's gross receipts from business transacted in Texas and the
denominator of which is the corporation's gross receipts from all sources.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE NONCORPORATE SUBSIDIARIES
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in the
Operating Partnership and the Noncorporate Subsidiaries (each of the Operating
Partnership and the Noncorporate Subsidiaries is referred to herein as a
"Partnership"). The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
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CLASSIFICATION AS A PARTNERSHIP
The Company will be entitled to include in its income its distributive
share of each Partnership's income and to deduct its distributive share of each
Partnership's losses only if each Partnership is classified for federal income
tax purposes as a partnership rather than as a corporation or an association
taxable as a corporation. An entity will be classified as a partnership rather
than as a corporation for federal income tax purposes if the entity (i) is
treated as a partnership under Treasury regulations, effective January 1, 1997,
relating to entity classification (the "Check-the-Box Regulations") and (ii) is
not a "publicly traded" partnership.
In general, under the Check-the-Box Regulations, an unincorporated entity
with at least two members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity fails to make
an election, it generally will be treated as a partnership for federal income
tax purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Partnerships, will be respected
for all periods prior to January 1, 1997 if (i) the entity had a reasonable
basis for its claimed classification, (ii) the entity and all members of the
entity recognized the federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and (iii) neither
the entity nor any of its members was notified in writing by a taxing authority
on or before May 8, 1996 that the classification of the entity was under
examination. Each Partnership in existence on January 1, 1997 reasonably
claimed partnership classification under the Treasury Regulations relating to
entity classification in effect prior to January 1, 1997, and such
classification should be respected for federal income tax purposes. In
addition, no Partnership was notified by a taxing authority on or before May 8,
1996 that its classification was under examination. The Partnerships intend to
continue to be classified as partnerships and the Company has represented that
no Partnership will elect to be treated as an association taxable as a
corporation for federal income tax purposes under the Check-the-Box Regulations.
A publicly traded partnership is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market (or the substantial equivalent thereof). A publicly traded partnership
will be treated as a corporation for federal income tax purposes unless at least
90% of such partnership's gross income for a taxable year consists of
"qualifying income" under section 7704(d) of the Code, which generally includes
any income that is qualifying income for purposes of the 95% gross income test
applicable to REITs (the "90% Passive-Type Income Exception"). See "--
Requirements for Qualification--Income Tests." The U.S. Treasury Department has
issued regulations (the "PTP Regulations") that provide limited safe harbors
from the definition of a publicly traded partnership. Pursuant to one of those
safe harbors (the "Private Placement Exclusion"), interests in a partnership
will not be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all interests in the partnership were issued in a
transaction (or transactions) that was not required to be registered under the
Securities Act, and (ii) the partnership does not have more than 100 partners at
any time during the partnership's taxable year. In determining the number of
partners in a partnership, a person owning an interest in a flow-through entity
(i.e., a partnership, grantor trust, or S corporation) that owns an interest in
the partnership is treated as a partner in such partnership only if (a)
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (b) a principal purpose of the use of the flow-
through entity is to permit the partnership to satisfy the 100-partner
limitation. Each Partnership qualifies for the Private Placement Exclusion. If
a Partnership is considered a publicly traded partnership under the PTP
Regulations because it is deemed to have more than 100 partners, such
Partnership should not be treated as a corporation because it should be eligible
for the 90% Passive-Type Income Exception.
If for any reason one of the Partnerships were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company
likely would not be able to qualify as a REIT. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests" and "--
Requirements for Qualification--Asset Tests." In addition, any change in a
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur a tax liability without any related cash
distribution. See "Federal Income Tax Considerations--Requirements for
Qualification--Distribution Requirements." Further, items of income and
deduction of such Partnership would not pass through to its partners, and its
partners would be treated as shareholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate tax
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rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing such Partnership's taxable
income.
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
Partners, Not Partnerships, Subject to Tax. A partnership is not a taxable
entity for federal income tax purposes. Rather, the Company will be required to
take into account its allocable share of each Partnership's income, gains,
losses, deductions, and credits for any taxable year of such Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution from such Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under section 704(b) of the Code if they do
not comply with the provisions of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
Each Partnership's allocations of taxable income and loss are intended to comply
with the requirements of section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department has issued
regulations requiring partnerships to use a "reasonable method" for allocating
items affected by section 704(c) of the Code and outlining several reasonable
allocation methods. The Operating Partnership generally has elected to use the
traditional method for allocating Code section 704(c) items with respect to the
Properties it acquires in exchange for Units.
Under the Operating Partnership Agreement, depreciation or amortization
deductions of the Operating Partnership generally are allocated among the
partners in accordance with their respective interests in the Operating
Partnership, except to the extent that the Operating Partnership is required
under Code section 704(c) to use a method for allocating tax depreciation
deductions attributable to the Properties that results in the Company receiving
a disproportionately large share of such deductions. In addition, gain on the
sale of a Property contributed to the Operating Partnership in exchange for
Units will be specially allocated to the contributor to the extent of any
"built-in" gain with respect to such Property for federal income tax purposes.
Depending on the allocation method elected under Code section 704(c), it is
possible that the Company (i) may be allocated lower amounts of depreciation
deductions for tax purposes with respect to contributed Properties than would be
allocated to the Company if such Properties were to have a tax basis equal to
their fair market value at the time of contribution and (ii) may be allocated
taxable gain in the event of a sale of such contributed Properties in excess of
the economic profit allocated to the Company as a result of such sale. These
allocations may cause the Company to recognize taxable income in excess of cash
proceeds, which might adversely affect the Company's ability to comply with the
REIT distribution requirement, although the Company does not anticipate that
this event will occur. The foregoing principles also will affect the
calculation of the Company's earnings and profits for purposes of determining
which portion of the Company's distributions is taxable as a dividend. The
allocations described in this paragraph may result in a higher portion of the
Company's distributions being taxed as a dividend than would have occurred had
the Company purchased the Properties for cash.
Basis in Operating Partnership Interest. The Company's adjusted tax basis
in its partnership interest in the Operating Partnership generally is equal to
(i) the amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) increased by (A) its allocable share
of the Operating Partnership's income and (B) its allocable share of
indebtedness of the Operating Partnership, and (iii) reduced, but not below
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zero, by (A) the Company's allocable share of the Operating Partnership's loss
and (B) the amount of cash distributed to the Company, including constructive
cash distributions resulting from a reduction in the Company's share of
indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition of
such loss will be deferred until such time as the recognition of such loss would
not reduce the Company's adjusted tax basis below zero. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decrease being considered a
constructive cash distribution to the partners), would reduce the Company's
adjusted tax basis below zero, such distributions (including such constructive
distributions) will constitute taxable income to the Company. Such
distributions and constructive distributions normally will be characterized as
capital gain, and, if the Company's partnership interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
will constitute long-term capital gain.
SALE OF THE OPERATING PARTNERSHIP'S OR A NONCORPORATE SUBSIDIARY'S PROPERTY
Generally, any gain realized by a Partnership on the sale of property held
for more than one year but not more than 18 months will be mid-term capital
gain, and any gain realized on the sale of property held for more than 18 months
will be long-term capital gain, except for any portion of such gain that is
treated as depreciation or cost recovery recapture. Any gain recognized by a
Partnership on the disposition of the Properties contributed to the Partnership
in exchange for partnership interests therein will be allocated first to the
contributor under section 704(c) of the Code to the extent of the contributor's
"built-in gain" on those Properties for federal income tax purposes. The
contributors' "built-in gain" on the Properties sold will equal the excess of
the contributors' proportionate share of the book value of those Properties over
the contributors' tax basis allocable to those Properties at the time of the
sale. Any remaining gain recognized by a Partnership on the disposition of the
contributed Properties, and any gain recognized upon the disposition of the
Properties acquired by a Partnership for cash, will be allocated among the
partners in accordance with their respective percentage interests in the
Partnership. The Bylaws of the Company provide that any decision to sell any
real estate asset in which a trustee, or officer of the Company, or any
Affiliate of the foregoing, has a direct or indirect interest, will be made by a
majority of the Trustees including a majority of the Independent Trustees. See
"Policies with Respect to Certain Activities--Conflict of Interest Policies--
Declaration of Trust and Bylaw Provisions."
The Company's share of any gain realized by a Partnership on the sale of
any property held by the Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. Such prohibited transaction income also may
have an adverse effect upon the Company's ability to satisfy the income tests
for REIT status. See "Federal Income Tax Considerations--Requirements For
Qualification--Income Tests" above. The Company, however, does not presently
intend to acquire or hold or to allow a Partnership to acquire or hold any
property that represents inventory or other property held primarily for sale to
customers in the ordinary course of the Company's or the Partnership's trade or
business.
MANAGER
The Operating Partnership owns 100% of the nonvoting stock of 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, the Company is considered to own its pro
rata share of such stock and notes.
As noted above, for the Company to qualify as a REIT the value of the
equity and debt securities of the Manager held, directly or indirectly, by the
Company may not exceed 5% of the total value of the Company's assets. In
addition, the Company may not own, directly or indirectly, more than 10% of the
voting stock of the Manager. The Company does not own, directly or through the
Operating Partnership, any of the voting securities of the Manager. In
addition, the Company believes that the value of the equity and debt securities
of the Manager is
29
<PAGE>
significantly less than 5% of the total value of its assets. However, if the
Service were to successfully challenge these determinations and conclude that
the value of the equity and debt securities of the Manager exceeded 5% of the
total assets of the Company, the Company likely would fail to qualify as a REIT.
See "--Proposed Tax Legislation."
The Manager is organized as a corporation and pays federal, state and local
income taxes on its taxable income at normal corporate rates. Any such taxes
reduce amounts available for distribution by the Manager, which in turn reduce
amounts available for distribution to the Company's shareholders.
PLAN OF DISTRIBUTION
The Company may sell Offered Securities in or outside the United States to
or through underwriters or may sell Offered Securities to investors directly or
through designated agents. Any such underwriter or agent involved in the offer
and sale of the Offered Securities will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Offered Securities at a fixed price or
prices, which may be changed, or from time to time at market prices prevailing
at the time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Company also may, from time to time, authorize
underwriters acting as agents to offer and sell the Offered Securities upon the
terms and conditions set forth in any Prospectus Supplement. Underwriters may
sell Offered Securities to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions (which may be
changed from time to time) from the underwriters and/or from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Offered Securities and any discounts,
concessions or commissions allowed by underwriters to participating dealers will
be set forth in the applicable Prospectus Supplement. Underwriters, dealers and
agents participating in the distribution of the Offered Securities may be deemed
to be underwriters, and any discounts and commissions received by them from the
Company or from purchasers of Offered Securities and any profit realized by them
on resale of the Offered Securities may be deemed to be underwriting discounts
and commissions under the Securities Act. Underwriters, dealers and agents may
be entitled, under agreements entered into with the Company, to indemnification
against and contribution toward certain civil liabilities, including liabilities
under the Securities Act.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Offered Securities from the Company at the public
offering price set forth in such Prospectus Supplement pursuant to Delayed
Delivery Contracts (the "Contracts") providing for payment and delivery on the
date or dates stated in such Prospectus Supplement. Each Contract will be for
an amount not less than, and the principal amount of Offered Securities sold
pursuant to Contracts shall not be less nor more than, the respective amounts
stated in such Prospectus Supplement. Institutions with which Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and other institutions, but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions except
(i) the purchase by an institution of the Offered Securities covered by its
Contract shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject and (ii)
the Company shall have sold to such underwriters the total principal amount of
the Offered Securities less the principal amount thereof covered by Contracts.
A commission indicated in the Prospectus Supplement will be paid to agents and
underwriters soliciting purchases of Offered Securities pursuant to Contracts
accepted by the Company. Agents and underwriters shall have no responsibility
in respect of the delivery or performance of Contracts.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with, and perform services for, the Company in the
ordinary course of business.
30
<PAGE>
If a dealer is utilized in the sale of the Offered Securities in respect of
which this Prospectus is delivered, the Company will sell such Offered
Securities to the dealer, as principal. The dealer may then resell such Offered
Securities to the public at varying prices to be determined by such dealer at
the time of resale.
Certain of the underwriters, dealers or agents utilized by the Company in
any offering hereby may be customers of, including borrowers from, engage in
transactions with, and perform services for, the Company or one or more of its
respective affiliates in the ordinary course of business. Underwriters, dealers,
agents and other persons may be entitled, under agreements which may be entered
into with the Company to indemnification against certain civil liabilities,
including liabilities under the Securities Act.
Until the distribution of the Offered Securities is completed, rules of the
Commission may limit the ability of the underwriters and certain selling group
members, if any, to bid for and purchase the Offered Securities. As an
exception to these rules, the representatives of the underwriters, if any, are
permitted to engage in certain transactions that stabilizes the price of the
Offered Securities. Such transactions may consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the Offered Securities.
If underwriters create a short position in the Offered Securities in
connection with the offering thereof, (i.e., if they sell more Offered
Securities than are set forth on the cover page of the applicable Prospectus
Supplement), the representatives of such underwriters may reduce that short
position by purchasing Offered Securities in the open market. Any such
representatives also may elect to reduce any short position by exercising all or
part of the over-allotment option described in the applicable Prospectus
Supplement.
Any such representatives also may impose a penalty bid on certain
underwriters and selling group members. This means that if the representatives
purchase Offered Securities in the open market to reduce the underwriters' short
position or to stabilize the price of the Offered Securities, they may reclaim
the amount of the selling concession from the underwriters and selling group
members who sold those shares as part of the offering thereof.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of an Offered
Security to the extent that it were to discourage resales of the Offered
Security by purchasers in the offering.
Neither the Company nor any of the underwriters, if any, makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Securities. In
addition, neither the Company nor any of the underwriters, if any, makes any
representation that the representatives of the underwriters, if any, will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices at
Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661 and Suite 1300, 7 World Trade Center, New York, New York 10048,
and can also be inspected and copied at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. Copies of such material
can be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the prescribed fees or
from the Commission's site on the World Wide Web at http://www.sec.gov.
31
<PAGE>
This Prospectus is part of a registration statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") filed by
the Company with the Commission under the Securities Act. This Prospectus does
not contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules of the Commission. For
further information, reference is made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission
(Commission File No. 001-14516) under the Exchange Act are hereby incorporated
by reference in this Prospectus:
(1) the Company's Annual Report on Form 10-K for the year ended December
31, 1997;
(2) the Company's Current Reports on Form 8-K filed on January 15, 1998,
February 10, 1998, February 17, 1998 and February 25, 1998;
(3) the description of the Common Shares contained in the Company's
Registration Statement on Form 8-A, filed on October 17, 1996, under the
Exchange Act, including any reports filed under the Exchange Act for the purpose
of updating such description; and
(4) the description of the Series B Preferred Shares contained in the
Company's Registration Statement on Form 8-A filed on February 17, 1998, as
amended by the Company's Registration Statement of Form 8-A/A filed on March 10,
1998, including any reports filed under the Exchange Act for the purpose of
updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act prior to the termination of the offerings of all of
the Offered Securities shall be deemed to be incorporated by reference herein.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
in any accompanying Prospectus Supplement relating to a specific offering of any
Offered Securities or in any other subsequently filed document, as the case may
be, which also is or is deemed to be incorporated by reference herein, modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus or any accompanying Prospectus Supplement.
The Company will provide on request and without charge to each person to
whom this Prospectus is delivered a copy (without exhibits) of any or all
documents incorporated by reference into this Prospectus. Requests for such
copies should be directed to Prentiss Properties Trust, 3890 W. Northwest
Highway, Suite 400, Dallas, Texas, Attention: Secretary (telephone (214) 654-
0886).
LEGAL OPINIONS
The validity of the Securities will be passed upon for the Company by
Hunton & Williams, Richmond, Virginia, who will rely on Ballard Spahr Andrews &
Ingersoll, LLP., Baltimore, Maryland, as to certain matters of Maryland law.
32
<PAGE>
EXPERTS
The consolidated and combined financial statements of the Company 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 (as defined therein) for the period January 1, 1996 through
October 21, 1996, and the year ended December 31, 1995, included in the
Company's Annual Report on Form 10-K 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
the Company's Current Report on Form 8-K dated February 10, 1998, all
incorporated by reference in this Prospectus, have been incorporated herein in
reliance on the reports of Coopers & Lybrand L.L.P., independent accountants
given on the authority of that firm as experts in accounting and auditing.
33
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.. $ 211,386
Accounting fees and expenses......................... 300,000
Blue Sky fees and expenses........................... 15,000
Legal fees and expenses.............................. 375,000
Printing............................................. 300,000
Miscellaneous........................................ 98,614
----------
TOTAL........................................... $1,300,000
==========
</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.
Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as is permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to 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
II-1
<PAGE>
matter giving rise to the proceeding and (i) was committed in bad faith or (ii)
was the result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services or
(c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In accordance with the MGCL, the Bylaws of the
Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the Trustee or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company as
authorized by the Bylaws and (b) a written statement by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met.
ITEM 16. EXHIBITS
4.1/*/ Form of Common Shares Certificate.
4.2/*/ Form of Amended and Restated Declaration of Trust of the Company
4.3 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)
4.4 Articles Supplementary to the Amended and Restated Declaration of
Trust Classifying and Designating the Series B Preferred Shares (filed
as Exhibit 3 to the Company's Registration Statement on Form 8-K filed
February 17, 1998)
4.5/*/ Bylaws of the Company
4.6 Rights Agreement, dated February 6, 1998, between the Company and
First Chicago Trust Company of New York, as Rights Agent (filed as an
Exhibit to the Company's Registration Statement on Form 8-A filed on
February 17, 1998.
4.7 Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
5.1 Opinion of Hunton & Williams.
8.1 Opinion of Hunton & Williams regarding tax matters.
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1).
23.2 Consent of Ballard Spahr Andrews and Ingersoll, LLP.
23.3 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney (located on the signature page of this Registration
Statement)
_______________________________
/*/ Filed as an Exhibit to the Company's Registration Statement on Form S-11,
File No. 33-09863, as amended, and incorporated by reference herein.
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
II-2
<PAGE>
with the Commission 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
(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 Commission 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;
(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; and
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 Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a 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
its 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 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-3
<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 the 3rd day of April,
1998.
Prentiss Properties Trust,
a Maryland real estate investment trust
(Registrant)
By: /s/ Thomas F. August
----------------------------------------
Thomas F. August
President and Chief Operating Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Michael V. Prentiss, Thomas F. August and Gregory S. Imhoff, or any of them, his
true and lawful attorney-in-fact, for him and in his name, place and stead, to
sign any and all amendments (including post-effective amendments) to this
Registration Statement, to sign any Registration Statements filed pursuant to
Rule 462(b) of the Securities Act of 1933, and to cause the same to be filed
with the Securities and Exchange Commission, hereby granting to said attorneys-
in-fact full power and authority to do and perform all and every act and thing
whatsoever requisite or desirable to be done in and about the premises as fully
to all intents and purposes as the undersigned might or could do in person,
hereby ratifying and confirming all acts and things that said attorneys-in-fact
may do or cause to be done by virtue of these presents.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the 3rd day of April, 1998 by
the following persons in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ Michael V. Prentiss
- --------------------------------
Michael V. Prentiss Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
/s/ Thomas F. August
- --------------------------------
Thomas F. August President, Chief Operating Officer and
Trustee
/s/ Thomas J. Hynes, Jr.
- --------------------------------
Thomas J. Hynes, Jr. Trustee
/s/ Barry J.C. Parker
- --------------------------------
Barry J.C. Parker Trustee
/s/ Leonard M. Riggs, Jr.
- --------------------------------
Leonard M. Riggs, Jr. Trustee
- --------------------------------
Ronald G. Steinhart Trustee
II-4
<PAGE>
/s/ Lawrence A. Wilson
- --------------------------------
Lawrence A. Wilson Trustee
/s/ Mark R. Doran
- --------------------------------
Mark R. Doran Executive Vice President, Chief Financial
Officer and Treasurer (Principal Financial
Officer)
/s/ Richard J. Bartel
- --------------------------------
Richard J. Bartel Executive Senior Vice President--Financial
Operations and Administration, and Chief
Administrative Officer (Principal Accounting
Officer)
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT PAGE
- ------ ------- ----
4.1/*/ Form of Common Shares Certificate.
4.2/*/ Form of Amended and Restated Declaration of Trust of the Company
4.3 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)
4.4 Articles Supplementary to the Amended and Restated Declaration of
Trust Classifying and Designating the Series B Preferred Shares (filed
as Exhibit 3 to the Company's Registration Statement on Form 8-A filed
February 17, 1998)
4.5/*/ Bylaws of the Company
4.6 Rights Agreement, dated February 6, 1998, between the Company and
First Chicago Trust Company of New York, as Rights Agent (filed as an
Exhibit to the Company's Registration Statement on Form 8-A filed on
February 17, 1998.
4.7 Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
5.1 Opinion of Hunton & Williams.
8.1 Opinion of Hunton & Williams regarding tax matters.
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1).
23.2 Consent of Ballard Spahr Andrews and Ingersoll, LLP.
23.3 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney (located on the signature page of this Registration
Statement)
_______________________________
/*/ Filed as an Exhibit to the Company's Registration Statement on Form S-11,
File No. 33-09863, as amended, and incorporated by reference herein.
II-6
<PAGE>
EXHIBIT 5.1
-----------
[HUNTON & WILLIAMS LETTERHEAD]
April 3, 1998
Board of Directors
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, TX 75220
Prentiss Properties Trust
Registration Statement on Form S-3
___________________________________
Ladies and Gentlemen:
We are counsel for Prentiss Properties Trust, a Maryland real estate
investment trust, (the "Company") in connection with its registration under the
Securities Act of 1933 of up to $716,561,172.12 in aggregate public offering
price of the Company's common and preferred shares of beneficial interest ("the
Shares") which are proposed to be offered and sold as described in the Company's
Registration Statement on Form S-3 (the "Registration Statement") to be filed
with the Securities and Exchange Commission (the "Commission") on April 3, 1998.
In rendering this opinion, we have relied upon, among other things, our
examination of such records of the Company and certificates of its officers and
of public officials as we have deemed necessary. With respect to matters of
Maryland law, we have relied upon the opinion of Ballard Spahr Andrews and
Ingersoll, LLP.
Based upon the foregoing, we are of the opinion that:
1. The Company is a real estate investment trust duly formed and existing
under and by virtue of the laws of the State of Maryland and is in good standing
with the State Department of Assessments and Taxation of Maryland.
2. When the issuance of the Shares has been duly authorized by
appropriate action and the Shares have been offered and sold as described in the
Registration Statement, the Shares will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement and the reference to our firm under the
heading "Legal Matters" in the Registration Statement.
Very truly yours,
/s/ Hunton & Williams
<PAGE>
EXHIBIT 8.1
-----------
[HUNTON & WILLIAMS LETTERHEAD]
April 3, 1998
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
Prentiss Properties Trust
-------------------------
Qualification as
----------------
Real Estate Investment Trust
----------------------------
Ladies and Gentlemen:
We have acted as counsel to Prentiss Properties Trust, a Maryland real
estate investment trust (the "Trust"), in connection with the preparation of a
Form S-3 registration statement filed with the Securities and Exchange
Commission ("SEC") on April 3, 1998 (the "Registration Statement") with respect
to the offer and sale from time to time of up to $716,561,172.12 aggregate
public offering price of common shares of beneficial interest, par value $.01
per share (the "Common Shares") and preferred shares of beneficial interest,
$.01 par value per share (the "Preferred Shares") (collectively, the
"Registration Shares"), of the Trust pursuant to a prospectus dated April 3,
1998 (the "Prospectus"). You have requested our opinion regarding certain U.S.
federal income tax matters in connection with the Offering.
As of February 5, 1998, the Operating Partnership owns, directly or
indirectly, equity interests in 217 office and industrial properties (the
"Properties"). The Operating Partnership owns and will own interests in certain
Properties through subsidiary partnerships, joint ventures, and limited
liability companies (collectively, the "Noncorporate Subsidiaries").
The Company owns 100% of the stock of Prentiss Properties I, Inc., a
Delaware corporation and the general partner of the Operating Partnership ("PP
I"). The Operating Partnership owns all of the nonvoting stock of Prentiss
Properties Limited,
<PAGE>
Prentiss Properties Trust
April 3, 1998
Page 2
Inc., a Delaware corporation ("PPL"), representing 95% of
the economic interests therein. All of the voting stock of PPL, representing 5%
of the economic interests therein, is owned by Michael V. Prentiss. PPL owns
100% of the outstanding stock of Prentiss Properties II, Inc., a Delaware
corporation ("PP II"). The Operating Partnership also owns all of the nonvoting
stock of Prentiss Properties Limited II, Inc., a Delaware corporation ("PPL
II"), representing 95% of the economic interests therein. All of the voting
stock of PPL II, representing 5% of the economic interests therein, is owned by
Michael V. Prentiss.
In giving this opinion, we have examined the following:
1. the Trust's Amended and Restated Declaration of Trust, as duly filed with
the Department of Assessments and Taxation of the State of Maryland on October
16, 1996;
2. the Trust's Bylaws;
3. the Prospectus;
4. the Second Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated October 22, 1996 (the "Operating Partnership
Agreement"), among PP I, as general partner, and several limited partners;
5. the partnership agreements, joint venture agreements, and operating
agreements of the Noncorporate Subsidiaries (together with the Operating
Partnership Agreement, the "Partnership Agreements");
6. the Articles of Incorporation and Bylaws of PPL;
7. the Articles of Incorporation and Bylaws of PPL II;
8. the Amended and Restated Certificate of Incorporation and the Bylaws of PP
II; and
9. such other documents as we have deemed necessary or appropriate for
purposes of this opinion.
<PAGE>
Prentiss Properties Trust
April 3, 1998
Page 3
In connection with the opinions rendered below, we have assumed, with
your consent, that:
1. each of the documents referred to above has been duly authorized, executed,
and delivered; is authentic, if an original, or is accurate, if a copy; and has
not been amended;
2. during its taxable year ending December 31, 1998 and future taxable years,
the Trust has operated and will continue to operate in a manner that makes and
will continue to make the representations contained in a certificate, dated the
date hereof and executed by a duly appointed officer of the Trust (the
"Officer's Certificate"), true for such years;
3. the Trust will not make any amendments to its organizational documents, PP
I's organizational documents, the Partnership Agreements, PPL's organizational
documents, PPL II's organizational documents, or PP II's organizational
documents after the date of this opinion that would affect its qualification as
a real estate investment trust (a "REIT") for any taxable year;
4. each partner or member of the Operating Partnership and the Noncorporate
Subsidiaries (each, a "Partner") that is a corporation or other entity has a
valid legal existence;
5. each Partner has full power, authority, and legal right to enter into and
to perform the terms of the applicable Partnership Agreement and the
transactions contemplated thereby; and
6. no action will be taken by the Trust, the Operating Partnership, the
Noncorporate Subsidiaries, the Partners, PPL, PPL II, or PP II after the date
hereof that would have the effect of altering the facts upon which the opinions
set forth below are based.
In connection with the opinions rendered below, we also have relied
upon the correctness of the representations contained in the Officer's
Certificate. After reasonable inquiry, no facts have come to our attention that
would cause us to question the accuracy and completeness of the facts contained
in the documents and assumptions set forth above, the representations set forth
in the Officer's Certificate, or the Prospectus in a material way. In addition,
to the extent that any of the representations provided to us in the Officer's
Certificate are with respect to matters set forth in the Internal Revenue
<PAGE>
Prentiss Properties Trust
April 3, 1998
Page 4
Code of 1986, as amended (the "Code"), or the Treasury regulations thereunder
(the "Regulations"), we have reviewed with the individuals making such
representations the relevant portion of the Code and the applicable Regulations.
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussions in
the Prospectus under the caption "Federal Income Tax Considerations" (which are
incorporated herein by reference), we are of the opinion that:
(a) the Trust qualified to be taxed as a REIT pursuant to sections 856
through 860 of the Code for its taxable years ended December 31, 1996 and
December 31, 1997, and the Trust's organization and current and proposed
method of operation will enable it to continue to qualify as a REIT for its
taxable year ending December 31, 1998 and in the future; and
(b) the descriptions of the law and the legal conclusions contained
in the Prospectus under the caption "Federal Income Tax Considerations" are
correct in all material respects, and the discussions thereunder fairly
summarize the federal income tax considerations that are likely to be
material to a holder of the Registration Shares.
We will not review on a continuing basis the Trust's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Trust's operations for any given taxable year will satisfy
the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code and
the Regulations, published administrative interpretations thereof, and published
court decisions. The Internal Revenue Service has not issued Regulations or
administrative interpretations with respect to various provisions of the Code
relating to REIT qualification. No assurance can be given that the law will not
change in a way that will prevent the Trust from qualifying as a REIT for
federal income tax purposes.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not admit that we are in
the
<PAGE>
Prentiss Properties Trust
April 3, 1998
Page 5
category of persons whose consent is required by Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations promulgated thereunder by
the SEC.
The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
other country, or any state or locality. We undertake no obligation to update
the opinions expressed herein after the date of this letter. This opinion
letter is solely for the information and use of the addressees, and it may not
be distributed, relied upon for any purpose by any other person, quoted in whole
or in part or otherwise reproduced in any document, or filed with any
governmental agency without our express written consent.
Very truly yours,
/s/ HUNTON & WILLIAMS
<PAGE>
EXHIBIT 23.2
------------
April 3, 1998
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
Re: Registration Statement on Form S-3: $716,561,172.12 of
Common Shares of Beneficial Interest and Preferred
Shares of Beneficial Interest.
Ladies and Gentlemen:
We hereby consent to the use of the name of our firm in the above-
referenced Registration Statement under the caption "Legal Opinions." In giving
this consent, we do not admit that we are within the category of persons whose
consent is required by Section 7 of the 1933 Act.
Very truly yours,
BALLARD, SPAHR, ANDREWS & INGERSOLL, LLP
<PAGE>
Exhibit 23.3
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration
statement on Form S-3 (File No. 333-_____) of our reports dated (i) February 5,
1998 on our audits of the consolidated and combined financial statements and
financial statements schedule of Prentiss Properties Trust and the Predecessor
Company, (ii) February 6, 1998 on our audits of the statement of revenues and
certain operating expenses of the Carrara Place Property and the combined
statement of revenues and certain operating expenses of the Newport National
Properties and (iii) October 20, 1997 on our audit of the combined statement of
revenues and certain operating expenses of the Silicon Valley Properties, all of
which reports are incorporated by reference herein. We also consent to the
reference to our firm under the caption "Experts."
Dallas, Texas
April 3, 1998
