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As filed with the Securities and Exchange Commission on December 24, 1998
REGISTRATION NO. 333-65793
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
________________
PRENTISS PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
MARYLAND 75-2261588
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
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3890 W. NORTHWEST HIGHWAY, SUITE 400 J. KEVAN DILBECK
DALLAS, TEXAS 75220 PRENTISS PROPERTIES TRUST
(214) 654-0886 3890 W. NORTHWEST HIGHWAY, SUITE 400
(Address, including zip code, and telephone number, DALLAS, TEXAS 75220
including area code, of (214) 654-0886
registrant's principal executive offices) (Name, address, including zip code, and telephone
number, including area code, of agent for service)
</TABLE>
COPY TO:
MICHAEL E. DILLARD, P.C.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1700 PACIFIC AVENUE, SUITE 4100
DALLAS, TEXAS 75201
(214) 969-2800
Approximate date of commencement of proposed sale to the public: From
time to time after 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:[_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 24, 1998
PROSPECTUS
PRENTISS PROPERTIES TRUST
3890 W. NORTHWEST HIGHWAY, SUITE 400
DALLAS, TEXAS 75220
(214) 654-0886
3,773,585 SERIES A CUMULATIVE CONVERTIBLE PREFERRED SHARES
OF BENEFICIAL INTEREST
3,773,585 COMMON SHARES OF BENEFICIAL INTEREST
This prospectus relates to the public offer and sale of up to 3,773,585 Series
A Cumulative Convertible Preferred Shares and up to 3,773,585 common shares of
beneficial interest that we may issue upon conversion of the Series A Preferred
Shares by the selling shareholder named herein or its transferees, pledgees,
donees or successors.
No public market for the Series A Preferred Shares exists and there can be no
assurance that an active trading market will develop. The common shares trade on
the New York Stock Exchange under the symbol "PP."
____________________
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ______________, 199__.
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TABLE OF CONTENTS
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PAGE
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Risk Factors............................................................... 3
Forward-Looking Statements................................................. 3
About this Prospectus...................................................... 4
The Company................................................................ 5
The Private Placement...................................................... 5
Use of Proceeds............................................................ 5
Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends.. 6
Description of Shares of Beneficial Interest............................... 7
Registration Rights........................................................ 14
Restrictions on Ownership and Transfer..................................... 14
Federal Income Tax Considerations.......................................... 17
Selling Shareholders....................................................... 32
Plan of Distribution....................................................... 32
Legal Opinions............................................................. 33
Experts.................................................................... 33
Where You Can Find More Information........................................ 33
</TABLE>
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RISK FACTORS
You should carefully consider the following information in conjunction with
the other information contained in this prospectus, any prospectus supplement
and the documents and risk factors incorporated by reference herein, before
deciding to invest in the Series A Preferred Shares or the common shares
issuable upon conversion of the Series A Preferred Shares (the "Conversion
Common Shares").
NO CURRENT MARKET FOR SERIES A PREFERRED SHARES; RISK THAT MARKET FOR THE SERIES
A PREFERRED SHARES WILL NOT DEVELOP
There is no established trading market for the Series A Preferred Shares.
We do not currently intend to list the Series A Preferred Shares on a national
securities exchange or the Nasdaq National Market, and even if we did, the
Series A Preferred Shares do not currently meet the listing requirements of any
national exchange or the Nasdaq National Market. Accordingly, we cannot give
assurance as to the following:
. whether an active market for the Series A Preferred Shares will
develop,
. the liquidity of any such market,
. your ability to sell the Series A Preferred Shares, or
. the prices that you may obtain for your Series A Preferred Shares.
FORWARD-LOOKING STATEMENTS
This prospectus, any prospectus supplement and the documents incorporated
by reference herein may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). When used in this prospectus, words such as "anticipate,"
"believe," "estimate," "expect," "intend," "predict," "project," and similar
expressions, as they relate to us or our management, identify forward-looking
statements. Such forward-looking statements are based on the beliefs of our
management as well as assumptions made by and information currently available to
us. These forward-looking statements are subject to certain risks,
uncertainties and assumptions, including risks, uncertainties and assumptions
related to the following:
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. Our reliance on major tenants; . Conflicts of interest;
. The geographic concentration of our properties; . Change in our investment, financing and borrowing
policies without shareholder approval;
. Risks associated with our real estate acquisition, . Our dependence on key personnel such as Michael V.
redevelopment, development and construction Prentiss and Thomas F. August;
activities;
. Factors that could cause poor operating performance . Our third-party property management, leasing,
of our properties; development and construction business and related
services;
. Our incurrence of debt; . Effect of market interest rates on price of common
shares;
. Limited ability of shareholders to effect a change . Effect of shares available for future sale on price
of control; of common shares; and
. Our failure to qualify as a REIT; . Potential capital stock dilution or decrease of
liquidity in connection with settlement of forward
agreements.
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Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect our current views with respect to future events and are subject to these
and other risks, uncertainties and assumptions, relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. You should
specifically consider the various factors identified in this prospectus, any
prospectus supplement and the documents incorporated by reference herein, which
could cause actual results to differ, including particularly those discussed in
the section entitled "Risk Factors" in this prospectus and in our Exchange Act
filings.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission (the "SEC") utilizing a "shelf registration"
process. Under this shelf process, the selling shareholder or its transferees,
pledgees, donees or successors (the "Selling Shareholders") may, from time to
time, sell the securities described in this prospectus. You should read both
this prospectus and any prospectus supplement together with additional
information described under the heading "Where You Can Find More
Information."
Unless the context otherwise requires, all references in this prospectus to
"we," "us," or "our," means Prentiss Properties Trust and its subsidiaries on a
combined basis, including (1) Prentiss Properties I, Inc., the general partner
of Prentiss Properties Acquisition Partners, L.P., (2) Prentiss Properties
Acquisition Partners, L.P., the operating partnership, and its subsidiaries, (3)
Prentiss Properties Limited, Inc. (the "Manager"), and (4) entities through
which the operating partnership owns interests in our properties. The
"Predecessor Company" refers to our operations from the period prior to our
initial public offering of common shares and the commencement of our intent to
qualify as a real estate investment trust ("REIT") on October 22, 1996.
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THE COMPANY
We are a self-administered and self-managed Maryland REIT that acquires,
owns, manages, leases, develops and builds office and industrial properties
throughout the United States. We are self-administered in that we provide our
own administrative services, such as accounting, tax and legal, internally
through our own employees. We are self-managed in that we internally provide all
the management and maintenance services that our properties require through our
own employees such as property managers, leasing professionals and engineers. As
of September 30, 1998, we owned interests in a diversified portfolio of 253
primarily suburban Class A office and suburban industrial properties, located in
20 major U.S. markets (the "Properties") as follows:
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NUMBER OF NET RENTABLE NUMBER OF PERCENT
--------- ------------ --------- -------
BUILDINGS SQUARE FEET TENANTS LEASED
--------- ----------- ------- ------
<S> <C> <C> <C> <C>
OFFICE PROPERTIES.......... 115 12.8 million 1,208 96%
INDUSTRIAL PROPERTIES...... 124 8.9 million 349 96%
OFFICE AND INDUSTRIAL
DEVELOPMENT PROJECTS..... 15* 1.9 million N/A N/A
--- ------------- -----
TOTAL................. 254* 23.6 million 1,557
=== ============= =====
</TABLE>
___________________
* Includes one expansion project at an existing industrial property.
In addition to the Properties, we manage 258 office and industrial properties,
in 19 U.S. markets, that are owned by third parties. The managed properties
contain approximately 29.2 million net rentable square feet.
We operate principally through the operating partnership and its
subsidiaries and the Manager. Our regional management offices are located in Los
Angeles, Dallas, Chicago, Washington, D.C., Atlanta and Philadelphia. We have
approximately 700 employees with expertise in areas such as acquisitions,
development, facilities management, property management and leasing.
THE PRIVATE PLACEMENT
In December 1997 and March 1998, we issued, in two tranches, an aggregate
of 3,773,585 Series A Preferred Shares to Security Capital Preferred Growth
Incorporated. Our aggregate net proceeds from that private placement were
approximately $100 million. We contributed the aggregate net proceeds from that
private placement to the operating partnership in exchange for an equal amount
of preferred units in the operating partnership. These preferred units have
identical terms as the Series A Preferred Shares.
Pursuant to a Registration Rights Agreement, dated as of December 29, 1997,
between us and Security Capital Preferred Growth Incorporated, we agreed to file
a shelf registration statement under the Securities Act, of which this
prospectus forms a part, relating to resales of the Series A Preferred Shares
and the Conversion Common Shares. We must maintain the effectiveness of the
registration statement until December 29, 2000, or earlier if all Series A
Preferred Shares and common shares covered by the registration statement have
been sold pursuant to the registration statement or may be sold in accordance
with Rule 144(k) under the Securities Act.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common shares or Series A
Preferred Shares by the Selling Shareholders. We will not receive any proceeds
from the issuance of common shares upon conversion of the Series A Preferred
Shares.
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RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
The following table sets forth our, and the Predecessor Company's,
consolidated ratios of earnings to combined fixed charges and preferred share
dividends for the six months ended September 30, 1998, the year ended December
31, 1997, and for each of the last five fiscal years. We did not pay any
significant dividends on our outstanding preferred shares in 1997. Accordingly,
the ratio of earnings to fixed charges and preferred share dividends is
identical to the ratio of earnings to fixed charges. Our data from the period
prior to our initial public offering ("IPO") of our common shares and the
commencement of our intent to qualify as a REIT on October 22, 1996, reflects
the operations of the Predecessor Company.
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PRENTISS PROPERTIES TRUST PREDECESSOR COMPANY
--------------------------------- ------------------------------
YEAR ENDED DECEMBER 31,
-----------------------
JANUARY 1, 1996
---------------
TO OCTOBER 21,
NINE MONTHS ENDED YEAR ENDED OCTOBER 22, 1996 TO ---------------
----------------- ---------- -------------------
SEPTEMBER 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996 1996 1995 1994 1993
------------------ ----------------- ----------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
combined fixed charges
and preferred share 2.16 2.68 7.90 1.80 3.57 3.30 2.98
dividends
</TABLE>
These computations include us and our subsidiaries and 50% or less equity
companies. For these ratios, "earnings" consists of pretax income from
operations before minority interests plus "combined fixed charges," excluding
interest capitalized. For this purpose, "combined fixed charges" consists of the
interest costs, whether expensed or capitalized, including an interest factor
attributable to rentals, and amortization of debt issuance costs.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The following summary of the material terms of the Series A Preferred
Shares and the common shares issuable upon conversion thereof is subject to the
detailed provisions of the following:
. the Amended and Restated Declaration of Trust (the "Declaration of
Trust");
. the Amended and Restated Bylaws as currently in effect (the
"Bylaws");
. the Articles Supplementary relating to our Series A Preferred Shares
(the "Series A Articles Supplementary");
. the Articles Supplementary relating to our Junior Participating
Cumulative Preferred Shares (the "Series B Junior Preferred Shares") of
beneficial interest, Series B, $0.01 par value per share (the "Series B
Junior Articles Supplementary"); and
. the Articles Supplementary relating our 8.30% Series B Cumulative
Redeemable Perpetual Preferred Shares (the "Series B Preferred Shares")
of beneficial interest, $0.01 par value per share (the "Series B
Articles Supplementary"). The Series A Articles Supplementary, Series B
Articles Supplementary and the Series B Junior Articles Supplementary
are referred to as the "Articles Supplementary".
The following summary does not purport to be complete, or to give full effect to
the provisions of statutory or common law and should be read in conjunction with
the terms of the Declaration of Trust, Bylaws and Articles Supplementary.
The Declaration of Trust allows us to issue up to 100,000,000 common shares
and 20,000,000 preferred shares of beneficial interest, $0.01 par value per
share. As of September 30, 1998, there were 38,925,580 common shares, 3,773,585
Series A Preferred Shares, no Series B Junior Preferred Shares and no Series B
Preferred Shares issued by us and outstanding. As permitted by the provisions of
Title 8, as amended from time to time, of the Corporations and Associations
Article of the Annotated Code of Maryland (the "Maryland REIT Law"), the
Declaration of Trust contains a provision permitting the Board of Trustees,
without any action by our shareholders, to amend the Declaration of Trust to
increase or decrease the aggregate number of shares of beneficial interest or
the number of shares of any class of shares of beneficial interest that we may
issue.
As a Maryland REIT, we are subject to the Maryland REIT Law and the
Maryland General Corporation Law, as amended from time to time (the "MGCL").
Both the Maryland REIT Law and the Declaration of Trust provide that you will
not be personally liable for any of our obligations solely as a result of your
status as our shareholder. The Bylaws further provide that we must indemnify you
against any claim or liability to which you may become subject by reason of your
being or having been a shareholder. In addition, we must pay or reimburse you
for all legal and other expenses reasonably incurred by you in connection with
any such claim or liability successfully defended. It is our policy to include a
clause in our contracts which provides that shareholders will not be personally
liable for obligations entered into on our behalf. However, with respect to tort
claims, contractual claims where shareholder liability is not removed, claims
for taxes and statutory liability, you may, in some jurisdictions, be personally
liable to the extent that we do not satisfy such claims. Inasmuch as we carry
public liability insurance that we consider adequate, any risk of personal
liability to you is limited to situations in which our assets plus our insurance
coverage would be insufficient to satisfy the claims against us and our
shareholders.
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COMMON SHARES
All Conversion Common Shares will be duly authorized, fully paid and
nonassessable when issued, and the holders thereof will not have preemptive or
appraisal rights. As a holder of our common shares, you are entitled to the
following:
. To receive dividends if, as and when authorized and declared by the
Board of Trustees out of legally available assets. We intend to pay
quarterly dividends to the holders of our common shares.
. To share ratably in our assets legally available for distribution to our
shareholders in the event of our liquidation, dissolution or winding-up
after payment of, or adequate provision for, all of our known debts and
liabilities.
. To one vote per share on all matters voted on by shareholders, including
elections of trustees. The Declaration of Trust does not allow
cumulative voting in the election of trustees, which means the holders
of a majority of the outstanding common shares can elect all of the
trustees then standing for election.
Your rights to dividends and liquidation preferences are subject to the
preferential rights of any of our other shares or series of shares of beneficial
interest and to the provisions of the Declaration of Trust regarding Shares-in-
Trust. Your voting rights are subject to the provisions of the Declaration of
Trust regarding Shares-in-Trust
Pursuant to the Maryland REIT Law, a REIT generally cannot amend its
declaration of trust or merge unless approved by the affirmative vote of
shareholders holding at least two-thirds of the shares entitled to vote on the
matter. A REIT may establish a lesser percentage, but not less than a majority
of all the votes entitled to be cast on the matter, in the REIT's declaration of
trust. Our Declaration of Trust provides for approval by a majority of all the
votes entitled to be cast on the matter in all situations permitting or
requiring action by the shareholders except with respect to the following, each
of which requires the affirmative vote of the holders of two-thirds of the
outstanding voting shares:
. The removal of trustees.
. Any amendment to specific sections of the Declaration of Trust that
relate to the Board of Trustees, restrictions on the transfer of Shares-
in-Trust, amendments, and our termination.
. Our termination.
The Board of Trustee may, by a two-thirds vote, amend the Declaration of Trust
to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the
"Code"), or the Maryland REIT Law without the affirmative vote of the
shareholders.
The Transfer Agent and Registrar for the common shares is First Chicago
Trust Company of New York. The common shares trade on the New York Stock
Exchange (the "NYSE") under the symbol "PP." We will apply to the NYSE to list
the additional common shares to be issued upon conversion of the Series A
Preferred Shares, and we anticipate that such shares will be so listed.
PREFERRED SHARE PURCHASE RIGHTS
On February 17, 1998, pursuant to the Rights Plan, dated February 6, 1998,
between us and First Chicago Trust Company of New York, as rights agent, we
distributed as a dividend one right ("Right") for each outstanding common share.
Each Right entitles the holder to buy one one-thousandth of a share (a
"Preferred Share Partnership Unit") of the Series B Junior Preferred Shares at
an exercise price of $85, subject to adjustment. Each Preferred Share
Partnership Unit of a Series B Junior Preferred Share is structured to be the
equivalent of one common share.
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The Rights will become exercisable in the following situations:
. If a person or group acquires, obtains the right to acquire or announces
a tender offer to acquire 10%, or 11% in the case of the Selling
Shareholders and their affiliates, or more of the outstanding common
shares . Each Right would entitle its holder to acquire Series B Junior
Preferred Shares at the exercise price or, at our option, common shares,
cash, property or other securities, having a value equal to twice the
exercise price of the Right.
. If we are acquired in a merger or other business combination or if 50%
or more of our assets or earning power is transferred. Each Right would
then entitle its holder, other than the acquiring person, to purchase
securities of the surviving company having a market value equal to twice
the exercise price of the Right.
Until a person or group acquires or announces a tender offer to acquire 10%
or more of our common shares, the Rights will be evidenced by the common share
certificates and will be transferred with and only with such common share
certificates. The surrender or transfer of any certificate of common shares will
also constitute the transfer of the Rights associated with those common shares.
The Rights will expire on February 17, 2008. Also, we may redeem each Right at a
price of $0.001 at any time until ten days after an announcement that a 10%
position has been acquired.
The Rights may have anti-takeover effects. The Rights can cause substantial
dilution to a person or group that acquires more than 10%, or 11% in the case of
the Selling Shareholders and their affiliates, of our outstanding common shares.
However, because the Rights are redeemable by the Board of Trustees, the Rights
should not interfere with any merger or other business combination approved by
the Board of Trustees.
PREFERRED SHARES
The Board of Trustees may issue preferred shares in one or more series,
without shareholder approval. The Board of Trustees may establish the
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms and conditions of redemption of our preferred shares. Thus, without
shareholder approval, the Board of Trustees could authorize the issuance of
preferred shares that could have the following effects:
. dilute the voting power and other rights of the holders of common
shares, and
. delay, defer or prevent a takeover or other transaction the holders of
some, or a majority, of the common shares might believe to be in their
best interests or in which holders of some, or a majority, of the common
shares might receive a premium for their common shares over the then-
market-price of such common shares.
SERIES A PREFERRED SHARES
In December 1997 and March 1998, we issued an aggregate of 3,773,585 Series
A Preferred Shares in a private placement. The Series A Preferred Shares are
validly issued, fully paid and nonassessable. The holders of the Series A
Preferred Shares have no preemptive rights with respect to any of our shares of
capital stock or any of our other securities convertible into or carrying rights
or options to purchase any such shares. The Series A Preferred Shares are not
subject to any sinking fund or other similar obligation to redeem or retire the
Series A Preferred Shares. We do not currently intend to list the Series A
Preferred Shares on a national securities exchange or the Nasdaq National
Market.
Transfer Agent. We currently act as Transfer Agent for the Series A
Preferred Shares.
Dividends. The holders of the Series A Preferred Shares will be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds legally
available for the payment of dividends, cumulative preferential cash
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dividends of $1.60 per share or the regular cash dividend on the common shares,
or portion thereof, into which a Series A Preferred Share is convertible. Such
dividends are cumulative from the date of original issue and payable quarterly
in arrears on a date which the Board of Trustees determines (each, a "Dividend
Payment Date"). A Dividend Payment Date may be no later than the thirtieth day
after the last day of each March, June, September and December. The Board of
Trustees will establish the record date for the payment of dividends to record
holders. Such record date may not be less than 10 nor more than 50 days
preceding the applicable Dividend Payment Dates.
Dividends on Series A Preferred Shares will accrue whether or not we have
earnings, whether or not there are funds legally available for the payment of
such dividends and whether or not such dividends are declared. Interest will not
be payable and will not accrue on dividend payments on the Series A Preferred
Shares that are in arrears. Holders of Series A Preferred Shares will not be
entitled to any dividends, whether payable in cash, property or shares of stock,
in excess of the full cumulative dividends on the Series A Preferred
Shares.
As long as any Series A Preferred Shares are outstanding, no dividends will
be declared or paid on any class or shares of beneficial interest ranking on a
parity with the Series A Preferred Shares ("Parity Shares"), unless full
cumulative dividends have been declared and paid or funds reserved for such
payment on the Series A Preferred Shares for all dividend periods terminating on
or prior to the dividend payment date on such class or series of Parity Shares.
However, if accrued dividends on the Series A Preferred Shares for all prior
dividend periods have not been paid in full, then any dividend declared on the
Series A Preferred Shares and on any Parity Shares for any dividend period will
be declared ratably in proportion to accrued and unpaid dividends on the Series
A Preferred Shares and such Parity Shares.
As long as any Series A Preferred Shares are outstanding and the following
conditions are satisfied, we may declare, pay or set apart funds for the payment
of any dividend or other distribution with respect to any class or series of our
shares of beneficial interest that ranks junior to the Series A Preferred Shares
for such purposes ("Junior Shares") or purchase any Junior Shares:
. all cumulative dividends with respect to the Series A Preferred Shares
and any Parity Shares at the time such dividends are payable have been
paid or declared, and funds have been set apart for payment of such
dividends, and
. sufficient funds have been paid or declared and set apart for the
payment of the dividend for the current dividend period with respect to
the Series A Preferred Shares and any Parity Shares.
Our purchase or redemption of common shares for the purpose of any of our
employee, incentive or benefit plans or that of any subsidiary is not subject to
the above conditions. We will first credit any dividend payment that we make on
the Series A Preferred Shares against the earliest accrued but unpaid dividend
due with respect to the Series A Preferred Shares that remains payable.
As used herein, the term "dividend" does not include dividends or other
distributions payable solely in Fully Junior Shares, or in options, warrants or
rights to subscribe for or purchase any Fully Junior Shares. The term "Fully
Junior Shares" means Junior Shares that rank junior to the Series A Preferred
Shares both as to the payment of dividends and the distribution of assets upon
liquidation, dissolution and winding up.
Liquidation Rights. Upon any voluntary or involuntary liquidation,
dissolution or winding up by us, the holders of Series A Preferred Shares will
be entitled to receive out of our assets legally available for distribution to
shareholders a liquidation preference of $26.50 per Series A Preferred Share,
plus an amount per Series A Preferred Share equal to all dividends, whether or
not earned or declared, accrued and unpaid thereon to the date of final
distribution to such holders, and no more.
We may not make any payment to any holder of Junior Shares until we pay the
holders of Series A Preferred Shares and Parity Shares their liquidation
preference in full. Upon liquidation, if our assets are insufficient to pay the
liquidation preference in full to any holder of the Series A Preferred Shares or
any other Parity Shares, then our assets will be distributed to the holders of
Series A Preferred Shares and any such Parity Shares ratably in
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accordance with the respective amounts which would be payable on such Series A
Preferred Shares and any such Parity Shares, if all amounts payable were paid in
full. Neither our consolidation or merger with another entity, a statutory share
exchange nor a sale, lease or transfer of all or substantially all of our assets
will be considered a liquidation, dissolution or winding up, voluntary or
involuntary.
In determining whether a distribution, by dividend, redemption or other
acquisition of shares or otherwise, to our shareholders whose rights on
dissolution are junior to those of holders of Series A Preferred Shares is
permitted under Maryland law, no effect shall be given to the amounts that would
be needed, if we were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon dissolution of holders of Series A
Preferred Shares.
Redemption at Our Option. We may not redeem the Series A Preferred Shares
prior to December 29, 2004 except as may be required to maintain our REIT
status. On and after December 29, 2004, we may redeem the Series A Preferred
Shares for cash out of legally available funds, at a redemption price of $26.50
per share, plus accumulated, accrued and unpaid dividends. We must give 30 to
90 days prior written notice of redemption.
If we mail notice of redemption of any Series A Preferred Shares and we
deposit the funds necessary for the redemption in trust, dividends will cease to
accrue on the Series A Preferred Shares being redeemed, those shares will no
longer be deemed to be outstanding and all rights of the holders of those shares
will cease, except the right to convert such shares into common shares and the
right to receive the redemption price. If we redeem fewer than all the
outstanding Series A Preferred Shares, we will select the shares to be redeemed
by lot or by any other method.
Conversion. By giving 60 days prior written notice no earlier than November
1, 1998, the holders of the Series A Preferred Shares will have, beginning on
January 1, 1999, the right to convert all or any portion of such shares into a
number of common shares based on a conversion price of $26.50 per common share,
subject to adjustment (the "Conversion Price"). Such conversion may occur
earlier than January 1, 1999, in the event of a change of control of Prentiss
Properties Trust or the termination of our status as a REIT, or as we otherwise
determine. The right to convert Series A Preferred Shares called for redemption
will terminate at the close of business on the fifth business day prior to the
redemption date for such Series A Preferred Shares unless we do not pay the
applicable redemption price. Holders of Series A Preferred Shares may convert
those shares by surrendering the certificate representing those shares endorsed
to us or in blank at the office of the Transfer Agent, together with a written
notice of conversion.
The holders of Series A Preferred Shares at the close of business on a
dividend record date will be entitled to receive that dividend on the
corresponding Dividend Payment Date, even if they convert the Series A Preferred
Shares between those dates. The holders of Series A Preferred Shares who
surrender such shares for conversion during the period between the close of
business on any dividend record date and the opening of business on the
corresponding Dividend Payment Date, except shares converted after the issuance
of a redemption notice during such period, must be accompanied by payment of an
amount equal to the dividend payable on such shares on such Dividend Payment
Date. Holders of Series A Preferred Shares on a dividend payment record date
who, or whose transferee, tender any such shares for conversion into common
shares on the corresponding Dividend Payment Date will receive the dividend
payable by us on such Series A Preferred Shares on such date, and the converting
holder need not include payment of the amount of such dividend upon surrender of
Series A Preferred Shares for conversion. We will not otherwise make any payment
or allowance for unpaid dividends, whether or not in arrears, on converted
Series A Preferred Shares or for dividends on the common shares issued upon such
conversion.
Conversion Price Adjustments. The Conversion Price is subject to adjustment
upon the following events:
. the payment of dividends and other distributions payable in common
shares on any class of our shares of beneficial interest;
. the subdivision, combination and reclassification of common shares;
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. the issuance to all holders of our common shares of rights, options or
warrants entitling them to subscribe for or purchase common shares at a
price per share less than 100% of the fair market value per common
share, as defined in the Series A Articles Supplementary;
. the distribution to all holders of our common shares of any of our
securities, other than common shares, or evidence of our indebtedness or
assets, excluding cumulative cash dividends or distributions that are
less than undistributed funds from operations, or rights, options or
warrants to subscribe for or purchase any of our securities, excluding
those rights, options and warrants referred to above; and
. our tender or exchange offer for all or any portion of the common shares
which involves the payment of consideration per common share having a
fair market value that exceeds the Current Market Price per common
share, as defined in the Series A Articles Supplementary.
If we are a party to any transaction, including a merger, consolidation,
statutory share exchange, self tender offer for all or substantially all of our
common shares, sale of all or substantially all of our assets or
recapitalization of our common shares, in which common shares will be converted
into the right to receive shares, securities or other property, each Series A
Preferred Share that is not redeemed or converted into the right to receive
shares, securities or other property prior to such transaction will thereafter
be convertible into the kind and amount of shares of beneficial interest,
securities and other property receivable upon the consummation of such
transaction by a holder of that number of common shares into which one Series A
Preferred Share was convertible immediately prior to such transaction. Such
holder of common shares (1) may not be a person with which we consolidated or
into which we merged or which merged into us or to which such sale or transfer
was made, as the case may be, and (2) must exercise any rights of election as to
the kind or amount of shares, securities and other property receivable upon such
transaction. We may not become a party to any such transaction unless the terms
thereof are consistent with the foregoing.
No adjustment of the Conversion Price is required until cumulative
adjustments amount to 1% or more of the Conversion Price. Any adjustments not
made will be carried forward and taken into account in subsequent
adjustments.
Limitation on Issuance of Additional Preferred Shares and Indebtedness.
Without the written consent of the holders of a majority of the issued and
outstanding Series A Preferred Shares, neither we nor the operating partnership,
or any of our subsidiaries, may issue any class of preferred securities or incur
any indebtedness, other than trade payables or accrued expenses incurred in the
ordinary course of business, if such issuance would cause our ratio of
Consolidated EBITDA to Consolidated Fixed Charges, as defined in the Series A
Articles Supplementary, for the four fiscal quarters immediately preceding such
issuance to be less than 1.75 to 1.0.
Ranking. With respect to payment of dividends and amounts upon liquidation,
dissolution or winding up, the Series A Preferred Shares will rank as
follows:
. senior to the common shares and any other class or series of our shares
of beneficial interest over which the Series A Preferred Shares have
preference or priority in the payment of dividends or distributions upon
our liquidation, dissolution or winding up;
. on a parity with all our equity securities, the terms of which provide
that the holders of such class or series and the holders of Series A
Preferred Shares shall be entitled to the receipt of dividends and
amounts distributable upon liquidation, dissolution or winding up in
proportion to their respective amounts of accrued and unpaid dividends
per share or liquidation preference, without the preference or priority
of one over the other; and
. junior to all our existing and future indebtedness and our equity
securities, the terms of which provide that the holders of such class or
series are entitled to receipt of dividends or amounts distributable
upon liquidation, dissolution or winding up, as the case may be, in
preference or
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priority to the holders of the Series A Preferred Shares. The term
"equity securities" does not include convertible debt securities,
which will rank senior to the Series A Preferred Stock prior to
conversion.
Voting Rights. The holders of Series A Preferred Shares generally have no
voting rights. However, if for two consecutive quarterly periods any of the
following conditions exist, the number of Trustees constituting the Board of
Trustees will be increased by two, and the holders of Series A Preferred Shares,
voting as a single class, will have the right to elect the two additional
Trustees at any annual meeting of shareholders or a properly called special
meeting:
. dividends payable on the Series A Preferred Shares are in arrears,
whether or not earned or declared;
. we fail to pay dividends on the common shares of at least $0.38 per
share, subject to adjustment; or
. we fail to maintain a ratio of Consolidated EBITDA to Consolidated
Fixed Charges of at least 1.75.
Whenever all of the above three conditions cease to exist, then such voting
rights will terminate, and the number of Trustees on the Board of Trustees will
be reduced accordingly. The term of office of all Trustees so elected will
terminate with the termination of such voting rights.
In addition, the approval of at least 51% of holders of the outstanding
Series A Preferred Shares, voting as a single class, is required in order
to:
. amend, alter or repeal the Declaration of Trust, including the
Articles Supplementary, to affect materially and adversely the rights,
preferences or voting power of the holders of the Series A Preferred
Shares. The amendment of the Declaration of Trust to create, authorize
or increase the authorized number of any Parity Shares, Junior Shares
or Fully Junior Shares will not be considered to have a material or
adverse affect on the holders of the Series A Preferred Shares;
. enter into a share exchange that affects the Series A Preferred
Shares; or
. consolidate with or merge with another entity, or consolidate or merge
another entity with and into us.
The approval of the holders of the outstanding Series A Preferred Shares is
not required in connection with a merger or consolidation if each Series A
Preferred Share remains outstanding without a material and adverse change to its
terms and rights or is converted into or exchanged for convertible preferred
shares of the surviving entity having rights identical in all material respects
to that of the Series A Preferred Shares. Additionally, no such vote of the
holders of the Series A Preferred Shares is required if we redeem all the
outstanding Series A Preferred Shares to the extent such redemption is
authorized by the Series A Articles Supplementary and the Declaration of
Trust.
SERIES B PREFERRED SHARES
In connection with our Shareholder Rights Plan, we designated 1,000,000
Series B Junior Preferred Shares, which may be issued to holders of Rights if
such Rights become exercisable. As of the date hereof, no Series B Junior
Preferred Shares were issued or outstanding.
On June 25, 1998, we privately placed 1,900,000 8.30% Series B Cumulative
Redeemable Perpetual Preferred Units of the operating partnership (the "Series B
Preferred Units") with Belaire Capital Fund LLC. In
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connection with the private placement, on June 25, 1998, we designated 1,900,000
Series B Preferred Shares. The holders of the Series B Preferred Units may
exchange the Series B Preferred Units at any time on or after June 25, 2008. The
Series B Preferred Units are exchangeable for Series B Preferred Shares at an
exchange rate of one Series B Preferred Share for one Series B Preferred Unit,
subject to adjustments. As of the date hereof, no Series B Preferred Shares were
issued or outstanding.
REGISTRATION RIGHTS
This summary of the material terms of the registration rights agreement
with Security Capital Preferred Growth Incorporated does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all the provisions of the registration rights agreement.
Pursuant to the registration rights agreement, we have agreed with Security
Capital Preferred Growth Incorporated, for the benefit of holders of the Series
A Preferred Shares and of any common shares issued upon the conversion thereof,
that we will, at our cost, keep the registration statement effective until
December 29, 2000, or earlier if all Series A Preferred Shares and common shares
covered by the registration statement have been sold pursuant to the
registration statement or may be sold in accordance with Rule 144(k) under the
Securities Act.
We will provide to each Selling Shareholder copies of the registration
statement, any amendment thereto, the prospectus that is a part of the
registration statement and such other documents as the Selling Shareholders may
reasonably request and take other actions as are required to permit unrestricted
resales of the Series A Preferred Shares or the Conversion Common Shares, as the
case may be. A Selling Shareholder selling Series A Preferred Shares or
Conversion Common Shares pursuant to the registration statement generally will
be
. required to deliver a prospectus to purchasers,
. subject to civil liability provisions under the Securities Act in
connection with such sales, and
. bound by the provisions of the registration rights agreement that are
applicable to such Selling Shareholder, including indemnification
obligations.
Additionally, prospective investors should be aware that if a Selling
Shareholder wishes to sell Series A Preferred Shares or Conversion Common Shares
through a broker-dealer, the broker-dealer may be unwilling to proceed with such
sale unless the Selling Shareholder indemnifies it against securities law
liabilities the broker-dealer may face as a result of participating in a
registered distribution.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
In order to qualify as a REIT under the Code, we must satisfy requirements
concerning the ownership of our outstanding shares of beneficial interest.
Specifically, no more than 50% in value of our outstanding shares of beneficial
interest may be owned, directly or indirectly, by five or fewer individuals or
entities during the last half of a taxable year, other than its 1996 taxable
year, and we must be beneficially owned by 100 or more persons during at least
335 days of a taxable year of 12 months or during a proportionate part of a
shorter taxable year, other than our 1996 taxable year.
Because the Board of Trustees believes it is essential for us to continue
to qualify as a REIT, the Declaration of Trust provides that no person may own
more than 8.5% of the number of outstanding common shares other than Michael V.
Prentiss, who currently may own up to 15% of the number of outstanding common
shares, or more than 9.8% of the number of outstanding preferred shares of any
series other than the Selling Shareholders, which may own all of the Series A
Preferred Shares (the "Ownership Limitation"). The Board of Trustees may, but is
not required to, decrease the ownership limit applicable to Mr. Prentiss'
ownership of common shares to as low as 9.8% of the outstanding common shares
upon an increase in the number of outstanding common shares or a reduction of
the number of common shares owned, directly or indirectly, by Mr. Prentiss. Upon
any such
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adjustment, the Ownership Limitation applicable to other shareholders with
respect to the common shares will be increased proportionately to a maximum of
9.8% of the number of outstanding common shares.
The Board of Trustees may exempt a recipient of common shares from the
Ownership Limitation as long as we receive evidence that our REIT status will
not be lost as follows:
. receipt of a ruling from the Internal Revenue Service (the
"IRS"),
. an opinion of counsel, or
. other evidence satisfactory to the Board of Trustees.
The Board of Trustees has exempted the Selling Shareholders from the Ownership
Limitation on the condition that Selling Shareholders not own more than 11% of
the number of outstanding common shares. The Board of Trustees may monitor,
modify, suspend or revoke the Selling Shareholders' 11% ownership limitation as
may be required to maintain our REIT status The Board of Trustees may not grant
an exemption from the Ownership Limitation to any proposed transferee if such
exemption would result in the termination of our status as a REIT.
Any transfer of common shares or preferred shares that causes any one of
the following conditions to exist will be null and void, and the intended
transferee will acquire no rights in such common shares or preferred
shares:
. any person owning, directly or indirectly, common shares or preferred
shares in excess of the Ownership Limitation;
. our outstanding shares being owned by fewer than 100 persons,
determined without reference to any rules of attribution;
. our being "closely held" within the meaning of Section 856(h) of the
Code; or
. our owning, directly or constructively, 10% or more of the ownership
interests in one of our tenants or the operating partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code.
If any purported transfer of common shares or preferred shares results in any of
the four above conditions, the common shares or preferred shares in excess of
the applicable limitation will be designated as "Shares-in-Trust" and
transferred automatically to a trust (the "Share Trust") effective on the day
before the purported transfer of such common shares or preferred shares. The
record holder of the common shares or preferred shares that are designated as
Shares-in-Trust (the "Prohibited Owner") will be required to submit such number
of common shares or preferred shares to us for registration in the name of the
Share Trust. We will designate the Share Trustee, but the Share Trustee will not
be affiliated with us. We will name one or more charitable organizations as the
beneficiary of the Share Trust (the "Beneficiary").
Shares-in-Trust will remain issued and outstanding common shares or
preferred shares and will be entitled to the same rights and privileges as all
other shares of the same class or series. The Share Trust will receive all
dividends and distributions on the Shares-in-Trust and will hold such dividends
and distributions in trust for the benefit of the Beneficiary. The Share Trustee
will vote all Shares-in-Trust. The Share Trustee may transfer the Shares-in-
Trust, provided the transferee:
. purchases such Shares-in-Trust for valuable consideration, and
. acquires such Shares-in-Trust without such acquisition resulting in a
transfer to another Share Trust and resulting in the redesignation of
such common shares or preferred shares as Shares-in-Trust.
The Prohibited Owner with respect to Shares-in-Trust:
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. will be required to repay to the Share Trust the amount of any
dividends or distributions received by the Prohibited Owner that are
attributable to any Shares-in-Trust, and
. will generally receive from the Share Trustee the lower of (1) the
amount paid by the Prohibited Owner for the common shares designated
as Shares-in-Trust, or, in the case of a gift or devise, the Market
Price, as defined in the Declaration of Trust, per share on the date
of such transfer, or (2) the amount received by the Share Trustee from
the sale of such Shares-in-Trust. Any amounts received by the Share
Trustee in excess of the amounts to be paid to the Prohibited Owner
will be distributed to the Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to us, or
our designee, at a price per share equal to the lesser of the following:
. the price per share in the transaction that created such Shares-in-
Trust, or, in the case of a gift or devise, the Market Price per share
on the date of such transfer, or
. the Market Price per share on the date that we, or our designee,
accepts such offer.
We will have the right to accept such offer for a period of 90 days after the
date of the purported transfer which resulted in such Shares-in-Trust.
Any person who acquires or attempts to acquire common shares or preferred
shares in violation of the foregoing restrictions, or any person who owned
common shares or preferred shares that were transferred to a Share Trust, is
required to immediately give written notice to us and to provide us such other
information as we may request in order to determine the effect, if any, of such
transfer on our status as a REIT.
The Declaration of Trust requires all persons who own, directly or
indirectly, more than 5%, or such lower percentages as required pursuant to
regulations under the Code, of the outstanding common shares and preferred
shares, within 30 days after January 1 of each year, to provide us a written
statement or affidavit stating their name and address, the number of common
shares and preferred shares owned, and a description of how such shares are
held. In addition, each direct or indirect shareholder must provide us such
additional information as we may request in order to determine the effect, if
any, of such ownership on our status as a REIT and to ensure compliance with the
Ownership Limitation.
The Ownership Limitation generally will not apply to the acquisition of
common shares or preferred shares by an underwriter that participates in a
public offering of such shares. In addition, the Board of Trustees, upon receipt
of a ruling from the IRS or an opinion of counsel and upon such other conditions
as the Board of Trustees may direct, may exempt a person from the Ownership
Limitation. However, the Board of Trustees may not grant an exemption from the
Ownership Limitation to any proposed transferee whose ownership, direct or
indirect, of our shares of beneficial interest in excess of the Ownership
Limitation would result in the termination of our status as a REIT. The
foregoing restrictions will continue to apply until the Board of Trustees
determines that it is no longer in our best interests to attempt to qualify, or
to continue to qualify, as a REIT and there is an affirmative vote of a majority
of the votes entitled to be cast on such matter at a regular or special meeting
of our shareholders.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a transaction or a change in control that might involve a premium
price for our common shares or otherwise be in the best interest of our
shareholders. All certificates representing common shares or preferred shares
will bear a legend referring to the restrictions described above.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material federal income tax
considerations that may be relevant to a prospective holder of the Series A
Preferred Shares or Conversion Common Shares (the "Offered Securities"). This
discussion does not address all aspects of taxation that may be relevant to
particular shareholders in light of their personal investment or tax
circumstances, or to shareholders, such as insurance companies, tax-exempt
organizations, except to the extent described below, financial institutions or
broker-dealers, foreign corporations, and persons who are not citizens or
residents of the United States, except to the extent described below, subject to
special treatment under the federal income tax laws.
This discussion is based on current provisions of the Code, existing,
temporary, and currently proposed Treasury Regulations promulgated under the
Code, the legislative history of the Code, existing administrative rulings and
practices of the IRS, and judicial decisions. No assurance can be given that
future legislative, judicial, or administrative actions or decisions, which may
be retroactive in effect, will not affect the accuracy of any statements in this
prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes. Akin, Gump, Strauss, Hauer & Feld,
L.L.P. has opined that this summary of the material federal income tax
consequences fairly summarizes the federal income tax consideration that are
likely to be material to a holder of the common shares.
BECAUSE YOUR INCOME TAX CONSIDERATIONS MAY VARY DEPENDING ON YOUR PERSONAL
INVESTMENT OR TAX CIRCUMSTANCES, WE RECOMMEND YOU CONSULT YOUR OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP, AND
SALE OF THE OFFERED SECURITIES AND OF OUR ELECTION TO BE TAXED AS A REIT,
INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF PRENTISS PROPERTIES TRUST
We elected to be taxed as a REIT within the meaning of and under sections
856 through 860 of the Code, effective for its short taxable year beginning on
the day prior to the closing of its IPO and ending on December 31, 1996. We
believe that, commencing with such taxable year, we have been organized and have
operated in such a manner so as to qualify for taxation as a REIT under the
Code, and we intend to continue to operate in such a manner. However, we can
give no assurance that we have or will remain so qualified.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
Qualification and taxation as a REIT depends upon our ability to meet on a
continuing basis, through actual annual operating results, distribution levels,
and share ownership, the various qualification tests imposed under the Code. No
assurance can be given that the actual results of our operations for any
particular taxable year will satisfy such requirements.
As a REIT, we generally are not subject to federal corporate income tax on
our net income that is distributed currently to our shareholders. That treatment
substantially eliminates the "double taxation", i.e., taxation at both the
corporate and shareholder levels, that generally results from an investment in a
corporation. However, we will be subject to federal income tax in the following
circumstances:
. we will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains.
. we may be subject to the "alternative minimum tax" on its
undistributed items of tax preference, if any.
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. if we have (1) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in
the ordinary course of business or (2) other nonqualifying income from
foreclosure property, we will be subject to tax at the highest
corporate rate on such income.
. if we have net income from prohibited transactions, which are, in
general, sales or other dispositions of property, other than
foreclosure property, held primarily for sale to customers in the
ordinary course of business, such income will be subject to a 100%
tax.
. if we fail to satisfy the 75% gross income test or the 95% gross
income test, as discussed below, and nonetheless have maintained our
qualification as a REIT because other requirements have been met, it
will be subject to a 100% tax on (1) the gross income attributable to
the greater of the amount by which we fail the 75% or 95% gross income
test multiplied by (2) a fraction intended to reflect our
profitability.
. if we should fail to distribute during each calendar year at least the
sum of (1) 85% of our REIT ordinary income for such year, (2) 95% of
our REIT capital gain net income for such year, and (3) any
undistributed taxable income from prior periods, we would be subject
to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. To the extent that we elect to
retain and pay income tax on the net long-term capital gain that we
receive in a taxable year, such retained amounts will be treated as
having been distributed for purposes of the 4% excise tax.
. if we acquire any asset from a C corporation, i.e., a corporation
generally subject to full corporate-level tax, in a transaction in
which the basis of the asset in our hands is determined by reference
to the basis of the asset, or any other asset, in the hands of the C
corporation and we recognize gain on the disposition of such asset
during the 10-year period beginning on the date on which such asset
was acquired by us, then to the extent of such asset's "built-in-
gain", i.e., the excess of the fair market value of such asset at the
time of our acquisition over the adjusted basis in such asset at such
time, such gain will be subject to tax at the highest regular
corporate rate applicable, as provided in Treasury Regulations that
have not yet been promulgated. The results described above with
respect to the recognition of "built-in-gain" assume that we will make
an election pursuant to IRS Notice 88-19 if we were to make any such
acquisition.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares,
or by transferable certificates of beneficial interest;
(3) that would be taxable as a domestic corporation, but for sections 856
through 860 of the Code;
(4) that is neither a financial institution referred to in section
582(c)(2) of the Code nor an insurance company to which subchapter L
of the Code applies;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) not more than 50% in value of the outstanding shares of which is
owned, directly or indirectly, by five or fewer individuals or
entities, during the last half of each taxable year (the "5/50
Rule");
(7) that makes an election to be a REIT, or has made such election for a
previous taxable year, and satisfies all relevant filing and other
administrative requirements established by the IRS that must be met in
order to elect and maintain REIT status;
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(8) that uses a calendar year for federal income tax purposes and complies
with the recordkeeping requirements of the Code and Treasury
Regulations promulgated thereunder; and
(9) that meets the Code's income and asset tests.
The Code provides that conditions (1) through (4) must be met during the
entire taxable year and that condition (5) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable year
of less than 12 months. Conditions (5) and (6) will not apply until after the
first taxable year for which an election is made by us to be taxed as a REIT.
Beginning with its 1998 taxable year, if we comply with the requirements for
ascertaining the ownership of our outstanding shares of beneficial interest and
do not know or have reason to know that we have violated the 5/50 Rule, we will
be deemed to satisfy the 5/50 Rule for the taxable year. We have issued
sufficient common shares with sufficient diversity of ownership to allow us to
satisfy requirements (5) and (6). In addition, the Declaration of Trust provides
for restrictions regarding transfer of our shares that are intended to assist us
in continuing to satisfy the share ownership requirements described in clauses
(5) and (6) above.
For purposes of determining stock ownership under the 5/50 Rule, a
supplemental unemployment compensation benefits plan, a private foundation, or a
portion of a trust permanently set aside or used exclusively for charitable
purposes is generally considered an individual. A trust that is a qualified
trust under Code section 401(a), however, is generally not considered an
individual, and beneficiaries of such trust are treated as holding shares of a
REIT in proportion to their actuarial interests in such trust for purposes of
the 5/50 Rule.
We currently have three wholly-owned subsidiaries, the general partner, the
general partner of Prentiss Properties Real Estate Fund I, L.P. and the general
partner of Prentiss Austin Properties, L.P., and may have additional wholly-
owned subsidiaries in the future. Code section 856(i) provides that a
corporation that is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities, and items of income,
deduction, and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities, and items of income, deduction, and credit of the REIT. A
"qualified REIT subsidiary" is a corporation all of the capital stock of which
is owned by the REIT. In applying the requirements described herein, any of our
"qualified REIT subsidiaries" will be ignored, and all assets, liabilities, and
items of income, deduction, and credit of such subsidiaries will be treated as
our assets, liabilities, and items of income, deduction, and credit. All of our
corporate subsidiaries are "qualified REIT subsidiaries." Those subsidiaries,
therefore, will not be subject to federal corporate income taxation, although
they may be subject to state and local taxation.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share,
determined on the basis of the REIT's capital interest in the partnership, of
the assets of the partnership and will be deemed to be entitled to the gross
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of section 856 of the Code, including satisfying the
gross income and asset tests described below. Thus, our proportionate share of
the assets, liabilities, and items of income of the operating partnership and
the noncorporate subsidiaries of the operating partnership (the "Noncorporate
Subsidiaries") will be treated as our assets, liabilities, and items of income
for purposes of applying the requirements described herein.
INCOME TESTS
In order for us to qualify and to maintain its qualification as a REIT, two
requirements relating to our gross income must be satisfied annually. First, at
least 75% of our gross income, excluding gross income from prohibited
transactions, for each taxable year must consist of defined types of income
derived directly or indirectly from investments relating to real property or
mortgages on real property, including "rents from real property" and, interest
on obligations secured by mortgages on real property, or qualified temporary
investment income. Second, at least 95% of our gross income, excluding gross
income from prohibited transactions, for each taxable year must be derived from
such real property or temporary investments, and from dividends, other types of
interest, and gain from the sale or disposition of stock or securities, or from
any combination of the foregoing.
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The rent we receive from our tenants ("Rent") will qualify as "rents from
real property" in satisfying the gross income requirements for a REIT described
above only if the following conditions are met:
. the amount of Rent must not be based, in whole or in part, on the
income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales.
. the Rent received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if we, or a direct or
indirect owner of 10% or more of our shares of beneficial interest,
directly or constructively owns 10% or more of such tenant (a "Related
Party Tenant").
. if Rent attributable to personal property, leased in connection with a
lease of a Property, is greater than 15% of the total Rent received
under the lease, then the portion of Rent attributable to such
personal property will not qualify as "rents from real property."
. for the Rent to qualify as "rents from real property," we generally
must not operate or manage the Properties or furnish or render
services to the tenants of such Properties, other than through an
"independent contractor" who is adequately compensated and from whom
we derive no revenue.
The "independent contractor" requirement, however, does not apply to the extent
the services provided by us are "usually or customarily rendered" in connection
with the rental of space for occupancy only, e.g., furnishing water, heat,
light, and air conditioning and cleaning windows, public entrances, and lobbies,
and are not otherwise considered "rendered to the occupant", e.g., renting
parking spaces on a reserved basis to tenants. In addition, we may furnish or
render a de minimis amount of "noncustomary services" to the tenants of a
Property other than through an independent contractor as long as the amount that
we receive for such services does not exceed 1% of our total receipts from the
Property. For that purpose, the amount attributable to our noncustomary services
will be at least equal to 150% of our cost of providing the services.
We do not charge Rent for any portion of any Property that is based, in
whole or in part, on the income or profits of any person, except by reason of
being based on a fixed percentage or percentages of receipts or sales, as
described above. Furthermore, we expect that, with respect to other properties
that we may acquire in the future, we will not charge Rent for any portion of
any property that is based, in whole or in part, on the income or profits of any
person to the extent that the receipt of such Rent would jeopardize our status
as a REIT. In addition, we currently do not receive any Rent from a Related
Party Tenant, and we expect that, to the extent that we receive Rent from a
Related Party Tenant in the future, such Rent will not cause us to fail to
satisfy either the 75% or 95% gross income test. We also currently do not
receive Rent attributable to personal property that is greater than 15% of the
Rent received under the applicable Lease. We expect that, in the future, we will
not allow the Rent attributable to personal property leased in connection with
any lease of real property to exceed 15% of the total Rent received under the
lease, if the receipt of such Rent would cause us to fail to satisfy either the
75% or 95% gross income test.
Through the operating partnership and the Noncorporate Subsidiaries, none
of which constitutes a qualifying independent contractor, we provide and will
provide in the future real estate services to our tenants. We believe that all
such services are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise "rendered to the
occupant," so that the provision of such services does not jeopardize the
qualification of the Rent as "rents from real property." In the case of any
services that are not "usual and customary" under the foregoing rules, we employ
and will continue to employ qualifying independent contractors to provide such
services. Furthermore, we expect that 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 us to fail to satisfy either the 75% or 95% gross
income test.
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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 us during a taxable
year that is not qualifying income for purposes of the 95% gross income test,
exceeds 5% of our gross income during such year, we would likely lose our REIT
status. If, however, any portion of the Rent received under a lease does not
qualify as "rents from real property" because either the Rent is considered
based on the income or profits of any person or the tenant is a Related Party
Tenant, none of the Rent we receive under such lease would qualify as "rents
from real property." In that case, if the Rent we receive under such lease, plus
any other income we receive during the taxable year that is not qualifying
income for purposes of the 95% gross income test, exceeds 5% of our gross income
for such year, we would likely lose our REIT status. Finally, if any portion of
the Rent does not qualify as "rents from real property" because we furnish
noncustomary services to the tenants of a Property other than through a
qualifying independent contractor, none of the Rent we receive with respect to
the related Property would qualify as "rents from real property." In that case,
if the Rent we receive with respect to the related Property, plus any other
income we receive during the taxable year that is not qualifying income for
purposes of the 95% gross income test, exceeds 5% of our gross income for such
year, we would lose our REIT status.
We, through the operating partnership, may receive other types of income
that will not qualify for purposes of the 75% or 95% gross income test. In
particular, dividends paid with respect to the stock of the Manager owned by the
operating partnership will be qualifying income for purposes of the 95% gross
income test, but not the 75% gross income test. In addition, the operating
partnership has received and in the future will receive indirectly fees for the
performance of services by a Noncorporate Subsidiary with respect to Properties
that are owned, directly or indirectly, by the operating partnership. Although
the law is not entirely clear, to the extent that the operating partnership
owns, directly or indirectly, both an interest in such Properties and an
interest in the Noncorporate Subsidiary providing the services, such fees should
be disregarded for purposes of the 75% and 95% gross income tests. However, the
remainder of such fees received by the operating partnership, i.e., any portion
of the fees that is attributable to a third party's ownership interest in the
Properties, will be nonqualifying income for purposes of the 75% and 95% gross
income tests. In addition, any fees received, directly or indirectly, by the
operating partnership in exchange for providing services with respect to
properties owned by unrelated third parties will not be qualifying income for
purposes of the 75% and 95% gross income tests. Furthermore, to the extent that
we receive interest that is accrued on the late payment of the Rent, such
amounts will not qualify as "rents from real property" and, thus, will not be
qualifying income for purposes of the 75% gross income test, but instead will be
treated as interest that qualifies for the 95% gross income test. We believe
that the aggregate amount of any such nonqualifying income in any taxable year
has not caused and will not cause us to fail to satisfy either the 75% or 95%
gross income test.
REITs generally are subject to tax at the maximum corporate rate on any
income from foreclosure property, other than income that would be qualifying
income for purposes of the 75% gross income test, less expenses directly
connected with the production of such income. "Foreclosure property" is defined
as any real property, including interests in real property, and any personal
property incident to such real property
. that is acquired by a REIT as the result of such REIT having bid on
such property at foreclosure, or having otherwise reduced such
property to ownership or possession by agreement or process of law,
after there was a default, or default was imminent, on a lease of such
property or on an indebtedness owed to the REIT that such property
secured,
. for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and
. for which such REIT makes a proper election to treat such property as
foreclosure property.
We do not anticipate that we will receive any income from foreclosure
property that is not qualifying income for purposes of the 75% gross income
test, but, if we do receive any such income, we will make an election to treat
the related property as foreclosure property.
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If property is not eligible for the election to be treated as foreclosure
property ("Ineligible Property") because the related loan was acquired by the
REIT at a time when default was imminent or anticipated, income received with
respect to such Ineligible Property may not be qualifying income for purposes of
the 75% or 95% gross income test. We anticipate that any income we receive with
respect to Ineligible Property will be qualifying income for purposes of the 75%
and 95% gross income tests.
The net income derived from a prohibited transaction is subject to a 100%
tax. The term "prohibited transaction" generally includes a sale or other
disposition of property, other than foreclosure property, that is held primarily
for sale to customers in the ordinary course of a trade or business. We believe
that no asset owned by us or the operating partnership will be held for sale to
customers and that a sale of any such asset will not be in the ordinary course
of our or the operating partnership's business. Whether an asset is held
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular asset. Nevertheless, we will attempt to
comply with the terms of safe-harbor provisions in the Code prescribing when
asset sales will not be characterized as prohibited transactions. Complete
assurance cannot be given, however, that we can comply with the safe-harbor
provisions of the Code or avoid owning property that may be characterized as
property held "primarily for sale to customers in the ordinary course of a trade
or business."
It is possible that, from time to time, we or the operating partnership
will enter into hedging transactions with respect to one or more of our assets
or liabilities. Any such hedging transaction could take a variety of forms,
including interest rate swap contracts, interest rate cap or floor contracts,
futures or forward contracts, and options. To the extent that we or the
operating partnership enters into an interest rate swap, cap agreement, option,
futures contract, forward rate agreement, or similar financial instrument to
reduce the interest rate risks with respect to indebtedness incurred or to be
incurred to acquire or carry real estate assets, any periodic income or gain
from the disposition of such contract should be qualifying income for purposes
of the 95% gross income test, but not the 75% gross income test. To the extent
that we or the operating partnership hedges with other types of financial
instruments or in other situations, it may not be entirely clear how the income
from those transactions will be treated for purposes of the various income tests
that apply to REITs under the Code. We intend to structure any hedging
transactions in a manner that does not jeopardize our status as a REIT.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we nevertheless may qualify as a REIT for such year if we are
entitled to relief under the Code. Those relief provisions generally will be
available if our failure to meet such tests is due to reasonable cause and not
due to willful neglect, we attach a schedule of the sources of our income to our
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances we would be entitled to the benefit of those relief provisions.
Even if those relief provisions apply, a 100% tax would be imposed on (1) the
gross income attributable to the greater of the amount by which we fail the 75%
or 95% gross income test multiplied by (2) a fraction intended to reflect our
profitability.
ASSET TESTS
We, at the close of each quarter of each taxable year, also must satisfy
the following two tests relating to the nature of our assets:
. at least 75% of the value of our total assets must be represented by
cash or cash items, which generally include receivables, government
securities, "real estate assets," or, in cases where we raise new
capital through stock or long-term, at least five-year, debt
offerings, temporary investments in stock or debt instruments during
the one-year period following our receipt of such capital.
. of the investments not included in the 75% asset class, the value of
any one issuer's securities we owned may not exceed 5% of the value of
our total assets; and we may not own more than 10% of any one issuer's
outstanding voting securities, except for its interests in the
operating partnership, the Noncorporate Subsidiaries, and any
qualified REIT subsidiary.
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The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the principal balance of a
mortgage does not exceed the value of the associated real property as of the
date of the REIT's loan commitment or, in the case of a purchase or a mortgage,
the date of the loan purchase commitment, and shares of other REITs. For
purposes of the 75% asset test, the term "interest in real property" includes an
interest in land and improvements thereon, such as buildings or other inherently
permanent structures, including items that are structural components of such
buildings or structures, a leasehold of real property, and an option to acquire
real property, or a leasehold of real property.
For purposes of the asset tests, we are deemed to own our proportionate
share of the assets of the operating partnership and each Noncorporate
Subsidiary, rather than our interests in those entities. At least 75% of the
value of our total assets have been and will be represented by real estate
assets, cash and cash items, including receivables, and government securities.
We, through the operating partnership, own 100% of the nonvoting stock of the
Manager and hold unsecured notes issued by the Manager. We do not own, directly
or indirectly, any of the voting stock of the Manager and believe that the value
of our ownership interest in the Manager does not exceed 5% of the value of its
total assets. In addition, we have not owned, and will not own securities of any
one issuer the value of which exceeds 5% of the value of our total assets or
more than 10% of any one issuer's outstanding voting securities, except for our
interests in the operating partnership, the Noncorporate Subsidiaries, and any
qualified REIT subsidiary. In addition, we have represented that we will not
acquire or dispose, or cause the operating partnership to acquire or dispose, of
assets in the future in a way that would cause it to violate either asset test.
If we should fail to satisfy the asset tests at the end of a calendar
quarter, such a failure would not cause us to lose our REIT status if (1) we
satisfied the asset tests at the close of the preceding calendar quarter and (2)
the discrepancy between the value of our assets and the asset test requirements
arose from changes in the market values of our assets and was not wholly or
partly caused by an acquisition of nonqualifying assets. If the condition
described in clause (2) is not satisfied, we still could avoid disqualification
by eliminating any discrepancy within 30 days after the close of the calendar
quarter in which it arose.
DISTRIBUTION REQUIREMENTS
In order to avoid corporate income taxation of our earnings, we are
required to distribute each taxable year dividends, other than capital gain
dividends and retained capital gains, to our shareholders in an aggregate amount
at least equal to (1) the sum of (A) 95% of our "REIT taxable income", computed
without regard to the dividends paid deduction and our net capital gain, and (B)
95% of the net income, after tax, if any, from foreclosure property, minus (2)
the sum of items of noncash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before we timely file our federal income tax return for such year and if paid on
or before the first regular dividend payment date after such declaration. To the
extent that we do not distribute all of our net capital gain or distribute at
least 95%, but less than 100%, of our "REIT taxable income," as adjusted, we
will be subject to tax thereon at regular corporate tax rates. Furthermore, if
we should fail to distribute during each calendar year at least the sum of (1)
85% of our REIT ordinary income for such year, (2) 95% of our REIT capital gain
income for such year, and (3) any undistributed taxable income from prior
periods, we would be subject to a 4% nondeductible excise tax on the excess of
such required distribution over the amounts actually distributed. We have made,
and intend to continue to make, timely distributions sufficient to satisfy the
annual distribution requirement. We may elect to retain and pay income tax on
our long-term capital gains. Any such retained amount will be treated as having
been distributed by us for purposes of the 4% excise tax described above.
It is possible that, from time to time, we may experience timing
differences between (1) the actual receipt of income and actual payment of
deductible expenses and (2) the inclusion of that income and deduction of such
expenses in arriving at our REIT taxable income. Further, it is possible that,
from time to time, we may be allocated a share of net capital gain attributable
to the sale of depreciated property that exceeds our allocable share of cash
attributable to that sale. Therefore, we may have less cash than is necessary to
meet our annual 95% distribution requirement or to avoid corporate income tax or
the excise tax imposed on undistributed income. In such a situation, we may find
it necessary to arrange for short-term, or possibly long-term, borrowings or to
raise funds through the issuance of Preferred Shares or common shares.
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We may be able to rectify a failure to meet the distribution requirement
for a year by paying "deficiency dividends" to our shareholders in a later year,
which may be included in our deduction for dividends paid for the earlier year.
Although we may be able to avoid being taxed on amounts distributed as
deficiency dividends, we will be required to pay to the IRS interest based upon
the amount of any deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS
Pursuant to applicable Treasury Regulations, we must maintain records and
request on an annual basis information from our shareholders designed to
disclose the actual ownership of our outstanding shares. We have complied and
intend to continue to comply with such requirements in the future.
FAILURE TO QUALIFY
If we fail to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, we will be subject to tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. Distributions to our shareholders in any year in which we fail to qualify
will not be deductible nor will they be required to be made. In such event, to
the extent of our current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income, and corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, we will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which we ceased to qualify as a REIT. It is not possible to state
whether in all circumstances we would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as we qualify as a REIT, distributions made to our taxable U.S.
shareholders out of current or accumulated earnings and profits, and not
designated as capital gain dividends or retained capital gains, will be taken
into account by such U.S. shareholders as ordinary income and will not be
eligible for the dividends received deduction generally available to
corporations. For purposes of determining whether distributions are made out of
our current or accumulated earnings and profits, our earnings and profits will
be allocated first to the Preferred Shares and then to the common shares. As
used herein, the term "U.S. shareholder" means a holder of Offered Securities
that for U.S. federal income tax purposes is (1) a citizen or resident of the
U.S., (2) a corporation, partnership, or other entity created or organized in or
under the laws of the U.S. or of any political subdivision thereof, (3) an
estate whose income from sources without the United States is includible in
gross income for U.S. federal income tax purposes regardless of its connection
with the conduct of a trade or business within the United States, or (4) any
trust with respect to which (A) a U.S. court is able to exercise primary
supervision over the administration of such trust and (B) one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust. Distributions that are designated as capital gain dividends generally
will be taxed as long-term capital gains, to the extent they do not exceed our
actual net capital gain for the taxable year, without regard to the period for
which the shareholder has held his Offered Securities. However, corporate
shareholders may be required under section 291 of the Code to treat up to 20%
of capital gain dividends as ordinary income. We may elect to retain and pay
income tax on our net long-term capital gains. In that case, our shareholders
would include in income their proportionate share of our undistributed long-term
capital gains. In addition, the shareholders would be deemed to have paid their
proportionate share of the tax paid by us, which would be credited or refunded
to the shareholders. Each shareholder's basis in his shares would be increased
by the amount of the undistributed long- term capital gain included in the
shareholder's income, less the shareholder's share of the tax paid by us.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Offered Securities, but rather will reduce
the adjusted basis of such shares. To the extent that such distributions in
excess of current and accumulated earnings and profits exceed the adjusted basis
of a shareholder's Offered Securities, such distributions will be included in
income as gains from the sale or exchange of a capital asset, assuming the
Offered Securities are capital assets in the hands of the shareholder. In
addition, any distribution we declare in October, November, or December of any
year and payable to a shareholder of record on a specified date in any such
month shall be treated as both paid by us and
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received by the shareholder on December 31 of such year, provided that the
distribution is actually paid by us during January of the following calendar
year.
Shareholders may not include in their individual income tax returns any of
our net operating losses or capital losses. Instead, we would carry over such
losses for potential offset against its future income. Taxable distributions
from us and gain from the disposition of the Offered Securities will not be
treated as passive activity income and, therefore, shareholders generally will
not be able to apply any "passive activity losses", such as losses from limited
partnerships which engage in passive activities in which a shareholder is a
limited partner, against such income. In addition, taxable distributions from us
generally will be treated as investment income for purposes of the investment
interest limitations. Capital gains from the disposition of Offered Securities,
or distributions treated as such, however, will be treated as investment income
only if the shareholder so elects, in which case such capital gains will be
taxed at ordinary income rates. We have notified and will continue to notify
shareholders after the close of our taxable year as to the portions of the
distributions attributable to that year that constitute ordinary income, return
of capital, and capital gain.
TAX CONSEQUENCES UPON CONVERSION OF SERIES A PREFERRED SHARES INTO COMMON SHARES
Generally, except with respect to cash received in lieu of fractional
shares, no gain or loss will be recognized upon the conversion of the Preferred
Shares into common shares. The tax basis of a holder of Preferred Shares (a
"Preferred Holder") in the common shares received will equal that holder's tax
basis in the Preferred Shares surrendered in the conversion reduced by any basis
attributable to fractional shares deemed received and the holding period for the
common shares will include the Preferred Holder's holding period for the
Preferred Shares. Based on the IRS's present advance ruling policy, cash
received in lieu of a fractional Common Share upon conversion of Preferred
Shares should be treated as a payment in redemption of the fractional share
interest in those common shares.
DEEMED DIVIDENDS ON SERIES A PREFERRED SHARES
The conversion price of the Preferred Shares may be adjusted if we make
distributions of stock, cash, or other property to its shareholders. While we do
not presently contemplate making such a distribution, if we make a distribution
of cash or property resulting in an adjustment to the conversion price, a
Preferred Holder may be viewed as receiving a "deemed distribution" which is
taxable as a dividend under Section 301 and 305 of the Code.
REDEMPTION OF SERIES A PREFERRED SHARES
The treatment to be accorded to any redemption by us of Preferred Shares
can only be determined on the basis of particular facts as to each Preferred
Holder at the time of redemption. In general, a Preferred Holder will recognize
capital gain or loss measured by the difference between the amount realized by
the Preferred Holder upon the redemption and that holder's adjusted tax basis in
the Preferred Shares redeemed, provided the Preferred Shares are held as a
capital asset, if that redemption (i) results in a "complete termination" of the
Preferred Holder's share interest in all classes of our shares under Section
302(b)(3) of the Code, (ii) is "substantially disproportionate" with respect to
the holder's interest in us under Section 302(b)(2) of the Code, which generally
will not be the case if only the Preferred Shares are redeemed, since they
generally do not have voting rights, or (iii) is "not essentially equivalent to
a dividend" with respect to the Preferred Holder under Section 302(b)(1) of the
Code. In determining whether any of these tests have been met, shares considered
to be owned by the Preferred Holder by reason of constructive ownership rules
set forth in the Code, as well as shares actually owned, must generally be taken
into account. To the extent a minority shareholder's interest in us is minimal,
any reduction of such shareholder's interest in us by a redemption should be
treated as a sale or exchange of such stock interest. However, to the extent a
redemption does not change the shareholder's net ownership in us, such a
redemption will be treated as a distribution under Section 301 to such redeeming
shareholder. Because the determination as to whether any of the alternative
tests of Section 302(b) of the Code will be satisfied with respect to any
particular Preferred Holder depends upon the facts and circumstances at the time
when the determination must be made, prospective investors are advised to
consult their own tax advisors to determine their tax treatment.
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If the redemption does not meet any of the tests under Section 302 of the
Code, then the redemption proceeds received from the Preferred Shares will be
treated as a distribution on the Preferred Shares as described under "--Taxation
of Taxable Domestic Shareholders." If the redemption is taxed as a dividend, the
Preferred Holder's adjusted tax basis in the Preferred Shares will be
transferred to any other share holdings of that holder in us. If, however, the
Preferred Holder has no remaining share holdings in us, that basis could be
transferred to a related person or it may be lost.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON SHARES
In general, any gain or loss realized upon a taxable disposition of the
Offered Securities by a shareholder who is not a dealer in securities will be
treated as capital gain or loss if the Offered Securities have been held as a
capital asset. Such gain or loss will generally constitute long-term capital
gain or loss and will be taxable at a rate of 20% if the Offered Securities have
been held for more than twelve months. Otherwise, such a gain will be taxed at
the holder's regular marginal tax rate. However, any loss upon a sale or
exchange of Offered Securities by a shareholder who has held such shares for six
months or less, after applying holding period rules, will be treated as a long-
term capital loss to the extent of distributions from us required to be treated
by such shareholder as long-term capital gain. All or a portion of any loss
realized upon a taxable disposition of the Offered Securities may be disallowed
if other Offered Securities are purchased within 30 days before or after the
disposition.
CAPITAL GAINS AND LOSSES
The highest marginal individual income tax rate is 39.6%. The maximum tax
rate on net capital gains applicable to noncorporate taxpayers is 20% for sales
and exchanges of assets held for more than one year. The maximum tax rate on
long-term capital gain from the sale or exchange of "section 1250 property",
i.e., depreciable real property, held for more than 18 months is 25% to the
extent that such gain would have been treated as ordinary income if the property
were "section 1245 property." With respect to distributions designated by us as
capital gain dividends and any retained capital gains that we are deemed to
distribute, we may designate, subject to limits, whether such a distribution is
taxable to its noncorporate stockholders at a 20%, or 25%. Thus, the tax rate
differential between capital gain and ordinary income for noncorporate taxpayers
may be significant. In addition, the characterization of income as capital or
ordinary may affect the deductibility of capital losses. Capital losses not
offset by capital gains may be deducted against a noncorporate taxpayer's
ordinary income only up to a maximum annual amount of $3,000. Unused capital
losses may be carried forward. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
We report and will continue to report to our U.S. shareholders and to the
IRS the amount of distributions paid during each calendar year, and the amount
of tax withheld, if any. Under the backup withholding rules, a shareholder may
be subject to backup withholding at the rate of 31% with respect to
distributions paid unless such holder is a corporation or is otherwise exempt
categories and, when required, demonstrates this fact or provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. If you are a Shareholder, and do not provide us with
his correct taxpayer identification number, you may be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against your income tax liability. In addition, we may be required to withhold a
portion of capital gain distributions to you if you fail to certify your
nonforeign status to us. The 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.
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
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are subject to taxation on their unrelated business taxable income ("UBTI").
While many investments in real estate generate UBTI, the IRS has issued a
published ruling that dividend distributions from a REIT to an exempt employee
pension trust do not constitute UBTI, provided that the shares of the REIT are
not otherwise used in an unrelated trade or business of the exempt employee
pension trust. Based on that ruling, amounts distributed by us to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the Offered Securities with debt, a
portion of its income from us will constitute UBTI pursuant to the "debt-
financed property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17), and (20), respectively, of Code section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions from
us as UBTI. In addition, a pension trust that owns more than 10% of our shares
may be required to treat a percentage of the dividends from us as UBTI (the
"UBTI Percentage"). The UBTI Percentage is the gross income derived by us from
an unrelated trade or business, determined as if we were a pension trust,
divided by our gross income for the year in which the dividends are paid. The
UBTI rule applies to a pension trust holding more than 10% of our stock only if
(1) the UBTI Percentage is at least 5%, (2) we qualify as a REIT by reason of
the modification of the 5/50 Rule that allows the beneficiaries of the pension
trust to be treated as holding our shares in proportion to their actuarial
interests in the pension trust, and (3) we are a "pension-held" REIT, i.e.,
either (A) one pension trust owns more than 25% of the value of our shares or
(B) a group of pension trusts individually holding more than 10% of the value of
our shares collectively own more than 50% of the value of our shares. Because
the Ownership Limitation prohibits any pension trust from owning more than 8.5%
of the common shares or more than 9.8% of any class or series of the Preferred
Shares, we should not be a "pension-held" REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE OFFERED SECURITIES, INCLUDING ANY REPORTING REQUIREMENTS.
If you are a Non-U.S. Shareholder, distributions that are not attributable
to gain from our sales or exchanges of U.S. real property interests and that we
do not designate as capital gains dividends or retained capital gains will be
treated as dividends of ordinary income to the extent that they are made out of
our current or accumulated earnings and profits. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
However, if income from the investment in the Offered Securities is treated as
effectively connected with the Non-U.S. Shareholder's conduct of a U.S. trade or
business, the Non-U.S. Shareholder generally will be subject to federal income
tax at graduated rates, in the same manner as U.S. shareholders are taxed with
respect to such distributions, and also may be subject to the 30% branch profits
tax in the case of a Non-U.S. Shareholder that is a non-U.S. corporation. We
expect to withhold U.S. income tax at the rate of 30% on the gross amount of any
such distributions made to a Non-U.S. Shareholder unless a lower treaty rate
applies and any required form evidencing eligibility for that reduced rate is
filed with us or the Non-U.S. Shareholder files an IRS Form 4224 with us
claiming that the distribution is effectively connected income. The Service has
issued final regulations that modify the manner in which we comply with the
withholding requirements. Those regulations are effective for distributions made
after December 31, 1998. Distributions in excess of our current and accumulated
earnings and profits will not be taxable to a shareholder to the extent that
such distributions do not exceed the adjusted basis of the shareholder's common
shares, but rather will reduce the adjusted basis of such shares. To the extent
that distributions in excess of current and accumulated earnings and profits
exceed the adjusted basis of a Non-U.S. Shareholder's Offered Securities, such
distributions will give rise to tax liability if the Non-U.S. Shareholder would
otherwise be subject to tax on any gain from the sale or disposition of his
Offered Securities, as described below. Because it generally cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the entire
amount of any distribution normally will be subject to withholding at the same
rate as a dividend. Amounts so withheld, however, are refundable to the extent
it is determined subsequently that such distribution was, in fact, in excess of
our current and accumulated earnings and profits.
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We are required to withhold 10% of any distribution in excess of our
current and accumulated earnings and profits. Consequently, although we intend
to withhold at a rate of 30% on the entire amount of any distribution, to the
extent that we do not do so, any portion of a distribution not subject to
withholding at a rate of 30% will be subject to withholding at a rate of 10%.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges by us of U.S. real property
interests will be taxed to a Non-U.S. Shareholder under the provisions of the
Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA,
distributions attributable to gain from sales of U.S. real property interests
are taxed to a Non-U.S. Shareholder as if such gain were effectively connected
with a U.S. business. Non-U.S. Shareholders thus would be taxed at the normal
capital gain rates applicable to U.S. shareholders, subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals. Distributions subject to FIRPTA also may be
subject to the 30% branch profits tax in the hands of a non-U.S. corporate
shareholder not entitled to treaty relief or exemption. We are required to
withhold 35% of any distribution that is designated by us as a capital gains
dividend. The amount withheld is creditable against the Non-U.S. Shareholder's
FIRPTA tax liability.
Gain recognized by a Non-U.S. Shareholder upon a sale of his common shares
generally will not be taxed under FIRPTA if we are a "domestically controlled
REIT," defined generally as a REIT in which at all times during a specified
testing period less than 50% in value of the stock was held directly or
indirectly by non-U.S. persons. However, because the Offered Securities will be
publicly traded, no assurance can be given that we are or will continue to be a
"domestically controlled REIT." In addition, a Non-U.S. Shareholder that owned,
actually or constructively, 5% or less of the common shares or Preferred Shares
at all times during a specified testing period will not be subject to tax under
FIRPTA if the common shares or Preferred Shares, as applicable, are "regularly
traded" on an established securities market. Furthermore, gain not subject to
FIRPTA will be taxable to a Non-U.S. Shareholder if (1) investment in the
Offered Securities is effectively connected with the Non-U.S. Shareholder's U.S.
trade or business, in which case the Non-U.S. Shareholder will be subject to the
same treatment as U.S. shareholders with respect to such gain, or (2) the Non-
U.S. Shareholder is a nonresident alien individual who was present in the U.S.
for 183 days or more during the taxable year and other conditions apply, in
which case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains. If the gain on the sale of the Offered Securities
were to be subject to taxation under FIRPTA, the Non-U.S. Shareholder would be
subject to the same treatment as U.S. shareholders with respect to such gain,
subject to applicable alternative minimum tax, a special alternative minimum tax
in the case of nonresident alien individuals, and the possible application of
the 30% branch profits tax in the case of non-U.S. corporations.
POSSIBLE LEGISLATION OR OTHER ACTION AFFECTING TAX CONSEQUENCES
The rules dealing with Federal income taxation are constantly under review
by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department. Changes to the Federal laws and interpretations thereof
could adversely affect an investment in us. For example, a proposal issued by
President Clinton on February 2, 1998, if enacted into law, may adversely affect
our ability to expand the present activities of our management subsidiaries. We
cannot predict whether, when, in what forms, or with what effective dates, the
tax laws applicable to us or an investment in us will be changed.
OTHER TAX CONSEQUENCES
We, the general partner, the operating partnership, the Manager, a
Noncorporate Subsidiary, or our shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which we,
it or they own property, transact business, or reside. Such state and local tax
treatment may not conform to the federal income tax consequences discussed
above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN INVESTMENT IN
US.
In particular, the State of Texas imposes a franchise tax upon corporations
and limited liability companies that do business in Texas, including REITs that
are organized as corporations. While we are organized as a Maryland real estate
investment trust and are therefore not subject to the Texas franchise tax, we
own, directly or
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indirectly, qualified REIT subsidiaries and limited liability companies that
are subject to the tax. The Texas franchise tax imposed on a corporation doing
business in Texas generally is equal to the greater of (1) .25% of "taxable
capital", generally, financial accounting net worth with adjustments,
apportioned to Texas; or (2) 4.5% of "taxable earned surplus", generally,
federal taxable income with adjustments, apportioned to Texas. A corporation's
taxable capital and taxable earned surplus are apportioned to Texas based upon a
fraction, the numerator of which is the corporation's gross receipts from
business transacted in Texas and the denominator of which is the corporation's
gross receipts from all sources.
TAX ASPECTS OF THE OPERATING PARTNERSHIP AND THE NONCORPORATE SUBSIDIARIES
The following discussion summarizes material federal income tax
considerations applicable to our direct or indirect investment in the operating
partnership and the Noncorporate Subsidiaries, each of the operating partnership
and the Noncorporate Subsidiaries is referred to herein as a "Partnership"). The
discussion does not cover state or local tax laws or any federal tax laws other
than income tax laws.
CLASSIFICATION AS A PARTNERSHIP
We will be entitled to include in our income our distributive share of each
Partnership's income and to deduct our distributive share of each Partnership's
losses only if each Partnership is classified for federal income tax purposes as
a partnership rather than as a corporation or an association taxable as a
corporation. An entity will be classified as a partnership rather than as a
corporation for federal income tax purposes if the entity is treated as a
partnership under Treasury regulations, effective January 1, 1997, relating to
entity classification (the "Check-the-Box Regulations") and is not a "publicly
traded" partnership.
In general, under the Check-the-Box Regulations, an unincorporated entity
with at least two members may elect to be classified either as an association
taxable as a corporation or as a partnership. If such an entity fails to make an
election, it generally will be treated as a partnership for federal income tax
purposes. The federal income tax classification of an entity that was in
existence prior to January 1, 1997, such as the Partnerships, will be respected
for all periods prior to January 1, 1997 if (1) the entity had a reasonable
basis for its claimed classification, (2) the entity and all members of the
entity recognized the federal tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and (3) neither
the entity nor any of its members was notified in writing by a taxing authority
on or before May 8, 1996 that the classification of the entity was under
examination. Each Partnership in existence on January 1, 1997 reasonably claimed
partnership classification under the Treasury Regulations relating to entity
classification in effect prior to January 1, 1997, and such classification
should be respected for federal income tax purposes. In addition, no Partnership
was notified by a taxing authority on or before May 8, 1996 that its
classification was under examination. The Partnerships intend to continue to be
classified as partnerships and no Partnership will elect to be treated as an
association taxable as a corporation for federal income tax purposes under the
Check-the-Box Regulations. We have represented that, to the best of our
knowledge, each Partnership will be treated as a "partnership" for federal
income tax purposes.
A publicly traded partnership is a partnership whose interests trade on an
established securities market or are readily tradable on a secondary market, or
the substantial equivalent thereof. A publicly traded partnership will be
treated as a corporation for federal income tax purposes unless at least 90% of
such partnership's gross income for a taxable year consists of "qualifying
income" under section 7704(d) of the Code, which generally includes any income
that is qualifying income for purposes of the 95% gross income test applicable
to REITs (the "90% Passive-Type Income Exception"). The U.S. Treasury Department
has issued regulations (the "PTP Regulations") that provide limited safe harbors
from the definition of a publicly traded partnership. Pursuant to one of those
safe harbors (the "Private Placement Exclusion"), interests in a partnership
will not be treated as readily tradable on a secondary market or the substantial
equivalent thereof if all interests in the partnership were issued in a
transaction, or transactions, that was not required to be registered under the
Securities Act, and the partnership does not have more than 100 partners at any
time during the partnership's taxable year. In determining the number of
partners in a partnership, a person owning an interest in a flow-through entity,
i.e., a partnership, grantor trust, or S corporation, that owns an interest in
the partnership is treated as a partner in such partnership only if
substantially all of the value of the owner's interest in the flow-through
entity is attributable to the flow-through entity's interest, direct or
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indirect, in the partnership and a principal purpose of the use of the flow-
through entity is to permit the partnership to satisfy the 100-partner
limitation. Each Partnership qualifies for the Private Placement Exclusion. If a
Partnership is considered a publicly traded partnership under the PTP
Regulations because it is deemed to have more than 100 partners, such
Partnership should not be treated as a corporation because it should be eligible
for the 90% Passive-Type Income Exception.
If for any reason one of the Partnerships are taxable as corporations,
rather than as partnerships, for federal income tax purposes, we would likely
not be able to qualify as a REIT. In addition, any change in a Partnership's
status for tax purposes might be treated as a taxable event, in which case we
might incur a tax liability without any related cash distribution. Further,
items of income and deduction of such Partnership would not pass through to its
partners, and its partners would be treated as shareholders for tax purposes.
Consequently, such Partnership would be required to pay income tax at corporate
tax rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing such Partnership's taxable
income.
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
Partners, not Partnerships, Subject to Tax. A partnership is not a taxable
entity for federal income tax purposes. Rather, we will be required to take into
account its allocable share of each Partnership's income, gains, losses,
deductions, and credits for any taxable year of such Partnership ending within
or with our taxable year, without regard to whether we have received or will
receive any distribution from such Partnership.
Partnership Allocations. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes under section 704(b) of the Code if they do
not comply with the provisions of section 704(b) of the Code and the Treasury
Regulations promulgated thereunder. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership, which
will be determined by taking into account all of the facts and circumstances
relating to the economic arrangement of the partners with respect to such item.
Each Partnership's allocations of taxable income and loss are intended to comply
with the requirements of section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations with Respect to Contributed Properties. Pursuant to section
704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner such that the contributor is charged with, or benefits
from, the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of such unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution. The Treasury Department has issued
regulations requiring partnerships to use a "reasonable method" for allocating
items affected by section 704(c) of the Code and outlining several reasonable
allocation methods. The operating partnership generally has elected to use the
traditional method for allocating Code section 704(c) items with respect to the
Properties it acquires in exchange for Units.
Under the Operating Partnership Agreement, depreciation or amortization
deductions of the operating partnership generally are allocated among the
partners in accordance with their respective interests in the operating
partnership, except to the extent that the operating partnership is required
under Code section 704(c) to use a method for allocating tax depreciation
deductions attributable to the Properties that results in our receiving a
disproportionately large share of such deductions. In addition, gain on the sale
of a Property contributed to the operating partnership in exchange for Units
will be specially allocated to the contributor to the extent of any "built-in"
gain with respect to such Property for federal income tax purposes. Depending on
the allocation method elected under Code section 704(c), it is possible that we
may be allocated lower amounts of depreciation deductions for tax purposes with
respect to contributed Properties than would be allocated to us if such
Properties were to have a tax basis equal to their fair market value at the time
of contribution and may be allocated taxable gain in the event of a sale of such
contributed Properties in excess of the economic profit allocated to us as a
result of such sale. These allocations may cause us to recognize taxable income
in excess of cash proceeds, which might adversely affect our ability to comply
with the REIT distribution requirement, although we do not anticipate that this
event will occur.
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The foregoing principles also will affect the calculation of our earnings and
profits for purposes of determining which portion of our distributions is
taxable as a dividend. The allocations described in this paragraph may result in
a higher portion of our distributions being taxed as dividends than would have
occurred had we purchased the Properties for cash.
Basis in Operating Partnership Interest. Our adjusted tax basis in our
partnership interest in the operating partnership generally is equal to (1) the
amount of cash and the basis of any other property contributed to the operating
partnership by us, (2) increased by (A) our allocable share of the operating
partnership's income and (B) our allocable share of indebtedness of the
operating partnership, and (3) reduced, but not below zero, by (A) our allocable
share of the operating partnership's loss and (B) the amount of cash distributed
to us, including constructive cash distributions resulting from a reduction in
our share of indebtedness of the operating partnership.
If the allocation of our distributive share of the operating partnership's
loss would reduce the adjusted tax basis of our partnership interest in the
operating partnership below zero, the recognition of such loss will be deferred
until such time as the recognition of such loss would not reduce our adjusted
tax basis below zero. To the extent that the operating partnership's
distributions, or any decrease in our share of the indebtedness of the operating
partnership, such decrease being considered a constructive cash distribution to
the partners, would reduce our adjusted tax basis below zero, such
distributions, including such constructive distributions, will constitute
taxable income to us. Such distributions and constructive distributions normally
will be characterized as capital gain, and if our partnership interest in the
operating partnership has been held for longer than the one-year long-term
capital gain holding period, the distributions and constructive distributions
will constitute long-term capital gain.
SALE OF THE OPERATING PARTNERSHIP'S OR A NONCORPORATE SUBSIDIARY'S PROPERTY
Generally, any gain realized by a Partnership on the sale of property held
for more than one year will be mid-term capital gain, and any gain realized on
the sale of property held for more than 18 months will be long-term capital
gain, except for any portion of such gain that is treated as depreciation or
cost recovery recapture. Any gain recognized by a Partnership on the disposition
of the Properties contributed to the Partnership in exchange for partnership
interests therein will be allocated first to the contributor under section
704(c) of the Code to the extent of the contributor's "built-in gain" on those
Properties for federal income tax purposes. The contributors' "built-in gain" on
the Properties sold will equal the excess of the contributors' proportionate
share of the book value of those Properties over the contributors' tax basis
allocable to those Properties at the time of the sale. Any remaining gain
recognized by a Partnership on the disposition of the contributed Properties,
and any gain recognized upon the disposition of the Properties acquired by a
Partnership for cash, will be allocated among the partners in accordance with
their respective percentage interests in the Partnership. The Bylaws provide
that any decision to sell any real estate asset in which a trustee, or officer,
or any Affiliate of the foregoing, has a direct or indirect interest, will be
made by a majority of the Trustees including a majority of the Independent
Trustees.
Our share of any gain realized by a Partnership on the sale of any property
held by the Partnership as inventory or other property held primarily for sale
to customers in the ordinary course of the Partnership's trade or business will
be treated as income from a prohibited transaction that is subject to a 100%
penalty tax. Such prohibited transaction income also may have an adverse effect
upon our ability to satisfy the income tests for REIT status. We, however, do
not presently intend to acquire or hold or to allow a Partnership to acquire or
hold any property that represents inventory or other property held primarily for
sale to customers in the ordinary course of our or the Partnership's trade or
business.
MANAGER
The operating partnership owns 100% of the nonvoting stock of the Manager,
which stock represents in the aggregate a 95% economic interest in the Manager.
The operating partnership also holds notes issued by the Manager in the
aggregate initial principal amount of $34.75 million. By virtue of its ownership
of the operating partnership, we are considered to own its pro rata share of
such stock and notes.
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As noted above, for us to qualify as a REIT the value of the equity and
debt securities of the Manager held, directly or indirectly, by us may not
exceed 5% of the total value of our assets. In addition, we may not own,
directly or indirectly, more than 10% of the voting stock of the Manager. We do
not own, directly or through the operating partnership, any of the voting
securities of the Manager. In addition, we believe that the value of the equity
and debt securities of the Manager is significantly less than 5% of the total
value of its assets. However, if the IRS were to successfully challenge these
determinations and conclude that the value of the equity and debt securities of
the Manager exceeded 5% of our total assets, we would likely fail to qualify as
a REIT.
The Manager is organized as a corporation and pays federal, state and local
income taxes on its taxable income at normal corporate rates. Any such taxes
reduce amounts available for distribution by the Manager, which in turn reduce
amounts available for distribution to our shareholders.
SELLING SHAREHOLDERS
The holder listed below and its transferees, pledgees, donees or other
successors, if not identified hereunder, then so identified in supplements to
this prospectus, are the Selling Shareholders. The Selling Shareholders may
include Merrill Lynch International Private Finance Limited, a Delaware
corporation and pledgee of Security Capital Preferred Growth Incorporated, or
any donees or other pledgees of the Selling Shareholders after the date of this
prospectus. If necessary, a supplement to this prospectus will identify any
other Selling Shareholder. The following table sets forth, as of a recent
practicable date prior to the effectiveness of the registration statement of
which this prospectus forms a part, information with respect to the Selling
Shareholders named below and the respective number of Series A Preferred Shares,
and Conversion Common Shares, owned by each Selling Shareholder that may be
offered pursuant to this prospectus. Each Selling Shareholder is registering the
entire amount of the Series A Preferred Shares and common shares set forth
opposite its name below.
<TABLE>
<CAPTION>
SERIES A PREFERRED COMMON SHARES SERIES A PREFERRED COMMON SHARES
SHARES OWNED OWNED PRIOR TO SHARES REGISTERED REGISTERED
SELLING SHAREHOLDER PRIOR TO THE OFFERING THE OFFERING HEREUNDER HEREUNDER
------------------- --------------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Security Capital Preferred 3,773,585 -0- 3,773,585 3,773,585
Growth Incorporated
</TABLE>
Because each of the Selling Shareholders may offer all, some or none of the
Series A Preferred Shares or the Conversion Common Shares, and because the
offering contemplated by this prospectus is currently not being underwritten, no
estimate can be given as to the number of Series A Preferred Shares or the
Conversion Common Shares which will be held by each of the Selling Shareholders
upon or prior to termination of this offering. Such information has been
obtained from the Selling Shareholders.
The sole relationship that the Selling Shareholder has had with us within
the past three years is in connection with the private placement.
PLAN OF DISTRIBUTION
The Selling Shareholders may from time to time offer and sell Conversion
Common Shares on the NYSE, in the over-the-counter market or otherwise. They
may sell the Series A Preferred Shares or the Conversion Common Shares in the
following manners, among others:
. in ordinary brokerage transactions; . through put or call transactions;
. in block transactions; . through short sales; or
. in private negotiated transactions; . pursuant to Rule 144.
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Those transactions may or may not involve brokers or dealers. If the
transactions do include brokers, the Selling Shareholders expect to pay
customary brokerage commissions and charges. We will pay all expenses other than
underwriting discounts, selling commissions and fees, and legal and accounting
fees incurred by the Selling Shareholders incident to the offering and sale of
the Series A Preferred Shares and the Conversion Common Shares.
The Selling Shareholders are not obligated to sell any or all of the Series
A Preferred Shares or the Conversion Common Shares offered pursuant to this
prospectus. Each of the Selling Shareholders reserves the right to accept and to
reject in whole or in part any proposed purchase of the Series A Preferred
Shares or the Conversion Common Shares.
To the extent required, a supplement to this prospectus or a post effective
amendment to the registration statement of which this prospectus is a part will
set forth the aggregate principal amount of the Series A Preferred Shares and
the number of the Conversion Common Shares to be sold, the names of the Selling
Shareholders, the purchase price, the name of any agent, dealer or underwriter
and any applicable commission with respect to a particular offer. The Selling
Shareholders and any agents, broker-dealers or underwriters that participate
with the Selling Shareholders in the distribution of the Series A Preferred
Shares or the Conversion Common Shares may be deemed to be "underwriters" within
the meaning of the Securities Act. In that event, any discounts, commissions or
concessions received by such broker-dealers, agents or underwriters and any
profit on the resale of the Series A Preferred Shares or the Conversion Common
Shares purchased by them may be deemed to be underwriting discounts or
commissions under the Securities Act.
We have agreed to indemnify the Selling Shareholders and their respective
directors, officers and controlling persons against liabilities relating to the
registration statement, including liabilities under the Securities Act. Each
Selling Shareholder has agreed to indemnify us and our directors, officers and
controlling persons against liabilities relating to information given to us by
that Selling Shareholder in writing for inclusion in the registration statement,
including liabilities under the Securities Act.
LEGAL OPINIONS
The legality of the issuance of our Series A Preferred Shares and the
Conversion Common Shares will be passed upon by Akin, Gump, Strauss, Hauer &
Feld, L.L.P., who will rely on Ballard Spahr Andrews & Ingersoll, LLP,
Baltimore, Maryland, as to matters of Maryland law.
EXPERTS
The consolidated and combined financial statements as of December 31, 1997
and 1996 and for the year ended December 31, 1997 and the period October 22,
1996, inception of operations, to December 31, 1996, and the Predecessor
Company, as defined therein, for the period January 1, 1996 through October 21,
1996, and the year ended December 31, 1995, included in our Annual Report on
Form 10-K and 10-K/A for the year ended December 31, 1997, the combined
statements of revenue and certain operating expenses of the Silicon Valley
Properties and the Newport National Properties and the statement of revenue and
certain operating expenses of the Carrara Place Property included in our Current
Reports on Form 8-K, filed February 10, 1998 and the combined statement of
revenues and certain operating expenses of the Willow Oaks Properties and the
statement of revenues and certain operating expenses of the Ordway Property
included in our Current Report on Form 8-K, filed October 9, 1998 and amended
December 24, 1998, all incorporated by reference in this prospectus, have been
incorporated herein in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants given on the authority of that firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public
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reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from our web
site at http://www.pplinc.com or at the SEC's web site at http://www.sec.gov.
We filed a registration statement on Form S-3 to register with the SEC the
Series A Preferred Shares and the common shares issuable upon conversion
thereof. This prospectus is a part of that registration statement. As allowed by
SEC rules, this prospectus does not contain all of the information you can find
in the registration statement or the exhibits to the registration statement.
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information filed with the
SEC will update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act from the date hereof until our
offering is completed.
1. Our Annual Report on Form 10-K and 10-K/A, File No. 001-14516, for the
year ended December 31, 1997.
2. Our Quarterly Reports on Form 10-Q and 10-Q/A, File No. 001-14516, for
the quarters ended March 31, June 30 and September 30, 1998.
3. Our Current Reports filed during the fiscal year ended December 31,
1998 as follows:
. Form 8-K, File No. 001-14516, filed on January 1, 1998;
. Form 8-K, File No. 001-14516, filed on January 15, 1998;
. Form 8-K, File No. 001-14516, filed on February 10, 1998;
. Form 8-K, File No. 001-14516, filed on February 17, 1998;
. Form 8-K, File No. 001-14516, filed on February 25, 1998;
. Form 8-K, File No. 001-14516, filed on July 1, 1998; and
. Form 8-K, File No. 001-14516, filed on October 9, 1998, as amended
by Form 8-K/A filed on December 24, 1998.
4. In addition to the above Current Reports, the following include
statements of revenue and expenses for acquisitions during the fiscal
year ending December 31, 1997 which were individually significant or
significant in the aggregate:
. Form S-11, File No. 333-23989, filed on March 26, 1997, as amended
by Form S-11/A, File No. 333-23989, filed on April 16, 1997;
. Form 8-K, File No. 001-14516, filed on April 16, 1997 as amended by
Form 8-K/A, File No. 001-14156, filed on June 12, 1997; and
. Form 8-K, File No. 001-14516, filed on November 3, 1997.
5. The description of the common shares contained in our registration
statement on Form 8-A, File No. 001-14516, filed on October 17, 1996,
under the Exchange Act, including any reports filed under the Exchange
Act for the purpose of updating such description.
6. The description of the Series B Junior Preferred Shares contained in
our registration statement on Form 8-A, File No. 000-23813, filed on
February 17, 1998, as amended by our registration statement of Form 8-
A, File No. 001-14516, filed on March 10, 1998, including any reports
filed under the Exchange Act for the purpose of updating such
description.
You may request a copy of these filings, at no cost, by writing or
telephoning:
34
<PAGE>
Prentiss Properties Trust
3890 W. Northwest Highway, Suite 400
Dallas, Texas
(214) 654-0886
You should rely on the information incorporated by reference or provided in
this prospectus or any prospectus supplement. We have authorized no one to
provide you different information. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this prospectus or any prospectus supplement is accurate
as of any date other than the date on the front of the document.
35
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses, other than underwriting
discounts and commissions, in connection with the issuance and distribution of
the securities being registered hereby, all of which will be paid by Prentiss
Properties Trust (the "Company"):
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.......................................... $19,866
Accounting fees and expenses................................................................. 10,000
Blue Sky fees and expenses................................................................... 1,000
Legal fees and expenses...................................................................... 50,000
Printing..................................................................................... 10,000
Miscellaneous................................................................................ 1,134
-------
TOTAL................................................................................... $92,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (a) actual receipt of an improper benefit or profit
in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Declaration of Trust of the Company contains such a provision which eliminates
such liability to the maximum extent permitted by the Maryland REIT Law.
The Declaration of Trust of the Company authorizes it, to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee or officer or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a trustee, director, officer or partner of such real estate investment trust,
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his status as present
or former shareholder. The Bylaws of the Company obligate it, to the maximum
extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former Trustee or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
Trustee of the Company and at the request of the Company, serves or has served
another real estate investment trust, corporation partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, director,
officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Declaration of Trust and Bylaws also permit the Company to indemnify and
advance expenses to any person who served a predecessor of the Company in any of
the capacities described above and to any employee or agent of the Company or a
predecessor of the Company. The Bylaws require the Company to indemnify a
Trustee or officer who has been successful, on the merits or otherwise, in the
defense of any proceeding to which he is made a party by reason of his service
in that capacity.
The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as is permitted by the MGCL for directors
II-1
<PAGE>
and officers of Maryland corporations. The MGCL permits a corporation to
indemnify its present and former directors and officers, among others, against
judgments, penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they may be made a
party by reason of their service in those or other capacities unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or officer
had reasonable corporation may not indemnify for an adverse judgment in a suit
by or in the right of the corporation or for a judgment of liability on the
basis that a personal benefit was improperly received unless a court orders
indemnification and then only for expenses. In accordance with the MGCL, the
Bylaws of the Company require it, as a condition to advancing expenses, to
obtain (a) a written affirmation by the Trustee or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws and (b) a written undertaking by or on
his behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER EXHIBITS
- ------ --------
3.1 -- Form of Amended and Restated Declaration of Trust of the Company (filed
as Exhibit 3.1 to the Company's Registration Statement on Amendment No.
1 of Form S-11, File No. 333-09863, and incorporated by reference
herein).
3.2 -- Articles Supplementary to the Amended and Restated Declaration of Trust
Classifying and Designating the Series A Preferred Shares (filed as
Exhibit 3.1 to the Company's Current Report on Form 8-K filed January
15, 1998 and incorporated by reference herein).
3.3 -- Articles Supplementary, dated February 17, 1998, Classifying and
Designating a Series of Preferred Shares of Beneficial Interest as
Junior Participating Cumulative Convertible Redeemable Preferred Shares
of Beneficial Interest, Series B, and Fixing Distribution and Other
Preferences and Rights of Such Shares (filed as Exhibit 3 to the
Company's Registration Statement on Form 8-A filed on February 17,
1998, File No. 000-23813).
3.4 -- Articles Supplementary, dated June 25, 1998, Classifying and
Designating a Series of Preferred Shares of Beneficial Interest as
Series B Cumulative Redeemable Perpetual Preferred Shares of Beneficial
Interest and Fixing Distribution and Other Preferences and Rights of
Such Shares (filed as Exhibit 3.5 to the Company's Form 10-Q filed
August 12, 1998 and incorporated by reference herein).
3.5 -- Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Amendment No. 1 of Form S-11, File No. 333-
09863, and incorporated by reference herein).
4.1 -- Form of Common Shares Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement on Amendment No. 1 of Form S-11, File
No. 333-09863, and incorporated by reference herein).
**4.2 -- Form of Series A Preferred Share Certificate.
4.3 -- Rights Agreement, dated February 6, 1998, between the Company and First
Chicago Trust Company of New York, as Rights Agent (filed as Exhibit
4.1 to the Company's Registration Statement on Form 8-A filed on
February 17, 1998 and incorporated by reference herein).
II-2
<PAGE>
4.4 -- Form of Rights Certificate (included as Exhibit A to the Rights
Agreement).
*5 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
*8 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. regarding tax
matters.
**10 -- Registration Rights Agreement, dated December 29, 1997, between the
Company and Security Capital Preferred Growth Incorporated.
*12 -- Statement regarding Computation of Ratios of Earnings to Combined
Fixed Charges and Preferred Share Dividends.
*23.1 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
Exhibits 5 and 8).
**23.2 -- Consent of Ballard Spahr Andrews & Ingersoll, LLP.
*23.3 -- Consent of PricewaterhouseCoopers LLP.
**24 -- Power of Attorney (included on the signature page of this
Registration Statement).
- -----------------------------
* Filed herewith.
** Previously filed.
(b) Financial Statement Schedules
None
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement (notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement); and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
II-3
<PAGE>
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; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in this registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant has
been advised that the in the opinion of the 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
their counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant further hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned thereunto duly
authorized, in the city of Dallas, state of Texas, on December 24, 1998.
PRENTISS PROPERTIES TRUST
By: /s/ THOMAS F. AUGUST
--------------------
Thomas F. August
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on December 24, 1998 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
/s/ MICHAEL V. PRENTISS * Chairman of the Board and Chief Executive
- ------------------------------
Michael V. Prentiss Officer
(Principal Executive Officer)
/s/ THOMAS F. AUGUST President, Chief Operating Officer and
- ------------------------------
Thomas F. August Trustee
______________________________ Trustee
Thomas J. Hynes, Jr.
/s/ BARRY J.C. PARKER * Trustee
- ------------------------------
Barry J.C. Parker
/s/ LEONARD M. RIGGS, JR. Trustee
- ------------------------------
Leonard M. Riggs, Jr.
/s/ RONALD G. STEINHART * Trustee
- ------------------------------
Ronald G. Steinhart
/s/ LAWRENCE A. WILSON * Trustee
- ------------------------------
Lawrence A. Wilson
/s/ MARK R. DORAN * Executive Vice President, Chief Financial
- ------------------------------
Mark R. Doran Office and Treasurer (Principal Financial
Officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
/s/ RICHARD J. BARTEL * Executive Senior Vice President--Financial
- ------------------------------
Richard J. Bartel Operations and Administration, and Chief
Administrative Officer
/s/ THOMAS P. SIMON * Vice President
- ------------------------------
Thomas P. Simon (Chief Accounting Officer)
</TABLE>
* By:/s/ THOMAS F. AUGUST
--------------------
Thomas F. August
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------- --------
<S> <C>
3.1 -- Form of Amended and Restated Declaration of Trust of the Company (filed as Exhibit 3.1 to the
Company's Registration Statement on Amendment No. 1 of Form S-11, File No. 333-09863, and
incorporated by reference herein).
3.2 -- Articles Supplementary to the Amended and Restated Declaration of Trust Classifying and
Designating the Series A Preferred Shares (filed as Exhibit 3.1 to the Company's Current
Report on Form 8-K filed January 15, 1998 and incorporated by reference herein).
3.3 -- Articles Supplementary, dated February 17, 1998, Classifying and Designating a Series of
Preferred Shares of Beneficial Interest as Junior Participating Cumulative Convertible
Redeemable Preferred Shares of Beneficial Interest, Series B, and Fixing Distribution and
Other Preferences and Rights of Such Shares (filed as Exhibit 3 to the Company's Registration
Statement on Form 8-A filed on February 17, 1998, File No. 000-23813).
3.4 -- Articles Supplementary, dated June 25, 1998, Classifying and Designating a Series of
Preferred Shares of Beneficial Interest as Series B Cumulative Redeemable Perpetual Preferred
Shares of Beneficial Interest and Fixing Distribution and Other Preferences and Rights of
Such Shares (filed as Exhibit 3.5 to the Company's Form 10-Q filed August 12, 1998 and
incorporated by reference herein).
3.5 -- Bylaws of the Company (filed as Exhibit 3.2 to the Company's Registration Statement on
Amendment No. 1 of Form S-11, File No. 333-09863, and incorporated by reference herein).
4.1 -- Form of Common Shares Certificate (filed as Exhibit 4.1 to the Company's Registration
Statement on Amendment No. 1 of Form S-11, File No. 333-09863, and incorporated by reference
herein).
**4.2 -- Form of Series A Preferred Share Certificate.
4.3 -- Rights Agreement, dated February 6, 1998, between the Company and First Chicago Trust Company
of New York, as Rights Agent (filed as Exhibit 4.1 to the Company's Registration Statement on
Form 8-A filed on February 17, 1998 and incorporated by reference herein).
4.4 -- Form of Rights Certificate (included as Exhibit A to the Rights Agreement).
*5 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
*8 -- Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. regarding tax matters.
**10 -- Registration Rights Agreement, dated December 29, 1997, between the Company and Security
Capital Preferred Growth Incorporated.
*12 -- Statement regarding Computation of Ratios of Earnings to Combined Fixed Charges and Preferred
Share Dividends.
*23.1 -- Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in Exhibits 5 and 8).
**23.2 -- Consent of Ballard Spahr Andrews & Ingersoll, LLP.
*23.3 -- Consent of PricewaterhouseCoopers LLP.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
**24 -- Power of Attorney (included on the signature page of this Registration Statement).
</TABLE>
_______________
* Filed herewith.
** Previously filed.
013072.0133 DALLAS #180415 v6
Security Capital
<PAGE>
EXHIBIT 5
---------
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS HERE]
December 24, 1998
Prentiss Properties Trust
3890 West Northwest Highway, Suite 400
Dallas, Texas 75220
Re: Prentiss Properties Trust
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as counsel to Prentiss Properties Trust, a Maryland real
estate investment trust (the "Company"), in connection with the Registration
Statement on Form S-3 (the "Registration Statement"), filed by the Company under
the Securities Act of 1933, as amended, relating to the sale from time to time
of (i) up to an aggregate of 3,773,585 Series A Cumulative Convertible Preferred
Shares of Beneficial Interest of the Company, par value $0.01 per share (the
"Series A Preferred Shares") as designated in the Articles Supplementary of the
Board of Trustees, dated as of December 18, 1997 (the "Articles Supplementary"),
and (ii) up to an aggregate of 3,773,585 common shares of beneficial interest of
the Company, par value $0.01 per share, that are issuable upon conversion of the
Series A Preferred Shares (the "Common Shares") as described in the Registration
Statement.
We have, as counsel, examined originals or copies, certified or otherwise
identified to our satisfaction, of such corporate records, agreements, documents
and other instruments, and such certificates or comparable documents of public
officials and of officers and representatives of the Company, and have made such
inquiries of such officers and representatives as we have deemed relevant and
necessary as a basis for the opinion hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such latter documents. In
addition, we have assumed that the Series A Preferred Shares have been issued
for at least the par value thereof and that the price at which the Series A
Preferred Shares can be converted into Common Shares will be at least the par
value of the Common Shares. As
<PAGE>
Prentiss Properties Trust
December 24,1998
Page 2
to all questions of fact material to this opinion that have not been
independently established, we have relied upon certificates or comparable
documents of officers and representatives of the Company.
Based upon such examination and representations, we advise you that, in our
opinion:
1. The Series A Preferred Shares have been duly authorized and are
validly issued, fully paid and nonassessable.
2. The Common Shares issuable upon conversion of the Series A Preferred
Shares, when issued and delivered in accordance with the terms of the Articles
Supplementary, will be duly and validly issued, fully paid and nonassessable.
In rendering the foregoing opinions, we have relied solely upon the opinion
of Ballard Spahr Andrews and Ingersoll, LLP with respect to matters of Maryland
law, and our opinions are subject to the same assumptions, qualifications and
limitations as those set forth in their opinion.
We consent to the filing of this opinion with the Commission as Exhibit 5.1
to the Registration Statement and the reference to this firm under the caption
"Legal Matters" in the Prospectus contained therein.
Very truly yours,
/s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE>
EXHIBIT 8
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS HERE]
December 24, 1998
Prentiss Properties Trust
3890 W. Northwest Highway
Suite 400
Dallas, Texas 75220
Dear Sir or Madam:
You have requested our opinion that Prentiss Properties Trust ("PPT") was
organized and has operated in conformity with the requirements for qualification
as a "real estate investment trust" (a "REIT") under the Internal Revenue Code
of 1986, as amended (the "Code"), beginning with its taxable year ending
December 31, 1996 and through the date hereof and its current and proposed
method of operation will enable PPT to continue to qualify as a REIT. In
rendering our opinion, we have examined such documents as we have deemed
necessary. We have assumed the current and continued correctness of the
representations made to us by PPT and we have made no independent verification
as to the correctness of such representations. Where any such factual
representation is qualified to the best knowledge of a person, we have assumed
that the representation is correct without regard to such qualification.
Further, we assume that all representations by PPT as to value are correct and
we have made no independent verification as to such values.
Our opinion is based on the provisions of the Code, Treasury Regulations
promulgated under the Code, judicial authority and currently published revenue
rulings and procedures, all as of the date of this letter, and all of which may
change at any time. Any change in the relevant facts (including any assumptions
upon which this opinion is, in part, based) or law could change our conclusions
and would render our opinion inapplicable. This opinion represents our best
legal judgment and has no binding effect on the IRS. Accordingly, no assurance
can be given that the IRS or a court would concur with the conclusions reached
herein.
<PAGE>
Prentiss Properties Trust
Page 2
December 24, 1998
Based on the foregoing, assuming that the election and actions of PPT
represented to us are and will be observed and completed as applicable in a
timely fashion, we are of the opinion that (i) PPT was organized and has
operated in conformity with the requirements for qualification as a REIT under
the Code beginning with its taxable year ending December 31, 1996 and through
the date hereof and its current and proposed method of operation will enable PPT
to continue to qualify as a REIT and (ii) the descriptions of the law and the
legal conclusions discussed in the Form S-3 Registration Statement filed with
the SEC on December 24, 1998 (the "Registration Statement") under the caption
"Federal Income Tax Considerations" fairly summarize the federal income tax
considerations that are likely to be material to a holder of the Series A
Preferred Shares or Common Shares issuable upon the conversion of the Series A
Preferred Shares.
We express no opinion as to any other matter. No reference may be
made to this opinion letter in any financial statement, or document, nor may
this opinion letter be distributed in any manner without our prior written
consent, except (i) such opinion may be furnished to the IRS in connection with
an examination and (ii) we consent to the filing of this opinion as an Exhibit
to the Registration Statement.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
/s/ Akin, Gump, Strauss, Hauer & Feld, L.L.P.
<PAGE>
EXHIBIT 12
----------
CALCULATION OF EARNINGS TO
--------------------------
COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS
----------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS YEAR OCT 22, 1996 JAN 1, 1996
ENDED ENDED TO TO YEAR ENDED
-----------------------
SEPTEMBER 30, 1998 1997 DEC. 31, 1996 OCT 21, 1996 1995 1994 1993
------------------ ----- ------------- ------------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income 49,779 36,946 4,996 5,118 9,970 9,072 2,857
Adjustments:
Gain on sale (8,203) (641) (378) (1,718)
Extraordinary item 8,908 878
Minority interest 5,041 5,235 844 -
Interest expense 28,245 21,131 759 4,549 3,783 3,120 1,444
Amortization of deferred financing 596 824 87 1,402 99 71 -
------------------ ------- ------------- ------------ ------ ------ -----
Earnings 84,366 64,373 6,686 10,691 13,852 10,545 4,301
Fixed Charges
Interest expense 28,245 21,131 759 4,549 3,783 3,120 1,444
Amortization of deferred financing 596 824 87 1,402 99 71 -
Perpetual preferred dividends 2,102
Convertible preferred dividends 4,146
Capitalized interest 4,057 2,022
------------------ ------- ------------- ------------ ------ ------ -----
39,146 23,977 846 5,951 3,882 3,191 1,444
Earnings to Fixed Charges and
Preferred Share Dividends 2.16 2.68 7.90 1.80 3.57 3.30 2.98
</TABLE>
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Amendment No. 1 to the
registration statement on Form S-3 of our reports dated (i) February 5, 1998,
except as to Note 23 for which the date is February 18, 1998, on our audits of
the consolidated and combined financial statements and financial statements
schedule of Prentiss Properties Trust and the Predecessor Company, (ii) October
20, 1997 on our audit of the combined statement of revenues and certain
operating expenses of the Silicon Valley Properties, (iii) February 6, 1998 on
our audits of the combined statement of revenues and certain operating expenses
of the Newport National Properties and the statement of revenues and certain
operating expenses of the Carrara Place Property, (iv) August 12, 1998 on our
audit of the statement of revenues and certain operating expenses of the Ordway
Property, and (v) September 30, 1998 on our audit of the combined statement of
revenues and certain operating expenses of the Willow Oaks Properties. We also
consent to the reference to our firm under the caption "Experts".
Dallas, Texas
December 24, 1998 /s/ PricewaterhouseCoopers LLP
