<PAGE>
As filed with the Securities and Exchange Commission on October 15, 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 (I.R.S. Employer Identification No.)
incorporation or organization)
3890 W. NORTHWEST HIGHWAY, SUITE 400 J. KEVAN DILBECK
DALLAS, TEXAS 75220 PRENTISS PROPERTIES TRUST
(214) 654-0886 3890 W. NORTHWEST HIGHWAY,
(Address, including zip code, SUITE 400
and telephone number, DALLAS, TEXAS 75220
including area code, of (214) 654-0886
registrant's principal (Name, address, including zip code,
executive offices) and telephone number, including
area code, of agent for service)
COPY TO:
MICHAEL E. DILLARD, P.C.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1700 PACIFIC AVENUE, SUITE 4100
DALLAS, TEXAS 75201
(214) 969-2800
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box: [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================
PROPOSED MAXIMUM
AGGREGATE PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS AGGREGATE AMOUNT OFFERING PRICE AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED TO BE REGISTERED(1) PER SHARE (2) OFFERING PRICE (2) FEE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of Beneficial
Interest, $0.01 par value per share (3) 524,180 $ 18.9375 $ 9,927,183 $ 2,760
=================================================================================================================
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended, this
Registration Statement also relates to such additional shares as may be
issuable as a result of certain adjustments including, without limitation,
stock dividends, stock splits and distributions of options, warrants and
convertible securities.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended,
based on the average of the high and low reported sales prices on the New
York Stock Exchange on October 8, 1998.
(3) The rights to purchase Junior Participating Cumulative Preferred Shares of
Beneficial Interest, Series B, par value $0.01 per share, are attached to
and trade with the Common Shares.
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.
<PAGE>
********************************************************************************
*The information in this Propectus is not complete and may be changed. We may *
*not sell these securities until the Registration Statement filed with the *
*Securities and Exchange Commission is effective. This Prospectus is not an *
*offer to sell these securities and is not soliciting an offer to buy these *
*securities in any state where the offer or sale is not permitted. *
********************************************************************************
SUBJECT TO COMPLETION, DATED OCTOBER 15, 1998
PROSPECTUS
PRENTISS PROPERTIES TRUST
3890 W. NORTHWEST HIGHWAY, SUITE 400
DALLAS, TEXAS 75220
(214) 654-0886
524,180 SHARES
COMMON SHARES OF BENEFICIAL INTEREST
We are a self-administered and self-managed Maryland real estate investment
trust that acquires, owns, manages, leases, develops and builds office and
industrial properties throughout the United States.
This Prospectus relates to 524,180 Common Shares of Beneficial Interest (the
"Common Shares") which Prentiss Properties Trust or Prentiss Properties I, Inc.,
the general partner of Prentiss Properties Acquisition Partners, L.P., may issue
to certain holders of 524,180 units of limited partnership interest in Prentiss
Properties Acquisition Partners, L.P. upon redemption of such units. To ensure
compliance with certain requirements related to the Company's qualification as a
real estate investment trust under the Internal Revenue Code of 1986, as
amended, the Company's Amended and Restated Declaration of Trust generally
limits the number of Common Shares that any single person or affiliated group
may own and restricts the transferability of Common Shares.
The holders of units of limited partnership interest in Prentiss Properties
Acquisition Partners, L.P. have the right to receive either cash or one Common
Share (subject to adjustments) in exchange for each such unit they now hold if
and to the extent they tender such units for redemption and Prentiss Properties
Trust or Prentiss Properties I, Inc. elects to redeem such units for Common
Shares.
Prentiss Properties Acquisition Partners, L.P. originally issued the 524,180
units of limited partnership interest to the holders of such units in exchange
for their contribution of certain assets to the capital of Prentiss Properties
Acquisition Partners, L.P.
The Common Shares trade on the New York Stock Exchange under the symbol
"PP."
See "Risk Factors" beginning on page 3 for considerations relating to an
investment in the Common Shares.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
The date of this Prospectus is ______________, 1998.
<PAGE>
TABLE OF CONTENTS
Page
----
Forward-Looking Statements............................................... 3
About this Prospectus.................................................... 3
Risk Factors............................................................. 3
The Company.............................................................. 4
Use of Proceeds.......................................................... 4
Description of Shares of Beneficial Interest............................. 4
Registration Rights...................................................... 7
Restrictions on Ownership and Transfer................................... 7
Description of Partnership Units......................................... 10
Federal Income Tax Considerations........................................ 16
Plan of Distribution..................................................... 31
Legal Opinions........................................................... 31
Experts.................................................................. 31
Where You Can Find More Information...................................... 31
2
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus, any Prospectus Supplement and the documents incorporated
by reference herein may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including, without limitation, statements containing the words
"believes," "anticipates," "expects" and words of similar import. Such forward-
looking statements relate to future events, the future financial performance of
the Company or the Operating Partnership (as defined herein), and involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, Operating Partnership or
industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. You should
specifically consider the various factors identified in this Prospectus, any
Prospectus Supplement and the documents incorporated by reference herein, which
could cause actual results to differ, including particularly those discussed in
the section entitled "Risk Factors" in this Prospectus and in the Company's
Exchange Act filings. We disclaim any obligation to update any such factors or
to publicly announce the result of any revisions to any statements to reflect
future events or developments.
ABOUT THIS PROSPECTUS
This Prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission (the "SEC") utilizing a "shelf registration"
process. Under this shelf process, we may, from time to time, issue Common
Shares to certain holders of 524,180 units (the "Limited Partners") of limited
partnership interest (the "Partnership Units") in Prentiss Properties
Acquisition Partners, L.P. in exchange for any Partnership Units the Limited
Partners may tender for redemption. You should read both this Prospectus and any
Prospectus Supplement together with additional information described under the
heading "Where You Can Find More Information."
Unless the context otherwise requires, all references in this Prospectus to
"we," "us," "our," or the "Company" means Prentiss Properties Trust and its
subsidiaries on a combined basis, including (1) Prentiss Properties I, Inc. (the
"General Partner"), (2) Prentiss Properties Acquisition Partners, L.P. (the
"Operating Partnership") and its subsidiaries, (3) Prentiss Properties Limited,
Inc. ("PPL") (the "Manager"), and (4) entities through which the Operating
Partnership owns interests in certain of our properties; "Common Shares" means
the Company's common shares of beneficial interest, par value $0.01 per share;
and "Predecessor Company" refers to the operations of the Company from the
period prior to the Company's initial public offering of its Common Shares and
the commencement of its intent to qualify as a real estate investment trust
("REIT") on October 22, 1996.
RISK FACTORS
You should carefully consider the following information in conjunction with
the other information contained in this Prospectus, any Prospectus Supplement
and the documents and risk factors incorporated by reference herein, before
making any investment decision relating to the Common Shares.
TAX CONSEQUENCES OF REDEEMING PARTNERSHIP UNITS
In the event that we exercise our right to acquire Partnership Units
tendered for redemption in exchange for cash or Common Shares, our acquisition
of such Partnership Units will be treated for tax purposes as a sale of the
Partnership Units. Each Limited Partner will be fully taxed on such a sale and
the Limited Partner will realize a gain in an amount equal to the sum of the
cash received (or the value of the Common Shares received) plus the amount of
any Operating Partnership liabilities allocable to the redeemed Partnership
Units at the time of the redemption. It is possible that the amount of gain a
Limited Partner recognizes, or even the tax liability resulting from such gain,
could exceed the amount of cash and the value of other property such as Common
Shares that the Limited Partner receives upon such disposition. See "Description
of Partnership Units--Tax Consequences of Redemption." In addition, fluctuations
in the market price of the Common Shares may limit the ability of a Limited
Partner to sell a substantial number of Common Shares in order to raise cash to
pay tax liabilities associated with the redemption of
3
<PAGE>
Partnership Units. In addition, the price the Limited Partner receives for such
shares may not equal the value of its Partnership Units at the time of
redemption. In the event that we do not exercise our right to acquire
Partnership Units tendered for redemption for cash or Common Shares, and the
Operating Partnership redeems such Partnership Units for cash, the tax
consequences may differ. See "Description of Partnership Units."
POTENTIAL CHANGE IN INVESTMENT UPON REDEMPTION OF PARTNERSHIP UNITS
If a Limited Partner exercises its right to redeem all or a portion of its
Partnership Units, the Limited Partner may receive cash or, if we or the General
Partner elects, Common Shares in exchange for its Partnership Units. If the
Limited Partner receives cash from either the Operating Partnership or us, the
Limited Partner will not have any interest in the Company or the Operating
Partnership (except to the extent that it retains Partnership Units). In
addition such Limited Partner would not benefit from any subsequent increases in
the value of Common Shares and would not receive any future distributions from
us or the Operating Partnership (unless the Limited Partner retains or acquires
in the future additional Common Shares or Partnership Units). If the Limited
Partner receives Common Shares, the Limited Partner will become one of our
shareholders rather than a holder of Partnership Units in the Operating
Partnership. See "Description of Partnership Units--Comparison of Ownership of
Partnership Units and Common Shares."
THE COMPANY
The Company is a self-administered and self-managed Maryland REIT that
acquires, owns, manages, leases, develops and builds office and industrial
properties throughout the United States. We operate principally through the
Operating Partnership and its subsidiaries and the Manager.
As of June 30, 1998, we owned interests in a diversified portfolio of 240
primarily suburban Class A office and suburban industrial properties containing
approximately 22.2 million net rentable square feet. The properties are located
in 20 major U.S. markets and consist of 115 office buildings (the "Office
Properties") containing approximately 13.0 million net rentable square feet and
125 industrial buildings (the "Industrial Properties" and, together with the
Office Properties, the "Properties") containing approximately 9.2 million net
rentable square feet. The Properties include 11 office and two industrial
development projects, including one expansion of an existing Property, totaling
approximately 1.8 million square feet. Exclusive of the development projects, as
of June 30, 1998, the Office Properties were approximately 95% leased to
approximately 1,142 tenants and the Industrial Properties were approximately 96%
leased to approximately 348 tenants. In addition to the 240 Properties owned, we
manage approximately 29.2 million net rentable square feet in 256 office and
industrial properties, in 19 U.S. markets, that are owned by third parties.
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 700 employees and benefits from its
in-house expertise in areas such as acquisitions, development, facilities
management, property management and leasing.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the Common
Shares to the Limited Partners but will acquire Partnership Units in exchange
for any Common Shares that we may issue to a redeeming Limited Partner. With
each such acquisition, our interest in the Operating Partnership will increase.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
General
The following summary of the material terms of the Common Shares is subject
to the detailed provisions of the Company's Amended and Restated Declaration of
Trust (the "Declaration of Trust"), as amended, the Amended and Restated Bylaws
as currently in effect (the "Bylaws"), the Company's Articles Supplementary
relating to its
4
<PAGE>
Series A Cumulative Convertible Preferred Shares (the "Series A Preferred
Shares") of beneficial interest, $0.01 par value per share (the "Series A
Articles Supplementary"), its Junior Participating Cumulative Preferred Shares
(the "Series B Junior Preferred Shares") of beneficial interest, Series B, $0.01
par value per share (the "Series B Junior Articles Supplementary") and its 8.30%
Series B Cumulative Redeemable Perpetual Preferred Shares (the "Series B
Preferred Shares") of beneficial interest, $0.01 par value per share (the
"Series B Articles Supplementary" and, together with the Series A Articles
Supplementary and the Series B Junior Articles Supplementary, the "Articles
Supplementary"). These statements do not purport to be complete, or to give full
effect to the provisions of statutory or common law and should be read in
conjunction with the terms of the Declaration of Trust, Bylaws and Articles
Supplementary.
The Declaration of Trust allows us to issue up to 100,000,000 Common Shares
and 20,000,000 preferred shares of beneficial interest, $0.01 par value per
share ("Preferred Shares"). The Preferred Shares may be issued from time to
time in one or more series, without shareholder approval, with such
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption thereof as shall be established by the
Board of Trustees. Thus, without shareholder approval, we could authorize the
issuance of Preferred Shares with voting, conversion and other rights that could
dilute the voting power and other rights of the holders of Common Shares. As of
June 30, 1998, there were 39,905,363 Common Shares, 3,773,585 Series A Preferred
Shares, no Series B Junior Preferred Shares and no Series B Preferred Shares
issued by the Company 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 our shareholders, to amend the
Declaration of Trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of any class of shares of beneficial
interest that we have authority to issue.
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, as amended from time to time (the "MGCL"). Both the
Maryland REIT Law and the Declaration of Trust provide that shareholders of the
Company will not be personally liable for any obligation of the Company solely
as a result of their 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 will not be personally liable
for obligations entered into on behalf of the Company. However, with respect to
tort claims, contractual claims where shareholder liability is not removed,
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 by this Prospectus 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
Declaration of Trust regarding Shares-in-Trust (as defined below), holders of
Common Shares are entitled to receive dividends if, as and when authorized and
declared by the Board of Trustees of the Company out of assets legally available
for the purpose of paying dividends. Holders of Common Shares are also entitled,
subject to the preferential rights of any other shares or series of shares of
beneficial interest, 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. We intend to pay quarterly dividends to
its the holders of our Common Shares.
5
<PAGE>
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, which means the holders of a majority of the outstanding Common Shares
can elect all of the trustees then standing for election. 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 for such purposes.
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 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: (1) the removal of
trustees (which requires the affirmative vote of the holders of two-thirds of
the outstanding voting shares of the Company); (2) 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 (3) 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 Declaration of
Trust permits such action by the Board of Trustees.
The Transfer Agent and Registrar for the Common Shares is First Chicago
Trust Company of New York. The Common Shares trade on the New York Stock
Exchange (the "NYSE") under the symbol "PP." We will apply to the NYSE to list
the additional Common Shares to be sold pursuant to any Prospectus Supplement,
and 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, dated
February 6, 1998, between the Company and First Chicago Trust Company of New
York, as rights agent, we distributed as a dividend one right ("Right") for each
outstanding Common Share. Each Right entitles the holder to buy one one-
thousandth of a share (a "Preferred Share Partnership Unit") of the Series B
Junior Preferred Shares at an exercise price of $85, subject to adjustment. Each
Preferred Share Partnership Unit of a Series B Junior Preferred Share is
structured to be the equivalent of one Common Share.
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, a Maryland
corporation ("Security Capital") (the holder of all of the Series A Preferred
Shares (as defined below)) and their 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 Junior 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 we are acquired in a merger or other business combination or
if 50% or more of our assets or earning power is transferred, each Right 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 a person or group acquires or announces a tender offer to acquire 10%
or more of the Common Shares, the Rights will be evidenced by the Common Share
certificates and will be transferred with and only with such Common Share
certificates, and the surrender or 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
6
<PAGE>
will expire on February 17, 2008, and may be redeemed by us at a price of $0.001
per Right at any time until ten days 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 Securities Capital and its affilitates, 11%) of the outstanding
Common Shares 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 of Trustees.
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 of Trustees is required by the Maryland REIT Law and the Declaration
of Trust to set forth for each such series, subject to the provisions of the
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 of Trustees 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. As of June
30, 1998, the Board of Trustees had designated 3,773,585 Series A Preferred
Shares, all of which were outstanding, 1,90,000 Series B Preferred Shares, none
of which were outstanding, and 1,000,000 Series B Junior Preferred Shares, none
of which were outstanding.
REGISTRATION RIGHTS
This summary of the material terms of the Registration Rights Agreement,
dated as of October 22, 1997, between the Company, the Operating Partnership,
the General Partner and the Limited Partners (the "Registration Rights
Agreement") does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement.
Pursuant to the Registration Rights Agreement, we agreed to file with the
SEC a registration statement, of which this Prospectus is a part, with respect
to our issuance of Common Shares issuable to the Limited Partners upon
redemption of their Partnership Units. In addition, we agreed to file such
amendments and supplements to the registration statement as may be necessary to
keep the registration statement effective until the earlier of (1) the date when
all the Common Shares covered by this Prospectus are issued or sold, (2) the
date on which all of the Limited Partners agree to the withdrawal of this
registration statement, or (3) the date on which all of the Common Shares
covered by this Prospectus could be sold in any three month period pursuant to
Rule 144 under the Securities Act.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order to qualify as a REIT under the Code, we must meet certain
requirements concerning the ownership of our outstanding shares of beneficial
interest. Specifically, no more than 50% in value of our outstanding shares of
beneficial interest may be owned, directly or indirectly, by five or fewer
individuals (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
Security Capital, which may own up to 11% of the number of outstanding Common
Shares) or more
7
<PAGE>
than 9.8% of the number of outstanding Preferred Shares of any series (other
than Security Capital, which may own all of the Series A Preferred Shares) (the
"Ownership Limitation"). The Board of Trustees may, but is not required to,
decrease the ownership limit applicable to Mr. Prentiss' ownership of Common
Shares to 9.8% (but not less than 9.8%) of the outstanding Common Shares upon
(1) an increase in the number of outstanding Common Shares or (2) a reduction of
the number of Common Shares owned, directly or indirectly, by Mr. Prentiss. Upon
any such adjustment, the Ownership Limitation applicable to other shareholders
with respect to the Common Shares will be increased proportionately to a maximum
of 9.8% of the number of outstanding Common Shares. Any transfer of Common or
Preferred Shares that causes any one of the following conditions to exist will
be null and void, and the intended transferee will acquire no rights in such
Common or Preferred Shares:
(1) any person owning, directly or indirectly, Common or Preferred Shares
in excess of the Ownership Limitation;
(2) the Company's outstanding shares being owned by fewer than 100 persons
(determined without reference to any rules of attribution);
(3) the Company being "closely held" within the meaning of Section 856(h)
of the Code; or
(4) the Company owning, 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.
Subject to certain exceptions described below, if any purported transfer of
Common or Preferred Shares results in any of the four above conditions, the
Common or Preferred Shares in excess of the applicable limitation will be
designated as "Shares-in-Trust" and transferred automatically to a trust (the
"Share Trust") effective on the day before the purported transfer of such Common
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 us for registration in the
name of the Share Trust. The Share Trustee will be designated by us but will not
be affiliated with us. We will name one or more charitable organizations as the
beneficiary of the Share Trust (the "Beneficiary").
Shares-in-Trust will remain issued and outstanding Common 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 (1)
purchases such Shares-in-Trust for valuable consideration and (2) 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 (1) that are attributable to any Shares-in-Trust and (2)
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 (1) 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 (2) 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 us, or
our designee, at a price per share equal to the lesser of (1) 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 (2)
the Market Price per share on the date that the Company, or its designee,
accepts such offer. We will have the right to accept such offer for a period of
ninety days after the later of (1) the date of the purported transfer which
resulted in such Shares-in-Trust and (2) the date the Company determines in good
faith that a transfer resulting in such Shares-in-Trust occurred.
8
<PAGE>
"Market Price" on any date means 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 means the last sale price, regular
way, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the 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"
means a day on which the principal national securities exchange on which the
Common or Preferred Shares are listed or admitted to trading is open for the
transaction of business or, if the Common or Preferred Shares are not listed or
admitted to trading on any national securities exchange, shall mean any day
other than a Saturday, a Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or executive order to
close.
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 to
immediately give written notice to us and to provide us such other information
as we may request in order to determine the effect, if any, of such transfer on
our status as a REIT.
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 us 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 us such additional information as we 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 of Trustees 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
our status as a REIT. The foregoing restrictions will continue to apply until
the Board of Trustees determines that it is no longer in our best interests to
attempt to qualify, or to continue to qualify, as a REIT and there is an
affirmative vote of a majority of the votes entitled to be cast on such matter
at a regular or special meeting of 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.
9
<PAGE>
DESCRIPTION OF PARTNERSHIP UNITS
The description of Partnership Units set forth below does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Second Amended and Restated Agreement of Limited Partnership of the Operating
Partnership (the "Partnership Agreement"), which is incorporated herein by
reference as an exhibit to the Registration Statement of which this Prospectus
is a part.
GENERAL
Limited Partners may, subject to certain limitations, require the Operating
Partnership to redeem all or a portion of their Partnership Units (the "Exchange
Right"). Upon redemption, a Limited Partner will receive for each Partnership
Unit redeemed cash in an amount equal to the market value of a Common Share
(subject to certain adjustments described in the Partnership Agreement
including, without limitation, adjustments in the event of stock dividends,
stock splits and distributions of options, warrants and convertible securities).
The market value of the Common Shares for purposes of redeeming Partnership
Units will be equal to the average, for the ten trading days prior to the day on
which the redemption notice was received by the Operating Partnership, of (1)
the sale price, regular way, of the Common Shares, or (2) if no sale takes place
on a particular day, the average of the closing bid and ask prices, regular way.
The Company or the General Partner may, in their sole discretion, by notice
to the Limited Partner within five business days after receipt of the Limited
Partner's redemption notice, elect to acquire each Partnership Unit presented to
the Operating Partnership for redemption for cash or for one Common Share
(subject to the above adjustments). We anticipate that we will elect to acquire
any Partnership Units presented to the Operating Partnership for redemption by
the Limited Partners by the issuance of Common Shares. Such an acquisition by
the Company will be treated as a sale of the Partnership Units to the Company
for Federal income tax purposes. See "--Tax Consequences of Redemption." Upon a
redemption for cash or an acquisition, a Limited Partner's right to receive
distributions for record dates declared thereafter with respect to the
Partnership Units redeemed will cease. Upon the receipt of Common Shares, a
Limited Partner will have rights as a holder of Common Shares from the time of
its acquisition of the Common Shares.
The Limited Partners must notify the Operating Partnership and the General
Partner of its desire to redeem Partnership Units. In addition, the Limited
Partner must request the redemption of at least 1,000 Partnership Units or, if
such Limited Partner holds less than 1,000 Partnership Units, all of the
Partnership Units held by such Limited Partner. Each Limited Partner may not
deliver more than two notices of redemption per calendar year. No acquisition
can occur if the delivery of Common Shares would alter the Company's
qualification as a REIT.
TAX CONSEQUENCES OF REDEMPTION
The following discussion summarizes certain Federal income tax
considerations that may be relevant to a Limited Partner should it exercise its
right to redeem its Partnership Units.
Tax Treatment of Exchange or Redemption of Partnership Units. If we elect
to purchase Partnership Units tendered for redemption and such purchase is
treated as a sale of the Partnership Units to us, it will be fully taxable to
the Limited Partner, and the Limited Partner will be treated as realizing for
tax purposes an amount equal to the sum of the cash value or the value of the
Common Shares received in the exchange plus the amount of any Operating
Partnership liabilities allocable to the redeemed Partnership Units at the time
of the redemption. The determination of the amount of gain or loss is discussed
more fully below. If we do not elect to purchase a Limited Partner's Partnership
Units tendered for redemption, and the Operating Partnership redeems such
Partnership Units for cash that we contribute to the Operating Partnership to
effect such redemption, the redemption would also likely be treated for tax
purposes as a sale of such Partnership Units to us in a fully taxable
transaction, although the matter is not free from doubt. In that event, the
Limited Partner would be treated as realizing an amount equal to the sum of the
cash received in the exchange plus the amount of any Operating Partnership
liabilities allocable to the redeemed Partnership Units at the time of the
redemption. The determination of the amount and character of gain or
10
<PAGE>
loss in the event of such a sale is discussed more fully below. See "--Tax
Treatment of Disposition of Partnership Units by a Limited Partner Generally."
If we do not elect to purchase Partnership Units tendered for redemption,
and the Operating Partnership redeems a Limited Partner's Partnership Units for
cash that is not contributed by us to effect the redemption, the tax
consequences would be the same as described in the previous paragraph, except
that, if the Operating Partnership redeems less than all of a Limited Partner's
Partnership Units, the Limited Partner would not be permitted to recognize any
loss occurring on the transaction and would recognize taxable gain only to the
extent that the cash, plus the amount of any Operating Partnership liabilities
allocable to the redeemed Partnership Units, exceeded the Limited Partner's
adjusted basis in all of its Partnership Units immediately before the
redemption. The same tax consequences would result if we contributed cash to the
Operating Partnership to effect a redemption, and the redemption transaction
were treated as the redemption of a Limited Partner's Partnership Units by the
Operating Partnership rather than a sale of Partnership Units to us.
Tax Treatment of Disposition of Partnership Units by a Limited Partner
Generally. If a Partnership Unit is disposed of in a manner that is treated as
a sale of the Partnership Unit, or a Limited Partner otherwise disposes of a
Partnership Unit other than in a transaction that is treated as a redemption of
the Partnership Unit, the determination of gain or loss from the sale or other
disposition will be based on the difference between the amount considered
realized for tax purposes and the adjusted tax basis in such Partnership Unit.
See "--Basis of Partnership Units." Upon the sale of a Partnership Unit, the
"amount realized" will be measured by the sum of the cash and fair market value
of other property (e.g., Common Shares) received plus the amount of any
Operating Partnership liabilities allocable to the Partnership Units sold. To
the extent that the amount of cash or property received plus the allocable share
of any Operating Partnership liabilities exceeds the Limited Partner's adjusted
tax basis in the Partnership Units disposed of, such Limited Partner will
recognize gain. It is possible that the amount of gain recognized or even the
tax liability resulting from such gain could exceed the amount of cash and/or
the value of any other property (i.e., Common Shares) received upon such
disposition.
Except as described below, any gain or loss recognized upon a sale or other
disposition of Partnership Units will be treated as gain or loss attributable to
the sale or disposition of a capital asset. To the extent, however, that the
amount realized upon the sale of a Partnership Unit attributable to a Limited
Partner's share of "unrealized receivables" of the Operating Partnership (as
defined in Section 751 of the Code) exceeds the basis attributed to those
assets, such excess will be treated as ordinary income. It is possible that the
amount of ordinary income can exceed the net amount of gain realized on the
sale, in which event, such excess will be treated as a capital loss. Unrealized
receivables include, to the extent not previously included in Operating
Partnership income, any rights to payment for services rendered or to be
rendered. Unrealized receivables also include amounts that would be subject to
recapture as ordinary income if the Operating Partnership had sold its assets at
their fair market value at the time of the transfer of a Partnership Unit.
Basis of Partnership Units. In general, a Limited Partner that acquired its
Partnership Units by contribution of property and/or money to the Operating
Partnership had an initial tax basis in its Partnership Units ("Initial Basis")
equal to the sum of (i) the amount of money contributed (including the Limited
Partner's allocable share of recourse and nonrecourse liabilities of the
Operating Partnership) and (ii) the Limited Partner's adjusted tax basis in any
other property contributed in exchange for such Partnership Units, and less the
amount of any money distributed (and liabilities of the Limited Partner assumed
(or to which were taken subject to) by the Operating Partnership) in connection
with the acquisition of the Partnership Units. The Initial Basis of Partnership
Units acquired by other means would have been determined under the general rules
of the Code, including the partnership provisions, governing the determination
of tax basis. Other rules, including the "disguised sale" rules discussed below,
also may affect Initial Basis, and Limited Partners are urged to consult their
own tax advisors regarding their Initial Basis.
Generally, a Limited Partner's Initial Tax Basis in his Partnership Units
is increased by (i) such Limited Partner's share of Operating Partnership
taxable and tax-exempt income and (ii) increases in such Limited Partner's
allocable share of liabilities of the Operating Partnership. Conversely, a
Limited Partner's basis in his Partnership Units is decreased (but not below
zero) by (A) such Limited Partner's share of Operating Partnership
distributions, (B) decreases in such Limited Partner's allocable share of
liabilities of the Operating Partnership, (C) such Limited Partner's share of
losses of the Operating Partnership and (D) such Limited Partner's share of
nondeductible expenditures of the Operating Partnership that are not chargeable
to his capital account.
11
<PAGE>
Potential Application of the Disguised Sale Regulations to a Redemption of
Partnership Units. There is a risk that a redemption by the Operating
Partnership of Partnership Units issued in exchange for a contribution of
property to the Operating Partnership may cause the original transfer of
property to the Operating Partnership in exchange for Partnership Units to be
treated as a "disguised sale" of property. Section 707 of the Code and the
Treasury Regulations thereunder (the "Disguised Sale Regulations") generally
provide that, unless one of the prescribed exceptions is applicable, a partner's
contribution of property to a partnership and a simultaneous or subsequent
transfer of money or other consideration (which may include the assumption of or
taking subject to a liability) from the partnership to the partner will be
presumed to be a sale, in whole or in part, of such property by the partner to
the partnership. Further, the Disguised Sale Regulations provide generally that,
in the absence of an applicable exception, if money or other consideration is
transferred by a partnership to a partner within two years of the partner's
contribution of property, the transactions are presumed to be a sale of the
contributed property unless the facts and circumstances clearly establish that
the transfers do not constitute a sale. In addition, the Disguised Sale
Regulations require that any such transfer of money or other consideration
within the two year period be reported to the Internal Revenue Service (the
"IRS"). The Disguised Sale Regulations also provide that if two years have
passed between the transfer of money or other consideration and the contribution
of property, the transactions will be presumed not to be a sale unless the facts
and circumstances clearly establish that the transfers constitute a sale.
Accordingly, if a Partnership Unit is redeemed by the Operating Partnership
for a Limited Partner who holds Partnership Units that were issued in exchange
for a contribution of property to the Operating Partnership, the IRS could
contend that the Disguised Sale Regulations apply because the Limited Partner
will thus receive cash subsequent to a previous contribution of property to the
Operating Partnership. In that event, the IRS could contend that the
contribution was taxable as a disguised sale under the Disguised Sale
Regulations. Any gain recognized thereby may be eligible for installment
reporting under Section 453 of the Code, subject to certain limitations. In
addition, in such event, the Disguised Sale Regulations might apply to cause a
portion of the proceeds received by a redeeming Limited Partner to be
characterized as original issue discount on a deferred obligation which would be
taxable as interest income in accordance with the provisions of Section 1272 of
the Code. Each Limited Partner is advised to consult its own tax advisors to
determine whether redemption of its Partnership Units could be subject to the
Disguised Sale Regulations.
COMPARISON OF OWNERSHIP OF PARTNERSHIP UNITS AND COMMON SHARES
The nature of an investment in Common Shares is generally economically
equivalent to an investment in Partnership Units in the Operating Partnership.
There are, however, some differences between ownership of Partnership Units and
ownership of Common Shares, some of which may be material to investors. The
information below highlights a number of significant differences between the
Operating Partnership and the Company relating to, among other things, form of
organization, permitted investments, policies and restrictions, management
structure, distributions, investor rights and Federal income taxation. The
information below also compares certain legal rights associated with the
ownership of Partnership Units and Common Shares. These comparisons are intended
to assist the Limited Partners in understanding how their investment will be
changed if their Partnership Units are redeemed for Common Shares. This
discussion is summary in nature and does not constitute a complete discussion of
these matters, and investors should carefully review the balance of this
Prospectus and the registration statement of which this Prospectus is a part for
additional information about us.
Form of Organization. The Operating Partnership is organized as a Delaware
limited partnership. The holders of Partnership Units, other than the General
Partner, hold a limited partnership interest in the Operating Partnership. We
are a Maryland REIT organized under the Maryland REIT Law. We operate
principally through the Operating Partnership. We currently have a 96.09%
limited partnership interest in the Operating Partnership, and such interest
will increase as Partnership Units are redeemed for cash or acquired by us.
Length of Investment. The Operating Partnership has a stated termination
date of December 31, 2050, although it may be terminated earlier under certain
circumstances. The Operating Partnership has no plans for disposition of its
assets. We have a perpetual term and intend to continue our operations for an
indefinite time period.
12
<PAGE>
Purpose and Permitted Investments. The purpose of the Operating Partnership
includes the conduct of any business that may be lawfully conducted by a limited
partnership formed under Delaware law, except that the Partnership Agreement
requires the business of the Operating Partnership to be conducted in such a
manner that will permit us to be classified as a REIT for Federal income tax
purposes. The Operating Partnership may, subject to the foregoing limitation,
invest or enter into partnerships, joint ventures or similar arrangements and
may own interests in any other entity. Under the Declaration of Trust, we may
invest in and acquire, hold, manage, administer, control and dispose of real
property and interests in real property, including, without limitation or
obligation, engaging in business as a REIT under the Code.
Capital Contribution. The Partnership Agreement provides that if the
Operating Partnership requires additional funds at any time or from time to time
in excess of funds available to the Operating Partnership from borrowing or
capital contributions, the General Partner or the Company may borrow such funds
from a financial institution or other lender and lend such funds to the
Operating Partnership on the same terms and conditions as are applicable to the
General Partner's or the Company's, as applicable, borrowing of such funds.
Moreover, the General Partner is authorized to cause the Operating Partnership
to issue partnership interests for less than fair market value if (i) we have
concluded in good faith that such issuance is in our best interest and the best
interest of the Operating Partnership and (ii) the General Partner makes a
capital contribution in an amount equal to the proceeds of such issuance. Under
the Partnership Agreement, the General Partner generally is obligated to
contribute or cause us to contribute the proceeds of a share offering by us as
additional capital to the Operating Partnership. Upon such contribution, we or
the General Partner, as applicable, will receive additional Partnership Units
and our or the General Partner's, as applicable, percentage interest in the
Operating Partnership will be increased on a proportionate basis based upon the
amount of such additional capital contributions. Conversely, the percentage
interests of the Limited Partners will be decreased on a proportionate basis in
the event of additional capital contributions by us or the General Partner. In
addition, if we or the General Partner or contribute additional capital to the
Operating Partnership, the General Partner will revalue the property of the
Operating Partnership to its fair market value (as determined by the General
Partner) and the capital accounts of the partners will be adjusted to reflect
the manner in which the unrealized gain or loss inherent in such property (that
has not been reflected in the capital accounts previously) would be allocated
among the partners under the terms of the Partnership Agreement if there were a
taxable disposition of such property for such fair market value on the date of
the revaluation.
The Board of Trustees may authorize the issuance of shares of beneficial
interest of any class, whether now or hereafter authorized, or securities or
rights, convertible into shares of beneficial interest, for such consideration
as the Board of Trustees may deem advisable, subject to such restrictions or
limitations as may be set forth in the Bylaws. We are not restricted under our
governing instruments from borrowing. The issuance of additional shares of
Common Shares or other similar equity securities may result in the dilution of
interests of the shareholders.
Potential Dilution. Limited partners in the Operating Partnership are
subject to potential dilution of their interests with respect to cash available
for distribution if the General Partner, in its sole discretion, causes the
Operating Partnership to issue additional Partnership Units or other equity
securities. Likewise, our shareholders are also subject to potential dilution if
the Board of Trustees, in its discretion, decides to issue additional Common
Shares or other equity securities.
Management Control. Pursuant to the Partnership Agreement, the General
Partner, as the sole general partner of the Operating Partnership, has full,
exclusive and complete responsibility and discretion in the management and
control of the Operating Partnership, and Limited Partners have no authority in
their capacity as limited partners to transact business for, or participate in
the management activities or decisions of, the Operating Partnership except as
required by applicable law. However, any amendment to the Partnership Agreement
that would (1) adversely affect the Exchange Rights (as defined herein), (2)
adversely affect a Limited Partners' right to receive cash distributions, (3)
alter the Operating Partnership's allocations of income or loss, or (4) impose
on the Limited Partners any obligations to make additional contributions to the
capital of the Operating Partnership, requires the consent of Limited Partners
(other than the General Partner) holding more than 50% of the Partnership Units
held by such partners.
13
<PAGE>
The Board of Trustees has exclusive control over our business and affairs
subject only to the restrictions in the Declaration of Trust and the Bylaws. The
Board of Trustees is classified into three classes. At each annual meeting of
the shareholders, the successors of the class of trustees whose terms expire at
that meeting will be elected for a term of three years. The Board of Trustees
may alter or repeal the Bylaws without shareholder action.
Management Liability and Indemnification. The Partnership Agreement
generally provides that the General Partner will incur no liability to the
Operating Partnership or any Limited Partner for losses sustained or liabilities
incurred as a result of errors in judgment or of any act or omission if the
General Partner acted in good faith. The Partnership Agreement also provides for
the indemnification of us and the General Partner and our officers and directors
from and against any and all losses, claims, damages, liabilities, joint or
several, expenses, judgments, fines, settlements, and other amounts arising from
any and all claims, demands, actions, suits or proceedings, civil, criminal,
administrative or investigative, that relate to the operations of the Operating
Partnership.
The Declaration of Trust contains 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 and the Bylaws obligate us to indemnify our trustees and
officers, and permit us to indemnify our employees and other agents, against
certain liabilities incurred in connection with their service in such
capacities.
The Bylaws require us to indemnify our officers, trustees and certain other
parties to the fullest extent permitted from time to time by Maryland law. The
Maryland REIT Law permits a Maryland REIT to indemnify and advance expenses to
its trustees and officers to the same extent as permitted by the MGCL for
directors and officers of Maryland corporations. The MGCL permits a corporation
to indemnify (a) any present or former director or officer who has been
successful, on the merits or otherwise, in the defense of a proceeding to which
he was made a party by reason of his service in that capacity, against
reasonable expenses incurred by him in connection with the proceeding and (b)
any present or former director or officer against any claim or liability unless
it is established that (i) his act or omission was committed in bad faith or was
the result of active or deliberate dishonesty, (ii) he actually received an
improper personal benefit in money, property or services or (iii) in the case of
a criminal proceeding, he had reasonable cause to believe that his act or
omission was unlawful. The MGCL also permits us to provide indemnification and
advance expenses to a present or former director or officer who served one of
our predecessors in such capacity, and to any employer or agent of us or our
predecessors.
Anti-takeover Provisions. Because we hold a 96.09% limited partnership
interest and own 100% of the General Partner, the existence of anti-takeover
provisions is not a significant consideration to the holders of Partnership
Units. The Declaration of Trust, Bylaws and the MGCL contain a number of
provisions that may have the effect of delaying or discouraging an unsolicited
proposal for the acquisition of the Company or the removal of incumbent
management. In addition, Preferred Share purchase rights are attached to the
Common Shares which may have certain anti-takeover effects. See "Description of
Shares of Beneficial Interest Preferred Share Purchase Rights."
Voting Rights. Under the Partnership Agreement, the Limited Partners do not
have voting rights relating to the operation and management of the Operating
Partnership except in connection with matters, as described more fully below,
involving certain amendments to the Partnership Agreement, a general assignment
for the benefits of creditors or appointment of a custodian, receiver or
trustee, entering any proceedings for bankruptcy, admittance of any successor
general partner, or dissolution of the Operating Partnership.
The holders of Common Shares are entitled to one vote per share on all
matters voted on by shareholders, including trustee elections, a merger or sale
of substantially all of the assets of the Company, certain amendments to the
Declaration of Trust and dissolution of the Company. We are managed and
controlled by a Board of Trustees consisting of three classes having staggered
terms of office. Each class is to be elected by our shareholders at their annual
meetings. Each Common Share has one vote, and the Declaration of Trust permits
the Board of Trustees to
14
<PAGE>
classify and issue Preferred Shares in one or more series having voting power
which may differ from that of the Common Shares.
Amendment of the Partnership Agreement or the Declaration of Trust. Any
amendment to the Partnership Agreement requires the consent of the General
Partner. The General Partner may amend the Partnership Agreement, without the
consent of the Limited Partners. However, Limited Partners holding more than 50%
interest in the Operating Partnership must consent to any amendment that
adversely affects (1) the Redemption Rights of Limited Partners, (2) the
distribution rights of Limited Partners, (3) allocations of profits and losses
to the Limited Partners, or (4) the obligations of Limited Partners to make
additional capital contributions.
If such amendment is to qualify as a REIT, the Board of Trustees may amend
the Declaration of Trust by a two-thirds vote without any shareholder action.
The Board of Trustees may 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 beneficial interest that we have authority to issue without any
shareholder action. Other amendments must generally be approved by affirmative
vote of the holders of not less than a majority votes entitled to be cast on the
matter, but the amendment of certain other specific provisions of the
Declaration of Trust requires the affirmative vote of two-thirds of all the
votes entitled to be cast on the matter.
Vote Required to Dissolve the Operating Partnership or the Company. Under
Delaware law, the Operating Partnership may be dissolved, other than in
accordance with the terms of the Partnership Agreement, only upon the unanimous
vote of the Limited Partners. Under Maryland law, the Board of Trustees must
obtain the approval of holders of at least two-thirds of all outstanding shares
of beneficial interest of the Company in order to dissolve the Company.
Distributions. The Partnership Agreement provides that the Operating
Partnership must distribute cash from operations (including net sale or
refinancing proceeds, but excluding net proceeds from the sale of the Operating
Partnership's property in connection with the liquidation of the Operating
Partnership) on a quarterly (or, at the election of the General Partner, more
frequent) basis, in amounts determined by the General Partner in its sole
discretion, to the partners in accordance with their respective percentage
interests in the Operating Partnership. Upon liquidation of the Operating
Partnership, after payment of, or adequate provision for, debts and obligations
of the Operating Partnership, including any partner loans, any remaining assets
of the Operating Partnership will be distributed to all partners with positive
capital accounts in accordance with their respective positive capital account
balances.
Subject to the preferential rights of any other shares or series of shares
of beneficial interest and to the provisions of the 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 out of assets legally available for the purpose of paying
dividends. Holders of Common Shares are also entitled to share ratably in the
assets of the Company legally available for distribution to our shareholders in
the event of our liquidation, dissolution or winding-up after payment of, or
adequate provision for, all known debts and liabilities of the Company. We
intend to pay quarterly dividends to our shareholders. In order to qualify as a
REIT, we must distribute at least 95% of our taxable income (excluding capital
gains), and any taxable income (including capital gains) not distributed will be
subject to corporate income tax. See "Federal Income Tax Considerations--
Taxation of the Company--Distribution Requirements."
Liability of Investors. Under the Partnership Agreement and applicable
Delaware law, the liability of the Limited Partners for the Operating
Partnership's debts and obligations is generally limited to the amount of their
investments in the Operating Partnership, together with their interest in the
Operating Partnership's undistributed income, if any.
Both the Maryland REIT Law and the Declaration of Trust provide that our
shareholders will not be personally liable for any obligation of the Company
solely as a result of their status as a shareholder of the Company. The Bylaws
further provide that we 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
15
<PAGE>
shareholder and that we 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 our policy to
include a clause in our contracts which provides that shareholders will not be
personally liable for obligations entered into on behalf of the Company.
However, with respect to tort claims, contractual claims where shareholder
liability is not removed, 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 we carry 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 us and
our shareholders.
Liquidity. Limited Partners may transfer their interests in the Operating
Partnership subject to certain limitations. Partnership Units are not registered
under the Securities Act or any state securities laws and therefore may not be
sold, pledged, hypothecated or otherwise transferred unless they are first
registered under the Securities Act or an exemption from registration is
available. In addition, a Limited Partner may not transfer its Partnership Units
if the transfer would (1) result in the Operating Partnership being treated as
an association taxable as a corporation other than a qualified REIT subsidiary
or (2) adversely affect our status as a REIT.
The issuance of the Common Shares will be registered under the Securities
Act and freely transferable, subject to the ownership limits of the Declaration
of Trust. See "Restrictions on Ownership and Transfer." The Common Shares are
listed on the NYSE. The breadth and strength of the secondary market will
depend, among other things, upon the number of shares outstanding, our financial
results and prospects, the general interest in our real estate investments and
our dividend yield compared to that of other debt and equity securities.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
considerations that may be relevant to a prospective holder of the Offered
Securities. This discussion does not address all aspects of taxation that may
be relevant to particular shareholders in light of their personal investment or
tax circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations (except to the extent described below),
financial institutions or broker-dealers, foreign corporations, and persons who
are not citizens or residents of the United States (except to the extent
described below) subject to special treatment under the federal income tax laws.
This discussion is based on current provisions of the Code, existing,
temporary, and currently proposed Treasury Regulations promulgated under the
Code, the legislative history of the Code, existing administrative rulings and
practices of the 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 within the meaning of and under
sections 856 through 860 of the Code, effective for its short taxable year
beginning on the day prior to the closing of its initial public offering and
ending on December 31, 1996. 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.
16
<PAGE>
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:
(1) the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
(2) under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its undistributed items of tax
preference, if any.
(3) if the Company has (1) net income from the sale or other disposition
of "foreclosure property" that is held primarily for sale to customers
in the ordinary course of business or (2) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest
corporate rate on such income.
(4) 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.
(5) 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 (1)
the gross income attributable to the greater of the amount by which
the Company fails the 75% or 95% gross income test multiplied by (2) a
fraction intended to reflect the Company's profitability.
(6) if the Company should fail to distribute during each calendar year at
least the sum of (1) 85% of its REIT ordinary income for such year,
(2) 95% of its REIT capital gain net income for such year, and (3) 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.
(7) 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
17
<PAGE>
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 "--Possible Legislative or Other Actions
Affecting Tax Consequences."
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (1) that is
managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (3) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (4) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(5) the beneficial ownership of which is held by 100 or more persons; (6) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(7) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and maintain REIT status; (8) that uses a calendar year for federal
income tax purposes and complies with the recordkeeping requirements of the Code
and Treasury Regulations promulgated thereunder; and (9) that meets certain
other tests, described below, regarding the nature of its income and assets. The
Code provides that conditions (1) to (4), inclusive, must be met during the
entire taxable year and that condition (5) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable year
of less than 12 months. Conditions (5) and (6) will not apply until after the
first taxable year for which an election is made by 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 (5) and (6). In
addition, the 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 (5) and (6) 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 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
(determined on the basis of the REIT's capital interest in the partnership) of
the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. Thus, the Company's proportionate
share of the assets, liabilities, and items of income of the Operating
18
<PAGE>
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 (e.g. furnishing water,
heat, light, and air conditioning and cleaning windows, public entrances, and
lobbies) and are not otherwise considered "rendered to the occupant" (e.g.
renting parking spaces on a reserved basis to tenants). In addition, 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 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
19
<PAGE>
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 the Rent is considered based on the income or profits of any person or
the tenant is a Related Party Tenant, none of the Rent received 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.
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 (1) 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, (2) for
20
<PAGE>
which the related loan was acquired by the REIT at a time when default was not
imminent or anticipated, and (3) 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 (1) the
gross income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test multiplied by (2) a fraction intended to
reflect the Company's profitability.
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
21
<PAGE>
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 as of the date of the REIT's loan commitment or, in the case of a
purchase or a mortgage, the date of the loan purchase commitment, and 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 "Possible Legislative or Other Actions Affecting Tax
Consequences."
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. At least
75% of the value of the Company's 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 not owned, and will not own securities of any one
issuer the value of which exceeds 5% of the value of the Company's total assets
or more than 10% of any one issuer's outstanding voting securities (except for
its interests in the Operating Partnership, the Noncorporate Subsidiaries, and
any qualified REIT subsidiary). In addition, the Company 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
(1) it satisfied the asset tests at the close of the preceding calendar quarter
and (2) 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 (2) 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 (1) 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 (2) 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 corporate tax rates. Furthermore, if
the Company should fail to distribute during each calendar year at least the sum
of (1) 85% of its REIT ordinary income for such year, (2) 95% of its REIT
capital gain income for such year, and (3) any undistributed taxable income from
prior periods, 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.
22
<PAGE>
It is possible that, from time to time, the Company may experience timing
differences between (1) the actual receipt of income and actual payment of
deductible expenses and (2) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. Further, it is possible that,
from time to time, 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.
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 (1) a citizen
or resident of the U.S., (2) a corporation, partnership, or other entity created
or organized in or under the laws of the U.S. or of any political subdivision
thereof, (3) an estate whose income from sources without the United States is
includible in gross income for U.S. federal income tax purposes regardless of
its connection with the conduct of a trade or business within the United States,
or (4) any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or more
U.S. fiduciaries have the authority to control all substantial decisions of the
trust. Distributions that are designated as capital gain dividends generally
will be taxed as long-term capital gains (to the extent they do not exceed 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-
23
<PAGE>
term capital gains. In addition, the shareholders would be deemed to have paid
their proportionate share of the tax paid by the Company, which would be
credited or refunded to the shareholders. Each shareholder's basis in his shares
would be increased by the amount of the undistributed long-term capital gain
included in the shareholder's income, less the shareholder's share of the tax
paid by the Company.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Offered Securities, but rather will reduce
the adjusted basis of such shares. To the extent that such distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a shareholder's Offered Securities, such distributions will be included in
income as gains from the sale or exchange of a capital asset, assuming the
Offered Securities are capital assets in the hands of the shareholder. In
addition, any distribution declared by the Company in October, November, or
December of any year and payable to a shareholder of record on a specified date
in any such month shall be treated as both paid by the Company and received by
the shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Offered Securities will not be treated as
passive activity income and, therefore, shareholders generally will not be able
to apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which a shareholder is a limited partner) against such
income. In addition, taxable distributions from the Company generally will be
treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of Offered Securities (or
distributions treated as such), however, will be treated as investment income
only if the shareholder so elects, in which case such capital gains will be
taxed at ordinary income rates. The Company has notified and will continue to
notify shareholders after the close of the Company's taxable year as to the
portions of the distributions attributable to that year that constitute ordinary
income, return of capital, and capital gain.
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 long-term capital
gain or loss and will be taxable at a rate of 20% if the Offered Securities have
been held for more than twelve months. Otherwise, such a gain will be taxed at
the holder's regular marginal tax rate. However, any loss upon a sale or
exchange of 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 20% for sales
and exchanges of assets held for more than one year. The maximum tax rate on
long-term capital gain from the sale or exchange of "section 1250 property"
(i.e., depreciable real property) held for more than 18 months is 25% to the
extent that such gain would have been treated as ordinary income if the property
were "section 1245 property." With respect to distributions designated by 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%, or 25%. Thus, the tax rate differential between capital gain and
ordinary income for noncorporate taxpayers may be significant. In addition, the
characterization of income as capital or ordinary may affect the deductibility
of capital losses. Capital losses not offset by capital gains may be deducted
against a noncorporate taxpayer's ordinary income only up to a maximum annual
amount of $3,000. Unused capital losses may be carried forward. All net
capital gain of a corporate taxpayer is subject to tax at ordinary corporate
rates. A corporate taxpayer can deduct
24
<PAGE>
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 is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with the applicable requirements
of the backup withholding rules. A shareholder who does not provide the Company
with his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their nonforeign status to the Company. The Service 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 (1) the UBTI Percentage is at least 5%, (2)
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 (3) 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.
25
<PAGE>
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 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 a lower treaty rate applies and any required form evidencing
eligibility for that reduced rate is filed with the Company or 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 (1) 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 (2) the Non-U.S. Shareholder is a nonresident alien
individual
26
<PAGE>
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).
POSSIBLE LEGISLATION OR OTHER ACTION AFFECTING TAX CONSEQUENCES
The rules dealing with Federal income taxation are constantly under review
by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department. Changes to the Federal laws and interpretations thereof
could adversely affect an investment in the Company. For example, a proposal
issued by President Clinton on February 2, 1998, if enacted into law, may
adversely affect the ability of the Company to expand the present activities of
its management subsidiaries. It cannot be predicted whether, when, in what
forms, or with what effective dates, the tax laws applicable to the Company or
an investment in the Company will be changed.
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
(1) .25% of "taxable capital" (generally, financial accounting net worth with
certain adjustments) apportioned to Texas; or (2) 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.
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 is treated
as a partnership under Treasury regulations, effective January 1, 1997, relating
to entity classification (the "Check-the-Box Regulations") and is not a
"publicly traded" partnership.
27
<PAGE>
In general, under the Check-the-Box Regulations, an unincorporated entity
with at least two members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity fails to make
an election, it generally will be treated as a partnership for federal income
tax purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Partnerships, will be respected
for all periods prior to January 1, 1997 if (1) the entity had a reasonable
basis for its claimed classification, (2) the entity and all members of the
entity recognized the federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and (3) neither
the entity nor any of its members was notified in writing by a taxing authority
on or before May 8, 1996 that the classification of the entity was under
examination. Each Partnership in existence on January 1, 1997 reasonably
claimed partnership classification under the Treasury Regulations relating to
entity classification in effect prior to January 1, 1997, and such
classification should be respected for federal income tax purposes. In
addition, no Partnership was notified by a taxing authority on or before May 8,
1996 that its classification was under examination. The Partnerships intend to
continue to be classified as partnerships and no Partnership will elect to be
treated as an association taxable as a corporation for federal income tax
purposes under the Check-the-Box Regulations. The Company has represented that,
to the best of its knowledge, each Partnership will be treated as a
"partnership" for federal income tax purposes.
A publicly traded partnership is a partnership whose interests trade on an
established securities market or are readily tradable on a secondary market (or
the substantial equivalent thereof). A publicly traded partnership will be
treated as a corporation for federal income tax purposes unless at least 90% of
such partnership's gross income for a taxable year consists of "qualifying
income" under section 7704(d) of the Code, which generally includes any income
that is qualifying income for purposes of the 95% gross income test applicable
to REITs (the "90% Passive-Type Income Exception"). 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 all interests in the partnership were issued in a
transaction (or transactions) that was not required to be registered under the
Securities Act, and the partnership does not have more than 100 partners at any
time during the partnership's taxable year. In determining the number of
partners in a partnership, a person owning an interest in a flow-through entity
(i.e., a partnership, grantor trust, or S corporation) that owns an interest in
the partnership is treated as a partner in such partnership only if
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and a principal purpose of the use of the flow-
through entity is to permit the partnership to satisfy the 100-partner
limitation. Each Partnership qualifies for the Private Placement Exclusion. If
a Partnership is considered a publicly traded partnership under the PTP
Regulations because it is deemed to have more than 100 partners, such
Partnership should not be treated as a corporation because it should be eligible
for the 90% Passive-Type Income Exception.
If for any reason one of the Partnerships were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company
likely would not be able to qualify as a REIT. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests" and "--
Requirements for Qualification--Asset Tests." In addition, any change in a
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur a tax liability without any related cash
distribution. See "Federal Income Tax Considerations--Requirements for
Qualification--Distribution Requirements." Further, items of income and
deduction of such Partnership would not pass through to its partners, and its
partners would be treated as shareholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute dividends that
would not be deductible in computing such Partnership's taxable income.
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
Partners, not Partnerships, Subject to Tax. A partnership is not a taxable
entity for federal income tax purposes. Rather, the Company will be required to
take into account its allocable share of each Partnership's income, gains,
losses, deductions, and credits for any taxable year of such Partnership ending
within or with the
28
<PAGE>
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 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 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
(1) the amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (2) increased by (A) its allocable share
of the Operating Partnership's income and (B) its allocable share of
indebtedness of the Operating Partnership, and (3) reduced, but not below zero,
by (A) the Company's allocable share of the Operating Partnership's loss and (B)
the amount of cash distributed to the Company, including constructive cash
distributions resulting from a reduction in the Company's share of indebtedness
of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition of
such loss will be deferred until such time as the recognition of such loss would
not reduce the Company's adjusted tax basis below zero. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's
29
<PAGE>
share of the indebtedness of the Operating Partnership (such decrease being
considered a constructive cash distribution to the partners), would reduce the
Company's adjusted tax basis below zero, such distributions (including such
constructive distributions) will constitute taxable income to the Company. Such
distributions and constructive distributions normally will be characterized as
capital gain, and, if the Company's partnership interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
will constitute long-term capital gain.
SALE OF THE OPERATING PARTNERSHIP'S OR A NONCORPORATE SUBSIDIARY'S PROPERTY
Generally, any gain realized by a Partnership on the sale of property held
for more than one year will be mid-term capital gain, and any gain realized on
the sale of property held for more than 18 months will be long-term capital
gain, except for any portion of such gain that is treated as depreciation or
cost recovery recapture. Any gain recognized by a Partnership on the
disposition of the Properties contributed to the Partnership in exchange for
partnership interests therein will be allocated first to the contributor under
section 704(c) of the Code to the extent of the contributor's "built-in gain" on
those Properties for federal income tax purposes. The contributors' "built-in
gain" on the Properties sold will equal the excess of the contributors'
proportionate share of the book value of those Properties over the contributors'
tax basis allocable to those Properties at the time of the sale. Any remaining
gain recognized by a Partnership on the disposition of the contributed
Properties, and any gain recognized upon the disposition of the Properties
acquired by a Partnership for cash, will be allocated among the partners in
accordance with their respective percentage interests in the Partnership. The
Bylaws of the Company provide that any decision to sell any real estate asset in
which a trustee, or officer of the Company, or any Affiliate of the foregoing,
has a direct or indirect interest, will be made by a majority of the Trustees
including a majority of the Independent Trustees.
The Company's share of any gain realized by a Partnership on the sale of
any property held by the Partnership as inventory or other property held
primarily for sale to customers in the ordinary course of the Partnership's
trade or business will be treated as income from a prohibited transaction that
is subject to a 100% penalty tax. Such prohibited transaction income also may
have an adverse effect upon the Company's ability to satisfy the income tests
for REIT status. See "Federal Income Tax Considerations--Requirements For
Qualification--Income Tests" above. The Company, however, does not presently
intend to acquire or hold or to allow a Partnership to acquire or hold any
property that represents inventory or other property held primarily for sale to
customers in the ordinary course of the Company's or the Partnership's trade or
business.
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 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 "--Possible Legislative or Other Actions Affecting Tax
Consequences."
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.
30
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus relates to the Company's or the General Partner's possible
issuance of up to 524,180 Common Shares to the following Limited Partners to the
extent that they tender the Partnership Units opposite their respective names to
the Operating Partnership for redemption:
COMMON SHARES ISSUABLE
UPON REDEMPTION OF
LIMITED PARTNERS PARTNERSHIP UNITS HELD PARTNERSHIP UNITS
---------------- ---------------------- ----------------------
Peter O. Hausmann 190,190 190,190
Henry C. Gulbrandsen, Jr. 131,956 131,956
Timothy J. Weber 131,956 131,956
Steven A. Stattner 70,078 70,078
------- -------
Total 524,180 524,180
======= =======
Pursuant to the Partnership Agreement, Messrs. Hausmann, Gulbrandsen, Weber
and Stattner contributed interests in certain assets to the capital of the
Operating Partnership in exchange for the Partnership Units opposite their
respective names. Pursuant to the Registration Rights Agreement, we agreed to
file with the SEC a registration statement, of which this Prospectus is a part,
with respect to the issuance of Common Shares to the Limited Partners upon
redemption of their Partnership Units.
We will not receive any cash proceeds from the issuance of the Common
Shares to the Limited Partners but will acquire one Partnership Unit in exchange
for each Common Share that we issue. Consequently, with each redemption, our
interest in the Operating Partnership will increase. We will pay all costs,
expenses and fees in connection with the registration of the Common Shares.
LEGAL OPINIONS
The legality of the issuance of the Common Shares will be passed upon by
Akin, Gump, Strauss, Hauer & Feld, L.L.P., who will rely on Ballard Spahr
Andrews & Ingersoll, LLP, Baltimore, Maryland, as to certain matters of Maryland
law.
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 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 Reports
on Form 8-K, filed February 10, 1998, and the combined statement of revenues and
certain operating expenses of the Willow Oaks Properties and the statement of
revenues and certain operating expenses of the Ordway Property included in the
Company's Current Report on Form 8-K, filed October 9, 1998, all incorporated by
reference in this Prospectus, have been incorporated herein in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants given on the
authority of that firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public
31
<PAGE>
reference rooms. Our SEC filings are also available to the public from our web
site at http://www.pplinc.com or at the SEC's web site at http://www.sec.gov.
We filed a Registration Statement on Form S-3 to register with the SEC the
Common Shares. This Prospectus is a part of that Registration Statement. As
allowed by SEC rules, this Prospectus does not contain all of the information
you can find in the Registration Statement or the exhibits to the Registration
Statement.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this Prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act until our offering is completed.
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1997;
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31 and June 30, 1998; and
3. The Company's Current Reports on Form 8-K filed on January 15, 1998,
February 10, 1998, February 17, 1998, February 25, 1998, July 1, 1998
and October 9, 1998.
4. 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.
5. The description of the Series B Junior 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, filed on March 10, 1998, including any reports filed under the
Exchange Act for the purpose of updating such description.
You may request a copy of these filings, at no cost, by writing or
telephoning:
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas
(214) 654-0886
You should rely on the information incorporated by reference or provided in
this Prospectus or any Prospectus Supplement. We have authorized no one to
provide you different information. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this Prospectus or Any Prospectus Supplement is accurate
as of any date other than the date on the front of the document.
32
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following sets forth the estimated expenses (other than underwriting
discounts and commissions) in connection with the issuance and distribution of
the securities being registered hereby, all of which be paid for by the Company:
Securities and Exchange Commission registration fee........ $ 2,760
Accounting fees and expenses............................... 4,000
Blue Sky fees and expenses................................. 1,000
Legal fees and expenses.................................... 25,000
Printing................................................... 5,000
Miscellaneous.............................................. 1,240
__________
TOTAL................................................. $ 39,000
==========
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of the Company contains such a provision which eliminates
such liability to the maximum extent permitted by the Maryland REIT Law.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a trustee, director, officer or partner of such real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his status as present
or former shareholder. The Bylaws of the Company obligate it, to the maximum
extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former Trustee or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Declaration of Trust and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any of
the capacities described above and to any employee or agent of the Company or a
predecessor of the Company. The Bylaws require the Company to indemnify a
Trustee or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as is permitted by the MGCL for directors
II-1
<PAGE>
and officers of Maryland corporations. The MGCL permits a corporation to
indemnify its present and former directors and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was unlawful. However,
a Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis that
a personal benefit was improperly received unless a court orders indemnification
and then only for expenses. In accordance with the MGCL, the Bylaws of the
Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the Trustee or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company as
authorized by the Bylaws and (b) a written undertaking by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER EXHIBITS
- ------- --------
3.1 -- Form of Amended and Restated Declaration of Trust of the
Company (filed as Exhibit 3.1 to the Company's Registration
Statement on Amendment No. 1 of Form S-11, File No. 333-09863,
and incorporated by reference herein).
3.2 -- Articles Supplementary to the Amended and Restated Declaration
of Trust Classifying and Designating the Series A Preferred
Shares (filed as Exhibit 3.1 to the Company's Current Report on
Form 8-K filed January 15, 1998 and incorporated by reference
herein).
3.3 -- Articles Supplementary, dated February 17, 1998, Classifying
and Designating a Series of Preferred Shares of Beneficial
Interest as Junior Participating Cumulative Convertible
Redeemable Preferred Shares of Beneficial Interest, Series B,
and Fixing Distribution and Other Preferences and Rights of
Such Shares (filed as Exhibit 3 to the Company's Registration
Statement on Form 8-A filed on February 17, 1998, File No. 000-
23813).
3.4 -- Articles Supplementary, dated June 25, 1998, Classifying and
Designating a Series of Preferred Shares of Beneficial Interest
as Series B Cumulative Redeemable Perpetual Preferred Shares of
Beneficial Interest and Fixing Distribution and Other
Preferences and Rights of Such Shares (filed as Exhibit 3.5 to
the Company's Form 10-Q filed August 12, 1998 and incorporated
by reference herein).
3.5 -- Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Amendment No. 1 of Form S-11, File
No. 333-09863, and incorporated by reference herein).
4.1 -- Form of Common Shares Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Amendment No. 1 of Form S-
11, File No. 333-09863, and incorporated by reference herein).
4.2 -- Rights Agreement, dated February 6, 1998, between the Company
and First Chicago Trust Company of New York, as Rights Agent
(filed as Exhibit 4.1 to the Company's Registration Statement
on Form 8-A filed on February 17, 1998 and incorporated by
reference herein).
4.4 -- Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
II-2
<PAGE>
*5 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
*8 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. regarding
certain tax matters.
*10.1 -- Registration Rights Agreement, dated October 22, 1997, between
the Prentiss Properties Trust, Prentiss Properties Acquisition
Partners, L.P., Prentiss Properties I, Inc., Peter O. Hausmann,
Henry C. Gulbrandsen, Jr., Timothy J. Weber and Steven A.
Stattner.
10.2 -- Second Amended and Restated Agreement of Limited Partnership of
Prentiss Properties Acquisition Partners, L.P. (filed as
Exhibit 10.2 to the Company's Annual Report on Form 10-K, filed
March 25, 1997).
10.3 -- First Amendment to the Second Amended and Restated Agreement of
Limited Partnership of Prentiss Properties Acquisition
Partners, L.P. (filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K, filed January 15, 1998).
10.4 -- Second Amendment to the Second Amended and Restated Agreement
of Limited Partnership of Prentiss Properties Acquisition
Partners, L.P. (filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q, filed August 12, 1998).
*23.1 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included
in Exhibits 5 and 8).
*23.2 -- Consent of Ballard Spahr Andrews & Ingersoll, LLP.
*23.3 -- Consent of PricewaterhouseCoopers LLP.
*24 -- Power of Attorney (included on the signature page of this
Registration Statement).
- --------------------
* Filed herewith.
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made of the securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement (notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no
II-3
<PAGE>
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 SEC by the registrant pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in
this registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that the in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted against the registrant by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of their counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant further hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-4
<PAGE>
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-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 October 15, 1998.
PRENTISS PROPERTIES TRUST
By: /s/ THOMAS F. AUGUST
--------------------------------------
Thomas F. August
President and Chief Operating Officer
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 October 15, 1998 by the
following persons in the capacities indicated.
NAME TITLE
- ---- -----
/s/ MICHAEL V. PRENTISS Chairman of the Board and Chief Executive
- ----------------------------- Officer (Principal Executive Officer)
Michael V. Prentiss
/s/ THOMAS F. AUGUST President, Chief Operating Officer and
- ----------------------------- Trustee
Thomas F. August
Trustee
- -----------------------------
Thomas J. Hynes, Jr.
/s/ BARRY J.C. PARKER Trustee
- -----------------------------
Barry J.C. Parker
Trustee
- -----------------------------
Leonard M. Riggs, Jr.
II-6
<PAGE>
/s/ RONALD G. STEINHART Trustee
- -----------------------------
Ronald G. Steinhart
/s/ LAWRENCE A. WILSON Trustee
- -----------------------------
Lawrence A. Wilson
/s/ MARK R. DORAN Executive Vice President, Chief Financial
- ----------------------------- Officer and Treasurer
Mark R. Doran (Principal Financial Officer)
/s/ RICHARD J. BARTEL Executive Senior Vice President--
- ----------------------------- Financial Operations and Administration,
Richard J. Bartel and Chief Administrative Officer
/s/ THOMAS P. SIMON Vice President
- ----------------------------- (Chief Accounting Officer)
Thomas P. Simon
II-7
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBITS
- ------- --------
3.1 -- Form of Amended and Restated Declaration of Trust of the
Company (filed as Exhibit 3.1 to the Company's Registration
Statement on Amendment No. 1 of Form S-11, File No. 333-09863,
and incorporated by reference herein).
3.2 -- Articles Supplementary to the Amended and Restated Declaration
of Trust Classifying and Designating the Series A Preferred
Shares (filed as Exhibit 3.1 to the Company's Current Report on
Form 8-K filed January 15, 1998 and incorporated by reference
herein).
3.3 -- Articles Supplementary, dated February 17, 1998, Classifying
and Designating a Series of Preferred Shares of Beneficial
Interest as Junior Participating Cumulative Convertible
Redeemable Preferred Shares of Beneficial Interest, Series B,
and Fixing Distribution and Other Preferences and Rights of
Such Shares (filed as Exhibit 3 to the Company's Registration
Statement on Form 8-A filed on February 17, 1998, File No. 000-
23813).
3.4 -- Articles Supplementary, dated June 25, 1998, Classifying and
Designating a Series of Preferred Shares of Beneficial Interest
as Series B Cumulative Redeemable Perpetual Preferred Shares of
Beneficial Interest and Fixing Distribution and Other
Preferences and Rights of Such Shares (filed as Exhibit 3.5 to
the Company's Form 10-Q filed August 12, 1998 and incorporated
by reference herein).
3.5 -- Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Amendment No. 1 of Form S-11, File
No. 333-09863, and incorporated by reference herein).
4.1 -- Form of Common Shares Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Amendment No. 1 of Form S-
11, File No. 333-09863, and incorporated by reference herein).
4.2 -- Rights Agreement, dated February 6, 1998, between the Company
and First Chicago Trust Company of New York, as Rights Agent
(filed as Exhibit 4.1 to the Company's Registration Statement
on Form 8-A filed on February 17, 1998 and incorporated by
reference herein).
4.4 -- Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
*5 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
*8 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. regarding
certain tax matters.
*10.1 -- Registration Rights Agreement, dated October 22, 1997, between
the Prentiss Properties Trust, Prentiss Properties Acquisition
Partners, L.P., Prentiss Properties I, Inc., Peter O. Hausmann,
Henry C. Gulbrandsen, Jr., Timothy J. Weber and Steven A.
Stattner.
10.2 -- Second Amended and Restated Agreement of Limited Partnership of
Prentiss Properties Acquisition Partners, L.P. (filed as
Exhibit 10.2 to the Company's Annual Report on Form 10-K, filed
March 25, 1997).
10.3 -- First Amendment to the Second Amended and Restated Agreement of
Limited Partnership of Prentiss Properties Acquisition
Partners, L.P. (filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K, filed January 15, 1998).
<PAGE>
10.4 -- Second Amendment to the Second Amended and Restated Agreement
of Limited Partnership of Prentiss Properties Acquisition
Partners, L.P. (filed as Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q, filed August 12, 1998).
*23.1 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included
in Exhibits 5 and 8).
*23.2 -- Consent of Ballard Spahr Andrews & Ingersoll, LLP.
*23.3 -- Consent of PricewaterhouseCoopers LLP.
*24 -- Power of Attorney (included on the signature page of this
Registration Statement).
- --------------------
* Filed herewith.
<PAGE>
EXHIBIT 5
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS HERE]
October 15, 1998
Prentiss Properties Trust
3890 West Northwest Highway, Suite 400
Dallas, Texas 75220
Re: Prentiss Properties Trust
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to Prentiss Properties Trust, a Maryland real
estate investment trust (the "Company"), in connection with the Registration
Statement on Form S-3 (the "Registration Statement"), filed by the Company under
the Securities Act of 1933, as amended, relating to the issuance from time to
time of up to an aggregate of 524,180 common shares of beneficial interest of
the Company, par value $0.01 per share (the "Common Shares"), that may be issued
to certain holders of 524,180 units of limited partnership interest (the
"Partnership Units") in Prentiss Properties Acquisition Partners, L.P. (the
"Operating Partnership") in exchange for and upon the tendering for redemption
of the Partnership Units by Peter O. Hausmann, Henry C. Gulbrandsen, Jr.,
Timothy J. Weber and Steven A. Stattner.
We have, as counsel, examined originals or copies, certified or otherwise
identified to our satisfaction, of such corporate records, agreements, documents
and other instruments, and such certificates or comparable documents of public
officials and of officers and representatives of the Company, and have made such
inquiries of such officers and representatives as we have deemed relevant and
necessary as a basis for the opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such latter documents. In
addition, we have assumed that the Common Shares will be issued for at least the
par value thereof. As to all questions of fact material to this opinion that
have not been independently established, we have relied upon certificates or
comparable documents of officers and representatives of the Company.
<PAGE>
Prentiss Properties Trust
October 15, 1998
Page 2
Based upon such examination and representations, we advise you that, in our
opinion, the Common Shares have been duly authorized and, upon issuance in
accordance with the terms of the Second Amended and Restated Agreement of
Limited Partnership of the Operating Partnership, such Common Shares will be
(assuming that upon any such issuance the total number of Common Shares issued
and outstanding will not exceed the total number of Common Shares that the
Company is then authorized to issued under the Amended and Restated Declaration
of Trust of the Company) validly issued, fully paid and nonassessable.
In rendering the foregoing opinion, we have relied solely upon the opinion
of Ballard Spahr Andrews and Ingersoll, LLP with respect to matters of Maryland
law, and our opinions are subject to the same assumptions, qualifications, and
limitations as those set forth in their opinion.
We consent to the filing of this opinion with the Commission as Exhibit 5.1
to the Registration Statement and the reference to this firm under the caption
"Legal Matters" in the Prospectus contained therein.
This opinion is rendered solely to you in connection with the above matter.
This opinion may not be relied upon by you for any other purpose or relied upon
by or furnished to any other person without our prior written consent.
Very truly yours,
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE>
EXHIBIT 8
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD APPEARS HERE]
October 15, 1998
Prentiss Properties Trust
3890 W. Northwest Highway
Suite 400
Dallas, Texas 75220
Dear Sir or Madam:
You have requested our opinion that Prentiss Properties Trust ("PPT") was
organized and has operated in conformity with the requirements for qualification
as a "real estate investment trust" (a "REIT") under the Internal Revenue Code
of 1986, as amended (the "Code"), beginning with its taxable year ending
December 31, 1996 and through the date hereof and its current and proposed
method of operation will enable PPT to continue to qualify as a REIT. In
rendering our opinion, we have examined such documents as we have deemed
necessary. We have assumed the current and continued correctness of the
representations made to us by PPT and we have made no independent verification
as to the correctness of such representations. Where any such factual
representation is qualified to the best knowledge of a person, we have assumed
that the representation is correct without regard to such qualification.
Further, we assume that all representations by PPT as to value are correct and
we have made no independent verification as to such values.
Our opinion is based on the provisions of the Code, Treasury Regulations
promulgated under the Code, judicial authority and currently published revenue
rulings and procedures, all as of the date of this letter, and all of which may
change at any time. Any change in the relevant facts (including any assumptions
upon which this opinion is, in part, based) or law could change our conclusions
and would render our opinion inapplicable. This opinion represents our best
legal judgment and has no binding effect on the IRS. Accordingly, no assurance
can be given that the IRS or a court would concur with the conclusions reached
herein.
<PAGE>
Prentiss Properties Trust
Page 2
October 15, 1998
Based on the foregoing, assuming that the election and actions of PPT
represented to us are and will be observed and completed as applicable in a
timely fashion, we are of the opinion that (i) PPT was organized and has
operated in conformity with the requirements for qualification as a REIT under
the Code beginning with its taxable year ending December 31, 1996 and through
the date hereof and its current and proposed method of operation will enable PPT
to continue to qualify as a REIT and (ii) the descriptions of the law and the
legal conclusions discussed in the Form S-3 Registration Statement filed with
the SEC on October 15, 1998 (the "Registration Statement") under the captions
"Description of Partnership Units--Tax Consequences of Redemption" and "Federal
Income Tax Considerations" fairly summarize the federal income tax
considerations that are likely to be material to a holder of the Partnership
Units or Common Shares, as the case may be.
We express no opinion as to any other matter. No reference may be made to
this opinion letter in any financial statement, or document, nor may this
opinion letter be distributed in any manner without our prior written consent,
except (i) such opinion may be furnished to the IRS in connection with an
examination and (ii) we consent to the filing of this opinion as an Exhibit to
the Registration Statement.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
/s/ Akin, Gump, Strauss, Hauer & Feld, L.L.P.
<PAGE>
EXHIBIT 10.1
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of the
22nd day of October, 1997 by and among PRENTISS PROPERTIES ACQUISITION PARTNERS,
L.P., a Delaware limited partnership (the "Partnership"), PRENTISS PROPERTIES
TRUST, a Maryland real estate investment trust ("the Company"), PRENTISS
PROPERTIES I, INC., a Delaware corporation and sole general partner of the
Partnership (the "General Partner"), and the limited partners listed on Exhibit
A hereto (the "Limited Partners"). The Limited Partners and their permitted
transferees and assignees are herein referred to individually as a "Holder" and
collectively, as "Holders".
RECITALS
WHEREAS, pursuant to the Second Amended and Restated Agreement of Limited
Partnership of Prentiss Partnership of Prentiss Properties Acquisition Partners,
L.P., dated as of October 22, 1996 (the "Partnership Agreement"), the Limited
Partners have contributed to the capital of the Partnership interests in certain
assets in exchange for the units of limited partnership interest in the
Partnership as set forth on Exhibit A hereto (the "Partnership Units");
WHEREAS, the parties hereto desire to set forth certain rights of the
Limited Partners as holders of the Partnership Units;
NOW, THEREFORE, for and in consideration of the mutual promises and
agreements contained in this Agreement, the parties hereto agree as follows:
AGREEMENT
ARTICLE I
DEFINITIONS
Capitalized terms not otherwise defined when first used herein shall have
the meanings set forth in the Partnership Agreement.
ARTICLE II
SHELF REGISTRATION
2.1. Shelf Registration. The Company agrees to file with the Commission a
shelf registration statement pursuant to Rule 415 of the Securities Act, or
similar rule that may be adopted by the Commission (the "Shelf Registration"),
at a time and in a manner reasonably designed to cause the Shelf Registration to
be declared effective by the Commission on or about the first anniversary of the
date of this Agreement, with respect to the issuance by the Company of at least
the number of REIT Shares issuable to the Limited Partners upon redemption of
the Partnership Units (the "Exchange Shares"). The Company will use its
reasonable best efforts to
<PAGE>
cause the Shelf Registration to be declared effective under the Securities Act
as soon as reasonably possible after filing. The Company will use its reasonable
best efforts to keep the Shelf Registration continuously effective until the
earlier of (a) the date when all of the Exchange Shares covered thereby are
issued or sold thereunder, (b) the date on which all Limited Partners then
holding Partnership Units agree to the withdrawal of the Registration Statement
or (c) the first date on which all of the Exchange Shares covered thereby could,
in the opinion of counsel for the Company, be sold in any three month period
pursuant to Rule 144 under the Securities Act or any successor rule thereto (the
"Shelf Registration Period"). The Company further agrees to supplement or make
amendments to the Shelf Registration, if required by the rules, regulations, or
instructions applicable to the registration form utilized by the Company or by
the Securities Act or rules and regulations thereunder for the Shelf
Registration. In addition, the Company agrees to file any additional Shelf
Registration as may be necessary from time to time to register additional
Exchange Shares issuable as a result of any change in the Conversion Ratio. No
provision of this Article II shall require the Company to file a registration
statement on any form other than Form S-3 or a successor form thereto.
2.2. Registration and Qualification Procedures. The Company will:
(a) use its reasonable best efforts to cause the Shelf Registration to
be declared effective by the Commission as soon after filing as reasonably
possible;
(b) use its reasonable best efforts to keep the Shelf Registration
effective and the related prospectus current throughout the Shelf Registration
Period;
(c) furnish to each Limited Partner such numbers of copies of the
relevant prospectuses, and supplements or amendments thereto, and such other
related documents as they may reasonably request; and
(d) use its reasonable best efforts to register or qualify the
securities covered by the Shelf Registration under applicable state securities
or blue sky laws; provided, however, that the Company shall not be required to
(i) qualify as a foreign corporation or consent to a general and unlimited
service of process in any jurisdiction in which it would not otherwise be
required to be qualified or so consent or (ii) qualify as a dealer in
securities.
2.3. Allocation of Expenses. The Partnership or the Company shall pay
all expenses in connection with the Shelf Registration, including, without
limitation (a) Commission registration fees, (b) printing expenses, (c)
accounting and legal fees and expenses for the Company and the Partnership (but
not the fees and expenses of any accountant or attorney engaged by any Limited
Partner) and (d) expenses of complying with applicable securities or blue sky
laws in connection with the Shelf Registration; provided, however, neither the
Partnership nor the Company shall be liable for (i) any discounts or commissions
to any broker attributable to any sale of Exchange Shares, or (ii) any fees or
expenses incurred by holders of Exchange Shares in connection with such
registration which, according to the written instructions of any regulatory
authority, the Partnership or the Company is not permitted to pay.
2
<PAGE>
2.4. Indemnification. In connection with the Shelf Registration, the
Company, the General Partner, and the Partnership agree to indemnify holders of
Partnership Units and Exchange Shares in accordance with the provisions of
Article IV hereof.
2.5. Listing on Securities Exchange. The Company will, at its expense, list
and maintain the listing on the NYSE of the Exchange Shares registered pursuant
to this Article II.
ARTICLE III
DEMAND REGISTRATION
3.1. Request for Registration. Subject to the provisions of this Article
III, if at any time after the first anniversary of the date of this Agreement
the Shelf Registration is withdrawn or otherwise unavailable for any reason for
a period exceeding 75 days (whether or not consecutive) in any three-month
period, then, upon the written request of any Limited Partner, the Company
agrees to file with the Commission a registration statement on the appropriate
form under the Securities Act covering not less than 70,000 Exchange Shares for
resale in open market transactions. The number of Exchange Shares requested to
be registered pursuant to the registration statement shall be set forth in the
written request of the Limited Partner. Prior to the filing of the registration
statement, the Limited Partner shall provide the Company with all information
required to enable the Company to effect the appropriate registration. In
effecting any registration pursuant to this Section 3.1, the Company may
include, in addition to Exchange Shares requested to be so registered,
securities of other shareholders of the Company as well as additional securities
of the Company on the appropriate registration form.
3.2. Timing. Notwithstanding anything to the contrary contained in this
Article III (i) the Company shall not be obligated to file or effect a
registration pursuant to this Article III during the period starting with the
date 45 days prior to the Company's estimated date of filing of, and ending on a
date 90 days following the effective date of, a registration statement
pertaining to an underwritten public offering of securities for the account of
the Company, provided that the Company is actively employing in good faith
reasonable efforts to cause such registration statement to become effective and
that the Company's estimate of the date of filing such registration statement is
made in good faith; and (ii) if the Company shall furnish to the Limited Partner
a certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Trustees it would be detrimental to the Company
or its shareholders for a registration statement to be filed in the near future,
then the Company's obligation to file a registration statement shall be deferred
for a period not to exceed six months.
3.3. One Time Registration. The Company shall be obligated to effect only
one registration pursuant to this Article III for each Limited Partner.
3.4. Registration and Qualification Procedures. If and whenever the Company
is required to effect any registration as provided in this Article III, the
Company will:
(a) as expeditiously as possible prepare and file with the Commission
the appropriate registration statement, as set forth in Section 3.1, including
any amendments or supplements to such registration statement that may be
required by the rules, regulations or
3
<PAGE>
instructions applicable to the registration form utilized by the Company or by
the Securities Act or rules and regulations thereunder for such registration
statement; provided, however that in no event will the Company's obligations
under this Article III extend to any Exchange Shares previously registered
pursuant to any registration statement that remains effective;
(b) use its reasonable best efforts to cause such registration
statement to be declared effective by the Commission as soon after filing as
reasonably possible;
(c) furnish to each Limited Partner such number of copies of each the
relevant prospectuses, and supplements or amendments thereto, and such other
related documents as they may reasonably request;
(d) use its reasonable best efforts to qualify the offering under
applicable state securities or blue sky laws; provided, however, that the
Company shall not be required to (i) qualify as a foreign corporation or consent
to a general and unlimited service of process in any jurisdiction in which it is
not otherwise required to be qualified or so consent or (ii) qualify as a dealer
in securities;
(e) use its reasonable best efforts to keep the registration statement
effective and the related prospectus current for ninety calendar days following
its effective date or such lesser period as the Limited Partners requesting such
registration may accept; and
(f) not be required to register Exchange Shares pursuant to Section 3.1
if, within ten calendar days following receipt of the request for registration,
the Company shall commit itself to purchase within ten business days for the
Cash Amount all of the Exchange Shares requested to be registered by the Limited
Partner pursuant to Section 3.1.
3.5. Expenses of Registration. The Partnership or the Company shall pay all
expenses in connection with each registration pursuant to Section 3.1,
including, without limitation (a) Commission registration fees, (b) printing
expenses, (c) accounting and legal fees and expenses for the Company and the
Partnership (but not the fees and expenses of an accountant or attorney engaged
by any Limited Partner) and (d) expenses of complying with applicable securities
or blue sky laws in connection with the Shelf Registration; provided, however,
neither the Partnership nor the Company shall be liable for (i) any discounts or
commissions to any broker attributable to any sale of Exchange Shares, or (ii)
any fees or expenses incurred by holders of Exchange Shares in connection with
such registration which, according to the written instructions of any regulatory
authority, the Partnership or the Company is not permitted to pay.
3.6. Listing on Securities Exchange. The Company will, at its expense,
list and maintain the listing on the NYSE of the Exchange Shares registered
pursuant to this Article III.
ARTICLE IV
INDEMNIFICATION
4.1. Indemnification by the Company, the General Partner, and the
Partnership. The Company, the General Partner, and the Partnership agree to
indemnify and hold harmless the
4
<PAGE>
Limited Partners, the directors and officers of any corporate Limited Partner,
and each Person (if any) who controls a corporate Limited Partner within the
meaning of Section 15 of the Securities Act, against any and all losses, claims,
damages, or liabilities to which they or any of them may become subject under
the Securities Act or any other statute or common law, including any amount paid
in settlement of any litigation, commenced or threatened, if such settlement is
effected with the written consent of the Company, and to reimburse them for any
legal or other expenses incurred by them in connection with investigating any
claims and defending any actions, insofar as any such losses, claims, damages,
liabilities, or actions arise out of or are based upon (a) any untrue statement
or alleged untrue statement of a material fact contained in any registration
statement filed hereunder to register the Exchange Shares or any post-effective
amendment thereto or in any filing made in connection with the qualification of
the offering under blue sky or other securities laws of jurisdictions in which
the Exchange Shares are offered (a "Blue Sky Filing"), or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, or (b) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, if used prior to the effective date of such registration
statement, or contained in any final prospectus (as amended or supplemented if
the Company shall have filed with the Commission any amendment thereof or
supplement thereto) if used within the period during which the Company is
required to keep the registration statement to which such prospectus relates
current, or the omission or alleged omission to state therein (if so used) a
material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided, however,
that the indemnification agreement contained in this Section 4.1 shall not apply
to such losses, claims, damages, liabilities, or actions arising out of, or
based upon, any such untrue statement or alleged untrue statement, or any such
omission or alleged omission, if such statement or omission was made in reliance
upon and in conformity with information furnished to the Company by the Limited
Partners specifically for use in connection with preparation of any registration
statement, any preliminary prospectus or final prospectus contained in any
registration statement, any such amendment or supplement thereto or any Blue Sky
Filing.
4.2. Indemnification Procedures.
(a) Each indemnified party shall, with reasonable promptness after its
receipt of written notice of the commencement of any action against such
indemnified party in respect of which indemnity may be sought from an
indemnifying party on account of an indemnity agreement contained herein, notify
the indemnifying party in writing of the commencement thereof.
(b) The omission to notify the indemnifying party shall not relieve it
from any liability which it may have to any indemnified party unless the failure
to give notice materially adversely affects the ability of the indemnifying
party to defend a claim which is the subject of indemnification hereunder (in
which case the indemnifying party shall be relieved of its obligation only to
the extent of offsetting any loss, damage, or liability it suffers as a
consequence of the failure against its monetary obligation to the indemnified
party).
5
<PAGE>
(c) In case any such action shall be brought against any indemnified
party and the indemnified party shall so notify an indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and to the extent it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party and, after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
hereunder for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation, except as provided below.
(d) The indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be paid by the indemnified party unless (i)
the indemnifying party agrees to pay the same, (ii) the indemnifying party fails
to assume the defense of such action with counsel reasonably satisfactory to the
indemnified party, or (iii) the named parties to any such action (including any
impleaded parties) have been advised by such counsel that representation of such
indemnified party and the indemnifying party by the same counsel would be
inappropriate under applicable standards of professional conduct (in which case
the indemnifying party shall not have the right to assume the defense of such
action on behalf of such indemnified party). No indemnifying party shall be
liable for any settlement entered into without its consent.
(e) The indemnity agreements contained herein shall be in addition to
any liabilities which the indemnifying party may have pursuant to law.
4.3. Contribution.
(a) If for any reason the indemnification provisions contemplated
herein are either unavailable or insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, or liabilities referred to
therein, then the party that otherwise would be required to provide
indemnification or the indemnifying party (in either case, for purposes of this
section, the "Indemnifying Party") in respect of such losses, claims, damages,
or liabilities, shall contribute to the amount paid or payable by the party that
would otherwise be entitled to indemnification or the indemnified party (in
either case, for purposes of this section, the "Indemnified Party") as a result
of such losses, claims, damages, liabilities, or expense, in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party and the
Indemnified Party, as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact related to information supplied by the Indemnifying Party or
Indemnified Party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities, and expenses referred to above shall be deemed to include
any legal or other fees or expenses reasonably incurred by such party.
6
<PAGE>
(b) The parties hereto agree that it would not be just and equitable
if contribution pursuant to this section were determined by pro rata allocation
(even if the holders or any underwriters or all of them were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. No person or entity determined to have committed a
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person or entity who
was not guilty of such fraudulent misrepresentation.
ARTICLE V
GENERAL
5.1. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be delivered by hand, transmitted by
facsimile transmission, or sent prepaid by international courier, to the
Limited Partners at their addresses as set forth on the books of the
Partnership. Notices to the Company, the Partnership and the General Partner
shall be delivered at or mailed to Prentiss Properties I, Inc., 3980 West
Northwest Highway, Suite 400, Dallas, Texas 75220. The Company, the Partnership
and the General Partner may specify a different address by written notice to the
Limited Partners. Any Limited Partners may specify a different address by
written notice to the Company. Any notice, request, demand or other
communication delivered or sent in the manner aforesaid shall be deemed given or
made (as the case may be) when delivered by hand or confirmed by facsimile
transmission, or, in the case of delivery by courier, when actually delivered
to the address of the intended recipient.
5.2. Entire Agreement. This Agreement and exhibits attached hereto
constitute the entire agreement of the parties and supersede all prior written
agreements and prior and contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof.
5.3. Pronouns and Plurals. When the context in which words are used in this
Agreement indicates that such is the intent, words in the singular number shall
include the plural and the masculine gender shall include the neuter or female
gender as the context may require.
5.4. Headings. The article and section headings in this Agreement are for
convenience only and shall not be used in construing the scope of this Agreement
or any particular article or section.
5.5. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original copy and all of which together
shall constitute one and the same instrument binding on all parties hereto,
notwithstanding that all parties shall not have signed the same counterpart.
5.6. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
7
<PAGE>
5.7. Assignment and Confirmation. This Agreement may be assigned by a
Limited Partner only upon the written consent of the Company (which consent
shall be deemed to have been given with respect to the assignment of this
Agreement to any transferee of Units permitted pursuant to Article IX of the
Partnership Agreement, but only as this Agreement relates to the Units
transferred). It shall be a condition to any Person succeeding to the rights of
a Limited Partner as permitted herein that such Person, if requested by the
Company, execute a counterpart to this Agreement and become a party hereto.
5.8. Amendment. This Agreement may be amended by written agreement executed
by the Company, the General Partner, the Partnership and each Limited Partner to
be bound thereby.
5.9. Authority; Binding Effect. Each party hereto represents and warrants
to the other parties that it has the full legal right, power and authority to
execute this Agreement, that this Agreement has been duly authorized, executed
and delivered on behalf of such party and constitutes a valid and binding
agreement of such party enforceable in accordance with its terms.
5.10. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but such counterparts shall together
constitute but one and the same Agreement.
5.11. Application of Agreement. This Agreement shall apply only to the
Partnership Units listed on Exhibit A and the Exchange Shares issuable in
respect thereof.
8
<PAGE>
IN WITNESS WHEREOF, each party has duly executed this Agreement as of the
day and year first above written.
PRENTISS PROPERTIES TRUST, a
Maryland real estate investment trust
By: /s/ THOMAS F. AUGUST
--------------------------------------------
Name: Thomas F. August
------------------------------------------
Title: President & COO
-----------------------------------------
PRENTISS PROPERTIES ACQUISITION
PARTNERS, L.P.
By: PRENTISS PROPERTIES I, INC., its general
partner
By: /s/ WILLIAM REISTER
----------------------------------------
Name: William Reister
--------------------------------------
Title: Vice President
-------------------------------------
LIMITED PARTNERS
/s/ PETER O. HAUSMANN
------------------------------------------------
Peter O. Hausmann
/s/ TIMOTHY J. WEBER
------------------------------------------------
Timothy J. Weber
/s/ HENRY C. GULBRANDSEN, JR.
------------------------------------------------
Henry C. Gulbrandsen, Jr.
/s/ STEVEN A. STATTNER
------------------------------------------------
Steven A. Stattner
9
<PAGE>
EXHIBIT A
PARTNERSHIP UNITS
Limited Partner Partnership Units
-------------- -----------------
Peter O. Hausmann 190,190
Henry C. Gulbrandsen, Jr. 131,956
Timothy J. Weber 131,956
Steven A. Stattner 70,078
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF REDEMPTION RIGHT
The undersigned hereby irrevocably (i) presents for redemption ________
units of limited partnership interest ("Units") in Prentiss Properties
Acquisition Partners, L.P. (the "Partnership") in accordance with the terms of
the Registration Rights Agreement, dated _________, 1997 ("Agreement") and the
"Exchange Right" referred to in Section 8.05 of the Second Amended and Restated
Agreement of Limited Partnership of the Partnership (the "Partnership
Agreement"), (ii) surrenders such Units and all right, title and interest
therein, (iii) surrenders herewith any certificate or other writing evidencing
the Units (and requests that any Units so evidenced that are not redeemed be
evidenced by the issuance of a new certificate or writing) and (iv) directs that
the "Cash Amount" or "REIT Shares Amount" (as determined by the General
Partner), as defined in the Agreement, deliverable upon exercise of the
Redemption Rights be delivered to the address specified below, and if REIT
Shares are to be delivered, such Company Shares be registered or placed in the
name(s) and at the address(es) specified below.
Dated:
--------------------, ---------
Name of Limited Partner:
----------------------------------------
(Signature of Limited Partner)
----------------------------------------
(Mailing Address)
----------------------------------------
(City) (State) (Zip Code)
Signature Guaranteed by:
----------------------------------------
If REIT Shares are to be issued, issue to:
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
Please insert social security or identifying number:
- ----------------------------------------
<PAGE>
EXHIBIT 23.2
October 14, 1998
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
Re: Prentiss Properties Trust: Registration Statement
on Form S-3; 524,180 Common 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 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) October 20, 1997
on our audit of the combined statement of revenues and certain operating
expenses of the Silicon Valley Properties, (iii) February 6, 1998 on our audits
of the combined statement of revenues and certain operating expenses of the
Newport National Properties and the statement of revenues and certain operating
expenses of the Carrara Place Property, (iv) August 12, 1998 on our audit of the
statement of revenues and certain operating expenses of the Ordway Property, and
(v) September 30, 1998 on our audit of the combined statement of revenues and
certain operating expenses of the Willow Oaks Properties. We also consent to the
reference to our firm under the caption "Experts".
PricewaterhouseCoopers LLP
Dallas, Texas
October 8, 1998
