<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
3890 W. NORTHWEST HIGHWAY, SUITE 400
DALLAS, TEXAS 75220
(214) 654-0886
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
J. KEVAN DILBECK
PRENTISS PROPERTIES TRUST
3890 W. NORTHWEST HIGHWAY, SUITE 400
DALLAS, TEXAS 75220
(214) 654-0886
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copy to:
RANDALL S. PARKS
HUNTON & WILLIAMS
RIVERFRONT PLAZA, EAST TOWER
951 EAST BYRD STREET
RICHMOND, VIRGINIA 23219-4074
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement in light of market
conditions and other factors.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: [_]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434 under
the Securities Act, please check the following box: [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OFFERING PRICE PER PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of Beneficial Interest,
$.01 par value, per share 6,025,938 $25.34 $152,697,268.90 $45,045.70
- -------------------------------------------------------------------------------------------------------------------------------
Preferred Share Purchase Rights (2) (2) (2) (2) (2)
===============================================================================================================================
</TABLE>
(1) Calculated pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, based upon the average of the high and low sales prices of the
Common Shares on the New York Stock Exchange on March 27, 1998.
(2) The Rights to Purchase Junior Participating Cumulative Preferred Shares of
Beneficial Interest, Series B, par value $.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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+ REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH +
+ THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD +
+ NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION +
+ STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER +
+ TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE +
+ OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+ WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE +
+ SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 2, 1998
PROSPECTUS
6,025,938 SHARES
PRENTISS PROPERTIES TRUST
COMMON SHARES OF BENEFICIAL INTEREST
------------
This Prospectus relates to the offer and sale from time to time by certain
selling shareholders named herein (the "Selling Shareholders") of up to
6,025,938 Common Shares of Beneficial Interest, par value $.01 per share (the
"Common Shares"), of Prentiss Properties Trust (together with its subsidiaries,
the "Company") owned by the Selling Shareholders. This registration of the
Common Shares does not necessarily mean that any of the Common Shares will be
offered or sold by the Selling Shareholders.
The Common Shares are traded on the New York Stock Exchange ("NYSE") under
the symbol "PP." The Company's Declaration of Trust generally limits the number
of Common Shares owned by any single person or affiliated group to 8.5% of the
outstanding Common Shares and restricts the transferability of the Common Shares
if the purported transfer would prevent the Company from qualifying as a REIT.
See "Restrictions on Ownership and Transfer."
The Selling Shareholders from time to time may offer and sell the Common
Shares (the "Offerings") directly or through underwriters, agents or broker-
dealers on terms to be determined at the time of sale. To the extent required,
the names of any underwriters, agents or broker-dealers and applicable
commissions or discounts and any other required information with respect to any
particular offer will be set forth in an accompanying Prospectus Supplement.
See "Plan of Distribution." Each of the Selling Shareholders reserves the sole
right to accept or reject, in whole or in part, any proposed purchase of the
Common Shares to be made directly or through agents.
The Company will not receive any cash proceeds from the sale of any Common
Shares by the Selling Shareholders, but has agreed to bear certain expenses of
registration of the Common Shares under federal and state securities laws.
The Selling Shareholders and any underwriters, dealers or agents that
participate in the distribution of Common Shares may be deemed to be
"underwriters" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and any commissions received by them and any profit on the
resale of the Common Shares may be deemed to be underwriting commissions or
discounts under the Securities Act.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS............................................. 2
THE COMPANY............................................................ 3
DESCRIPTION OF THE COMMON SHARES....................................... 4
RESTRICTIONS ON OWNERSHIP AND TRANSFER................................. 6
FEDERAL INCOME TAX CONSIDERATIONS...................................... 8
SELLING SHAREHOLDERS................................................... 23
PLAN OF DISTRIBUTION................................................... 26
LEGAL OPINIONS......................................................... 27
EXPERTS................................................................ 27
AVAILABLE INFORMATION.................................................. 27
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................ 27
FORWARD-LOOKING STATEMENTS
This Prospectus, any Prospectus Supplement and the documents incorporated
by reference herein may contain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), including, without limitation,
statements containing the words "believes," "anticipates," "expects" and words
of similar import. Such forward-looking statements may relate to future events,
including the future financial performance of the Company, and involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company or industry to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Prospective investors should
specifically consider the various factors identified in this Prospectus, any
Prospectus Supplement, and the documents incorporated by reference herein, which
could cause actual results to differ, including particularly those discussed in
the section entitled "Risk Factors," under Item 1 in the Company's Annual Report
on Form 10-K incorporated herein by reference. The Company disclaims any
obligation to update any such factors or to publicly announce the result of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
2
<PAGE>
Unless the context otherwise requires, all references in this Prospectus to
the (i) "Company" shall mean Prentiss Properties Trust and its subsidiaries on a
combined basis, including (a) Prentiss Properties I, Inc. (the "General
Partner"), (b) Prentiss Properties Acquisition Partners, L.P. (the "Operating
Partnership") and its subsidiaries, (c) Prentiss Properties Limited, Inc.
("PPL") (the "Manager"), and (d) entities through which the Operating
Partnership owns interests in certain of the Properties; and (ii) "Common
Shares" shall mean the Company's common shares of beneficial interest, par value
$.01 per share.
THE COMPANY
The Company is a self-administered and self-managed REIT that acquires,
owns, manages, leases, develops and builds office and industrial properties
throughout the United States. The Company operates principally through the
Operating Partnership and its subsidiaries and the Manager. As of March 1,
1998, the Company owned interests in a diversified portfolio of 229 primarily
suburban Class A office and suburban industrial properties containing
approximately 19.9 million net rentable square feet. The properties are located
in 18 major U.S. markets and consist of 98 office buildings (the "Office
Properties") containing approximately 10.4 million net rentable square feet and
131 industrial buildings (the "Industrial Properties" and together with the
Office Properties, the "Properties") containing approximately 9.4 million net
rentable square feet. As of March 1, 1998, the Office Properties were
approximately 96% leased to approximately 850 tenants and the Industrial
Properties were approximately 94% leased to approximately 400 tenants. The
Company manages approximately 48.7 million net rentable square feet in 486
office and industrial properties in 23 U.S. markets that are owned by the
Company and by third parties and that are leased to approximately 3,000 tenants.
The Company also has six office properties and four industrial properties under
development, which together will contain approximately 1.3 million net rentable
square feet.
The Company is a full service real estate company with regional management
offices in Los Angeles, Dallas, Chicago, Washington, D.C., Atlanta and
Philadelphia. The Company has approximately 800 employees and benefits from its
in-house expertise in areas such as acquisitions, development, facilities
management, property management and leasing.
The Company is a Maryland real estate investment trust. Its executive
offices are located at 3890 W. Northwest Highway, Suite 400, Dallas, Texas
75220, and its telephone number is (214) 654-0886.
3
<PAGE>
DESCRIPTION OF THE COMMON SHARES
GENERAL
The Declaration of Trust of the Company provides that the Company may issue
up to 100,000,000 Common Shares and 20,000,000 Preferred Shares, including
3,773,585 Series A Preferred Shares and 1,000,000 Junior Participating
Cumulative Preferred Shares of Beneficial Interest, Series B (the "Series B
Preferred Shares"). At March 1, 1998, there were 39,501,270 Common Shares
issued and outstanding. In addition, Security Capital Preferred Growth,
Incorporated ("SCPG") owns 2,830,189 Series A Preferred Shares and has the right
to purchase an additional 943,398 Series A Preferred Shares prior to March 31,
1998, all of which are or would be convertible into an equal number of Common
Shares (subject to adjustment). There are no Series B Preferred Shares
outstanding.
The following information with respect to the shares of beneficial interest
of the Company is subject to the detailed provisions of the Company's
Declaration of Trust, as amended, and the Amended and Restated Bylaws as
currently in effect. These statements do not purport to be complete, or to give
full effect to the provisions of statutory or common law, and are subject to,
and are qualified in their entirety by reference to, the terms of such
Declaration of Trust and Bylaws.
As a Maryland REIT, the Company is subject to 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 various provisions of the Maryland
General Corporation Law (the "MGCL"). Both the Maryland REIT Law and the
Company's Declaration of Trust provide that no shareholder of the Company will
be personally liable for any obligation of the Company solely as a result of his
status as a shareholder of the Company. The Company's Bylaws further provide
that the Company shall indemnify each shareholder against any claim or liability
to which the shareholder may become subject by reason of his being or having
been a shareholder or former shareholder and that the Company shall pay or
reimburse each shareholder or former shareholder for all legal and other
expenses reasonably incurred by him in connection with any such claim or
liability. In addition, it is the Company's policy to include a clause in its
contracts which provides that shareholders assume no personal liability for
obligations entered into on behalf of the Company. However, with respect to tort
claims, contractual claims where shareholder liability is not so negated, claims
for taxes and certain statutory liability, the shareholders may, in some
jurisdictions, be personally liable to the extent that such claims are not
satisfied by the Company. Inasmuch as the Company carries public liability
insurance which it considers adequate, any risk of personal liability to
shareholders is limited to situations in which the Company's assets plus its
insurance coverage would be insufficient to satisfy the claims against the
Company and its shareholders.
COMMON SHARES
All Common Shares offered hereby are duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or series
of shares of beneficial interest and to the provisions of the Company's
Declaration of Trust regarding Shares-in-Trust (as defined below), holders of
Common Shares are entitled to receive dividends if, as and when authorized and
declared by the Board of Trustees of the Company out of assets legally available
therefor and to share ratably in the assets of the Company legally available for
distribution to its shareholders in the event of its liquidation, dissolution or
winding-up after payment of, or adequate provision for, all known debts and
liabilities of the Company. The Company intends to pay quarterly dividends to
its shareholders.
4
<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 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
directors. Subject to any preferential rights of any outstanding series of
Preferred Shares, the holders of Common Shares are entitled to such
distributions as may be declared from time to time by the Board of Trustees from
funds available therefore, and upon liquidation are entitled to receive pro rata
all assets of the Company available for distribution to such holders. All shares
of beneficial interest issued will be fully paid and nonassessable, and the
holders thereof will not have preemptive rights.
Pursuant to the Maryland REIT Law, a REIT generally cannot amend its
declaration of trust or merge, unless approved by the affirmative vote of
shareholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage (but not less than a majority of all the votes
entitled to be cast on the matter) is set forth in the REIT's declaration of
trust. The Company's Declaration of Trust provides for approval by a majority of
all the votes entitled to be cast on the matter in all situations permitting or
requiring action to be taken or authorized by a greater number of votes except
with respect to: (a) the removal of trustees (which requires the affirmative
vote of the holders of two-thirds of the outstanding voting shares of the
Company); (b) the amendment of the Declaration of Trust by shareholders under
certain circumstances specified in the Declaration of Trust which require the
affirmative vote of two-thirds of all the votes entitled to be cast on the
matter; and (c) the termination of the Company (which requires the affirmative
vote of two-thirds of all the votes entitled to be cast on the matter). A
declaration of trust may permit the trustees by a two-thirds vote to amend the
declaration of trust from time to time to qualify as a REIT under the Code or
the Maryland REIT Law without the affirmative vote or written consent of the
shareholders. The Company's Declaration of Trust permits such action by the
Board of Trustees.
The Transfer Agent for the Common Shares is First Chicago Trust Company of
New York. The Common Shares are traded on the NYSE under the symbol "PP."
PREFERRED SHARE PURCHASE RIGHTS
On February 17, 1998, pursuant to the Company's Rights Plan, the Company
distributed as a dividend one Right (a "Right") to purchase a Series A Preferred
Share (as defined herein) for each outstanding share of Common Stock. Each
Right entitles the holder to buy one one-thousandth of a share (a "Unit") of the
Company's Series B Preferred Shares at an exercise price of $85, subject to
adjustment. Each Unit of a Series B Preferred Share is structured to be the
equivalent of one Common Share.
The Rights will become exercisable only if a person or group acquires,
obtains the right to acquire or announces a tender offer to acquire 10% (or, in
the case of SCPG and its affiliates, 11%) or more of the outstanding Common
Shares. When exercisable, the Rights entitle the holder, upon payment of the
exercise price, to acquire Series B Preferred Shares or, at the option of the
Company, Common Shares (or, in certain circumstances, cash, property or other
securities), having a value equal to twice the Right's exercise price. If the
Company is acquired in a merger or other business combination or if 50% or more
of the Company's assets or earning power is transferred, each Right will entitle
the holder, other than the acquiring person, to purchase securities of the
surviving company having a market value equal to twice the exercise price of the
Right.
Until such time as a person or group acquires or announces a tender offer
to acquire 10% or more of the Common Shares, (i) the Rights will be evidenced by
the Common Share certificates and will be transferred with and only with such
Common Share certificates, and (ii) the surrender for transfer of any
certificate for Common Shares will also constitute the transfer of the Rights
associated with the Common Shares represented by such certificate. The Rights
will expire on February 17, 2008, and may be redeemed by the Company at a price
of $.001 per right at any time prior to the tenth day after an announcement that
a 10% position has been acquired.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that acquires 10% or more of the
outstanding Common Shares of the Company if certain events thereafter
5
<PAGE>
occur without the Rights having been redeemed. However, because the Rights are
redeemable by the Board of Trustees in certain circumstances, the Rights should
not interfere with any merger or other business combination approved by the
Board.
PREFERRED SHARES
The Company's Declaration of Trust provides that the Company may issue up
to 20,000,000 Preferred Shares, from time to time, in one or more series, as
authorized by the Board of Trustees. Prior to issuance of shares of each
series, the Board is required by the Maryland REIT Law and the Company's
Declaration of Trust to set for each such series, subject to the provisions of
the Company's Declaration of Trust regarding Shares-in-Trust, the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each series. As of March 15, 1998, the Board of Trustees had
authorized 3,773,585 Series A Preferred Shares, 2,830,189 of which were
outstanding, and 1,000,000 Series B Preferred Shares, none of which were
outstanding.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of beneficial
interest. Specifically, no more than 50% in value of the Company's outstanding
shares of beneficial interest may be owned, directly or indirectly, by five or
fewer individuals (as defined in the Code to include certain entities) during
the last half of a taxable year (other than its 1996 taxable year), and the
Company must be beneficially owned by 100 or more persons during at least 335
days of a taxable year of 12 months or during a proportionate part of a shorter
taxable year (other than its 1996 taxable year). See "Federal Income Tax
Considerations--Requirements for Qualification."
Because the Board of Trustees believes it is essential for the Company to
continue to qualify as a REIT, the Declaration of Trust, subject to certain
exceptions described below, provides that no person may own, or be deemed to own
by virtue of the attribution provisions of the Code, more than 8.5% of the
number of outstanding Common Shares (other than Michael V. Prentiss, who
currently may own up to 15% of the number of outstanding Common Shares and SCPG,
which may own up to 11% of the number of outstanding Common Shares) or more than
9.8% of the number of outstanding Preferred Shares of any series (other than
SCPG, which may own all of the Series A Preferred Shares) (the "Ownership
Limitation"). The Board of Trustees may, but is not required to, decrease the
ownership limit applicable to Michael V. Prentiss' ownership of Common Shares to
a minimum of 9.8% upon (i) an increase in the number of outstanding Common
Shares or (ii) a reduction of the number of Common Shares owned, directly or
indirectly, by Michael V. Prentiss. Upon any such adjustment, the Ownership
Limitation applicable to other shareholders with respect to the Common Shares
will be increased proportionately to a maximum of 9.8% of the number of
outstanding Common Shares. Any transfer of Common or Preferred Shares that
would (i) result in any person owning, directly or indirectly, Common or
Preferred Shares in excess of the Ownership Limitation, (ii) result in the
Company's outstanding shares being owned by fewer than 100 persons (determined
without reference to any rules of attribution), (iii) result in the Company
being "closely held" within the meaning of Section 856(h) of the Code, or (iv)
cause the Company to own, directly or constructively, 10% or more of the
ownership interests in a tenant of the Company's or the Operating Partnership's
real property, within the meaning of Section 856(d)(2)(B) of the Code, shall be
null and void, and the intended transferee will acquire no rights in such Common
or Preferred Shares.
Subject to certain exceptions described below, if any purported transfer of
Common or Preferred Shares would (i) result in any person owning, directly or
indirectly, Common or Preferred Shares in excess of the Ownership Limitation,
(ii) result in the Company's outstanding shares being owned by fewer than 100
persons (determined without reference to any rules of attribution), (iii) result
in the Company being "closely held" within the meaning of Section 856(h) of the
Code, or (iv) cause the Company to own, directly or constructively, 10% or more
of the ownership interests in a tenant of the Company's or the Operating
Partnership's real property, within the meaning of Section 856(d)(2)(B) of the
Code, the Common or Preferred Shares will be designated as "Shares-in-Trust" and
transferred automatically to a trust (the "Share Trust") effective on the day
before the purported transfer of such
6
<PAGE>
Common or Preferred Shares. The record holder of the Common or Preferred Shares
that are designated as Shares-in-Trust (the "Prohibited Owner") will be required
to submit such number of Common or Preferred Shares to the Company for
registration in the name of the Share Trust. The Share Trustee will be
designated by the Company, but will not be affiliated with the Company. The
beneficiary of the Share Trust (the "Beneficiary") will be one or more
charitable organizations that are named by the Company.
Shares-in-Trust will remain issued and outstanding Common or Preferred
Shares and will be entitled to the same rights and privileges as all other
shares of the same class or series. The Share Trust will receive all dividends
and distributions on the Shares-in-Trust and will hold such dividends and
distributions in trust for the benefit of the Beneficiary. The Share Trustee
will vote all Shares-in-Trust. The Share Trustee will designate a permitted
transferee of the Shares-in-Trust, provided that the permitted transferee (i)
purchases such Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in a transfer to another
Share Trust and resulting in the redesignation of such Common or Preferred
Shares as Shares-in-Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Share Trust the amount of any dividends or distributions received
by the Prohibited Owner (i) that are attributable to any Shares-in-Trust and
(ii) the record date for which was on or after the date that such shares became
Shares-in-Trust. The Prohibited Owner generally will receive from the Share
Trustee the lesser of (i) the price per share such Prohibited Owner paid for the
Common or Preferred Shares that were designated as Shares-in-Trust (or, in the
case of a gift or devise, the Market Price (as defined below) per share on the
date of such transfer) and (ii) the price per share received by the Share
Trustee from the sale of such Shares-in-Trust. Any amounts received by the
Share Trustee in excess of the amounts to be paid to the Prohibited Owner will
be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. The Company will have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
purported transfer which resulted in such Shares-in-Trust and (ii) the date the
Company determines in good faith that a transfer resulting in such Shares-in-
Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price (as
defined below) for the five consecutive Trading Days (as defined below) ending
on such date. The "Closing Price" on any date shall mean the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the NYSE or, if the Common or Preferred Shares
are not listed or admitted to trading on the NYSE, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common or Preferred
Shares are listed or admitted to trading or, if the Common or Preferred Shares
are not listed or admitted to trading on any national securities exchange, the
last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported on The Nasdaq National
Market or, if such system is no longer in use, the principal automated
quotations system that may then be in use or, if the Common or Preferred Shares
are not quoted by any such organization, the average of the closing bid and
asked prices as furnished by a professional market maker making a market in the
Common or Preferred Shares selected by the Board of Trustees. "Trading Day"
shall mean a day on which the principal national securities exchange on which
the Common or Preferred Shares are listed or admitted to trading is open for the
transaction of business or, if the Common or Preferred Shares are not listed or
admitted to trading on any national securities exchange, shall mean any day
other than a Saturday, a Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or executive order to
close.
Any person who acquires or attempts to acquire Common or Preferred Shares
in violation of the foregoing restrictions, or any person who owned Common or
Preferred Shares that were transferred to a Share Trust, is required (i) to give
immediately written notice to the Company of such event and (ii) to provide to
the Company such other information as the Company may request in order to
determine the effect, if any, of such transfer on the Company's status as a
REIT.
7
<PAGE>
The Declaration of Trust requires all persons who own, directly or
indirectly, more than 5% (or such lower percentages as required pursuant to
regulations under the Code) of the outstanding Common and Preferred Shares,
within 30 days after January 1 of each year, to provide to the Company a written
statement or affidavit stating the name and address of such direct or indirect
owner, the number of Common and Preferred Shares owned directly or indirectly,
and a description of how such shares are held. In addition, each direct or
indirect shareholder shall provide to the Company such additional information as
the Company may request in order to determine the effect, if any, of such
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
Common or Preferred Shares by an underwriter that participates in a public
offering of such shares. In addition, the Board of Trustees, upon receipt of a
ruling from the Service or an opinion of counsel and upon such other conditions
as the Board of Trustees may direct, may exempt a person from the Ownership
Limitation under certain circumstances. However, the Board may not grant an
exemption from the Ownership Limitation to any proposed transferee whose
ownership, direct or indirect, of shares of beneficial interest of the Company
in excess of the Ownership Limitation would result in the termination of the
Company's status as a REIT. The foregoing restrictions will continue to apply
until (i) the Board of Trustees determines that it is no longer in the best
interests of the Company to attempt to qualify, or to continue to qualify, as a
REIT and (ii) there is an affirmative vote of a majority of the votes entitled
to be cast on such matter at a regular or special meeting of the shareholders of
the Company.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for the Common Shares or otherwise be in the best
interest of the shareholders of the Company.
All certificates representing Common Shares or Preferred Shares will bear a
legend referring to the restrictions described above.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of the Common Shares. The
discussion contained herein does not address all aspects of taxation that may be
relevant to particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations (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.
The statements in this discussion are based on current provisions of the
Code, existing, temporary, and currently proposed Treasury Regulations
promulgated under the Code, the legislative history of the Code, existing
administrative rulings and practices of the Internal Revenue Service (the
"Service"), and judicial decisions. No assurance can be given that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
8
<PAGE>
TAXATION OF THE COMPANY
The Company elected to be taxed as a REIT under Sections 856 through 860 of
the Code, effective for its short taxable year beginning on the day prior to the
closing of its IPO and ending on December 31, 1996. The Company believes that,
commencing with such taxable year, it has been organized and has operated in
such a manner so as to qualify for taxation as a REIT under the Code, and the
Company intends to continue to operate in such a manner, but no assurance can be
given that the Company has or will remain so qualified.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
Qualification and taxation as a REIT depend upon the Company's ability to
meet on a continuing basis, through actual annual operating results,
distribution levels, and share ownership, the various qualification tests
imposed under the Code discussed below. No assurance can be given that the
actual results of the Company's operations for any particular taxable year will
satisfy such requirements. For a discussion of the tax consequences of failure
to qualify as a REIT, see "Failure to Qualify."
As a REIT, the Company generally is not subject to federal corporate income
tax on its net income that is distributed currently to its shareholders. That
treatment substantially eliminates the "double taxation" (i.e., taxation at both
the corporate and shareholder levels) that generally results from an investment
in a corporation. However, the Company will be subject to federal income tax in
the following circumstances. First, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its undistributed
items of tax preference, if any. Third, if the Company has (i) net income from
the sale or other disposition of "foreclosure property" that is held primarily
for sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income. Fourth, if the Company has net income
from prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), and
nonetheless has maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on (i) the gross
income attributable to the greater of the amount by which the Company fails the
75% or 95% gross income test multiplied by (ii) a fraction intended to reflect
the Company's profitability. Sixth, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such
year, and (iii) any undistributed taxable income from prior periods, the Company
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. To the extent that the Company elects to
retain and pay income tax on the net long-term capital gain that it receives in
a taxable year, such retained amounts will be treated as having been distributed
for purposes of the 4% excise tax. Finally, if the Company acquires any asset
from a C corporation (i.e., a corporation generally subject to full corporate-
level tax) in a transaction in which the basis of the asset in the Company's
hands is determined by reference to the basis of the asset (or any other asset)
in the hands of the C corporation and the Company recognizes gain on the
disposition of such asset during the 10-year period beginning on the date on
which such asset was acquired by the Company, then to the extent of such asset's
"built-in-gain" (i.e., the excess of the fair market value of such asset at the
time of acquisition by the Company over the adjusted basis in such asset at such
time), such gain will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). The results described above with respect to the recognition of
"built-in-gain" assume that the Company will make an election pursuant to IRS
Notice 88-19 if it were to make any such acquisition. See "Proposed Tax
Legislation."
9
<PAGE>
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and maintain REIT status; (viii) that uses a calendar year for federal
income tax purposes and complies with the recordkeeping requirements of the Code
and Treasury Regulations promulgated thereunder; and (ix) that meets certain
other tests, described below, regarding the nature of its income and assets.
The Code provides that conditions (i) to (iv), inclusive, must be met during the
entire taxable year and that condition (v) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable year
of less than 12 months. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made by the Company to be taxed as a
REIT. Beginning with its 1998 taxable year, if the Company complies with the
requirements for ascertaining the ownership of its outstanding shares of
beneficial interest and does not know or have reason to know that it has
violated the 5/50 Rule, it will be deemed to satisfy the 5/50 Rule for the
taxable year. The Company has issued sufficient Common Shares with sufficient
diversity of ownership to allow it to satisfy requirements (v) and (vi). In
addition, the Company's Declaration of Trust provides for restrictions regarding
transfer of its shares that are intended to assist the Company in continuing to
satisfy the share ownership requirements described in clauses (v) and (vi)
above. Such transfer restrictions are described in "Restrictions on Ownership
and Transfer."
For purposes of determining stock ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. A trust that is a qualified
trust under Code Section 401(a), however, generally is not considered an
individual and beneficiaries of such trust are treated as holding shares of a
REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.
The Company currently has two wholly-owned subsidiaries, the General
Partner and the general partner of Prentiss Properties Real Estate Fund I, 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. Both of the Company's corporate
subsidiaries are "qualified REIT subsidiaries." Those subsidiaries, therefore,
will not be subject to federal corporate income taxation, although they may be
subject to state and local taxation.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of Section 856 of the Code, including satisfying the
gross income and asset tests described below. Thus, the Company's proportionate
share of the assets, liabilities, and items of income of the Operating
Partnership and the noncorporate subsidiaries of the Operating Partnership (the
"Noncorporate Subsidiaries") will be treated as assets, liabilities, and items
of income of the Company for purposes of applying the requirements described
herein.
10
<PAGE>
INCOME TESTS
In order for the Company to qualify and to maintain its qualification as a
REIT, two requirements relating to the Company's gross income must be satisfied
annually. First, at least 75% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must consist of
defined types of income derived directly or indirectly from investments relating
to real property or mortgages on real property (including "rents from real
property" and, in certain circumstances, interest) or temporary investment
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing. The specific application of these tests to
the Company is discussed below.
The rent received by the Company from its tenants ("Rent") will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if several conditions are met. First, the amount of
Rent must not be based, in whole or in part, on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from the term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales. Second, the Rent received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the Company, or a direct or indirect owner of 10% or more
of the Company, directly or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if Rent attributable to personal property,
leased in connection with a lease of a Property, is greater than 15% of the
total Rent received under the lease, then the portion of Rent attributable to
such personal property will not qualify as "rents from real property." Finally,
for the Rent to qualify as "rents from real property," the Company generally
must not operate or manage the Properties or furnish or render services to the
tenants of such Properties, other than through an "independent contractor" who
is adequately compensated and from whom the Company derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent the
services provided by the Company are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant." In addition, the Company may furnish or
render a de minimis amount of "noncustomary services" to the tenants of a
Property other than through an independent contractor as long as the amount that
the Company receives that is attributable to such services does not exceed 1% of
its total receipts from the Property. For that purpose, the amount attributable
to the Company's noncustomary services will be at least equal to 150% of the
Company's cost of providing the services.
The Company does not charge Rent for any portion of any Property that is
based, in whole or in part, on the income or profits of any person (except by
reason of being based on a fixed percentage or percentages of receipts or sales,
as described above). Furthermore, the Company expects that, with respect to
other properties that it may acquire in the future, it will not charge Rent for
any portion of any property that is based, in whole or in part, on the income or
profits of any person to the extent that the receipt of such Rent would
jeopardize the Company's status as a REIT. In addition, the Company currently
does not receive any Rent from a Related Party Tenant, and the Company expects
that, to the extent that it receives Rent from a Related Party Tenant in the
future, such Rent will not cause the Company to fail to satisfy either the 75%
or 95% gross income test. The Company also currently does not receive Rent
attributable to personal property that is greater than 15% of the Rent received
under the applicable Lease. The Company expects that, in the future, it will
not allow the Rent attributable to personal property leased in connection with
any lease of real property to exceed 15% of the total Rent received under the
lease, if the receipt of such Rent would cause the Company to fail to satisfy
either the 75% or 95% gross income test.
Through the Operating Partnership, the Noncorporate Subsidiaries, and the
Manager, none of which constitutes a qualifying independent contractor, the
Company provides and will provide in the future certain services to its tenants.
The Company believes that all such services are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise "rendered to the occupant," so that the provision of such services
does not jeopardize the qualification of the Rent as "rents from real property."
In the case of any services that are not "usual and customary" under the
foregoing rules, the Company employs and will continue to employ qualifying
independent contractors to provide such services. Furthermore, the Company
expects that it will not provide noncustomary services with respect to other
properties that it acquires in the future (other than through a qualifying
independent contractor) to the extent that the provision of such services would
cause the Company to fail to satisfy either the 75% or 95% gross income test.
11
<PAGE>
If any portion of the Rent does not qualify as "rents from real property"
because such Rent is attributable to personal property and exceeds 15% of the
total Rent received under the applicable lease, the portion of the Rent that is
attributable to the personal property will not be qualifying income for purposes
of either the 75% or 95% gross income test. Thus, if the Rent attributable to
such personal property, plus any other income received by the Company during a
taxable year that is not qualifying income for purposes of the 95% gross income
test, exceeds 5% of the Company's gross income during such year, the Company
likely would lose its REIT status. If, however, any portion of the Rent
received under a lease does not qualify as "rents from real property" because
either (i) the Rent is considered based on the income or profits of any person
or (ii) the tenant is a Related Party Tenant, none of the Rent received by the
Company under such lease would qualify as "rents from real property." In that
case, if the Rent received by the Company under such lease, plus any other
income received by the Company during the taxable year that is not qualifying
income for purposes of the 95% gross income test, exceeds 5% of the Company's
gross income for such year, the Company likely would lose its REIT status.
Finally, if any portion of the Rent does not qualify as "rents from real
property" because the Company furnishes noncustomary services to the tenants of
a Property other than through a qualifying independent contractor, none of the
Rent received by the Company with respect to the related Property would qualify
as "rents from real property." In that case, if the Rent received by the
Company with respect to the related Property, plus any other income received by
the Company during the taxable year that is not qualifying income for purposes
of the 95% gross income test, exceeds 5% of the Company's gross income for such
year, the Company would lose its REIT status.
The Company, through the Operating Partnership, may receive other types of
income that will not qualify for purposes of the 75% or 95% gross income test.
In particular, dividends paid with respect to the stock of the Manager owned by
the Operating Partnership will be qualifying income for purposes of the 95%
gross income test, but not the 75% gross income test. In addition, the
Operating Partnership has received and in the future will receive indirectly
certain fees for the performance of certain services by a Noncorporate
Subsidiary with respect to Properties that are owned, directly or indirectly, by
the Operating Partnership. Although the law is not entirely clear, to the
extent that the Operating Partnership owns, directly or indirectly, both an
interest in such Properties and an interest in the Noncorporate Subsidiary
providing the services, such fees should be disregarded for purposes of the 75%
and 95% gross income tests. However, the remainder of such fees received by the
Operating Partnership (i.e., any portion of the fees that is attributable to a
third party's ownership interest in the Properties) will be nonqualifying income
for purposes of the 75% and 95% gross income tests. In addition, any fees
received, directly or indirectly, by the Operating Partnership in exchange for
providing services with respect to properties owned by unrelated third parties
will not be qualifying income for purposes of the 75% and 95% gross income
tests. Furthermore, to the extent that the Company receives interest that is
accrued on the late payment of the Rent, such amounts will not qualify as "rents
from real property" and, thus, will not be qualifying income for purposes of the
75% gross income test, but instead will be treated as interest that qualifies
for the 95% gross income test. The Company believes that the aggregate amount
of any such nonqualifying income in any taxable year has not caused and will not
cause the Company to fail to satisfy either the 75% or 95% gross income test.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property (other than income that would be qualifying
income for purposes of the 75% gross income test), less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property (including interests in real property) and any personal
property incident to such real property (i) that is acquired by a REIT as the
result of such REIT having bid on such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and (iii) for which such REIT makes a
proper election to treat such property as foreclosure property. The Company
does not anticipate that it will receive any income from foreclosure property
that is not qualifying income for purposes of the 75% gross income test, but, if
the Company does receive any such income, the Company will make an election to
treat the related property as foreclosure property.
If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes of
the 75% or 95%
12
<PAGE>
gross income test. The Company anticipates that any income it receives with
respect to Ineligible Property will be qualifying income for purposes of the 75%
and 95% gross income tests.
The net income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. The Company
believes that no asset owned by the Company or the Operating Partnership will be
held for sale to customers and that a sale of any such asset will not be in the
ordinary course of the Company's or the Operating Partnership's business.
Whether an asset is held "primarily for sale to customers in the ordinary course
of a trade or business" depends, however, on the facts and circumstances in
effect from time to time, including those related to a particular asset.
Nevertheless, the Company will attempt to comply with the terms of safe-harbor
provisions in the Code prescribing when asset sales will not be characterized as
prohibited transactions. Complete assurance cannot be given, however, that the
Company can comply with the safe-harbor provisions of the Code or avoid owning
property that may be characterized as property held "primarily for sale to
customers in the ordinary course of a trade or business."
It is possible that, from time to time, the Company or the Operating
Partnership will enter into hedging transactions with respect to one or more of
its assets or liabilities. Any such hedging transactions could take a variety of
forms, including interest rate swap contracts, interest rate cap or floor
contracts, futures or forward contracts, and options. To the extent that the
Company or the Operating Partnership enters into an interest rate swap, cap
agreement, option, futures contract, forward rate agreement, or similar
financial instrument to reduce the interest rate risks with respect to
indebtedness incurred or to be incurred to acquire or carry real estate assets,
any periodic income or gain from the disposition of such contract should be
qualifying income for purposes of the 95% gross income test, but not the 75%
gross income test. To the extent that the Company or the Operating Partnership
hedges with other types of financial instruments or in other situations, it may
not be entirely clear how the income from those transactions will be treated for
purposes of the various income tests that apply to REITs under the Code. The
Company intends to structure any hedging transactions in a manner that does not
jeopardize its status as a REIT.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances the
Company would be entitled to the benefit of those relief provisions. As
discussed above in "Federal Income Tax Considerations--Taxation of the Company,"
even if those relief provisions apply, a 100% tax would be imposed on (i) the
gross income attributable to the greater of the amount by which the Company
fails the 75% or 95% gross income test multiplied by (ii) a fraction intended to
reflect the Company's profitability.
ASSET TESTS
The Company, at the close of each quarter of each taxable year, also must
satisfy two tests relating to the nature of its assets. First, at least 75% of
the value of the Company's total assets must be represented by cash or cash
items (including certain receivables), government securities, "real estate
assets," or, in cases where the Company raises new capital through stock or
long-term (at least five-year) debt offerings, temporary investments in stock or
debt instruments during the one-year period following the Company's receipt of
such capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the principal balance of a
mortgage does not exceed the value of the associated real property, and shares
of other REITs. For purposes of the 75% asset test, the term "interest in real
property" includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold of real
property, and an option to acquire real property (or a leasehold of real
property). Second, of the investments not included in the 75% asset class, the
value of any one issuer's securities owned by the Company may not exceed 5% of
the value of the Company's total assets and the Company may not own more than
10% of any one issuer's outstanding voting securities (except for its interests
in the Operating Partnership, the Noncorporate Subsidiaries, and any qualified
REIT subsidiary). See "--Proposed Tax Legislation."
13
<PAGE>
For purposes of the asset tests, the Company is deemed to own its
proportionate share of the assets of the Operating Partnership and each
Noncorporate Subsidiary, rather than its interests in those entities. The
Company has represented that at least 75% of the value of its total assets has
been and will be represented by real estate assets, cash and cash items
(including receivables), and government securities. The Company, through the
Operating Partnership, owns 100% of the nonvoting stock of each Manager and
holds certain unsecured notes issued by the Managers. The Company does not own,
directly or indirectly, any of the voting stock of the Managers and believes
that the value of its ownership interest in each Manager does not exceed 5% of
the value of its total assets. In addition, the Company has represented that it
has not owned, and will not own (A) securities of any one issuer the value of
which exceeds 5% of the value of the Company's total assets or (B) more than 10%
of any one issuer's outstanding voting securities (except for its interests in
the Operating Partnership, the Noncorporate Subsidiaries, and any qualified REIT
subsidiary). In addition, the Company has represented that it will not acquire
or dispose, or cause the Operating Partnership to acquire or dispose, of assets
in the future in a way that would cause it to violate either asset test.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused by an acquisition of nonqualifying assets. If the
condition described in clause (ii) of the preceding sentence were not satisfied,
the Company still could avoid disqualification by eliminating any discrepancy
within 30 days after the close of the calendar quarter in which it arose.
DISTRIBUTION REQUIREMENTS
The Company, in order to avoid corporate income taxation of the earnings
that it distributes, is required to distribute with respect to each taxable year
dividends (other than capital gain dividends and retained capital gains) to its
shareholders in an aggregate amount at least equal to (i) the sum of (A) 95% of
its "REIT taxable income" (computed without regard to the dividends paid
deduction and its net capital gain) and (B) 95% of the net income (after tax),
if any, from foreclosure property, minus (ii) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before the Company
timely files its federal income tax return for such year and if paid on or
before the first regular dividend payment date after such declaration. To the
extent that the Company does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax thereon at regular ordinary and capital
gains corporate tax rates. Furthermore, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain income for such year,
and (iii) any undistributed taxable income from prior periods, the Company would
be subject to a 4% nondeductible excise tax on the excess of such required
distribution over the amounts actually distributed. The Company has made, and
intends to continue to make, timely distributions sufficient to satisfy the
annual distribution requirement. The Company may elect to retain and pay income
tax on its long-term capital gains. Any such retained amount will be treated as
having been distributed by the Company for purposes of the 4% excise tax
described above.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. Further, it is possible that,
from time to time, the Company may be allocated a share of net capital gain
attributable to the sale of depreciated property that exceeds its allocable
share of cash attributable to that sale. Therefore, the Company may have less
cash than is necessary to meet its annual 95% distribution requirement or to
avoid corporate income tax or the excise tax imposed on certain undistributed
income. In such a situation, the Company may find it necessary to arrange for
short-term (or possibly long-term) borrowings or to raise funds through the
issuance of Preferred Shares or Common Shares.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement, for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being
14
<PAGE>
taxed on amounts distributed as deficiency dividends, it will be required to pay
to the Service interest based upon the amount of any deduction taken for
deficiency dividends.
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, the Company must maintain
certain records and request on an annual basis certain information from its
shareholders designed to disclose the actual ownership of its outstanding
shares. The Company has complied and intends to continue to comply with such
requirements in the future.
PARTNERSHIP ANTI-ABUSE RULE
The U.S. Treasury Department has issued a final regulation (the "Anti-Abuse
Rule") under the partnership provisions of the Code (the "Partnership
Provisions") that authorizes the Service, in certain "abusive" transactions
involving partnerships, to disregard the form of the transaction and recast it
for federal tax purposes as the Service deems appropriate. The Anti-Abuse Rule
applies where a partnership is formed or utilized in connection with a
transaction (or series of related transactions) with a principal purpose of
substantially reducing the present value of the partners' aggregate federal tax
liability in a manner inconsistent with the intent of the Partnership
Provisions. The Anti-Abuse Rule states that the Partnership Provisions are
intended to permit taxpayers to conduct joint business (including investment)
activities through a flexible economic arrangement that accurately reflects the
partners' economic agreement and clearly reflects the partners' income without
incurring any entity-level tax. The purposes for structuring a transaction
involving a partnership are determined based on all of the facts and
circumstances, including a comparison of the purported business purpose for a
transaction and the claimed tax benefits resulting from the transaction. A
reduction in the present value of the partners' aggregate federal tax liability
through the use of a partnership does not, by itself, establish inconsistency
with the intent of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that elects
to be treated as a REIT contributes substantially all of the proceeds from a
public offering to a partnership in exchange for a general partnership interest.
The limited partners of the partnership contribute real property assets to the
partnership, subject to liabilities that exceed their respective aggregate bases
in such property. In addition, some of the limited partners have the right,
beginning two years after the formation of the partnership, to require the
redemption of their limited partnership interests in exchange for cash or REIT
stock (at the REIT's option) equal to the fair market value of their respective
interests in the partnership at the time of the redemption. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the Service. The
Company believes that the Anti-Abuse Rule will not have any adverse impact on
its ability to qualify as a REIT. However, the Exchange Rights do not conform in
all respects to the redemption rights described in the foregoing example.
Moreover, the Anti-Abuse Rule is extraordinarily broad in scope and is applied
based on an analysis of all of the facts and circumstances. As a result, there
can be no assurance that the Service will not attempt to apply the Anti-Abuse
Rule to the Company. If the conditions of the Anti-Abuse Rule are met, the
Service is authorized to take appropriate enforcement action, including
disregarding the Operating Partnership or a Noncorporate Subsidiary for federal
tax purposes or treating one or more of its partners as nonpartners. Any such
action potentially could jeopardize the Company's status as a REIT.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's shareholders in any year
in which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event, to the extent of the Company's
current and accumulated earnings and profits, all distributions to shareholders
will be taxable as ordinary income and, subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a REIT for the four taxable
years following the year during which the Company ceased to qualify as a REIT.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
15
<PAGE>
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 Common Shares that for U.S. federal income tax purposes is (i) a citizen or
resident of the U.S., (ii) a corporation, partnership, or other entity created
or organized in or under the laws of the U.S. or of any political subdivision
thereof, (iii) an estate whose income from sources without the United States is
includible in gross income for U.S. federal income tax purposes regardless of
its connection with the conduct of a trade or business within the United States,
or (iv) any trust with respect to which (A) a U.S. court is able to exercise
primary supervision over the administration of such trust and (B) one or more
U.S. fiduciaries have the authority to control all substantial decisions of the
trust. Distributions that are designated as capital gain dividends will be
taxed as gains from the sale or exchange of a capital asset held for more than
one year (to the extent they do not exceed the Company's actual net capital gain
for the taxable year) without regard to the period for which the shareholder has
held his Common Shares. However, corporate shareholders may be required to
treat up to 20% of certain capital gain dividends as ordinary income. The
Company may elect to retain and pay income tax on its net long-term capital
gains. In that case, the Company's shareholders would include in income their
proportionate share of the Company's undistributed long-term capital gains. In
addition, the shareholders would be deemed to have paid their proportionate
share of the tax paid by the Company, which would be credited or refunded to the
shareholders. Each shareholder's basis in his shares would be increased by the
amount of the undistributed long-term capital gain included in the shareholder's
income, less the shareholder's share of the tax paid by the Company.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Common Shares, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions in excess
of current and accumulated earnings and profits exceed the adjusted basis of a
shareholder's Common Shares, such distributions will be included in income as
gains from the sale or exchange of a capital asset, assuming the Common Shares
are capital assets in the hands of the shareholder. In addition, any
distribution declared by the Company in October, November, or December of any
year and payable to a shareholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the distribution is
actually paid by the Company during January of the following calendar year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Shares will not be treated as passive
activity income and, therefore, shareholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a shareholder is a limited partner) against such income.
In addition, taxable distributions from the Company generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of Common Shares (or distributions treated as such),
however, will be treated as investment income only if the shareholder so elects,
in which case such capital gains will be taxed at ordinary income rates. The
Company has notified and will continue to notify shareholders after the close of
the Company's taxable year as to the portions of the distributions attributable
to that year that constitute ordinary income, return of capital, and capital
gain.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, any gain or loss realized upon a taxable disposition of the
Common Shares by a shareholder who is not a dealer in securities will be treated
as capital gain or loss if the Common Shares have been held as a capital asset.
Such gain or loss will generally constitute either short-term, mid-term or long-
term capital gain or loss depending on the length of time the shareholder holds
the securities. However, any loss upon a sale or exchange of Common Shares by a
shareholder who has held such shares for six months or less (after applying
certain holding period rules), will be treated as a long-term capital loss to
the extent of distributions from the Company required to
16
<PAGE>
be treated by such shareholder as long-term capital gain. All or a portion of
any loss realized upon a taxable disposition of the Common Shares may be
disallowed if other Common Shares are purchased within 30 days before or after
the disposition.
CAPITAL GAINS AND LOSSES
The highest marginal individual income tax rate is 39.6%. The maximum tax
rate on net capital gains applicable to noncorporate taxpayers is 28% for sales
and exchanges of assets held for more than one year but not more than 18 months,
and 20% for sales and exchanges of assets held for more than 18 months. The
maximum tax rate on long-term capital gain from the sale or exchange of "Section
1250 property" (i.e., depreciable real property) held for more than 18 months is
25% to the extent that such gain would have been treated as ordinary income if
the property were "Section 1245 property." With respect to distributions
designated by the Company as capital gain dividends and any retained capital
gains that the Company is deemed to distribute, the Company may designate
(subject to certain limits) whether such a distribution is taxable to its
noncorporate stockholders at a 20%, 25%, or 28% rate. Thus, the tax rate
differential between capital gain and ordinary income for noncorporate taxpayers
may be significant. In addition, the characterization of income as capital or
ordinary may affect the deductibility of capital losses. Capital losses not
offset by capital gains may be deducted against a noncorporate taxpayer's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company reports and will continue to report to its U.S. shareholders
and to the Service the amount of distributions paid during each calendar year,
and the amount of tax withheld, if any. Under the backup withholding rules, a
shareholder may be subject to backup withholding at the rate of 31% with respect
to distributions paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with the applicable
requirements of the backup withholding rules. A 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 Common Shares with debt, a portion
of its income from the Company will constitute UBTI pursuant to the "debt-
financed property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code Section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions from
the Company as UBTI. In addition, in certain circumstances, a pension trust
that owns more than 10% of the Company's shares is required to treat a
percentage of the dividends from the Company as UBTI (the "UBTI Percentage").
The UBTI Percentage is the gross income derived by the Company from an unrelated
trade or business (determined as if the Company were a
17
<PAGE>
pension trust) divided by the gross income of the Company for the year in which
the dividends are paid. The UBTI rule applies to a pension trust holding more
than 10% of the Company's stock only if (i) the UBTI Percentage is at least 5%,
(ii) the Company qualifies as a REIT by reason of the modification of the 5/50
Rule that allows the beneficiaries of the pension trust to be treated as holding
shares of the Company in proportion to their actuarial interests in the pension
trust, and (iii) the Company is a "pension-held" REIT (i.e., either (A) one
pension trust owns more than 25% of the value of the Company's shares or (B) a
group of pension trusts individually holding more than 10% of the value of the
Company's shares collectively owns more than 50% of the value of the Company's
shares). Because the Ownership Limitation prohibits any pension trust from
owning more than 8.5% of the Common Shares or more than 9.8% of any class or
series of the Preferred Shares, the Company should not be a "pension-held" REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gains dividends or retained capital
gains will be treated as dividends of ordinary income to the extent that they
are made out of current or accumulated earnings and profits of the Company.
Such distributions ordinarily will be subject to a withholding tax equal to 30%
of the gross amount of the distribution unless an applicable tax treaty reduces
or eliminates that tax. However, if income from the investment in the Common
Shares is treated as effectively connected with the Non-U.S. Shareholder's
conduct of a U.S. trade or business, the Non-U.S. Shareholder generally will be
subject to federal income tax at graduated rates, in the same manner as U.S.
shareholders are taxed with respect to such distributions (and also may be
subject to the 30% branch profits tax in the case of a Non-U.S. Shareholder that
is a non-U.S. corporation). The Company expects to withhold U.S. income tax at
the rate of 30% on the gross amount of any such distributions made to a Non-U.S.
Shareholder unless (i) a lower treaty rate applies and any required form
evidencing eligibility for that reduced rate is filed with the Company or (ii)
the Non-U.S. Shareholder files an IRS Form 4224 with the Company claiming that
the distribution is effectively connected income. The Service 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 Common Shares, such distributions will give rise to tax liability
if the Non-U.S. Shareholder would otherwise be subject to tax on any gain from
the sale or disposition of his Common Shares, as described below. Because it
generally cannot be determined at the time a distribution is made whether or not
such distribution will be in excess of current and accumulated earnings and
profits, the entire amount of any distribution normally will be subject to
withholding at the same rate as a dividend. Amounts so withheld, however, are
refundable to the extent it is determined subsequently that such distribution
was, in fact, in excess of current and accumulated earnings and profits of the
Company.
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
18
<PAGE>
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 Common Shares will be
publicly traded, no assurance can be given that the Company is or will continue
to be a "domestically controlled REIT." In addition, a Non-U.S. Shareholder
that owned, actually or constructively, 5% or less of the Common Shares or
Preferred Shares at all times during a specified testing period will not be
subject to tax under FIRPTA if the Common or Preferred Shares, as applicable,
are "regularly traded" on an established securities market. Furthermore, gain
not subject to FIRPTA will be taxable to a Non-U.S. Shareholder if (i)
investment in the Common Shares is effectively connected with the Non-U.S.
Shareholder's U.S. trade or business, in which case the Non-U.S. Shareholder
will be subject to the same treatment as U.S. shareholders with respect to such
gain, or (ii) the Non-U.S. Shareholder is a nonresident alien individual who was
present in the U.S. for 183 days or more during the taxable year and certain
other conditions apply, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains. If the gain on the sale
of the Common Shares were to be subject to taxation under FIRPTA, the Non-U.S.
Shareholder would be subject to the same treatment as U.S. shareholders with
respect to such gain (subject to applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals, and the
possible application of the 30% branch profits tax in the case of non-U.S.
corporations).
PROPOSED TAX LEGISLATION
On February 2, 1998, President Clinton released his budget proposal for
fiscal year 1999 (the "Proposal"). Two provisions contained in the Proposal
potentially could affect the Company if enacted in final form as presently
proposed. First, the Proposal would prohibit a REIT from owning, directly or
indirectly, more than 10% of the voting power or value of all classes of a C
corporation's stock (other than the stock of a qualified REIT subsidiary).
Currently, a REIT may own no more than 10% of the voting stock of a C
corporation (other than the stock of a qualified REIT subsidiary), but its
ownership of the nonvoting stock of a C corporation is not limited (other than
by the rule that the value of a REIT's combined equity and debt interest in a C
corporation may not exceed 5% of the value of a REIT's total assets). That
provision is proposed to be effective with respect to stock in a C corporation
acquired by a REIT on or after the date of "first committee action" (i.e., first
action by the House Ways and Means Committee with respect to the provision)
("First Committee Action"). A REIT that owns stock in a C corporation in excess
of the new ownership limit prior to First Committee Action would be
"grandfathered," but only to the extent that the corporation does not engage in
a new trade or business or acquire substantial new assets on or after the date
of First Committee Action. The Company, through the Operating Partnership,
currently owns 100% of the nonvoting stock of the Manager. See "Manager." If
enacted as presently written, that provision could prevent the Manager from
expanding its current operations and would significantly limit the Company's
ability to use other taxable subsidiaries to conduct businesses the income from
which would be nonqualifying income if received directly by the Company.
Second, the Proposal would require recognition of any built-in gain
associated with the assets of a "large" C corporation (i.e., a C corporation
whose stock has a fair market value of more than $5 million) upon its conversion
to REIT status or merger into a REIT. That provision is proposed to be
effective for conversions to REIT status effective for taxable years beginning
after January 1, 1999 and mergers of C corporations into REITs that occur after
December 31, 1998. This provision would require immediate recognition of any
"built-in gain" of an acquired C corporation that is determined to be "large"
if, at any time after December 31, 1998, such corporation merges into the
Company.
19
<PAGE>
OTHER TAX CONSEQUENCES
The Company, the General Partner, the Operating Partnership, the Manager, a
Noncorporate Subsidiary, or the Company's shareholders may be subject to state
or local taxation in various state or local jurisdictions, including those in
which it or they own property, transact business, or reside. Such state and
local tax treatment may not conform to the federal income tax consequences
discussed above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN
INVESTMENT IN THE COMPANY.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas, including REITs that
are organized as corporations. The Texas franchise tax imposed on a corporation
doing business in Texas generally is equal to the greater of (i) 0.25% of
"taxable capital" (generally, financial accounting net worth with certain
adjustments) apportioned to Texas; or (ii) 4.5% of "taxable earned surplus"
(generally, federal taxable income with certain adjustments) apportioned to
Texas. A corporation's taxable capital and taxable earned surplus are
apportioned to Texas based upon a fraction, the numerator of which is the
corporation's gross receipts from business transacted in Texas and the
denominator of which is the corporation's gross receipts from all sources.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE NONCORPORATE SUBSIDIARIES
The following discussion summarizes certain federal income tax
considerations applicable to the Company's direct or indirect investment in the
Operating Partnership and the Noncorporate Subsidiaries (each of the Operating
Partnership and the Noncorporate Subsidiaries is referred to herein as a
"Partnership"). The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
CLASSIFICATION AS A PARTNERSHIP
The Company will be entitled to include in its income its distributive
share of each Partnership's income and to deduct its distributive share of each
Partnership's losses only if each Partnership is classified for federal income
tax purposes as a partnership rather than as a corporation or an association
taxable as a corporation. An entity will be classified as a partnership rather
than as a corporation for federal income tax purposes if the entity (i) is
treated as a partnership under Treasury regulations, effective January 1, 1997,
relating to entity classification (the "Check-the-Box Regulations") and (ii) is
not a "publicly traded" partnership.
In general, under the Check-the-Box Regulations, an unincorporated entity
with at least two members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity fails to make
an election, it generally will be treated as a partnership for federal income
tax purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Partnerships, will be respected
for all periods prior to January 1, 1997 if (i) the entity had a reasonable
basis for its claimed classification, (ii) the entity and all members of the
entity recognized the federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and (iii) neither
the entity nor any of its members was notified in writing by a taxing authority
on or before May 8, 1996 that the classification of the entity was under
examination. Each Partnership in existence on January 1, 1997 reasonably
claimed partnership classification under the Treasury Regulations relating to
entity classification in effect prior to January 1, 1997, and such
classification should be respected for federal income tax purposes. In
addition, no Partnership was notified by a taxing authority on or before May 8,
1996 that its classification was under examination. The Partnerships intend to
continue to be classified as partnerships and the Company has represented that
no Partnership will elect to be treated as an association taxable as a
corporation for federal income tax purposes under the Check-the-Box Regulations.
A publicly traded partnership is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market (or the substantial equivalent thereof). A publicly traded partnership
will be treated as a corporation for federal income tax purposes unless at least
90% of such partnership's gross income for a taxable year consists of
"qualifying income" under Section 7704(d) of the Code, which generally includes
any income that is qualifying income for purposes of the 95% gross income test
applicable to REITs (the
20
<PAGE>
"90% Passive-Type Income Exception"). See "--Requirements for Qualification--
Income Tests." The U.S. Treasury Department has issued regulations (the "PTP
Regulations") that provide limited safe harbors from the definition of a
publicly traded partnership. Pursuant to one of those safe harbors (the
"Private Placement Exclusion"), interests in a partnership will not be treated
as readily tradable on a secondary market or the substantial equivalent thereof
if (i) all interests in the partnership were issued in a transaction (or
transactions) that was not required to be registered under the Securities Act,
and (ii) the partnership does not have more than 100 partners at any time during
the partnership's taxable year. In determining the number of partners in a
partnership, a person owning an interest in a flow-through entity (i.e., a
partnership, grantor trust, or S corporation) that owns an interest in the
partnership is treated as a partner in such partnership only if (a)
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest (direct or
indirect) in the partnership and (b) a principal purpose of the use of the flow-
through entity is to permit the partnership to satisfy the 100-partner
limitation. Each Partnership qualifies for the Private Placement Exclusion. If
a Partnership is considered a publicly traded partnership under the PTP
Regulations because it is deemed to have more than 100 partners, such
Partnership should not be treated as a corporation because it should be eligible
for the 90% Passive-Type Income Exception.
If for any reason one of the Partnerships were taxable as a corporation,
rather than as a partnership, for federal income tax purposes, the Company
likely would not be able to qualify as a REIT. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests" and "--
Requirements for Qualification--Asset Tests." In addition, any change in a
Partnership's status for tax purposes might be treated as a taxable event, in
which case the Company might incur a tax liability without any related cash
distribution. See "Federal Income Tax Considerations--Requirements for
Qualification--Distribution Requirements." Further, items of income and
deduction of such Partnership would not pass through to its partners, and its
partners would be treated as shareholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate tax rates on its
net income, and distributions to its partners would constitute dividends that
would not be deductible in computing such Partnership's taxable income.
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
Partners, Not Partnerships, Subject to Tax. A partnership is not a taxable
entity for federal income tax purposes. Rather, the Company will be required to
take into account its allocable share of each Partnership's income, gains,
losses, deductions, and credits for any taxable year of such Partnership ending
within or with the taxable year of the Company, without regard to whether the
Company has received or will receive any distribution from such Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under Section 704(b) of the Code if they do
not comply with the provisions of Section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
Each Partnership's allocations of taxable income and loss are intended to comply
with the requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations With Respect to Contributed Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department has issued
regulations requiring partnerships to use a "reasonable method" for allocating
items affected by Section 704(c) of the Code and outlining several reasonable
allocation methods. The Operating Partnership generally has elected to use the
traditional method for allocating Code Section 704(c) items with respect to the
Properties it acquires in exchange for Units.
21
<PAGE>
Under the Operating Partnership Agreement, depreciation or amortization
deductions of the Operating Partnership generally are allocated among the
partners in accordance with their respective interests in the Operating
Partnership, except to the extent that the Operating Partnership is required
under Code Section 704(c) to use a method for allocating tax depreciation
deductions attributable to the Properties that results in the Company receiving
a disproportionately large share of such deductions. In addition, gain on the
sale of a Property contributed to the Operating Partnership in exchange for
Units will be specially allocated to the contributor to the extent of any
"built-in" gain with respect to such Property for federal income tax purposes.
Depending on the allocation method elected under Code Section 704(c), it is
possible that the Company (i) may be allocated lower amounts of depreciation
deductions for tax purposes with respect to contributed Properties than would be
allocated to the Company if such Properties were to have a tax basis equal to
their fair market value at the time of contribution and (ii) may be allocated
taxable gain in the event of a sale of such contributed Properties in excess of
the economic profit allocated to the Company as a result of such sale. These
allocations may cause the Company to recognize taxable income in excess of cash
proceeds, which might adversely affect the Company's ability to comply with the
REIT distribution requirement, although the Company does not anticipate that
this event will occur. The foregoing principles also will affect the
calculation of the Company's earnings and profits for purposes of determining
which portion of the Company's distributions is taxable as a dividend. The
allocations described in this paragraph may result in a higher portion of the
Company's distributions being taxed as a dividend than would have occurred had
the Company purchased the Properties for cash.
Basis in Operating Partnership Interest. The Company's adjusted tax basis
in its partnership interest in the Operating Partnership generally is equal to
(i) the amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) increased by (A) its allocable share
of the Operating Partnership's income and (B) its allocable share of
indebtedness of the Operating Partnership, and (iii) reduced, but not below
zero, by (A) the Company's allocable share of the Operating Partnership's loss
and (B) the amount of cash distributed to the Company, including constructive
cash distributions resulting from a reduction in the Company's share of
indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnership below zero, the recognition of
such loss will be deferred until such time as the recognition of such loss would
not reduce the Company's adjusted tax basis below zero. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decrease being considered a
constructive cash distribution to the partners), would reduce the Company's
adjusted tax basis below zero, such distributions (including such constructive
distributions) will constitute taxable income to the Company. Such
distributions and constructive distributions normally will be characterized as
capital gain, and, if the Company's partnership interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), the distributions and constructive distributions
will constitute long-term capital gain.
SALE OF THE OPERATING PARTNERSHIP'S OR A NONCORPORATE SUBSIDIARY'S PROPERTY
Generally, any gain realized by a Partnership on the sale of property held
for more than one year but not more than 18 months will be mid-term capital
gain, and any gain realized on the sale of property held for more than 18 months
will be long-term capital gain, except for any portion of such gain that is
treated as depreciation or cost recovery recapture. Any gain recognized by a
Partnership on the disposition of the Properties contributed to the Partnership
in exchange for partnership interests therein will be allocated first to the
contributor under Section 704(c) of the Code to the extent of the contributor's
"built-in gain" on those Properties for federal income tax purposes. The
contributors' "built-in gain" on the Properties sold will equal the excess of
the contributors' proportionate share of the book value of those Properties over
the contributors' tax basis allocable to those Properties at the time of the
sale. Any remaining gain recognized by a Partnership on the disposition of the
contributed Properties, and any gain recognized upon the disposition of the
Properties acquired by a Partnership for cash, will be allocated among the
partners in accordance with their respective percentage interests in the
Partnership. The Bylaws of the Company provide that any decision to sell any
real estate asset in which a trustee, or officer of the Company, or any
Affiliate of the foregoing, has a direct or indirect interest, will be made by a
majority of the Trustees including a majority of the Independent Trustees.
22
<PAGE>
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 "--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 that it owns does not exceed 5% of the total value of its assets.
If the Service were to successfully challenge these determinations, however, the
Company likely would fail to qualify as a REIT. See "--Proposed Tax
Legislation."
The Manager is organized as a corporation and pays federal, state and local
income taxes on its taxable income at normal corporate rates. Any such taxes
reduce amounts available for distribution by the Manager, which in turn reduce
amounts available for distribution to the Company's shareholders.
SELLING SHAREHOLDERS
This Prospectus relates to the offer and sale from time to time of Common
Shares by Ameritech Pension Trust ("Ameritech"), Public Employee Retirement
System of Idaho ("PERSI"), American Airlines Inc. Masterfund Benefit Trust
("American Airlines Trust"), UBS Limited ("UBS Limited"), UBS and the Merged
Entity Owners and Merged Entity Employees (as defined below).
Ameritech, PERSI, and American Airlines Trust (collectively, the
"Continuing Investors") acquired their respective Common Shares (the "Continuing
Investor Shares") from the Company in connection with the Company's initial
public offering on October 22, 1996 (the "IPO"). Pursuant to certain Purchase
Agreements dated October 22, 1996 between the Company and each of the Continuing
Investors, and related Registration Rights Agreements dated October 22, 1996
between the Company and each of the Continuing Investors, the Company agreed to
file with the Securities and Exchange Commission (the "Commission") a
registration statement, of which this Prospectus is a part, with respect to the
resale of the Continuing Investor Shares and to prepare and file such amendments
and supplements to the registration statement as may be necessary to keep the
registration statement effective until the earlier of (i) the date when all the
Continuing Investor Shares covered hereby are sold, or (ii) the date on which
all Continuing Investors may sell their Continuing Investor Shares without
registration under the Securities Act pursuant to Rule 144(k) thereunder.
UBS Limited acquired its 1,100,000 Common Shares (the "UBS Purchase
Shares") pursuant to a purchase agreement among the Company, UBS Limited and UBS
(UBS Limited and UBS collectively, the "UBS Parties") dated February 2, 1998,
(the "UBS Purchase Agreement"). In addition, at the option of the Company, UBS
may acquire from the Company from time to time until February 2, 1999, up to
500,000 Common Shares (the "UBS Settlement Shares") pursuant to a forward stock
contract between the Company and UBS, dated February 2, 1998 (the "UBS Forward
Agreement"). This Prospectus relates in part to the offer and sale from time to
time of both the
23
<PAGE>
UBS Purchase Shares and the UBS Settlement Shares (collectively, the "UBS
Shares"). The Company agreed to file with the Commission a registration
statement, of which this Prospectus is a part, with respect to the resale of the
UBS Shares and to prepare and file such amendments and supplements to the
registration statement as may be necessary to keep the registration statement
effective until the earlier of (i) the date when all the UBS Shares are sold, or
(ii) the date on which the UBS Parties may sell their UBS Shares without
registration under the Securities Act pursuant to Rule 144(k) thereunder.
Pursuant to their respective agreements, the Company has agreed to
indemnify each of the Continuing Investors, the UBS Parties and each entities'
officers, directors and controlling persons against certain liabilities,
including certain liabilities under the Securities Act. Insofar as
indemnification of the Continuing Investors and the UBS Parties for liabilities
arising under the Securities Act may be permitted pursuant to their respective
agreements with the Company, the Company is aware that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and, therefore, may be unenforceable.
In connection with the Company's IPO, certain of the Prentiss Principals
(PDO Three, Inc., Prentiss O'Hare Illinois, Inc., Prentiss Property Acquisition,
Inc., and Prentiss Properties Holding, Inc. (the "Merged Entities")) received
Units in exchange for certain assets contributed to the Operating Partnership.
In February 1998, (i) the Merged Entities distributed 113,500 Units to certain
employees of the Merged Entities listed in the table below (the "Merged Entity
Employees"), (ii) the Company issued 2,432,541 Common Shares in exchange for all
of the capital stock of the Merged Entities to the owners of the Merged Entities
listed on the table below (the "Merged Entity Owners"), and (iii) the Merged
Entity Employees redeemed their 113,500 Units in exchange for an equal number of
Common Shares. The Company agreed to file with the Commission a registration
statement, of which this Prospectus is a part, with respect to the resale of the
Common Shares by the Merged Entity Owners and Merged Entity Employees. The
Merged Entity Owners and Merged Entity Employees are not permitted to sell their
respective Common Shares registered pursuant to the registration statement of
which this Prospectus is a part until October 22, 1998.
The Merged Entity Employees either are employees of the Company or have
been employees of the Company within the past three years. The Merged Entity
Owners are current employees of the Company, have been employees of the Company
within the past three years or are trusts established for the benefit of
relatives of certain employees of the Company. In addition, Messrs. Prentiss
and August are members of the Company's Board of Trustees.
The Company has agreed to pay the expenses of registering all of the Common
Shares offered hereby under the Securities Act, including all registration,
filing and exchange listing fees, blue sky expenses, fees of its own counsel and
accountants, and underwriters' fees customarily paid by issuers (excluding
underwriting discounts, commissions and transfer taxes).
It is unknown if, when, or in what amounts any Selling Shareholder may
offer the Common Shares for sale. There can be no assurance that the Selling
Shareholders will sell all or any of the Common Shares offered hereby. Because
the Selling Shareholders may offer all or some of their respective Common
Shares, and because there are currently no agreements, arrangements or
understandings with respect to the sale of any of the Common Shares that will be
held by the Selling Shareholders after the completion of the offering, no
estimate can be given as to the principal amount of the Selling Shareholder's
Common Shares that will be held by each Selling Shareholder after completion of
the offering.
The Selling Shareholders and any broker or dealer through whom any of the
Shares are sold may be deemed to be underwriters within the meaning of the
Securities Act with respect to the Common Shares offered hereby, and any profits
realized by the Selling Shareholders or such brokers or dealer may be deemed to
be underwriting commissions. Brokers' commissions and dealer's discounts, taxes
and other selling expenses to be borne by the Selling Shareholder are not
expected to exceed normal selling expenses for such sales. The registration of
the Common Shares offered hereby under the Securities Act shall not be deemed an
admission by the Selling Shareholders of the Company that the Selling
Shareholders are underwriters for purposes of the Securities Act of any Common
Shares offered under this Prospectus.
24
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERINGS MAXIMUM NUMBER OF AFTER THE OFFERINGS(1)
---------------------- SHARES TO BE SOLD IN THE ----------------------
SELLING SHAREHOLDER SHARES PERCENT (2) OFFERINGS SHARES PERCENT (2)
- ------------------- ------ ------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
Ameritech Pension Trust 783,363 1.97 783,363 0 -
Public Employee Retirement System of Idaho 783,363 1.97 783,363 0 -
American Airlines Inc. Masterfund Benefit Trust 313,171 - 313,171 0 -
UBS Limited 1,100,000 2.76 1,100,000 0 -
c/o UBS Securities LLC
Union Bank of Switzerland, 0 500,000 0 -
London Branch
c/o UBS Securities LLC
Merged Entity Owners(3)
- -----------------------
Michael V. Prentiss(4) 1,679,853 4.21 1,017,952 661,901 -
Thomas F. August(5) 220,653 - 128,030 92,623 -
Dennis J. Dubois(6) 141,809 - 82,240 59,569 -
Richard B. Bradshaw 147,926 - 145,498 2,428 -
Santo Bisignano, Jr., as Trustee of the 58,259 - 57,234 1,025 -
TFA Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 58,259 - 57,234 1,025 -
MJA Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 32,196 - 31,629 567 -
BD Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 32,196 - 31,629 567 -
DJD Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 298,958 - 293,697 5,261 -
PEP Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 298,960 - 293,699 5,261 -
KAP Grantor Retained Annuity Trust
Santo Bisignano, Jr., as Trustee of the 298,960 - 293,699 5,261 -
MBP Grantor Retained Annuity Trust
Merged Entity Employees(3)
- --------------------------
Robert K. Wiberg 6,960 - 5,000 1,960 -
William A. Holvey 2,126 - 2,000 126 -
Peter Teeling 2,000 - 2,000 0 -
Janet S. Davis 3,850 - 3,750 100 -
David C. Robertson 18,014 - 7,500 10,514 -
Louay Alsadek 7,143 - 5,000 2,143 -
Alan DeFrancis 2,631 - 2,000 631 -
Elizabeth Hearle 2,250 - 2,000 250 -
Lawrence Krueger 19,500 - 17,500 2,000 -
Daniel K. Cushing 4,347 - 2,000 2,347 -
Richard Bartel 14,531 - 12,500 2,031 -
Gregory S. Imhoff 5,804 - 5,000 804 -
Thomas P. Simon 5,506 - 5,000 506 -
David E. Rinkliff 4,504 - 3,750 754 -
Kent L. Barner 3,782 - 3,750 32 -
Richard E. Hopwood 2,100 - 2,000 100 -
Sally W. Elliott 2,100 - 2,000 100 -
Elizabeth K. Younglove 4,000 - 2,000 2,000 -
Duane F. Henley 8,500 - 5,000 3,500 -
William J. Reister 6,061 - 5,000 1,061 -
Mark R. Doran 10,400 - 10,000 400 -
Christopher M. Hipps 5,000 - 5,000 0 -
John K. Dilbeck 4,831 - 3,750 1,081 -
---------
TOTAL MAXIMUM NUMBER OF SHARES TO BE SOLD IN
THE OFFERING 6,025,938
=========
</TABLE>
- ------------------------------
(1) Assuming all of the maximum number of shares to be sold in the Offerings
are sold.
(2) Percentages less than 1% of the outstanding Common Shares are omitted.
(3) Common Shares held by these persons generally may not be sold prior to
October 22, 1998.
(4) Excludes 586,762 Common Shares issuable upon the exercise of options
granted under the 1996 Plan, 386,762 of which vest in equal installments on
each of the first three anniversaries of the date of the grant and 200,000
which vest in equal installments on each of the third, fourth and fifth
anniversaries of the date of grant. Includes Units redeemable for 336,000
Common Shares which are held in a trust of which Mr. Prentiss is a trustee,
and of which Mr. Prentiss disclaims beneficial ownership. Excludes 881,095
Common Shares owned by certain Grantor Retained Annuity Trusts, of which
Mr. Prentiss does not have beneficial ownership.
(5) Excludes 323,944 Common Shares issuable upon the exercise of options
granted under the 1996 Plan, 173,944 of which vest in equal installments on
each of the first three anniversaries of the date of the grant and 150,000
which vest in equal installments on each of the third, fourth and fifth
anniversaries of the date of grant. Includes Units redeemable for 88,576
Common Shares. Excludes 114,468 Common Shares owned by certain Grantor
Retained Annuity Trusts, of which Mr. August does not have beneficial
ownership.
(6) Excludes 64,366 Common Shares issuable upon the exercise of options granted
under the 1996 Plan, which vest in equal installments on each of the first
three anniversaries of the date of the grant. Includes Units redeemable for
58,274 Common Shares. Excludes 63,258 Common Shares owned by certain
Grantor Retained Annuity Trusts, of which Mr. DuBois does not have
beneficial ownership.
25
<PAGE>
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time of the
Common Shares by the Selling Shareholders. The Company is registering the
Common Shares for sale to provide the holders thereof with freely tradeable
securities. The registration of the Common Shares does not necessarily mean
that any of the Common Shares will be offered or sold by the Selling
Shareholders.
The Company will not receive any proceeds from the offering and sale of the
Common Shares by the Selling Shareholders. The Common Shares may be sold from
time to time to purchasers directly by any of the Selling Shareholders.
Alternatively, the Selling Shareholders may from time to time offer the Common
Shares to or through underwriters, broker-dealers or agents. In connection with
any such sale, any underwriter, broker-dealer or agent may act as agent for the
Selling Shareholders or may purchase from the Selling Shareholders all or a
portion of the Common Shares as principal and may sell such Common Shares by one
or more of the methods described below. Such sales may be made on the NYSE or
other exchanges on which the Common Shares are then traded, in the over-the-
counter market, in negotiated transactions or otherwise at prices related to the
then-current market prices or at prices otherwise negotiated. Underwriters,
broker-dealers or agents may receive compensation in the form of commissions
from the Selling Shareholders and/or the purchasers of the Common Shares for
whom they may act as agent. The Selling Shareholders and any underwriters,
dealers or agents that participate in the distribution of the Common Shares may
be deemed to be "underwriters" within the meaning of the Securities Act, and any
profit or commissions on the sale of Common Shares received by any such
underwriters, dealers or agents may be deemed to be underwriting commissions or
discounts under the Securities Act.
The Common Shares may also be sold in one or more of the following
transactions: (a) block transactions in which a broker-dealer may sell all or a
portion of such shares as agent but may position and resell all or a portion of
the block as principal to facilitate the transaction; (b) purchases by any such
broker-dealer as principal and resale by such broker-dealer for its own account
pursuant to a Prospectus Supplement; (c) a special offering, an exchange
distribution or a secondary distribution in accordance with applicable NYSE or
other stock exchange rules; (d) ordinary brokerage transactions and transactions
in which any such broker-dealer solicits purchasers; (e) sales "at the market"
to or through a market maker or into an existing trading market, on an exchange
or otherwise, for such shares; and (f) sales in other ways not involving market
makers or established trading markets, including direct sales to purchasers. In
effecting sales, broker-dealers engaged by the Selling Shareholders may arrange
for other broker-dealers to participate. Broker-dealers will receive
commissions or other compensation from the Selling Shareholders in amounts to be
negotiated immediately prior to the sale that will not exceed those customary in
the types of transactions involved.
At the time a particular offer of Common Shares is made, a Prospectus
Supplement, if required, will be distributed which will set forth the names of
any underwriters, broker-dealers or agents and any commissions and other terms
constituting compensation from the Selling Shareholders and any other required
information. The Common Shares may be sold from time to time at varying prices
determined at the time of sale or at negotiated prices.
In order to comply with the securities laws of certain states, if
applicable, the Common Shares may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the Common Shares may not
be sold unless they have been registered or qualified for sale in such state or
an exemption from such registration or qualification requirement is available
and is complied with.
All expenses incident to the offering and sale of the Common Shares, if
any, excluding certain underwriters' discounts and transfer taxes, shall be paid
by the Company. See "Selling Shareholders."
26
<PAGE>
LEGAL OPINIONS
The validity of the Securities will be passed upon for the Company by
Hunton & Williams, Richmond, Virginia, who will rely on Ballard Spahr Andrews &
Ingersoll, LLP, Baltimore, Maryland, as to certain matters of Maryland law.
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
Company's predecessors as of December 31, 1995, and for the period January 1,
1996 through October 21, 1996, and the year ended December 31, 1995 included in
its Annual Report on Form 10-K for the year ended December 31, 1996, and the
combined statements of revenue and certain operating expenses included in the
Company's Current Reports on Form 8-K/A, dated December 31, 1996, and April 2,
1997, the Company's Current Reports on Form 8-K dated October 22, 1997 and
February 5, 1998, and the Company's Registration Statement on Form S-11, dated
April 29, 1997, all incorporated by reference in this Prospectus, have been
incorporated herein in reliance on the reports of Coopers & Lybrand, L.L.P.,
independent accountants given on the authority of that firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices at
Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661 and Suite 1300, 7 World Trade Center, New York, New York 10048,
and can also be inspected and copied at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. Copies of such material
can be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the prescribed fees or
from the Commission's site on the World Wide Web at http://www.sec.gov.
This Prospectus is part of a registration statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") filed by
the Company with the Commission under the Securities Act. This Prospectus does
not contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules of the Commission. For
further information, reference is made to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission
(Commission File No. 001-14516) under the Exchange Act are hereby incorporated
by reference in this Prospectus:
(1) the Company's Annual Report on Form 10-K for the year ended December
31, 1997;
(2) the Company's Current Reports on Form 8-K, filed on January 15, 1998,
February 10, 1998, February 17, 1998 and February 25, 1998.
27
<PAGE>
(3) the description of the Common Shares contained in the Company's
Registration Statement on Form 8-A, filed on October 17, 1996, under the
Exchange Act, including any reports filed under the Exchange Act for the purpose
of updating such description.
(4) the description of the Series B Preferred Shares contained in the
Company's Registration Statement on Form 8-A filed on February 17, 1998, as
amended by the Company's Registration Statement of Form 8-A/A filed on March 10,
1998, including any reports filed under the Exchange Act for the purpose of
updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act prior to the termination of the offerings of all of
the Common Shares shall be deemed to be incorporated by reference herein. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
in any accompanying Prospectus Supplement relating to a specific offering of any
Offered Securities or in any other subsequently filed document, as the case may
be, which also is or is deemed to be incorporated by reference herein, modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus or any accompanying Prospectus Supplement.
The Company will provide on request and without charge to each person to
whom this Prospectus is delivered a copy (without exhibits) of any or all
documents incorporated by reference into this Prospectus. Requests for such
copies should be directed to Prentiss Properties Trust, 3890 W. Northwest
Highway, Suite 400, Dallas, Texas, Attention: Secretary (telephone (214)
654-0886).
28
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.. $45,045
New York Stock Exchange listing fee.................. 7,000
Accounting fees and expenses......................... 15,000
Blue Sky fees and expenses........................... 1,000
Legal fees and expenses.............................. 15,000
Miscellaneous........................................ 1,955
-------
TOTAL........................................... $85,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of the Company contains such a provision which eliminates
such liability to the maximum extent permitted by the Maryland REIT Law.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a trustee, director, officer or partner of such real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his status as present
or former shareholder. The Bylaws of the Company obligate it, to the maximum
extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former Trustee or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Declaration of Trust and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any of
the capacities described above and to any employee or agent of the Company or a
predecessor of the Company. The Bylaws require the Company to indemnify a
Trustee or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity.
Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as is permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnify its present
and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the 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
II-1
<PAGE>
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In accordance with the MGCL, the Bylaws of the
Company require it, as a condition to advancing expenses, to obtain (a) a
written affirmation by the Trustee or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the Company as
authorized by the Bylaws and (b) a written statement by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard Of conduct was not met.
ITEM 16. EXHIBITS
4.1* Form of Common Share Certificate.
4.2* Form of Amended and Restated Declaration of Trust of the Company
4.3* Bylaws of the Company
4.4 Rights Agreement, dated February 6, 1998, between the Company and
First Chicago Trust Company of New York, as Rights Agent (filed as an
Exhibit to the Company's Registration Statement on Form 8-A filed on
February 17, 1998.
4.5 Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
5.1 Opinion of Hunton & Williams.
8.1 Opinion of Hunton & Williams regarding tax matters.
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1).
23.2 Consent of Ballard Spahr Andrews and Ingersoll, LLP
23.3 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney (located on the signature page of this
Registration Statement)
- -------------------------------
* Filed as an Exhibit to the Company's Registration Statement on Form S-11,
File No. 33-09863, as amended, and incorporated by reference herein.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement (Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement); and
II-2
<PAGE>
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that the undertakings set forth in subparagraphs (i) and
(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in this registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof; and
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that the in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted against the
registrant by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned registrant further hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned thereunto duly
authorized, in the City of Dallas, State of Texas, on the 26th day of March,
1998.
Prentiss Properties Trust,
a Maryland real estate investment trust
(Registrant)
By: /s/ Thomas F. August
-------------------------------------
Thomas F. August
President and Chief Operating Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Michael V. Prentiss, Thomas F. August and Gregory S. Imhoff, or any of them, his
true and lawful attorney-in-fact, for him and in his name, place and stead, to
sign any and all amendments (including post-effective amendments) to this
Registration Statement, to sign any Registration Statements filed pursuant to
Rule 462(b) of the Securities Act of 1933, and to cause the same to be filed
with the Securities and Exchange Commission, hereby granting to said attorneys-
in-fact full power and authority to do and perform all and every act and thing
whatsoever requisite or desirable to be done in and about the premises as fully
to all intents and purposes as the undersigned might or could do in person,
hereby ratifying and confirming all acts and things that said attorneys-in-fact
may do or cause to be done by virtue of these presents.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the 26th day of March, 1998 by
the following persons in the capacities indicated.
SIGNATURE 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
/s/ Thomas J. Hynes, Jr. Trustee
- --------------------------
Thomas J. Hynes, Jr.
/s/ Barry J.C. Parker Trustee
- --------------------------
Barry J.C. Parker
/s/ Leonard Riggs, Jr. Trustee
- --------------------------
Leonard Riggs, Jr.
/s/ Ronald G. Steinhart Trustee
- --------------------------
Ronald G. Steinhart
II-4
<PAGE>
/s/ Lawrence A. Wilson Trustee
- --------------------------
Lawrence A. Wilson
/s/ Mark R. Doran Executive Vice President, Chief Financial Officer
- -------------------------- and Treasurer (Principal Financial Officer)
Mark R. Doran
/s/ Richard J. Bartel Executive Senior Vice President--Financial
- -------------------------- Operations and Administration, and Chief
Richard J. Bartel Administrative Officer
(Principal Accounting Officer)
II-5
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT PAGE
- ------- ------- ----
4.1* Form of Common Shares Certificate.
4.2* Form of Amended and Restated Declaration of Trust of the
Company
4.3* Bylaws of the Company
4.4 Rights Agreement, dated February 6, 1998, between the Company and
First Chicago Trust Company of New York, as Rights Agent (filed
as an Exhibit to the Company's Registration Statement on Form 8-A
filed on February 17, 1998.
4.5 Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
5.1 Opinion of Hunton & Williams.
8.1 Opinion of Hunton & Williams regarding tax matters.
23.1 Consent of Hunton & Williams (included in Exhibits 5.1 and 8.1).
23.2 Consent of Ballard Spahr Andrews and Ingersoll, LLP.
23.3 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney (located on the signature page of this
Registration Statement)
- -------------------------------
* Filed as an Exhibit to the Company's Registration Statement on Form S-11,
File No. 33-09863, as amended, and incorporated by reference herein.
II-6
<PAGE>
Exhibit 5.1
-----------
[Hunton & Williams Letterhead]
April 1, 1998
Board of Directors
Prentiss Properties Trust
3890 West Northwest Highway, Suite 400
Dallas, TX 75220
Prentiss Properties Trust
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We are counsel for Prentiss Properties Trust, a Maryland real estate
investment trust, (the "Company") in connection with its registration under the
Securities Act of 1933 of up to 6,496,130 of the Company's common shares of
beneficial interest ("the Shares") which are proposed to be offered and sold as
described in the Company's Registration Statement on Form S-3 (the "Registration
Statement") to be filed with the Securities and Exchange Commission (the
"Commission") on April 1, 1998.
In rendering this opinion, we have relied upon, among other things, our
examination of such records of the Company and certificates of its officers and
of public officials as we have deemed necessary. With respect to matters of
Maryland law, we have relied upon the opinion of Ballard Spahr Andrews and
Ingersoll, LLP.
Based upon the foregoing, we are of the opinion that:
1. The Company is a real estate investment trust duly formed and
existing under and by virtue the laws of the State of Maryland.
2. The Shares have been duly authorized and are validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement and the reference to our firm under the
heading "Legal Matters" in the Registration Statement.
Very truly yours,
/s/ Hunton & Williams
07667/08301
<PAGE>
Exhibit 8.1
-----------
April 1, 1998
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
Prentiss Properties Trust
-------------------------
Qualification as
----------------
Real Estate Investment Trust
----------------------------
Ladies and Gentlemen:
We have acted as counsel to Prentiss Properties Trust, a Maryland real
estate investment trust (the "Trust"), in connection with the preparation of a
Form S-3 registration statement filed with the Securities and Exchange
Commission ("SEC") on March 20, 1998 (the "Registration Statement") with respect
to the offer and sale from time to time of up to 6,496,130 common shares of
beneficial interest (the "Registration Shares"), par value $0.01 per share
("Common Shares"), of the Trust owned by certain selling shareholders named in a
prospectus dated March 20, 1998 (the "Prospectus"). You have requested our
opinion regarding certain U.S. federal income tax matters in connection with the
Offering.
As of February 5, 1998, the Operating Partnership owns, directly or
indirectly, equity interests in 217 office and industrial properties (the
"Properties"). The Operating Partnership owns and will own interests in certain
Properties through subsidiary partnerships, joint ventures, and limited
liability companies (collectively, the "Noncorporate Subsidiaries").
The Company owns 100% of the stock of Prentiss Properties I, Inc., a
Delaware corporation and the general partner of the Operating Partnership ("PP
I"). The Operating Partnership owns all of the nonvoting stock of Prentiss
Properties Limited, Inc., a Delaware corporation ("PPL"), representing 95% of
the economic interests therein. All of the voting stock of PPL, representing 5%
of the economic interests therein, is
<PAGE>
Prentiss Properties Trust
March 20, 1998
Page 2
owned by Michael V. Prentiss. PPL owns 100% of the outstanding stock of Prentiss
Properties II, Inc., a Delaware corporation ("PP II"). The Operating Partnership
also owns all of the nonvoting stock of Prentiss Properties Limited II, Inc., a
Delaware corporation ("PPL II"), representing 95% of the economic interests
therein. All of the voting stock of PPL II, representing 5% of the economic
interests therein, is owned by Michael V. Prentiss.
In giving this opinion, we have examined the following:
1. the Trust's Amended and Restated Declaration of Trust, as duly filed with
the Department of Assessments and Taxation of the State of Maryland on October
16, 1996;
2. the Trust's Bylaws;
3. the Prospectus;
4. the Second Amended and Restated Agreement of Limited Partnership of the
Operating Partnership, dated October 22, 1996 (the "Operating Partnership
Agreement"), among PP I, as general partner, and several limited partners;
5. the partnership agreements, joint venture agreements, and operating
agreements of the Noncorporate Subsidiaries (together with the Operating
Partnership Agreement, the "Partnership Agreements");
6. the Articles of Incorporation and Bylaws of PPL;
7. the Articles of Incorporation and Bylaws of PPL II;
8. the Amended and Restated Certificate of Incorporation and the Bylaws of
PP II; and
9. such other documents as we have deemed necessary or appropriate for
purposes of this opinion.
In connection with the opinions rendered below, we have assumed,
with your consent, that :
<PAGE>
Prentiss Properties Trust
March 20, 1998
Page 3
1. each of the documents referred to above has been duly authorized,
executed, and delivered; is authentic, if an original, or is accurate, if a
copy; and has not been amended;
2. during its taxable year ending December 31, 1998 and future taxable years,
the Trust has operated and will continue to operate in a manner that makes and
will continue to make the representations contained in a certificate, dated the
date hereof and executed by a duly appointed officer of the Trust (the
"Officer's Certificate"), true for such years;
3. the Trust will not make any amendments to its organizational documents, PP
I's organizational documents, the Partnership Agreements, PPL's organizational
documents, PPL II's organizational documents, or PP II's organizational
documents after the date of this opinion that would affect its qualification as
a real estate investment trust (a "REIT") for any taxable year;
4. each partner or member of the Operating Partnership and the Noncorporate
Subsidiaries (each, a "Partner") that is a corporation or other entity has a
valid legal existence;
5. each Partner has full power, authority, and legal right to enter into and
to perform the terms of the applicable Partnership Agreement and the
transactions contemplated thereby; and
6. no action will be taken by the Trust, the Operating Partnership, the
Noncorporate Subsidiaries, the Partners, PPL, PPL II, or PP II after the date
hereof that would have the effect of altering the facts upon which the opinions
set forth below are based.
In connection with the opinions rendered below, we also have relied
upon the correctness of the representations contained in the Officer's
Certificate. After reasonable inquiry, no facts have come to our attention that
would cause us to question the accuracy and completeness of the facts contained
in the documents and assumptions set forth above, the representations set forth
in the Officer's Certificate, or the Prospectus in a material way. In addition,
to the extent that any of the representations provided to us in the Officer's
Certificate are with respect to matters set forth in the Internal Revenue Code
of 1986, as amended (the "Code"), or the Treasury regulations thereunder (the
"Regulations"), we have reviewed with the individuals making such
representations the relevant portion of the Code and the applicable Regulations.
<PAGE>
Prentiss Properties Trust
March 20, 1998
Page 4
Based on the documents and assumptions set forth above, the
representations set forth in the Officer's Certificate, and the discussions in
the Prospectus under the caption "Federal Income Tax Considerations" (which are
incorporated herein by reference), we are of the opinion that:
(a) the Trust qualified to be taxed as a REIT pursuant to sections
856 through 860 of the Code for its taxable years ended December 31, 1996
and December 31, 1997, and the Trust's organization and current and
proposed method of operation will enable it to continue to qualify as a
REIT for its taxable year ending December 31, 1998 and in the future; and
(b) the descriptions of the law and the legal conclusions
contained in the Prospectus under the caption "Federal Income Tax
Considerations" are correct in all material respects, and the discussions
thereunder fairly summarize the federal income tax considerations that are
likely to be material to a holder of the Registration Shares.
We will not review on a continuing basis the Trust's compliance with the
documents or assumptions set forth above, or the representations set forth in
the Officer's Certificate. Accordingly, no assurance can be given that the
actual results of the Trust's operations for any given taxable year will satisfy
the requirements for qualification and taxation as a REIT.
The foregoing opinions are based on current provisions of the Code
and the Regulations, published administrative interpretations thereof, and
published court decisions. The Internal Revenue Service has not issued
Regulations or administrative interpretations with respect to various provisions
of the Code relating to REIT qualification. No assurance can be given that the
law will not change in a way that will prevent the Trust from qualifying as a
REIT for federal income tax purposes.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement. In giving this consent, we do not admit that we are
in the category of persons whose consent is required by Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations promulgated
thereunder by the SEC.
The foregoing opinions are limited to the U.S. federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax
<PAGE>
Prentiss Properties Trust
March 20, 1998
Page 5
matters or to any issues arising under the tax laws of any other country, or any
state or locality. We undertake no obligation to update the opinions expressed
herein after the date of this letter. This opinion letter is solely for the
information and use of the addressees, and it may not be distributed, relied
upon for any purpose by any other person, quoted in whole or in part or
otherwise reproduced in any document, or filed with any governmental agency
without our express written consent.
Very truly yours,
/s/ HUNTON & WILLIAMS
<PAGE>
Exhibit 23.2
------------
April 1, 1998
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas 75220
Re: Registration Statement on Form S-3
dated April 1, 1998
Ladies and Gentlemen:
We hereby consent to the use of the name of our firm in the above-
referenced Registration Statement under the caption "Legal Opinions." In giving
this consent, we do not admit that we are within the category of persons whose
consent is required by Section 7 of the 1933 Act.
Very truly yours,
BALLARD, SPAHR, ANDREWS & INGERSOLL, LLP
<PAGE>
Exhibit 23.3
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
on Form S-3 (File No. 333-____) of our reports dated (i) February 5, 1998 on
our audits of the consolidated and combined financial statements and financial
statements schedule of Prentiss Properties Trust and the Predecessor Company,
(ii) March 12, 1997 on our audits of the combined statements of revenues and
certain operating expenses of the Dulles Properties, the Chicago Office
Properties, and the Natomas Properties, (iii) March 17, 1997 on our audit of the
combined statement of revenues and certain operating expenses of the Selected
1997 Pending Acquisitions, (iv) October 3, 1997 on our audits of the combined
statements of revenues and certain operating expenses of the World Savings
Center Property and the Selected Properties Acquired Subsequent to June 30,
1997, (v) October 20, 1997 on our audit of the combined statement of revenues
and certain operating expenses of the Silicon Valley Properties, (vi) October
22, 1997 on our audit of the combined statement of revenues and certain
operating expenses of the Terramics Properties, and (vii) February 6, 1998 on
our audits of the statement of revenues and certain operating expenses of the
Carrara Place Property and the combined statement of revenues and certain
operating expenses of the Newport National Properties. We also consent to the
reference to our firm under the caption "Experts."
Dallas, Texas
April 1, 1998
