<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
ARDEN REALTY GROUP, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
-------------------
9100 Wilshire Boulevard
East Tower, Suite 700
Beverly Hills, California 90212
(310) 271-8600
(Address of principal executive offices)
------------------------
Richard S. Ziman
9100 Wilshire Boulevard
East Tower, Suite 700
Beverly Hills, California 90212
(310) 271-8600
(Name and Address of Agent for Service)
------------------------
COPIES TO:
William J. Cernius J. Warren Gorrell, Jr.
Latham & Watkins Joseph G. Connolly, Jr.
650 Town Center Drive Hogan & Hartson L.L.P.
Suite 2000 Columbia Square
Costa Mesa, California 92626 555 Thirteenth Street, N.W.
(714) 540-1235 Washington, D.C. 20004-1109
(202) 637-5600
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
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,
please check the following box. / /
-------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share....... 21,533,000 $20.00 $430,660,000 $148,504
</TABLE>
(1) Includes 2,808,000 shares which the Underwriters have the option to purchase
solely to cover overallotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
------------------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
FORM S-11
ITEM NO. AND HEADING LOCATION IN PROSPECTUS
----------------------------------- -----------------------------------
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus......................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front Cover Page; Outside
Back Cover Page; Additional
Information
3. Summary Information and Risk
Factors............................ Outside Front Cover Page;
Prospectus Summary; Risk Factors;
The Company
4. Determination of Offering Price.... Outside Front Cover Page;
Underwriting
5. Dilution........................... Dilution
6. Selling Security Holders........... Not Applicable
7. Plan of Distribution............... Outside Front Cover Page;
Underwriting
8. Use of Proceeds.................... Use of Proceeds; Business and
Properties
9. Selected Financial Data............ Selected Combined Financial Data
10. Management's Discussion and
Analysis of Financial Condition and
Results of Operations.............. Management's Discussion and
Analysis of Financial Condition and
Results of Operations
11. General Information as to
Registrant......................... Prospectus Summary; The Company;
Formation Transactions
12. Policy with Respect to Certain
Activities......................... Policies and Objectives With
Respect to Certain Activities
13. Investment Policies of
Registrant......................... Policies and Objectives With
Respect to Certain Activities
14. Description of Real Estate......... Prospectus Summary; Business and
Properties
15. Operating Data..................... Business and Properties
16. Tax Treatment of Registrant and its
Security Holders................... Prospectus Summary; Federal Income
Tax Considerations
17. Market Price of and Dividends on
the Registrant's Common Equity and
Related Stockholder Matters........ Distribution Policy; Shares
Available for Future Sale; Capital
Stock
18. Description of Registrant's
Securities......................... Capital Stock
19. Legal Proceedings.................. Business and Properties -- Legal
Proceedings
20. Security Ownership of Certain
Beneficial Owners and Management... Principal Stockholders
21. Directors and Executive Officers... Management
22. Executive Compensation............. Management -- Executive
Compensation
23. Certain Relationships and Related
Transactions....................... Management; Formation Transactions;
Certain Transactions
24. Selection, Management and Custody
of Registrant's Investments........ Risk Factors; The Company; Policies
and Objectives With Respect to
Certain Activities
25. Policies with Respect to Certain
Transactions....................... Risk Factors; Policies and
Objectives With Respect to Certain
Activities; Certain Transactions
26. Limitations of Liability........... Capital Stock -- Charter and Bylaw
Provisions
27. Financial Statements and
Information........................ Prospectus Summary; Selected
Combined Financial Data; Financial
Statements
28. Interests of Named Experts and
Counsel............................ Experts; Legal Matters
29. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................... Capital Stock -- Charter and Bylaw
Provisions; Underwriting
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
Subject to Completion, dated July 16, 1996
PROSPECTUS
18,725,000 SHARES
ARDEN REALTY GROUP, INC.
COMMON STOCK
----------------
Arden Realty Group, Inc. (the "Company") is a Maryland corporation which has
been formed to continue and expand the real estate business of Arden Realty
Group, Inc., a California corporation ("Arden"), and certain affiliated entities
(collectively, the "Arden Predecessors") which are engaged in owning, acquiring,
managing, leasing and renovating office properties in Southern California. Upon
completion of the offering (the "Offering"), the Company will own 24 office
properties (the "Properties") containing approximately 4.0 million rentable
square feet. All of the Properties are located in Southern California, with 21
in suburban Los Angeles County, two in Orange County and one in San Diego
County. The Company will be a fully integrated, self-administered and
self-managed real estate company and expects to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. The Company intends
to pay regular quarterly distributions to its stockholders beginning with a
distribution for the period ending December 31, 1996.
All of the shares of the Company's common stock, par value $.01 per share
(the "Common Stock"), offered hereby are being sold by the Company and will
represent approximately 87.37% of all outstanding shares of the Company's Common
Stock (or interests exchangeable for Common Stock). The remaining approximately
12.63% of the equity in the Company will be held by officers and directors of
the Company (11.83%) and certain other parties which owned direct or indirect
interests in certain of the Properties immediately prior to the Offering (.80%).
The equity held by such parties will be in the form of partnership interests
("OP Units") of Arden Realty Group Limited Partnership, a Maryland limited
partnership (the "Operating Partnership"). To assist the Company in complying
with certain qualification requirements applicable to REITs, the Company's
charter provides that no stockholder or group of affiliated stockholders may
actually or constructively own more than 9.0% of the outstanding Common Stock,
subject to certain specified exceptions. See "Capital Stock -- Restrictions on
Transfer."
Prior to the Offering, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price will be $20.00
per share. See "Underwriting" for information relating to the factors to be
considered in determining the initial public offering price. The Common Stock
has been approved for listing on the New York Stock Exchange, subject to
official notice of issuance, under the symbol "ARI."
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING:
- The possibility that the consideration to be paid by the Company for the
Properties and other assets contributed to the Company may exceed their
fair market value;
- Risks generally associated with borrowing, including the possibility that
the Company may not be able to refinance outstanding debt upon maturity
(initially $104 million);
- Risks generally associated with real estate investment and property
management such as the need to renew leases or relet space upon lease
expirations, the instability of cash flows and changes in the value of
office properties owned by the Company due to economic and other
conditions;
- Concentration of the Properties in Southern California which increases the
risk of the Company being adversely affected by a downturn in the Southern
California economy or office markets;
- Conflicts of interest in connection with the transactions relating to the
formation of the Company;
- Risks associated with acquiring new properties, including the lack of
operating history under the Company's management of the most recently
acquired Properties;
- Taxation of the Company as a regular corporation if it fails to qualify as
a REIT, taxation of the Operating Partnership as a corporation if it fails
to qualify as a partnership and the resulting decrease in cash available
for distribution; and
- Risks that certain types of losses, such as from earthquakes, could exceed
the Company's insurance coverage.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price to Underwriting Discounts Proceeds to
Public and Commissions (1) Company (2)
<S> <C> <C> <C>
Per Share................................... $ $ $
Total (3)................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
2,808,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover overallotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the shares
will be made at the offices of Lehman Brothers Inc., New York, New York on or
about , 1996.
---------------------------
LEHMAN BROTHERS
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
SMITH BARNEY INC.
EVEREN SECURITIES, INC. RAYMOND JAMES & ASSOCIATES, INC.
, 1996
<PAGE>
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
[Graphics--To Come]
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 1
The Company............................................................. 1
Risk Factors............................................................ 3
Business and Growth Strategies.......................................... 4
Southern California Economy and Office Markets.......................... 6
Overview................................................................ 6
Declining Unemployment Rates and Increasing Employment.................. 6
Improving Office Markets................................................ 7
The Properties.......................................................... 8
Structure and Formation of the Company.................................. 10
Financing Policies...................................................... 14
Mortgage Financing and Credit Facility.................................. 14
The Offering............................................................ 15
Distributions........................................................... 15
Tax Status of the Company............................................... 15
Summary Selected Combined Financial Data................................ 16
RISK FACTORS.............................................................. 18
Price to be Paid for Properties and Other Assets May Exceed Their Fair
Market Value........................................................... 18
Real Estate Financing Risks............................................. 18
Real Estate Investment Risks............................................ 19
Geographic Concentration................................................ 20
Conflicts of Interests in the Formation Transactions and the Business of
the Company............................................................ 20
Risk Associated with the Recent Acquisition of Many of the New
Properties; Lack of Operating History.................................. 22
Risk of Acquisition, Renovation and Development Activities.............. 22
Adverse Consequences of Failure to Qualify as a REIT; Other Tax
Liabilities............................................................ 23
Failure of the Operating Partnership to Qualify as a Partnership for
Federal Income Tax Purposes............................................ 23
Insurance............................................................... 24
No Limitation on Debt................................................... 24
Dependence on Key Personnel............................................. 24
Limits on Changes in Control............................................ 24
Historical Losses....................................................... 26
Possible Environmental Liabilities...................................... 26
Effect on Common Stock Price of Shares Available for Future Sale........ 27
Immediate and Substantial Dilution...................................... 27
<CAPTION>
PAGE
----
<S> <C>
Absence of Prior Public Market for Common Stock......................... 27
Changes in Policies Without Stockholder Approval........................ 28
Influence of Executive Officers, Directors and Principal Stockholders... 28
Risks of Fee Management Business........................................ 28
Effect of Market Interest Rates on Price of Common Stock................ 28
THE COMPANY............................................................... 29
BUSINESS AND GROWTH STRATEGIES............................................ 31
Business Strategies..................................................... 31
Growth Strategies....................................................... 32
USE OF PROCEEDS........................................................... 35
Mortgage Debt to be Repaid.............................................. 36
DISTRIBUTIONS............................................................. 36
CAPITALIZATION............................................................ 41
DILUTION.................................................................. 42
SELECTED COMBINED FINANCIAL DATA.......................................... 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 45
Overview................................................................ 45
Results of Operations................................................... 45
Pro Forma Operating Results............................................. 50
Liquidity and Capital Resources......................................... 51
Cash Flows.............................................................. 52
Inflation............................................................... 52
SOUTHERN CALIFORNIA ECONOMY AND OFFICE MARKETS............................ 53
Southern California Economy............................................. 53
Southern California Office Markets...................................... 55
BUSINESS AND PROPERTIES................................................... 58
General................................................................. 58
Properties.............................................................. 58
Tenants................................................................. 60
Tenant Diversification.................................................. 60
Lease Expirations....................................................... 61
Tenant Retention and Expansions......................................... 61
Historical Tenant Improvements and Leasing Commissions.................. 62
Historical Capital Expenditures......................................... 63
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Historical Occupancy.................................................... 63
Office Submarkets and Property Information.............................. 64
Los Angeles County Office Market and Properties......................... 65
Los Angeles West Office Market Sector................................... 66
Los Angeles North Office Market Sector.................................. 71
Los Angeles South Office Market Sector.................................. 75
Orange County Office Market and Properties.............................. 77
San Diego County Office Market and Property............................. 79
C&W Market Study........................................................ 81
Competition............................................................. 82
Insurance............................................................... 82
Environmental Regulations............................................... 82
Legal Proceedings....................................................... 83
Employees............................................................... 83
MANAGEMENT................................................................ 84
Directors and Executive Officers........................................ 84
Committees of the Board of Directors.................................... 86
Compensation of Directors............................................... 86
Executive Compensation.................................................. 86
Employment Agreements................................................... 86
Stock Incentive Plan.................................................... 86
401(k) Plan............................................................. 86
Limitation of Liability and Indemnification............................. 88
STRUCTURE AND FORMATION OF THE COMPANY.................................... 89
The Operating Entities of the Company................................... 89
The Formation Transactions.............................................. 90
Consequences of the Offering and the Formation Transactions............. 91
Determination and Valuation of Ownership Interests...................... 91
Benefits of the Formation Transactions and the Offering to Affiliates of
the Company............................................................ 92
POLICIES WITH RESPECT TO CERTAIN TRANSACTIONS............................. 93
Investment Policies..................................................... 93
Dispositions............................................................ 93
Financing Policies...................................................... 94
Conflict of Interest Policies........................................... 95
Policies with Respect to Other Activities............................... 96
CERTAIN TRANSACTIONS...................................................... 96
Formation Transactions.................................................. 96
<CAPTION>
PAGE
----
<S> <C>
Partnership Agreement; Redemption/ Exchange Rights...................... 96
Registration Rights..................................................... 96
PARTNERSHIP AGREEMENT..................................................... 97
Management.............................................................. 97
Transferability of Interests............................................ 97
Capital Contributions................................................... 97
Redemption/Exchange Rights.............................................. 97
Issuance of Additional OP Units/ Common Stock........................... 98
Tax Matters............................................................. 98
Operations.............................................................. 98
Duties and Conflicts.................................................... 98
Term.................................................................... 98
Indemnification......................................................... 98
PRINCIPAL STOCKHOLDERS.................................................... 99
CAPITAL STOCK............................................................. 100
General................................................................. 100
Common Stock............................................................ 100
Preferred Stock......................................................... 100
Power to Issue Additional Shares of Common Stock and Preferred Stock.... 101
Transfer Agent and Registrar............................................ 101
Restrictions on Transfer................................................ 101
CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S CHARTER AND BYLAWS... 103
Board of Directors - Number, Classification, Vacancies.................. 103
Removal of Directors.................................................... 103
Business Combinations................................................... 104
Control Share Acquisitions.............................................. 104
Amendment to the Charter................................................ 105
Dissolution of the Company.............................................. 105
Advance Notice of Director Nominations and New Business................. 105
Anti-takeover Effect of Certain Provisions of Maryland Law and of the
Charter and Bylaws..................................................... 105
Rights to Purchase Securities and Other Property........................ 105
SHARES AVAILABLE FOR FUTURE SALE.......................................... 106
General................................................................. 106
Registration Rights..................................................... 107
FEDERAL INCOME TAX CONSIDERATIONS......................................... 107
Taxation of the Company................................................. 107
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Failure to Qualify...................................................... 112
Taxation of Taxable U.S. Stockholders Generally......................... 112
Backup Withholding...................................................... 113
Taxation of Tax-Exempt Stockholders..................................... 113
Taxation of Non-U.S. Stockholders....................................... 114
Tax Aspects of the Operating Partnership................................ 116
Other Tax Consequences.................................................. 118
ERISA CONSIDERATIONS...................................................... 118
Employment Benefit Plans, Tax-Qualified Pension, Profit Sharing or Stock
Bonus Plans and IRAs................................................... 119
<CAPTION>
PAGE
----
<S> <C>
Status of the Company and the Operating Partnership under ERISA......... 119
UNDERWRITING.............................................................. 121
EXPERTS................................................................... 122
LEGAL MATTERS............................................................. 123
ADDITIONAL INFORMATION.................................................... 123
GLOSSARY.................................................................. 124
</TABLE>
CAUTIONARY STATEMENT
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH
AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR
THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE
CAUTIONARY STATEMENTS SET FORTH UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE
IN THE PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS.
iii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS INDICATED OTHERWISE, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES
THAT (I) THE INITIAL PUBLIC OFFERING PRICE IS $20.00 PER SHARE, (II) THE
UNDERWRITERS' OVERALLOTMENT OPTION IS NOT EXERCISED, (III) THE TRANSACTIONS
DESCRIBED ELSEWHERE IN THIS PROSPECTUS UNDER "STRUCTURE AND FORMATION OF THE
COMPANY" ARE CONSUMMATED AND (IV) NONE OF THE OP UNITS REDEEMABLE FOR CASH OR,
AT THE ELECTION OF THE COMPANY, EXCHANGEABLE FOR COMMON STOCK HAVE BEEN SO
REDEEMED OR EXCHANGED. ALTHOUGH THE COMPANY AND THE OPERATING PARTNERSHIP ARE
SEPARATE ENTITIES, FOR EASE OF REFERENCE AND UNLESS THE CONTEXT OTHERWISE
REQUIRES, ALL REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" REFER TO THE
COMPANY AND THE OPERATING PARTNERSHIP, COLLECTIVELY. ALL REFERENCES IN THIS
PROSPECTUS TO THE HISTORICAL ACTIVITIES OF THE COMPANY REFER TO THE ACTIVITIES
OF THE ARDEN PREDECESSORS. SEE "GLOSSARY" FOR THE DEFINITIONS OF CERTAIN TERMS
USED IN THIS PROSPECTUS, INCLUDING CAPITALIZED TERMS USED HEREIN WITHOUT
DEFINITION.
THE COMPANY
The Company has been formed to continue and expand the real estate business
of Arden Realty Group, Inc., a California corporation ("Arden"), and certain
affiliated entities (collectively, the "Arden Predecessors") which are engaged
in owning, acquiring, managing, leasing and renovating office properties in
Southern California. The Company's founders, Richard S. Ziman and Victor J.
Coleman, along with the other five senior officers at the Company, have an
average of more than 18 years of experience in the Southern California real
estate industry. Upon completion of the Offering, the Company will own 24 office
properties (the "Properties") containing approximately 4.0 million rentable
square feet. All of the Properties are located in Southern California, with 21
in suburban Los Angeles County, two in Orange County and one in San Diego
County. As of April 30, 1996, the Properties had a weighted average occupancy
rate of approximately 88%. Arden currently manages 22 of the Properties. Upon
completion of the Offering, the Company will manage all of the Properties and
four additional properties containing approximately 325,000 rentable square feet
which are currently managed by Arden for institutional investors and other
third-party owners. The Company will be a fully integrated, self-administered
and self-managed real estate company and expects to qualify as a REIT for
federal income tax purposes.
The Company believes that all of the Properties are located in strong
submarkets which generally have significant rent growth potential due to
employment growth, declining vacancy rates, limited new construction activity
and existing rental rates at levels significantly below those required to make
new construction economically feasible. The Company's portfolio is comprised
primarily of Class A suburban office properties. The Company generally considers
Class A suburban office properties to be those which have desirable locations
and high quality finishes, are well maintained and professionally managed and
are capable of achieving rental and occupancy rates which are typically above
those prevailing in their respective markets. Of the Company's 24 Properties, 20
Properties have been built since 1980 and 14 Properties, including all four
built prior to 1980, have been substantially renovated within the last three
years. The Properties are leased to over 540 tenants which engage in a wide
variety of businesses, including financial services, entertainment, health care
services, accounting, law, computer technology, education and publishing. Major
tenants in the Company's portfolio, based on square feet leased, include:
Merrill Lynch, Hewlett Packard, Deloitte & Touche, GTE California, McDonnell
Douglas, Pepperdine University, Grey Advertising, Earth Technology and The
Hearst Corporation. As of April 30, 1996, no single tenant accounted for more
than approximately 3.5% of the aggregate Adjusted Annualized Base Rent (as
defined herein) of the Company's portfolio and only 16 tenants individually
represented more than 1% of such aggregate Adjusted Annualized Base Rent.
The Company believes that certain economic fundamentals in Southern
California provide an attractive environment for owning, acquiring and operating
Class A suburban office properties:
- According to AMERICA'S OFFICE ECONOMY prepared by Cognetics, Inc., Los
Angeles County, in which 21 of the Company's 24 Properties are located, is
the number one market in the United States for primary office employment
growth;
<PAGE>
- According to statistics released by the U.S. Bureau of Labor Statistics,
the unemployment rate in the Los Angeles/Long Beach Primary Metropolitan
Statistical Area (the "Los Angeles PMSA"), in which 21 of the 24
Properties are located, has decreased significantly over the past four
years, falling from an average of 9.8% during 1992 to 7.9% during 1995;
- The Economic Development Corporation of Los Angeles County (the "Los
Angeles EDC") has forecast nonfarm employment growth rates of 2.1% in 1996
and 1997 in Los Angeles County;
- The Los Angeles EDC has also forecast that economic activity will increase
twice as fast in Los Angeles County than in the nation as a whole during
1996 and 1997, with inflation-adjusted gross product growing at a rate of
5.2% and 5% in Los Angeles County as compared to 2.5% and 2.4% for the
nation as a whole; and
- Since 1992, there has been very limited construction of new office
properties in the Southern California region. The Company believes that
this limited construction of office properties coupled with a growing
economy will continue to result in increased demand for office space and
positive net absorption in the Southern California region, and
particularly in the selected submarkets where most of the Properties are
located. See "Southern California Economy and Office Markets."
Richard S. Ziman, the Chairman and Chief Executive Officer of the Company,
has been involved in the real estate business for over 25 years. In 1979, Mr.
Ziman co-founded, as managing general partner, Pacific Financial Group ("PFG"),
whose primary focus was to acquire underperforming office buildings in good
locations and then actively manage, lease and renovate the properties to
increase cash flow and enhance their value. During the early and mid 1980's, PFG
acquired over 4.0 million square feet of commercial office space almost
exclusively in Los Angeles County and Orange County. In order to capitalize on
the escalation of prices for Southern California office properties in the late
1980's, PFG sold substantially all of its interests in its office properties
portfolio prior to the general downturn in the real estate market in Southern
California.
In 1993, in anticipation of a recovery in the Southern California real
estate market, the Company began to selectively acquire commercial office
properties located in suburban Los Angeles County. In assembling its existing
portfolio and as part of its operating strategy, the Company acquired office
properties that were located in submarkets with growth potential, were
underperforming or needed renovation and which offered opportunities for the
Company to implement its value-added strategy to increase cash flow. This
strategy includes active management and aggressive leasing efforts, a focused
renovation and refurbishment program for underperforming assets, reduction and
containment of operating costs and emphasis on tenant satisfaction (including
efforts to maximize tenant retention at lease expiration and programs to
relocate tenants to other spaces within the Company's portfolio). The Company's
commitment to tenant satisfaction and retention is evidenced by its retention
rate of approximately 79% (based on square feet renewed) from 1993 through 1995
and management's on-going relationships with multi-site tenants such as
McDonnell Douglas, Merrill Lynch, Imperial Bank, Smith Barney, GTE California
and City National Bank.
The Company believes that it has been successful in implementing its
value-added strategy and increasing occupancy rates and rental revenue. As of
April 30, 1996, the Properties owned by the Company for more than one year had a
weighted average occupancy rate of approximately 87%, compared to a weighted
average occupancy of approximately 78% as of the respective dates such
Properties were acquired by the Company. In addition, the Company's occupancy
rates at many of its Properties are above market averages in the applicable
submarkets based on information included in a market study prepared by Cushman &
Wakefield of California, Inc. ("C&W") for the Company (the "C&W Market Study").
As of April 30, 1996, the weighted average occupancy rate of the 21 Properties
located in Los Angeles County was approximately 89%, compared to weighted
average occupancy rates, as of December 31, 1995, of approximately 81% for
office properties throughout Los Angeles County and approximately 84% for office
properties in the Los Angeles County submarkets in which such Properties are
located (based in each case on the C&W Market Study).
2
<PAGE>
The Company believes that the submarkets in which the Properties are
located, as well as certain additional submarkets within the Southern California
region, present significant opportunities for the Company to continue to acquire
Class A suburban office properties at attractive yields and for prices
significantly below replacement costs. To date, the Company has acquired each of
its Properties at a cost which the Company believes is significantly below
replacement cost based on estimates of replacement costs of Class A office
buildings included in the C&W Market Study. As part of its growth strategy to
pursue such acquisitions, the Company has acquired five properties during 1996
and will use approximately $35 million of the net proceeds from the Offering to
acquire two additional Properties (the "Acquisition Properties") concurrently
with the Offering. The Acquisition Properties contain a total of approximately
298,000 rentable square feet and are located in suburban Los Angeles County. The
Company believes that these acquisitions demonstrate its ability, through its
local market expertise, to identify and complete acquisitions in selected
submarkets within Southern California at prices significantly below replacement
cost based on estimates of replacement costs of Class A office buildings
included in the C&W Market Study. See "Business and Growth Strategies." To
capitalize on future acquisition opportunities, the Company is finalizing a $200
million credit facility (the "Credit Facility") which the Company expects to use
for acquiring properties and for general corporate purposes.
Upon completion of the Offering, the founders and executive officers of the
Company will beneficially own approximately 9.32% of the Company, assuming the
exchange of all of their OP Units for Common Stock and excluding shares of
Common Stock subject to options granted under the Company's 1996 Stock Incentive
Plan (the "Stock Incentive Plan").
RISK FACTORS
An investment in the Common Stock involves various risks, and prospective
investors should carefully consider the matters discussed under "Risk Factors"
prior to an investment in the Company. Such risks include, among others:
- the possibility that the consideration to be paid by the Company for the
Properties and the other assets contributed to the Company in its
formation may exceed their fair market value due to the lack of
third-party appraisals;
- risks generally associated with borrowing, including the possibility that
the Company may not be able to refinance outstanding indebtedness upon
maturity (including the Mortgage Financing (as defined below) and the
Credit Facility which will mature in seven years and two years,
respectively) or that such indebtedness might be refinanced at higher
interest rates or otherwise on terms less favorable to the Company than
existing indebtedness, which could adversely affect the Company's ability
to make expected distributions to stockholders and its ability to qualify
as a REIT;
- risks generally associated with real estate investment and property
management, such as the need to renew leases or relet space upon lease
expirations and, at times, to pay renovation and reletting costs in
connection therewith, the effect of economic and other conditions on
office property cash flows and values, the ability of tenants to make
lease payments, the ability of a property to generate revenue sufficient
to meet operating expenses, including future debt service, and the
illiquidity of real estate investments, all of which may adversely affect
the Company's ability to make expected distributions to stockholders;
- concentration of all of the Properties in Southern California, and the
dependence of the Properties on the conditions of the economy and the
office markets of Southern California and, particularly, Los Angeles
County which increases the risk of the Company being adversely affected by
a downturn in the Southern California or Los Angeles County economy or
office markets;
- conflicts of interests in the transactions relating to the formation of
the Company and the acquisition and refinancing of the Properties in
connection with such formation, including conflicts relating to the
interests of certain members of management in such transactions and
conflicts which may arise as
3
<PAGE>
a result of Lehman Brothers Inc. serving as lead managing underwriter for
the Offering and receiving a significant portion of the net proceeds of
the Offering as repayment of debt currently secured by certain of the
Properties;
- conflicts of interest involving management of the Company and certain
members of the Board of Directors in business decisions regarding the
Company, including conflicts associated with any prepayment of debt
secured by the Properties that may arise due to the more adverse tax
consequences of such prepayment to certain members of management and of
the Board of Directors as holders of OP Units;
- risks associated with the acquisition of new properties generally, and
with the Company's recent acquisition of many of the Properties, including
risks of acquiring properties over which the Company has had no control
and which may have characteristics or deficiencies unknown to the Company
affecting the value or revenue potential thereof, the risk that newly
acquired properties will fail to perform as expected, risks associated
with integrating such acquisitions into the Company's existing management
structure and risks associated with the lack of operating history under
the Company's management of the most recently acquired Properties;
- taxation of the Company as a corporation if it fails to qualify as a REIT
for federal income tax purposes, treatment of the Operating Partnership as
an association taxable as a corporation if it fails to qualify as a
partnership for federal income tax purposes (and the resulting failure of
the Company to qualify as a REIT), the Company's liability for certain
federal, state and local income taxes in such event and the resulting
decrease in cash available for distribution;
- risks that certain types of losses, such as from earthquakes, could exceed
the Company's insurance coverage;
- absence of a limitation in the organizational documents of the Company on
the amount of indebtedness that the Company may incur;
- dependence on certain key personnel;
- anti-takeover effect of limiting actual or constructive ownership of
capital stock of the Company by a single person to 9.0% of the outstanding
capital stock, subject to certain specified exceptions, and of certain
other provisions contained in the organizational documents of the Company
and the Operating Partnership, which may discourage a change in control
and limit the opportunity for stockholders to receive a premium over the
then-current market price for their Common Stock;
- existence of net losses of the Arden Predecessors, on a combined basis, of
approximately $1.9 million for the three months ended March 31, 1996 and
approximately $1.2 million for the year ended December 31, 1995;
- possible environmental liabilities in connection with the Company's
ownership and/or operation of the Properties;
- effect of shares available for future sale on the price of the Common
Stock;
- immediate and substantial dilution in the net tangible book value per
share of the shares of Common Stock purchased in the Offering; and
- absence of a prior public market for the Common Stock.
BUSINESS AND GROWTH STRATEGIES
The Company's primary business objectives are to maximize growth in cash
flow and to enhance the value of its portfolio in order to maximize total return
to its stockholders. The Company believes it can achieve these objectives by
continuing to implement its business strategies and capitalize on the external
and internal growth opportunities described below. The Company also believes,
based on its evaluation of market conditions, that a number of factors will
enhance its ability to achieve its business objectives,
4
<PAGE>
including (i) the continuing improvement in the Southern California economy;
(ii) the limited construction of new office properties in the Southern
California region due to the substantial cost to develop new office properties
compared to current acquisition prices and substantial building construction
limitations in many submarkets, which provides opportunities to maximize
occupancy rates, rental rates and overall portfolio value; and (iii) the limited
availability of conventional real estate financing for new construction of
office properties in Southern California.
BUSINESS STRATEGIES
The Company's primary business strategies are to (i) acquire and renovate
underperforming office properties in submarkets where it can utilize its local
market expertise and extensive real estate experience; (ii) actively manage its
portfolio; and (iii) selectively provide real estate management services to
third parties. When market conditions permit, the Company may also develop new
properties in submarkets where it has local market expertise.
The Company believes that (i) the Southern California region offers
significant growth opportunities for well-capitalized, experienced owners of
real estate with extensive local market expertise and (ii) being a public
company will enhance its ability to obtain acquisition financing, to take
advantage of opportunities to acquire additional office properties at attractive
prices and to develop office properties, when feasible, at attractive returns.
Through four regional offices, the Company implements its business strategies
by: (i) emphasizing tenant satisfaction and retention and employing intensive
property marketing programs; (ii) utilizing a multidisciplinary approach to
acquisition, management, leasing and renovation activities that is designed to
coordinate decision-making and enhance responsiveness to market opportunities
and tenant needs; and (iii) implementing cost control management and systems
that capitalize on economies of scale arising from the size and location of the
Company's portfolio. The Company believes that the implementation of these
operating practices has increased the occupancy and rental revenue of its
existing portfolio.
GROWTH STRATEGIES
EXTERNAL GROWTH: The Company believes that significant opportunities
continue to exist to acquire additional office properties that: (i) provide
attractive initial yields with significant potential for growth in cash flow;
(ii) are in desirable locations within submarkets which the Company believes
have economic growth potential; and (iii) are underperforming or need
renovation, and which therefore provide opportunities for the Company to
increase the cash flow and value of such properties through active management
and aggressive leasing.
The Company intends to continue to acquire office properties within
submarkets in Southern California which the Company believes present
opportunities for long-term stable and rising rental rates due to employment
growth, population movements within the region and restrictions on new
development. The Company generally targets properties which are underperforming
or need renovation and offer opportunities for the Company to implement its
value-added strategy to increase cash flow. For example, as of April 30, 1996,
the Properties owned by the Company for more than one year had a weighted
average occupancy rate of approximately 87%, compared to approximately 78% as of
the respective dates such Properties were acquired by the Company.
In addition, the Company will seek to acquire properties at a significant
discount to replacement cost in the relevant office submarkets. Since the
beginning of 1993, the Company has acquired its Properties in suburban Los
Angeles County at a cost which the Company believes is significantly below
replacement cost based on estimates of replacement costs of Class A office
buildings included in the C&W Market Study. See "Southern California Economy and
Office Markets."
The Company believes it has certain competitive advantages which enhance its
ability to identify and capitalize on acquisition opportunities, including: (i)
management's significant local market expertise, experience and knowledge of
properties, submarkets and potential tenants within the Southern California
region; (ii) management's long-standing relationships with tenants, real estate
brokers and institutional and other owners of commercial real estate; (iii) its
fully integrated real estate operations which allow the Company to respond
quickly to acquisition opportunities and enable it to provide real estate
management
5
<PAGE>
services to third parties as a means of identifying such opportunities; (iv) its
access to capital as a public company, including the Company's $200 million
Credit Facility; (v) its ability to acquire properties in exchange for OP Units
or Common Stock if the sellers so desire; and (vi) management's reputation as an
experienced purchaser of office properties in Southern California which has the
ability to effectively close transactions.
The Company may also seek to take advantage of management's development
expertise to develop office space when market conditions support office building
development. The Company believes, however, that opportunities exist for it to
continue to acquire office properties within selected submarkets in Southern
California at less than replacement cost and, therefore, currently intends to
focus on acquisitions rather than development.
INTERNAL GROWTH: The Company believes that opportunities exist to increase
cash flow from its existing portfolio and that such opportunities will be
enhanced as the Southern California office market continues to improve. The
Company intends to pursue internal growth by (i) continuing to maintain and
improve occupancy rates through active management and aggressive leasing; (ii)
realizing fixed contractual base rental increases or increases tied to indices
such as the Consumer Price Index (the "CPI"); (iii) re-leasing expiring leases
at increasing market rents which are expected to result, over time, from
increased demand for office space in Southern California; (iv) controlling
operating expenses through the implementation of cost control management and
systems; (v) capitalizing on economies of scale arising from the size of its
portfolio; and (vi) increasing revenue generated from parking facilities at
certain Properties where the Company is currently offering free parking as an
amenity or charging below market rates.
SOUTHERN CALIFORNIA ECONOMY AND OFFICE MARKETS
OVERVIEW
The Company believes that current and forecast trends affecting Southern
California have created and will continue to create a favorable economic
environment in the suburban Southern California office markets where
substantially all of the Company's Properties are located. First, the Company
believes that the supply of Class A office space in Southern California has
stabilized and is unlikely to increase over the short term in large part because
it is not economically feasible to develop new Class A office space based on
rental rates currently attainable in Southern California office markets
according to C&W. Second, the recent economic restructuring and growth of many
of Southern California's primary office-using sectors including the
entertainment, export/import, managed health care, high technology,
telecommunications, and civilian and military aerospace and defense industries
has caused a growth in demand for office space. Third, demand for Class A office
space relative to the level of supply has led to higher occupancy rates and a
trend towards higher rental rates which are supportable in the office markets
where the Company's Properties are located. Finally, patterns of residential
relocation to suburban areas due in part to the public perception of greater
personal security and to the availability of greater recreational and
residential amenities in suburban areas, coupled with a heightened preference
for living in close proximity to work and employers' resultant access to a
broader, more skilled local labor force have fueled growth of suburban office
property demand. The Company believes that these factors and other specific
economic indicators discussed below suggest a general strengthening of the
Southern California economy. Given the quality and location of its Properties,
the Company believes it is competitively positioned to capitalize on these
economic trends and the resulting demand for suburban Class A office space. In
addition, the Company believes that the suburban Los Angeles County submarkets
in which its Properties are located will outperform the Los Angeles central
business district (the "Downtown/CBD"), which has not begun to recover from the
real estate downturn.
DECLINING UNEMPLOYMENT RATES AND INCREASING EMPLOYMENT.
Data from the U.S. Bureau of Labor Statistics indicates that the
unemployment rates in Los Angeles, Orange and San Diego counties peaked in 1993,
the height of the 1990 to 1993 recession in Southern California, and that an
economic recovery began in 1994. The graph below illustrates unemployment trends
for the United States, California and the three counties in which the Properties
are located.
6
<PAGE>
Line graph entitled Historical Year-End Unemployment Rates depicting the
following data points:
<TABLE>
<CAPTION>
LOS ANGELES ORANGE SAN DIEGO
CALIFORNIA COUNTY COUNTY COUNTY U.S.
<S> <C> <C> <C> <C> <C>
1991 7.7% 8.2% 5.2% 6.2% 6.7%
1992 9.3% 9.8% 6.6% 7.3% 7.4%
1993 9.4% 9.8% 6.7% 7.8% 6.8%
1994 8.6% 9.4% 5.8% 7.2% 6.1%
1995 7.8% 7.9% 5.3% 6.5% 5.6%
</TABLE>
[Insert Unemployment Rates Graph Here]
- --------------
Source: U.S. Bureau of Labor Statistics
In addition, the U.S. Bureau of Economic Analysis has forecast a total
increase in nonfarm employment for the period from 1993 to 2005 of 14.2% for Los
Angeles County, 35.3% for Orange County and 30.7% for San Diego County,
representing average annual growth rates of 1.1%, 2.5% and 2.3%, respectively.
IMPROVING OFFICE MARKETS
The Company believes that the office markets in which it operates have and
will continue to improve in terms of declining direct vacancy rates, increased
net absorption, and stabilized or increasing rental rates.
According to C&W, the Los Angeles County suburban office market, Orange
County office market and downtown San Diego office market have improved in terms
of declining vacancies and increased net absorption from 1994 to 1995. In
particular, the Los Angeles County suburban office market (which excludes the
Downtown/CBD office market sector) has experienced declining direct vacancy
rates for the past five years and positive net absorption for the past three
years. Direct vacancy represents space available from owners of office
properties and does not include space available for sub-lease by tenants. As
outlined in the charts below, similar trends have been experienced in the Orange
County and downtown San Diego office markets. Line graph entitled Historical
Year-End Direct Vacancy Rates depicting the following data points:
<TABLE>
<CAPTION>
LOS ANGELES
COUNTY DOWNTOWN SAN
U.S. (SUBURBAN) ORANGE COUNTY DIEGO
<S> <C> <C> <C> <C>
1991 17.5% 19.2% 19.5% 19.4%
1992 18.2% 18.9% 19.1% 20.7%
1993 17.2% 18.4% 17.1% 19.4%
1994 15.3% 17.3% 17.2% 19.8%
1995 14.0% 17.0% 15.5% 17.9%
</TABLE>
- --------------
Source: Cushman & Wakefield
7
<PAGE>
Bar graph entitled Historical Annual Net Absorption depicting the following data
points:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
DOWNTOWN SAN DIEGO 201,334 (45,192) 273,777
ORANGE COUNTY 1,003,756 188,000 295,057
LOS ANGELES COUNTY 55,268 234,566 983,906
</TABLE>
- --------------
Source: Cushman & Wakefield
According to C&W, virtually no new office development has occurred in Los
Angeles County, Orange County or downtown San Diego since 1992. In addition, C&W
states that new speculative development is unlikely at the current time,
primarily because new construction is not economically feasible given current
market rental rates and also because of certain governmental constraints and
zoning restrictions in certain markets. Because of the lack of new construction
of office properties in suburban Los Angeles County and assuming the
continuation of the year-end 1995 positive net absorption, C&W has projected a
trend indicating the reduction of aggregate direct vacancy rates in the suburban
Los Angeles County office market from 17% as of December 31, 1995 to 14.4% by
the end of 1998.
THE PROPERTIES
Upon completion of the Offering, the Company will own 24 office properties
containing approximately 4.0 million rentable square feet. The Properties
consist primarily of Class A suburban office properties and individually range
from approximately 49,000 to 548,000 rentable square feet. The Company believes
that the Properties have desirable locations within established business
communities and are well-maintained. Of the Company's 24 Properties, 20
Properties have been built since 1980 and 14 Properties, including all four
built prior to 1980, have been substantially renovated within the last three
years. The average age of the buildings is approximately 12 years.
Management believes that the location and quality of construction of the
Properties, as well as the Company's reputation for providing a high level of
tenant service, have enabled the Company to attract and retain a diverse tenant
base. As of April 30, 1996, the Properties were leased to over 540 tenants.
Major tenants in the Company's portfolio, based on square feet leased, include:
Merrill Lynch, Hewlett Packard, Deloitte & Touche, GTE California, McDonnell
Douglas, Pepperdine University, Grey Advertising, Earth Technology and The
Hearst Corporation. As of April 30, 1996, no single tenant accounted for more
than approximately 3.5% of the aggregate Adjusted Annualized Base Rent of the
Company's portfolio and only 16 tenants individually represented more than 1% of
such aggregate Adjusted Annualized Base Rent.
8
<PAGE>
The following table sets forth certain information about each of the
Properties as of April 30, 1996:
<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE OF ADJUSTED
TOTAL ANNUALIZED
APPROXIMATE PORTFOLIO BASE RENT
YEAR BUILT/ RENTABLE RENTABLE PERCENT PER LEASED
SUBMARKET/PROPERTY LOCATION RENOVATED SQUARE FEET SQUARE FEET LEASED SQUARE FOOT
- -------------------------------------- ---------------- ------------ ------------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
LOS ANGELES COUNTY
- --------------------------------------
LOS ANGELES WEST
BEVERLY HILLS/CENTURY CITY
9665 Wilshire Beverly Hills 1972/92-3 158,345 3.9% 96.3% $ 31.00
Beverly Atrium Beverly Hills 1989 61,314 1.5 100.0 22.70
Century Park Center Los Angeles 1972/94 247,483 6.1 85.9 20.98
WESTWOOD/WEST LOS ANGELES
Westwood Terrace Los Angeles 1988 135,583 3.4 96.9 25.11
1950 Sawtelle Los Angeles 1988/95 103,620 2.6 76.3 20.21
MARINA AREA/CULVER CITY/LAX
400 Corporate Pointe Culver City 1987 164,845 4.1 91.5 19.72
Bristol Plaza Culver City 1982 84,014 2.1 78.7 18.02
Skyview Center Los Angeles 1981,87/95(1) 386,294 9.6 80.6 16.87
PARK MILE/WEST HOLLYWOOD
The New Wilshire Los Angeles 1986 202,544 5.0 84.1 20.48
LOS ANGELES NORTH
SIMI/CONEJO VALLEY
5601 Lindero Canyon Westlake 1989 105,830 2.6 100.0 11.15
Calabasas Commerce Center Calabasas 1990 123,121 3.0 100.0 17.14
WEST SAN FERNANDO VALLEY
Woodland Hills Financial Center Woodland Hills 1972/95 221,790 5.5 86.7 21.81
CENTRAL SAN FERNANDO VALLEY
16000 Ventura Blvd. Encino 1980/96 178,341 4.4 85.8 19.63
EAST SAN FERNANDO VALLEY/TRI-CITIES
425 West Broadway Glendale 1984 71,489 1.8 89.9 19.45
303 Glenoaks (2) Burbank 1983/96 175,449 4.3 95.7 20.38
70 South Lake Pasadena 1982/94 100,133 2.5 76.6 20.83
LOS ANGELES SOUTH
LONG BEACH
4811 Airport Plaza Drive Long Beach 1987/95 121,610 3.0 100.0 8.64
4900/10 Airport Plaza Drive Long Beach 1987/95 150,403 3.7 100.0 7.80
5000 East Spring Long Beach 1989/95 163,358 4.0 87.0 19.93
100 West Broadway Long Beach 1987/96 191,727 4.7 84.4 20.21
CERRITOS/NORWALK
12501 East Imperial Highway (2) Norwalk 1978/94 122,175 3.0 91.9 15.85
ORANGE COUNTY
- --------------------------------------
WEST COUNTY
5832 Bolsa Avenue Huntington Beach 1985 49,355 1.2 100.0 12.96
TRI-FREEWAY AREA
Anaheim City Centre Anaheim 1986/91 175,391 4.3 85.5 15.24
SAN DIEGO COUNTY
- --------------------------------------
SAN DIEGO MARKET
Imperial Bank Tower San Diego 1982/96 547,578 13.5 82.0 17.95
------------ ----- ----- ------
Total/Weighted Average 4,041,792 100.0% 88.0% $ 19.96(3)
</TABLE>
- ---------------
(1) Skyview Center consists of two Class A 11- and 12-story office towers
completed in 1981 and 1987, respectively, which were both renovated in 1995.
(2) Acquisition Property to be acquired concurrently with the Offering.
(3) Weighted average Adjusted Annualized Base Rent per leased square foot is
calculated based only on rent which is received from tenants under gross
leases, which represent approximately 84% of the total portfolio leased
square feet. Excluded from the weighted average calculation are 5601 Lindero
Canyon, 4811 Airport Plaza Drive, 4900/10 Airport Plaza Drive, 5832 Bolsa
Avenue, 50% of space at 400 Corporate Pointe leased to Pepperdine
University, and 48.3% of space at Calabasas Commerce Center leased to two
tenants, all of which are triple net leased.
9
<PAGE>
STRUCTURE AND FORMATION OF THE COMPANY
FORMATION TRANSACTIONS
Concurrently with the consummation of the Offering, the Company and the
Operating Partnership, together with the partners and members of the Arden
Predecessors and other parties which hold ownership interests in certain of the
Properties (collectively, the "Participants"), will engage in certain formation
transactions (the "Formation Transactions"). The Formation Transactions have
been designed to (i) enable the Company to raise the necessary capital to
acquire the Properties and repay certain mortgage debt relating thereto, (ii)
provide a vehicle for future acquisitions, (iii) enable the Company to comply
with certain requirements under the federal income tax laws and regulations
relating to REITs, (iv) facilitate potential securitized mortgage financings and
(v) preserve certain tax advantages for certain Arden Predecessors. The
Formation Transactions are as follows:
- The Company will sell shares of Common Stock in the Offering.
- Pursuant to separate option agreements (the "Option Agreements"), the
Company will acquire for cash from certain Participants (not including
Messrs. Ziman and Coleman who will not receive cash in the Formation
Transactions) the interests owned by such Participants in certain of the
Arden Predecessors and in certain of the Properties. The Company will pay
approximately $28.6 million from the net proceeds of the Offering for such
interests.
- The Company will contribute (i) the interests in the Arden Predecessors
and in the Properties acquired pursuant to the Option Agreements and (ii)
the net proceeds from the Offering (after payment of the cash
consideration to certain Participants as described above) to the Operating
Partnership in exchange for a 87.37% general partner interest in the
Operating Partnership.
- Pursuant to separate contribution agreements (the "Contribution
Agreements"), the following additional contributions will be made to the
Operating Partnership in exchange for OP Units representing limited
partner interests: (i) certain Participants will contribute the remaining
interests in the Arden Predecessors and in certain of the Properties
(I.E., all interests not acquired by the Company pursuant to the Option
Agreements) and (ii) Arden will contribute certain of its assets,
including management contracts relating to certain of the Properties and
the contract rights to purchase the Acquisition Properties (303 Glenoaks
and 12501 East Imperial Highway). The Participants making such
contributions (including Arden and Messrs. Ziman and Coleman), will
receive an aggregate of 2,706,000 OP Units, with an estimated value of
approximately $54.1 million based on the assumed initial public offering
price of the Common Stock.
- The Company, through the Operating Partnership, will borrow approximately
$104 million aggregate principal amount under a seven-year term loan (the
"Mortgage Financing") which will be secured by cross-collateralized,
cross-defaulted first mortgage lien(s) on 10 of the Properties (the
"Mortgage Financing Properties").
- Approximately $35 million of the net proceeds of the Offering and the
Mortgage Financing will be used by the Operating Partnership to purchase
the Acquisition Properties.
- Approximately $392 million of the net proceeds of the Offering and the
Mortgage Financing will be used by the Operating Partnership to repay
certain mortgage debt secured by the Properties and indebtedness
outstanding under lines of credit to be assumed by the Operating
Partnership in the Formation Transactions.
- The Company, through the Operating Partnership, will enter into the $200
million Credit Facility.
Additional information regarding the Formation Transactions is set forth
under "Structure and Formation of the Company."
Upon completion of the Formation Transactions, the Operating Partnership
will hold substantially all of the assets of the Company, including 100% of the
interests in all of the Properties. Based on the assumed initial public offering
price of the Common Stock, (i) the purchasers of Common Stock in the Offering
will
10
<PAGE>
own all of the outstanding Common Stock (or 87.37% assuming exchange of all OP
Units for shares of Common Stock), (ii) the Company will be the sole general
partner of the Operating Partnership and will own 87.37% of the interests in the
Operating Partnership and (iii) Messrs. Ziman and Coleman will beneficially own,
directly or indirectly through affiliates (including Arden), 1,966,283 OP Units
(representing an 9.17% limited partner interest in the Operating Partnership).
Pursuant to the partnership agreement governing the Operating Partnership (the
"Partnership Agreement"), the Participants receiving OP Units in the Formation
Transactions will have certain rights, beginning one year after consummation of
the Offering, to cause the Operating Partnership to redeem their OP Units for
cash or, at the election of the Company, to exchange their OP Units for shares
of Common Stock (on a one-for-one basis). See "Underwriting" for certain
transfer restrictions applicable to the OP Units held by Messrs. Ziman and
Coleman and to shares of Common Stock issued in exchange for such OP Units.
The aggregate estimated value of the cash and OP Units to be paid by the
Company and the Operating Partnership for the interests in the Arden
Predecessors, the direct interests in certain of the Properties and the assets
of Arden is approximately $82.7 million. The aggregate book value of the
interests and assets to be transferred to the Company and the Operating
Partnership is approximately $15.8 million.
No independent appraisals, valuations or fairness opinions have been
obtained in connection with the Formation Transactions. Accordingly, there can
be no assurance that the value of the OP Units and cash received by the
Participants in the Formation Transactions is equivalent to the fair market
value of the interests and assets acquired by the Company and contributed to the
Operating Partnership. See "Risk Factors -- Price to be Paid for Properties and
Other Assets May Exceed Their Fair Market Value."
STRUCTURE OF THE COMPANY
The Company will be the sole general partner of the Operating Partnership.
The Company will conduct substantially all of its business through the Operating
Partnership, which will hold all of the Company's interests in the Properties.
As the sole general partner of the Operating Partnership, the Company will have
exclusive power to manage and conduct the business of the Operating Partnership,
subject to certain limited exceptions. See "Structure and Formation of the
Company -- The Operating Entities of the Company" and "Partnership Agreement --
Management."
11
<PAGE>
The following diagram depicts the ownership structure of the Company and the
Operating Partnership upon completion of the Offering and the Formation
Transactions:
STRUCTURE OF THE COMPANY UPON
COMPLETION OF THE OFFERING AND THE FORMATION TRANSACTIONS
[CHART]
BENEFITS TO RELATED PARTIES
Certain affiliates of the Company will realize certain material benefits in
connection with the Formation Transactions, including the following:
- In exchange for their respective ownership interests in the Arden
Predecessors and the assets of Arden, Messrs. Ziman and Coleman will
become beneficial owners of a total of 1,966,283 OP Units, with a total
value of approximately $39.3 million based on the assumed initial public
offering price of the Common Stock, which compares to a book value of such
interests and assets of approximately $1.7 million as of March 31, 1996.
The Company does not believe that the book values of the interests and
assets exchanged are equivalent to the fair market values of such
interests and assets.
- Approximately $392 million of indebtedness secured by the Properties and
indebtedness outstanding under lines of credit to be assumed by the
Operating Partnership will be repaid in the Formation Transactions.
- Pursuant to the Partnership Agreement, certain Participants who hold OP
Units, including Messrs. Ziman and Coleman, will receive special
allocations of interest deduction of approximately $14.5 million relating
to the repayment of mortgage debt on certain of the Properties.
12
<PAGE>
- Messrs. Ziman and Coleman will serve as directors and officers of the
Company and the Operating Partnership and will enter into employment
agreements providing for annual salaries, bonuses, participation in the
Company's Stock Incentive Plan and other benefits for their services.
- So long as he is Chief Executive Officer, Mr. Ziman will have certain
participation rights in connection with future issuances of Common Stock
by the Company or OP Units by the Operating Partnership which will enable
him to maintain his overall percentage ownership of the combined equity of
the Company and the Operating Partnership.
- Certain Participants including Messrs. Ziman and Coleman will have
registration rights with respect to shares of Common Stock issued in
exchange for OP Units.
Additional information regarding these and certain other benefits to be
received by affiliates of the Company in connection with the Formation
Transactions is set forth under "Structure and Formation of the Company --
Benefits of the Formation Transactions and the Offering to Affiliates of the
Company," and "Management -- Employment Agreements." See "Risk Factors --
Conflicts of Interest in Formation Transactions and the Business of the Company
- -- Benefits from the Formation Transactions" and "Certain Transactions."
DETERMINATION AND VALUATION OF OWNERSHIP INTERESTS
The Company's percentage interest in the Operating Partnership was
determined based upon the percentage of estimated Cash Available for
Distribution (as defined herein) required to pay estimated cash distributions
resulting in an annual distribution rate equal to 8% of the assumed initial
public offering price of the Common Stock. The ownership interest in the
Operating Partnership allocated to the Company is equal to this percentage of
estimated Cash Available for Distribution and the remaining interest in the
Operating Partnership will be allocated to the Participants receiving OP Units
in the Formation Transactions. The parameters and assumptions used in deriving
the estimated Cash Available for Distribution are described under
"Distributions."
The Company did not obtain appraisals with respect to the market value of
any of the Properties or other assets that the Company will own immediately
after consummation of the Offering and the Formation Transactions or an opinion
as to the fairness of the allocation of shares to the purchasers in the
Offering. The valuation of the Company has been determined based primarily upon
the estimated Cash Available for Distribution and the factors discussed under
"Underwriting," rather than a property-by-property valuation based on historical
cost or current market value. This methodology has been used because management
believes it is appropriate to value the Company as an ongoing business rather
than with a view to values that could be obtained from a liquidation of the
Company or of individual properties owned by the Company.
RESTRICTIONS ON TRANSFER
Under the Partnership Agreement, the Participants in the Formation
Transactions are prohibited from transferring their OP Units, except under
certain limited circumstances. Messrs. Ziman and Coleman have agreed not to sell
any shares of Common Stock acquired by them upon exchange of OP Units for a
period of two years after the completion of the Offering without the consent of
Lehman Brothers Inc. See "Partnership Agreement -- Transferability of Interests"
and "Underwriting."
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK
Due to limitations on the concentration of ownership of stock of a REIT
imposed by the Internal Revenue Code of 1986, as amended (the "Code"), the
charter of the Company (the "Charter") prohibits any stockholder from actually
or constructively owning more than 9.0% of the outstanding shares of Common
Stock (the "Ownership Limit"), except that Mr. Ziman and certain family members
and affiliates may actually and constructively own up to 13% of the outstanding
shares of Common Stock. See "Risk Factors -- Limits on Changes in Control" and
"Capital Stock -- Restrictions on Transfer."
13
<PAGE>
FINANCING POLICIES
As a general policy, the Company intends, but is not obligated, to limit its
debt to total market capitalization ratio to no more than 50%. Since such ratio
is based upon market values of equity, it will fluctuate with changes in the
price of the Common Stock; however, the Company believes that this ratio
provides an appropriate indication of leverage for a company whose assets are
primarily real estate. The Company's debt to total market capitalization ratio
at the time of the Offering will be approximately 19.5% (17.8% if the
Underwriters' overallotment option is exercised in full). See "Policies With
Respect To Certain Transactions -- Financing Policies."
MORTGAGE FINANCING AND CREDIT FACILITY
MORTGAGE FINANCING. The Company is finalizing a seven-year term loan of
$104 million which will close concurrently with the Offering. The proceeds of
the Mortgage Financing, together with proceeds from the Offering, will be used
primarily to refinance the Company's existing mortgage indebtedness. The
Mortgage Financing will be non-recourse, secured primarily by fully
cross-collateralized and cross-defaulted first mortgage liens on the 10 Mortgage
Financing Properties. The Mortgage Financing will require monthly payments of
interest only, with all principal due on the seventh anniversary of the closing
of the Mortgage Financing. The Mortgage Financing is expected to bear interest
at a fixed rate of 7.95% per annum based on current interest rates.
THE CREDIT FACILITY. The Company is finalizing a two-year, $200 million
revolving Credit Facility with a one year extension. The Credit Facility will be
used, among other things, to finance acquisition of properties, and to the
extent required, for working capital purposes, which may include providing funds
for tenant improvements and capital expenditures.
The Credit Facility will be subject to customary conditions, including the
payment of the commitment and maintenance fees, an initial minimum net operating
income, an initial loan-to-value ratio not exceeding 65% and the establishment
of a replacement reserve for capital expenditures, and will give the lender the
right to approve the Properties securing the Credit Facility.
14
<PAGE>
THE OFFERING
All of the shares of Common Stock being offered in the Offering are being
offered by the Company.
Common Stock Offered by the Company... 18,725,000 shares
Common Stock Outstanding After the
Offering (1)........................ 18,725,000 shares
Use of Proceeds....................... Payments to certain Participants (not
including Messrs. Ziman and Coleman
who will not receive cash in the
Formation Transactions) for their
interests in the Arden Predecessors
and in certain of the Properties,
repayment of mortgage debt on the
Properties, including accrued and
additional interest on such mortgage
debt, purchase of the Acquisition
Properties, tenant improvements and
capital expenditure reserves, and for
working capital purposes. See "Use of
Proceeds," "Capitalization," and
"Management's Discussion and Analysis
of Financial Condition and Results of
Operations -- Liquidity and Capital
Resources."
New York Stock Exchange Symbol........ "ARI"
- --------------
(1) Assumes no OP Units are exchanged for Common Stock. If all OP Units were
exchanged for Common Stock, there would be 21,431,000 shares of Common Stock
outstanding after the Offering.
DISTRIBUTIONS
The Company intends to make regular quarterly distributions to its
stockholders. The Company intends to pay a PRO RATA distribution with respect to
the period commencing on the closing of the Offering and ending on December 31,
1996, based upon $0.40 per share for a full quarter. On an annualized basis,
this would be $1.60 per share (of which $0.258 may represent a return of capital
for tax purposes), or an annual distribution rate of 8%, based on the assumed
initial public offering price per share of $20. The Company intends initially to
distribute annually approximately 94.5% of estimated Cash Available for
Distribution. The Company established this distribution rate based upon an
estimate of Cash Available for Distribution that will be available for
distributions after the Offering. See "Distributions" for information as to how
this estimate was derived. The Company intends to maintain its initial
distribution rate for the twelve-month period following consummation of the
Offering unless actual results of operations, economic conditions or other
factors differ materially from the assumptions used in its estimate.
Distributions by the Company will be determined by the Board of Directors and
will be dependent upon a number of factors. The Company believes that its
estimate of Cash Available for Distribution constitutes a reasonable basis for
setting the initial distribution; however, no assurance can be given that the
estimate will prove accurate, and actual distributions may therefore be
significantly different from the expected distributions. In addition, in order
to maintain its qualification as a REIT under the Code, the Company is required
to distribute currently 95% of its taxable income. See "Distributions." The
Company does not intend to reduce the expected distribution per share if the
Underwriters' overallotment option is exercised.
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
1996, and believes its organization and proposed method of operation will enable
it to meet the requirements for qualification as a REIT. To maintain REIT
15
<PAGE>
status, an entity must meet a number of organizational and operational
requirements, including a requirement that it currently distribute at least 95%
of its taxable income to its stockholders. As a REIT, the Company generally will
not be subject to federal income tax on net income it distributes currently to
its stockholders. If the Company fails to qualify as a REIT in any taxable year,
it will be subject to federal income tax at regular corporate rates. See
"Federal Income Tax Considerations" and "Risk Factors -- Adverse Consequences of
Failure to Qualify as a REIT; Other Tax Liabilities." Even if the Company
qualifies for taxation as a REIT, the Company may be subject to certain federal,
state and local taxes on its income and property.
SUMMARY SELECTED COMBINED FINANCIAL DATA
The following sets forth selected combined financial and operating
information on a pro forma basis for the Company and on a combined historical
basis for the Arden Predecessors. The following information should be read in
conjunction with the financial statements and notes thereto of the Company and
of the Arden Predecessors included elsewhere in this Prospectus. The selected
combined historical financial and operating information of the Arden
Predecessors at December 31, 1995 and 1994, and for the years ended December 31,
1995, 1994 and 1993, has been derived from the historical combined financial
statements audited by Ernst & Young LLP, independent auditors, whose report with
respect thereto is included elsewhere in this Prospectus. The selected combined
financial and operating information for the three months ended March 31, 1996
and March 31, 1995 has been derived from the unaudited combined financial
statements of the Arden Predecessors included elsewhere in this Prospectus.
The unaudited selected pro forma financial and operating information for the
three months ended March 31, 1996 and the year ended December 31, 1995 is
presented as if the Offering, the Formation Transactions (including the purchase
of the Acquisition Properties), and the acquisitions of the Properties acquired
during 1996 prior to the Offering (the "1996 Acquired Properties") and the
Properties acquired during 1995 (the "1995 Acquired Properties") had all
occurred by March 31, 1996 for the combined balance sheet and at the beginning
of the period presented for the combined statements of operations. The pro forma
balance sheet information also gives effect to the recording of minority
interest for OP Units, as if these transactions occurred on March 31, 1996. The
pro forma financial information is not necessarily indicative of what the actual
financial position or results of the Company would have been as of and for the
periods indicated, nor does it purport to represent the Company's future
financial position or results of operations.
16
<PAGE>
THE COMPANY (PRO FORMA) AND
ARDEN PREDECESSORS (COMBINED HISTORICAL)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
------------------------------ -------------------------------------------------------
COMBINED
PRO FORMA HISTORICAL PRO FORMA COMBINED HISTORICAL
--------- ------------------ --------- -------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
--------- -------- -------- --------- --------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA, PERCENTAGES AND NUMBER OF PROPERTIES)
OPERATING DATA:
Revenue:
Rental.................................. $16,562 $ 12,471 $ 4,667 $66,691 $ 24,442 $ 11,928 $ 3,155 $-- $--
Tenant reimbursements................... 859 758 128 3,019 822 509 38 -- --
Parking................................. 1,596 1,267 268 5,895 1,665 741 284 -- --
Other................................... 542 558 325 2,441 1,653 734 313 324 11
--------- -------- -------- --------- --------- -------- -------- ----- -----
Total revenue......................... 19,559 15,054 5,388 78,046 28,582 13,912 3,790 324 11
EXPENSES:
Property operating, taxes, insurance and
ground rent............................ 5,462 4,579 1,532 24,546 8,679 3,810 1,163 -- --
Property general and administrative..... 887 732 282 3,991 1,588 735 349 -- --
--------- -------- -------- --------- --------- -------- -------- ----- -----
Total property operating expenses..... 6,349 5,311 1,814 28,537 10,267 4,545 1,512 -- --
General and administrative expenses..... 934 364 373 3,735 1,377 689 386 471 7
--------- -------- -------- --------- --------- -------- -------- ----- -----
Income before interest, depreciation and
amortization........................... 12,276 9,379 3,201 45,774 16,938 8,679 1,892 (147) 4
Depreciation and amortization........... 3,109 2,396 879 11,690 4,373 2,184 528 2 --
Interest expense........................ 2,114 8,832 2,241 8,419 13,780 5,109 673 9 --
--------- -------- -------- --------- --------- -------- -------- ----- -----
Income (loss) before extraordinary loss... 7,053 (1,849) 81 25,665 (1,215) 1,385 691 (158) 4
Extraordinary loss........................ -- -- -- -- -- 601 -- --
--------- -------- -------- --------- --------- -------- -------- ----- -----
Income (loss) before minority interest.... 7,053 (1,849) 81 25,665 (1,215) 784 691 (158) 4
Minority interest......................... 891 -- -- 3,242 -- -- -- -- --
--------- -------- -------- --------- --------- -------- -------- ----- -----
Net income (loss)......................... $ 6,162 $ (1,849) $ 81 $22,423 $ (1,215) $ 784 $ 691 $(158) $ 4
--------- -------- -------- --------- --------- -------- -------- ----- -----
--------- -------- -------- --------- --------- -------- -------- ----- -----
Net income per common share............... $ .33 $ 1.20
--------- ---------
--------- ---------
OTHER DATA:
Funds from Operations(1).................. $10,162 $ 547 $ 960 $37,355 $ 3,131 $ 3,565 $ 1,216 $(158) $ 4
Cash flows from operating activities...... -- 1,370 109 -- 4,231 1,196 1,681 (258) 7
Cash flows from investing activities...... -- (95,854) (20,086) -- (150,022) (45,804) (62,907) -- --
Cash flows from financing activities...... -- 94,006 19,349 -- 146,531 43,584 62,971 250 1
Number of Properties owned at period
end..................................... 24 21 9 24 17 8 3 -- --
Gross rentable square feet of Properties
owned at period end..................... 4,042 3,552 1,309 4,042 2,632 1,131 531 -- --
Occupancy at period end of Properties
owned at period end..................... 88% 88% 83% 88% 88% 82% 84% -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
MARCH 31, 1996
---------------------- COMBINED HISTORICAL
COMBINED ---------------------------------------
PRO FORMA HISTORICAL 1995 1994 1993 1992 1991
--------- ---------- -------- -------- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Commercial office properties -- net of accumulated
depreciation................................................... $414,825 $345,633 $252,082 $106,135 $62,392 -- --
Total assets..................................................... 435,866 380,290 277,643 113,054 65,808 134 10
Mortgage loans payable and unsecured lines of credit............. 103,830 353,394 253,996 94,432 60,975 250 --
Total liabilities................................................ 110,352 364,513 262,955 97,081 62,330 287 5
Minority interest................................................ 41,103 -- -- -- -- -- --
Owners'/Stockholders' equity..................................... 284,411 15,777 14,688 15,973 3,478 (153) 5
</TABLE>
- ---------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 (the "White Paper") defines Funds from Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Management considers Funds from Operations
an appropriate measure of performance of an equity REIT because it is
predicated on cash flow analyses. The Company computes Funds from Operations
in accordance with standards established by the White Paper. Funds from
Operations should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indicator of the Company's
financial performance or to cash flow from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make distributions.
17
<PAGE>
RISK FACTORS
An investment in the Common Stock involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus before making a decision
to purchase Common Stock in the Offering.
PRICE TO BE PAID FOR PROPERTIES AND OTHER ASSETS MAY EXCEED THEIR FAIR MARKET
VALUE
No independent valuations, appraisals or fairness opinions were obtained in
connection with the Formation Transactions. Accordingly, there can be no
assurance that the prices paid by the Company will not exceed the fair market
value of the interests in the Arden Predecessors, the Properties and the other
assets to be acquired by the Company in the Formation Transactions. The
valuation of the Company has been determined based primarily upon a
capitalization of estimated Cash Available for Distribution and the factors
discussed under "Structure and Formation of the Company -- The Formation
Transactions -- Determination and Valuation of Ownership Interests" and
"Underwriting," rather than an asset-by-asset valuation based on historical cost
or current market value. In valuing the Company certain assumptions were made
concerning the estimate of revenue to be derived from the Properties. See
"Distributions."
The Formation Transactions are not the result of arm's-length negotiations.
The Participants (including Messrs. Ziman and Coleman, who are founders of Arden
and the Arden Predecessors and executive officers and members of the Board of
Directors of the Company) have preexisting ownership interests in Arden and the
Arden Predecessors. The ownership interests of such individuals differ in
proportion and amount. Messrs. Ziman and Coleman have negotiated the purchase
price for the assets to be acquired by the Company in the Formation Transactions
and each of these individuals will receive substantial economic benefits as a
result of such transactions. There can be no assurance that the fair market
value of the Properties and the other assets to be acquired by the Company will
equal or exceed the sum of the value of the OP Units issued and the amount of
cash paid to the Participants in the Formation Transactions.
REAL ESTATE FINANCING RISKS
DEBT FINANCING AND EXISTING DEBT MATURITIES. The Company will be subject to
risks normally associated with debt financing, including the risk that the
Company's cash flow will be insufficient to meet required payments of principal
and interest, the risk that existing indebtedness on the Properties (which in
all cases will not have been fully amortized at maturity) will not be able to be
refinanced or that the terms of such refinancing will not be as favorable as the
terms of existing indebtedness. Upon consummation of the Offering and the
Formation Transactions, the Company expects to have outstanding indebtedness of
approximately $104 million, which will mature in seven years. If principal
payments due at maturity cannot be refinanced, extended or paid with proceeds of
other capital transactions, such as new equity capital, the Company expects that
its cash flow will not be sufficient in all years to pay distributions at
expected levels and to repay all such maturing debt. Furthermore, if prevailing
interest rates or other factors at the time of refinancing (such as the
reluctance of lenders to make commercial real estate loans) result in higher
interest rates upon refinancing, the interest expense relating to such
refinanced indebtedness would increase, which could adversely affect the
Company's cash flow and its ability to make expected distributions to its
stockholders.
POTENTIAL DEFAULTS UNDER THE MORTGAGE FINANCING. Concurrently with the
Offering, the Company, through the Operating Partnership, will borrow
approximately $104 million in principal amount under the Mortgage Financing. The
payment and other obligations under the Mortgage Financing will be secured by
cross-collateralized, and cross-defaulted first mortgage lien(s) on the 10
Mortgage Financing Properties. If the Company is unable to meet its obligations
under the Mortgage Financing, the Mortgage Financing Properties securing such
debt could be foreclosed on, which would have a material adverse effect on the
Company and its ability to make expected distributions and could threaten the
continued viability of the Company. See "Policies With Respect to Certain
Transactions -- Financing Policies."
RISK OF RISING INTEREST RATES AND VARIABLE RATE DEBT. Upon consummation of
the Offering and the Formation Transactions, the Company expects to enter into a
$200 million Credit Facility. Advances under the Credit Facility may bear
interest at a variable rate. In addition, the Company may incur other variable
18
<PAGE>
rate indebtedness in the future. Increases in interest rates on such
indebtedness would increase the Company's interest expense, which could
adversely affect the Company's cash flow and its ability to pay expected
distributions to stockholders. Accordingly, the Company may in the future engage
in other transactions to further limit its exposure to rising interest rates as
appropriate and cost effective. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend in
large part on the amount of income generated and expenses incurred. If the
Properties do not generate revenue sufficient to meet operating expenses,
including debt service, tenant improvements, leasing commissions and other
capital expenditures, the Company may have to borrow additional amounts to cover
fixed costs and the Company's cash flow and ability to make distributions to its
stockholders will be adversely affected.
The Company's revenue and the value of its properties may be adversely
affected by a number of factors, including the national economic climate; the
local economic climate; local real estate conditions; the perceptions of
prospective tenants of the attractiveness of the property; the ability of the
Company to manage and maintain the Properties and secure adequate insurance; and
increased operating costs (including real estate taxes and utilities). In
addition, real estate values and income from properties are also affected by
such factors as applicable laws, including tax laws, interest rate levels and
the availability of financing.
RETENTION OF TENANTS AND RELETTING SPACE. The Company will be subject to
the risks that upon expiration, leases may not be renewed, the space may not be
relet or the terms of renewal or reletting (including the cost of required
renovations) may be less favorable than current lease terms. Leases on a total
of approximately 15% and 53% of the occupied space in the Properties will expire
through the end of 1997 and 2000, respectively. The Company has established
initial and annual reserves for renovation and reletting expenses, which take
into consideration its views of both the current and expected business
conditions in the suburban Los Angeles County and Southern California office
markets, but no assurance can be given that these reserves will be sufficient to
cover such costs. During 1996, the re-leasing of the Company's expiring leases
may result in a net decrease in cash flow from the leases due to the number of
leases expected to expire during such period which are above current market
rents. If the Company is unable to promptly relet or renew leases for all or a
substantial portion of this space, if the rental rates upon such renewal or
reletting are significantly lower than expected or if the Company's reserves for
these purposes prove inadequate, the Company's cash flow and ability to make
expected distributions to stockholders could be adversely affected.
ILLIQUIDITY OF REAL ESTATE. Equity real estate investments are relatively
illiquid. Such illiquidity will tend to limit the ability of the Company to vary
its portfolio promptly in response to changes in economic or other conditions.
In addition, the Code limits a REIT's ability to sell properties held for fewer
than four years, which may affect the Company's ability to sell properties
without adversely affecting returns to holders of Common Stock.
COMPETITION. Numerous office properties compete with the Properties in
attracting tenants to lease space. Some of the competing properties may be
newer, better located or owned by parties better capitalized than the Company.
The number of competitive commercial properties in a particular area could have
a material adverse effect on (i) the ability to lease space in the Properties
(or at newly acquired or developed properties) and (ii) the rents charged.
CHANGES IN LAWS. Because increases in income, service or transfer taxes are
generally not passed through to tenants under leases, such increases may
adversely affect the Company's cash flow and its ability to make distributions
to stockholders. The Properties are also subject to various federal, state and
local regulatory requirements, such as requirements of the Americans with
Disabilities Act (the "ADA") and state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to private
litigants. The Company believes that the Properties are currently in substantial
compliance with all such regulatory requirements.
19
<PAGE>
However, there can be no assurance that these requirements will not be changed
or that new requirements will not be imposed which would require significant
unanticipated expenditures by the Company and could have an adverse effect on
the Company's cash flow and expected distributions.
BANKRUPTCY AND FINANCIAL CONDITION OF TENANTS. At any time, a tenant of the
Properties may seek the protection of bankruptcy laws, which could result in
rejection and termination of such tenant's lease and thereby cause a reduction
in cash flow available for distribution by the Company. Although the Company has
not experienced material losses from tenant bankruptcies, no assurance can be
given that tenants will not file for bankruptcy protection in the future or, if
any tenants file, that they will affirm their leases and continue to make rental
payments in a timely manner. In addition, a tenant from time to time may
experience a downturn in its business which may weaken its financial condition
and result in the failure to make rental payments when due. If tenant leases are
not affirmed following bankruptcy or if a tenant's financial condition weakens,
the Company's income may be adversely affected.
AMERICANS WITH DISABILITIES ACT COMPLIANCE. Under the ADA, all public
accommodations and commercial facilities are required to meet certain federal
requirements related to access and use by disabled persons. These requirements
became effective in 1992. Compliance with the ADA requirements could require
removal of access barriers and non-compliance could result in imposition of
fines by the U.S. government or an award of damages to private litigants.
Although the Company believes that the Properties are substantially in
compliance with these requirements, the Company may incur additional costs to
comply with the ADA. Although the Company believes that such costs will not have
a material adverse effect on the Company, if required changes involved a greater
expenditure than the Company currently anticipates, the Company's ability to
make expected distributions could be adversely affected.
RISKS INVOLVED IN PROPERTY OWNERSHIP THROUGH PARTNERSHIPS AND JOINT
VENTURES. The Company will own its interests in the Properties through the
Operating Partnership. In addition, the Company may also participate with other
entities in property ownership through joint ventures or partnerships in the
future. Partnership or joint venture investments may, under certain
circumstances, involve risks not otherwise present, including the possibility
that the Company's partners or co-venturers might become bankrupt, that such
partners or co-venturers might at any time have economic or other business
interests or goals which are inconsistent with the business interests or goals
of the Company, and that such partners or co-venturers may be in a position to
take action contrary to the Company's instructions or requests or contrary to
the Company's policies or objectives, including the Company's policy with
respect to maintaining its qualification as a REIT. The Company will, however,
seek to maintain sufficient control of such partnerships or joint ventures to
permit the Company's business objectives to be achieved. There is no limitation
under the Company's organizational documents as to the amount of available funds
that may be invested in partnerships or joint ventures.
GEOGRAPHIC CONCENTRATION
All of the Company's Properties are located in Southern California, with 21
of the 24 Properties located in suburban Los Angeles County. Los Angeles County
just recently began to recover from an economic recession which affected
Southern California generally and Los Angeles County in particular since the
early 1990s. The Company's revenue and the value of its Properties may be
affected by a number of factors, including the local economic climate (which may
be adversely impacted by business layoffs or downsizing, industry slowdowns,
changing demographics and other factors) and local real estate conditions (such
as oversupply of or reduced demand for office and other competing commercial
properties). Therefore, the Company's performance and its ability to make
distributions to stockholders will likely be dependent, to a large extent, on
the economic conditions in this market area.
CONFLICTS OF INTERESTS IN THE FORMATION TRANSACTIONS AND THE BUSINESS OF THE
COMPANY
BENEFITS FROM FORMATION TRANSACTIONS. Participants receiving OP Units in
the Formation Transactions (including Messrs. Ziman and Coleman, who are
executive officers and directors of the Company, and Mr. Arthur Gilbert, who is
a director nominee of the Company, and Ms. Michele Byer, who is an executive
officer of the Company), will realize certain benefits from the Formation
Transactions that will not generally be received by other persons participating
in the formation of the Company, including receipt of an
20
<PAGE>
aggregate of approximately 2,706,000 OP Units, and options to purchase an
aggregate of 780,000 shares of Common Stock under the Stock Incentive Plan. In
addition, Messrs. Ziman and Coleman will enter into employment agreements with
the Company. See "Structure and Formation of the Company -- Benefits of the
Formation Transactions and the Offering to Affiliates of the Company" and
"Management -- Employment Agreements." Because these persons were involved in
structuring the Formation Transactions, they had the ability to influence the
type and level of benefits they received. As such, these persons may have
interests that conflict with the interests of others participating in the
Formation Transactions and with the interests of persons acquiring Common Stock
in the Offering. As a result, the type and level of benefits these persons
received may have been different if they had not participated in structuring the
Formation Transactions.
REPAYMENT OF CERTAIN DEBT. Lehman Brothers Holdings Inc., an affiliate of
Lehman Brothers Inc., the lead managing underwriter for the Offering, will
receive approximately $303 million (67.7% of the net proceeds of the Offering
and the Mortgage Financing) as repayment of indebtedness and related interest
expected to be outstanding upon consummation of the Offering. See
"Underwriting."
FAILURE TO ENFORCE TERMS OF FORMATION AGREEMENTS. As partners and members
in the Arden Predecessors (which have owned the Properties), owners of Arden,
and recipients of cash and OP Units in the Formation Transactions, certain
members of the Company management, including Messrs. Ziman, Coleman and Gilbert
and Ms. Byer, will have a conflict of interest with respect to their obligations
as directors or executive officers of the Company in enforcing the terms
(including customary representations and warranties as to ownership and
operation) of the agreements relating to the transfer to the Company of their
interests in the Properties and the Arden assets. The failure to enforce the
material terms of those agreements, particularly the indemnification provisions
for breaches of representations and warranties, could result in a monetary loss
to the Company, which loss could have a material adverse effect on the Company's
financial condition or results of operations. In addition, the aggregate
liability of Messrs. Ziman and Coleman and Arden under those agreements is
limited to approximately $39.3 million (the initial value of the OP Units
received by them in the Formation Transactions based on the assumed initial
offering price of the Common Stock offered hereby), and each such party is
severally liable, up to the initial value of the OP Units received by such
party, only for breaches of such party's respective representations and
warranties. The Company therefore will have no right of recovery as to any
damages in excess of such aggregate or individual amounts that may result from
breaches of such representations and warranties.
TAX CONSEQUENCES UPON ANY PREPAYMENT OF MORTGAGE FINANCING. Certain Limited
Partners, including Messrs. Ziman, Coleman and Gilbert and Ms. Byer, will incur
adverse tax consequences upon the prepayment of the Mortgage Financing which are
different from the tax consequences to the Company and persons who purchase
shares of Common Stock in the Offering. Consequently, such Limited Partners may
have different objectives regarding the appropriate timing of any such
prepayment. While the Company will have the exclusive authority under the
Partnership Agreement to determine whether, when, and on what terms to prepay
the Mortgage Financing, any such decision would require the approval of the
Board of Directors. Messrs. Ziman, Coleman and Gilbert and Ms. Byer will have
substantial influence with respect to any such decision, and such influence
could be exercised in a manner not consistent with the interests of some, or a
majority, of the Company's stockholders including in a manner which could
prevent prepayment of the Mortgage Financing.
LIMITATION UPON SALE OR REFINANCING OF CENTURY PARK CENTER. Due to the
potential adverse consequences to certain Limited Partners which may result from
a sale or refinancing of Century Park Center, for a period of seven years
following the Offering, any sale or refinancing of Century Park Center requires
the consent of a majority of the Limited Partners, which may cause the Company
to be unable to sell this Property in circumstances in which it would be
advantageous to do so.
OTHER REAL ESTATE INTERESTS. Messrs. Ziman, Coleman and Gilbert hold
certain real estate interests which are not being contributed to the Company as
part of the Formation Transactions. Except for one property owned by Mr.
Gilbert, none of such real estate interests relate to properties that are office
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properties. None of such real estate interests, including Mr. Gilbert's interest
in such office property, are appropriate for inclusion in the REIT as they do
not satisfy the investment and acquisition policies of the Company.
RISKS ASSOCIATED WITH THE RECENT ACQUISITION OF MANY OF THE NEW PROPERTIES; LACK
OF OPERATING HISTORY
After giving effect to the Formation Transactions, the Company will own 24
Properties, consisting of approximately 4.0 million rentable square feet. All of
the Properties have been under the Company's management for 3 1/2 years or less.
The most recently acquired of the Properties may have characteristics or
deficiencies unknown to the Company affecting their valuation or revenue
potential, and it is also possible that the operating performance of the most
recently acquired Properties may decline under the Company's management.
The Company is currently experiencing a period of rapid growth. As the
Company acquires additional properties, the Company will be subject to risks
associated with managing new properties, including lease-up and tenant
retention. In addition, the Company's ability to manage its growth effectively
will require it to successfully integrate its new acquisitions into its existing
management structure. No assurances can be given that the Company will be able
to succeed with such integration or effectively manage additional properties or
that newly acquired properties will perform as expected.
RISK OF ACQUISITION, RENOVATION AND DEVELOPMENT ACTIVITIES
The Company intends to continue acquiring office properties. See "Business
and Growth Strategies -- Business Strategies." Acquisitions of office properties
entail risks that investments will fail to perform in accordance with
expectations. Estimates of renovation costs and costs of improvements to bring
an acquired property up to standards established for the market position
intended for that property may prove inaccurate. In addition, there are general
investment risks associated with any new real estate investment.
The Company intends to expand and/or renovate its Properties from time to
time. Expansion and renovation projects generally require expenditure of capital
as well as various government and other approvals, the receipt of which cannot
be assured. While policies with respect to expansion and renovation activities
are intended to limit some of the risks otherwise associated with such
activities, the Company will nevertheless incur certain risks, including
expenditures of funds on, and devotion of management's time to, projects which
may not be completed.
The Company anticipates that future acquisitions and renovations will be
financed through a combination of advances under the Credit Facility, other
lines of credit and other forms of secured or unsecured financing. If new
developments are financed through construction loans, there is a risk that, upon
completion of construction, permanent financing for newly developed properties
may not be available or may be available only on disadvantageous terms.
While the Company has generally limited its acquisition, renovation,
management and leasing business primarily to the Southern California market, it
is possible that the Company will in the future expand its business to new
geographic markets. The Company will not initially possess the same level of
familiarity with new markets outside of Southern California, which could
adversely affect its ability to acquire, develop, manage or lease properties in
any new localities.
Changing market conditions, including competition from other purchasers of
Class A suburban office properties, may diminish the Company's opportunities for
attractive additional acquisitions.
The Company also intends to review from time to time the possibility of
developing and constructing office buildings and other commercial properties in
accordance with the Company's development and underwriting policies. See
"Business and Growth Strategies -- Business Strategies." Risks associated with
the Company's development and construction activities may include: abandonment
of development opportunities; construction costs of a property exceeding
original estimates, possibly making the property uneconomical; occupancy rates
and rents at a newly completed property may not be sufficient to make the
property profitable; financing may not be available on favorable terms for
development of a property; and
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construction and lease-up may not be completed on schedule, resulting in
increased debt service expense and construction costs. In addition, new
development activities, regardless of whether they would ultimately be
successful, typically require a substantial portion of management's time and
attention. Development activities would also be subject to risks relating to the
inability to obtain, or delays in obtaining, all necessary zoning, land-use,
building, occupancy, and other required governmental permits and authorizations.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
TAX LIABILITIES AS A CONSEQUENCE OF FAILURE TO QUALIFY AS A REIT. The
Company intends to operate so as to qualify as a REIT under the Code, commencing
with its taxable year ending December 31, 1996. Although management believes
that it will be organized and will operate in such a manner, no assurance can be
given that the Company will be organized or will be able to operate in a manner
so as to qualify or remain so qualified. Qualification as a REIT involves the
satisfaction of numerous requirements (some on an annual and quarterly basis)
established under highly technical and complex Code provisions for which there
are only limited judicial and administrative interpretations, and involve the
determination of various factual matters and circumstances not entirely within
the Company's control. For example, in order to qualify as a REIT, at least 95%
of the Company's gross income in any year must be derived from qualifying
sources and the Company must pay distributions to stockholders aggregating
annually at least 95% of its REIT taxable income (excluding capital gains). The
complexity of these provisions and of the applicable Treasury Regulations that
have been promulgated under the Code is greater in the case of a REIT that holds
its assets in partnership form. No assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. The Company is relying on
the opinion of Latham & Watkins, counsel to the Company, regarding various
issues affecting the Company's ability to qualify, and continue to qualify, as a
REIT. See "Federal Income Tax Considerations -- Taxation of the Company." Such
legal opinion is based on various assumptions and factual representations by the
Company regarding the Company's ability to meet the various requirements for
qualification as a REIT, and no assurance can be given that actual operating
results will meet these requirements. Such legal opinion is not binding on the
IRS or any court.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates.
Moreover, unless entitled to relief under certain statutory provisions, the
Company also would be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost. This treatment
would significantly reduce the net earnings of the Company available for
investment or distribution to stockholders because of the additional tax
liability to the Company for the years involved. In addition, distributions to
stockholders would no longer be required to be made. See "Federal Income Tax
Considerations -- Taxation of the Company -- Requirements for Qualification."
OTHER TAX LIABILITIES. Even if the Company qualifies for and maintains its
REIT status, it will be subject to certain federal, state and local taxes on its
income and property. If the Company has net income from a prohibited
transaction, such income will be subject to a 100% tax. See "Federal Income Tax
Considerations."
FAILURE OF THE OPERATING PARTNERSHIP TO QUALIFY AS A PARTNERSHIP FOR FEDERAL
INCOME TAX PURPOSES
The Company will receive an opinion of Latham & Watkins, tax counsel to the
Company, at the closing of the Formation Transactions to the effect that the
Operating Partnership is properly treated as a partnership for federal income
tax purposes. Such opinion is not binding on the IRS or the courts. If the IRS
were to successfully challenge the tax status of the Operating Partnership as a
partnership for federal income tax purposes, the Operating Partnership would be
treated as an association taxable as a corporation. In such event, the character
of the Company's assets and income would change, which would preclude the
Company from satisfying the REIT asset tests and possibly the income tests (as
set forth in the Code) and, in turn, would prevent the Company from qualifying
as a REIT. The imposition of a corporate tax on the Operating Partnership would
also reduce the amount of funds available for distribution to the Company and
its stockholders. See "Federal Income Tax Considerations -- Tax Aspects of the
Operating Partnership."
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INSURANCE
The Operating Partnership carries comprehensive liability, fire, extended
coverage and rental loss insurance covering all of the Properties, with policy
specifications and insured limits which the Company believes are adequate and
appropriate under the circumstances. The Operating Partnership also carries
earthquake insurance on all of the Properties. There are, however, certain types
of losses that are not generally insured because it is not economically feasible
to insure against such losses. Should an uninsured loss or a loss in excess of
insured limits occur, the Operating Partnership could lose its capital invested
in the property, as well as the anticipated future revenue from the property
and, in the case of debt which is with recourse to the Operating Partnership,
would remain obligated for any mortgage debt or other financial obligations
related to the property. Any such loss would adversely affect the Company.
Moreover, as a general partner of the Operating Partnership, the Company will
generally be liable for any unsatisfied obligations other than non-recourse
obligations. The Company believes that the Properties are adequately insured. In
addition, in light of the California earthquake risk, California building codes
since the early 1970's have established construction standards for all newly
built and renovated buildings, including office buildings, the current and
strictest construction standards having been adopted in 1984. Of the 24
Properties, 13 have been built since January 1, 1985 and the Company believes
that all of the Properties were constructed in full compliance with the
applicable standards existing at the time of construction. While earthquakes
have occurred in Southern California, the only loss the Company has experienced
as a result of earthquakes was minor damage to three of its buildings due to the
Northridge earthquake, which resulted in an extraordinary loss of $601,000 in
the year ended December 31, 1994. No assurance can be given that material losses
in excess of insurance proceeds will not occur in the future.
NO LIMITATION ON DEBT
Upon completion of the Offering and the Formation Transactions, the
Company's debt to total market capitalization ratio will be approximately 19.5%
(17.8% if the Underwriters' overallotment option is exercised in full). The
Company currently has a policy of incurring debt only if upon such incurrence
the debt to total market capitalization ratio would be 50% or less, but the
organizational documents of the Company do not contain any limitation on the
amount of indebtedness the Company may incur. Accordingly, the Board of
Directors could alter or eliminate this policy. If this policy were changed, the
Company could become more highly leveraged, resulting in an increase in debt
service that could adversely affect the Company's cash flow and, consequently,
the amount available for distribution to stockholders and could increase the
risk of default on the Company's indebtedness.
The Company has established its debt policy relative to the total market
capitalization of the Company rather than relative to the book value of its
assets. The Company has used total market capitalization because it believes
that the book value of its assets (which to a large extent is the depreciated
original cost of real property, the Company's primary tangible assets) does not
accurately reflect its ability to borrow and to meet debt service requirements.
The market capitalization of the Company, however, is more variable than book
value, and does not necessarily reflect the fair market value of the underlying
assets of the Company at all times. The Company will also consider factors other
than market capitalization in making decisions regarding the incurrence of
indebtedness, such as the purchase price of properties to be acquired with debt
financing, the estimated market value of its properties upon refinancing and the
ability of particular properties and the Company as a whole to generate cash
flow to cover expected debt service.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers,
particularly Messrs. Ziman and Coleman. The loss of their services could have a
material adverse effect on the operations of the Company. Prior to the
consummation of the Offering, each of Messrs. Ziman and Coleman will enter into
an employment agreement with the Company. See "Management -- Employment
Agreements."
LIMITS ON CHANGES IN CONTROL
Certain provisions of Maryland law and of the Charter and bylaws of the
Company (the "Bylaws") may have the effect of delaying, deferring or preventing
a third party from making an acquisition proposal for the Company and may
thereby inhibit a change in control of the Company. For example, such provisions
may
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(i) deter tender offers for the Common Stock, which offers may be attractive to
the stockholders, or (ii) deter purchases of large blocks of Common Stock,
thereby limiting the opportunity for stockholders to receive a premium for their
Common Stock over then-prevailing market prices. See "Capital Stock" and
"Certain Provisions of Maryland Law and the Company's Charter and Bylaws." These
provisions include the following:
LIMITS ON OWNERSHIP OF COMMON STOCK. In order for the Company to maintain
its qualification as a REIT, not more than 50% in value of the outstanding
shares of Common Stock of the Company may be owned, actually or constructively,
by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year (other than the first year for
which the election to be treated as a REIT has been made). In addition, if the
Company, or an owner of 10% or more of the Company, actually or constructively
owns 10% or more of a tenant of the Company (or a tenant of any partnership in
which the Company is a partner), the rent received by the Company (either
directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. See
"Federal Income Tax Considerations -- Taxation of the Company." In order to
protect the Company against the risk of losing REIT status due to the
concentration of ownership among its stockholders, the Ownership Limit included
in the Charter limits actual or constructive ownership of the outstanding shares
of Common Stock by any single stockholder to 9.0% of the total of the then
outstanding shares of Common Stock. See "Capital Stock -- Restrictions on
Transfer." Although the Board of Directors presently has no intention of doing
so (except as described below), the Board of Directors could waive this
restriction with respect to a particular stockholder if it were satisfied, based
upon the advice of tax counsel, that ownership by such stockholder in excess of
the Ownership Limit would not jeopardize the Company's status as a REIT and the
Board of Directors otherwise decided such action would be in the best interests
of the Company. Actual or constructive ownership of shares of Common Stock in
excess of the Ownership Limit will cause the violative transfer or ownership to
be void with respect to the transferee or owner as to that number of shares in
excess of the Ownership Limit and such shares will be automatically transferred
to a trust for the benefit of a qualified charitable organization. Such
transferee or owner shall have no right to vote such shares or be entitled to
dividends or other distributions with respect to such shares. The Board of
Directors has waived the Ownership Limit with respect to Mr. Ziman and certain
family members and affiliates and permitted such parties to actually and
constructively own up to 13% of the outstanding shares of Common Stock. See
"Capital Stock -- Restrictions on Transfer" for additional information regarding
the Ownership Limit.
PREFERRED STOCK. The Charter authorizes the Board of Directors to cause the
Company to issue authorized but unissued shares of Common Stock or Preferred
Stock and to classify or reclassify any unissued shares of Preferred Stock and
to set the preferences, rights and other terms of such classified or
unclassified shares. See "Capital Stock -- Preferred Stock." Although the Board
of Directors has no such intention at the present time, it could establish a
series of Preferred Stock that could, depending on the terms of such series,
delay, defer or prevent a transaction or a change in control of the Company that
might involve a premium price for the Common Stock or otherwise be in the best
interest of the stockholders.
STAGGERED BOARD. The Company's Board of Directors is divided into three
classes of directors. The initial terms of the first, second and third classes
will expire in 1997, 1998 and 1999, respectively. Beginning in 1997, directors
of each class will be chosen for three-year terms upon the expiration of their
current terms and each year one class of directors will be elected by the
stockholders. The staggered terms of directors may reduce the possibility of a
tender offer or an attempt to change control of the Company even though a tender
offer or change in control might be in the best interest of the stockholders.
See "Certain Provisions of Maryland Law and the Company's Charter and Bylaws --
Board of Directors - Number, Classification, Vacancies."
REQUIRED CONSENT OF THE OPERATING PARTNERSHIP FOR MERGER. The Company may
not merge, consolidate or engage in any combination with another person or sell
all or substantially all of its assets unless such transaction includes the
merger of the Operating Partnership, which requires the approval of the holders
of a majority of the outstanding OP Units representing limited partner
interests. This voting requirement might limit the possibility for an
acquisition or change in control of the Company.
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MARYLAND BUSINESS COMBINATION STATUTE. Under the Maryland General
Corporation Law, as amended ("MGCL"), certain "business combinations" (including
certain issuances of equity securities) between a Maryland corporation and any
person who beneficially owns 10% or more of the voting power of the
corporation's shares (an "Interested Stockholder") or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder becomes an Interested Stockholder. Thereafter, any such business
combination must be approved by two super-majority stockholder votes unless,
among other conditions, the corporation's common stockholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the Interested
Stockholder for its common shares. The Charter exempts Mr. Ziman from the
business combination provisions of the MGCL. The applicability of such
prohibitions and requirements to potential business combinations involving the
Company could have the effect of discouraging a third party from making an
acquisition proposal for the Company and may thereby inhibit a change in control
of the Company. See "Certain Provisions of Maryland Law and the Company's
Charter and Bylaws -- Business Combinations."
HISTORICAL LOSSES
The Arden Predecessors had a combined historical net loss of approximately
$1.9 million for the three months ended March 31, 1996 and approximately $1.2
million for the year ended December 31, 1995. These net losses reflect the
substantial interest expense associated with the acquisition financing of the
Properties and certain non-cash charges such as depreciation and amortization.
See "Selected Combined Financial Data" and the financial statements and
accompanying notes included in this Prospectus. These historical results may not
be indicative of future results. Nonetheless, there can be no assurance that the
Company will not incur net losses in the future.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a governmental
entity or to third parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically impose clean-up responsibility and liability without regard
to whether the owner knew of or caused the presence of the contaminants, and the
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure properly to remediate the contamination on such property, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances at a disposal or treatment facility also may be
liable for the costs of removal or remediation of a release of hazardous or
toxic substances at such disposal or treatment facility, whether or not such
facility is owned or operated by such person. In addition, some environmental
laws create a lien on the contaminated site in favor of the government for
damages and costs incurred in connection with the contamination. Finally, the
owner of a site may be subject to common law claims by third parties based on
damages and costs resulting from environmental contamination emanating from such
site.
Certain federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos-containing materials ("ACM")
when such materials are in poor condition or in the event of construction,
remodeling, renovation or demolition of a building. Such laws may impose
liability for release of ACM and may provide for third parties to seek recovery
from owners or operators of real properties for personal injury associated with
ACM. In connection with its ownership and operation of the Properties, the
Company may be potentially liable for such costs. ACM has been detected through
sampling by environmental consultants at 70 South Lake, 16000 Ventura Boulevard
and 9665 Wilshire. The non-friable ACM was found in certain floor tiles and pipe
wrappings at 16000 Ventura Boulevard and 70 South Lake and in vinyl floor tiles,
carpet mastic, drywall mud/tape, textured ceiling material, core insulation
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material and fireproofing at 9665 Wilshire. The non-friable ACM found at these
Properties is not expected to present a risk as long as it continues to be
properly managed. The environmental consultants recommended no further ACM
sampling or removal action at any of the Properties.
In the past two years, independent environmental consultants have conducted
or updated Phase I Environmental Assessments ("Phase I Assessments") at the
Properties. These Phase I Assessments have included, among other things, a
visual inspection of the Properties and the surrounding area and a review of
relevant state, federal and historical documents. No invasive techniques such as
soil or groundwater sampling were performed.
The Company's Phase I Assessments of the Properties have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations taken as a
whole, nor is the Company aware of any such material environmental liability.
Nevertheless, it is possible that the Company's Phase I Assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that (i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company.
The Company believes that the Properties are in substantial compliance in
all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products,
except as noted above. The Company has not been notified by any governmental
authority, and is not otherwise aware, of any material noncompliance, liability
or claim relating to hazardous or toxic substances or petroleum products in
connection with any of its present Properties, other than as noted above.
EFFECT ON COMMON STOCK PRICE OF SHARES AVAILABLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices of
the Common Stock. In connection with the formation of the Company, 2,706,000 OP
Units, in addition to Common Stock sold by the Company in the Offering, will be
issued. See "Structure and Formation of the Company." Messrs. Ziman and Coleman
have agreed to certain restrictions on the dispositions of the shares of Common
Stock issued upon exchange of OP Units. See "Underwriting." When such
restrictions lapse, Common Stock issued upon the exchange of OP Units may be
sold in the public market pursuant to registration rights that the Company has
granted to the Participants or available exemptions from registration. In
addition, 1,500,000 shares of Common Stock will be reserved for issuance
pursuant to the Company's Stock Incentive Plan, and these shares will be
available for sale in the public markets from time to time pursuant to
exemptions from registration requirements or upon registration. Options to
purchase a total of 780,000 shares of Common Stock will be granted to certain
executive officers, employees and directors upon the closing of the Offering.
See "Management -- Compensation of Directors," "-- Executive Compensation" and
"-- Stock Incentive Plan." No prediction can be made about the effect that
future sales of Common Stock will have on the market prices of shares.
IMMEDIATE AND SUBSTANTIAL DILUTION
As set forth more fully under "Dilution," the pro forma net tangible book
value per share of the assets of the Company after the Offering will be
substantially less than the initial public offering price per share in the
Offering. Accordingly, purchasers of the Common Stock offered hereby will
experience immediate and substantial dilution of $4.81 per share in the net
tangible book value of the Common Stock from the initial public offering price.
See "Dilution."
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained or that shares of Common Stock will be resold at or above the initial
public offering price. The initial public offering price of the Common Stock has
been determined by agreement among the Company and the Underwriters and may not
be indicative of the
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market price for the Common Stock after the Offering. See "Underwriting." The
market value of the Common Stock could be substantially affected by general
market conditions, including changes in interest rates. Moreover, numerous other
factors, such as governmental regulatory action and changes in tax laws, could
have a significant impact on the future market price of the Common Stock.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL
The investment, financing, borrowing and distribution policies of the
Company and its policies with respect to all other activities, including growth,
debt, capitalization and operations, will be determined by the Board of
Directors. Although the Board of Directors has no present intention to do so,
these policies may be amended or revised at any time and from time to time at
the discretion of the Board of Directors without a vote of the stockholders of
the Company. A change in these policies could adversely affect the Company's
financial condition, results of operations or the market price of the Common
Stock. See "Policies with Respect to Certain Transactions."
INFLUENCE OF EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
Upon completion of the Offering, all directors and executive officers of the
Company as a group will beneficially own approximately 94% of the OP Units
which, commencing one year after consummation of the Offering, will be
redeemable by the holder for cash or, at the option of the Company, exchangeable
for shares of Common Stock on a one-for-one basis. Assuming the exchange of all
of these OP Units for shares of Common Stock, all directors and executive
officers as a group would beneficially own approximately 11.83% of the total
issued and outstanding shares. Mr. Ziman currently serves as Chairman and Chief
Executive Officer and will be, along with Mr. Coleman, who currently serves as
President and Chief Operating Officer, and Mr. Gilbert (a director nominee) on
the initial Board of Directors of the Company. Accordingly, such persons will
have substantial influence on the Company, which influence might not be
consistent with the interests of other stockholders, and may in the future have
a substantial influence on the outcome of any matters submitted to the Company's
stockholders for approval if all of their OP Units are exchanged for Common
Stock. In addition, although there is no current agreement, understanding or
arrangement for those Participants who received OP Units to act together on any
matter, the Participants could be in a position to exercise significant
influence over the affairs of the Company if they were to act together in the
future. See "Principal Stockholders."
RISKS OF FEE MANAGEMENT BUSINESS
The Company, through the Operating Partnership, intends to pursue
selectively the management of properties owned by third parties. Risks
associated with the management and leasing of properties owned by third parties
include the risk that the management and leasing contracts (which are typically
cancelable upon 15 to 60 days' notice or upon certain events, including sale of
the property) will be terminated by the property owner or will be lost in
connection with a sale of such property, that contracts may not be renewed upon
expiration or may not be renewed on terms consistent with current terms and that
the rental revenues upon which management and leasing fees are based will
decline as a result of general real estate market conditions or specific market
factors affecting properties managed or leased by the Operating Partnership,
resulting in decreased management or leasing fee income.
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK
One of the factors that will influence the market price of the Common Stock
in public markets will be the annual distribution rate on the shares. Increasing
market interest rates may lead prospective purchasers of the Common Stock to
demand a higher annual distribution rate from future distributions. Such an
increase in the required distribution rate may adversely affect the market price
of the Common Stock.
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THE COMPANY
The Company has been formed to continue and expand the real estate business
of Arden and the other Arden Predecessors which are engaged in owning,
acquiring, managing, leasing and renovating office properties in Southern
California. The Company's founders, Richard S. Ziman and Victor J. Coleman,
along with the other five senior officers at the Company, have an average of
more than 18 years of experience in the Southern California real estate
industry. Upon completion of the Offering, the Company will own 24 office
properties (the "Properties") containing approximately 4.0 million rentable
square feet. All of the Properties are located in Southern California, with 21
in suburban Los Angeles County, two in Orange County and one in San Diego
County. As of April 30, 1996, the Properties had a weighted average occupancy
rate of approximately 88%. Arden currently manages 22 of the Properties. Upon
completion of the Offering, the Company will manage all of the Properties and
four additional properties containing approximately 325,000 rentable square feet
which are currently managed by Arden for institutional investors and other
third-party owners. The Company will be a fully integrated, self-administered
and self-managed real estate company and expects to qualify as a REIT for
federal income tax purposes.
The Company believes that all of the Properties are located in strong
submarkets which generally have significant rent growth potential due to
employment growth, declining vacancy rates, limited new construction activity
and existing rental rates at levels significantly below those required to make
new construction economically feasible. The Company's portfolio is comprised
primarily of Class A suburban office properties. The Company generally considers
Class A suburban office properties to be those which have desirable locations
and high quality finishes, are well maintained and professionally managed and
are capable of achieving rental and occupancy rates which are typically above
those prevailing in their respective markets. Of the Company's 24 Properties, 20
Properties have been built since 1980 and 14 Properties, including all four
built prior to 1980, have been substantially renovated within the last three
years. The Properties are leased to over 540 tenants which engage in a wide
variety of businesses, including financial services, entertainment, health care
services, accounting, law, computer technology, education and publishing. Major
tenants in the Company's portfolio, based on square feet leased, include:
Merrill Lynch, Hewlett Packard, Deloitte & Touche, GTE California, McDonnell
Douglas, Pepperdine University, Grey Advertising, Earth Technology and The
Hearst Corporation. As of April 30, 1996, no single tenant accounted for more
than approximately 3.5% of the aggregate Adjusted Annualized Base Rent of the
Company's portfolio and only 16 tenants individually represented more than 1% of
such aggregate Adjusted Annualized Base Rent.
The Company believes that certain economic fundamentals in Southern
California provide an attractive environment for owning, acquiring and operating
Class A suburban office properties:
- According to AMERICA'S OFFICE ECONOMY prepared by Cognetics, Inc., Los
Angeles County, in which 21 of the Company's 24 Properties are located, is
the number one market in the United States for primary office employment
growth;
- According to statistics released by the U.S. Bureau of Labor Statistics,
the unemployment rate in the Los Angeles PMSA, in which 21 of the 24
Properties are located, has decreased significantly over the past four
years, falling from an average of 9.8% during 1992 to 7.9% during 1995;
- The Los Angeles EDC has forecast nonfarm employment growth rates of 2.1%
in 1996 and 1997 in Los Angeles County;
- The Los Angeles EDC has also forecast that economic activity will increase
twice as fast in Los Angeles County than in the nation as a whole during
1996 and 1997, with inflation-adjusted gross product growing at a rate of
5.2% and 5% in Los Angeles County as compared to 2.5% and 2.4% for the
nation as a whole; and
- Since 1992, there has been very limited construction of new office
properties in the Southern California region. The Company believes that
this limited construction of office properties coupled with a growing
economy will continue to result in increased demand for office space and
positive net absorption in the Southern California region, and
particularly in the selected submarkets where most of the Properties are
located. See "Southern California Economy and Office Markets."
29
<PAGE>
Richard S. Ziman, the Chairman and Chief Executive Officer of the Company,
has been involved in the real estate business for over 25 years. In 1979, Mr.
Ziman co-founded, as managing general partner, PFG, whose primary focus was to
acquire underperforming office buildings in good locations and then actively
manage, lease and renovate the properties to increase cash flow and enhance
their value. During the early and mid 1980's, PFG acquired over 4.0 million
square feet of commercial office space almost exclusively in Los Angeles County
and Orange County. In order to capitalize on the escalation of prices for
Southern California office properties in the late 1980's, PFG sold substantially
all of its interests in its office properties portfolio prior to the general
downturn in the real estate market in Southern California.
In 1993, in anticipation of a recovery in the Southern California real
estate market, the Company began to selectively acquire commercial office
properties located in suburban Los Angeles County. In assembling its existing
portfolio and as part of its operating strategy, the Company acquired office
properties that were located in submarkets with growth potential, were
underperforming or needed renovation and which offered opportunities for the
Company to implement its value-added strategy to increase cash flow. This
strategy includes active management and aggressive leasing efforts, a focused
renovation and refurbishment program for underperforming assets, reduction and
containment of operating costs and emphasis on tenant satisfaction (including
efforts to maximize tenant retention at lease expiration and programs to
relocate tenants to other spaces within the Company's portfolio). The Company's
commitment to tenant satisfaction and retention is evidenced by its retention
rate of approximately 79% (based on square feet renewed) from 1993 through 1995
and management's on-going relationships with multi-site tenants such as
McDonnell Douglas, Merrill Lynch, Imperial Bank, Smith Barney, GTE California
and City National Bank.
The Company believes that it has been successful in implementing its
value-added strategy and increasing occupancy rates and rental revenue. As of
April 30, 1996, the Properties owned by the Company for more than one year had a
weighted average occupancy rate of approximately 87%, compared to a weighted
average occupancy of approximately 78% as of the respective dates such
Properties were acquired by the Company. In addition, the Company's occupancy
rates at many of its Properties are above market averages in the applicable
submarkets based on information included in the C&W Market Study. As of April
30, 1996, the weighted average occupancy rate of the 21 Properties located in
Los Angeles County was approximately 89%, compared to weighted average occupancy
rates, as of December 31, 1995, of approximately 81% for office properties
throughout Los Angeles County and approximately 84% for office properties in the
Los Angeles County submarkets in which such Properties are located (based in
each case on the C&W Market Study).
The Company believes that the submarkets in which the Properties are
located, as well as certain additional submarkets within the Southern California
region, present significant opportunities for the Company to continue to acquire
Class A suburban office properties at attractive yields and for prices
significantly below replacement costs. To date, the Company has acquired its
Properties at a cost which the Company believes is significantly below
replacement cost based on estimates of replacement costs of Class A office
buildings included in the C&W Market Study. As part of its growth strategy to
pursue such acquisitions, the Company has acquired five properties in 1996 and
will use approximately $35 million of the net proceeds from the Offering to
acquire the two Acquisition Properties concurrently with the Offering. The
Acquisition Properties contain a total of approximately 298,000 rentable square
feet and are located in suburban Los Angeles County. The Company believes that
these acquisitions demonstrate its ability, through its local market expertise,
to identify and complete acquisitions in selected submarkets within Southern
California at prices significantly below replacement cost based on estimates of
replacement costs of Class A office buildings included in the C&W Market Study.
See "Business and Growth Strategies." To capitalize on future acquisition
opportunities, the Company is finalizing a $200 million Credit Facility which
the Company expects to use for acquiring properties and for general corporate
purposes.
Upon completion of the Offering, the founders and executive officers of the
Company will beneficially own approximately 9.32% of the Company, assuming the
exchange of all of their OP Units for Common Stock and excluding shares of
Common Stock subject to options granted under the Company's Stock Incentive
Plan.
30
<PAGE>
The Company is a Maryland corporation incorporated on May 1, 1996. The
Company's executive offices are located at 9100 Wilshire Boulevard, East Tower,
Suite 700, Beverly Hills, California 90212 and its telephone number is (310)
271-8600.
BUSINESS AND GROWTH STRATEGIES
The Company's primary business objectives are to maximize growth in cash
flow and to enhance the value of its portfolio in order to maximize total return
to its stockholders. The Company believes it can achieve these objectives by
continuing to implement its business strategies and capitalize on the external
and internal growth opportunities described below. The Company also believes,
based on its evaluation of market conditions, that a number of factors will
enhance its ability to achieve its business objectives, including (i) the
continuing improvement in the Southern California economy; (ii) the limited
construction of new office properties in the Southern California region due to
the substantial cost to develop new office properties compared to current
acquisition prices and substantial building construction limitations in many
submarkets, which provides opportunities to maximize occupancy rates, rental
rates and overall portfolio value; and (iii) the limited availability of
conventional real estate financing for new construction of office properties in
Southern California.
BUSINESS STRATEGIES
The Company's primary business strategies are to (i) acquire and renovate
underperforming office properties in submarkets where it can utilize its local
market expertise and extensive real estate experience; (ii) actively manage its
portfolio; and (iii) selectively provide real estate management services to
third parties. When market conditions permit, the Company may also develop new
properties in submarkets where it has local market expertise.
The Company believes that (i) the Southern California region offers
significant growth opportunities for well-capitalized, experienced owners of
real estate with extensive local market expertise and (ii) being a public
company will enhance its ability to take advantage of opportunities to acquire
additional office properties at attractive prices and develop office properties,
when feasible, at attractive returns. Through four regional offices, the Company
implements its business strategies by: (i) emphasizing tenant satisfaction and
retention and employing intensive property marketing programs; (ii) utilizing a
multidisciplinary approach to acquisition, management, leasing and renovation
activities that is designed to coordinate decision-making and enhance
responsiveness to market opportunities and tenant needs; and (iii) implementing
cost control management and systems that capitalize on economies of scale
arising from the size and location of the Company's portfolio. The Company
believes that the implementation of these operating practices has increased the
occupancy and rental revenue of its existing portfolio.
AGGRESSIVE LEASING. The Company utilizes its market position and
relationships with a broad array of brokers and tenants to implement its
aggressive leasing efforts and monitor and understand the current and future
space needs of office tenants in its various submarkets. Since the Company
retains several different brokerage companies as leasing agents (at least nine
different companies across the four regions and 24 Properties) to implement its
leasing program, it has a high profile in the brokerage community. This strategy
enables the Company to attract and place tenants throughout all of the
Properties, thereby improving the Company's penetration in the tenant community.
The Company believes that not only does the breadth of its submarket presence
permit it to offer a wide variety of space alternatives to prospective tenants
and to existing tenants whose facility requirements change over time, but also
its leasing agents are given incentives to locate tenants to Properties where
they are not the leasing agent.
Management continually strives to be responsive to tenant needs in various
other ways, including by adding tailored amenities at specific buildings, such
as lobby reconfiguration and valet-assisted parking. The Company also
underwrites its acquisitions with sufficient capital to provide for ample tenant
improvements and leasing commissions in contrast to many owners of office
properties who lack funds to build out space for tenants and to pay leasing
commissions.
31
<PAGE>
INTEGRATED DECISION-MAKING AND RESPONSIVENESS. In addition to the location
and quality of the Properties, management generally credits its ability to
maintain its Properties at above-average market occupancy levels to the
coordination of its decision-making team. Acquisition, renovation and leasing
activities are coordinated to enhance responsiveness to market opportunities and
tenant needs. The Company's renovation and construction executive plays an
integral role in both its leasing and acquisition activities. The acquisition,
leasing and renovation teams work closely with the Company's senior management
from the initial meetings with prospective tenants or sellers, and throughout
the negotiation process. This integrated approach permits the Company to analyze
the economic terms and costs (including tenant build-out and retrofitting costs)
for each lease on a timely and efficient basis throughout lease negotiations.
With respect to acquisitions, the Company can quickly analyze the costs of
upgrades and lease-up potential. The Company is able to commit to leasing and
acquisition terms quickly, facilitate timely deal execution and build-out of
space for prospective tenants and minimize downtime between lease rollovers.
COST CONTROL OPERATING EFFICIENCIES. The size and geographic location of
the Company's portfolio permit it to enhance portfolio value by lowering
operating costs and expenses, compared to single-site ownership and management.
The Company seeks to capitalize on economies of scale resulting from the
Southern California geographic focus of the portfolio and the maintenance of a
centralized state of the art accounting system for cost control at each of the
Properties. The Company also strives to minimize overhead costs through
maintenance of four regional offices, each of which has responsibility for a
number of Properties within specific submarkets, and by controlling corporate
general and administrative expenses.
GROWTH STRATEGIES
EXTERNAL GROWTH: The Company believes that significant opportunities
continue to exist to acquire additional office properties that: (i) provide
attractive initial yields with significant potential for growth in cash flow;
(ii) are in desirable locations within submarkets which the Company believes
have economic growth potential; and (iii) are underperforming or need
renovation, and which therefore provide opportunities for the Company to
increase the cash flow and value of such properties through active management
and aggressive leasing.
The Company intends to continue to acquire office properties within
submarkets in Southern California which the Company believes present
opportunities for long-term stable and rising rental rates due to employment
growth, population movements within the region and restrictions on new
development. The Company generally targets properties which are underperforming
or need renovation and offer opportunities for the Company to implement its
value-added strategy to increase cash flow. For example, as of April 30, 1996,
the Properties owned by the Company for more than one year had a weighted
average occupancy rate of approximately 87%, compared to approximately 78% as of
the respective dates such Properties were acquired.
In addition, the Company will seek to acquire properties at a significant
discount to replacement cost in the relevant submarket. Since the beginning of
1993, the Company has acquired its Properties in suburban Los Angeles County at
a cost which the Company believes is significantly below replacement cost based
on estimates of replacement costs of Class A office buildings included in the
C&W Market Study. See "Southern California Economy and Office Markets."
The Company believes it has certain competitive advantages which enhance its
ability to identify and capitalize on acquisition opportunities, including: (i)
management's significant local market expertise, experience and knowledge of
properties, submarkets and potential tenants within the Southern California
region; (ii) management's long-standing relationships with tenants, real estate
brokers and institutional and other owners of commercial real estate; (iii) its
fully integrated real estate operations which allow the Company to respond
quickly to acquisition opportunities and enable it to provide real estate
management services to third parties as a means of identifying such
opportunities; (iv) its access to capital as a public company, including the
Company's $200 million Credit Facility; (v) its ability to acquire properties in
exchange for OP Units or Common Stock if the sellers so desire; and (vi)
management's reputation as an experienced purchaser of office properties in
Southern California which has the ability to effectively close transactions.
32
<PAGE>
Recent examples of the Company's ability to identify attractive acquisition
opportunities include the two Acquisition Properties, 303 Glenoaks and 12501
East Imperial Highway Properties. The Property at 303 Glenoaks is a ten-story,
175,449 square foot, Class A building situated in the Burbank Civic Center area.
The Company believes that the Burbank market, which is adjacent to the very low
vacancy Burbank Media District market, affords it an opportunity to capitalize
on the Burbank market tightness by maximizing rental rates at levels below those
achieved in the Burbank Media District and benefiting from the spill-over of
tenants from the Burbank Media District who either cannot find space there or
who do not wish to pay the full Burbank Media District rents. In addition, the
Company plans a common area renovation in order to become even more attractive
to its existing and potential tenant base. The Property at 12501 East Imperial
Highway is a 122,175 square foot, six-story building is located immediately off
Interstate 5, the primary central, north-south artery of California. Located
between downtown Los Angeles and Orange County, this Property is occupied by
major tenants, such as IBM, Mead Corporation, which runs a training facility,
and GTE California, which runs a teleconferencing facility on site. In addition
to taking advantage of its portfolio-wide operating efficiencies, the Company
plans to decrease operating expenses at this Property by furnishing management
services from its Property in Anaheim rather than having an on-site manager.
The Company may also seek to take advantage of management's development
expertise to develop office space when market conditions support office building
development. The Company believes, however, that opportunities exist for it to
continue to acquire office properties within selected submarkets in Southern
California at less than replacement cost and, therefore, currently intends to
focus on acquisitions rather than development.
INTERNAL GROWTH: The Company believes that opportunities exist to increase
cash flow from its existing portfolio and that such opportunities will be
enhanced as the Southern California office market continues to improve. The
Company intends to pursue internal growth by (i) continuing to maintain and
improve occupancy rates through active management and aggressive leasing; (ii)
realizing fixed contractual base rental increases or increases tied to indices
such as the CPI; (iii) re-leasing expiring leases at increasing market rents
which are expected to result, over time, from increased demand for office space
in Southern California; (iv) controlling operating expenses through the
implementation of cost control management and systems; (v) capitalizing on
economies of scale arising from the size of its portfolio; and (vi) increasing
revenue generated from parking facilities at certain Properties where the
Company is currently offering free parking as an amenity or charging below
market rates.
(i) MAINTAINING AND IMPROVING OCCUPANCY RATES: The Company believes that
it has been successful in attracting, expanding and retaining a diverse tenant
base by actively managing its office properties with an emphasis on tenant
retention and satisfaction. The Company strives to be responsive to the needs of
individual tenants through its on-site professional management staff and by
providing tenants with alternative space within the Company's portfolio to
accommodate their changing space requirements. The Company's success in
maintaining and improving occupancy rates is demonstrated, in part, by the
number of existing tenants which have renewed or released their space, leased
additional space to support their extension needs, or moved to other space
within the Company's portfolio. The Company has achieved a tenant retention rate
of approximately 79% (based on square feet renewed) from inception through
December 31, 1995. See "Business and Properties -- Tenant Retention and
Expansions." The Company also seeks to improve occupancies by aggressively
marketing available space within its portfolio. As of April 30, 1996,
approximately 487,000 rentable square feet were unleased within the Company's
portfolio.
(ii) CONTRACTUAL BASE RENTAL INCREASES: The Company expects to achieve
internal growth in cash flow through leases which contain provisions for fixed
contractual rental increases (including increases from free or partial rent to
full rent) or increases which are tied to indices such as the CPI. Between March
31, 1996 and July 31, 1997, the contractual base rents under leases in the
Company's portfolio are expected to increase by an aggregate of approximately
$1.1 million on an annual basis due to fixed contractual rent increases (not
including increases from free or partial rent to full rent or increases which
are tied to indices such as the CPI).
33
<PAGE>
(iii) RE-LEASING EXPIRING LEASES TO INCREASING MARKET RENTS: Although
there can be no assurances in this regard, the Company believes that as the
commercial real estate market in Southern California continues to improve, there
will be increasing demand for office space and declining vacancies which are
expected to result, over time, in increasing market rents. The Company believes
it would have significant opportunities to increase cash flow during such
periods of increasing market rents by renewing or re-leasing expiring leases at
the increased market rents.
(iv) COST CONTROL MANAGEMENT AND SYSTEMS: The Company seeks to lower
operating expenses by implementing cost control management that capitalizes on
economies of scale opportunities resulting from the size and location of the
Company's portfolio. The Company focuses on cost control in various areas of
operations. For example, the Company is seeking to significantly lower its
utility costs, which constitute over 25% of the operating costs of most of the
Properties, through the portfolio-wide installation of energy enhancement
technologies, which include lighting retrofit, replacement of heating,
ventilation and air conditioning systems, and computer-driven energy management
systems which monitor and react to the climatic requirements of individual
Properties. The energy enhancement program is expected to be implemented
throughout the Properties over the next six months.
(v) CAPITALIZING ON ECONOMIES OF SCALE: In order to capitalize on
economies of scale arising from the size of the Company's portfolio, the
Company's property and asset managers are responsible for several Properties,
which spreads administrative costs over such Properties and reduces per square
foot administrative expense. In addition, the Company believes that insurance
coverage, parking operations, building and other services and tenant
improvements purchased on a portfolio-wide basis will facilitate further
economies of scale savings.
(vi) REVENUE FROM PARKING FACILITIES: The Company owns or leases parking
facilities which are attached or adjacent to many of the Properties. The Company
currently provides free parking to tenants at six of the Properties as an
amenity and charges tenants at the remaining Properties at or below market rates
for parking. If the demand for Southern California office space increases and
occupancy rates rise, which the Company believes is the trend, the Company
believes that there may be opportunities to generate additional revenue from the
parking facilities associated with its Properties by charging for parking which
is currently provided for free, increasing below market rates and maintaining
its arrangements with a limited number of third-party operators of the Company's
parking facilities.
34
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting the
estimated underwriting discounts and commissions and estimated expenses of the
Offering, are estimated to be approximately $345 million (approximately $397
million if the Underwriters' overallotment option is exercised in full),
assuming a public offering price of $20 per share. The net cash proceeds of the
Offering will be used by the Company as follows: approximately $28.6 million for
payments to certain Participants (not including Messrs. Ziman and Coleman who
will not receive any cash in the Formation Transactions) for their interests in
the Arden Predecessors and in certain of the Properties and the balance
(approximately $316.4 million) will be contributed to the Operating Partnership
in exchange for the Company's general partner interest therein. The Operating
Partnership will subsequently use the proceeds received from the Company along
with the net cash proceeds of approximately $102 million from the Mortgage
Financing borrowed concurrently with the Offering, as follows: approximately
$392 million for repayment of mortgage debt on the Properties (which was
incurred to acquire the Properties) and unsecured lines of credit and the
related additional and accrued interest thereon, including approximately $303
million for repayment of mortgage debt owed to Lehman Brothers Holdings Inc.,
approximately $35 million for payment of the purchase price for the Acquisition
Properties, and the remaining net proceeds will be used for tenant improvements,
capital expenditure reserves and working capital purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
If the Underwriters' overallotment option to purchase 2,808,000 shares of
Common Stock is exercised in full, the Company expects to use the additional net
proceeds (which will be approximately $52.2 million) to acquire additional
office properties and for working capital.
Pending application of net proceeds, the Company will invest such portion of
the net proceeds in interest-bearing accounts and short-term, interest-bearing
securities, which are consistent with the Company's intention to qualify for
taxation as a REIT.
The following table sets forth certain information regarding the debt to be
repaid upon completion of the Offering, which consists primarily of mortgage or
secured debt encumbering certain of the Properties. The mortgages and other
indebtedness to be repaid upon completion of the Offering had a weighted average
interest rate of approximately 8.512% and a weighted average remaining term to
maturity of approximately 3.11 years as of March 31, 1996.
35
<PAGE>
MORTGAGE DEBT TO BE REPAID
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
OF DEBT TO BE
REPAID UPON
CONSUMMATION
OF THE OFFERING (1)
-------------------
(IN THOUSANDS)
<S> <C>
PROPERTY
- ----------------------------------------------------------------------
9665 Wilshire......................................................... $ 30,719
Beverly Atrium........................................................ 15,631
Century Park Center................................................... 25,184
Westwood Terrace...................................................... 20,588
1950 Sawtelle......................................................... 10,200
400 Corporate Pointe.................................................. 21,887
Bristol Plaza......................................................... 5,200
Skyview Center........................................................ 40,392
The New Wilshire...................................................... 21,569
5601 Lindero Canyon................................................... 10,196
Calabasas Commerce Center............................................. 11,569
Woodland Hills Financial.............................................. 22,612
16000 Ventura Blvd.................................................... 17,151
425 West Broadway..................................................... 4,063
70 South Lake......................................................... 10,785
4811 Airport Plaza Drive.............................................. 14,314
4910 Airport Plaza Drive.............................................. (2)
5000 East Spring...................................................... 10,954
100 Broadway.......................................................... 20,000(3)
5832 Bolsa............................................................ 4,615
Anaheim City Centre................................................... 8,027
Imperial Bank Tower................................................... 41,449
--------
Total............................................................. $367,105
--------
--------
</TABLE>
- --------------
(1) Exact repayment amounts may differ due to amortization. These figures are
estimated as of May 31, 1996 and exclude accrued and additional interest
estimated to be approximately $24.5 million in the aggregate and $589,000
under lines of credit to be assumed by the Operating Partnership.
(2) Included in amount listed above for 4811 Airport Plaza Drive.
(3) Property was acquired by the Arden Predecessors subsequent to May 31, 1996.
DISTRIBUTIONS
Subsequent to the Offering, the Company intends to make regular quarterly
distributions to the holders of its Common Stock. The Company intends to cause
the Operating Partnership initially to distribute annually approximately 94.5%
of estimated Cash Available for Distribution. The Company intends to pay a pro
rata distribution with respect to the period commencing on the closing of the
Offering and ending on December 31, 1996 based upon $0.40 per share for a full
quarter. On an annualized basis, this would be $1.60 per share (of which $0.258
may represent a return of capital for tax purposes), or an annual distribution
rate of approximately 8% based on the assumed initial public offering price per
share of $20.00. The Company does not intend to reduce the expected distribution
per share if the Underwriters' overallotment option is exercised. The following
discussion and the information set forth in the table and footnotes below should
be read in connection with the financial statements and notes thereto, the pro
forma financial information and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" included elsewhere in this Prospectus.
36
<PAGE>
The Company's estimate of the Cash Available for Distribution after the
Offering is based upon pro forma Funds from Operations for the 12 months ended
March 31, 1996, with certain adjustments based on the items described below. To
estimate Cash Available for Distribution for the 12 months ended July 31, 1997,
pro forma Funds from Operations for the 12 months ended March 31, 1996 was
adjusted (a) without giving effect to any changes in working capital resulting
from changes in current assets and current liabilities (which changes are not
anticipated to be material) or the amount of cash estimated to be used for (i)
investing activities for development, acquisition and other activities (other
than a reserve for capital expenditures and tenant improvements for renewing
space) and (ii) financing activities, (b) for certain known events and/or
contractual commitments that either occurred subsequent to March 31, 1996 or
during the 12 months ended March 31, 1996 but were not effective for the full 12
months and (c) for certain non-GAAP adjustments consisting of (i) revising
historical rent estimates from a GAAP basis to amounts currently being paid or
due from tenants and (ii) an estimate of amounts anticipated for recurring
tenant improvements, leasing commissions and capital expenditures. The estimate
of Cash Available for Distribution is being made solely for the purpose of
setting the initial distribution and is not intended to be a projection or
forecast of the Company's results of operations or its liquidity, nor is the
methodology upon which such adjustments were made necessarily intended to be a
basis for determining future distributions. Future distributions by the Company
will be at the discretion of the Board of Directors. There can be no assurance
that any distributions will be made or that the estimated level of distributions
will be maintained by the Company.
The Company anticipates that its distributions will exceed earnings and
profits for income tax reporting purposes due to non-cash expenses, primarily
depreciation and amortization, to be incurred by the Company. Therefore,
approximately 16.2% (or $0.258 per share) of the distributions anticipated to be
paid by the Company in the first 12 months subsequent to the Offering are
expected to represent a return of capital for federal income tax purposes and in
such event will not be subject to federal income tax under current law to the
extent such distributions do not exceed a stockholder's basis in his or her
Common Stock. The nontaxable distributions will reduce the stockholder's tax
basis in the Common Stock and, therefore, the gain (or loss) recognized on the
sale of such Common Stock or upon liquidation of the Company will be increased
(or decreased) accordingly. The estimated Cash Available for Distribution is
anticipated to be in excess of the annual distribution requirements applicable
to REITs. The percentage of stockholder distributions that represents a
nontaxable return of capital may vary substantially from year to year.
Federal income tax law requires that a REIT distribute annually at least 95%
of its REIT taxable income. See "Federal Income Tax Considerations -- Taxation
of the Company." The amount of distributions on an annual basis necessary to
maintain the Company's REIT status based on pro forma taxable income of the
Operating Partnership for the 12 months ended March 31, 1996 as adjusted for
certain items in the following table would have been approximately $27.3
million. Under certain circumstances, the Company may be required to make
distributions in excess of Cash Available for Distribution in order to meet such
distribution requirements. For a discussion of the tax treatment of
distributions to holders of Common Stock see "Federal Income Tax
Considerations."
The Company believes that its estimate of Cash Available for Distribution
constitutes a reasonable basis for setting the initial distribution, and the
Company expects to maintain its initial distribution rate for the 12 months
subsequent to the Offering unless actual results of operations, economic
conditions or other factors differ from the assumptions used in the estimate.
The Company's actual results of operations will be affected by a number of
factors, including the revenue received from the Properties, the operating
expenses of the Company, interest expense, the ability of tenants of the
Properties to meet their obligations and unanticipated capital expenditures.
Variations in the net proceeds from the Offering as a result of a change in the
initial public offering price or the exercise of the Underwriters' overallotment
option may affect the Cash Available for Distribution and the payout ratio of
Cash Available For Distribution and available reserves. No assurance can be
given that the Company's estimate will prove accurate. Actual results may vary
substantially from the estimate.
37
<PAGE>
The following table describes the calculation of pro forma Funds from
Operations for the 12 months ended March 31, 1996 and the adjustments to pro
forma Funds from Operations for the 12 months ended March 31, 1996 in estimating
initial Cash Available for Distribution for the 12 months ended July 31, 1997
(amounts in thousands except share data, per share data, square footage data and
percentages):
<TABLE>
<S> <C>
Pro forma income before minority interest for the year ended December
31, 1995............................................................ $25,665
Pro forma income before minority interest for the three months ended
March 31, 1995...................................................... (6,146)
Pro forma income before minority interest for the three months ended
March 31, 1996...................................................... 7,053
-------
Pro forma income before minority interest for the 12 months ended
March 31,
1996................................................................ 26,572
Plus pro forma real estate depreciation for the 12 months ended March
31,
1996 (1)............................................................ 11,010
Plus pro forma amortization of leasing commissions and tenant
improvements for the 12 months ended March 31, 1996 (2)............. 854
-------
Pro forma Funds from Operations for the 12 months ended March 31,
1996................................................................ 38,436
Adjustments:
Provision for assumed expiring leases (3)........................... (1,185)
Incremental pro forma lease adjustment (4).......................... 1,840
Contractual rent increases (5)...................................... 4,278
Increase in tenant reimbursements (6)............................... 855
Net increase in property operating expenses relating to new leases
(7)................................................................ (307)
Contractual increase in parking income and other income (8)......... 167
Net effect of straight lining of rents (9).......................... (3,799)
Estimated recurring non-revenue enhancing tenant improvements and
leasing commissions (10)........................................... (3,393)
Estimated recurring non-revenue enhancing capital expenditures
(11)............................................................... (606)
-------
Total estimated Cash Available for Distribution for the 12 months
ended July 31, 1997................................................. $36,286
Total estimated cash distributions.................................... $34,290
Less: Minority interests' share of estimated Cash Available for
Distribution........................................................ 4,331
-------
Estimated cash distributions to stockholders of the Company (12)...... $29,959
Estimated initial cash distribution per share (13).................... $ 1.60
Estimated Cash Available for Distribution payout ratio (14)........... 94.5%
</TABLE>
- --------------
(1) Pro forma depreciation for the year ended December 31, 1995 of $11,007 plus
pro forma depreciation for the three months ended March 31, 1996 of $2,772
minus pro forma depreciation for the three months ended March 31, 1995 of
$2,769.
(2) Pro forma amortization of leasing commissions and tenant improvements for
the year ended December 31, 1995 of $683 plus pro forma amortization of
leasing commissions and tenant improvements for the three months ended March
31, 1996 of $337 minus pro forma amortization of leasing commissions and
tenant improvements for the three months ended March 31, 1995 of $166.
(3) The provision for assumed expiring leases represents adjustments for a
possible reduction in occupancy and in rental rates and consists of (i) a
reduction of $952 which represents 25% of the rent payable under all leases
expiring from May 31, 1996 through July 31, 1997 assuming that 25% of such
expiring leases will not be renewed (and for the period that such leases
will not generate rent during the 12 months ended July 31, 1997) and (ii) a
reduction of $233 for the 75% of leases assumed to be renewed between May
31, 1996 and July 31, 1997 assuming that such leases renew at the lower of
the Company's
38
<PAGE>
historical contractual rental rate during the past nine months or the
Company's analysis of the market rate. The Company's historical renewal
rate, based on square footage, from inception through December 31, 1995 is
79%.
(4) Reflects rental increases and decreases from 1995 and 1996 completed leasing
transactions relating to the Properties and consists of (i) a net increase
of $2,197 representing additional minimum rent from new leases and renewals
executed between March 31, 1996 and May 31, 1996 to the extent such leases
generate additional minimum rents for the 12 months ended July 31, 1997,
(ii) a decrease of $681 representing the decrease in rental revenue for
leases that expired between March 31, 1996 and May 31, 1996 to the extent
such leases generated rent for the 12 months ended March 31, 1996 and (iii)
a net amount of $324 representing the full year minimum rent in effect for
existing leases on which rent is only partially reflected in the historical
financial statements of the Arden Predecessors for the 12 months ended March
31, 1996 and the decrease in rental revenue for leases expired during the 12
months ended March 31, 1996 to the extent rental revenue was included in
rental revenue for the 12 months ended March 31, 1996.
(5) Represents net contractual rent increases for all leases in effect at March
31, 1996 which will be realized during the 12-month period ending July 31,
1997 for the portion of the year each such lease will be in effect. Includes
increases of $3,194 relating to leases which were in free or partial rent
periods at March 31, 1996 and $1,084 relating to fixed contractual rental
increases.
(6) Represents the contractual increase in tenant reimbursements attributable to
leases executed prior to March 31, 1996 based upon the estimated expenses to
be reimbursed by the tenants for the 12 months ended July 31, 1997 in excess
of the estimated base year amounts.
(7) Represents the estimated net increase in operating expenses based on the net
increase in the occupancy of space for leases signed during the 12 months
ended March 31, 1996, and between March 31, 1996 and May 31, 1996, offset by
the decrease in occupancy from actual lease terminations through May 31,
1996 and for the provision for expiring leases (See (3) above) as if such
increases and decreases were in effect for the full 12 months ended July 31,
1997.
(8) Represents net additional parking revenue of $116 to be received for the 12
months ended July 31, 1997, relating to leases signed subsequent to March
31, 1996 and the increase in management fee revenue of $51 for the 12 months
ending July 31, 1997 relating to three third-party property management
contracts pursuant to which the Company began receiving fees subsequent to
March 31, 1996. The Company believes that it can manage the additional
properties with its existing resources and, accordingly, there will be no
additional increase in its operating expenses attributable to these new
contracts. The management contracts are terminable upon 15 to 60 days'
notice although the Company is not aware of any intention to cancel any of
these management contracts.
(9) Represents the effect of adjusting straight-line rental revenue included in
pro forma net income for the 12 months ended March 31, 1996 from the
straight-line accrual basis under GAAP to amounts currently being paid or
due from tenants.
(10) Reflects non-revenue enhancing capital tenant improvements ("TI") and
leasing commissions ("LC") for the Properties for the 12 months ended July
31, 1997 based on the weighted average TI and LC
39
<PAGE>
expenditures per square foot for renewed and re-tenanted space at the
Properties since the Company's inception multiplied by the average annual
square feet of leased space for which leases expire during the five year
period ending December 31, 2001 (387,000 square feet).
<TABLE>
<CAPTION>
THREE
YEAR ENDED DECEMBER 31, YEAR
----------------------- WEIGHTED
1993 1994 1995 AVERAGE
----- ----- ------ ------
<S> <C> <C> <C> <C>
RENEWAL
TI per square foot................................ $3.58 $2.23 $ 8.05(i) $4.83
LC per square foot................................ $ .09 $3.44 $ 2.28 $2.87
----- ----- ------ ------
Total TI and LC per square foot............... $3.67 $5.67 $10.33 $7.70
----- ----- ------ ------
----- ----- ------ ------
RE-TENANTED (ii)
TI per square foot................................ $2.22 $9.04 $ 9.82 $9.16
LC per square foot................................ $ .31 $2.72 $ 3.05 $2.81
----- ----- ------ ------
Total TI and LC per square foot............... $2.53 $11.76 $12.87 $11.97
----- ----- ------ ------
----- ----- ------ ------
</TABLE>
---------------------
(i) Includes tenant improvement costs relating to one lease signed at
Anaheim City Centre for which the Company incurred substantial
renovation costs in connection with a full floor retrofit. Tenant
improvement costs for the remaining leases renewed in 1995 equaled
$4.67 per square foot.
(ii) Does not include shell space build out for 87,395 square feet. Shell
space remaining at the Properties is less than 2% of the aggregate
rentable square footage of the Properties.
<TABLE>
<CAPTION>
THREE YEAR AVERAGE ANNUAL
WEIGHTED SQUARE FOOTAGE RATE OF
AVERAGE TI AND EXPIRING IN RENEWALS/ TOTAL
LC PER SQUARE FOOT 1997-2001 RE-TENANTED COST
------------------ --------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Renewal................................. $ 7.70 x 387,000 x 75%(i) = $2,235,000
Re-tenanted............................. $11.97 x 387,000 x 25% = 1,158,000
----------
$3,393,000
----------
----------
</TABLE>
---------------------
(i) The historical 3-year weighted average renewal rate for the Company
is 79%.
(11) The reserve for recurring non-revenue enhancing capital expenditures for
the 12 months ended July 31, 1997 was based upon an annual cost per square
foot of $.15. Based on its historical experience, the Company believes that
this amount reasonably approximates the annual recurring capital
expenditures for the Properties. For the years ended December 31, 1993, 1994
and 1995, the weighted average cost per square foot was $.02, $.06 and $.15,
respectively. The Company's weighted average capital expenditure per square
foot per year since inception is $.10.
(12) The Company's share of estimated cash distributions is based on its
approximately 87.37% ownership of the aggregate equity capitalization of the
Operating Partnership.
(13) Based on a total of 18,725,000 shares to be outstanding following
consummation of the Offering. The Company estimates that approximately 16.2%
of the estimated cash distributions for the 12 months ended July 31, 1997
will represent a return of capital for federal income tax purposes.
(14) Calculated by dividing total estimated cash distributions by estimated Cash
Available for Distribution for the 12 months ended July 31, 1997.
40
<PAGE>
CAPITALIZATION
The following table sets forth the combined historical capitalization of the
Arden Predecessors and the pro forma combined capitalization of the Company as
of March 31, 1996, as adjusted to give effect to the Formation Transactions, the
Offering and use of the net proceeds from the Offering and from the concurrent
Mortgage Financing as set forth under "Use of Proceeds." The information set
forth in the table should be read in connection with the financial statements
and notes thereto, the pro forma financial information and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------
COMBINED
HISTORICAL PRO FORMA
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage Loans (1).................................................. $352,805 $103,830
Line of Credit...................................................... 589 --
Minority interest in Operating Partnership............................ -- 41,103
Stockholders' equity:
Preferred Stock, $.01 par value, 20,000,000 shares authorized; none
issued and outstanding............................................. -- --
Common Stock, $.01 par value; 100,000,000 shares authorized;
18,725,000 issued and outstanding (2).............................. -- 187
Additional Paid-in Capital.......................................... -- 284,224
Owners' Equity...................................................... 15,777 --
-------- ---------
Total Owners'/Stockholders' Equity................................ 15,777 284,411
-------- ---------
Total Capitalization............................................ $369,171 $429,344
-------- ---------
-------- ---------
</TABLE>
- --------------
(1) See note 4 of the notes to the combined financial statements of the Arden
Predecessors for information relating to the indebtedness.
(2) Includes shares of Common Stock to be issued in the Offering. Does not
include (i) shares of Common Stock that may be issued upon the exchange of
OP Units issued in connection with the Formation Transactions, (ii) shares
of Common Stock subject to the Underwriters' overallotment option or (iii)
shares of Common Stock subject to options granted under the Company's Stock
Incentive Plan.
41
<PAGE>
DILUTION
At March 31, 1996, the Company had a net tangible book value of
approximately $15.8 million. After giving effect to (i) the sale of the shares
of Common Stock offered hereby (at an assumed initial public offering price of
$20 per share) and the receipt by the Company of approximately $345 million in
net proceeds from the Offering, after deducting underwriting discounts and
commissions and estimated Offering expenses, (ii) the repayment of approximately
$392 million of indebtedness under mortgage debt and unsecured lines of credit
(including approximately $24.5 million of accrued and additional interest, of
which approximately $20 million was not accrued as of March 31, 1996 on the
combined balance sheet of the Arden Predecessors), the pro forma net tangible
book value at March 31, 1996 would have been $284 million, or $15.19 per share
of Common Stock. This amount represents an immediate increase in net tangible
book value of $9.36 per share to the existing holders of OP Units and an
immediate dilution in pro forma net tangible book value of $4.81 per share of
Common Stock to new investors. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $20.00
Net tangible book value per share prior to the Offering (1)......... $5.83
Increase in net tangible book value per share attributable to the
Offering (2)....................................................... $9.36
Pro forma net tangible book value after the Offering (3).............. $15.19
------
Dilution in net tangible book value per share of Common Stock to new
investors (4)....................................................... $ 4.81
------
------
</TABLE>
- --------------
(1) Net tangible book value per share prior to the Offering is determined by
dividing net tangible book value of the Company (total tangible assets less
total liabilities and minority interest) by the number of shares of Common
Stock issuable upon the exchange of all OP Units to be issued to the
Participants in connection with the Formation Transactions.
(2) Based on an assumed initial public offering price of $20.00 per share of
Common Stock and after deducting Underwriters' discounts and commissions and
estimated Offering expenses.
(3) Based on total pro forma net tangible book value of $284 million divided by
the total number of shares of Common Stock. There is no impact on dilution
attributable to the issuance of Common Stock in exchange for OP Units to be
issued to the Participants since such OP Units would be exchanged for Common
Stock on a one-for-one basis.
(4) Dilution is determined by subtracting net tangible book value per share of
Common Stock after the Offering from the assumed initial public offering
price for a share of Common Stock.
The following table summarizes, on a pro forma basis giving effect to the
Offering and the Formation Transactions, the number of shares of Common Stock to
be sold by the Company in the Offering and the number of OP Units to be issued
to the Participants in connection with the Formation Transactions, the net
tangible book value as of March 31, 1996 of the assets contributed in the
Formation Transactions and the net tangible book value of the average
contribution per share based on total contributions.
<TABLE>
<CAPTION>
COMMON STOCK/ BOOK VALUE OF BOOK VALUE OF
OP UNITS ISSUED CONTRIBUTIONS AVG.
--------------- ----------------- CONTRIBUTION
SHARES PERCENT $ PERCENT PER SHARE/UNIT
------ ------- -------- ------- --------------
(IN THOUSANDS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
New investors in the Offering......................................... 18,725 87.37% $345,472 95.63% $20.00(1)
OP Units issued to the Participants................................... 2,706 12.63% $ 15,777 4.37% $ 5.83
------ ------- -------- -------
Total............................................................... 21,431 100.00% $361,249 100.00%
------ ------- -------- -------
------ ------- -------- -------
</TABLE>
- --------------
(1) Before deducting underwriting discounts and commissions and estimated
expenses of the Offering.
42
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The following sets forth selected combined financial and operating
information on a pro forma basis for the Company and on a combined historical
basis for the Arden Predecessors. The following information should be read in
conjunction with the financial statements and notes thereto of the Company and
of the Arden Predecessors included elsewhere in this Prospectus. The selected
combined historical financial and operating information of the Arden
Predecessors at December 31, 1995 and 1994, and for the years ended December 31,
1995, 1994 and 1993, has been derived from the historical combined financial
statements audited by Ernst & Young LLP, independent auditors, whose report with
respect thereto is included elsewhere in this Prospectus. The selected combined
financial and operating information for the three months ended March 31, 1996
and March 31, 1995 has been derived from the unaudited combined financial
statements of the Arden Predecessors included elsewhere in this Prospectus.
The unaudited pro forma financial and operating information for the three
months ended March 31, 1996 and the year ended December 31, 1995 is presented as
if the Offering, the Formation Transactions (including the purchase of the
Acquisition Properties), and the acquisitions of the 1996 Acquired Properties
and the 1995 Acquired Properties had all occurred by March 31, 1996 for the
combined balance sheet and at the beginning of the period presented for the
combined statements of operations. The pro forma balance sheet information also
gives effect to the recording of minority interest for OP Units, as if these
transactions occurred on March 31, 1996. The pro forma financial information is
not necessarily indicative of what the actual financial position or results of
the Company would have been as of and for the periods indicated, nor does it
purport to represent the Company's future financial position or results of
operations.
43
<PAGE>
THE COMPANY (PRO FORMA) AND
ARDEN PREDECESSORS (COMBINED HISTORICAL)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31,
------------------------------ ------------------------------------------------------
COMBINED
PRO FORMA HISTORICAL PRO FORMA COMBINED HISTORICAL
--------- ------------------ --------- ------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
--------- -------- -------- --------- --------- -------- -------- ----- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA, PERCENTAGES AND NUMBER OF PROPERTIES)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental................................... $16,562 $ 12,471 $ 4,667 $66,691 $ 24,442 $ 11,928 $ 3,155 $-- $--
Tenant reimbursements.................... 859 758 128 3,019 822 509 38 -- --
Parking.................................. 1,596 1,267 268 5,895 1,665 741 284 -- --
Other.................................... 542 558 325 2,441 1,653 734 313 324 11
--------- -------- -------- --------- --------- -------- -------- ----- ----
Total revenue.......................... 19,559 15,054 5,388 78,046 28,582 13,912 3,790 324 11
EXPENSES:
Property operating, taxes, insurance and
ground rent............................. 5,462 4,579 1,532 24,546 8,679 3,810 1,163 -- --
Property general and administrative...... 887 732 282 3,991 1,588 735 349 -- --
--------- -------- -------- --------- --------- -------- -------- ----- ----
Total property operating expenses...... 6,349 5,311 1,814 28,537 10,267 4,545 1,512 -- --
General and administrative expenses...... 934 364 373 3,735 1,377 689 386 471 7
--------- -------- -------- --------- --------- -------- -------- ----- ----
Income before interest, depreciation and
amortization............................ 12,276 9,379 3,201 45,774 16,938 8,679 1,892 (147) 4
Depreciation and amortization............ 3,109 2,396 879 11,690 4,373 2,184 528 2 --
Interest expense......................... 2,114 8,832 2,241 8,419 13,780 5,109 673 9 --
--------- -------- -------- --------- --------- -------- -------- ----- ----
Income (loss) before extraordinary loss.... 7,053 (1,849) 81 25,665 (1,215) 1,385 691 (158) 4
Extraordinary loss......................... -- -- -- -- -- 601 -- --
--------- -------- -------- --------- --------- -------- -------- ----- ----
Income (loss) before minority interest..... 7,053 (1,849) 81 25,665 (1,215) 784 691 (158) 4
Minority interest.......................... 891 -- -- 3,242 -- -- -- -- --
--------- -------- -------- --------- --------- -------- -------- ----- ----
Net income (loss).......................... $ 6,162 $ (1,849) $ 81 $22,423 $ (1,215) $ 784 $ 691 $(158) $ 4
--------- -------- -------- --------- --------- -------- -------- ----- ----
--------- -------- -------- --------- --------- -------- -------- ----- ----
Net income per common share................ $ .33 $ 1.20
--------- ---------
--------- ---------
OTHER DATA:
Funds from Operations...................... $10,162 $ 547 $ 960 $37,355 $ 3,131 $ 3,565 $ 1,216 $(158) $ 4
Cash flows from operating activities....... -- 1,370 109 -- 4,231 1,196 1,681 (258) 7
Cash flows from investing activities....... -- (95,854) (20,086) -- (150,022) (45,804) (62,907) -- --
Cash flows from financing activities....... -- 94,006 19,349 -- 146,531 43,584 62,971 250 1
Number of Properties owned at period end... 24 21 9 24 17 8 3 -- --
Gross rentable square feet of Properties
owned at period end...................... 4,042 3,552 1,309 4,042 2,632 1,131 531 -- --
Occupancy at period end of Properties owned
at period end............................ 88% 88% 83% 88% 88% 82% 84% -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
MARCH 31, 1996
-------------------- COMBINED HISTORICAL
COMBINED ---------------------------------------
PRO FORMA HISTORICAL 1995 1994 1993 1992 1991
--------- -------- -------- -------- ------- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Commercial office properties -- net of accumulated
depreciation................................................... $414,825 $345,633 $252,082 $106,135 $62,392 -- --
Total assets..................................................... 435,866 380,290 277,643 113,054 65,808 134 10
Mortgage loans payable and unsecured lines of credit............. 103,830 353,394 253,996 94,432 60,975 250 --
Total liabilities................................................ 110,352 364,513 262,955 97,081 62,330 287 5
Minority interest................................................ 41,103 -- -- -- -- -- --
Owners'/Stockholders' equity..................................... 284,411 15,777 14,688 15,973 3,478 (153) 5
</TABLE>
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with Selected
Financial Data and the financial statements appearing elsewhere in this
Prospectus. Where appropriate, the following discussion includes analysis of the
effects of the Formation Transactions and the Offering, including the Mortgage
Financing and the purchase of the Acquisition Properties. These effects are
reflected in the pro forma condensed combined financial statements located
elsewhere in this Prospectus.
The Company receives income primarily from rental revenue (including tenant
reimbursements) and parking revenue from commercial office properties, and to a
lesser extent, from the management of certain properties owned by third parties.
The Company has acquired its current portfolio over the last three years, with
approximately 15% of the Properties (as a percentage of pro forma rental revenue
for the three months ended March 31, 1996) acquired in calendar year 1993,
approximately 12% of the Properties acquired in 1994, approximately 34% acquired
in 1995, and the balance (39%) acquired or to be acquired in the current
calendar year. As a result of the Company's aggressive acquisition program, the
financial data shows significant increases in total revenue from year to year,
largely attributable to the acquisitions during each such year and the benefit
of a full period of effective rental and other revenue for Properties acquired
in the preceding year. For the foregoing reasons, the Company does not believe
its year to year and quarter to quarter financial data are comparable.
In addition to increases in revenue, the Company also believes that cost
savings will be achieved through the economies of scale achieved in managing its
Properties as the portfolio increases in size. For example, total property
operating expense (which is defined as property operating , taxes, insurance and
ground rent expenses and property general and administrative expenses) for the
Properties that were owned for the entire three months ended March 31, 1995 and
March 31, 1996 decreased 3% or $59,000. Similarly, for the three months ending
March 31, 1995 and March 31, 1996 general and administrative expenses declined
by 2% and also decreased to 2% of total revenue from 7% of total revenue. The
Company expects that general and administrative expenses will continue to
decline as a percentage of total revenue.
The Company expects that the more significant part of its revenue growth in
the next one to two years will come from additional acquisitions and contractual
rent increases rather than from occupancy and market rent increases in its
current portfolio. On the other hand, the Company believes that if the Southern
California office rental market continues to improve, then rental rate increases
will become a more substantial part of its revenue growth over time. See
"Business and Growth Strategies -- Growth Strategies."
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 TO THREE MONTHS ENDED MARCH
31, 1995. During the first quarter of 1996, the Arden Predecessors purchased
four Properties resulting in an increase in real estate investments of
approximately $95 million. Operating income (which is defined as total revenue
less total property operating expenses increased by $6.2 million for the three
months ended March 31, 1996 compared to the three months ended March 31, 1995.
This 173% increase is due to a $9.7 million or 179% increase in total revenue
generated from the Properties for the three months ended March 31, 1996 compared
to the three months ended March 31, 1995. The increase in total revenue was
offset in part by an increase in property operating and general and
administrative expenses of $3.5 million or 193% for the three months ended March
31, 1996 compared to the three months ended March 31, 1995.
Rental revenue increased by $7.8 million or 167% for the three months ended
March 31, 1996 compared to the three months ended March 31, 1995. The increase
in rental revenue resulted principally from a full three months of rental
revenue from Properties acquired during calendar year 1995, eight of which were
acquired after March 31, 1995 and partial quarter rental revenue from Properties
acquired during the three months ended March 31, 1996. Rental revenue from the
calendar year 1995 acquisition Properties increased to $5.5 million for the
three months ended March 31, 1996, representing a full three months of rental
revenue, from $106,000 in the prior period. Rental revenue associated with the
1996
45
<PAGE>
acquisition Properties added an additional approximately $2.2 million to rental
revenue during the three months ended March 31, 1996. Rental revenue also
increased as a result of contractual base rent increases on leases in effect
during both periods and due to improvement in occupancy ratios at certain
Properties. Occupancy rose from 83% to 88% on a portfolio-wide basis for
Properties owned at both March 31, 1996 and 1995.
Tenant reimbursements and other revenue increased by $863,000 or 191% for
the three months ended March 31, 1996 compared to the three months ended March
31, 1995. The increase in tenant reimbursements and other revenue resulted
principally from a full three months of tenant reimbursements from Properties
acquired during calendar year 1995 and partial quarter tenant reimbursements
from Properties acquired during the three months ended March 31, 1996. Tenant
reimbursements from the calendar year 1995 acquisition Properties added an
additional $413,000 for the three months ended March 31, 1996, representing a
full three months of tenant reimbursements. Tenant reimbursements associated
with the 1996 acquisition Properties added an additional $141,000 to rental
revenue during the three months ended March 31, 1996. Other revenue,
representing primarily management fees for third party-owned properties,
increased by 72% for the three months ended March 31, 1996 compared to the prior
period.
Parking revenue increased by $1.0 million or 373% for the three months ended
March 31, 1996 compared to the three months ended March 31, 1995. The increase
resulted principally from a full three months of parking revenue from Properties
acquired during calendar year 1995 and partial quarter parking revenue from
Properties acquired during the three months ended March 31, 1996. Parking
revenue from the calendar year 1995 acquisition Properties increased to $799,000
for the three months ended March 31, 1996, representing a full three months of
parking revenue, from $1,000 in the prior period. Parking revenue associated
with the 1996 acquisition Properties added an additional $171,000 to parking
revenue during the three months ended March 31, 1996.
For the three months ended March 31, 1996 and 1995, total property operating
expenses were $5.3 million, or 40% of rental revenue and tenant reimbursements,
and $1.8 million, or 38% of rental revenue and tenant reimbursements,
respectively. The increase in property operating expenses is primarily
attributable to the Properties acquired during calendar year 1995 and during the
three months ended March 31, 1996 and the expenses associated with the
absorption of vacant rentable space. The increase in property operating expenses
from the three months ended March 31, 1995 to the three months ended March 31,
1996 resulting from the acquisition of Properties during the three months ended
March 31, 1996 was approximately $1.2 million. In addition, total property
operating expenses increased by $2.3 million as a result of a full three months
of operations for the Properties acquired in 1995, and the above-described
increase in occupancy at the Properties owned at both March 31, 1996 and 1995.
Total property operating expenses related to Properties owned by the Company for
the entire three months ended March 31, 1995 and 1996 decreased 3% or $59,000.
General and administrative expenses decreased by $9,000 or 2% for the three
months ended March 31, 1996 compared to the three months ended March 31, 1995.
General and administrative expenses during the 1996 period also fell to 2% of
total revenue compared to 7% of total revenue during the 1995 period due to the
economies of scale associated with adding additional properties. The Company
believes that because it will not need to hire significant new staff to manage
its current portfolio and to acquire new properties, general and administrative
expenses as a percentage of total revenue should continue to fall.
Interest expense includes interest at the contractual rate of the mortgage
loans amortization of the loan fees paid at origination, and accrual of other
interest payable upon the retirement of the debt. Interest expense for the three
months ended March 31, 1996 was approximately $8.8 million, including interest
payable upon the retirement of certain mortgage loans of $2.1 million. Interest
expense increased by approximately $6.6 million or 294% for the three months
ended March 31, 1996 compared to the three months ended March 31, 1995,
primarily as a result of the increase in mortgage loans payable to fund the
calendar year 1995 acquisitions and the acquisitions that occurred during the
three months ended March 31, 1996. The interest expense associated with the
mortgage loans incurred during the three months ended
46
<PAGE>
March 31, 1996 was approximately $1.6 million. In addition, the three months
ended March 31, 1996 included a full quarter of interest expense for Properties
acquired during calendar year 1995, which increased interest expense by
approximately $4.8 million.
Depreciation and amortization increased by $1.5 million or 173% primarily
due to the calendar year 1995 acquisitions and the acquisitions during the three
months ended March 31, 1996.
As a result of the foregoing, the Company had a net loss of $1.8 million for
the three months ended March 31, 1996 compared to net income of $81,000 for the
prior period.
The following is a comparison of the operating data for the Properties
("Same Store Properties") that were owned for the entire three months ended
March 31, 1995 and March 31, 1996:
<TABLE>
<CAPTION>
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
<S> <C> <C>
Revenue:
Rental.............................................................. $4,534,000 $4,561,000
Tenant reimbursements............................................... 204,000 127,000
Parking............................................................. 297,000 267,000
Other............................................................... 82,000 227,000
-------------- --------------
Total revenue..................................................... 5,117,000 5,182,000
Expenses:
Property operating, taxes, insurance and ground rent................ 1,382,000 1,487,000
Property general and administrative................................. 320,000 274,000
-------------- --------------
Total property operating expenses................................. 1,702,000 1,761,000
Operating Income...................................................... $3,415,000 $3,421,000
-------------- --------------
-------------- --------------
</TABLE>
Operating income for the Same Store Properties for the three months ended
March 31, 1996 decreased over the same period in the prior year by $6,000. This
decrease is attributable to a decrease in other income of $145,000 primarily
relating to a lease buyout of $189,000 during the three months ended March 31,
1995. This decrease was partially offset by a combined net increase in rental
revenue, tenant reimbursements and parking income of $80,000. In addition,
operating expenses including taxes, insurance, ground rent and property general
and administrative expenses for these Same Store Properties decreased by $59,000
for the three months ended March 31, 1996 over the same period in the prior year
due to the economies of scale that the Company achieved by owning a larger
portfolio of properties and the reassessment of property taxes. The Company was
able to obtain certain discounts by utilizing its greater purchasing power.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31,
1994. During 1995, the Arden Predecessors purchased nine Properties resulting
in an increase in real estate investments of approximately $146 million.
Operating income increased by $8.9 million for the year ended December 31, 1995
compared to the year ended December 31, 1994. This 96% increase is due to a
$14.7 million or 105% increase in total revenue for the year ended December 31,
1995 compared to the year ended December 31, 1994. The increase in total revenue
was offset in part by an increase in total property operating and general and
administrative expenses of $5.7 million or 126% for the year ended December 31,
1995 compared to the year ended December 31, 1994.
Rental revenue increased by $12.5 million or 105% for the year ended
December 31, 1995 compared to the year ended December 31, 1994. The increase in
rental revenue resulted principally from a full year of rental revenue from
Properties acquired in 1994 and partial year rental revenue from Properties
acquired in 1995. Rental revenue from the 1994 acquisition Properties increased
to $8.8 million for the year ended December 31, 1995, representing a full year
of rental revenue, from $2.0 million for such Properties in the prior year.
Rental revenue associated with the 1995 acquisition Properties added an
additional approximately $5.4 million to rental revenue in 1995. Rental revenue
also increased as a result of contractual base
47
<PAGE>
rent increases on leases in effect during both years and due to improvement in
occupancy ratios at certain properties. Occupancy rose from 82% to 88% on a
portfolio wide basis for properties owned at both December 31, 1994 and 1995.
Tenant reimbursements and other revenue increased by $1.2 million or 99% for
the year ended December 31, 1995 compared to the year ended December 31, 1994.
Other revenue increased by $919,000, primarily representing management fees from
third party-owned properties. The increase in tenant reimbursements and other
revenue resulted principally from a full year of tenant reimbursements from
Properties acquired during 1994 and partial year tenant reimbursements from
Properties acquired during the year ended December 31, 1995 as well as the
addition of one new third party property management agreement during 1995.
Tenant reimbursements from the calendar year 1994 acquisition Properties
increased to $395,000 for the year ended December 31, 1995, representing a full
year of tenant reimbursements, from $190,000 in the prior year. Tenant
reimbursements associated with the 1995 acquisition Properties added an
additional approximately $160,000 to tenant reimbursements during the year ended
December 31, 1995.
Parking revenue increased by $924,000 or 125% for the year ended December
31, 1995 compared to the year ended December 31, 1994. The increase resulted
principally from a full year of parking revenue from Properties acquired during
calendar year 1994 and partial year parking revenue from Properties acquired
during the year ended December 31, 1995. Parking revenue from the calendar year
1994 acquisition Properties increased to $115,000 for the year ended December
31, 1995, representing a full year of such revenue, from $20,000 in the prior
year. Parking revenue associated with the 1995 acquisition properties, added an
additional $584,000 to parking revenue during the year ended December 31, 1995.
Total property operating expenses were $10.3 million, or 41% of rental
revenue and tenant reimbursements, and $4.5 million, or 37% of rental revenue
and tenant reimbursements, for the years ended December 31, 1995 and December
31, 1994, respectively. The increase in total property operating expenses is
primarily attributable to a full year of total property operating expenses for
the 1994 acquisition Properties, the partial year of total property operating
expenses for the 1995 Acquisition Properties and the expenses associated with
the absorption of vacant rentable space across the portfolio. The increase in
total property operating expenses from 1994 to 1995 resulting from the 1995
acquisitions was approximately $2.6 million. In addition, total property
operating expenses increased by $3.2 million for the year ended December 31,
1995 as a result of a full year of operations for the Properties acquired in
1994, and the above-described increase in occupancy at the Properties owned at
both December 31, 1994 and 1995. Total property operating expenses related to
Properties owned by the Company for all of both 1994 and 1995 remained
substantially unchanged due to the efficiency of owning and operating more
Properties and sharing resources.
General and administrative expenses increased by $688,000 or 100% for the
year ended December 31, 1995 compared to the year ended December 31, 1994
primarily due to additional employees required to manage the increased portfolio
of Properties. General and administrative expenses as a percentage of total
revenue remained flat at 5% during 1995 and 1994. The Company believes that
because it will not need to hire significant new staff to manage its current
portfolio and to acquire new properties, general and administrative expenses as
a percentage of total revenue should begin to fall in subsequent years.
Interest expense includes interest at the contractual rate of the mortgage
loans, amortization of the loan fees paid at origination, and accrual of other
interest payable upon the retirement of the debt. Interest expense for the year
ended December 31, 1995 was approximately $13.8 million, including interest
payable upon the retirement of certain mortgage loans of $1.1 million. Interest
expense increased by $8.7 million, or 170% for the year ended December 31, 1995
compared to the year ended December 31, 1994 primarily as a result of the
increase in mortgage loans incurred to fund the 1995 acquisitions. The interest
expense associated with the 1995 mortgage loans was $4.5 million. In addition,
1995 included a full year of interest expense for debt incurred to acquire
Properties in 1994, which increased interest expense by approximately $2.9
million.
Depreciation and amortization increased by $2.2 million or 100% primarily
due to the 1995 acquisitions and the full year effect of the 1994 acquisitions.
48
<PAGE>
As a result of the foregoing, the Company had a net loss of $1.2 million for
the year ended December 31, 1995 compared to net income of $784,000 for the
prior year.
The following is a comparison of the operating data for the Same Store
Properties that were owned for the entire year ended December 31, 1994 and
December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Revenue:
Rental.............................................................. $ 10,179,000 $9,966,000
Tenant reimbursements............................................... 267,000 319,000
Parking............................................................. 965,000 721,000
Other............................................................... 373,000 418,000
------------ ------------
Total revenue..................................................... 11,784,000 11,424,000
Expenses:
Property operating, taxes, insurance and ground rent................ 3,312,000 3,324,000
Property general and administrative................................. 586,000 627,000
------------ ------------
Total property operating expenses................................. 3,898,000 3,951,000
Operating Income...................................................... $ 7,886,000 $7,473,000
------------ ------------
------------ ------------
</TABLE>
Operating income for the Same Store Properties for the year ended December
31, 1995 increased over the prior year by $413,000. This increase is
attributable to an increase in occupancy from 84% at December 31, 1994 to 92% at
December 31, 1995 and an overall increase in contractual base rent and
amortization of free rent periods. Operating expenses including taxes,
insurance, ground rent and property general and administrative expenses for
these Same Store Properties decreased by $53,000 for the year ended December 31,
1995 over the prior year due to the economies of scale that the Company obtained
by owning a larger portfolio of Properties. The Company was able to allocate its
personnel among more of its Properties and obtain certain discounts by utilizing
its greater purchasing power.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED 1993. During 1994,
the Arden Predecessors purchased five Properties resulting in an increase in
investments in Properties of approximately $43.2 million. Operating income
increased by $7.1 million for the year ended December 31, 1994 compared to the
year ended December 31, 1993. This 311% increase is due primarily to a $10.1
million or 267% increase in total revenue for the year ended December 31, 1994
compared to the year ended December 31, 1993. The increase in total revenue was
offset by a $3.0 million or 201% increase in total property operating expenses
for the year ended December 31, 1994 compared to the year ended December 31,
1993.
Rental revenue increased by $8.8 million 278% for the year ended December
31, 1994 compared to the year ended December 31, 1993. The increase in rental
revenue resulted principally from a full year of rental revenue from Properties
acquired in 1993 and partial year rental revenue from Properties acquired in
1994. Rental revenue from the 1993 acquisition Properties increased to $10.0
million for the year ended December 31, 1994, representing a full year of rental
revenue from those Properties, from $3.2 million in the prior year. Rental
revenue associated with the 1994 acquisition Properties added an additional $2.0
million to rental revenue in 1994. Occupancy decreased from 84% at December 31,
1993 to 82% at December 31, 1994 on a portfolio-wide basis as a result of the
acquisition of the 1994 Acquisition Properties.
Tenant reimbursements and other revenue increased by $892,000 or 254% for
the year ended December 31, 1994 compared to the year ended December 31, 1993.
Tenant reimbursement increases represented $471,000 of this increase, and other
revenue, primarily representing management fees from third party-owned
properties, represented $421,000 of this increase. The increase in tenant
reimbursements resulted principally from a full year of tenant reimbursements
from Properties acquired during 1993 and partial year tenant reimbursements from
Properties acquired during 1994. Tenant reimbursements from the calendar year
1993 acquisition Properties increased to $319,000 for the year ended December
31, 1994, representing a full year of such revenue, from $38,000 in the prior
year. Tenant reimbursements associated with the 1994
49
<PAGE>
acquisition Properties added an additional approximately $190,000 to such
revenue during 1994. The increase in property management fees resulted primarily
from a full year of property management fees in 1994 for third party-owned
properties managed for part of the year in the prior period.
Parking revenue increased by $457,000 or 161% for the year ended December
31, 1994 compared to the year ended December 31, 1993. The increase resulted
primarily from a full year of parking revenue from Properties acquired during
calendar year 1993 and partial year parking revenue from Properties acquired
during the year ended December 31, 1994. Parking revenue from the calendar year
1993 acquisition Properties increased to $721,000 for the year ended December
31, 1994, representing a full year of such revenue, from $284,000 in the prior
year. Parking revenue associated with the 1994 acquisition Properties added an
additional $20,000 to parking revenue during the year ended December 31, 1994.
Total property operating expenses were $4.5 million, or 37% of rental
revenue and tenant reimbursements, and $1.5 million, or 47% of rental revenue
and tenant reimbursements, for the years ended December 31, 1994 and 1993,
respectively. The increase in total property operating expenses is primarily
attributable to the addition of the 1994 acquisition Properties and the expenses
associated with the absorption of vacant rentable space across the portfolio.
The increase in total property operating expenses from 1993 to 1994 resulting
from the 1994 acquisitions was approximately $593,000. In addition, total
property operating expenses increased by $2.4 million as a result of a full year
of operations for the Properties acquired in 1993, and the increases in the
occupancy at such Properties.
General and administrative expenses increased $303,000 or 79% in 1994
compared to 1993 primarily due to an increase in payroll of $210,000 required by
the Company to manage its increased portfolio. General and administrative
expenses as a percentage of total revenue decreased to 5% in 1994 from 10% in
1993 as the Company was able to spread its personnel and other overhead costs
over more Properties.
Interest expense in 1994 increased by $4.4 million, or 659%, compared to
1993. The increase was primarily due to a full year of interest on debt incurred
in 1993, as well as the interest due on a $31 million loan used to fund the 1994
acquisitions. The interest expense associated with the 1994 property acquisition
debt was approximately $985,000. Interest expense increased by $3.4 million as a
result of a full year of interest expense for debt incurred to acquire
Properties in 1993.
Depreciation and amortization increased by $1.7 million or 314% primarily
due to the 1994 acquisitions and the full year effect of the 1993 acquisitions.
As a result of the Northridge earthquake, the Company had some minor damage
to three of its buildings, resulting in an extraordinary loss of $601,000 in the
year ended December 31, 1994.
As a result of the foregoing, the Company had net income of $784,000 for the
year ended December 31, 1994 compared to net income of $691,000 for the prior
year.
PRO FORMA OPERATING RESULTS
THREE MONTHS ENDED MARCH 31, 1996. On a pro forma basis, combined net
income (before deduction of the minority interest) would have been $7.0 million
for the three months ended March 31, 1996, or $6.2 million combined net income
of the Company (after deduction of the minority interest), comparing positively
to the historical net loss of $1.8 million for the three months ended March 31,
1996. This positive comparison results from a significant reduction in interest
expense based on the effects of the proposed Offering as well as a substantial
increase in total revenue, due to the benefit of a pro forma full three months
of revenue from the Properties acquired (and to be acquired) in 1996.
Pro forma total revenue is $19.6 million representing a $4.5 million
increase over historical 1996, resulting primarily from an increase of $3.7
million in rental revenue associated with Properties acquired (and to be
acquired) in 1996. Pro forma revenue from tenant reimbursements and parking is
$2.5 million, representing a $430,000 increase over historical results.
The historical 1996 interest expense of $8.8 million decreased substantially
to $2.1 million on a pro forma basis. Correspondingly, interest expense as a
percentage of total revenue dropped substantially, from
50
<PAGE>
59% of total revenue in historical 1996 to 10.8% of total revenue on a pro forma
basis. Total property operating expenses increased to $6.3 million on a pro
forma basis compared to $5.3 million for historical 1996.
YEAR ENDED DECEMBER 31, 1995. On a pro forma basis, combined net income
(before deduction of the minority interest) would have been $25.7 million for
the year ended December 31, 1995, or $22.4 million combined net income of the
Company (after deduction of the minority interest), comparing positively to the
historical net loss of $1.2 million for the year ended December 31, 1995. This
positive comparison results from a significant reduction in interest expense as
well as a substantial increase in total revenue, due to the benefit of a pro
forma full year of revenue from the Properties acquired in 1995, and pro forma
revenue from the 1996 acquisitions.
Pro forma total revenue is $78.0 million representing a $49.5 million
increase over historical 1995, resulting primarily from an increase of $23.7
million in rental revenue associated with Properties acquired (and to be
acquired) in 1996, combined with a full year of rental revenue from the
Properties acquired in 1995 totaling $21.8 million. Revenue from tenant
reimbursements and parking also increased on a pro forma basis over historical
1995 primarily due to $3.0 million of such revenue generated at the Properties
acquired or to be acquired in 1996. The historical 1995 interest expense of
$13.8 million decreased to $8.4 million on a pro forma basis. Interest expense
as a percentage of revenue dropped substantially, from 48% of total revenue in
1995 to 10.8% of total revenue on a pro forma basis. Total property operating
expenses remained steady at 42% of rental revenue both on a pro forma basis and
for historical 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes the Offering and the Formation Transactions will
improve its financial performance through changes to its capital structure,
principally the substantial reduction in its overall debt and its debt to equity
ratio. Through the Formation Transactions, the Company will repay all of its
existing mortgage debt and replace it with secured fixed rate debt in the
principal amount of $104 million. Thus, total secured debt after the Formation
Transactions (assuming no advances under the Credit Facility) will be reduced by
approximately $270.0 million in principal. This will result in a significant
reduction of annual mortgage interest expense as a percentage of total revenue
(10.8% on a pro forma basis as compared to 48% for the historical year ended
December 31, 1995). Thus, cash from operations required to fund interest
expenses will decrease substantially, although such reduction will be offset by
the use of cash from operations to meet annual REIT distribution requirements.
In addition, the Offering and Formation Transactions, together with the Mortgage
Financing and the Credit Facility, will produce a lower leveraged capital
structure. The market capitalization of the Company, based on the initial public
offering price of the issued and outstanding shares of Common Stock and OP Units
(assuming all OP Units are exchanged for shares of Common Stock) and the debt
outstanding at the completion of the Offering is expected to be approximately
$532.5 million with total debt (exclusive of accounts payable and accrued
expenses) of approximately $104 million. As a result, the Company's debt to
total market capitalization ratio will be approximately 19.5% (17.8% if the
Underwriters' overallotment option is exercised in full). The Credit Facility
combined with this lower leveraged capital structure will enhance the Company's
ability to take advantage of acquisition opportunities as well as provide, if
necessary, working capital for funding commitments to construct tenant leasehold
improvements and payment of leasing commissions associated with new leasing
activity.
After the Offering, the Company expects to have approximately $200 million
available under the Credit Facility. The Company anticipates that the Credit
Facility will be used primarily to acquire additional properties and for general
working capital needs.
The Company's mortgage indebtedness expected to be outstanding after the
closing of the Offering will require a balloon payment in 2003 of $104 million.
Since the Company anticipates that none of the principal of its mortgage
indebtedness will be amortized prior to maturity and the Company will not have
sufficient funds on hand to repay such indebtedness at maturity, it will be
necessary for the Company to refinance such debt either through additional debt
financings secured by individual properties or groups of properties, by
unsecured private or public debt offerings or additional equity offerings. See
"Risk Factors -- Real Estate Financing Risks."
51
<PAGE>
The Company expects to make distributions from Cash Available for
Distributions, which the Company believes will exceed Cash Available for
Distributions historically available as a result of the reduction in debt
service expected to result from the repayment of indebtedness described above.
Amounts accumulated for distribution will be invested by the Company primarily
in short-term investments that are collateralized by securities of the United
States government or any of its agencies, high-grade commercial paper and bank
deposits. See "Distributions."
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital and net cash provided by operations. The
Company believes that its net cash provided by operations will be sufficient to
allow the Company to make any distributions necessary to enable the Company to
continue to qualify as a REIT. The Company also believes that the foregoing
sources of liquidity will be sufficient to fund its short-term liquidity needs
for the foreseeable future.
The Company expects to meet certain long-term liquidity requirements such as
property acquisitions, scheduled debt maturities, renovations, expansions and
other non-recurring capital improvements through long-term secured and unsecured
indebtedness and the issuance of additional equity securities. The Company also
expects to use funds available under the Credit Facility to fund acquisitions,
development activities and capital improvements on an interim basis.
CASH FLOWS
COMPARISON FOR THE THREE MONTHS ENDED MARCH 31, 1996 TO THE THREE MONTHS
ENDED MARCH 31, 1995. The increase in cash and cash equivalents of $890,000 from
March 31, 1995 to March 31, 1996 is due to the excess of cash provided by
financing activities over cash used in operating activities and investing
activities. Net cash provided by operating activities increased by $1.3 million
from $109,000 to $1.4 million primarily due to an increase in rental revenue
offset by higher mortgage interest. Net cash used in investing activities
increased by $75.8 million from $20.1 million to $95.9 million mainly due to an
increase in the amount of real estate assets purchased during 1996 compared to
1995. Net cash provided by financing activities increased by $74.7 million from
$19.3 million to $94.0 million due primarily to proceeds received on mortgage
loans.
COMPARISON FOR THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER
31, 1994. The increase in cash and cash equivalents of $740,000 from December
31, 1994 to December 31, 1995 is due to the excess of cash provided by operating
and financing activities over cash used in investing activities. Net cash
provided by operating activities increased by $3.0 million from $1.2 million to
$4.2 million primarily due to the additional cash flow generated by the increase
in the number of Properties owned. Net cash used in investing activities
increased by $104.2 million from $45.8 million to $150.0 million mainly due to
an increase in the amount of real estate assets purchased during 1995 compared
to 1994. Net cash provided by financing activities increased by $102.7 million
from $43.9 million to $146.5 million due to proceeds received on mortgage notes
offset in part by increases in mortgage loans repaid and restricted cash.
COMPARISON FOR THE YEAR ENDED DECEMBER 31, 1994 TO THE YEAR ENDED DECEMBER
31, 1993. The decrease in cash and cash equivalents of $754,000 from December
31, 1993 to December 31, 1994 is due to distributions from one Arden Predecessor
to its owners of $1.5 million and the acquisition of improvements and Properties
in excess of financing activities. These uses were partially offset by owner
contributions. Net cash provided by operating activities decreased by $485,000
from $1.7 million to $1.2 million primarily due to an increase in rents and
other receivables, deferred rents prepaid financing and leasing costs and
prepaid expenses and other assets offset by an increase in depreciation and
amortization and net income. Net cash used in investing activities decreased by
$17.1 million from $62.9 million to $45.8 million mainly due to a decrease in
the value of real estate assets purchased during 1994 compared to 1993. Net cash
provided by financing activities decreased by $19.1 million from $63.0 million
to $43.9 million due to a decrease in the amount proceeds received on mortgage
notes incurred to finance real estate acquisitions offset in part by an increase
in owners' contributions.
52
<PAGE>
INFLATION
Substantially all of the office leases provide for separate escalations of
real estate taxes and operating expenses over a base amount. In addition, many
of the office leases provide for fixed base rent increases or indexed
escalations (based on the CPI or other measures). The Company believes that
inflationary increases in expenses will be offset by the expense reimbursements
and contractual rent increases described above.
The Credit Facility will bear interest at a variable rate, which will be
influenced by changes in short-term interest rates, and will be sensitive to
inflation.
SOUTHERN CALIFORNIA ECONOMY AND OFFICE MARKETS
The Company believes that current and forecast trends affecting Southern
California have created and will continue to create a favorable economic
environment in the suburban Southern California office markets where
substantially all of the Company's Properties are located. First, the Company
believes that the supply of Class A office space in Southern California has
stabilized and is unlikely to increase over the short term in large part because
it is not economically feasible to develop new Class A office space based on
rental rates currently attainable in Southern California office markets
according to C&W. Second, the recent economic restructuring of many of Southern
California's primary office-using sectors including the entertainment,
export/import, managed health care, high technology, telecommunications, and
civilian and military aerospace and defense industries has caused growth in
demand for office space. Third, demand for Class A office space relative to the
level of supply has led to higher occupancy rates and a trend towards higher
rental rates which are supportable in the office markets where the Company's
Properties are located. Finally, patterns of residential relocation to suburban
areas due in part to the public perception of greater personal security and to
the availability of greater recreational and residential amenities in suburban
areas, coupled with a heightened preference for living in close proximity to
work and employers' resultant access to a broader, more skilled local labor
force have fueled growth of suburban office property demand. The Company
believes that these factors and other specific economic indicators discussed
below suggest a general strengthening of the Southern California economy. Given
the quality and location of its Properties, the Company believes it is
competitively positioned to capitalize on these economic trends and the
resulting demand for suburban Class A office space. In addition, the Company
believes that the suburban Los Angeles County submarkets in which its Properties
are located will outperform the Downtown/CBD, which has not begun to recover
from the real estate downturn.
SOUTHERN CALIFORNIA ECONOMY
OVERVIEW. The Company believes that the office markets in Southern
California, and particularly suburban Los Angeles County, have improved and will
be excellent markets in which to own and operate office properties over the long
term.
The three-county region in which the Company's Properties are located
includes Los Angeles, Orange and San Diego counties which collectively comprise
approximately 45% of the statewide population and employment base in California.
Data from the U.S. Bureau of Labor Statistics indicates that the unemployment
rate in these counties peaked in 1993 during the height of the 1990 to 1993
recessionary period in Southern California. Recently, however, these counties
experienced a gradual economic recovery marked by falling unemployment rates
beginning in 1994 which, according to the 1995 ECONOMIC REPORT, was precipitated
by growth in the services and trade employment sectors, among others, and a less
pronounced rate of decline in defense related activities in Southern California.
For instance, the unemployment rate for the Los Angeles PMSA has been declining
since 1993 and dropped below 8% in 1995 for the first time since 1990. Similar
trends of decreasing unemployment rates were also experienced in Orange and San
Diego counties. The graph below illustrates unemployment trends for the United
States, California and the three counties in which the Company's Properties are
located.
Line graph entitled Historical Year-End Unemployment Rates depicting the
53
<PAGE>
following data points:
<TABLE>
<CAPTION>
LOS
ANGELES ORANGE SAN DIEGO
CALIFORNIA COUNTY COUNTY COUNTY U.S.
<S> <C> <C> <C> <C> <C>
1991 7.7% 8.2% 5.2% 6.2% 6.7%
1992 9.3% 9.8% 6.6% 7.3% 7.4%
1993 9.4% 9.8% 6.7% 7.8% 6.8%
1994 8.6% 9.4% 5.8% 7.2% 6.1%
1995 7.8% 7.9% 5.3% 6.5% 5.6%
</TABLE>
- --------------
Source: U.S. Bureau of Labor Statistics
The U.S. Bureau of Economic Analysis has forecast a total increase in
non-farm employment for the period from 1993 to 2005 of 14.2% for Los Angeles
County, 35.3% for Orange County and 30.7% for San Diego County, representing
average annual growth rates of 1.1%, 2.5% and 2.3%, respectively.
A driving factor in the forecast employment growth within the three counties
in which the Company operates is a strong population growth rate, which, over
the next five years is expected to significantly outpace the population growth
rates in both California and the United States as shown below:
<TABLE>
<CAPTION>
POPULATION POPULATION
GROWTH GROWTH
1990-1996 1996E-2001
AREA ESTIMATED PROJECTED
- -------------------------------------------------- ---------- -----------
<S> <C> <C>
Los Angeles County................................ 3.2% 10.0%
Orange County..................................... 7.1% 18.0%
San Diego County.................................. 6.4% 20.6%
California........................................ 6.8% 4.4%
United States..................................... 6.7% 4.4%
</TABLE>
- --------------
Source: Urban Decisions Systems, Inc.
As primary office employment grows, office demand is expected to increase.
According to AMERICA'S OFFICE ECONOMY prepared by Cognetics, Inc., Los Angeles
County, in which 21 of the Company's 24 Properties are located, is the number
one market in the United States for primary office employment growth, and San
Diego is ranked 18th.
TOP 20 MARKETS FOR PRIMARY OFFICE
EMPLOYMENT GROWTH (1995-2005)
<TABLE>
<C> <S>
1. LOS ANGELES
2. Atlanta
3. San Francisco-Oakland-San Jose
4. Washington, DC-MD-VA
5. Dallas-Ft. Worth
6. Chicago
7. Phoenix
8. New York
9. Houston-Galveston
10. Tampa-St. Petersburg
11. Minneapolis-St. Paul
12. Denver-Boulder
13. Boston
14. Orlando
15. Seattle
16. Philadelphia
17. Miami-Ft. Lauderdale
18. SAN DIEGO
19. Detroit
20. Kansas City
</TABLE>
- --------------
Source: Cognetics, Inc.
A significant factor for primary office employment growth in Los Angeles,
Orange and San Diego counties is a trend within these local economies to become
more services-oriented. Data from the U.S. Bureau of Labor Statistics indicates
a trend over the past six years of growth in the services and government sectors
(both large office space users), and a decline in the manufacturing, finance,
insurance and real estate (FIRE) and trade sectors, with the other employment
sectors remaining stable in proportion to total non-farm employment. Employment
in the service sector in the Los Angeles PMSA increased to 33% of total non-farm
employment in 1995 from 29% in 1990. Both Orange County and San Diego County
experienced a similar trend in the employment shift towards services.
54
<PAGE>
In addition to becoming a more diversified economy with a stronger emphasis
on the services and government sectors, according to the Los Angeles EDC, Los
Angeles County ranks number one in the nation in the number of business
establishments by county and is a major center of international trade. According
to the 1995 ECONOMIC REPORT, Los Angeles County is also the nation's leading
manufacturing center. Los Angeles County comprises 40% of the nondurable
manufacturing employment, 95% of the motion picture employment and 56% of the
aerospace employment in California. The Los Angeles PMSA is the largest PMSA in
the United States (larger than both the New York City PMSA and the Chicago PMSA)
and accounts for approximately 28% of California's population and employment
base. Demand for office space in Los Angeles County is expected to remain strong
as a result of these characteristics.
International trade is another major component of the Los Angeles economy
and while growth in international trade is difficult to attribute to specific
employment sectors, it is an indicator of the general strength of the local
economy. In 1994 the Los Angeles Customs District (which is primarily comprised
of the Los Angeles/Long Beach port complex and the Los Angeles International
Airport) surpassed New York/ New Jersey as the nation's leading port. According
to the California Department of Finance, from 1987 to 1995 international trade
passing through the Los Angeles Customs District has increased from
approximately $77.6 billion in 1987 to approximately $164.2 billion in 1995.
SOUTHERN CALIFORNIA OFFICE MARKETS
OVERVIEW. The Company believes that the Los Angeles, Orange and San Diego
County office markets are attractive markets in which to own and operate office
properties. Specifically, the Los Angeles County market, in which 21 of the 24
Properties are located, has the following favorable market characteristics
according to C&W: (i) the Los Angeles County suburban submarkets have
experienced three years of positive net absorption and five years of declining
direct vacancy rates; (ii) there has been virtually no new additions to supply
to the Los Angeles County suburban office market since 1992; and (iii) new
speculative office development is unlikely at the current time, primarily
because new construction is not economically feasible given current market
rental rates and also because of governmental constraints and zoning
restrictions in certain markets.
INCREASING DEMAND FOR OFFICE SPACE. In the past three years the underlying
fundamentals of supply and demand in the suburban Los Angeles County, Orange
County and downtown San Diego office markets have improved. The peak in
available supply occurred near the midpoint of the recession. Since that time,
the local economies have been recovering and the relationship between supply and
demand has resulted in declining direct vacancy rates and positive net
absorption in these markets. According to C&W, as of December 31, 1995, the
direct vacancy rate for the suburban Los Angeles County office market, the
Orange County office market and the downtown San Diego office market was 17.0%,
15.5% and 17.9%, respectively, as compared to 19.2%, 19.5% and 19.4% as of
December 31, 1991, respectively.
Line graph entitled Historical Year-End Direct Vacancy Rates depicting the
following data points:
<TABLE>
<CAPTION>
LOS ANGELES
COUNTY DOWNTOWN
U.S. (SUBURBAN) ORANGE COUNTY SAN DIEGO
<S> <C> <C> <C> <C>
1991 17.5% 19.2% 19.5% 19.4%
1992 18.2% 18.9% 19.1% 20.7%
1993 17.2% 18.4% 17.1% 19.4%
1994 15.3% 17.3% 17.2% 19.8%
1995 14.0% 17.0% 15.5% 17.9%
</TABLE>
- --------------
Source: Cushman & Wakefield
Note: U.S. vacancy is the weighted average of 44 markets.
Bar graph entitled Historical Annual Net Absorption depicting the following data
55
<PAGE>
points:
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
DOWNTOWN SAN DIEGO 201,334 (45,192) 273,777
ORANGE COUNTY 1,003,756 188,000 295,057
LOS ANGELES COUNTY 55,268 234,566 983,906
</TABLE>
- --------------
Source: Cushman & Wakefield
PROJECTED DECLINING DIRECT VACANCY RATES. C&W has projected that aggregate
direct vacancy rates in the suburban Los Angeles County office market would
decline to 14.4% as of December 31, 1998 assuming (i) no additions to the supply
of office space inventory that existed in such office markets as of December 3,
1995 and (ii) annual positive net absorption of direct availabilities of
1,000,000 square feet. C&W's projection of such absorption and declining direct
vacancy rates was based on recent historical positive net absorption experienced
in the suburban Los Angeles County office market. No assurance can be made that
such absorption of direct availabilities will occur in the future or that the
current supply of office space inventory will not increase, and therefore that
direct vacancy rates will decline as outlined in the graph below.
Line graph entitled Historical Year-End Direct Vacancy Rates depicting the
following data points:
<TABLE>
<CAPTION>
LOS ANGELES
COUNTY DOWNTOWN
U.S. (SUBURBAN) ORANGE COUNTY SAN DIEGO
<S> <C> <C> <C> <C>
1991 17.5% 19.2% 19.5% 19.4%
1992 18.2% 18.9% 19.1% 20.7%
1993 17.2% 18.4% 17.1% 19.4%
1994 15.3% 17.3% 17.2% 19.8%
1995 14.0% 17.0% 15.5% 17.9%
</TABLE>
- --------------
Source: Cushman & Wakefield
NO NEW SUPPLY OF OFFICE SPACE. According to C&W, there has been virtually
no new office development in Los Angeles County and Orange County since 1992.
Similarly, there has been no new office development in downtown San Diego since
1991. In the opinion of C&W, the addition of any new speculative office space to
these markets is unlikely at the current time, primarily because speculative new
construction is not economically feasible given current market rental rates and
also because of governmental constraints and zoning restrictions in certain
markets.
POTENTIAL REVENUE INCREASE AT REPLACEMENT COSTS RENTS. The Company believes
that all of its Properties have been purchased at a substantial discount from
replacement cost and have the potential for significant internal revenue growth
as rental rates for office properties in their respective submarkets recover to
levels ("Replacement Cost Rents") that would provide a reasonable return on
investment to a developer of a new Class A multi-tenant office building.
According to C&W, market rental rates in Los Angeles County are currently below
the levels required to justify new Class A office development. Based on
estimates provided by C&W, Replacement Cost Rents required to justify new
construction would be equal to approximately $35 per square foot for excellent
quality Class A office buildings and $24 per square foot for average quality
Class A office buildings. By comparison, the current weighted average annual
base rental rate (full service gross leases only, excluding leases subject to
triple net lease provisions) received by the Company in each of its Properties
which ranges from $15.24 per square foot to $31.00 per square foot with a total
weighted average annual base rental rate of $19.96 per square foot and the
weighted average annual asking rents for competitive office properties in their
respective submarkets are substantially below Replacement Cost Rents. This is
confirmed by the fact that according to C&W there has been extremely limited
office development (375,000 square feet out of a total 81,741,409 square feet)
and no speculative office development in the Los Angeles submarkets where the
Company operates Properties in the past four years.
56
<PAGE>
The costs and implied Replacement Cost Rents outlined above exclude any
value attributable to underlying land, which, if purchased in connection with a
new development would imply that higher Replacement Cost Rents would be required
to justify the increased costs of development resulting from the land
acquisition costs. There can be no assurance as to when, if, and the extent to
which the Properties owned and operated by the Company will experience an
increase in rental rates.
57
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Upon completion of the Offering, the Company will own 24 office properties
containing approximately 4.0 million rentable square feet. The Properties
consist primarily of Class A suburban office properties and individually range
from approximately 49,000 to 548,000 rentable square feet. All of the Properties
are located in Southern California, with 21 located in suburban Los Angeles
County, two in Orange County, and one in San Diego County. The Company believes
that the Properties have desirable locations within established business
communities and are well-maintained. Of the Company's 24 Properties, 20
Properties have been built since 1980 and 14 Properties, including all four
built prior to 1980, have been substantially renovated within the last three
years. The average age of the buildings is approximately 12 years. The
Properties offer an array of various amenities including security, parking,
conference facilities, on-site management, food services and health clubs.
Management believes that the location, quality of construction and building
amenities, as well as the Company's reputation for providing a high level of
tenant service, have enabled the Company to attract and retain a diverse tenant
base. As of April 30, 1996, the Properties had a weighted average occupancy rate
of approximately 88% and were leased to over 540 tenants. Major tenants, based
on square feet leased, include Merrill Lynch, Hewlett Packard Company, Deloitte
& Touche, GTE California, McDonnell Douglas, Pepperdine University, Grey
Advertising, Earth Technology and The Hearst Corporation. As of April 30, 1996,
no one tenant represented more than approximately 3.5% of the aggregate Adjusted
Annualized Base Rent of the Company's portfolio and only 16 tenants individually
represented more than 1% of such Adjusted Annualized Base Rent.
The Properties are leased to a variety of local, national and foreign
businesses. Leases are typically structured for terms of three, five or 10
years. Most of the Company's leases are full service, gross leases under which
tenants typically pay for all real estate taxes and operating expenses above
those for an established base year or expense stop. Leases typically contain
provisions permitting tenants to renew at prevailing market rates. Under the
leases, the landlord is generally responsible for structural repairs. Most
leases do not permit early termination; however, certain leases permit the
tenant to terminate upon six months' notice after the third year of a five-year
lease or the fifth year of a 10-year lease, subject to the tenant's obligation
to pay all unamortized tenant improvements and leasing commissions, a penalty of
three to six months of additional rent, and any rent concessions provided,
depending on the lease terms. Finally, tenants generally pay directly (without
regard to a base year or expense stop) for overtime use of air conditioning and
for onsite monthly employee and visitor parking.
Although the Company primarily utilizes gross leases (which represented
approximately 84% of the total portfolio leased square feet as of April 30,
1996), it also has triple net leases with a number of tenants. In general, the
triple net leases require the tenants to pay all real property taxes, insurance
and expenses of maintaining the leased space or Property and have renewal and
termination provisions similar to those described above.
PROPERTIES
The following table sets forth certain information regarding each of the
Properties as of April 30, 1996:
58
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL ADJUSTED
APPROXIMATE PORTFOLIO ANNUALIZED
YEAR BUILT/ RENTABLE RENTABLE PERCENT BASE RENT
SUBMARKET/PROPERTY LOCATION RENOVATED SQUARE FEET SQUARE FEET LEASED ($000S)
- ---------------------------------------- ---------------- ------------ ------------ --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
LOS ANGELES COUNTY
- ----------------------------------------
LOS ANGELES WEST
BEVERLY HILLS/CENTURY CITY
9665 Wilshire Beverly Hills 1972/92-3 158,345 3.9% 96.3% $ 4,724
Beverly Atrium Beverly Hills 1989 61,314 1.5 100.0 1,392
Century Park Center Los Angeles 1972/94 247,483 6.1 85.9 4,458
WESTWOOD/WEST LOS ANGELES
Westwood Terrace Los Angeles 1988 135,583 3.4 96.9 3,299
1950 Sawtelle Los Angeles 1988/95 103,620 2.6 76.3 1,598
MARINA AREA/CULVER CITY/LAX
400 Corporate Pointe Culver City 1987 164,845 4.1 91.5 2,974
Bristol Plaza Culver City 1982 84,014 2.1 78.7 1,191
Skyview Center Los Angeles 1981,87/95(1) 386,294 9.6 80.6 5,255
PARK MILE/WEST HOLLYWOOD
The New Wilshire Los Angeles 1986 202,544 5.0 84.1 3,487
<CAPTION>
LOS ANGELES NORTH
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SIMI/CONEJO VALLEY
5601 Lindero Canyon Westlake 1989 105,830 2.6 100.0 1,180
Calabasas Commerce Center Calabasas 1990 123,121 3.0 100.0 2,111
WEST SAN FERNANDO VALLEY
Woodland Hills Financial Center Woodland Hills 1972/95 221,790 5.5 86.7 4,195
CENTRAL SAN FERNANDO VALLEY
16000 Ventura Blvd. Encino 1980/96 178,341 4.4 85.8 3,002
EAST SAN FERNANDO VALLEY/TRI-CITIES
425 West Broadway Glendale 1984 71,489 1.8 89.9 1,250
303 Glenoaks(2) Burbank 1983/96 175,449 4.3 95.7 3,421
70 South Lake Pasadena 1982/94 100,133 2.5 76.6 1,598
<CAPTION>
LOS ANGELES SOUTH
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LONG BEACH
4811 Airport Plaza Drive Long Beach 1987/95 121,610 3.0 100.0 1,051
4900/10 Airport Plaza Drive Long Beach 1987/95 150,403 3.7 100.0 1,173
5000 East Spring Long Beach 1989/95 163,358 4.0 87.0 2,833
100 West Broadway Long Beach 1987/96 191,727 4.7 84.4 3,270
CERRITOS/NORWALK
12501 East Imperial Highway (2) Norwalk 1978/94 122,175 3.0 91.9 1,780
<CAPTION>
ORANGE COUNTY
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEST COUNTY
5832 Bolsa Avenue Huntington Beach 1985 49,355 1.2 100.0 640
TRI-FREEWAY AREA
Anaheim City Centre Anaheim 1986/91 175,391 4.3 85.5 2,286
<CAPTION>
SAN DIEGO COUNTY
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SAN DIEGO MARKET
Imperial Bank Tower San Diego 1982/96 547,578 13.5 82.0 8,065
------------ ----- ----- -----------
Total/Weighted Average 4,041,792 100.0% 88.0% $ 66,232
<CAPTION>
PERCENTAGE OF AVG. ADJUSTED
PORTFOLIO ANNUALIZED
ADJUSTED BASE RENT PER
ANNUALIZED LEASED NUMBER
SUBMARKET/PROPERTY BASE RENT SQUARE FOOT OF LEASES
- ---------------------------------------- --------------- --------------- -------------
<S> <C> <C> <C>
LOS ANGELES COUNTY
- ----------------------------------------
LOS ANGELES WEST
BEVERLY HILLS/CENTURY CITY
9665 Wilshire 7.1% $ 31.00 20
Beverly Atrium 2.1 22.70 11
Century Park Center 6.7 20.98 87
WESTWOOD/WEST LOS ANGELES
Westwood Terrace 5.0 25.11 21
1950 Sawtelle 2.4 20.21 27
MARINA AREA/CULVER CITY/LAX
400 Corporate Pointe 4.5 19.72 15
Bristol Plaza 1.8 18.02 21
Skyview Center 7.9 16.87 48
PARK MILE/WEST HOLLYWOOD
The New Wilshire 5.3 20.48 30
LOS ANGELES NORTH
- ----------------------------------------
<S> <C> <C> <C>
SIMI/CONEJO VALLEY
5601 Lindero Canyon 1.8 11.15 2
Calabasas Commerce Center 3.2 17.14 11
WEST SAN FERNANDO VALLEY
Woodland Hills Financial Center 6.3 21.81 56
CENTRAL SAN FERNANDO VALLEY
16000 Ventura Blvd. 4.5 19.63 43
EAST SAN FERNANDO VALLEY/TRI-CITIES
425 West Broadway 1.9 19.45 12
303 Glenoaks(2) 5.2 20.38 22
70 South Lake 2.4 20.83 10
LOS ANGELES SOUTH
- ----------------------------------------
<S> <C> <C> <C>
LONG BEACH
4811 Airport Plaza Drive 1.6 8.64 1
4900/10 Airport Plaza Drive 1.8 7.80 1
5000 East Spring 4.3 19.93 26
100 West Broadway 4.9 20.21 24
CERRITOS/NORWALK
12501 East Imperial Highway (2) 2.7 15.85 3
ORANGE COUNTY
- ----------------------------------------
<S> <C> <C> <C>
WEST COUNTY
5832 Bolsa Avenue 1.0 12.96 1
TRI-FREEWAY AREA
Anaheim City Centre 3.5 15.24 13
SAN DIEGO COUNTY
- ----------------------------------------
<S> <C> <C> <C>
SAN DIEGO MARKET
Imperial Bank Tower 12.2 17.95 43
----- ------ ---
Total/Weighted Average 100.0% $ 19.96(3) 548
</TABLE>
- --------------------
(1) Skyview Center consists of two Class A 11- and 12-story office towers
completed in 1981 and 1987, respectively.
(2) Acquisition Property to be acquired concurrently with the Offering.
(3) Weighted average Adjusted Annualized Base Rent per leased square foot is
calculated based only on rent which is received from tenants under gross
leases, which represent approximately 84% of the total portfolio leased
square feet. Excluded from the weighted average calculation are 5601 Lindero
Canyon, 4811 Airport Plaza Drive, 4900/10 Airport Plaza Drive, 5832 Bolsa
Avenue, 50% of space at 400 Corporate Pointe leased to Pepperdine
University, and 48.3% of space at Calabasas Commerce Center leased to two
tenants, all of which are triple net leased.
59
<PAGE>
TENANTS
The Properties are leased to over 540 tenants which are engaged in a variety
of businesses, including financial services, entertainment, health care
services, accounting, law, computer technology, education and publishing. The
following table sets forth information regarding the Company's leases with its
20 largest tenants based upon Adjusted Annualized Base Rent as of April 30,
1996:
TENANT DIVERSIFICATION
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE
WEIGHTED AVG. PERCENTAGE OF ADJUSTED PORTFOLIO
NUMBER REMAINING AGGREGATE AGGREGATE ANNUALIZED ADJUSTED
OF LEASE TERM IN RENTABLE LEASED SQUARE BASE RENT ANNUALIZED
LEASES MONTHS(1) SQUARE FEET FEET ($000S) BASE RENT
------ ------------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
McDonnell Douglas....................... 2 115 272,013 7.65% $ 2,224 3.49%
GTE California.......................... 2 42 113,127 3.18% 1,633 2.56%
Pepperdine University................... 2 80 82,441 2.32% 1,623 2.55%
Logicon, Inc............................ 1 75 74,174 2.09% 1,575 2.47%
Merrill Lynch........................... 2 55 47,818 1.34% 1,317 2.07%
Imperial Bank Realty Co................. 2 50 38,855 1.09% 1,275 2.00%
Earth Technology Corporation............ 2 86 50,750 1.43% 1,136 1.78%
Latham & Watkins........................ 1 95 56,425 1.59% 1,045 1.64%
The Hearst Corporation.................. 2 43 29,870 0.84% 1,034 1.62%
Grey Advertising........................ 2 115 50,152 1.41% 993 1.56%
DiC Entertainment....................... 1 80 51,708 1.45% 993 1.56%
NME Hospitals........................... 1 43 24,069 0.68% 829 1.30%
Gruntal & Company....................... 1 14 15,321 0.43% 704 1.10%
Intracorp............................... 1 28 54,179 1.52% 691 1.08%
Smith Barney, Inc....................... 2 92 24,736 0.70% 678 1.06%
XIRCOM, Inc............................. 1 15 46,321 1.30% 673 1.05%
Crawford & Company...................... 1 23 20,347 0.57% 623 0.98%
Candle Corporation...................... 1 78 52,130 1.47% 601 0.94%
JB Oxford Holdings...................... 2 65 18,796 0.53% 595 0.93%
Deloitte & Touche....................... 1 57 30,279 0.85% 581 0.91%
TOTAL/WEIGHTED AVERAGE.............. 30 75 1,153,511 32.45% $ 20,823 32.65%
</TABLE>
- ------------------
(1) Weighted average calculation based on aggregate rentable square footage
leased by each tenant.
The following table sets forth information relating to the distribution of
the Company's leases, based on rentable square feet under lease, as of April 30,
1996:
LEASE DISTRIBUTIONS
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE PERCENTAGE OF
PORTFOLIO ADJUSTED AGGREGATE
NUMBER PERCENT LEASED ANNUALIZED PORTFOLIO ADJUSTED
SQUARE FEET OF OF ALL TOTAL LEASED SQUARE BASE RENT ANNUALIZED
UNDER LEASE LEASES LEASES SQUARE FEET FEET ($000S) BASE RENT
- ---------------------------------------- ------ ------- ------------ ------------ ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Less than 2,500......................... 260 47.45 % 344,701 9.70% $ 6,454 9.74%
2,501--5,000............................ 115 20.99 % 406,457 11.43% 7,645 11.54%
5,001--7,500............................ 49 8.94 % 309,960 8.72% 6,168 9.31%
7,501--10,000........................... 36 6.57 % 312,659 8.79% 6,330 9.56%
10,001--20,000.......................... 58 10.58 % 828,102 23.29% 17,530 26.47%
20,001--40,000.......................... 16 2.92 % 406,121 11.42% 8,499 12.83%
40,001+................................. 14 2.55 % 947,259 26.64% 13,606 20.54%
TOTAL............................... 548 100.00 % 3,555,259 100.00% $ 66,232 100.00%
</TABLE>
60
<PAGE>
LEASE EXPIRATIONS
The following table sets forth a schedule of the lease expirations for the
Properties for leases in place as of April 30, 1996, assuming that none of the
tenants exercise renewal options or termination rights, if any, at or prior to
the scheduled expirations:
<TABLE>
<CAPTION>
ADJUSTED
YEAR OF NUMBER OF SQUARE FOOTAGE PERCENTAGE OF ANNUALIZED BASE PERCENTAGE OF ADJUSTED
LEASE LEASES OF EXPIRING TOTAL LEASED RENT OF EXPIRING ANNUALIZED BASE RENT OF
EXPIRATION EXPIRING LEASES SQUARE FEET LEASES ($000S) EXPIRING LEASES
- --------------- --------------- -------------- --------------- ----------------- -------------------------
<S> <C> <C> <C> <C> <C>
1996 75 192,501 5.41% $ 4,039 6.10%
1997 89 343,222 9.65% 7,909 11.94%
1998 104 450,630 12.68% 8,701 13.14%
1999 86 449,304 12.64% 8,688 13.12%
2000 78 444,577 12.50% 8,939 13.50%
2001 37 248,263 6.98% 4,660 7.04%
2002 23 537,322 15.11% 9,847 14.87%
2003 13 117,785 3.31% 2,406 3.63%
2004 12 194,200 5.46% 3,437 5.19%
2005 14 429,233 12.07% 4,923 7.43%
2006 4 82,296 2.31% 1,727 2.61%
2008 2 17,484 0.49% 318 0.48%
2010 1 7,404 0.21% 179 0.27%
2011 and
thereafter 10 41,038 1.16% 457 0.69%
TOTAL 548 3,555,259 100.00% $ 66,232 100.00%
</TABLE>
TENANT RETENTION AND EXPANSIONS
The Company believes that its relationship with tenants contributes in large
part to its success in attracting, expanding and retaining its quality and
diverse tenant base. The Company strives to develop and maintain good
relationships with tenants through its active management style and by being
responsive to individual tenants' needs. The Company services tenants primarily
through its on site, professional management staff. Management believes that
tenant satisfaction fosters long-term tenant relationships and creates expansion
opportunities, which, in turn, enhance the Company's ability to maintain and
increase occupancy rates. The Company's success in this area is demonstrated in
part by the number of existing tenants which have re-leased their space, leased
additional space to support their expansion needs or moved to other space within
the Company's portfolio. During 1994 and 1995, the Company expanded 10 tenants
by a total of over 12,400 square feet. Recently, the Company was able to expand
and move California Pizza Kitchen from approximately 17,224 square feet in
Westwood Terrace to approximately 21,579 square feet in Skyview Center. Another
example of the Company's ability to capitalize on relocation and expansion
opportunities is the relocation of Stanford Business Systems from 400 Corporate
Pointe to expanded space with its new parent company at Skyview Center, which
also allowed the Company to accommodate a 7,311 square foot expansion at 400
Corporate Pointe by Pepperdine University, the largest tenant at 400 Corporate
Pointe.
61
<PAGE>
The following table sets forth certain historical information regarding
tenants at the Properties who renewed an existing lease at or prior to the
expiration of the existing lease:
HISTORICAL LEASE RENEWALS
<TABLE>
<CAPTION>
TOTAL/
WEIGHTED
AVERAGE
1993 1994 1995 1993-1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Number of leases expired during calendar year....................... 3 28 33 64
Number of lease renewals............................................ 3 20 21 44
Percentage of leases renewed........................................ 100% 71% 64% 69%
Aggregate rentable square footage of expiring leases................ 2,870 112,539 99,577 214,986
Aggregate rentable square footage of lease renewals................. 2,870 92,057 75,213 170,140
Percentage of expiring rentable square footage renewed.............. 100% 82% 76% 79%
</TABLE>
HISTORICAL TENANT IMPROVEMENTS AND LEASING COMMISSIONS
The following table sets forth certain historical information regarding
Tenant Improvement ("TI") and Leasing Commission ("LC") costs for tenants at the
Properties. Based on square footage, the majority of leases signed relate to
Renewals and Re-tenanted Space (78%), while leases signed relating to Shell
Space comprised 22%. Shell Space remaining at the Properties is less than 2% of
the aggregate rentable square footage of the Properties.
<TABLE>
<CAPTION>
TOTAL/
WEIGHTED
AVERAGE
1993 1994 1995 1993-1995
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
RENEWALS
Number of Leases 3 20 21 44
Square Feet of Renewals 2,870 92,057 75,213 170,140
TI per square foot............................................. $ 3.58 $ 2.23 $ 8.05(i) $ 4.83
LC per square foot............................................. $ 0.09 $ 3.44 $ 2.28 $ 2.87
--------- --------- --------- -----------
Total TI and LC per square foot............................ $ 3.67 $ 5.67 $10.33 $ 7.70
--------- --------- --------- -----------
--------- --------- --------- -----------
RE-TENANTED SPACE (II)
Number of Leases 7 13 47 67
Square Feet of Re-tenanted Space 9,910 22,265 108,430 140,605
TI per square foot............................................. $ 2.22 $ 9.04 $ 9.82 $ 9.16
LC per square foot............................................. $ 0.31 $ 2.72 $ 3.05 $ 2.81
--------- --------- --------- -----------
Total TI and LC per square foot............................ $ 2.53 $11.76 $12.87 $11.97
--------- --------- --------- -----------
--------- --------- --------- -----------
SHELL SPACE (III)
Number of Leases 5 8 10 23
Square Feet of Shell Space 17,389 16,130 53,876 87,395
TI per square foot............................................. $31.22 $36.25 $26.29 $29.11
LC per square foot............................................. $ 3.65 $ 7.19 $ 4.83 $ 5.03
--------- --------- --------- -----------
Total TI and LC per square foot............................ $34.87 $43.44 $31.12 $34.14
--------- --------- --------- -----------
--------- --------- --------- -----------
TOTAL
Number of Leases 15 41 78 134
Square Feet 30,169 130,452 237,519 398,140
TI per square foot............................................. $19.06 $ 7.60 $12.99 $11.69
LC per square foot............................................. $ 2.22 $ 3.78 $ 3.21 $ 3.32
--------- --------- --------- -----------
Total TI and LC per square foot............................ $21.28 $11.38 $16.20 $15.01
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
- --------------
(i) Includes tenant improvement costs relating to one lease signed at Anaheim
City Centre for which the Company incurred substantial renovation costs in
connection with a full floor retrofit. Tenant improvement costs for the
remaining leases renewed in 1995 equaled $4.67 per square foot.
62
<PAGE>
(ii) Does not include Shell Space build-out for 87,395 square feet.
(iii) Shell Space remaining at the Properties is less than 2% of the aggregate
rentable space footage of the Properties.
HISTORICAL CAPITAL EXPENDITURES
The following table sets forth information relating to the historical
capital expenditures of the Company's Properties:
HISTORICAL CAPITAL EXPENDITURES
<TABLE>
<CAPTION>
1993 1994 1995
--------- ---------- ----------
<S> <C> <C> <C>
Number of Properties (1)..................................................... 3 8 10
Number of Square Feet........................................................ 530,587 1,130,669 1,412,630
Capital Expenditures Incurred................................................ $ 9,470 $ 51,592 $ 200,848
Weighted Average Capital Expenditures per square foot (2).................... $ 0.02 $ 0.06 $ 0.15
Three Year Weighted Average per square foot.................................. $ 0.10
</TABLE>
- --------------
(1) Represents the actual number of Properties for which capital expenditures
were incurred during the year.
(2) For those Properties owned less than a full year, computes the per square
foot amount by annualizing the capital expenditures amount to a pro forma
full year cost.
HISTORICAL OCCUPANCY
The table below sets forth the weighted average occupancy rates, based on
square feet leased, of the Properties owned by the Company at the indicated
dates:
HISTORICAL OCCUPANCY RATES
<TABLE>
<CAPTION>
APPROXIMATE AGGREGATE PERCENTAGE OF RENTABLE
DATE RENTABLE SQUARE FEET SQUARE FEET OCCUPIED
- ------------------------------------------------ --------------------- -------------------------
<S> <C> <C>
December 31, 1993............................... 530,587 84%
June 30, 1994................................... 636,417 87%
December 31, 1994............................... 1,130,669 82%
June 30, 1995................................... 1,412,630 84%
December 31, 1995............................... 2,632,318 88%
</TABLE>
63
<PAGE>
OFFICE SUBMARKETS AND PROPERTY INFORMATION
The Company owns and operates 24 Properties comprising approximately 4.0
million rentable square feet in suburban Los Angeles County, Orange County and
San Diego County. The following map shows the relative geographic location of
Los Angeles County, Orange County and San Diego County.
Map depicting Los Angeles County, Orange County and San Diego County.
64
<PAGE>
The Properties are located in a number of office market sectors and
submarkets within these counties as outlined in the table below:
PROPERTY MARKET SECTORS AND SUBMARKETS
PROPERTY STATISTICS
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF OF
TOTAL ADJUSTED PORTFOLIO
APPROXIMATE PORTFOLIO ANNUALIZED ADJUSTED
NUMBER OF RENTABLE RENTABLE BASE RENT ANNUALIZED
PROPERTIES SQUARE FEET SQUARE FEET ($000S) BASE RENT
---------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
LOS ANGELES COUNTY................................ 21 3,269,468 80.9% $ 55,241 83.4%
LOS ANGELES WEST OFFICE MARKET SECTOR
West Los Angeles and Adjacent Submarkets...... 6 908,889 22.5 18,958 28.6
Culver City/Century Blvd. Submarkets.......... 3 635,153 15.7 9,419 14.2
LOS ANGELES NORTH OFFICE MARKET SECTOR
Simi/Conejo Valley Submarkets................. 2 228,951 5.7 3,291 5.0
West and Central San Fernando Valley
Submarkets................................... 2 400,131 9.9 7,197 10.8
East San Fernando Valley/Tri Cities
Submarkets................................... 3 347,071 8.6 6,269 9.5
LOS ANGELES SOUTH OFFICE MARKET SECTOR
Long Beach and Cerritos/Norwalk Submarkets.... 5 749,273 18.5 10,107 15.3
ORANGE COUNTY..................................... 2 224,746 5.6% 2,926 4.4
Anaheim Submarket............................. 1 175,391 4.4 2,286 3.4
Huntington Beach Submarket.................... 1 49,355 1.2 640 1.0
SAN DIEGO COUNTY.................................. 1 547,578 13.5% 8,065 12.2
Central City (downtown San Diego) Submarket... 1 547,578 13.5 8,065 12.2
--
----------- ----- ---------- -----
TOTAL......................................... 24 4,041,792 100.0% $ 66,232 100.0%
--
--
----------- ----- ---------- -----
----------- ----- ---------- -----
</TABLE>
LOS ANGELES COUNTY OFFICE MARKET AND PROPERTIES
According to C&W, the Los Angeles County office market contained office
space inventory of approximately 168 million rentable square feet which, as of
December 31, 1995, had a direct vacancy rate of 18.7%. The Los Angeles County
office market is divided by C&W into the following four sectors: Los Angeles
West, Los Angeles North, Los Angeles South/South Bay and Los Angeles
Central/Downtown, with each of the sectors in turn composed of numerous
submarkets as illustrated on the map below.
65
<PAGE>
Map of Los Angeles County showing location
of Los Angeles North, Los Angeles West, Los Angeles Central and
Los Angeles South office market sectors.
During 1995, 272,154 square feet of office space was absorbed on a net basis
in the four Los Angeles County sectors inclusive of the Los Angeles
Central/Downtown sector which had net negative absorption of 711,752 square
feet. Excluding the net negative absorption of the Los Angeles Central/Downtown
sector, the remaining three sectors absorbed approximately 984,000 square feet.
The direct vacancy rate for Los Angeles County excluding the Los Angeles
Central/Downtown sector was 17.0% as of December 31, 1995, as compared to 17.3%
in 1994. Set forth below is detailed market information regarding the four
sectors within the Los Angeles County office market:
LOS ANGELES COUNTY
OFFICE MARKET STATISTICS
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
DIRECT NET WTD. AVG.
NUMBER DIRECT VACANCY ABSORPTION ASKING
MARKET INVENTORY OF BLDGS AVAILABILITIES* RATE YTD 1995 RENTAL RATE
- ----------------------------------------------- ------------- ----------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
LOS ANGELES WEST............................... 50,014,880 367 9,289,766 18.6% 419,123 $ 20.93
LOS ANGELES NORTH.............................. 39,355,810 467 5,682,217 14.4% 196,129 $ 20.80
LOS ANGELES SOUTH/SOUTH BAY.................... 27,336,900 240 4,813,583 17.6% 368,654 $ 18.14
LOS ANGELES CENTRAL/ DOWNTOWN.................. 51,544,706 243 11,610,517 22.5% (711,752) $ 18.44
------------- ----- ------------- --- ----------- -----------
TOTAL...................................... 168,252,296 1,317 31,396,083 18.7% 272,154 $ 19.56
------------- ----- ------------- --- ----------- -----------
------------- ----- ------------- --- ----------- -----------
</TABLE>
- --------------
Source: Cushman & Wakefield
* Does not include currently leased but available sublease space.
LOS ANGELES WEST OFFICE MARKET SECTOR
The Los Angeles West office market sector contains several distinct office
submarkets, including, among others, the Beverly Hills, Century City, Westwood,
West Los Angeles, Marina Area, Culver City, LAX, Hollywood and West Hollywood
office submarkets. According to C&W, there are approximately 50,014,880 square
feet of office space inventory in the Los Angeles West office market sector
which comprises approximately 30% of the office space inventory in Los Angeles
County. As of December 31, 1995, the direct vacancy rate in the Los Angeles West
office market sector was 18.6%. Collectively, the office submarkets within the
Los Angeles West office market sector had weighted average asking rents of
$20.93 per square foot as of December 31, 1995.
66
<PAGE>
Map of Los Angeles West office market sector.
Several of the office submarkets in the Los Angeles West office market
sector, including Westwood, Beverly Hills, and Century City are considered among
the most prestigious and desirable office locations in Los Angeles County and
command premium rental rates, with average annual asking rents of $28.32, $25.08
and $23.28 per square foot, respectively. The Golden Triangle area of Beverly
Hills has quoted annual asking rents ranging from $19.80 to $42.00 with a
predominant range of $24.00 to $36.00 per square foot. Certain office properties
within these office submarkets achieve annual rental rates of as much as $39.00
per square foot. The tenant base of office space users in the Los Angeles West
office market sector is primarily composed of firms in the entertainment,
advertising, professional and financial services, legal, accounting, insurance
and real estate industries.
The Company owns nine Properties located in the Los Angeles West office
market sector that collectively contain approximately 1,544,042 net rentable
square feet which represents approximately 38% of the total rentable square
footage of the Properties. The Properties are located in the office submarkets
of Beverly Hills, Century City, Westwood, West Los Angeles, Culver
City/Westchester, LAX and the 6000 Block of Wilshire Boulevard (a segment of the
Miracle Mile office submarket adjacent to Beverly Hills). No new development of
mid-rise or high-rise properties is permitted in the Beverly Hills office
submarket as the City of Beverly Hills has enacted zoning limitations that
impose a three-story height limit for all new commercial development. Set forth
below is detailed submarket information regarding the Los Angeles West sector:
67
<PAGE>
LOS ANGELES WEST
OFFICE SUBMARKET STATISTICS
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
DIRECT NET WTD. AVG.
NUMBER DIRECT VACANCY ABSORPTION ASKING
SUBMARKET INVENTORY OF BLDGS AVAILABILITIES(1) RATE YTD 1995 RENTAL RATE
- ------------------------------------------- ------------ ----------- -------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BEVERLY HILLS/CENTURY CITY................. 14,351,740 89 2,340,143 16.3% 317,263 $ 24.12
Beverly Hills.......................... 5,499,685 63 1,100,405 20.0% 143,812 $ 25.08
Century City........................... 8,852,055 26 1,239,738 14.0% 173,451 $ 23.28
WESTWOOD/WEST LOS ANGELES.................. 17,304,111 139 2,924,088 16.9% 67,888 $ 23.88
Westwood............................... 4,084,735 21 579,241 14.2% 172,706 $ 28.32
West Los Angeles....................... 3,798,977 34 821,453 21.6%(2) (120,211) $ 18.84
Brentwood.............................. 3,254,337 23 399,587 12.3% 148,907 $ 24.84
Santa Monica........................... 6,005,655 58 1,087,661 18.1% (141,470) $ 25.20
Pacific Palisades...................... 160,407 3 36,146 22.5% 7,956 $ 20.64
MARINA AREA/CULVER CITY/ LAX............... 8,959,927 63 1,912,170 21.3% 223,275 $ 14.85
Culver City/Westchester................ 3,643,649 32 537,237 14.7% 52,844 $ 17.28
Los Angeles Airport (LAX).............. 4,211,847 20 1,232,354 29.3%(3) 77,496 $ 13.20
Marina Del Rey/Venice/MarVista......... 1,104,431 11 142,579 12.9% 92,935 $ 19.92
PARK MILE/WEST HOLLYWOOD................... 9,399,102 76 2,113,365 22.5% (189,303) $ 18.80
Miracle Mile........................... 4,444,716 20 1,140,562 25.7% (242,985) $ 19.47
Park Mile.............................. 1,079,452 11 252,993 23.4% 23,958 $ 16.23
Hollywood.............................. 2,576,475 30 488,686 19.0% 43,438 $ 15.72
West Hollywood......................... 1,298,459 15 231,124 17.8% (13,714) $ 24.84
TOTAL.................................. 50,014,880 367 9,289,766 18.6% 419,123 $ 20.93
</TABLE>
- --------------
Source: Cushman & Wakefield
(1) Does not include currently leased but available sublease space.
(2) The marginally higher vacancy in this office submarket is partially
attributable to the loss of a major tenant (Aurora, formerly Executive Life)
which previously occupied over 300,000 square feet in two properties.
(3) The 29.3% direct vacancy rate for the LAX office submarket compared to other
office submarkets in the Los Angeles West office market sector reflects the
fact that of the 20 buildings in such submarket, only seven buildings
comprising 22.2% of such submarket's rentable square feet are classified by
C&W as Class A office properties (all of which were completed between 1981
and 1987), with the remaining 13 properties classified as Class B or Class C
properties. The Class B and Class C properties do not directly compete with
the newer and higher quality Skyview Centers I and II and the other Class A
properties in the LAX office submarket. The direct vacancy level for Class A
properties in the LAX office submarket was 25.0% as of December 31, 1995.
PROPERTIES LOCATED IN THE BEVERLY HILLS OFFICE SUBMARKET:
9665 WILSHIRE. 9665 Wilshire is a ten-story office tower located in the
Golden Triangle of Beverly Hills completed in 1972 and substantially renovated
in 1992 and 1993. The Property contains 158,345 rentable square feet and 444
parking spaces. As of April 30, 1996 the Property was 96.3% leased with an
average Adjusted Annualized Base Rent per leased square foot of $31.00.
According to C&W, as of April 30, 1996, the 9665 Wilshire Boulevard Peer Group
(the term "Peer Group" as used herein with respect to each of the Properties has
the meaning set forth in the Glossary) contained approximately 1,807,958 square
feet of office space inventory in 17 buildings and had weighted average annual
asking rental rates ranging from $27.14 to $29.49 per square foot with a direct
vacancy rate of 28.7%. Primary tenants at this Property include Sotheby's, Inc.
(17,222 square feet), Merrill Lynch (15,363 square feet), Smith Barney (15,321
square feet), Gruntal & Co. (15,321 square feet), J.B. Oxford Holdings (15,321
square feet) and Sutro & Co. (11,797 square feet). Aggregate square footage of
leases expiring in 1996, 1997, and 1998 represent 3.8%, 22.0% and 5.5% of the
Property's occupied square footage, respectively.
68
<PAGE>
BEVERLY ATRIUM. Beverly Atrium is a 3-story office complex completed in
1989 of steel frame construction with a stone and brick exterior. The Property
contains 61,314 rentable square feet and 245 parking spaces. The Property is
located immediately south of the Golden Triangle area. As of April 30, 1996, the
Property was 100% leased with an average Adjusted Annualized Base Rent per
leased square foot of $22.70. According to C&W, as of April 30, 1996, the
Beverly Atrium Peer Group contained approximately 1,807,958 square feet of
office space inventory in 17 buildings and had weighted average annual asking
rental rates ranging from $27.14 to $29.49 per square foot with a direct vacancy
rate of 28.7%. Primary tenants at this Property include GE Commercial Finance
(18,489 square feet), Islands Restaurant (7,404 square feet) and Unigem
International (10,281 square feet). Aggregate square footage of leases expiring
in 1996, 1997, and 1998 represent 7.8%, 4.3% and 21.2% of the Property's
occupied square footage, respectively.
PROPERTY LOCATED IN THE CENTURY CITY OFFICE SUBMARKET:
CENTURY PARK CENTER. Century Park Center contains a 15-story office tower
and an adjacent three story office building completed in 1972. The Property
contains approximately 247,483 rentable square feet with 674 parking spaces. The
building was renovated during 1994, which included redesigning the full-length
glass facade, refilming all of the curtain wall spandrels and installing tenemic
metal to highlight the exterior window frames. In addition, the building's
security and energy management systems and facilities were upgraded, lighting
was retrofitted, and all common areas were renovated. As of April 30, 1996, the
Property was 85.9% leased with an average Adjusted Annualized Base Rent per
leased square foot of $20.98. According to C&W, as of April 30, 1996, the
Century Park Center Peer Group contained approximately 3,649,937 square feet of
office space inventory in 11 buildings and had weighted average annual asking
rental rates ranging from $20.64 to $24.96 per square foot with a direct vacancy
rate of 21.8%. The Property is primarily tenanted with numerous professional and
medical related tenants ranging predominantly in size from 1,000 square feet to
3,000 square feet. The largest tenant at this Property is NME Hospitals (24,069
square feet) which occupies approximately 10% of the rentable square feet.
Aggregate square footage of leases expiring in 1996, 1997, and 1998 represent
11.8%, 10.2% and 13.5% of the Property's occupied square footage, respectively.
PROPERTY LOCATED IN THE WESTWOOD OFFICE SUBMARKET:
WESTWOOD TERRACE. Westwood Terrace is a 5-story office building completed
in 1988 of steel frame construction with a white precast concrete panel and
blue-green continuous ribbon glass exterior with layered terraces on each story.
The Property contains approximately 135,583 rentable square feet and 450 parking
spaces. As of April 30, 1996, the Property was 96.9% leased with an average
Adjusted Annualized Base Rent per leased square foot of $25.11. According to
C&W, as of April 30, 1996, the Westwood Terrace Peer Group contained
approximately 1,004,079 square feet of office space inventory in six buildings
and had weighted average annual asking rental rates ranging from $22.50 to
$31.87 per square foot with a direct vacancy rate of 11.2%. Primary tenants at
this Property include The Hearst Corporation (25,731 square feet) and Blue Cross
of California (15,261 square feet). Aggregate square footage of leases expiring
in 1996, 1997, and 1998 represent 18.7%, 2.9% and 5.4% of the Property's
occupied square footage, respectively.
PROPERTY LOCATED IN THE WEST LOS ANGELES OFFICE SUBMARKET:
1950 SAWTELLE. 1950 Sawtelle is a three-story, office building completed in
1988, of steel frame construction with a brick exterior. The Property, which was
renovated in 1995, contains approximately 103,620 rentable square feet and has
254 parking spaces. As of April 30, 1996, the Property was 76.3% leased with an
average Adjusted Annualized Base Rent per leased square foot of $20.21.
According to C&W, as of April 30, 1996, the 1950 Sawtelle Peer Group contained
approximately 1,814,375 square feet of office space inventory in 10 buildings
and had weighted average annual asking rental rates ranging from $17.74 to
$19.09 per square foot with a direct vacancy rate of 25.8%. The Property's
tenant base is largely comprised of numerous small and medium sized service,
medical and other professional tenants who occupy tenant suites that
predominantly range in size from 1,500 square feet to 3,000 square feet. The
largest tenant at this Property, Integrated Decisions (10,635 square feet),
occupies approximately 10.26% of the Property's aggregate rentable square feet.
Aggregate square footage of leases expiring in 1996, 1997, and 1998 represent
5.3%, 30.9% and 50.6% of the Property's occupied square footage, respectively.
69
<PAGE>
PROPERTIES LOCATED IN THE CULVER CITY/WESTCHESTER OFFICE SUBMARKET:
400 CORPORATE POINTE. 400 Corporate Pointe is an eight-story office
building completed in 1987 of steel-framed construction with a dark glass and
concrete panel exterior. The Property contains approximately 164,845 rentable
square feet with 588 parking spaces. The Property is within 1/2 mile of the
I-405 and I-90 Freeways and La Cienega Boulevard, a major north-south artery. As
of April 30, 1996, the Property was 91.5% leased with an average Adjusted
Annualized Base Rent per leased square foot of $19.72. According to C&W, as of
April 30, 1996, the 400 Corporate Pointe Peer Group contained approximately
1,792,632 square feet of office space inventory in 14 buildings and had weighted
average annual asking rental rates ranging from $17.22 to $17.81 per square foot
with a direct vacancy rate of 26.9%. Primary tenants at this Property include
Pepperdine University (82,441 square feet) which is subject to a triple net
lease expiring in the year 2002, and Crawford & Co. (20,347). Aggregate square
footage of leases expiring in 1996, 1997, and 1998 represent 1.3%, 5.9% and
15.6% of the Property's occupied square footage, respectively.
BRISTOL PLAZA. Bristol Plaza is a four-story office building completed in
1982 of steel-frame construction with a brushed aluminum and reflective glass
exterior. The Property contains 84,014 rentable square feet and 320 parking
spaces. The Property is within 1/2 mile of the I-405 and I-90 Freeways and La
Cienega Boulevard, a major north-south artery. As of April 30, 1996, the
Property was 78.7% leased with an average Adjusted Annualized Base Rent per
leased square foot of $18.02. According to C&W, as of April 30, 1996, the
Bristol Plaza Peer Group contained approximately 1,873,463 square feet of office
space inventory in 14 buildings and had weighted average annual asking rental
rates ranging from $17.24 to $17.83 per square foot with a direct vacancy rate
of 25.6%. Primary tenants at this Property include Bristol A/R (12,163 square
feet) and the State of California (10,527 square feet). No other tenant
comprises more than 8% of the Property's aggregate square footage. Aggregate
square footage of leases expiring in 1996, 1997, and 1998 represent 5.2%, 5.9%
and 36.1% of the Property's occupied square footage, respectively.
PROPERTY LOCATED IN THE LAX OFFICE SUBMARKET:
SKYVIEW CENTER. Skyview Center consists of two 11-and 12-story office
towers completed in 1981 and 1987, respectively, of steel frame construction
with a reflective glass and painted metal mullions exterior. The buildings were
renovated in 1995. The Property contains approximately 386,294 rentable square
feet with 393 parking spaces. Adjacent to the Property is a 14.4 acre surface
parking lot containing approximately 2,000 parking spaces that are utilized as
short and long term airport parking. Each building comprises approximately 50%
of the total rentable area. As of April 30, 1996, the Property was 80.6% leased
with an average Adjusted Annualized Base Rent per leased square foot of $16.87.
According to C&W, as of April 30, 1996, the Skyview Center Peer Group contained
approximately 2,645,382 square feet of office space inventory in 11 buildings
located along the Century Boulevard and in El Segundo with weighted average
annual asking rental rates ranging from $17.68 to $20.48 per square foot with a
direct vacancy rate of 13.8%. Primary tenants at this Property include Logicon,
Inc. (74,174 square feet), Learning Tree International (34,145 square feet) and
American Tours International (32,586 square feet). Aggregate square footage of
leases expiring in 1996, 1997, and 1998 represent 3.0%, 10.1% and 7.2% of the
Property's occupied square footage, respectively.
70
<PAGE>
PROPERTY LOCATED IN THE 6000 BLOCK OF WILSHIRE BOULEVARD OFFICE MICROMARKET(1):
THE NEW WILSHIRE. The New Wilshire is a 16-story office tower completed in
1986 of steel frame construction with a tempered vision and spandrel glass
curtain wall exterior. The Property contains approximately 202,544 rentable
square feet and 398 parking spaces. As of April 30, 1996 the Property was
84.1% leased with an average Adjusted Annualized Base Rent per leased square
foot of $20.48. According to C&W, as of April 30, 1996, The New Wilshire
Peer Group contained approximately 3,098,896 square feet of office space
inventory in seven buildings and had weighted average annual asking rental
rates ranging from $20.04 to $23.90 per square foot with a direct vacancy
rate of 19.9%. Primary tenants at this Property include Grey Advertising
(47,652 square feet), Muse Cordero (15,551 square feet) and Hallmark
Entertainment (14,379 square feet). Aggregate square footage of leases
expiring in 1996, 1997, and 1998 represent 13.5%, 14.4% and 16.7% of the
Property's occupied square footage, respectively.
- ------------------------
(1) The Company defines the geographical location where this Property is
located as a separate office micromarket. While C&W defines this location
as a segment of the Miracle Mile office submarket, the Company believes
that this location functions as a separate office micromarket which is
independent of the overall Miracle Mile office submarket. The Company
further believes that the 6000 Block of Wilshire Boulevard office
micromarket is primarily influenced by, and is a peripheral or satellite
micromarket of, the adjacent Beverly Hills office submarket.
LOS ANGELES NORTH OFFICE MARKET SECTOR
The Los Angeles North office market sector, as defined by C&W, encompasses
four market areas located primarily in the San Fernando Valley, Santa Clarita
Valley, and Conejo Valley areas of Los Angeles County, and portions of
southeastern Ventura County. The four primary markets in the Los Angeles North
office market sector include: Simi/Conejo Valley, West San Fernando Valley,
Central San Fernando Valley, and East San Fernando Valley/Tri Cities, with each
of these office markets in turn composed of several office submarkets.
Map of Los Angeles North office market sector.
The distinct office submarkets within The Los Angeles North sector are
indicated in the table below. According to C&W, there are approximately
39,400,000 square feet of office space inventory in the Los Angeles North office
market sector which comprise approximately 23% of the office space inventory in
Los
71
<PAGE>
Angeles County. As of December 31, 1995 the collective submarkets within the Los
Angeles North office market sector had a direct vacancy rate of 14.4%, with
weighted average annual asking rents of $20.80 per square foot.
The Company owns seven Properties located in the Los Angeles North office
market sector that collectively contain approximately 976,153 rentable square
feet which represents approximately 24% of the total rentable square footage of
the Properties. The Properties are located in the office submarkets of Westlake
Village, Calabasas, Woodland Hills, Encino, Glendale, Burbank City Center and
Pasadena. Set forth below is detailed submarket information regarding the Los
Angeles North sector.
LOS ANGELES NORTH
OFFICE SUBMARKET STATISTICS
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
DIRECT NET WTD. AVG.
NUMBER DIRECT VACANCY ABSORPTION ASKING
SUBMARKET INVENTORY OF BLDGS AVAILABILITIES(1) RATE YTD 1995 RENTAL RATE
- ------------------------------ ---------- -------- ------------------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
SIMI/CONEJO VALLEY............ 4,537,562 87 510,332 11.2% 243,948 $18.36
Simi Valley................. 196,326 6 28,401 14.5% 32,363 $14.64
Thousand Oaks/Newbury
Park....................... 701,607 14 239,761 34.2% (597) $19.80
Westlake Village............ 1,735,399 32 149,247 8.6% 176,534 $17.16
Agoura Hills................ 497,672 10 40,588 8.2% (7,747) $15.48
Calabasas................... 1,406,558 25 52,335 3.7% 43,395 $19.32
WEST SAN FERNANDO VALLEY...... 8,487,933 96 1,404,681 16.5% 209,106 $21.60
Northridge/Reseda........... 266,000 5 14,408 5.4% 110,394 $16.92
Tarzana..................... 508,929 10 95,615 18.8% 11,998 $19.08
Canoga Park/Chatsworth...... 1,316,333 24 279,918 21.3% (109,904) $16.32
Warner Center............... 5,325,021 39 887,559 16.7% 164,899 $23.88
Woodland Hills.............. 1,071,650 18 127,181 11.9% 31,719 $18.84
CENTRAL SAN FERNANDO VALLEY... 8,525,170 111 1,528,178 17.9% (181,315) $19.68
Encino...................... 3,910,209 39 627,549 16.0% (90,048) $21.36
Sherman Oaks................ 2,264,136 27 429,972 19.0% (7,327) $20.40
Van Nuys.................... 1,442,363 27 293,101 20.3% (38,627) $17.16
Park City/Granada/Mission
Hills...................... 386,090 7 64,839 16.8% (27,904) $15.84
Valencia/Newhall............ 522,372 11 112,717 21.6% (17,409) $17.04
EAST SAN FERNANDO VALLEY/TRI-
CITIES....................... 17,805,145 173 2,239,026 12.6% (75,610) $21.61
Burbank-Media District...... 2,043,350 15 31,937 1.6% 87,406 $28.43
Burbank-City Center......... 1,710,879 23 242,563 14.2% (26,003) $18.83
Glendale.................... 5,052,071 44 799,750 15.8% (151,308)(2) $23.16
Pasadena.................... 5,542,296 57 732,964 13.2% (105,482) $21.47
Pasadena East............... 574,421 6 206,210 35.9% (4,418) $18.69
Studio City/Universal
City....................... 1,763,500 15 79,999 4.5% 56,744 $25.20
North Hollywood............. 1,118,628 13 145,603 13.0% 67,451 $19.08
---------- --- ---------- ------- ------------ -----------
TOTAL..................... 39,355,810 467 5,682,217 14.4% 196,129 $20.80
---------- --- ---------- ------- ------------ -----------
---------- --- ---------- ------- ------------ -----------
</TABLE>
- --------------
Source: Cushman & Wakefield
(1) Does not include currently leased but available sublease space.
(2) The negative absorption in the Glendale office submarket during 1995
primarily reflects the activity of one building, where the Bank of America
vacated approximately 200,000 square feet, and is in contrast to the
positive absorption experienced in 1993 and 1994. During the first quarter
of 1996 two major
72
<PAGE>
entertainment tenants, Walt Disney and Turner Animation, entered into leases
in the Glendale office submarket of 150,000 square feet and 70,000 square
feet, respectively, both of which are located in the premises vacated in
1995 by Bank of America.
PROPERTY LOCATED IN THE WESTLAKE VILLAGE OFFICE SUBMARKET:
5601 LINDERO CANYON. 5601 Lindero Canyon is a two-story office building
completed in 1989 of tilt up concrete construction with a white concrete and
black glass facade. The Property contains approximately 105,830 rentable
square feet and 415 parking spaces. As of April 30, 1996, the building was
100% triple net leased with an average Adjusted Annualized Base Rate per
leased square foot of $11.15. According to C&W, as of April 30, 1996, the
5601 Lindero Canyon Peer Group contained approximately 630,451 square feet
of office space inventory in 9 buildings and had a weighted average annual
asking rental rate of $19.03 per square foot with a direct vacancy rate of
4.7%. The Property has two tenants, Hewlett-Packard (53,700 square feet) and
Candle Corporation (52,130 square feet), both of which operate under triple
net leases that expire in 2002.
PROPERTY LOCATED IN THE CALABASAS OFFICE SUBMARKET:
CALABASAS COMMERCE CENTER. Calabasas Commerce Center is comprised of four,
one- and two-story office buildings completed in 1990. The Property contains
approximately 123,121 rentable square feet and 464 surface parking spaces.
As of April 30, 1996, the Property was 100% leased with an average Adjusted
Annualized Base Rent per leased square foot of $17.14. According to C&W, as
of April 30, 1996, the Calabasas Commerce Center Peer Group contained
approximately 371,634 square feet of office space inventory in five
buildings and had a weighted average annual asking rental rate of $19.16 per
square foot with a direct vacancy rate of 5.4%. Primary tenants at this
Property include the City of Calabasas (9,243 square feet), Wyle
Laboratories (10,841 square feet), Novalogic Inc.(13,932 square feet), Fort
Dearborn Life Insurance (9,128 square feet) and Breath Assure (8,613 square
feet). One tenant, XIRCOM, Inc. leases an entire building comprising
approximately 46,321 square feet. XIRCOM, Inc. vacated the property in 1994
in order to relocate to another office building that could accommodate its
expansion requirements. To date, XIRCOM, Inc. has continued to meet all of
its rental payment obligations under its lease, which expires in 1997, and
is currently attempting to sublease its space. Aggregate square footage of
leases expiring in 1996, 1997 and 1998 represent 7.4%, 55.8% and 3.6% of the
Property's occupied square footage, respectively.
PROPERTY LOCATED IN THE WOODLAND HILLS OFFICE SUBMARKET:
WOODLAND HILLS FINANCIAL CENTER. Woodland Hills Financial Center is a
12-story office tower with an adjacent four-story office building completed
in 1972 and renovated in 1995. The Property contains approximately 221,790
rentable square feet and 510 parking spaces. As of April 30, 1996, the
building was 86.7% leased with an average Adjusted Annualized Base Rent per
leased square foot of $21.81. According to C&W, as of April 30, 1996, the
Woodland Hills Financial Center Peer Group contained approximately 854,004
square feet of office space inventory in six buildings and had weighted
average annual asking rental rates ranging from $22.50 to $22.97 per square
foot with a direct vacancy rate of 10.0%. Primary tenants at this Property
include Presidential Mortgage (19,600 square feet), Dennison, Bennet & Press
(14,386 square feet), Pacific Homes (13,989 square feet) and Wells Fargo
Bank (8,983 square feet). Aggregate square footage of leases expiring in
1996, 1997 and 1998 represent 15.1%, 7.7%, and 23.0% of the Property's
occupied square footage, respectively.
PROPERTY LOCATED IN THE ENCINO OFFICE SUBMARKET:
16000 VENTURA BOULEVARD. 16000 Ventura Boulevard is a 12-story office tower
completed in 1980 of steel reinforced concrete with a blue glass exterior.
The building was renovated in 1996. The Property contains approximately
178,341 rentable square feet and 630 parking spaces. As of April 30, 1996,
the building was 85.8% leased with an average Adjusted Annualized Base Rent
per leased square foot of $19.63. According to C&W, as of April 30, 1996,
the 16000 Ventura Boulevard Peer Group contained approximately 2,418,206
square feet of office space inventory in 12 buildings and had weighted
average annual asking rental rates ranging from $20.21 to $22.45 per square
foot with a direct vacancy rate of
73
<PAGE>
15.0%. Primary tenants at this Property include Barrister Executive Suites
(16,142 square feet), Information Technology (8,665 square feet), Greenberg
& Bass (8,814 square feet) and Cohen & Steinbrech (8,199 square feet).
Aggregate square footage of leases expiring in 1996, 1997 and 1998 represent
9.2%, 31.4% and 19.5% of the Property's occupied square footage,
respectively.
PROPERTY LOCATED IN THE GLENDALE OFFICE SUBMARKET:
425 WEST BROADWAY. 425 West Broadway is a four story office building
completed in 1984 of steel reinforced concrete with a concrete panel and
reflective glass exterior. The building was renovated in 1996. The Property
contains approximately 71,489 rentable square feet with 205 parking spaces.
As of April 30, 1996, the Property was 89.9% leased with an average Adjusted
Annualized Base Rent per leased square foot of $19.45. According to C&W, as
of April 30, 1996, the 425 West Broadway Peer Group contained approximately
409,078 square feet of office space inventory in four buildings and had
weighted average annual asking rental rates ranging from $19.78 to $20.43
per square foot with a direct vacancy rate of 11.0%. Primary tenants at this
Property include Glendale News (18,189 square feet) and TIB Insurance
(14,075 square feet). Aggregate square footage of leases expiring in 1996,
1997 and 1998 represent 2.7%, 6.3% and 38.4% of the Property's occupied
square footage, respectively.
PROPERTY LOCATED IN THE BURBANK CITY CENTER OFFICE SUBMARKET:
303 GLENOAKS. 303 Glenoaks is a 10-story office tower completed in 1983 of
steel frame construction with a black glass curtain wall exterior. The
Property, which was renovated in 1996, contains approximately 175,449
rentable square feet with 526 parking spaces. As of April 30, 1996, the
Property was 95.7% leased with an average Adjusted Annualized Base Rent per
leased square foot of $20.38. According to C&W, as of April 30, 1996, the
303 Glenoaks Peer Group contained approximately 452,850 square feet of
office space inventory in 6 buildings and had weighted average annual asking
rental rates ranging from $21.28 to $21.85 per square foot with a direct
vacancy rate of 17.5%. Primary tenants at this Property include DiC
Entertainment (51,708 square feet), Insurance Company of the West (23,450
square feet), New Wave Entertainment (18,639 square feet), NCI (11,142
square feet) and Lockheed Finance Corporation (10,319 square feet).
Aggregate square footage of leases expiring in 1996, 1997 and 1998 represent
0.4%, 1.6% and 5.1% of the Property's occupied square footage, respectively.
PROPERTY LOCATED IN THE PASADENA OFFICE SUBMARKET:
70 SOUTH LAKE. 70 South Lake is an 11-story office tower completed in 1982
of steel frame construction with concrete panelled curtain wall, aluminum
spandrel and glass exterior. The building was renovated in 1994. The
Property contains approximately 100,133 rentable square feet and 329 parking
spaces. As of April 30, 1996, the Property was 76.6% leased with an average
Adjusted Annualized Base Rent per leased square foot of $20.83. According to
C&W, as of April 30, 1996, the 70 South Lake Peer Group contained
approximately 1,651,940 square feet of office space inventory in eight
buildings and had weighted average annual asking rental rates ranging from
$23.04 to $25.71 per square foot with a direct vacancy rate of 9.2%. Primary
tenants at this Property include Countrywide Funding Corporation (16,726
square feet), Union Bank (18,481 square feet) and Smith Barney (9,415 square
feet). No leases expire in the next two years and 10.9% of the Property's
occupied square footage expires in 1998.
74
<PAGE>
LOS ANGELES SOUTH OFFICE MARKET SECTOR
The Los Angeles South office market sector, as defined by C&W, encompasses
three market areas located primarily in the South Bay area of Los Angeles County
and is the smallest office market sector in Los Angeles County. The Los Angeles
South office market sector is composed of three primary office markets: El
Segundo, Torrance and Long Beach, with each of the office markets in turn
composed of a number of submarkets.
[Insert Map of Los Angeles South Sector]
The Los Angeles South office market sector contains nine distinct office
submarkets as outlined in the table below. According to C&W, there are
approximately 27,336,900 square feet of office space inventory in the Los
Angeles South office market sector which comprise approximately 16% of the
office space inventory in Los Angeles County. As of December 31, 1995 the
collective office submarkets within the Los Angeles South office market sector
had a direct vacancy rate of 17.6%, with weighted average annual asking rents of
$18.14 per square foot.
The Company owns five Properties located in the Los Angeles South office
market sector that collectively contain approximately 749,273 rentable square
feet, which represents approximately 19% of the total rentable square footage of
the Properties. The Properties within the Los Angeles South office market sector
are all located in the Long Beach office market. The Long Beach office market is
located south of El Segundo and Torrance and north of Huntington Beach. The Long
Beach office market is composed of five office submarkets: Long Beach Airport/
I-405 Freeway Corridor, North Long Beach, Downtown Long Beach, Long Beach
Marina, and Cerritos/Norwalk. The Long Beach market is one of the more
prestigious office markets in the Los Angeles South office market sector.
According to C&W, as of December 31, 1995 the Long Beach and adjacent office
market had an office space inventory of approximately 10,500,161 square feet in
89 buildings with a direct vacancy rate of 17.6% and weighted average annual
asking rents of $18.64, down from a direct vacancy rate of 17.3% with weighted
average annual asking rents of $19.20 per square foot as of December 31, 1994.
Set forth below is detailed submarket information regarding the Los Angeles
South sector:
75
<PAGE>
LOS ANGELES SOUTH
OFFICE SUBMARKET STATISTICS
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
DIRECT NET WTD. AVG.
NUMBER DIRECT VACANCY ABSORPTION ASKING
SUBMARKET INVENTORY OF BLDGS AVAILABILITIES(1) RATE YTD 1995 RENTAL RATE
- ------------------------------ ---------- -------- ------------------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
EL SEGUNDO.................... 9,424,153 69 1,471,128 15.6% 326,730 $17.88
TORRANCE...................... 7,412,586 82 1,490,376 20.1% (307,739) $17.76
LONG BEACH.................... 10,500,161 89 1,852,079 17.6% 349,663 $18.64
Long Beach Airport/I-405
Fwy. Corridor.............. 2,130,258 19 319,077 15.0% 419,823 $18.48
North Long Beach............ 1,020,376 13 222,907 21.8% (46) $15.00
Downtown Long Beach......... 3,811,553 20 999,351 26.2% (129,899) $19.92
Long Beach Marina........... 457,018 6 55,247 12.1% 19,419 $18.96
Cerritos/Norwalk............ 3,080,956 31 255,497 6.7% 40,366 $16.95
---------- --- ---------- ------- ------------ -----------
TOTAL..................... 27,336,900 240 4,813,583 17.6% 368,654 $18.14
---------- --- ---------- ------- ------------ -----------
---------- --- ---------- ------- ------------ -----------
</TABLE>
- --------------
Source: Cushman & Wakefield
(1) Does not include currently leased but available sublease space.
PROPERTIES LOCATED IN THE LONG BEACH AIRPORT/I-405 FREEWAY CORRIDOR OFFICE
SUBMARKET:
4811 AIRPORT PLAZA DRIVE. 4811 Airport Plaza Drive is a six-story office
building completed in 1987 of steel frame construction and red granite and
reflective glass exterior. The building was renovated in 1995. The Property
contains approximately 121,610 rentable square feet with 707 parking spaces
and is subject to a ground lease with the City of Long Beach which expires
in 2055. As of April 30, 1996, the building was 100% triple net leased to
McDonnell Douglas at an Adjusted Annualized Base Rent per leased square foot
of $8.64. According to C&W, as of April 30, 1996, the 4811 Airport Plaza
Drive Peer Group contained approximately 1,230,855 square feet of office
space inventory in 9 buildings and had weighted average annual asking rental
rates ranging from $22.81 to $26.26 per square foot with a direct vacancy
rate of 4.9%. The McDonnell Douglas lease expires in 2005.
4900 AND 4910 AIRPORT PLAZA DRIVE. 4900 and 4910 Airport Plaza Drive are
two three-story, connected office buildings completed in 1987 of steel frame
construction with granite and reflective glass exteriors. The buildings were
renovated in 1995. The Property contains approximately 150,403 rentable
square feet. The Property has the use of 520 parking spaces and is subject
to a ground lease with the City of Long Beach which expires in 2055. As of
April 30, 1996, the Property was 100% triple net leased to McDonnell Douglas
at an Adjusted Annualized Base Rent per leased square foot of $7.80.
According to C&W, as of April 30, 1996, the 4900 and 4910 Airport Plaza
Drive Peer Group contained approximately 1,202,062 square feet of office
space inventory in nine buildings and had weighted average annual asking
rental rates ranging from $22.81 to $26.26 per square foot with a direct
vacancy rate of 5.1%. The McDonnell Douglas lease expires in 2005.
5000 EAST SPRING. 5000 East Spring is an eight-story office building
completed in 1989 of steel framed construction with a travertine marble and
reflective glass exterior. The building was renovated in 1995. The Property
contains 163,358 net rentable square feet and 2,504 parking spaces. The
Property is subject to a long term ground lease with the City of Long Beach
(master lessor) which expires in 2032. As of April 30, 1996, the building
was 87.0% leased with an average Adjusted Annualized Base Rent per leased
square foot of $19.93. According to C&W, as of April 30, 1996, the 5000 East
Spring Peer Group contained approximately 1,189,107 square feet of office
space inventory in nine buildings and had weighted average annual asking
rental rates ranging from $22.74 to $26.60 per square foot with a direct
vacancy rate of 4.6%. Primary tenants at this Property include PSI
Engineers, Inc. (13,896 square feet), Medical Eye Service (13,588 square
feet), Coast Federal Bank (11,646 square feet), Auto Insurance Specialists
(10,583 square feet), Sea-Land Service (9,112 square feet), Payless
Shoesource (9,680 square
76
<PAGE>
feet) and IDS Financial Services (6,387 square feet). Aggregate square
footage of leases expiring in 1996, 1997 and 1998 represent 10.6%, 3.4% and
2.0% of the Property's occupied square footage, respectively.
PROPERTY LOCATED IN THE DOWNTOWN LONG BEACH OFFICE SUBMARKET:
100 WEST BROADWAY. 100 West Broadway is a six-story office building
completed in 1987 of steel frame construction with a concrete and reflective
glass exterior. The building was renovated in 1996. The Property contains
approximately 191,727 rentable square feet and 645 parking spaces. As of
April 30, 1996 the Property was 84.4% leased with an average Adjusted
Annualized Base Rent per leased square foot of $20.21. According to C&W, as
of April 30, 1996, the 100 West Broadway Peer Group contained approximately
1,561,223 square feet of office space inventory in 10 buildings and had a
weighted average annual asking rental rates ranging from $18.77 to $20.32
per square foot with a direct vacancy rate of 34.4%. Primary tenants at this
Property include Earth Technology Corporation (50,750 square feet), Inchcape
(26,195 square feet), the General Services Administration (16,738 square
feet) and Pacific Maritime (15,338 square feet). Aggregate square footage of
leases expiring in 1996, 1997 and 1998 represent 1.1%, 5% and 10.5% of the
Property's occupied square footage, respectively.
PROPERTY LOCATED IN THE CERRITOS/NORWALK OFFICE SUBMARKET:
12501 EAST IMPERIAL HIGHWAY. 12501 East Imperial Highway is a six-story
office building completed in 1978. The building was renovated in 1994. The
Property contains approximately 122,175 rentable square feet and 515 parking
spaces. As of April 30, 1996, the Property was 91.9% leased with an average
Adjusted Annualized Base Rent per leased square foot of $15.85. According to
C&W, as of April 30, 1996, the 12501 East Imperial Highway Peer Group
contained approximately 1,899,992 square feet of office space inventory in
16 buildings and had a weighted average annual asking rental rates ranging
from $18.32 to $18.47 per square foot with a direct vacancy rate of 18.5%.
Primary tenants at this Property include GTE California (63,772 square
feet), Mead Corporation (27,913 square feet) and IBM (20,620 square feet).
No leases expire in the next two years and 24.9% of the Property's occupied
square footage expires in 1998.
ORANGE COUNTY OFFICE MARKET AND PROPERTIES
The Orange County office market contains several distinct office markets,
including, among others, the West County, Tri-Freeway Area, Central County,
Greater Airport Area, South County, and North County office markets, which are
in turn, composed of numerous submarkets. According to C&W, there are
approximately 52,668,350 square feet of office space inventory in the Orange
County office market. As of December 31, 1995 the collective submarkets within
the Orange County office market had a direct vacancy rate of 15.5%, with
weighted average annual asking rents of $17.28 per square foot.
[Insert map of Orange County]
77
<PAGE>
The Orange County office market is currently in the midst of a recovery from
the recent real estate recession. Direct vacancy levels, which were in excess of
20% in 1991, have declined to 15.5% as of December 31, 1995. The Orange County
office market is driven by the Greater Airport Area office market which
comprises approximately 48% of the office space inventory in Orange County. The
Company owns two Properties in Orange County in the Huntington Beach and Anaheim
Stadium Area office submarkets that collectively contain 224,746 rentable square
feet representing approximately 6% of the total rentable square footage of the
Properties. Set forth below is detailed market information regarding the Orange
County office market.
ORANGE COUNTY
OFFICE MARKET AND SUBMARKET STATISTICS
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
DIRECT NET WTD. AVG.
NUMBER DIRECT VACANCY ABSORPTION ASKING
SUBMARKET INVENTORY OF BLDGS AVAILABILITIES(1) RATE YTD 1995 RENTAL RATE
- ------------------------------ ---------- -------- ------------------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
WEST COUNTY................... 3,901,199 64 696,122 17.8% (93,203) $15.12
Seal Beach.................. 295,019 4 17,646 6.0% 4,077 $24.96
Westminster................. 205,700 4 29,638 14.4% (11,482) $15.00
Huntington Beach............ 1,014,519 18 219,035 21.6% 21,131 $15.48
Fountain Valley............. 549,912 9 80,134 14.6% (11,189) $15.84
Garden Grove................ 893,809 12 213,168 23.8% (54,632) $14.28
Los Alamitos/Stanton........ 266,502 5 85,580 32.1% (20,233) $12.36
Cypress..................... 675,738 12 50,921 7.5% (20,875) $17.04
TRI-FREEWAY AREA.............. 9,523,392 107 2,023,109 21.2% 85,793 $16.56
Parkcenter Area............. 2,598,284 41 444,188 17.1% 72,936 $14.40
Anaheim Stadium Area........ 2,472,409 36 414,147 16.8% (45,422) $15.48
The City Area............... 2,291,191 15 627,817 27.4% 9,677 $17.16
Main Place Area............. 2,161,508 15 536,957 24.8% 48,602 $18.36
CENTRAL COUNTY................ 5,656,141 102 1,049,902 18.6% 8,065 $14.04
GREATER AIRPORT AREA.......... 24,992,997 252 3,333,179 13.3% 235,485 $19.32
SOUTH COUNTY.................. 4,979,988 100 595,528 12.0% 71,259 $18.12
NORTH COUNTY.................. 3,614,633 54 442,671 12.2% 27,940 $16.20
---------- --- ---------- ------- ------------ -----------
TOTAL..................... 52,668,350 679 8,140,511 15.5% 335,339 $17.28
---------- --- ---------- ------- ------------ -----------
---------- --- ---------- ------- ------------ -----------
</TABLE>
- --------------
Source: Cushman & Wakefield
* Does not include currently leased but available sublease space.
PROPERTY LOCATED IN THE HUNTINGTON BEACH OFFICE SUBMARKET:
5832 BOLSA AVENUE. 5832 Bolsa Avenue is a two-story office building
completed in 1985 of steel frame construction with a concrete and glass
panel exterior. The Property contains approximately 49,355 rentable square
feet and 380 parking spaces. As of April 30, 1996, the building was 100%
triple net leased to GTE California at an Adjusted Annualized Base Rent per
leased square foot of $12.96. According to C&W, as of April 30, 1996, the
5832 Bolsa Avenue Peer Group contained approximately 860,277 square feet of
office space inventory in 12 buildings and had weighted average annual
asking rental rates ranging from $15.68 to $16.43 per square foot with a
direct vacancy rate of 21.8%. The GTE California lease expires on April 30,
2000.
PROPERTY LOCATED IN THE ANAHEIM STADIUM AREA OFFICE SUBMARKET:
ANAHEIM CITY CENTRE. Anaheim City Centre is a 10-story office tower
completed in 1986 of steel reinforced concrete construction with a red
travertine marble and black reflective glass exterior. The building was
renovated in 1991. The Property contains approximately 175,391 rentable
square feet and
78
<PAGE>
679 parking spaces. The parking structure is subject to a long term ground
lease with the City of Anaheim that expires in 2034. As of April 30, 1996,
the Property was 85.5% leased with an average Adjusted Annualized Base Rent
per leased square foot of $15.24. According to C&W, as of April 30, 1996,
the Anaheim City Centre Peer Group contained approximately 3,352,488 square
feet of office space inventory in 11 buildings and had weighted average
annual asking rental rates ranging from $19.05 to $19.30 per square foot
with a direct vacancy rate of 11.7%. Primary tenants at this Property
include Intracorp (54,179 square feet), Computer Learning (22,042 square
feet) and McGladrey Pullen (18,032 square feet). No leases expire in 1996
and the aggregate square footage of leases expiring in 1997 and 1998
represent 3.2% and 37.6% of the Property's occupied square footage,
respectively.
SAN DIEGO COUNTY OFFICE MARKET AND PROPERTY
The San Diego County office market contains eight distinct office
submarkets, including South Bay, Central City (which includes Downtown San
Diego), East County, Mission Valley/Kearny Mesa, La Jolla/ Morena, North City
(which includes the University Towne Center), the I-15 Corridor and the North
Coast. According to C&W, there is approximately 58,325,238 square feet of office
space inventory in the San Diego County office market. As of December 31, 1995
the collective submarkets within the San Diego County office market had a direct
vacancy rate of 14.6%. The San Diego County office market is recovering from an
office market recession, having experienced five straight years of positive
absorption and increasing occupancy, with the direct vacancy rate decreasing
4.8% over this period from the 1991 direct vacancy rate of 19.4%.
[Map of San Diego County]
The two focal points of the San Diego County office market are Downtown San
Diego, which is considered to be the primary component of the Central City
office submarket, and University Towne Center which is the most significant
component of the North City office submarket. Each of the office submarkets in
San Diego County has developed along the path of the San Diego County's freeway
system. Each office submarket's building type and tenant appeal has generally
corresponded to its proximity to Downtown San Diego and University Towne Center,
with predominantly mid-rise and high-rise office buildings within a 15 mile
radius of Downtown San Diego and low rise office buildings in business parks in
the outlying submarkets. Historically, most development moved east and north
from these focal points. The Downtown San
79
<PAGE>
Diego portion of the Central City office submarket is considered to be the
primary office submarket in San Diego County, with its main competition being
the La Jolla and North City (University Towne Center) office submarkets. Set
forth below is detailed submarket information regarding the San Diego County
submarket:
SAN DIEGO COUNTY
OFFICE SUBMARKET STATISTICS
AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
DIRECT
DIRECT VACANCY NET ABSORPTION
SUBMARKET INVENTORY AVAILABILITIES* RATE YTD 1995
- ------------------------------------------------------------ ---------- --------------- ------- --------------
<S> <C> <C> <C> <C>
SAN DIEGO MARKET
South Bay................................................. 2,176,580 195,528 9.0% (41,224)
Central City (includes Downtown San Diego)................ 16,059,577 2,689,327 16.7% 270,856
East County............................................... 2,143,941 284,809 13.3% 11,990
Mission Valley/Kearny Mesa................................ 12,558,657 2,160,842 17.2% (38,105)
La Jolla/Morena........................................... 2,400,630 334,533 13.9% 87,849
North City (University Towne Center)...................... 12,801,915 1,584,187 12.4% 98,473
I-15 Corridor............................................. 4,768,885 669,841 14.0% 25,512
North Coast............................................... 5,415,053 622,373 11.5% 73,735
---------- --------------- ------- -------
TOTAL................................................... 58,325,238 8,541,440 14.6% 489,086
---------- --------------- ------- -------
---------- --------------- ------- -------
</TABLE>
- --------------
Source: Cushman & Wakefield
* Does not include currently leased but available sublease space.
PROPERTY LOCATED IN THE DOWNTOWN SAN DIEGO PORTION OF THE CENTRAL CITY OFFICE
SUBMARKET:
IMPERIAL BANK TOWER. Imperial Bank Tower is a 24-story office building
completed in 1982 and renovated in 1996. As of March 31, 1996, Imperial Bank
Tower had a book value equal to or greater than 10% of the total assets of
the Company. The Property contains approximately 547,578 rentable square
feet and 382 parking spaces in an adjacent parking structure. The Property
is located in downtown San Diego's financial district approximately 1/2 mile
from Interstate 5. The building is situated on approximately 30,056 square
feet of land and includes a five-story atrium located on a 4,792 square foot
parcel subject to a ground lease expiring in 2069. The Company has an option
to purchase this parcel at fair market value. The adjacent 382-stall parking
garage is situated on a 24,829 square foot parcel subject to a ground lease
expiring in 2076, which may be purchased by the Company after 2032 at fair
market value. Additional parking is provided on a lot east of the building
that is subject to a ground lease expiring in the year 2000. The average
occupancy rate of the building was 88.3%, 88.3%, 84.4%, 80.8% and 81.9% for
the years 1991 to 1995, respectively. The net effective annual rent per
square foot of the building for the same period, from 1991 to 1995, was
$18.26, $15.96, $19.00, $18.76 and $17.72, respectively. As of April 30,
1996, the building was 82.0% leased with an average Adjusted Annualized Base
Rent per leased square foot of $17.95. According to C&W, as of April 30,
1996, the Imperial Bank Tower Peer Group contained approximately 4,087,971
square feet of office space inventory in 11 buildings and had weighted
average annual asking rental rates ranging from $18.53 to $24.89 per square
foot with a direct vacancy rate of 11.9%. Primary tenants include Latham &
Watkins (56,425 square feet), Imperial Bank Realty Corp. (38,855 square
feet), Merrill Lynch (32,455 square feet), Deloitte & Touche (30,279 square
feet), Arthur Anderson & Co. (18,754 square feet) and three agencies of the
United States government. Latham & Watkins, a law firm, is the only tenant
which occupies ten percent or more of the rentable square footage of the
building. Pursuant to the terms of its lease, Latham & Watkins pays annual
base rent of approximately $1.05 million increasing to approximately $1.33
million in 1999 for the remainder of the lease term which expires in 2004.
In addition, Latham & Watkins has two renewal options of five years each,
three options to expand and two termination options exercisable on December
31, 1998 and May 1, 2001, respectively. Aggregate square footage of leases
expiring in 1996, 1997 and 1998 represent 4.3%, 7.2%, 6.9% of the Property's
occupied square footage, respectively.
80
<PAGE>
The following table sets forth a schedule of lease expirations as of April
30, 1996 for Imperial Bank Tower, assuming no tenants elect to renew their
leases at their scheduled expirations or elect to terminate their leases prior
to their scheduled expirations:
<TABLE>
<CAPTION>
PERCENTAGE OF
SQUARE FOOTAGE PERCENTAGE OF ADJUSTED ANNUALIZED AGGREGATE PORTFOLIO
YEAR OF LEASE NUMBER OF OF EXPIRING AGGREGATE PORTFOLIO BASE RENT OF ADJUSTED ANNUALIZED
EXPIRATION LEASES EXPIRING LEASES LEASED SQUARE FEET EXPIRING LEASES BASE RENT
- ----------------------- --------------- -------------- ------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C>
1996................... 3 19,282 0.54% $ 404,772 0.61%
1997................... 5 32,492 0.91 1,088,244 1.64
1998................... 6 30,918 0.87 509,238 0.77
1999................... 3 15,702 0.44 253,268 0.38
2000................... 4 43,243 1.22 714,871 1.08
2001................... 4 33,853 0.95 505,724 0.76
2002................... 6 88,170 2.48 1,660,502 2.51
2003................... 3 20,855 0.59 366,075 0.55
2004................... 3 78,838 2.22 1,155,094 1.74
2005................... 4 67,395 1.90 1,205,657 1.82
2008 and thereafter.... 2 18,463 0.52 201,315 0.30
--
------- ----- ------------------- -----
TOTAL.............. 43 449,211 12.63% $ 8,064,759 12.17%
--
--
------- ----- ------------------- -----
------- ----- ------------------- -----
</TABLE>
C&W MARKET STUDY
The C&W Market Study was prepared for the Company by Cushman & Wakefield of
California, Inc., which is a real estate service firm with significant
experience and expertise relating to the Southern California office markets and
the various submarkets therein. The information in the C&W Market Study reflects
data available at December 31, 1995 and does not reflect data or changes
subsequent to that date (except that C&W Peer Group information reflects data
available as of April 30, 1996). The information contained in the C&W Market
Study has been gathered by C&W from sources assumed to be reliable, including
publicly available records. Because records of all transactions are not readily
available, the information contained in the C&W Market Study may not reflect all
transactions occurring in the geographic area discussed in the C&W Market Study.
In addition, transactions that are reported may not be described accurately or
completely in the publicly available records. C&W shall not be responsible for
and does not warrant the accuracy or completeness of any such information
derived from such publicly available records (or information relating to
transactions that were not reported).
In connection with the C&W Market Study, C&W made numerous assumptions with
respect to industry performance, general business and economic conditions, and
other matters. Any estimates or approximations contained therein could
reasonably be subject to different interpretations by other parties. Because
predictions of future events are inherently subject to uncertainty, none of C&W,
the Company or any other person can assume that such predicted rental rates,
absorption, or other events will occur as outlined or predicted in the C&W
Market Study. Reported asking rental rates of properties, Replacement Cost Rents
or estimated replacement costs do not purport to necessarily reflect the rental
rates at which properties may actually be rented, actual rents required to
support new development or the actual cost of replacement. In many instances,
asking rents and actual rental rates differ significantly.
Changes in local, national and international economic conditions will affect
the markets described in the C&W Market Study. Therefore, C&W can give no
assurance that occupancy and absorption levels and rental rates as of the date
of the C&W Market Study will continue or that such occupancy levels and rental
rates will be attained at any time in the future. Forecasts of absorption rates,
rental activity, Replacement Cost Rents and replacement costs are C&W's
estimates as of the date of the C&W Market Study. Actual future market
conditions may differ materially from the forecasts and projections contained
therein.
C&W is a part of a national network of affiliated companies providing real
estate services. As such, from time to time, C&W and its affiliates have
provided and in the future may provide real estate related services, including
brokerage and leasing agent services, to the Company or its principals, or may
represent the
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Company, its principals or others doing business with the Company. C&W received
compensation of approximately $39,000 from the Company in connection with C&W's
preparation of the C&W Market Study.
COMPETITION
The Company may be competing with other owners and developers that have
greater resources and more experience than the Company. Additionally, the number
of competitive properties in any particular market in which the Company's
Properties are located could have a material adverse effect on both the
Company's ability to lease space at the Properties or any newly-acquired
property and on the rents charged at the Properties. The Company believes that
the Offering, the Credit Facility and its access as a public company to the
capital markets to raise funds during periods when conventional sources of
financing may be unavailable or prohibitively expensive will provide the Company
with substantial competitive advantages. Further, the Company believes that the
number of real estate developers has decreased as a result of the recessionary
market conditions and tight credit markets during the early 1990's as well as
the reluctance on the part of more conventional financing sources to fund
development and acquisition projects.
INSURANCE
The Operating Partnership carries comprehensive liability, fire, extended
coverage and rental loss insurance covering all of the Properties, with policy
specifications and insured limits which the Company believes are adequate and
appropriate under the circumstances. The Operating Partnership also carries
earthquake insurance on all of the Properties. There are, however, certain types
of losses that are not generally insured because they are either uninsurable or
not economically feasible to insure. Should an uninsured loss or a loss in
excess of insured limits occur, the Operating Partnership could lose its capital
invested in the Property, as well as the anticipated future revenues from the
Property and, in the case of debt which is with recourse to the Operating
Partnership, would remain obligated for any mortgage debt or other financial
obligations related to the Property. Any such loss would adversely affect the
Company. Moreover, as a general partner of the Operating Partnership, the
Company will generally be liable for any unsatisfied obligations other than
non-recourse obligations. The Company believes that the Properties are
adequately insured. In addition, in light of the California earthquake risk,
California building codes since the early 1970's have established construction
standards for all newly built and renovated buildings, including office
buildings, the current and strictest construction standards having been adopted
in 1984. Of the 24 Properties, 13 have been built since January 1, 1985 and the
Company believes that all of the Properties were constructed in full compliance
with the applicable standards existing at the time of construction. While
earthquakes have occurred in Southern California, the only loss the Company has
experienced as a result of earthquakes was minor damage to three of its
buildings due to the Northridge earthquake, which resulted in an extraordinary
loss of $601,000 in the year ended December 31, 1994. No assurance can be given
that material losses in excess of insurance proceeds will not occur in the
future.
ENVIRONMENTAL REGULATIONS
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and clean up hazardous or toxic substances or petroleum
product releases at such property and may be held liable to a governmental
entity or to third parties for property damage and for investigation and
clean-up costs incurred by such parties in connection with the contamination.
Such laws typically impose clean-up responsibility and liability without regard
to whether the owner knew of or caused the presence of the contaminants, and the
liability under such laws has been interpreted to be joint and several unless
the harm is divisible and there is a reasonable basis for allocation of
responsibility. The costs of investigation, remediation or removal of such
substances may be substantial, and the presence of such substances, or the
failure to properly remediate the contamination on such property, may adversely
affect the owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances at a disposal or treatment facility also may be
liable for the costs of removal or remediation of a release of hazardous or
toxic substances at such disposal or treatment facility, whether or not such
facility is owned or operated by such person. In addition, some environmental
laws create a lien on the contaminated
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site in favor of the government for damages and costs incurred in connection
with the contamination. Finally, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from such site.
Certain federal, state and local laws, regulations and ordinances govern the
removal, encapsulation or disturbance of ACM when such materials are in poor
condition or in the event of construction, remodeling, renovation or demolition
of a building. Such laws may impose liability for release of ACM and may provide
for third parties to seek recovery from owners or operators of real properties
for personal injury associated with ACM. In connection with its ownership and
operation of the Properties, the Company may be potentially liable for such
costs. ACM has been detected through sampling by environmental consultants at 70
South Lake, 16000 Ventura Boulevard and 9665 Wilshire. The non-friable ACM was
found in certain floor tiles and pipe wrappings at 16000 Ventura Boulevard and
70 South Lake and in vinyl floor tiles, carpet mastic, drywall mud/tape,
textured ceiling material, core insulation material and fireproofing at 9665
Wilshire. The non-friable ACM found at these Properties is not expected to
present a risk as long as it continues to be properly managed. The environmental
consultants recommended no further ACM sampling or removal action at any of the
Properties.
In the past two years, independent environmental consultants have conducted
or updated Phase I Assessments at the Properties. These Phase I Assessments have
included, among other things, a visual inspection of the Properties and the
surrounding area and a review of relevant state, federal and historical
documents. No invasive techniques such as soil or groundwater sampling were
performed. The environmental consultants who conducted the Phase I Assessment at
the Imperial Bank Tower recommended that a Phase II study be conducted with
respect to the possible presence of an underground storage tank situated under
the Property's adjacent parking garage, which is leased by the Company. The
Company does not believe that the environmental consultant's findings support
its recommendation and, therefore, has elected not to conduct a Phase II study
at the Imperial Bank Tower.
The Company's Phase I Assessments of the Properties have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations taken as a
whole, nor is the Company aware of any such material environmental liability.
Nevertheless, it is possible that the Company's Phase I Assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no assurance
that (i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company.
The Company believes that the Properties are in substantial compliance in
all material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products,
except as noted above. The Company has not been notified by any governmental
authority, and is not otherwise aware, of any material noncompliance, liability
or claim relating to hazardous or toxic substances or petroleum products in
connection with any of its present Properties, other than as noted above.
LEGAL PROCEEDINGS
As a result of its acquisition of the Properties, the Company will become a
successor party-in-interest to certain legal proceedings arising in the ordinary
course of business of the Arden Predecessors. The Company does not expect that
these proceedings, in the aggregate, will have a material adverse effect on the
Company.
EMPLOYEES
Upon consummation of the Offering and the Formation Transactions, the
Company will employ approximately 50 persons, including 7 senior officers and
personnel in the areas of acquisition and business development (3), property
management (27), financial services (11) and legal affairs (1).
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company will be expanded immediately following
consummation of the Offering to include the director nominees named below, each
of whom has been nominated for election and consented to serve. Upon election of
the director nominees, there will be a majority of directors who are not
employees or affiliates of the Company. Pursuant to the Charter, the Board of
Directors is divided into three classes of directors. The initial terms of the
first, second and third classes will expire in 1997, 1998 and 1999,
respectively. Beginning in 1997, directors of each class will be chosen for
three-year terms upon the expiration of their current terms and each year one
class of directors will be elected by the stockholders. The Company believes
that classification of the Board of Directors will help to assure the continuity
and stability of the Company's business strategies and policies as determined by
the Board of Directors. Holders of shares of Common Stock will have no right to
cumulative voting in the election of directors. Consequently, at each annual
meeting of stockholders, the holders of a majority of the shares of Common Stock
will be able to elect all of the successors of the class of directors whose
terms expire at that meeting.
The following table sets forth certain information with respect to the
directors, director nominees and executive officers of the Company immediately
following the consummation of this Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION TERM
- -------------------- --- ------------------------------------------------------------------- ---------
<S> <C> <C> <C>
Richard S. Ziman 53 Chairman of the Board and Chief Executive Officer 1999
Victor J. Coleman 35 President, Chief Operating Officer and Director 1999
Michele Byer 49 Chief Accounting Officer and Secretary
Brigitta B. Troy 54 Executive Vice President and Director of Acquisitions
Andrew J. Sobel 37 Executive Vice President and Director of Leasing
Herbert L. Porter 55 Senior Vice President and Director of Construction and Capital
Improvements
Carl D. Covitz 57 Director Nominee 1997
Kenneth B. Roath 60 Director Nominee 1997
Arthur Gilbert 83 Director Nominee 1998
Steven C. Good 54 Director Nominee 1998
</TABLE>
The following is a biographical summary of the experience of the directors,
director nominees and executive officers of the Company:
RICHARD S. ZIMAN. Mr. Ziman has served as the Chairman and Chief Executive
Officer of the Company and as a Director of the Company since its formation. He
has been involved in the real estate industry for over 25 years. In 1990, Mr.
Ziman formed Arden and has served as its Chairman of the Board and Chief
Executive Officer since its inception. In 1979 he co-founded Pacific Financial
Group, a diversified real estate investment and development firm headquartered
in Beverly Hills, of which he was the Managing General Partner. Mr. Ziman
received his Bachelor's Degree and his Juris Doctor Degree from the University
of Southern California and practiced law as a partner of the law firm of Loeb &
Loeb from 1971 to 1980, specializing in transactional and financing aspects of
real estate.
VICTOR J. COLEMAN. Mr. Coleman has served as the President and Chief
Operating Officer of the Company and as a Director of the Company since its
formation. He is also the President, Chief Operating
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Officer and co-founder of Arden. From 1987 to 1989, Mr. Coleman was Vice
President of Los Angeles Realty Services, Inc. and earlier in his career from
1985 to 1987 was Director of Marketing/Investment Advisor of Development Systems
International and an associate at Drexel Burnham Lambert specializing in private
placements with institutional and individual investors. Mr. Coleman received his
Bachelor's Degree from the University of California at Berkeley and received his
Master of Business Administration from Golden Gate University.
MICHELE BYER. Ms. Byer has served as Chief Accounting Officer and Secretary
of the Company since its formation. Ms. Byer has 28 years of experience in the
real estate industry, of which the last 13 have been with Arden and Pacific
Financial Group. Prior to joining Pacific Financial Group and the Company, Ms.
Byer was a practicing CPA with the firm Kenneth Leventhal & Company which
specialized in real estate. She received her Bachelor's Degree from the
University of California at Los Angeles.
BRIGITTA B. TROY. Ms. Troy has served as Executive Vice President and
Director of Acquisitions of the Company since its formation. She joined Arden in
1993 and was Director of Acquisitions for Pacific Financial Group from 1982 to
1989. During the period from 1989 to 1993, she was a principal of Esquire
Investment Partners, a real estate advisory company. A graduate of Radcliffe
College, Ms. Troy received her Juris Doctor Degree from the University of
Southern California Law School and a Master of Business Administration from UCLA
Graduate School of Management. Ms. Troy has over 15 years experience in the
commercial real estate business.
ANDREW J. SOBEL. Mr. Sobel has served as Executive Vice President and
Director of Leasing of the Company since its formation. He joined Arden in 1992.
Mr. Sobel is an attorney admitted to the State Bar of California in 1985 with 11
years of experience in the practice of real estate law. From 1990 to 1992, Mr.
Sobel was a sole practitioner. From 1987 to 1990 he was an attorney with the law
firm of Pircher, Nichols & Meeks specializing in all aspects of its real estate
transactional practice including acquisitions, leasings and financings. Mr.
Sobel received his Bachelor's Degree from State University of New York at Oswego
and his Juris Doctor Degree from the University of California at Berkeley (Boalt
Hall).
HERBERT L. PORTER. Mr. Porter is a Senior Vice President and Director of
Construction and Capital Improvements of the Company. He joined Arden in 1993.
Prior to joining Arden from 1973 to 1992, Mr. Porter was a partner/owner in his
own real estate development and property management company specializing in
medium to high-rise commercial office buildings. Mr. Porter's 23 years in
commercial office development include planning, financing, acquisition,
entitlements and approvals, design, construction, marketing, leasing, tenant
improvements and outright sale. Mr. Porter received his Bachelor's Degree from
the University of Southern California.
CARL D. COVITZ. Mr. Covitz has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering. For
18 of the past 23 years, Mr. Covitz has served as the owner and President of
Landmark Capital, Inc., a national real estate development and investment
company involved in the construction, financing, ownership and management of
commercial, residential, and warehouse properties. Mr. Covitz has also
previously served, from 1990 to 1993, as Secretary of the Business,
Transportation & Housing Agency of the State of California as well as Under
Secretary and Chief Operating Officer of the U.S. Department of Housing and
Urban Development from 1987 to 1989. Mr. Covitz is currently the Chairman of the
Board of Directors of Century Housing Corporation and is the past Chairman of
the Board of several organizations including the Federal Home Loan Bank of San
Francisco and the Los Angeles City Housing Authority. Mr. Covitz received his
Bachelor's Degree from the Wharton School at the University of Pennsylvania and
his Master of Business Administration from the Columbia University Graduate
School of Business.
KENNETH B. ROATH. Mr. Roath has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering. Mr.
Roath is currently Chairman, President and Chief Executive Officer of Health
Care Property Investors, Inc., a leader in the health care REIT industry. Prior
to joining Health Care Property Investors, Inc. at its inception in 1985, Mr.
Roath was employed for 17 years by Pacific Holding Corporation of Los Angeles,
the last four of which he served as President and Chief Operating Officer. Mr.
Roath is the immediate past Chairman of NAREIT and also
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serves as a member of the Board of Governors and Executive Committee of NAREIT.
He is a director of Franchise Finance Corporation of America. Mr. Roath received
his Bachelor's Degree in accounting from San Diego State University.
ARTHUR GILBERT. Mr. Gilbert has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering. Mr.
Gilbert has been involved in the real estate business for over 50 years and has
developed over 6 million square feet of office, industrial and retail properties
located primarily in Southern California. He is a Trustee of the Los Angeles
County Museum of Art and an Honorary Trustee of the National Board of Directors
of American Technion Society.
STEVEN C. GOOD. Mr. Good has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering. Mr.
Good is the senior partner in the firm of Good Swartz & Berns, an accountancy
corporation which evolved from the firm of Block, Good and Gagerman which he
founded in 1976. Prior to 1976, Mr. Good was a partner first at Laventhol &
Horwath, a national accounting firm, and later at Horowitz & Good. Mr. Good is a
founder and past Chairman of CU Bancorp where he directed the bank's operations
from 1982 through 1989. For the past seven years he has been a member of the
Board of Directors of Opto Sensors, Incorporated. Mr. Good received his Bachelor
of Science in Business Administration from the University of California at Los
Angeles and attended UCLA's Graduate School.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. Promptly following the consummation of the Offering, the
Board of Directors will establish an Audit Committee. The Audit Committee will
make recommendations concerning the engagement of independent public
accountants, review with the independent public accountants the scope and
results of the audit engagement, approve professional services provided by the
independent public accountants, review the independence of the independent
public accountants, consider the range of audit and non-audit fees and review
the adequacy of the Company's internal accounting controls. The Audit Committee
will initially consist of two or more non-employee directors.
EXECUTIVE COMMITTEE. Promptly following the consummation of the Offering,
the Board of Directors will establish an Executive Committee. Subject to the
Company's conflict of interest policies, the Executive Committee will be granted
the authority to acquire and dispose of real property and the power to
authorize, on behalf of the full Board of Directors, the execution of certain
contracts and agreements, including those related to the borrowing of money by
the Company (and, consistent with the Partnership Agreement of the Operating
Partnership, to cause the Operating Partnership to take such actions). The
Executive Committee will include at least two non-employee directors.
COMPENSATION COMMITTEE. Promptly following the consummation of the
Offering, the Board of Directors will establish a Compensation Committee to
establish remuneration levels for executive officers of the Company and
implement the Company's Stock Incentive Plan and any other incentive programs.
The Compensation Committee will initially consist of two or more non-employee
directors.
The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Company.
COMPENSATION OF DIRECTORS
The Company intends to pay its non-employee directors annual compensation of
$18,000 for their services. In addition, non-employee directors will receive a
fee of $1,000 for each Board of Directors meeting attended. Non-employee
directors attending any committee meetings will receive an additional fee of
$1,000 for each committee meeting attended, unless the committee meeting is held
on the day of a meeting of the Board of Directors. Non-employee directors will
also be reimbursed for reasonable expenses incurred to attend director and
committee meetings. Officers of the Company who are directors will not be paid
any directors' fees. Non-employee directors will receive, upon initial election
to the Board of Directors, an option to purchase 10,000 shares of Common Stock
which will vest over four years.
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EXECUTIVE COMPENSATION
Prior to the Offering, the Company did not pay any compensation to its
officers. The following table below sets forth the annual base salary rates and
other compensation expected to be paid in 1996 to the Company's Chief Executive
Officer and each of the Company's five other most highly compensated executive
officers (the "Named Executive Officers").
<TABLE>
<CAPTION>
1996 BASE OPTIONS
NAME TITLE SALARY RATE ALLOCATED(1)
- -------------------- ----------------------------------------------------------------- ----------- -----------
<S> <C> <C> <C>
Richard S. Ziman Chairman of the Board and Chief Executive Officer $ 300,000 400,000
Victor J. Coleman President, Chief Operating Officer and Director 250,000 250,000
Michele Byer Chief Accounting Officer and Secretary 125,000 40,000
Herbert L. Porter Senior Vice President and Director of Construction and Capital
Improvements 120,000 30,000
Brigitta B. Troy Executive Vice President and Director of Acquisitions 110,000 20,000
Andrew J. Sobel Executive Vice President and Director of Leasing 110,000 40,000
</TABLE>
- --------------
(1) All options will be exercisable at a price per share equal to the initial
offering price per share of Common Stock offered hereby.
EMPLOYMENT AGREEMENTS
Each of Messrs. Ziman and Coleman will enter into an employment agreement
with the Company which will be effective as of the consummation of the Offering.
The employment agreements will have an initial term of five years in the case of
Mr. Ziman and three years in the case of Mr. Coleman, and will be subject to
automatic one-year extensions following the expiration of the initial term.
For the first year of the term, the employment agreements provide for an
initial annual base compensation in the amounts set forth in the Executive
Compensation table with the amount of any initial bonus to be determined by the
Compensation Committee. For subsequent years, both the amount of the base
compensation and any bonus will be determined by the Compensation Committee.
The employment agreements entitle the executives to participate in the
Company's Stock Incentive Plan (each executive will initially be allocated the
number of stock options set forth in the Executive Compensation table) and to
receive certain other insurance and pension benefits. In addition, in the event
of a termination by the Company without "cause," a termination by the executive
for "good reason," or a termination pursuant to a "change in control" of the
Company (as such terms are defined in the employment agreements), the terminated
executive will be entitled to (i) a single severance payment equal to the sum of
the executive's highest annual base compensation and highest annual bonus
received during the preceding thirty-six month period and (ii) receipt of
certain severance benefits for a period of one year commencing on the date of
termination.
As part of their employment agreements, each of Messrs. Ziman and Coleman
will be bound by a non-competition covenant with the Company which prohibits
them from engaging in (i) the acquisition, renovation, management or leasing of
any office properties in the Los Angeles, Orange and San Diego counties of
Southern California and (ii) any active or passive investment in or reasonably
relating to the acquisition, renovation, management or leasing of office
properties in the Los Angeles, Orange and San Diego counties of Southern
California for a period of one year following the date of such executive's
termination.
STOCK INCENTIVE PLAN
Prior to the consummation of the Offering, the Company intends to adopt the
Stock Incentive Plan for the purpose of attracting and retaining executive
officers, directors and employees.
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The Stock Incentive Plan will be qualified under Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Stock
Incentive Plan will be administered by the Compensation Committee and provide
for the granting of stock options, stock appreciation rights or restricted stock
with respect to up to 1,500,000 shares of Common Stock to executive or other key
employees of the Company. Stock options may be granted in the form of "incentive
stock options," as defined in Section 422 of the Code, or non-statutory stock
options and are exercisable for up to 10 years following the date of grant. The
exercise price of each option will be set by the Compensation Committee;
provided, however, that the price per share must be equal to or greater than the
fair market value of the Common Stock on the grant date.
The Stock Incentive Plan also provides for the issuance of stock
appreciation rights which will generally entitle a holder to receive cash or
stock, as determined by the Compensation Committee, at the time of exercise
equal to the difference between the exercise price and the fair market value of
the Common Stock. In addition, the Stock Incentive Plan permits the Company to
issue shares of restricted stock to executive or other key employees upon such
terms and conditions as shall be determined by the Compensation Committee.
401(K) PLAN
Effective upon the consummation of the Offering, the Company intends to
establish the Arden Realty Group Section 401(k) Savings/Retirement Plan (the
"401(k) Plan") to cover eligible employees of the Company and any designated
affiliate.
The 401(k) Plan will permit eligible employees of the Company to defer up to
15% of their annual compensation, subject to certain limitations imposed by the
Code. The employees' elective deferrals are immediately vested and
non-forfeitable upon contribution to the 401(k) Plan. The Company currently does
not intend to make matching contributions to the 401(k) Plan; however, it
reserves the right to make matching contributions or discretionary profit
sharing contributions in the future.
The 401(k) Plan is designed to qualify under Section 401 of the Code so that
contributions by employees or by the Company to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions by the Company, if any, will be
deductible by the Company when made.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders 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 Charter contains
such a provision which eliminates such liability to the maximum extent permitted
by the MGCL.
The Charter 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
director or officer or (b) any individual who, while a director of the Company
and at the request of the Company, serves or has served another corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a director, officer, partner or trustee of such corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise from and against
any claim or liability to which such persons may incur by reason of his status
as a present or former stockholder, director or officer of the Company. 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 director 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 director of the Company and at the
request of the Company, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such 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 against any
claim or liability to which he may become subject by reason
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of such service. The Charter and the 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 MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director 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 MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
The Partnership Agreement also provides for indemnification and advance of
expenses of the Company and its officers and directors to the same extent
indemnification and advance of expenses is provided to officers and directors of
the Company in the Charter, and limits the liability of the Company and its
officers and directors to the Operating Partnership and its partners to the same
extent liability of officers and directors of the Company to the Company and its
stockholders is limited under the Charter. See "Partnership Agreement --
Indemnification."
STRUCTURE AND FORMATION OF THE COMPANY
THE OPERATING ENTITIES OF THE COMPANY
Following the consummation of the Offering and the Formation Transactions,
the operations of the Company will be carried on through the Operating
Partnership. The Formation Transactions were designed to (i) enable the Company
to raise the necessary capital to acquire the Properties and repay certain
mortgage debt relating thereto, (ii) provide a vehicle for future acquisitions,
(iii) enable the Company to comply with certain requirements under the federal
income tax code and regulations relating to REITs, (iv) facilitate potential
securitized mortgage financings and (v) preserve certain tax advantages for
certain Arden Predecessors.
THE OPERATING PARTNERSHIP
Following the closing of the Offering and the Formation Transactions,
substantially all of the Company's assets will be held by, and its operations
conducted through, the Operating Partnership, of which the Company will be the
sole general partner. The Company's interest in the Operating Partnership will
entitle it to share in cash distributions from, and in the profits and losses
of, the Operating Partnership in proportion to the Company's percentage
ownership, which initially will be approximately 87.37%. Certain Participants,
including Messrs. Ziman, Coleman and Gilbert, Ms. Byer and Arden, will own the
remaining OP Units. Beginning one year after the consummation of the Offering,
any holder of OP Units may cause the Operating Partnership to redeem such OP
Units for cash or, at the election of the Company, exchange such OP Units for
shares of Common Stock of the Company (on a one-for-one basis), subject to
certain limitations. See "Partnership Agreement -- Redemption/Exchange Rights."
With each redemption or exchange of OP Units, the Company's percentage interest
in the Operating Partnership will increase.
As the sole general partner of the Operating Partnership, the Company will
generally have the exclusive power under the Partnership Agreement to manage and
conduct the business of the Operating Partnership,
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subject to certain limited exceptions. See "Partnership Agreement --
Management." The Board of Directors will manage the affairs of the Company by
directing the affairs of the Operating Partnership. The Operating Partnership
cannot be terminated (except in connection with a sale of all or substantially
all of the assets of the Company or as the result of judicial decree or the
redemption of all of the OP Units held by the limited partners) until the year
2096 without a vote of the partners of the Operating Partnership. For further
information regarding the Operating Partnership, see "Partnership Agreement."
THE FORMATION TRANSACTIONS
OWNERSHIP OF THE PROPERTIES PRIOR TO THE FORMATION TRANSACTIONS
The Arden Predecessors own 20 of the Properties directly through fee simple
interests and hold an undivided tenancy in common interest in two other
Properties, which are also partially owned by unrelated third parties who will
participate in the Formation Transactions. The two Acquisition Properties are
owned by unrelated third parties who have entered into agreements to sell the
respective Acquisition Properties to Arden. Each of the Arden Predecessors was
formed at various times over the last 3 1/2 years, generally in connection with
the initial acquisition of a Property or an interest in the Property by such
Arden Predecessor. The Arden Predecessors, which directly own the Properties or
interests in the Properties, are comprised primarily of partnerships and limited
liability companies which are (i) managed by Messrs. Ziman and Coleman directly
or through affiliates of the Arden Predecessors and (ii) owned by Messrs. Ziman
and Coleman, and certain of their relatives and affiliates and by other third
parties.
Arden has been engaged in the property management, leasing and renovation
business for over 5 years and, in connection therewith, has provided services to
22 of the Properties and to properties owned by third parties. After the
consummation of the Offering and the Formation Transactions, the Operating
Partnership will continue to carry on the property management, leasing and
renovation business with respect to the Properties carried on by Arden prior
thereto.
PRE-FORMATION TRANSACTIONS
- The Company filed its Charter in the state of Maryland on May 1, 1996.
- The Operating Partnership was formed effective May 20, 1996 with the
Company as the sole general partner and Mr. Coleman as the sole limited
partner.
- All of the Participants have entered into an Option Agreement with the
Company and/or a Contribution Agreement with the Operating Partnership to
transfer their ownership interests in the Arden Predecessors, in certain
of the Properties or, with respect to Arden, in certain of its assets, to
the Operating Partnership in exchange for OP Units or to the Company for
cash. See "Risk Factors -- Conflicts of Interests in the Formation
Transactions and the Business of the Company."
FORMATION TRANSACTIONS
Concurrently with the consummation of the Offering, the Company, the
Operating Partnership and the Participants will engage in the following
Formation Transactions.
- The Company will sell shares of Common Stock in the Offering.
- Pursuant to the Option Agreements, the Company will acquire for cash from
certain Participants (other than Messrs. Ziman and Coleman who will
receive no cash from the Formation Transactions) the interests owned by
such Participants in certain of the Arden Predecessors and in certain of
the Properties. The Company will pay approximately $28.6 million from the
net proceeds of the Offering for such interests.
- The Company will contribute (i) the interests in the Arden Predecessors
and in the Properties acquired pursuant to the Option Agreements and (ii)
the net proceeds from the Offering (after payment of the cash
consideration to certain Participants as described above) to the Operating
Partnership in exchange for a 87.37% general partner interest in the
Operating Partnership.
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- Pursuant to the Contribution Agreements, the following additional
contributions will be made to the Operating Partnership in exchange for OP
Units representing limited partners interests: (i) certain Participants
will contribute the remaining interests in the Arden Predecessors and in
certain of the Properties ( I.E., all interests not acquired by the
Company pursuant to the Option Agreements) and (ii) Arden will contribute
certain of its assets, including management contracts relating to certain
of the Properties and the contract rights to purchase the Acquisition
Properties. The Participants making such contributions (including Messrs.
Ziman, Coleman and Gilbert and Ms. Byer) will receive an aggregate of
2,706,000 OP Units, with an estimated value of approximately $54.1 million
based on the assumed initial public offering price of the Common Stock.
- The Company, through the Operating Partnership, will borrow approximately
$104 million aggregate principal amount pursuant to the Mortgage Financing
which will be secured by cross-collateralized, cross-defaulted first
mortgage lien(s) on the Mortgage Financing Properties.
- Approximately $35 million of the net proceeds of the Offering and the
Mortgage Financing will be used by the Operating Partnership to purchase
the Acquisition Properties.
- Approximately $392 million of the net proceeds of the Offering and the
Mortgage Financing will be used by the Operating Partnership to repay
certain mortgage debt secured by the Properties and indebtedness
outstanding under lines of credit to be assumed by the Operating
Partnership in the Formation Transactions.
- The Company, through the Operating Partnership, will enter into the $200
million Credit Facility.
CONSEQUENCES OF THE OFFERING AND THE FORMATION TRANSACTIONS
The Offering and the Formation Transactions will result in the following
consequences:
- The Operating Partnership will directly or indirectly own 100% of all
Properties by virtue of the Operating Partnership's acquisition of 100% of
the interests in the Arden Predecessors, the Property interests
contributed by certain Participants and the assets contributed by Arden.
- The purchasers of the Common Stock offered in the Offering will own all of
the outstanding Common Stock.
- The Company will be the sole general partner of, and own 87.37% of the
ownership interests in, the Operating Partnership.
If all limited partners of the Operating Partnership were to exchange their
OP Units for Common Stock immediately after completion of the Offering
(notwithstanding the provision of the Partnership Agreement which prohibits such
exchange prior to the first anniversary of the consummation of the Offering),
but subject to the Common Stock Ownership Limit, then the Participants would
beneficially own approximately 12.63% of the outstanding Common Stock (of which
6.07%, 3.10%, 2.51% and .15% would be beneficially owned by Messrs. Ziman,
Coleman and Gilbert and Ms. Byer, respectively).
See "Risk Factors -- Conflicts of Interests in the Formation Transactions
and the Business of the Company; Benefits from Formation Transactions,"
"Partnership Agreement -- Redemption/Exchange Rights" and "Principal
Stockholders."
DETERMINATION AND VALUATION OF OWNERSHIP INTERESTS
The Company's percentage interest in the Operating Partnership was
determined based upon the percentage of estimated Cash Available for
Distribution required to pay expected cash distributions on the shares of Common
Stock to be issued in the Offering resulting in an annual distribution rate
equal to 8% of the assumed initial public offering price of the Common Stock.
The ownership interest in the Operating Partnership allocated to the Company is
equal to this percentage of estimated Cash Available for Distribution and the
remaining interest in the Operating Partnership was allocated to the
Participants receiving OP Units in the Formation Transactions. The parameters
and assumptions used in deriving the estimated Cash Available for Distribution
are described under "Distributions."
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Based on the issuance of 18,725,000 shares of Common Stock in the Offering,
the Company will hold a 87.37% ownership interest in the Operating Partnership
and the Participants will hold a 12.63% ownership interest in the Operating
Partnership. If the Underwriters' overallotment option is exercised in full, the
Company will hold a 88.84% ownership interest in the Operating Partnership and
the Participants will hold a 11.16% ownership interest in the Operating
Partnership.
The Company did not obtain appraisals with respect to the market value of
any of the assets that the Company will own immediately after the consummation
of the Offering and the Formation Transactions or an opinion as to the fairness
of the allocation of shares to the purchasers in the Offering. The valuation of
the Company has been determined based primarily upon the estimated Cash
Available for Distribution of the Company and the factors discussed under
"Underwriting," rather than a property-by-property valuation based on historical
cost or current market value. This methodology has been used because management
believes it is appropriate to value the Company as an ongoing business rather
than with a view to values that could be obtained from a liquidation of the
Company or of individual properties owned by the Company. See "Underwriting."
BENEFITS OF THE FORMATION TRANSACTIONS AND THE OFFERING TO AFFILIATES OF THE
COMPANY
Certain affiliates of the Company will realize certain material benefits in
connection with the Formation Transactions, including the following:
- In exchange for their respective ownership interests in the Arden
Predecessors and the assets of Arden, Messrs. Ziman, Coleman and Gilbert
and Ms. Byer will become beneficial owners of a total of 2,534,656 OP
Units, with a total value of $50.7 million based on the assumed initial
public offering price of the Common Stock, which compares to a book value
of such interests and assets of approximately $6.7 million as of March 31,
1996. The Company does not believe that the book values of the interests
and assets exchanged are equivalent to the fair market values of such
interests and assets.
- The Participants will realize an immediate accretion in the net tangible
book value of their investment in the Company of $9.36 per share of Common
Stock.
- The Participants will own interests in the Operating Partnership which
will be more liquid after restrictions on transfer expire than their
current interests in the Arden Predecessors which own the Properties prior
to consummation of the Formation Transactions.
- Approximately $392 million of indebtedness secured by the Properties and
indebtedness outstanding under lines of credit to be assumed by the
Operating Partnership will be repaid in the Formation Transactions.
- Pursuant to the Partnership Agreement, certain Participants who hold OP
Units, including Messrs. Ziman, Coleman and Gilbert and Ms. Byer, will
receive special allocations of interest deduction of approximately $14.5
million relating to the repayment of mortgage debt on certain of the
Properties.
- Messrs. Ziman and Coleman will serve as directors and officers of the
Company and the Operating Partnership and will enter into agreements
providing for annual salaries, bonuses, participation in the Company's
Stock Incentive Plan and other benefits for their services.
- So long as he is Chief Executive Officer, Mr. Ziman will have certain
participation rights in connection with future issuances of Common Stock
by the Company or OP Units by the Operating Partnership which will enable
him to maintain his overall percentage ownership of the combined equity of
the Company and the Operating Partnership.
- Certain Participants including Messrs. Ziman, Coleman and Gilbert and Ms.
Byer will have registration rights with respect to shares of Common Stock
issued in exchange for OP Units.
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See "Risk Factors -- Conflicts of Interests in the Formation Transactions
and the Business of the Company," "Dilution," "Partnership Agreement --
Redemption/Exchange Rights," "Management" and "Certain Transactions."
POLICIES WITH RESPECT TO CERTAIN TRANSACTIONS
The following is a discussion of certain investment, financing and other
policies of the Company. These policies have been determined by the Company's
Board of Directors and may be amended or revised from time to time by the Board
of Directors without a vote of the stockholders, except that (i) the Company
cannot change its policy of holding its assets and conducting its business only
through the Operating Partnership and its affiliates without the consent of the
holders of OP Units as provided in the Partnership Agreement, and (ii) changes
in certain policies with respect to conflicts of interest must be consistent
with legal requirements.
INVESTMENT POLICIES
The Company will conduct all of its investment activities through the
Operating Partnership and its affiliates. The Company's investment objectives
are to provide quarterly cash distributions and achieve long-term capital
appreciation through increases in the value of the Company. For a discussion of
the Properties and the Company's acquisition and other strategic objectives, see
"Business and Properties" and "Business and Growth Strategies."
The Company may purchase or lease income-producing commercial and other
types of properties for long-term investment, expand and improve the real estate
presently owned or other properties purchased, or sell such real estate
properties, in whole or in part, when circumstances warrant. The Company may
also participate with third parties in property ownership, through joint
ventures or other types of co-ownership. Such investments may permit the Company
to own interests in larger assets without unduly restricting diversification
and, therefore, add flexibility in structuring its portfolio. The Company will
not enter into a joint venture or partnership to make an investment that would
not otherwise meet its investment policies. Equity investments may be subject to
existing mortgage financing and other indebtedness or such financing or
indebtedness as may be incurred in connection with acquiring or refinancing
these investments. Debt service on such financing or indebtedness will have a
priority over any distributions with respect to the Common Stock.
While the Company's current portfolio consists of, and the Company's
business objectives emphasize, equity investments in commercial real estate, the
Company may, in the discretion of the Board of Directors, invest in other types
of equity real estate investments, mortgages (including participating or
convertible mortgages) and other real estate interests. The Company currently
intends to invest in or develop commercial properties in Southern California,
and primarily in suburban Los Angeles County. However, future development or
investment activities will not be limited to any geographic area or product type
or to a specified percentage of the Company's assets. While the Company intends
to diversify in terms of property locations, size and market, the Company does
not have any limit on the amount or percentage of its assets that may be
invested in any one property or any one market area.
Subject to the percentage of ownership limitations and gross income tests
necessary for REIT qualification, the Company also may invest in securities of
other REITs, other entities engaged in real estate activities or securities of
other issuers, including for the purpose of exercising control over such
entities. Investments are also subject to the Company's policy not to be treated
as an investment company under the Investment Company Act of 1940, as amended
(the "1940 Act").
DISPOSITIONS
The Company does not currently intend to dispose of any of the Properties,
although it reserves the right to do so if, based upon management's periodic
review of the Company's portfolio, the Board of Directors determines that such
action would be in the best interests of the Company. The tax consequences
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of the disposition of the Properties may, however, influence the decision of
certain directors and executive officers of the Company who hold OP Units as to
the desirability of a proposed disposition. See "Risk Factors -- Conflicts of
Interests in the Formation Transactions and the Business of the Company."
Any decision to dispose of a Property will be made by the Company and
approved by a majority of the Board of Directors. In addition, under the
Partnership Agreement, the consent of a majority of the Limited Partners of the
Operating Partnership must approve any sale or disposition of the Century Park
Center Property for a period of seven years from the closing of the Offering.
FINANCING POLICIES
As a general policy, the Company intends to limit its total consolidated
indebtedness incurred so that at the time any debt is incurred, the Company'
debt to total market capitalization ratio does not exceed 50%. Upon completion
of the Offering and the Formation Transactions, the debt to total market
capitalization ratio of the Company will be approximately 19.5% (17.8% if the
Underwriters' overallotment option is exercised in full). The Charter and Bylaws
do not, however, limit the amount or percentage of indebtedness that the Company
may incur. In addition, the Company may from time to time modify its debt policy
in light of current economic conditions, relative costs of debt and equity
capital, market values of its Properties, general conditions in the market for
debt and equity securities, fluctuations in the market price of its Common
Stock, growth and acquisition opportunities and other factors. Accordingly, the
Company may increase or decrease its debt to total market capitalization ratio
beyond the limits described above. If these policies were changed, the Company
could become more highly leveraged, resulting in an increased risk of default on
its obligations and a related increase in debt service requirements that could
adversely affect the financial condition and results of operations of the
Company and the Company's ability to make distributions to stockholders.
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The Company has established its debt policy relative to the total market
capitalization of the Company computed at the time the debt is incurred, rather
than relative to the book value of such assets, a ratio that is frequently
employed, because it believes that the book value of its assets (which to a
large extent is the depreciated value of real property, the Company's primary
tangible asset) does not accurately reflect its ability to borrow and to meet
debt service requirements. Total market capitalization, however, is subject to
greater fluctuation than book value, and does not necessarily reflect the fair
market value of the underlying assets of the Company at all times. Moreover, due
to fluctuations in the value of the Company's portfolio of Properties over time,
and since any measurement of the Company's total consolidated indebtedness to
total market capitalization is made only at the time debt is incurred, the debt
to total market capitalization ratio could exceed the 50% level.
The Company has not established any limit on the number or amount of
mortgages that may be placed on any single property or on its portfolio as a
whole.
Although the Company will consider factors other than total market
capitalization in making decisions regarding the incurrence of debt (such as the
purchase price of properties to be acquired with debt financing, the estimated
market value of properties upon refinancing, and the ability of particular
properties and the Company as a whole to generate sufficient cash flow to cover
expected debt service), there can be no assurance that the debt to total market
capitalization ratio, or any other measure of asset value, at the time the debt
is incurred or at any other time will be consistent with any particular level of
distributions to stockholders. See "Risk Factors -- No Limitations on Debt."
MORTGAGE FINANCING. The Company is finalizing a seven-year term loan of
$104 million which will close concurrently with the Offering. The proceeds of
the Mortgage Financing, together with proceeds from the Offering, will be used
primarily to refinance the Company's existing mortgage indebtedness. The
Mortgage Financing will be non-recourse, secured primarily by fully
cross-collateralized and cross-defaulted first mortgage lien(s) on the 10
Mortgage Financing Properties. The Mortgage Financing will require monthly
payments of interest only, with all principal due on the seventh anniversary of
the closing of the Mortgage Financing. The Mortgage Financing will bear interest
at a fixed rate of 7.95% per annum based on current interest rates.
THE CREDIT FACILITY. The Company is finalizing a two-year, $200 million
revolving Credit Facility with a one year extension. The Credit Facility will be
used, among other things, to finance acquisition of properties, and to the
extent required, for working capital purposes, which may include providing funds
for tenant improvements and capital expenditures.
The Credit Facility will be subject to customary conditions, including the
payment of the commitment and maintenance fees, an initial minimum net operating
income, an initial loan-to-value ratio not exceeding 65% and the establishment
of a replacement reserve for capital expenditures, and will give the lender the
right to approve the Properties securing the Credit Facility.
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered into agreements with
Messrs. Ziman and Coleman designed to eliminate or minimize potential conflicts
of interest. These agreements include non-competition provisions that generally
prohibit Messrs. Ziman and Coleman from engaging in the acquisition, management,
leasing or renovation of any office properties in the Los Angeles, Orange and
San Diego counties of Southern California and from engaging in any active or
passive investment in or reasonably relating to the acquisition, renovation,
management or leasing of any office properties in the Los Angeles, Orange and
San Diego counties of Southern California for a period of one year following the
date of termination of such executive's employment. See "Management --
Employment Agreements." The Company's Board of Directors is subject to certain
provisions of Maryland law, which are designed to eliminate or minimize certain
potential conflicts of interest. However, there can be no assurance that these
policies always will be successful in eliminating the influence of such
conflicts, and if they are not successful, decisions could be made that might
fail to reflect fully the interests of all stockholders.
POLICIES APPLICABLE TO ALL DIRECTORS. The Company has adopted a policy
that, without the approval of a majority of the non-employee directors, it will
not (i) acquire from or sell to any director, officer or employee
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of the Company, or any entity in which a director, officer or employee of the
Company beneficially owns more than a 1% interest, or acquire from or sell to
any affiliate of any of the foregoing, any of the assets or other property of
the Company, (ii) make any loan to or borrow from any of the foregoing persons
or (iii) engage in any other transaction with any of the foregoing persons.
Pursuant to Maryland law, each director will be subject to restrictions on
misappropriation of corporate opportunities. In addition, under Maryland law, a
contract or other transaction between the Company and a Director or between the
Company and any other corporation or other entity in which a Director is a
director or has a material financial interest is not void or voidable solely on
the grounds of such interest, the presence of the Director at the meeting at
which the contract or transaction is approved or the Director's vote in favor
thereof if (a) the transaction or contract is approved or ratified, after
disclosure of the common directorship or interest, by the affirmative vote of a
majority of disinterested directors, even if the disinterested directors
constitute less than a quorum, or by a majority of the votes cast by
disinterested stockholders, or (b) the transaction or contract is fair and
reasonable to the Company.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer Common Stock, Preferred Stock or options
to purchase stock in exchange for property and to repurchase or otherwise
acquire its Common Stock or other securities in the open market or otherwise and
may engage in such activities in the future. As described under "The Partnership
Agreement -- Redemption/Exchange Rights," the Company expects (but is not
obligated) to issue Common Stock to holders of OP Units in the Operating
Partnership upon exercise of their redemption/ exchange rights. Except in
connection with the Formation Transactions, the Company has not issued Common
Stock, OP Units or any other securities in exchange for property or any other
purpose, and the Board of Directors has no present intention of causing the
Company to repurchase any Common Stock. The Company may issue Preferred Stock
from time to time, in one or more series, as authorized by the Board of
Directors without the need for stockholder approval. See "Capital Stock --
Preferred Stock." The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers other than the Operating
Partnership, nor has the Company invested in the securities of other issuers
other than the Operating Partnership for the purposes of exercising control, and
does not intend to do so. At all times, the Company intends to make investments
in such a manner as to qualify as a REIT, unless because of circumstances or
changes in the Code (or the Treasury Regulations), the Board of Directors
determines that it is no longer in the best interest of the Company to qualify
as a REIT. The Company has not made any loans to third parties, although it may
in the future make loans to third parties, including, without limitation, to
joint ventures in which it participates. The Company intends to make investments
in such a way that it will not be treated as an investment company under the
1940 Act. The Company's policies with respect to such activities may be reviewed
and modified or amended from time to time by the Company's Board of Directors
without a vote of the stockholders.
CERTAIN TRANSACTIONS
FORMATION TRANSACTIONS
The terms of the acquisitions of interests in the Properties and in Arden by
the Operating Partnership are described in "Structure and Formation of the
Company -- The Formation Transactions."
PARTNERSHIP AGREEMENT; REDEMPTION/EXCHANGE RIGHTS
The Company will enter into the Partnership Agreement with the Participants
receiving OP Units. Among other things, the Partnership Agreement provides such
holders of OP Units with the right to cause the Operating Partnership to redeem
OP Units for cash or, at the election of the Company, exchange such OP Units for
shares of Common Stock of the Company (on a one-for-one basis). See "Risk
Factors -- Conflicts of Interests in the Formation Transactions and the Business
of the Company; Benefits from Formation Transactions," "Policies With Respect to
Certain Transactions -- Conflict of Interest Policies" and "Partnership
Agreement -- Redemption/Exchange Rights."
REGISTRATION RIGHTS
For a description of certain registration rights held by the Participants,
see "Shares Available for Future Sale -- Registration Rights."
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PARTNERSHIP AGREEMENT
THE FOLLOWING SUMMARY OF THE PARTNERSHIP AGREEMENT, INCLUDING THE
DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROSPECTUS, IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PARTNERSHIP AGREEMENT, WHICH IS
FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A
PART.
MANAGEMENT
The Operating Partnership has been organized as a Maryland limited
partnership pursuant to the terms of the Partnership Agreement. Generally,
pursuant to the Partnership Agreement, the Company, as the sole general partner
of the Operating Partnership, will have full, exclusive and complete
responsibility and discretion in the management and control of the Operating
Partnership, subject to certain limited exceptions. The limited partners of the
Operating Partnership (the "Limited Partners") will have no authority in such
capacity to transact business for, or participate in the management activities
or decisions of, the Operating Partnership. Any decision to sell all or
substantially all of the assets of the Operating Partnership, to merge or to
dissolve or, within seven years following the closing of the Offering, to sell
or dispose of the Century Park Center Property would require the consent of the
holders of 50% of the OP Units representing limited partner interests.
TRANSFERABILITY OF INTERESTS
The Partnership Agreement provides that the Company may not voluntarily
withdraw from the Operating Partnership, or transfer or assign its interest in
the Operating Partnership, without the consent of the holders of 60% of the OP
Units representing limited partner interests. Pursuant to the Partnership
Agreement, the Limited Partners have agreed not to transfer, assign, sell,
encumber or otherwise dispose of, without the consent of the Company, their
interest in the Operating Partnership, other than to Affiliates (as defined in
the Partnership Agreement) who agree to assume the obligations of the transferor
under the Partnership Agreement. Messrs. Ziman and Coleman and certain other
Participants are subject to additional restrictions on their ability to transfer
shares of Common Stock. See "Underwriting."
CAPITAL CONTRIBUTIONS
If the Operating Partnership requires additional funds at any time or from
time to time in excess of funds available to the Operating Partnership from
borrowings or capital contributions, and the Company borrows such funds from a
financial institution or other lender then the Company will lend such funds to
the Operating Partnership on comparable terms and conditions as are applicable
to the Company's borrowing of such funds. The Company may contribute the amount
of any required funds not loaned to the Operating Partnership as an additional
capital contribution to the Operating Partnership. If the Company so contributes
additional capital to the Operating Partnership, the Company's partnership
interest in the Operating Partnership will be increased on a proportionate basis
based upon the amount of such additional capital contributions and the value of
the Operating Partnership at the time of such contributions. Conversely, the
partnership interests of the Limited Partners will be decreased on a
proportionate basis in the event of additional capital contributions by the
Company. The Company's rights to make loans or additional capital contributions
to the Operating Partnership are generally subject to Mr. Ziman's right to
receive notice thereof and to fund the loan or capital contribution on a pro
rata basis so long as Mr. Ziman is the Company's Chief Executive Officer.
REDEMPTION/EXCHANGE RIGHTS
Limited Partners will receive rights which will enable them to require the
Operating Partnership to redeem part or all of their OP Units for cash (based
upon the fair market value of an equivalent number of shares of Common Stock at
the time of such redemption) or, at the election of the Company, exchange such
OP Units for shares of Common Stock (on a one-for-one basis, subject to
adjustment in the event of stock splits, stock dividends, issuance of certain
rights, certain extraordinary distributions and similar events) from the
Company, subject to the Ownership Limit and certain limitations on resale of
shares. The Company presently anticipates that it will elect to issue Common
Stock in exchange for OP Units in connection with each such redemption request,
rather than having the Operating Partnership pay cash. With each such redemption
or exchange, the Company's percentage ownership interest in the Operating
Partnership will increase. This redemption/exchange right may be exercised by
Limited Partners from time to time, in whole or in part, subject to the
limitations that such right may not be exercised (i) prior to the expiration of
one year
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following the consummation of the Offering or (ii) at any time to the extent
such exercise would result in such Limited Partner actually or constructively
owning common stock in excess of the Common Stock Ownership Limit, assuming
Common Stock was issued in such exchange.
ISSUANCE OF ADDITIONAL OP UNITS/COMMON STOCK
As general partner of the Operating Partnership, the Company has the ability
to cause the Operating Partnership to issue additional OP Units. In addition,
the Company may, from time to time, issue additional shares of Common Stock. In
either event, Mr. Ziman will have the right, so long as he serves as the
Company's Chief Executive Officer, to purchase OP Units at a purchase price
equal to the purchase price in the transaction giving rise to such participation
rights and to the extent necessary to maintain his overall percentage interest
in the Company, assuming the exchange of all OP Units for Common Stock.
TAX MATTERS
Pursuant to the Partnership Agreement, the Company will be the tax matters
partner of the Operating Partnership and, as such, will have authority to make
tax elections under the Code on behalf of the Operating Partnership.
The net income or net loss of the Operating Partnership will generally be
allocated to the Company and the Limited Partners in accordance with their
respective percentage interests in the Operating Partnership, subject to special
allocations to certain Limited Partners of interest deductions and income from
the discharge of indebtedness attributable to loans transferred by Arden
Predecessors to the Operating Partnership and to compliance with the provisions
of Sections 704(b) and 704(c) of the Code and the regulations promulgated
thereunder. See "Federal Income Tax Considerations -- Tax Aspects of the
Operating Partnership."
OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT and to avoid any federal income tax liability.
The Partnership Agreement provides that the net operating cash revenues of
the Operating Partnership, as well as the net sales and refinancing proceeds,
will be distributed from time to time (but at least quarterly) as determined by
the Company pro rata in accordance with the partners' percentage interests.
Pursuant to the Partnership Agreement, subject to certain exceptions, the
Operating Partnership will also assume and pay when due, or reimburse the
Company for payment of all costs and expenses relating to the operations of the
Company.
DUTIES AND CONFLICTS
The Partnership Agreement provides that all business activities of the
Company, including all activities pertaining to the acquisition and operation of
office properties, must be conducted through the Operating Partnership.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2096, or until sooner dissolved upon the bankruptcy, dissolution,
withdrawal or termination of the Company (unless the Limited Partners other than
the Company elect to continue the Operating Partnership), the election of the
Company and the Limited Partners, on entry of decree of judicial dissolution, or
the sale or other disposition of all or substantially all the assets of the
Operating Partnership or redemption of all OP Units.
INDEMNIFICATION
To the extent permitted by law, the Partnership Agreement provides for
indemnification and advance of expenses of the Company and its officers and
directors to the same extent indemnification and advance of expenses is provided
to officers and directors of the Company in its Charter, and limits the
liability of the Company and its officers and directors to the Operating
Partnership and its partners to the same extent liability of officers and
directors of the Company is limited under the Charter. See "Management --
Limitation of Liability and Indemnification."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock (or Common Stock for which OP Units are exchangeable)
by each director and director nominee, by each Named Executive Officer
identified on the table on page 87, by all directors (including director
nominees) and officers of the Company as a group and by each person who is
expected to be the beneficial owner of 5% or more of the outstanding shares of
Common Stock immediately following the completion of the Offering. Except as
indicated below, all of such Common Stock is owned directly, and the indicated
person has sole voting and investment power.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF COMMON
NAME AND ADDRESS(1) COMMON STOCK(2) STOCK OUTSTANDING(2)
- ---------------------------------------------------------------------- ------------------- ---------------------
<S> <C> <C>
Richard S. Ziman 1,300,747 6.1%
Victor J. Coleman 665,536 3.1%
Michele Byer 31,427 *
Brigitta B. Troy -- --
Andrew J. Sobel -- --
Herbert L. Porter -- --
Arthur Gilbert 536,946 2.5%
Carl D. Covitz -- --
Kenneth B. Roath -- --
Steven C. Good -- --
All directors and officers as a group (seven persons) 2,534,656 11.8%
</TABLE>
- --------------
* Less than one percent.
(1) Unless otherwise noted, the address for each of the persons listed is 9100
Wilshire Boulevard, East Tower, Suite 700, Beverly Hills, California 90212.
(2) Assumes that all OP Units held by the person are redeemed for shares of
Common Stock and that none of the OP Units held by other persons are
redeemed for shares of Common Stock. See "Capital Stock -- Restrictions on
Transfer."
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CAPITAL STOCK
The following summary of the terms of the stock of the Company does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Charter and the Company's Bylaws, copies of which are
exhibits to the Registration Statement of which this Prospectus is a part. See
"Additional Information."
GENERAL
The Charter provides that the Company may issue up to 100,000,000 shares of
Common Stock and 20,000,000 shares of preferred stock, $.01 par value per share
("Preferred Stock"). Upon completion of the Offering, 18,725,000 shares of
Common Stock will be issued and outstanding and no shares of Preferred Stock
will be issued and outstanding. Under Maryland law, stockholders generally are
not liable for the corporation's obligations solely as a result of their status
as stockholders.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other shares
or series of stock and to the provisions of the Charter regarding the
restrictions on transfer of stock, holders of shares of Common Stock are
entitled to receive dividends on such stock if, as and when authorized and
declared by the Board of Directors of the Company out of assets legally
available therefor and to share ratably in the assets of the Company legally
available for distribution to its stockholders in the event of its liquidation,
dissolution or winding up after payment of or adequate provision for all known
debts and liabilities of the Company.
Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, each outstanding share of Common Stock entitles the holder to
one vote on all matters submitted to a vote of stockholders, including the
election of directors and, except as provided with respect to any other class or
series of stock, the holders of such shares will possess the exclusive voting
power. There is no cumulative voting in the election of directors, which means
that the holders of a majority of the outstanding shares of Common Stock can
elect all of the directors then standing for election and the holders of the
remaining shares will not be able to elect any directors.
Holders of shares of Common Stock have no preference, conversion, exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of the Company. Subject to the provisions of the
Charter regarding the restrictions on transfer of stock, shares of Common Stock
will have equal dividend, liquidation and other rights.
Under the MGCL, a corporation generally cannot dissolve, amend its charter,
merge, sell all or substantially all of its assets, engage in a share exchange
or engage in similar transactions outside the ordinary course of business unless
approved by the affirmative vote of stockholders holding at least two-thirds of
the votes entitled to be cast on the matter unless a greater or lesser
percentage (but not less than a majority of all of the votes to be cast on the
matter) is set forth in the corporation's charter. The Company's Charter does
not provide for a lesser percentage in such situations.
PREFERRED STOCK
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Stock and to reclassify any previously classified but
unissued shares of any series, as authorized by the Board of Directors. Prior to
issuance of shares of each series, the Board is required by the MGCL and the
Charter of the Company to set, subject to the provisions of the Charter
regarding the restrictions on transfer of stock, the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such series. Thus, the Board could authorize the issuance of
shares of Preferred Stock with terms and conditions which could have the effect
of delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest. As of the date hereof, no shares of
Preferred Stock are outstanding and the Company has no present plans to issue
any Preferred Stock.
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POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock and
to classify or reclassify unissued shares of Preferred Stock and thereafter to
cause the Company to issue such classified or reclassified shares of stock will
provide the Company with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs which might arise. The
additional classes or series, as well as the Common Stock, will be available for
issuance without further action by the Company's stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which the Company's securities may be listed or
traded. Although the Board of Directors has no intention at the present time of
doing so, it could authorize the Company to issue a class or series that could,
depending upon the terms of such class or series, delay, defer or prevent a
transaction or a change in control of the Company that might involve a premium
price for holders of Common Stock or otherwise be in their best interest.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, no more than 50% in
value of its outstanding shares of stock may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which an election to be treated as a REIT has been made). In addition,
if the Company, or an owner of 10% or more of the Company, actually or
constructively owns 10% or more of a tenant of the Company (or a tenant of any
partnership in which the Company is a partner), the rent received by the Company
(either directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. A
REIT's stock must also be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve months or during a proportionate part
of a shorter taxable year (other than the first year for which an election to be
treated as a REIT has been made).
Because the Company expects to qualify as a REIT, the Charter contains
restrictions on the ownership and transfer of Common Stock which are intended to
assist the Company in complying with theses requirements. The Charter provides
that, subject to certain specified exceptions, no person or entity may own, or
be deemed to own by virtue of the applicable constructive ownership provisions
of the Code, more than 9.0% (by number or value, whichever is more restrictive)
of the outstanding shares of Common Stock (the "Ownership Limit"). The
constructive ownership rules are complex, and may cause shares of Common Stock
owned actually or constructively by a group of related individuals and/or
entities to be owned constructively by one individual or entity. As a result,
the acquisition of less than 9.0% of the shares of Common Stock (or the
acquisition of an interest in an entity that owns, actually or constructively,
Common Stock) by an individual or entity, could, nevertheless cause that
individual or entity, or another individual or entity, to own constructively in
excess of 9.0% of the outstanding Common Stock and thus subject such shares to
the Ownership Limit. The Board of Directors may, but in no event will be
required to, waive the Ownership Limit with respect to a particular stockholder
if it determines that such ownership will not jeopardize the Company's status as
a REIT. As a condition of such waiver, the Board of Directors may require
opinions of counsel satisfactory to it and/or undertakings or representations
from the applicant with respect to preserving the REIT status of the Company.
The Board of Directors has obtained such undertakings and representations from
Mr. Ziman and, as a result, has waived the Ownership Limit with respect to the
Ziman family and certain affiliated entities, including the Operating
Partnership. The Ziman family and such entities will be permitted to own,
actually or constructively, up to 13% by number or value, whichever is more
restrictive, of the Common Stock.
The Charter further prohibits (a) any person from actually or constructively
owning shares of stock of the Company that would result in the Company being
"closely held" under Section 856(h) of the Code or otherwise cause the Company
to fail to qualify as a REIT and (b) any person from transferring shares of
stock of the Company if such transfer would result in shares of stock of the
Company being owned by fewer than 100 persons. Any person who acquires or
attempts or intends to acquire actual or constructive
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ownership of shares of stock of the Company that will or may violate any of the
foregoing restrictions on transferability and ownership is required to give
notice immediately to the Company and provide the Company with such other
information as the Company may request in order to determine the effect of such
transfer on the Company's status as a REIT. The foregoing restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interest of the Company to attempt
to qualify, or to continue to qualify, as a REIT.
If any purported transfer of Common Stock of the Company or any other event
would otherwise result in any person violating the Ownership Limit or the
Charter, then any such purported transfer will be void and of no force or effect
with respect to the purported transferee (the "Prohibited Transferee") as to
that number of shares in excess of the Ownership Limit and the Prohibited
Transferee shall acquire no right or interest (or, in the case of any event
other than a purported transfer, the person or entity holding record title to
any such shares in excess of the Ownership Limit (the "Prohibited Owner") shall
cease to own any right or interest) in such excess shares. Any such excess
shares described above will be transferred automatically, by operation of law,
to a trust, the beneficiary of which will be a qualified charitable organization
selected by the Company (the "Beneficiary"). Such automatic transfer shall be
deemed to be effective as of the close of business on the Business Day (as
defined in the Charter) prior to the date of such violative transfer. Within 20
days of receiving notice from the Company of the transfer of shares to the
trust, the trustee of the trust (who shall be designated by the Company and be
unaffiliated with the Company and any Prohibited Transferee or Prohibited Owner)
will be required to sell such excess shares to a person or entity who could own
such shares without violating the Ownership Limit, and distribute to the
Prohibited Transferee an amount equal to the lesser of the price paid by the
Prohibited Transferee for such excess shares or the sales proceeds received by
the trust for such excess shares. In the case of any excess shares resulting
from any event other than a transfer, or from a transfer for no consideration
(such as a gift), the trustee will be required to sell such excess shares to a
qualified person or entity and distribute to the Prohibited Owner an amount
equal to the lesser of the fair market value of such excess shares as of the
date of such event or the sales proceeds received by the trust for such excess
shares. In either case, any proceeds in excess of the amount distributable to
the Prohibited Transferee or Prohibited Owner, as applicable, will be
distributed to the Beneficiary. Prior to a sale of any such excess shares by the
trust, the trustee will be entitled to receive in trust for the Beneficiary, all
dividends and other distributions paid by the Company with respect to such
excess shares, and also will be entitled to exercise all voting rights with
respect to such excess shares. Subject to Maryland law, effective as of the date
that such shares have been transferred to the trust, the trustee shall have the
authority (at the trustee's sole discretion) (i) to rescind as void any vote
cast by a Prohibited Transferee prior to the discovery by the Company that such
shares have been transferred to the trust and (ii) to recast such vote in
accordance with the desires of the trustee acting for the benefit of the
Beneficiary. However, if the Company has already taken irreversible corporate
action, then the trustee shall not have the authority to rescind and recast such
vote. Any dividend or other distribution paid to the Prohibited Transferee or
Prohibited Owner (prior to the discovery by the Company that such shares had
been automatically transferred to a trust as described above) will be required
to be repaid to the trustee upon demand for distribution to the Beneficiary. In
the event that the transfer to the trust as described above is not automatically
effective (for any reason) to prevent violation of the Ownership Limit, then the
Charter provides that the transfer of the excess shares will be void.
In addition, shares of stock of the Company held in the Trust shall be
deemed to have been offered for sale to the Company, or its designee, at a price
per share equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the Trust (or, in the case of a devise or gift, the
Market Price at the time of such devise or gift) and (ii) the Market Price on
the date the Company, or its designee, accepts such offer. The Company shall
have the right to accept such offer until the Trustee has sold the shares of
stock held in the Trust. Upon such a sale to the Company, the interest of the
Charitable Beneficiary in the shares sold shall terminate and the Trustee shall
distribute the net proceeds of the sale to the Prohibited Owner.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
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Under the Charter, every owner of a specified percentage (or more) of the
outstanding shares of Common Stock must file a completed questionnaire with the
Company containing information regarding their ownership of such shares, as set
forth in the Treasury Regulations. Under current Treasury Regulations, the
percentage will be set between 0.5% and 5.0%, depending upon the number of
record holders of the Company's shares. In addition, each stockholder shall upon
demand be required to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of such
stockholder's actual and constructive ownership of Common Stock on the Company's
status as a REIT and to ensure compliance with the Ownership Limit.
These ownership limits could delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interest of stockholders.
CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S CHARTER AND BYLAWS
THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS OF THE COMPANY DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT
TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MARYLAND LAW AND THE CHARTER
AND BYLAWS OF THE COMPANY, COPIES OF WHICH ARE EXHIBITS TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
The Charter and the Bylaws of the Company contain certain provisions that
could make more difficult the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to negotiate first
with the Board of Directors. The Company believes that the benefits of these
provisions outweigh the potential disadvantages of discouraging such proposals
because, among other things, negotiation of such proposals might result in an
improvement of their terms. The description set forth below is intended as a
summary only and is qualified in its entirety by reference to the Charter and
the Bylaws, which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. See also "Capital Stock --
Restrictions on Transfer."
BOARD OF DIRECTORS - NUMBER, CLASSIFICATION, VACANCIES
The Bylaws provide that the number of directors of the Company may be
established by the Board of Directors but may not be fewer than 5 nor more than
11. Any vacancy will be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the remaining directors, except that a
vacancy resulting from an increase in the number of directors must be filled by
a majority of the entire Board of Directors.
The Company's Board of Directors is divided into three classes of directors.
The initial terms of the first, second and third classes will expire in 1997,
1998 and 1999, respectively. Beginning in 1997, directors of each class will be
chosen for three-year terms upon the expiration of their current terms and each
year one class of directors will be elected by the stockholders. The staggered
terms of directors may reduce the possibility of a tender offer or an attempt to
change control of the Company even though a tender offer or change in control
might be in the best interest of the stockholders.
The classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult. At least
two annual meetings of stockholders, instead of one, will generally be required
to effect a change in a majority of the Board of Directors. Thus, the classified
board provision could increase the likelihood that incumbent directors will
retain their positions. The staggered terms of directors may reduce the
possibility of a tender offer or an attempt to change control of the Company,
even though a tender offer or change in control might be in the best interest of
the stockholders.
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed only for cause (as
defined in the Charter) and only by the affirmative vote of at least two-thirds
of the votes entitled to be cast in the election of directors. This provision,
when coupled with the provision in the Bylaws authorizing the Board of Directors
to fill vacant
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directorships, precludes stockholders from removing incumbent directors except
upon the existence of cause for removal and a substantial affirmative vote and
filling the vacancies created by such removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested Stockholder")
or an affiliate of such an Interested Stockholder are prohibited for five years
after the most recent date on which the Interested Stockholder becomes an
Interested Stockholder. Thereafter, any such business combination must be
recommended by the board of directors of such corporation and approved by the
affirmative vote of at least (a) 80% of the votes entitled to be cast by holders
of outstanding shares of voting stock of the corporation and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. These provisions of Maryland law do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. In addition, the Company's Charter exempts Mr. Ziman
from the business combination provisions of the MGCL.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock owned by the acquiror, by officers or by directors who
are employees of the corporation. "Control shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as the result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
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The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's shares of stock. There can be no assurance that such provision will
not be amended or eliminated at any time in the future.
AMENDMENT TO THE CHARTER
The Charter, including its provisions on classification of the Board of
Directors and removal of directors, may be amended only by the affirmative vote
of the holders of not less than two thirds of all of the votes entitled to be
cast on the matter.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
the holders of not less than two thirds of all of the votes entitled to be cast
on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual meeting
of stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(i) pursuant to the Company's notice of the meeting, (ii) by the Board of
Directors or (iii) by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and (b)
with respect to special meetings of the stockholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of stockholders and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to the Company's notice of the meeting,
(ii) by the Board of Directors or (iii) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a stockholder who
is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER
AND BYLAWS
The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Charter on classification of the Board of Directors and
removal of directors and the advance notice provisions of the Bylaws could
delay, defer or prevent a transaction or a change in control of the Company that
might involve a premium price for holders of Common Stock or otherwise be in
their best interest.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The Charter authorizes the Board of Directors to create and issue rights
entitling the holders thereof to purchase from the Company shares of stock or
other securities or property. The times at which and terms upon which such
rights are to be issued would be determined by the Board of Directors and set
forth in the contracts or instruments that evidence such rights. This provision
is intended to confirm the Board of Directors' authority to issue share purchase
rights, which may have terms that could impede a merger, tender offer or other
takeover attempt, or other rights to purchase shares or securities of the
Company or any other corporation.
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SHARES AVAILABLE FOR FUTURE SALE
GENERAL
Upon the completion of the Offering, the Company will have outstanding
18,725,000 shares of Common Stock (21,533,000 shares if the Underwriters'
overallotment option is exercised in full). In addition, 2,706,000 shares of
Common Stock are reserved for issuance upon exchange of OP Units. The shares of
Common Stock issued in the Offering will be freely tradeable by persons other
than "affiliates" of the Company without restriction under the Securities Act,
subject to the limitations on ownership set forth in the Charter. See "Capital
Stock -- Restrictions on Transfer." The shares of Common Stock owned by the
Participants or acquired by any Participant in redemption of OP Units (the
"Restricted Shares") will be "restricted" securities under the meaning of Rule
144 promulgated under the Securities Act ("Rule 144") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144. As
described below under " -- Registration Rights," the Company has granted certain
holders registration rights with respect to their shares of Common Stock.
In general, under Rule 144 as currently in effect, if two years have elapsed
since the later of the date of acquisition of Restricted Shares from the Company
or any "affiliate" of the Company, as that term is defined under the Securities
Act, the acquiror or subsequent holder thereof is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
of the Common Stock during the four calendar weeks preceding the date on which
notice of the sale is filed with the SEC. Sales under Rule 144 are also subject
to certain manner of sales provisions, notice requirements and the availability
of current public information about the Company. If three years have elapsed
since the date of acquisition of Restricted Shares from the Company or from any
"affiliate" of the Company, and the acquiror or subsequent holder thereof is
deemed not to have been an affiliate of the Company at any time during the 90
days preceding a sale, such person is entitled to sell such shares in the public
market under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
The Commission has proposed to amend the holding period required by Rule 144
to permit sales of "restricted securities" after one year rather than two years
(and two years rather than three years for "non-affiliates" who desire to sell
such shares under Rule 144(k)). If such proposed amendment were enacted, the
"restricted securities" would become freely tradeable (subject to any applicable
contractual restrictions) at these earlier dates.
In connection with the Offering, Messrs. Ziman and Coleman have agreed not
to sell any shares of Common Stock acquired by them upon exchange of OP Units
for a period of two years after the completion of the Offering without the
consent of Lehman Brothers Inc. Such restriction will not apply to any OP Units
or other shares of Common Stock purchased or otherwise acquired by Messrs. Ziman
or Coleman following consummation of the Offering. See "Underwriting."
The Company has established the Stock Incentive Plan for the purpose of
attracting and retaining directors, executive officers and other key employees.
See "Management -- Stock Incentive Plan" and "-- Compensation of Directors." The
Company intends to issue options to purchase approximately 780,000 shares of
Common Stock to directors, executive officers and certain key employees prior to
the completion of the Offering and has reserved 720,000 additional shares for
future issuance under the Stock Incentive Plan. Prior to the expiration of the
initial 12-month period following consummation of the Offering, the Company
expects to file a registration statement on Form S-8 with the SEC with respect
to the shares of Common Stock issuable under the Stock Incentive Plan, which
shares may be resold without restriction, unless held by affiliates.
Prior to the Offering, there has been no public market for the Common Stock.
Trading of the Common Stock on the New York Stock Exchange is expected to
commence immediately following the completion of the Offering. No prediction can
be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price prevailing
from time to time. Sales of substantial amounts of Common Stock (including
shares issued upon the exercise of Options), or the perception that
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such sales occur, could adversely affect prevailing market prices of the Common
Stock. See "Risk Factors -- Absence of Prior Public Market for Common Stock --
Effect on Common Stock Price of Shares Available for Future Sale" and
"Partnership Agreement -- Transferability of Interests."
REGISTRATION RIGHTS
The Company has granted the Participants who received OP Units in the
Formation Transactions certain registration rights with respect to the shares of
Common Stock owned by them or acquired by them in connection with the exercise
of the Redemption/Exchange Rights under the Partnership Agreement. These
registration rights require the Company to register all such shares of Common
Stock effective on the first anniversary of the consummation of the Offering.
The Company will bear expenses incident to its registration requirements under
the registration rights, except that such expenses shall not include any
underwriting discounts or commissions or transfer taxes, if any, relating to
such shares.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain material federal income tax considerations
regarding the Company and the Offering is based on current law, is for general
information only and is not tax advice. The information set forth below, to the
extent that it constitutes matters of law, summaries of legal matters or legal
conclusions is the opinion of Latham & Watkins, tax counsel to the Company. This
discussion does not purport to deal with all aspects of taxation that may be
relevant to particular stockholders in light of their personal investment or tax
circumstances, or to certain types of stockholders subject to special treatment
under the tax laws, including without limitation insurance companies, financial
institutions or broker-dealers, tax-exempt organizations (except to the extent
discussed under the heading "Taxation of Tax-Exempt Stockholders") or foreign
corporations and persons who are not citizens or residents of the United States
(except to the extent discussed under the heading "Taxation of Non-U.S.
Stockholders"). In addition, the summary below does not consider the effect of
any foreign, state, local or other tax laws that may be applicable to
prospective stockholders.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP
AND SALE OF THE COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL. The Company plans to make an election to be taxed as a REIT under
Sections 856 through 860 of the Code, commencing with its taxable year ending
December 31, 1996. The Company believes that, commencing with its taxable year
ending December 31, 1996, it will be organized and will operate in such a manner
as to qualify for taxation as a REIT under the Code commencing with such taxable
year, and the Company intends to continue to operate in such a manner, but no
assurance can be given that it will continue to operate in such a manner so as
to qualify or remain qualified.
These sections of the Code and the corresponding Treasury Regulations, are
highly technical and complex. The following sets forth the material aspects of
the sections that govern the federal income tax treatment of a REIT and its
stockholders. This summary is qualified in its entirety by the applicable Code
provisions, rules and regulations promulgated thereunder, and administrative and
judicial interpretations thereof.
Latham & Watkins has acted as tax counsel to the Company in connection with
the Offering and the Company's election to be taxed as a REIT. In the opinion of
Latham & Watkins, commencing with the Company's taxable year ending December 31,
1996, the Company will be organized in conformity with the requirements for
qualification as a REIT, and its proposed method of operation will enable it to
meet the requirements for qualification and taxation as a REIT under the Code.
It must be emphasized that this
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opinion is based upon certain representations made by the Company as to factual
matters relating to the organization and operation of the Company and the
Operating Partnership. In addition, this opinion is based upon the factual
representations of the Company concerning its business and properties as set
forth in this Prospectus and assumes that the actions described in this
Prospectus are completed in a timely fashion. Moreover, such qualification and
taxation as a REIT depends upon the Company's ability to meet (through actual
annual operating results, distribution levels and diversity of stock ownership)
the various qualification tests imposed under the Code discussed below, the
results of which will not be reviewed by Latham & Watkins. Accordingly, no
assurance can be given that the actual results of the Company's operation for
any particular taxable year will satisfy such requirements. Further, the
anticipated income tax treatment described in this Prospectus may be changed,
perhaps retroactively, by legislative, administrative or judicial action at any
time. See " -- Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (at the corporate and stockholder levels) that generally results from
investment in a regular corporation. However, the Company will be subject to
federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying income
from foreclosure property, it will be subject to tax at the highest corporate
rate on such income. Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of business
other than foreclosure property), such income will be subject to a 100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test or the
95% gross income test (as discussed below), but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75% or
95% test multiplied by (b) a fraction intended to reflect the Company's
profitability. Sixth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, with respect to any asset (a "Built-In Gain
Asset") acquired by the Company from a corporation which is or has been a C
corporation (I.E., generally a corporation subject to full corporate-level tax)
in a transaction in which the basis of the Built-In Gain Asset in the hands of
the Company is determined by reference to the basis of the asset in the hands of
the C corporation, if the Company recognizes gain on the disposition of such
asset during the ten-year period (the "Recognition Period") beginning on the
date on which such asset was acquired by the Company, then, to the extent of the
Built-In Gain (i.e., the excess of (a) the fair market value of such asset over
(b) the Company's adjusted basis in such asset, determined as of the beginning
of the Recognition Period), such gain will be subject to tax at the highest
regular corporate rate pursuant to Internal Revenue Service ("IRS") regulations
that have not yet been promulgated. The results described above with respect to
the recognition of Built-In Gain assume that the Company will make an election
pursuant to IRS Notice 88-19.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable as a domestic corporation, but for Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company subject
to certain provisions of the Code; (v) the beneficial ownership of which is held
by 100 or more persons; (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities); and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) to (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable
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year of twelve months, or during a proportionate part of a taxable year of less
than twelve months. Conditions (v) and (vi) will not apply until after the first
taxable year for which an election is made to be taxed as a REIT. For purposes
of conditions (v) and (vi), pension funds and certain other tax-exempt entities
are treated as individuals, subject to a "look-through" exception in the case of
condition (vi).
The Company believes that it will have issued sufficient shares of Common
Stock with sufficient diversity of ownership pursuant to the Offering to allow
it to satisfy conditions (v) and (vi). In addition, the Company's Charter
provides for restrictions regarding the transfer and ownership of shares, which
restrictions are intended to assist the Company in continuing to satisfy the
share ownership requirements described in (v) and (vi) above. Such ownership and
transfer restrictions are described in "Capital Stock -- Restrictions on
Transfer." These restrictions, however, may not ensure that the Company will, in
all cases, be able to satisfy the share ownership requirements described above.
If the Company fails to satisfy such share ownership requirements, the Company's
status as a REIT will terminate. See " -- Failure to Qualify."
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company will have a calendar taxable year.
OWNERSHIP OF A PARTNERSHIP INTEREST. In the case of a REIT which is a
partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership and will
be deemed to be entitled to the income of the partnership attributable to such
share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income tests
and the asset tests. Thus, the Company's proportionate share of the assets and
items of income of the Operating Partnership (including the Operating
Partnership's share of such items of any subsidiary partnerships) will be
treated as assets and items of income of the Company for purposes of applying
the requirements described herein. A summary of the rules governing the federal
income taxation of partnerships and their partners is provided below in " -- Tax
Aspects of the Operating Partnership." The Company has direct control of the
Operating Partnership and intends to operate it consistent with the requirements
for qualification as a REIT.
INCOME TESTS. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" and, in certain circumstances, interest) or from certain types of
temporary investments. Second, at least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived from such real property investments, dividends, interest and gain
from the sale or disposition of stock or securities (or from any combination of
the foregoing). Third, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year. For purposes of applying the 30% gross
income test, the holding period of Properties acquired by the Operating
Partnership in the Formation Transactions will be deemed to have commenced on
the date of acquisition.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, the Code provides that rents received from a
tenant will not qualify as "rents from real property" in satisfying the gross
income tests if the REIT, or an actual or constructive owner of 10% or more of
the REIT, actually or constructively owns 10% or more of such tenant (a "Related
Party Tenant"). Third, if rent attributable to personal property, leased in
connection with a lease of real 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."
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Finally, for rents received to qualify as "rents from real property," the REIT
generally must not operate or manage the property or furnish or render services
to the tenants of such property, other than through an independent contractor
from whom the REIT derives no revenue. The REIT may, however, directly perform
certain services that are "usually or customarily rendered" in connection with
the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant" of the property. The Company does not and will not
(i) charge rent for 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 percentage of
receipts or sales, as described above), (ii) rent any property to a Related
Party Tenant (unless the Board of Directors determines in its discretion that
the rent received from such Related Party Tenant is not material and will not
jeopardize the Company's status as a REIT), (iii) derive rental income
attributable to personal property (other than personal property leased in
connection with the lease of real property, the amount of which is less than 15%
of the total rent received under the lease), or (iv) perform services considered
to be rendered to the occupant of the property, other than through an
independent contractor from whom the Company derives no revenue.
The Company expects to receive fees in exchange for the performance of
certain management activities for third parties with respect to properties in
which the Company does not own an interest. Such fees will result in
nonqualifying income to the Company under the 95% and 75% gross income tests.
The Company believes that the aggregate amount of nonqualifying income in any
taxable year, including such fees, will not exceed the limit on nonqualifying
income under the gross income tests.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends 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 "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its federal income tax
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. For example, if the Company fails to satisfy the gross income tests
because nonqualifying income that the Company intentionally incurs exceeds the
limits on such income, the IRS could conclude that the Company's failure to
satisfy the tests was not due to reasonable cause. If these relief provisions
are inapplicable to a particular set of circumstances involving the Company, the
Company will not qualify as a REIT. As discussed above in "-- Taxation of the
Company -- General," even if these relief provisions apply, a tax would be
imposed with respect to the excess net income. No similar mitigation provision
provides relief if the Company fails the 30% income test. In such case, the
Company would cease to qualify as a REIT.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business (including the Company's share of any such gain realized by
the Operating Partnership) will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Such prohibited transaction
income may also have an adverse effect upon the Company's ability to satisfy the
income tests for qualification as a REIT. Under existing law, whether property
is held as inventory or primarily for sale to customers in the ordinary course
of a trade or business is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. The Operating
Partnership intends to hold the Properties for investment with a view to
long-term appreciation, to engage in the business of acquiring, developing,
owning, and operating the Properties (and other properties) and to make such
occasional sales of the Properties as are consistent with the Operating
Partnership's investment objectives. There can be no assurance, however, that
the IRS might not contend that one or more of such sales is subject to the 100%
penalty tax.
ASSET TESTS. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets (including its
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allocable share of the assets held by the Operating Partnership) must be
represented by real estate assets including (i) its allocable share of real
estate assets held by partnerships in which the Company owns an interest and
(ii) stock or debt instruments held for not more than one year purchased with
the proceeds of a stock offering or long-term (at least five years) debt
offering of the Company, cash, cash items and government securities. Second, not
more than 25% of the Company's total assets may be represented by securities
other than those in the 75% asset class. Third, of the investments included in
the 25% asset class, the value of any one issuer's securities owned by the
Company may not exceed 5% of the value of the Company's total assets and the
Company may not own more than 10% of any one issuer's outstanding voting
securities.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including as a result of the
Company increasing its interest in the Operating Partnership), the failure can
be cured by disposition of sufficient nonqualifying assets within 30 days after
the close of that quarter. The Company intends to maintain adequate records of
the value of its assets to ensure compliance with the asset tests and to take
such other actions within 30 days after the close of any quarter as may be
required to cure any noncompliance. If the Company fails to cure noncompliance
with the asset tests within such time period, the Company would cease to qualify
as a REIT.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (b) 95% of the net income
(after tax), if any, from foreclosure property, minus (ii) the sum of certain
items of noncash income. In addition, if the Company disposes of any Built-In
Gain Asset during its Recognition Period, the Company will be required, pursuant
to Treasury Regulations which have not yet been promulgated, to distribute at
least 95% of the Built-in Gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration. To the extent that the
Company does not distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gain corporate tax rates.
The Company intends to make timely distributions sufficient to satisfy these
annual distribution requirements. In this regard, the Partnership Agreement
authorizes the Company, as general partner, to take such steps as may be
necessary to cause the Operating Partnership to distribute to its partners an
amount sufficient to permit the Company to meet these distribution requirements.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it will
generally have sufficient cash or liquid assets to enable it to satisfy the
distribution requirements described above. It is possible, however, that the
Company, from time to time, may not have sufficient cash or other liquid assets
to meet these distribution requirements due to timing differences between (i)
the actual receipt of income and actual payment of deductible expenses and (ii)
the inclusion of such income and deduction of such expenses in arriving at
taxable income of the Company. In the event that such timing differences occur,
in order to meet the distribution requirements, the Company may find it
necessary to arrange for short-term, or possibly long-term, borrowings or to pay
dividends in the form of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Company
will be required to pay interest based upon the amount of any deduction taken
for deficiency dividends.
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Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distribution over the amounts actually
distributed.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. As a result, the Company's failure to qualify as a REIT
would significantly reduce the cash available for distribution by the Company to
its stockholders. In addition, if the Company fails to qualify as a REIT, all
distributions to stockholders will be taxable as ordinary income, to the extent
of the Company's current and accumulated earnings and profits, and, subject to
certain limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, or (iii) is an estate or trust the income
of which is subject to United States federal income taxation regardless of its
source.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction in the case of U.S. Stockholders
that are corporations. Distributions made by the Company that are properly
designated by the Company as capital gain dividends will be taxable to taxable
U.S. Stockholders as long-term capital gains (to the extent that they do not
exceed the Company's actual net capital gain for the taxable year) without
regard to the period for which a U.S. Stockholder has held his shares of Common
Stock. U.S. Stockholders that are corporations may, however, be required to
treat up to 20% of certain capital gain dividends as ordinary income. To the
extent that the Company makes distributions (not designated as capital gain
dividends) in excess of its current and accumulated earnings and profits, such
distributions will be treated first as a tax-free return of capital to each U.S.
Stockholder, reducing the adjusted basis which such U.S. Stockholder has in his
shares of Common Stock for tax purposes by the amount of such distribution (but
not below zero), with distributions in excess of a U.S. Stockholder's adjusted
basis in his shares taxable as capital gains (provided that the shares have been
held as a capital asset). Dividends declared by the Company in October,
November, or December of any year and payable to a stockholder of record on a
specified date in any such month shall be treated as both paid by the Company
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by the Company on or before January 31 of the
following calendar year. Stockholders may not include in their own income tax
returns any net operating losses or capital losses of the Company.
Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Stockholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be able
to apply any "passive losses" against such income or gain. Distributions made by
the Company (to the extent they do not constitute a return of capital) generally
will be treated as investment income for purposes of computing the investment
income limitation. Gain arising from the sale or other disposition of Common
Stock, however, will not be treated as investment income unless the U.S.
Stockholder elects to reduce the amount of such U.S. Stockholder's total net
capital gain eligible for the 28% maximum capital gains rate by the amount of
such gain with respect to such Common Stock.
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Upon any sale or other disposition of Common Stock, a U.S. Stockholder will
recognize gain or loss for federal income tax purposes in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Common Stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and will be long-term gain or loss if such
shares have been held for more than one year. In general, any loss recognized by
a U.S. Stockholder upon the sale or other disposition of shares of Common Stock
that have been held for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss, to the extent of
distributions received by such U.S. Stockholder from the Company which were
required to be treated as long-term capital gains.
BACKUP WITHHOLDING
The Company will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such holder
(a) is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or (b) provides a taxpayer identification
number, certifies as to no loss of exemption from backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Stockholder that does not provide the Company with his correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the stockholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions to any stockholders who fail to certify
their non-foreign status to the Company. See " -- Taxation of Non-U.S.
Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt stockholder
(except certain tax-exempt stockholders described below) has not held its shares
of Common Stock as "debt financed property" within the meaning of the Code and
such shares are not otherwise used in a trade or business, the dividend income
from the Company will not be UBTI to a tax-exempt stockholder. Similarly, income
from the sale of Common Stock will not constitute UBTI unless such tax-exempt
stockholder has held such shares as "debt financed property" within the meaning
of the Code or has used the shares in a trade or business.
For tax-exempt stockholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation Act of
1993 (the "1993 Act") provides that, effective for taxable years beginning in
1994, a portion of the dividends paid by a "pension held REIT" shall be treated
as UBTI as to any trust which (i) is described in Section 401(a) of the Code,
(ii) is tax-exempt under Section 501(a) of the Code, and (iii) holds more than
10% (by value) of the interests in the REIT. Tax-exempt pension funds that are
described in Section 401(a) of the Code are referred to below as "qualified
trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code (added by the 1993 Act)
provides that stock owned by qualified trusts shall be treated, for purposes of
the "not closely held" requirement, as owned by the beneficiaries of the trust
(rather than by the trust itself), AND (ii) EITHER (a) at least one such
qualified trust holds more than 25% (by value) of the interests in the REIT, OR
(b) one or more such qualified trusts, each of which owns more than 10% (by
value) of the interests in the REIT, hold in the aggregate more than 50% (by
value) of the interests in the REIT. The percentage of any REIT dividend treated
as UBTI is equal to the ratio of (i) the UBTI earned by
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the REIT (treating the REIT as if it were a qualified trust and therefore
subject to tax on UBTI) to (ii) the total gross income of the REIT. A DE MINIMIS
exception applies where the percentage is less than 5% for any year. The
provisions requiring qualified trusts to treat a portion of REIT distributions
as UBTI will not apply if the REIT is able to satisfy the "not closely held"
requirement without relying upon the "look-through" exception with respect to
qualified trusts. As a result of certain limitations on transfer and ownership
of Common Stock contained in the Charter, the Company does not expect to be
classified as a "pension held REIT."
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United States
federal income tax and does not address state, local or foreign tax consequences
that may be relevant to a Non-U.S. Stockholder in light of its particular
circumstances. In addition, this discussion is based on current law, which is
subject to change, and assumes that the Company qualifies for taxation as a
REIT. Prospective Non-U.S. Stockholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income tax
laws with regard to an investment in Common Stock, including any reporting
requirements.
DISTRIBUTIONS. Distributions by the Company to a Non-U.S. Stockholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of the
Company. Such distributions ordinarily will be subject to withholding of United
States federal income tax on a gross basis (that is, without allowance of
deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Stockholder of a United States trade
or business. Dividends that are effectively connected with such a trade or
business will be subject to tax on a net basis (that is, after allowance of
deductions) at graduated rates, in the same manner as domestic stockholders are
taxed with respect to such dividends and are generally not subject to
withholding. Any such dividends received by a Non-U.S. Stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, not currently in effect, however, a Non-U.S.
Stockholder who wished to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification and other requirements. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company. Certain certification
and disclosure requirements must be satisfied to be exempt from withholding
under the effectively connected income exemption discussed above.
Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Non-U.S. Stockholder to the extent that
they do not exceed the adjusted basis of the stockholders's Common Stock, but
rather will reduce the adjusted basis of such stock. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Stockholder's Common
Stock, they will give rise to gain from the sale or exchange of his stock, the
tax treatment of which is described below. If it cannot be determined at the
time a distribution is made whether or not such distribution will be in excess
of current or accumulated earnings and profits, the distribution will generally
be treated as a dividend for withholding purposes. However, amounts thus
withheld are generally refundable by the IRS if it is subsequently determined
that such distribution was, in fact, in excess of current or accumulated
earnings and profits of the Company.
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Distributions to a Non-U.S. Stockholder that are designated by the Company
at the time of distribution as capital gains dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless (i) investment
in the Common Stock is effectively connected with the Non-U.S. Stockholder's
United States trade or business, in which case the Non-U.S. Stockholder will be
subject to the same treatment as domestic stockholders with respect to such gain
(except that a stockholder that is a foreign corporation may also be subject to
the 30% branch profits tax, as discussed above), or (ii) the Non-U.S.
Stockholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States, in which case the nonresident alien individual will be subject to
a 30% tax on the individual's capital gains.
Distributions to a Non-U.S. Stockholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
cause the Non-U.S. Stockholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Stockholders would thus generally be taxed at the same rates applicable to
domestic stockholders (subject to a special alternative minimum tax in the case
of nonresident alien individuals). Also, such gain may be subject to a 30%
branch profits tax in the hands of a Non-U.S. Stockholder that is a corporation,
as discussed above. The Company is required to withhold 35% of any such
distribution. That amount is creditable against the Non-U.S. Stockholder's
United States federal income tax liability.
SALE OF COMMON STOCK. Gain recognized by a Non-U.S. Stockholder upon the
sale or exchange of shares of Common Stock generally will not be subject to
United States taxation unless such shares constitute a "United States real
property interest" within the meaning of FIRPTA. The Common Stock will not
constitute a "United States real property interest" so long as the Company is a
"domestically controlled REIT." A "domestically controlled REIT" is a REIT in
which at all times during a specified testing period less than 50% in value of
its stock is held directly or indirectly by Non-U.S. Stockholders. The Company
believes that at the closing of the Offering it will be a "domestically
controlled REIT," and therefore that the sale of shares of Common Stock will not
be subject to taxation under FIRPTA. However, because the shares of Common Stock
will be publicly traded, no assurance can be given that the Company will
continue to be a "domestically-controlled REIT." Notwithstanding the foregoing,
gain from the sale or exchange of shares of Common Stock not otherwise subject
to FIRPTA will be taxable to a Non-U.S. Stockholder if the Non-U.S. Stockholder
is a nonresident alien individual who is present in the United States for 183
days or more during the taxable year and has a "tax home" in the United States.
In such case, the nonresident alien individual will be subject to a 30% United
States withholding tax on the amount of such individual's gain.
If the Company does not qualify as or ceases to be a
"domestically-controlled REIT," whether gain arising from the sale or exchange
by a Non-U.S. Stockholder of shares of Common Stock would be subject to United
States taxation under FIRPTA as a sale of a "United States real property
interest" will depend on whether the shares are "regularly traded" (as defined
by applicable Treasury Regulations) on an established securities market (E.G.,
the New York Stock Exchange) and on the size of the selling Non-U.S.
Stockholder's interest in the Company. If gain on the sale or exchange of shares
of Common Stock were subject to taxation under FIRPTA, the Non-U.S. Stockholder
would be subject to regular United States income tax with respect to such gain
in the same manner as a U.S. Stockholder (subject to any 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 foreign corporations), and the purchaser of the stock would be required
to withhold and remit to the IRS 10% of the purchase price.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Stockholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock by or through a foreign office of a foreign
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broker. Information reporting (but not backup withholding) will apply, however,
to a payment of the proceeds of a sale of Common Stock by a foreign office of a
broker that (a) is a United States person, (b) derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (c) is a "controlled foreign corporation" (generally, a foreign
corporation controlled by United States stockholders) for United States tax
purposes, unless the broker has documentary evidence in its records that the
holder is a Non-U.S. Stockholder and certain other conditions are met, or the
stockholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of Common Stock is subject
to both backup withholding and information reporting unless the stockholder
certifies under penalty of perjury that the stockholder is a Non-U.S.
Stockholder, or otherwise establishes an exemption. A Non-U.S. Stockholder may
obtain a refund of any amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS.
The United States Treasury has recently issued proposed regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify and modify reliance standards. If finalized in their
current form, the proposed regulations would generally be effective for payments
made after December 31, 1997, subject to certain transition rules.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
GENERAL.
Substantially all of the Company's investments will be held indirectly
through the Operating Partnership. In general, partnerships are "pass-through"
entities which are not subject to federal income tax. Rather, partners are
allocated their proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive a distribution from the
partnership. The Company will include in its income its proportionate share of
the foregoing partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income. Moreover, for purposes of the
REIT asset tests, the Company will include its proportionate share of assets
held by the Operating Partnership. See " -- Taxation of the Company."
ENTITY CLASSIFICATION. The Company's interest in the Operating Partnership
involves special tax considerations, including the possibility of a challenge by
the IRS of the status of the Operating Partnership as a partnership (as opposed
to an association taxable as a corporation) for federal income tax purposes. If
the Operating Partnership were treated as an association, it would be taxable as
a corporation and therefore be subject to an entity-level tax on its income. In
such a situation, the character of the Company's assets and items of gross
income would change and preclude the Company from satisfying the asset tests and
possibly the income tests (see " -- Taxation of the Company -- Asset Tests" and
" -- Income Tests"), and in turn would prevent the Company from qualifying as a
REIT. See " -- Taxation of the Company -- Failure to Qualify" above for a
discussion of the effect of the Company's failure to meet such tests for a
taxable year. In addition, a change in the Operating Partnership's status for
tax purposes might be treated as a taxable event in which case the Company might
incur a tax liability without any related cash distributions.
An organization formed as a partnership will be treated as a partnership for
federal income tax purposes rather than as a corporation only if it has no more
than two of the four corporate characteristics that the Treasury Regulations use
to distinguish a partnership from a corporation for tax purposes. These four
characteristics are (i) continuity of life, (ii) centralization of management,
(iii) limited liability and (iv) free transferability of interests. The Company
has not requested, and does not intend to request, a ruling from the IRS that
the Operating Partnership will be treated as a partnership for federal income
tax purposes. However, in connection with the closing of the Formation
Transactions, Latham & Watkins will deliver an opinion to the Operating
Partnership stating that based on the provisions of the Partnership Agreement
and certain factual assumptions and representations described in the opinion,
the Operating Partnership will be treated as a partnership for federal income
tax purposes (and not as an association or a publicly traded partnership taxable
as a corporation). Unlike a private letter ruling, an opinion of counsel is not
binding on the IRS, and no assurance can be given that the IRS will not
challenge the status of the Operating Partnership as a partnership for federal
income tax purposes. If such challenge were sustained by a court, the Operating
Partnership could be treated as a corporation for federal income tax purposes.
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Recently proposed Treasury Regulations (the "Proposed Regulations"), if
finalized in their present form, would eliminate the four factor test described
above and, in its place, permit a partnership or limited liability company to
elect to be taxed as a partnership for federal income tax purposes without
regard to the number of corporate characteristics possessed by such entity. The
Proposed Regulations are proposed to apply for tax periods beginning on or after
the date that final regulations are published by the IRS. Until that time, the
existing regulations will continue to apply. The Proposed Regulations provide
that the IRS will not challenge the classification of an existing partnership or
limited liability company for tax periods to which the existing Treasury
Regulations apply if (1) the entity had a reasonable basis for its claimed
classification, (2) the entity claimed that same classification in all prior
years, and (3) as of the date that the proposed regulations were published,
neither the entity nor any member of the entity had been notified in writing
that the classification of the entity is under examination by the IRS.
PARTNERSHIP ALLOCATIONS. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic arrangement
of the partners.
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. The Operating 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.
The Partnership Agreement provides that net income or net loss of the
Operating Partnership will generally be allocated to the Company and the Limited
Partners in accordance with their respective percentage interests in the
Operating Partnership. Notwithstanding the foregoing, such agreement provides
that certain interest deductions and income from the discharge of certain
indebtedness of the Operating Partnership, attributable to loans transferred to
the Operating Partnership by Arden Predecessors, will be allocated
disproportionately to the Limited Partners. In addition, allocations of net
income or net loss will be subject to compliance with the provisions of Sections
704(b) and 704(c) of the Code and the Treasury Regulations promulgated
thereunder.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. Pursuant to Section 704(c)
of the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property (such as the Properties) that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated in
a manner such that the contributing partner is charged with, or benefits from,
respectively, 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 contributed property at the time of contribution and the adjusted tax
basis of such property at such time (a "Book-Tax Difference"). Such allocations
are solely for federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. The
Operating Partnership was formed by way of contributions of appreciated property
(including the Properties). Consequently, the Partnership Agreement requires
that such allocations be made in a manner consistent with Section 704(c) of the
Code.
In general, the Limited Partners of the Operating Partnership will be
allocated depreciation deductions for tax purposes which are lower than such
deductions would be if determined on a pro rata basis. In addition, in the event
of the disposition of any of the contributed assets which have a Book-Tax
Difference, all income attributable to such Book-Tax Difference will generally
be allocated to such limited partners, and the Company will generally be
allocated only its share of capital gains attributable to appreciation, if any,
occurring after the closing of the Formation Transactions. This will tend to
eliminate the Book-Tax Difference over the life of the Operating Partnership.
However, the special allocation rules of Section 704(c) do not always entirely
eliminate the Book-Tax Difference on an annual basis or with respect to a
specific taxable
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transaction such as a sale. Thus, the carryover basis of the contributed assets
in the hands the Operating Partnership may cause the Company to be allocated
lower depreciation and other deductions, and possibly an amount of taxable
income in the event of a sale of such contributed assets in excess of the
economic or book income allocated to it as a result of such sale. This may cause
the Company to recognize taxable income in excess of cash proceeds, which might
adversely affect the Company's ability to comply with the REIT distribution
requirements. See " -- Taxation of the Company -- Annual Distribution
Requirements."
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including retention of the "traditional method" or the election of certain
methods which would permit any distortions caused by a Book-Tax Difference to be
entirely rectified on an annual basis or with respect to a specific taxable
transaction such as a sale. The Operating Partnership and the Company have not
yet selected a method to account for Book-Tax Differences with respect to the
Properties initially contributed to the Operating Partnership.
With respect to any property purchased by the Operating Partnership
subsequent to the admission of the Company to the Operating Partnership, such
property will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Code will not apply.
BASIS IN OPERATING PARTNERSHIP INTEREST. The Company's adjusted tax basis
in its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the Operating
Partnership by the Company, (ii) will be increased by (a) its allocable share of
the Operating Partnership's income and (b) its allocable share of indebtedness
of the Operating Partnership and (iii) will be reduced, but not below zero, by
the Company's allocable share of (a) losses suffered by the Operating
Partnership, (b) the amount of cash distributed to the Company and (c) by
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss will
be deferred until such time and to the extent that the Company has adjusted tax
basis in its interest in the Operating Partnership. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decreases being considered a
constructive cash distribution to the partners), exceeds the Company's adjusted
tax basis, such excess distributions (including such constructive distributions)
constitute taxable income to the Company. Such taxable income will normally be
characterized as a capital gain, and if the Company's interest in the Operating
Partnership has been held for longer than the long-term capital gain holding
period (currently one year), such distributions and constructive distributions
will constitute long-term capital gain.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
ERISA CONSIDERATIONS
THE FOLLOWING IS A SUMMARY OF MATERIAL CONSIDERATIONS ARISING UNDER ERISA
AND THE PROHIBITED TRANSACTIONS PROVISIONS OF SECTION 4975 OF THE CODE THAT MAY
BE RELEVANT TO A PROSPECTIVE PURCHASER (INCLUDING WITH RESPECT TO THE DISCUSSION
CONTAINED IN " -- STATUS OF THE COMPANY AND THE OPERATING PARTNERSHIP UNDER
ERISA," TO A PROSPECTIVE PURCHASER THAT IS NOT AN EMPLOYEE BENEFIT PLAN SUBJECT
TO ERISA, ANOTHER TAX-QUALIFIED PENSION, PROFIT SHARING OR STOCK BONUS PLAN, OR
AN INDIVIDUAL RETIREMENT ACCOUNT OR ANNUITY ("IRA")). THE DISCUSSION DOES NOT
PURPORT TO DEAL WITH ALL ASPECTS OF ERISA OR SECTION 4975 OF THE CODE THAT MAY
BE RELEVANT TO PARTICULAR PROSPECTIVE PURCHASERS (INCLUDING EMPLOYEE BENEFIT
PLANS SUBJECT TO ERISA, OTHER TAX-QUALIFIED PLANS AND IRAS) OR MATERIAL
CONSIDERATIONS RELATING TO PROSPECTIVE PURCHASERS THAT ARE GOVERNMENTAL PLANS,
CHURCH PLANS OR OTHER EMPLOYEE BENEFIT PLANS THAT ARE EXEMPT FROM ERISA OR
SECTION 4975 OF THE CODE BUT THAT MAY BE SUBJECT TO STATE LAW REQUIREMENTS IN
LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.
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A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES OF THE COMMON STOCK ON
BEHALF OF A PROSPECTIVE PURCHASER WHICH IS AN EMPLOYEE BENEFIT PLAN SUBJECT TO
ERISA, A TAX-QUALIFIED PENSION, PROFIT SHARING OR STOCK BONUS PLAN, AN IRA, A
CHURCH PLAN OR A GOVERNMENTAL PLAN IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR
REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE
CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF SHARES
OF THE COMMON STOCK BY SUCH PLAN OR IRA.
EMPLOYMENT BENEFIT PLANS, TAX-QUALIFIED PENSION, PROFIT SHARING OR STOCK BONUS
PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to ERISA (an "ERISA
Plan") should carefully consider whether an investment in the Common Stock is
consistent with its fiduciary responsibilities under ERISA. In particular, the
fiduciary requirements of Part 4 of Title I of ERISA require an ERISA Plan's
investments to be (i) prudent and in the interests of the participants and
beneficiaries of the ERISA Plan, (ii) diversified in order to minimize the risk
of large losses, unless it is clearly prudent not to do so and (iii) authorized
under the terms of the governing documents of the ERISA Plan. In addition, a
fiduciary of an ERISA Plan should not cause or permit to enter into transactions
prohibited under Section 406 of ERISA or Section 4975 of the Code. In
determining whether an investment in the Common Stock is prudent for purposes of
ERISA, the appropriate fiduciary of an ERISA Plan should consider all of the
facts and circumstances, including whether the investment is reasonably
designed, as a part of the ERISA Plan's investment portfolio for which the
fiduciary has responsibility, to meet the objectives of the ERISA Plan, taking
into consideration the risk of loss and opportunity for gain (or other return)
from the investment, the diversification, cash flow and funding requirements of
the ERISA Plan, and the liquidity and current return of the ERISA Plan's
investment portfolio. A fiduciary should also take into account the nature of
the Company's business, the length of the Company's operating history, the terms
of the Management Agreements, the fact that certain investment properties may
not have been identified yet, other matters described under "Risk Factors" and
the possibility of UBTI. See "Federal Income Tax Considerations -- Taxation of
Stockholders."
The fiduciary of an ERISA Plan, an IRA or a qualified pension, profit
sharing or stock bonus plan not subject to ERISA (a "Non-ERISA Plan") should be
subject to Section 4975 of the Code ("Other Plans") should ensure that the
purchase of Common Stock will not constitute a prohibited transactions under
ERISA or the Code.
STATUS OF THE COMPANY AND THE OPERATING PARTNERSHIP UNDER ERISA
THE FOLLOWING SECTION DISCUSSES CERTAIN PRINCIPLES THAT APPLY IN DETERMINING
WHETHER THE FIDUCIARY REQUIREMENTS OF ERISA AND THE PROHIBITED TRANSACTION
PROVISIONS OF ERISA AND THE CODE APPLY TO AN ENTITY BECAUSE ONE OR MORE
INVESTORS IN THE ENTITY'S EQUITY INTERESTS IS AN ERISA PLAN OR OTHER PLAN. AN
ERISA PLAN FIDUCIARY SHOULD ALSO CONSIDER THE RELEVANCE OF THESE PRINCIPLES TO
ERISA'S PROHIBITION ON IMPROPER DELEGATION OF CONTROL OVER OR RESPONSIBILITY FOR
"PLAN ASSETS" AND ERISA'S IMPOSITION OF CO-FIDUCIARY LIABILITY ON A FIDUCIARY
WHO PARTICIPATES IN, PERMITS (BY ACTION OR INACTION) THE OCCURRENCE OF, OR FAILS
TO REMEDY A KNOWN BREACH BY ANOTHER FIDUCIARY.
If the assets of the Company are deemed to be assets of an ERISA Plan or
Other Plan ("plan assets"), (i) the prudence standards and other provisions of
Part 4 of Title I of ERISA and the prohibited transaction provisions of ERISA
and the Code would be applicable to any transactions involving the Company's
assets and (ii) persons who exercise any authority or control over the Company's
assets, or who provide investment advice to the Company, would be (for purposes
of ERISA and the Code) fiduciaries of ERISA Plans and Other Plans that acquire
Common Stock. The Department of Labor (the "DOL"), which has certain
administrative responsibility over ERISA Plans and Other Plans, has issued a
regulation defining plan assets for certain purposes (the "DOL Regulation"). The
DOL Regulation generally provides that when an ERISA Plan or Other Plan acquires
a security that is an equity interest in an entity and that security is neither
a "publicly-offered security" nor a security issued by an investment company
registered under the 1940 Act, the assets of the ERISA Plan or Other Plan
include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless it is established either that the entity
is an "operating company" (as defined in the DOL Regulation) or that equity
participation in the entity by "benefit plan investors" is not "significant."
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The DOL Regulation defines a "publicly-offered security" as a security that
is "widely held," "freely transferable" and either part of a class of securities
registered under the Exchange Act, or sold pursuant to an effective registration
statement under the Securities Act (provided the securities are registered under
the Exchange Act within 120 days, or such later time as may be allowed by the
SEC (the "registration period"), after the end of the fiscal year of the issuer
during which the offering occurred). The Common Stock is being sold in an
offering registered under the Securities Act and the Company intends to register
the Common Stock under the Exchange Act within the registration period.
The DOL Regulation provides that a security is "widely-held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. The
Company expects the Common Stock to be "widely held" upon completion of the
Offering.
The DOL Regulation provides that whether a security is "freely transferable"
is a factual question to be determined on the basis of all relevant facts and
circumstances. The DOL Regulation further provides that where a security is part
of an offering in which the minimum investment is $10,000 or less, certain
restrictions ordinarily will not, alone or in combination, affect a finding that
such securities are "freely transferable." The Offering will not impose a
minimum investment requirement. The restrictions on transfer enumerated in the
DOL Regulation as ordinarily not affecting a finding that the securities are
"freely transferable" include: (i) any restriction on or prohibition against any
transfer or assignment that would result in a termination or reclassification of
the Company for federal or state tax purposes, or that would otherwise violate
any state or federal law or court order, (ii) any requirement that advance
notice of a transfer or assignment be given to the Company, (iii) any
requirement that either the transferor or transferee, or both, execute
documentation setting forth representations as to compliance with any
restrictions on transfer that are among those enumerated in the DOL Regulation
as not affecting free transferability, (iv) any administrative procedure that
establishes an effective date, or an event (such as completion of the Offering)
prior to which a transfer or assignment will not be effective, (v) any
prohibition against transfer or assignment to an ineligible or unsuitable
investor, and (vi) any limitation or restriction on transfer or assignment that
is not imposed by the issuer or a person acting on behalf of the issuer. The
Company believes that the restrictions imposed under the Charter on the transfer
of Common Stock are of the type of restrictions on transfer generally permitted
under the DOL Regulation or are not otherwise material and should not result in
the failure of the Common Stock to be "freely transferable" within the meaning
of the DOL Regulation. See "Capital Stock -- Restrictions on Transfer." The
Company also believes that certain restrictions on transfer that derive from the
securities laws, from contractual arrangements with the Underwriters in
connection with the Offering and from certain provisions should not result in
the failure of the Common Stock to be "freely transferable." See "Underwriting"
and "Certain Provisions of Maryland Law and the Company's Charter and Bylaws."
Furthermore, the Company is not aware of any other facts or circumstances
limiting the transferability of the Common Stock that are not included among
those enumerated as not affecting their free transferability under the DOL
Regulation, and the Company does not expect to impose in the future (or to
permit any person to impose on its behalf) any other limitations or restrictions
on transfer that would not be among the enumerated permissible limitations or
restrictions.
Assuming that the Company registers the Common Stock under the Exchange Act
within the registration period, the Common Stock will be "widely held" and that
no facts and circumstances other than those referred to in the preceding
paragraph exist that restrict transferability of the Common Stock, the Company
believes that, under the DOL Regulation, the Common Stock should be
"publicly-offered securities" and, therefore, that the assets of the Company
should not be deemed to be plan assets of any ERISA Plan or Other Plan that
invests in the Common Stock.
The DOL Regulation will also apply in determining whether the assets of the
Operating Partnership will be deemed to be plan assets. The partnership
interests in the Operating Partnership will not be publicly offered securities.
Nevertheless, if the Common Stock constitutes publicly offered securities, the
Company believes that the indirect investment in the Operating Partnership by
ERISA Plans or Other Plans through their ownership of the Common Stock will not
cause the assets of the Operating Partnership to be treated as plan assets.
120
<PAGE>
UNDERWRITING
The underwriters of the Offering (the "Underwriters"), for whom Lehman
Brothers Inc., Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc.,
EVEREN Securities, Inc. and Raymond James & Associates, Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
conditions contained in the Underwriting Agreement (the form of which is filed
as an exhibit to the Registration Statement of which this Prospectus forms a
part), to purchase from the Company and the Company has agreed to sell to each
Underwriter, the aggregate number of shares of Common Stock set forth opposite
the name of each such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- -------------------------------------------------------------------------------- ------------
<S> <C>
Lehman Brothers Inc.............................................................
Alex. Brown & Sons Incorporated.................................................
Dean Witter Reynolds Inc........................................................
Smith Barney Inc................................................................
EVEREN Securities, Inc..........................................................
Raymond James & Associates, Inc.................................................
------------
Total......................................................................... 18,725,000
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to certain
conditions, and that if any of the shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all of the shares agreed to
be purchased by the Underwriters under the Underwriting Agreement must be so
purchased.
The Company has been advised that the Underwriters propose to offer shares
of Common Stock directly to the public initially at the public offering price
set forth on the cover page of this Prospectus, and to certain selected dealers
who may include the Underwriters at such public offering price less a selling
concession not in excess of $ per share. The selected dealers may reallow a
concession not in excess of $ per share to certain brokers or dealers.
After the Offering, the public offering price, the concession to selected
dealers, and the reallowance may be changed by the Representatives.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
the payments they may be required to make in respect thereto.
The Company has granted to the Underwriters an option to purchase up to an
additional 2,808,000 shares of Common Stock, at the public offering price, less
the aggregate underwriting discounts and commissions, shown on the cover page of
this Prospectus, solely to cover overallotments, if any. Such option may be
exercised at any time within 30 days after the date of the Underwriting
Agreement. To the extent that such option is exercised, each Underwriter will be
committed, subject to certain conditions, to purchase a number of the additional
shares of Common Stock proportionate to such Underwriter's initial commitment as
indicated in the preceding table.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined through negotiations
between the Company and the Representatives. Among the factors to be considered
in such negotiations, in addition to prevailing market conditions, are
distribution rates and financial characteristics of publicly traded REITs that
the Company and the Representatives believe to be comparable to the Company, the
expected results of operations of the Company (which are based on the results of
operations of the Properties and the fee management business in recent periods),
estimates of future business potential and earnings prospects of the Company as
a whole and the current state of the real estate market in the Company's primary
markets and the economy as a whole. The initial price per share to the public
set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the Common Stock. Such price is
subject to changes as a result of market conditions and other factors.
121
<PAGE>
The Underwriters do not intend to confirm sales of Common Stock to any
account over which they exercise discretionary authority.
Lehman Brothers Holdings Inc., an affiliate of Lehman Brothers Inc., will
receive approximately $303 million (67.7% of the net proceeds from the Offering
and the Mortgage Financing) as repayment of indebtedness and related interest
expected to be outstanding upon consummation of the Offering. See "Use of
Proceeds."
In connection with the Offering, Messrs. Ziman and Coleman have agreed not
to sell any shares of Common Stock acquired by them upon exchange of OP Units
for a period of two years after the completion of the Offering without the
consent of Lehman Brothers Inc. Such restrictions will not apply to any OP Units
or other shares of Common Stock purchased or otherwise acquired by Messrs. Ziman
or Coleman following consummation of the Offering.
The Company has agreed for a period of 180 days from the date of this
Prospectus, not to, directly or indirectly, offer for sale, sell or otherwise
dispose of (or enter into any transaction or device which is designed to, or
could be expected to, result in the disposition by any person at any time in the
future of) shares of Common Stock (other than the shares offered hereby and
shares issued pursuant to the Stock Incentive Plan existing on the date hereof)
or sell or grant options, rights or warrants with respect to any shares of
Common Stock (other than the grant of options pursuant to the Stock Incentive
Plan existing on the date hereof), without the prior written consent of Lehman
Brothers Inc.
The Company has agreed to pay Lehman Brothers Inc. an advisory fee equal to
% of the gross proceeds received from the sale of Common Stock of the Offering
for advisory services rendered in connection with the evaluation, analysis and
structuring of the Company's formation and the Offering.
Although the Conduct Rules of the National Association of Securities
Dealers, Inc. exempt REITs from the conflict of interest provisions thereof,
because an affiliate of Lehman Brothers Inc. will receive more than 10% of the
net proceeds of the Offering in repayment of currently outstanding indebtedness,
the Underwriters have determined to conduct the Offering in accordance with the
applicable provisions of Rule 2720 of the Conduct Rules. In accordance with
these requirements, Dean Witter Reynolds Inc. (the "Independent Underwriter") is
assuming the responsibilities of acting as "qualified independent underwriter,"
and will recommend the maximum initial public offering price for the shares of
Common Stock in compliance with the requirements of the Conduct Rules. In
connection with the Offering, the Independent Underwriter is performing due
diligence investigations and is reviewing and participating in the preparation
of this Prospectus and the Registration Statement of which this Prospectus forms
a part. The initial public offering price of the Common Stock will be no higher
than the price recommended by the Independent Underwiter.
EXPERTS
The combined financial statements of the Arden Predecessors as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995, the statements of revenues and certain expenses for the 1995 Acquired
Properties, the 1996 Acquired Properties, the Acquisition Properties, and the
balance sheet of Arden Realty Group, Inc., a Maryland Corporation as of May 1,
1996, all appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The C&W Market Study was prepared for the Company by Cushman & Wakefield of
California, Inc., which is a real estate service firm with significant
experience and expertise relating to the Southern California office markets and
the various submarkets therein. C&W is a part of a national network of
affiliated companies providing real estate related services. The statistical and
other information from the C&W Market Study appearing in this Prospectus and
Registration Statement has been included herein in reliance on C&W's expertise
as a real estate services firm, with respect to the Southern California office
markets.
122
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Latham & Watkins and certain legal matters will be
passed upon for the Underwriters by Hogan & Hartson L.L.P. Latham & Watkins will
rely upon the opinion of Ballard Spahr Andrews & Ingersoll as to certain matters
of Maryland law.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-11 (of which this Prospectus is a
part) under the Securities Act with respect to the securities offered hereby.
This Prospectus does not contain all information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the SEC. Statements contained in this Prospectus as to the
content of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference and the exhibits and schedules
hereto. For further information regarding the Company and the Common Stock
offered hereby, reference is hereby made to the Registration Statement and such
exhibits and schedules, which may be obtained from the SEC as its principal
office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the
fees prescribed by the SEC. The SEC maintains a website at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
SEC. In addition, the Common Stock will be listed on the New York Stock Exchange
("NYSE") and similar information concerning the Company can be inspected and
copied at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
The Company intends to furnish its stockholders with annual reports
containing audited combined financial statements and a report thereon by
independent certified public accountants.
123
<PAGE>
GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
"1940 ACT" means the Investment Company Act of 1940, as amended.
"1993 ACT" means the Omnibus Budget Reconciliation Act of 1993.
"401(K) PLAN" means the Arden Realty Group Section 401(k) Savings/Retirement
Plan.
"ACM" means asbestos-containing materials.
"ADA" means the Americans with Disabilities Act.
"ADJUSTED ANNUALIZED BASE RENT" means the monthly contractual base rent
under the applicable lease(s) (e.g., relating to a tenant, a Property or all of
the Properties, as applicable) as of a specified date multiplied by 12. If, as
of a specified date, one or more of the applicable leases calls for free rent,
the Adjusted Annualized Base Rent has been calculated based on the first full
rent month under the lease(s).
"ARDEN" means Arden Realty Group, Inc., a California corporation.
"ARDEN PREDECESSORS" means Arden and certain Arden affiliated entities which
are engaged in owning, acquiring, managing, leasing and renovating office
properties in Southern California.
"BOOK-TAX DIFFERENCE" means the difference between the fair market value of
contributed property at the time of contribution and the adjusted tax basis of
such property at such time.
"BUILT-IN GAIN ASSET" means any asset acquired by the Company from a
corporation which is or has been a C corporation.
"C&W" means Cushman & Wakefield of California, Inc.
"CHARITABLE BENEFICIARY" means a qualified charitable organization selected
by the Company which will be the beneficiary of a trust created to hold any
excess shares.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMON STOCK" means shares of the Company's Common Stock, $.01 par value
per share.
"COMPANY" means Arden Realty Group, Inc., a Maryland corporation.
"CONTRIBUTION AGREEMENTS" means separate contribution agreements between (i)
the Operating Partnership and certain Participants whereby certain interests in
the Arden Predecessors and in certain of the Properties held by such
Participants will be contributed to the Operating Partnership in exchange for OP
Units and (ii) the Operating Partnership and Arden whereby Arden will contribute
certain of its assets to the Operating Partnership in exchange for OP Units.
"CONTROLLED FOREIGN CORPORATION" means generally a foreign corporation
controlled by United States stockholders.
"CREDIT FACILITY" means the $200 million credit facility being finalized by
the Company.
"CPI" means the Consumer Price Index.
"CUSHMAN & WAKEFIELD" means Cushman & Wakefield of California, Inc.
"DOL" means the Department of Labor.
"ENVIRONMENTAL LAWS" means the various Federal, state and local laws,
ordinances and regulations relating to the protection of the environment.
"ERISA PLAN" means an employee benefit plan subject to ERISA.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
124
<PAGE>
"FFO" means Funds from Operations which is defined as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures.
"GAAP" means generally accepted accounting principles.
"INTERESTED STOCKHOLDER" means any person who beneficially owns ten percent
or more of the voting power of a corporation's shares.
"IRA" means an individual retirement account or annuity.
"IRS" means the Internal Revenue Service.
"LBHI" means Lehman Brothers Holdings Inc., an affiliate of Lehman Brothers
"LEASED" refers to space for which leases have been executed and have
commenced as of the specified date.
"LIMITED PARTNERS" means the limited partners of the Operating Partnership.
"MGCL" means the Maryland General Corporation Law, as amended.
"MORTGAGE FINANCING" means the seven-year term loan of approximately $104
million to the Company.
"NON-ERISA PLAN" means an IRA or a qualified pension, profit sharing or
stock bonus plan not subject to ERISA.
"NON-U.S. STOCKHOLDERS" means the persons that are, for purposes of United
States federal income taxation, nonresident alien individuals, foreign
corporations, foreign partnerships or foreign estates or trusts.
"NYSE" means the New York Stock Exchange.
"OFFERING" means the Offering of shares of Common Stock of the Company
pursuant to and as described in this Prospectus.
"OPERATING PARTNERSHIP" means Arden Realty Group Limited Partnership, a
Maryland limited partnership.
"OPTION AGREEMENTS" means separate option agreements between the Company and
certain Participants whereby certain interests in the Arden Predecessors and in
certain of the Properties held by such Participants will be transferred to the
Company in exchange for cash.
"OP UNITS" means the limited and general partner interests in the Operating
Partnership.
"OWNERSHIP LIMIT" means the Company's Charter provision prohibiting any
stockholder or group of affiliated stockholders from owning more than 9.0% of
the outstanding Common Stock.
"PARTNERSHIP AGREEMENT" means the agreement of limited partnership of the
Operating Partnership.
"PARTICIPANTS" means the parties participating in the Formation Transactions
including the Company and the Operating Partnership, together with the partners
and members of the Arden Predecessors and other parties which hold ownership
interests in certain of the Properties.
"PEER GROUP" means the group of properties identified by C&W that are most
similar in terms of quality, market position and tenant appeal to each of the
Company's Properties.
"PFG" means Pacific Financial Group, a California limited partnership.
"PHASE I ASSESSMENTS" means Phase I Environmental Assessments conducted by
environmental consultants.
125
<PAGE>
"PLAN ASSETS" means the assets of the Company which are deemed to be assets
of an ERISA Plan or other plan.
"PREFERRED STOCK" means the $.01 par value preferred stock of the Company.
"PROHIBITED OWNER" means the person or entity holding record title to shares
of the Company in excess of the Ownership Limit.
"PROHIBITED TRANSFEREE" means any transfer of Common Stock of the Company
whereby the purported transfer would result in any person violating the
Ownership Limit.
"PROPERTIES" means the 24 office properties referred to herein which
comprise the Company's portfolio of Southern California office properties.
"PUBLICLY-OFFERED SECURITY" means a security that is widely held, freely
transferable and either part of a class of securities registered under the
Exchange Act, or sold pursuant to an effective registration statement under the
Securities Act (provided the securities are registered under the Exchange Act
within 120 days, or such later time as may be allowed by the SEC (the
registration period), after the end of the fiscal year of the issuer during
which the offering occurred).
"RECOGNITION PERIOD" means the ten-year period beginning on the date a
Built-In Gain Asset is acquired by the Company.
"REIT" means real estate investment trust as defined by Sections 856 through
860 of the Code and applicable Treasury Regulations.
"RELATED PARTY TENANT" means a tenant actually or constructively owned 10%
or more by the REIT or an owner of 10% or more of the REIT.
"REPLACEMENT COST RENTS" as defined in the C&W Market Study means the rental
rates that would be required to provide a reasonable return on investment to a
developer of a new Class A multi-tenant office building.
"REPRESENTATIVES" means Lehman Brothers Inc., Alex. Brown & Sons
Incorporated, Dean Witter Reynolds Inc., Smith Barney Inc., EVEREN Securities,
Inc. and Raymond James & Associates, Inc.
"RESTRICTED SHARES" means the shares of Common Stock acquired by any
Participant in exchange for OP Units which will be restricted securities under
the meaning of Rule 144 promulgated under the Securities Act.
"RULE 144" means Rule 144 promulgated under the Securities Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"STOCK INCENTIVE PLAN" means the 1996 Stock Incentive Plan of Arden Realty
Group, Inc. and Arden Realty Group, Ltd.
"UBTI" means unrelated business taxable income.
"UNDERWRITERS" means the underwriters of the Offering for whom Lehman
Brothers Inc., Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc., Smith
Barney Inc., EVEREN Securities, Inc. and Raymond James & Associates, Inc. are
acting as representatives.
"U.S. STOCKHOLDER" means a holder of shares of Common Stock who (for United
States federal income tax purposes) (i) is a citizen or resident of the United
States, (ii) is a corporation, partnership, or other entity created or organized
in or under the laws of the United States or of any political subdivision
thereof, or (iii) is an estate or trust the income of which is subject to United
States federal income taxation regardless of its source.
"UST" means underground storage tank.
126
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ARDEN REALTY GROUP, INC.
Pro Forma Condensed Combined Financial Statements (Unaudited):............................................ F-2
Pro Forma Condensed Combined Balance Sheet as of March 31, 1996......................................... F-3
Pro Forma Condensed Combined Statement of Operations for the Three Months Ended March 31, 1996.......... F-4
Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1995............... F-5
Notes to Pro Forma Condensed Combined Financial Statements.............................................. F-6
Historical:
Report of Independent Auditors.......................................................................... F-10
Balance Sheet as of May 1, 1996......................................................................... F-11
Notes to Balance Sheet.................................................................................. F-12
ARDEN PREDECESSORS
Combined Financial Statements:
Report of Independent Auditors.......................................................................... F-15
Combined Balance Sheets as of March 31, 1996 (Unaudited), December 31, 1995 and 1994.................... F-16
Combined Statements of Operations for the Three Months ended March 31, 1996 and 1995 (Unaudited) and the
Years Ended December 31, 1995, 1994 and 1993........................................................... F-17
Combined Statements of Owners' Equity for the Three Months ended March 31, 1996 and 1995 (Unaudited) and
the Years Ended December 31, 1995, 1994 and 1993....................................................... F-18
Combined Statements of Cash Flows for the Three Months ended March 31, 1996 and 1995 (Unaudited) and the
Years Ended December 31, 1995, 1994 and 1993........................................................... F-19
Notes to Combined Financial Statements.................................................................. F-20
Schedule III - Commercial Office Properties and Accumulated Depreciation................................ F-27
1995 ACQUIRED PROPERTIES
Combined Statements of Revenue and Certain Expenses:
Report of Independent Auditors.......................................................................... F-29
Combined Statements of Revenue and Certain Expenses for the Three Months Ended March 31, 1996 and 1995
(Unaudited) and the Year Ended December 31, 1995....................................................... F-30
Notes to Combined Statements of Revenue and Certain Expenses............................................ F-31
1996 ACQUIRED PROPERTIES
Combined Statements of Revenue and Certain Expenses:
Report of Independent Auditors.......................................................................... F-33
Combined Statements of Revenue and Certain Expenses for the Three Months Ended March 31, 1996 and 1995
(Unaudited) and the Year Ended December 31, 1995....................................................... F-34
Notes to Combined Statements of Revenue and Certain Expenses............................................ F-35
ACQUISITION PROPERTIES
Combined Statements of Revenue and Certain Expenses:
Report of Independent Auditors.......................................................................... F-37
Combined Statements of Revenue and Certain Expenses for the Three Months Ended March 31, 1996 and 1995
(Unaudited) and the Year Ended December 31, 1995....................................................... F-38
Notes to Combined Statements of Revenue and Certain Expenses............................................ F-39
</TABLE>
F-1
<PAGE>
ARDEN REALTY GROUP, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial and operating information for the three
months ended March 31, 1996 and the year ended December 31, 1995 is presented as
if the Offering, the Formation Transactions (including the purchase of the
Acquisition Properties), and the acquisitions of the Properties acquired during
1996 prior to the Offering (the "1996 Acquired Properties") and the Properties
acquired during 1995 (the "1995 Acquired Properties") all had occurred by the
date of the March 31, 1996 combined balance sheet and at the beginning of the
period presented for the combined statements of operations. The pro forma March
31, 1996 balance sheet information also gives effect to the recording of
minority interest for OP Units, as if these transactions occurred on March 31,
1996.
The pro forma financial statements are not necessarily indicative of what
the Company's financial position or results of operations would have been
assuming the completion of the Formation Transactions and the Offering on such
date or at the beginning of the period indicated, nor does it purport to project
the Company's financial position or results of operations at any future date or
for any future period.
F-2
<PAGE>
ARDEN REALTY GROUP, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
ARDEN PRO FORMA COMPANY
PREDECESSORS ADJUSTMENTS PRO FORMA
------------ ------------ -----------
<S> <C> <C> <C>
Commercial office properties-net................................... $ 345,633 $ 69,192(A) $ 414,825
Cash and cash equivalents.......................................... 1,253 9,180(B) 10,433
Restricted cash.................................................... 23,301 (23,301 (C) --
Rents and other receivables........................................ 1,892 -- 1,892
Deferred rents..................................................... 3,874 -- 3,874
Prepaid financing and leasing costs-net............................ 2,648 505(D) 3,153
Prepaid expenses and other assets.................................. 1,689 -- 1,689
------------ ------------ -----------
Total assets................................................... $ 380,290 $ 55,576 $ 435,866
------------ ------------ -----------
------------ ------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage loans payable............................................. $ 352,805 $ (248,975 (E) $ 103,830
Unsecured lines of credit.......................................... 589 (589 (F) --
Accounts payable and accrued expenses.............................. 5,242 (1,441 (G) 3,801
Deferred interest.................................................. 3,156 (3,156 (H) --
Security deposits.................................................. 2,721 -- 2,721
------------ ------------ -----------
Total liabilities.............................................. 364,513 (254,161) 110,352
------------ ------------ -----------
Minority interests in Operating Partnership........................ -- 41,103(I) 41,103
Owners' Equity..................................................... 15,777 (15,777 (J) --
STOCKHOLDERS' EQUITY:
Common Stock..................................................... -- 187(K) 187
Additional paid-in capital....................................... -- 284,224(L) 284,224
Retained earnings................................................ -- -- --
------------ ------------ -----------
Total stockholders' equity..................................... 0 284,411 284,411
------------ ------------ -----------
Total liabilities and equity................................... $ 380,290 $ 55,576 $ 435,866
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ARDEN REALTY GROUP, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL 1996
ARDEN ACQUIRED ACQUISITION TOTAL PRO FORMA COMPANY
PREDECESSORS PROPERTIES PROPERTIES COMBINED ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Rental.............................. $ 12,471 $ 5,019 $ 942 $ 18,432 $ (1,870)(M) $ 16,562
Tenant reimbursements............... 758 309 17 1,084 (225)(N) 859
Parking............................. 1,267 459 41 1,767 (171)(O) 1,596
Other............................... 558 73 110 741 (199)(P) 542
------------ ----------- ----------- ----------- ----------- -----------
Total revenue..................... 15,054 5,860 1,110 22,024 (2,465) 19,559
------------ ----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES
Property operating, taxes, insurance
and ground rent.................... 4,579 2,269 454 7,302 (1,840)(Q) 5,462
Property general and
administrative..................... 732 133 23 888 (1)(R) 887
------------ ----------- ----------- ----------- ----------- -----------
Total property operating
expenses......................... 5,311 2,402 477 8,190 (1,841) 6,349
------------ ----------- ----------- ----------- ----------- -----------
9,743 3,458 633 13,834 (624) 13,210
REIT general and administrative..... 364 -- -- 364 570(S) 934
Interest expense.................... 8,832 -- -- 8,832 (6,718)(T) 2,114
------------ ----------- ----------- ----------- ----------- -----------
9,196 -- -- 9,196 (6,148) 3,048
------------ ----------- ----------- ----------- ----------- -----------
Income before depreciation,
amortization and minority
interests............................ 547 3,458 633 4,638 5,524 10,162
Depreciation and amortization....... 2,396 -- -- 2,396 713(U) 3,109
------------ ----------- ----------- ----------- ----------- -----------
(Loss) Income before minority
interests............................ (1,849) 3,458 633 2,242 4,811 7,053
Minority interests.................... -- -- -- -- 891(V) 891
------------ ----------- ----------- ----------- ----------- -----------
(Loss) Income......................... $ (1,849) $ 3,458 $ 633 $ 2,242 $ 3,920 $ 6,162
------------ ----------- ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- ----------- -----------
PRO FORMA COMMON SHARES OUTSTANDING
BEFORE CONVERSION OF OP UNITS........ 18,725
-----------
-----------
NET INCOME PER SHARE.................. $.33
-----------
-----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ARDEN REALTY GROUP, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL 1995 1996
ARDEN ACQUIRED ACQUIRED ACQUISITION TOTAL PRO FORMA
PREDECESSORS PROPERTIES PROPERTIES PROPERTIES COMBINED ADJUSTMENTS
------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Rental........................................ $ 24,442 $ 21,791 $ 19,391 $ 4,280 $ 69,904 $ (3,213)(M)
Tenant reimbursements......................... 822 1,233 961 54 3,070 (51)(N)
Parking....................................... 1,665 2,822 1,859 133 6,479 (584)(O)
Other......................................... 1,653 972 350 85 3,060 (619)(P)
------------ ----------- ----------- ----------- ----------- -----------
Total revenue............................... 28,582 26,818 22,561 4,552 82,513 (4,467)
------------ ----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES
Property operating, taxes, insurance and
ground rent.................................. 8,679 10,082 8,335 2,120 29,216 (4,670)(Q)
Property general and administrative........... 1,588 952 513 108 3,161 830(R)
------------ ----------- ----------- ----------- ----------- -----------
Total property operating expenses........... 10,267 11,034 8,848 2,228 32,377 (3,840)
------------ ----------- ----------- ----------- ----------- -----------
18,315 15,784 13,713 2,324 50,136 (627)
REIT general and administrative................. 1,377 -- -- -- 1,377 2,358(S)
Interest expense................................ 13.780 -- -- -- 13,780 (5,361)(T)
------------ ----------- ----------- ----------- ----------- -----------
15,157 -- -- -- 15,157 (3,003)
------------ ----------- ----------- ----------- ----------- -----------
Income before depreciation, amortization and
minority interests............................. 3,158 15,784 13,713 2,324 34,979 2,376
Depreciation and amortization................. 4,373 -- -- -- 4,373 7,317(U)
------------ ----------- ----------- ----------- ----------- -----------
(Loss) Income before minority interests......... (1,215) 15,784 13,713 2,324 30,606 (4,941)
Minority interests.............................. -- -- -- -- -- 3,242(V)
------------ ----------- ----------- ----------- ----------- -----------
(Loss) Income................................... $ (1,215) $ 15,784 $ 13,713 $ 2,324 $ 30,606 $ (8,183)
------------ ----------- ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- ----------- -----------
PRO FORMA COMMON SHARES OUTSTANDING BEFORE
CONVERSION OF OP UNITS.........................
NET INCOME PER SHARE............................
<CAPTION>
COMPANY
PRO FORMA
-----------
<S> <C>
REVENUE
Rental........................................ $ 66,691
Tenant reimbursements......................... 3,019
Parking....................................... 5,895
Other......................................... 2,441
-----------
Total revenue............................... 78,046
-----------
OPERATING EXPENSES
Property operating, taxes, insurance and
ground rent.................................. 24,546
Property general and administrative........... 3,991
-----------
Total property operating expenses........... 28,537
-----------
49,509
REIT general and administrative................. 3,735
Interest expense................................ 8,419
-----------
12,154
-----------
Income before depreciation, amortization and
minority interests............................. 37,355
Depreciation and amortization................. 11,690
-----------
(Loss) Income before minority interests......... 25,665
Minority interests.............................. 3,242
-----------
(Loss) Income................................... $ 22,423
-----------
-----------
PRO FORMA COMMON SHARES OUTSTANDING BEFORE
CONVERSION OF OP UNITS......................... 18,725
-----------
-----------
NET INCOME PER SHARE............................ $1.20
-----------
-----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ARDEN REALTY GROUP, INC.
NOTES TO PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. ADJUSTMENTS TO THE PRO FORMA CONDENSED COMBINED BALANCE SHEET
The adjustments to the Pro Forma Condensed Combined Balance Sheet as of
March 31, 1996 are as follows:
<TABLE>
<S> <C> <C>
(A) Increase in commercial properties - net
Purchase price and actual and estimated additional closing costs of
100 Broadway and the Acquisition Properties......................... $ 55,450
Purchase price in excess of book value of interests in the Properties
purchased from Arden Predecessors................................... 13,742
---------
Increase in commercial properties-net.............................. $ 69,192
---------
---------
(B) Increase in cash and cash equivalents
Net Offering Proceeds:
Proceeds from the Offering......................................... $ 374,505
Proceeds from the new debt origination............................. 103,830
Costs associated with offering..................................... (29,033)
Costs associated with the new debt origination..................... (1,422)
---------
Net Offering Proceeds............................................ 447,880
Use of Proceeds:
Payment of mortgage loans of Arden Predecessors.................... (352,805)
Payment of unsecured line of credit of Arden Predecessors.......... (589)
Purchase of 100 Broadway and the Acquisition Properties............ (55,450)
Purchases of certain interests in Arden Predecessors............... (28,575)
Payment of additional interest on debt of Arden Predecessors....... (23,141)
Release of restricted cash......................................... 23,301
Payment of accrued interest on debt of Arden Predecessors.......... (1,441)
---------
Use of Proceeds.................................................. (438,700)
Increase in cash and cash equivalents.......................... $ 9,180
---------
---------
(C) Release of restricted cash at payment of debt.............................. $ (23,301)
---------
---------
(D) Increase in prepaid financing and leasing costs - net
Decrease in prepaid financing costs related to the retired debt........ $ (917)
Increase in prepaid financing costs related to originated debt......... 1,422
---------
Total increase in prepaid financing and leasing costs-net............ $ 505
---------
---------
(E) Decrease in mortgage loans payable
Repayment of mortgage loans............................................ $(352,805)
Origination of new debt................................................ 103,830
---------
Net decrease in mortgage loans payable............................... $(248,975)
---------
---------
(F) Repayment of unsecured lines of credit..................................... $ (589)
---------
---------
(G) Payment of accrued interest expense at time of repayment of existing debt $ (1,441)
---------
---------
</TABLE>
F-6
<PAGE>
ARDEN REALTY GROUP, INC.
NOTES TO PRO FORMA CONDENSED COMBINED -- (CONTINUED)
FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1. ADJUSTMENTS TO THE PRO FORMA CONDENSED COMBINED BALANCE SHEET (CONTINUED)
<TABLE>
<S> <C> <C>
(H) Payment of deferred interest at time of repayment of existing debt (part of
additional interest)...................................................... $ (3,156)
---------
---------
(I) To establish minority interests based on equity share of minority interest
in Operating Partnership.................................................. $ 41,103
---------
---------
(J) Elimination of owners' equity of Arden Predecessors........................ $ (15,777)
---------
---------
(K) Par Value of the Common Stock to be issued................................. $ 187
---------
---------
(L) Increase in additional paid-in capital
Proceeds from the Offering........................................... $ 374,505
Costs associated with the Offering................................... (29,033)
Book value of certain purchased interests in Arden Predecessors...... (14,833)
Par value............................................................ (187)
Write off of unamortized Loan Fees................................... (917)
Elimination of owners' equity of Arden Predecessors.................. 15,777
Payment of additional interest not previously accrued................ (19,985)
Minority interest.................................................... (41,103)
---------
---------
Increase in additional paid-in capital............................. $ 284,224
---------
---------
</TABLE>
2. ADJUSTMENTS TO THE PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
The pro forma adjustments reflected in the Pro Forma Condensed Combined
Statements of Operations for the three months ended March 31, 1996 and the year
ended December 31, 1995 are set forth below. The pro forma adjustments include
the elimination of the portion of revenue and expenses that are included in the
March 31, 1996 and December 31, 1995 financial statements for the 1996 Acquired
Properties and the 1995 Acquired Properties, respectively, which are also
included in the statement of operations of the Arden Predecessors for the period
owned by the Arden Predecessors (the "Arden Eliminations"). The following is the
list of the Arden Eliminations:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C> <C>
Elimination of rental revenue.......................................... $ 2,022 $ 5,174
Elimination of tenant reimbursements................................... 141 160
Elimination of parking revenue......................................... 171 584
Elimination of other income............................................ 12 95
Elimination of property operating, taxes, insurance and ground rent.... 1,121 3,069
Elimination of property general and administrative..................... 57 152
</TABLE>
F-7
<PAGE>
ARDEN REALTY GROUP, INC.
NOTES TO PRO FORMA CONDENSED COMBINED -- (CONTINUED)
FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
2. ADJUSTMENTS TO THE PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C> <C>
(M) Decrease in rental revenue
The Arden Elimination............................................ $ (2,022) $ (5,174)
To adjust the 1995 Acquired Properties, the 1996 Acquired
Properties and the Acquisition Properties to effective rental
revenue based on the accounting basis of the Arden
Predecessors.................................................... 152 1,961
------- --------
Net decrease in rental revenue................................. $ (1,870) $ (3,213)
------- --------
------- --------
(N) Decrease in tenant reimbursements
The Arden Elimination............................................ $ (141) $ (160)
Adjustment to tenant reimbursements due to the reassessment of
property taxes and changes in insurance and property and general
administrative costs............................................ (84) 109
------- --------
Net decrease in tenant reimbursements.......................... $ (225) $ (51)
------- --------
------- --------
(O) The Arden Elimination.................................................. $ (171) $ (584)
------- --------
------- --------
(P) Decrease in other income
The Arden Elimination............................................ $ (12) $ (95)
To eliminate non-recurring construction management fees and
interest income................................................. (187) (524)
------- --------
Net decrease in other income................................... $ (199) $ (619)
------- --------
------- --------
(Q) Decrease in property operating, taxes, insurance and ground rent
The Arden Elimination............................................ $ (1,121) $ (3,069)
Net decrease due to the reassessment of property taxes and
reduction of insurance costs.................................... (719) (1,601)
------- --------
Net decrease in property operating, taxes, insurance and ground
rent.......................................................... $ (1,840) $ (4,670)
------- --------
------- --------
(R) (Decrease) increase in property general and administrative
The Arden Elimination............................................ $ (57) $ (152)
Increase in property general and administrative related to
additional property payroll costs relating to the 1995 Acquired
Properties, the 1996 Acquired Properties and the Acquisition
Properties...................................................... 56 982
------- --------
Net (decrease) increase in property general and administrative $ (1) $ 830
------- --------
------- --------
</TABLE>
F-8
<PAGE>
ARDEN REALTY GROUP, INC.
NOTES TO PRO FORMA CONDENSED COMBINED -- (CONTINUED)
FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
2. ADJUSTMENTS TO THE PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C> <C>
(S) Increase in REIT general and administrative related to current level of
operations as a public real estate investment trust................... $ 570 $ 2,358
------- --------
------- --------
(T) Decrease in interest expense
Decrease in interest expense due to repayment of mortgage
loans........................................................... $ (8,832) $ (13,780)
Increase in interest expense related to the newly originated
debt............................................................ 2,063 8,216
Net increase for loan fee amortization related to the originated
debt............................................................ 51 203
------- --------
Net decrease in interest expense............................... $ (6,718) $ (5,361)
------- --------
------- --------
(U) Net increase in depreciation expense to reflect a full period of
depreciation for the 1995 Acquired Properties, the 1996 Acquired
Properties and the Acquisition Properties............................. $ 613 $ 6,918
Increase in depreciation due to the purchase price in excess of book
value of interest in the Properties purchased from Arden
Predecessors.......................................................... 100 399
------- --------
Net increase in depreciation expense........................... $ 713 $ 7,317
------- --------
------- --------
(V) To reflect adjustment for minority interest in the Operating
Partnership of 12.63%................................................. $ 891 $ 3,242
------- --------
------- --------
</TABLE>
F-9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Arden Realty Group, Inc.
We have audited the accompanying balance sheet of Arden Realty Group, Inc.,
a Maryland Corporation, as of May 1, 1996. This balance sheet is the
responsibility of the management of Arden Realty Group, Inc. Our responsibility
is to express an opinion on the balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet presents fairly, in all material respects,
the financial position of Arden Realty Group, Inc., a Maryland corporation, as
of May 1, 1996 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
May 1, 1996
F-10
<PAGE>
ARDEN REALTY GROUP, INC.
BALANCE SHEET
MAY 1, 1996
<TABLE>
<S> <C>
ASSETS........................................................................ $ --
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commitments and contingencies (NOTE 2)........................................ $ --
-----------
Preferred Stock, $.01 par value, 20,000,000 shares authorized, none issued and
outstanding.................................................................. $ --
-----------
Common stock, $.01 par value, 100,000,000 shares authorized, none issued and
outstanding.................................................................. $ --
-----------
$ --
-----------
-----------
</TABLE>
See accompanying notes.
F-11
<PAGE>
ARDEN REALTY GROUP, INC.
NOTES TO BALANCE SHEET
MAY 1, 1996
1. ORGANIZATION
Arden Realty Group, Inc. (the "Company") is a Maryland corporation which was
formed on May 1, 1996, to acquire a portfolio of office properties (the
"Properties") and continue the real estate business of Arden Realty Group, Inc.,
a California Corporation, its principals and certain affiliated partnerships and
other entities (collectively the "Arden Predecessors") which are engaged in
owning, acquiring, managing, leasing and renovating office properties in
Southern California.
The Company will be the sole general partner of a newly formed limited
partnership (the "Operating Partnership"). The Company will initially hold an
aggregate of 87.37% of the ownership interests in the Operating Partnership. The
Operating Partnership will hold all the interests in the Properties. The Company
will conduct substantially all of its business through the Operating
Partnership. As the sole general partner of the Operating Partnership, the
Company will have exclusive power to manage and conduct the business of the
Operating Partnership, subject to certain limited exceptions.
Concurrently with the consummation of a proposed public offering of the
Company's Common Stock (the "Offering"), the Company and the Operating
Partnership, together with the partners and members of the Arden Predecessors
and other parties which hold ownership interests in certain of the Properties
(collectively, the "Participants"), will engage in certain formation
transactions (the "Formation Transactions"). The Formation Transactions have
been designed to (i) enable the Company to raise the necessary capital to
acquire the Properties and repay certain mortgage debt relating thereto, (ii)
provide a vehicle for future acquisitions, (iii) enable the Company to comply
with certain requirements under the federal income tax laws and regulations
relating to real estate investment trusts, (iv) facilitate potential securitized
mortgage financings, and (v) preserve certain tax advantages for certain Arden
Predecessors. The Formation Transactions are as follows:
- The Company will sell shares of Common Stock in the Offering.
- Pursuant to separate option agreements (the "Option Agreements"), the
Company will acquire for cash from certain Participants (not including
Messrs. Ziman and Coleman who will not receive cash in the Formation
Transactions) the interests owned by such Participants in certain of the
Arden Predecessors and in certain of the Properties. The Company will pay
approximately $28.6 million from the net proceeds of the Offering for such
interests.
- The Company will contribute (i) the interests in the Arden Predecessors
and in the Properties acquired pursuant to the Option Agreements and (ii)
the net proceeds from the Offering (after payment of the cash
consideration to certain Participants as described above) to the Operating
Partnership in exchange for a 87.37% general partner interest in the
Operating Partnership.
- Pursuant to separate contribution agreements (the "Contribution
Agreements"), the following additional contributions will be made to the
Operating Partnership in exchange for OP Units representing limited
partner interests: (i) certain Participants will contribute the remaining
interests in the Arden Predecessors and in certain of the Properties
(I.E., all interests not acquired by the Company pursuant to the Option
Agreements) and (ii) Arden will contribute certain of its assets,
including management contracts relating to certain of the Properties and
the contract rights to purchase the Acquisition Properties (303 Glenoaks
Blvd. and 12501 East Imperial Highway). The Participants making such
contributions (including Arden and Messrs. Ziman and Coleman) will receive
an aggregate of 2,706,000 OP Units, with an estimated value of
approximately $54.1 million based on the assumed initial public offering
price of the Common Stock.
F-12
<PAGE>
ARDEN REALTY GROUP, INC.
NOTES TO BALANCE SHEET -- (CONTINUED)
MAY 1, 1996
1. ORGANIZATION (CONTINUED)
- The Company, through the Operating Partnership, will borrow approximately
$104 million aggregated principal amount under a seven-year term loan (the
"Mortgage Financing") which will be secured by cross-collateralized and
cross-defaulted first mortgage lien(s) on 10 of the Properties (the
"Mortgage Financing Properties").
- Approximately $35 million of the net proceeds of the Offering and the
Mortgage Financing will be used by the Operating Partnership to purchase
the Acquisition Properties.
- Approximately $392 million of the net proceeds of the Offering and the
Mortgage Financing will be used by the Operating Partnership to repay
certain mortgage debt secured by the Properties and indebtedness
outstanding under lines of credit to be assumed by the Operating
Partnership in the Formation Transactions.
- The Company, through the Operating Partnership, will enter into the $200
million Credit Facility.
2. COMMITMENTS AND CONTINGENCIES
The Company will become a party to various legal actions resulting from the
operating activities to be transferred to the Operating Partnership. These
actions are incidental to the transferred business and management does not
believe that these actions will have a material adverse effect on the Company.
Pursuant to the Operating Partnership's limited partnership agreement,
beginning one year after consummation of the Offering, the OP Units issued
concurrently with the Offering are redeemable (at the election of the holder)
for cash or, at the option of the Company, exchangeable for shares of Common
Stock of the Company on a one-for-one basis.
3. RISKS AND UNCERTAINTIES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. INCOME TAXES
After the Offering, the Company intends to make an election to be taxed as a
real estate investment trust ("REIT") under Sections 586 through 860 of the
Internal Revenue Code. As a REIT, the Company generally will not be subject to
federal income tax if it distributes at least 95% of its taxable income for each
tax year to its stockholders. REITs are subject to a number of organizational
and operational requirements. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
tax rates. Even if the Company qualifies for taxation as a REIT, the Company may
be subject to state and local income taxes and to federal income tax and excise
tax on its undistributed income.
5. STOCK INCENTIVE PLAN
The Company intends to adopt a Stock Incentive Plan to provide incentives to
attract and retain officers, key employees and outside directors.
The Stock Incentive Plan will be qualified under Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the"Exchange Act"). The Stock
Incentive Plan will be administered by the Compensation Committee and provide
for the granting of stock options, stock appreciation rights or restricted stock
with respect to up to 1,500,000 shares of Common Stock to executive or other key
employees of the Company.
F-13
<PAGE>
ARDEN REALTY GROUP, INC.
NOTES TO BALANCE SHEET -- (CONTINUED)
MAY 1, 1996
5. STOCK INCENTIVE PLAN (CONTINUED)
Stock options may be granted in the form of "incentive stock options," as
defined in Section 422 of the Code, or non-statutory stock options and are
exercisable for up to 10 years following the date of grant. The exercise price
of each option will be established by the Compensation Committee; provided,
however, that the price per share must be equal to or greater than the fair
market value of the Common Stock on the grant date.
The Stock Incentive Plan also provides for the issuance of stock
appreciation rights which will generally entitle a holder to receive cash or
stock, as determined by the Compensation Committee, at the time of exercise
equal to the difference between the exercise price and the fair market value of
the Common Stock. In addition, the Stock Incentive Plan permits the Company to
issue shares of restricted stock to executive or other key employees upon such
terms and conditions as shall be determined by the Compensation Committee.
During 1995 an accounting pronouncement was issued by the Financial
Accounting Standards Board that applies to the Company, Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." This new standard will become effective for the Company's 1996
fiscal year. SFAS No. 123 establishes a fair value method for accounting for
stock-based compensation, such as option plans, but does not require that the
new method be adopted. The Company may elect to continue following the
methodology in APB Opinion No. 25, "Accounting for Stock Issued to Employees",
whereby the compensation expense is measured as the difference between the
exercise price of the option and the stock price on the measurement date with
the fair value of options disclosed in the footnotes in the financial
statements. SFAS No. 123 is not expected to adversely affect the Company's
future reported results.
F-14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Owners of the Arden Predecessors
We have audited the accompanying combined balance sheets of the Arden
Predecessors, as defined in Note 1, as of December 31, 1995 and 1994, and the
related combined statements of operations, owners' equity and cash flows for
each of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule III, commercial office properties and
accumulated depreciation. These financial statements and schedule are the
responsibility of the management of the Arden Predecessors. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Arden
Predecessors as of December 31, 1995 and 1994, and the combined results of their
operations and cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Ernst & Young LLP
Los Angeles, California
April 10, 1996
F-15
<PAGE>
ARDEN PREDECESSORS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
MARCH 31, ---------- ----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Commercial office properties, net of accumulated depreciation of $8,954,
$6,651 and $2,576, respectively............................................ $ 345,633 $ 252,082 $ 106,135
Cash and cash equivalents................................................... 1,253 1,731 991
Restricted cash............................................................. 23,301 14,971 2,008
Rents and other receivables................................................. 1,892 1,583 561
Deferred rents.............................................................. 3,874 3,126 1,587
Prepaid financing and leasing costs, net of accumulated amortization of
$950, $894 and $151, respectively.......................................... 2,648 2,400 1,204
Prepaid expenses and other assets........................................... 1,689 1,750 568
----------- ---------- ----------
Total assets............................................................ $ 380,290 $ 277,643 $ 113,054
----------- ---------- ----------
----------- ---------- ----------
LIABILITIES AND OWNERS' EQUITY
Mortgage loans payable...................................................... $ 352,805 $ 253,183 $ 93,684
Unsecured lines of credit................................................... 589 813 748
Accounts payable and accrued expenses....................................... 5,242 5,681 1,756
Deferred interest........................................................... 3,156 1,056 --
Security deposits........................................................... 2,721 2,222 893
----------- ---------- ----------
Total liabilities....................................................... 364,513 262,955 97,081
Owners' equity.............................................................. 15,777 14,688 15,973
----------- ---------- ----------
Total liabilities and owners' equity.................................... $ 380,290 $ 277,643 $ 113,054
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes.
F-16
<PAGE>
ARDEN PREDECESSORS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
--------------- ------------------------
1996 1995 1995 1994 1993
------- ------ ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Rental.................................................... $12,471 $4,667 $24,442 $11,928 $3,155
Tenant reimbursements..................................... 758 128 822 509 38
Parking................................................... 1,267 268 1,665 741 284
Other..................................................... 558 325 1,653 734 313
------- ------ ------- ------- ------
Total revenue......................................... 15,054 5,388 28,582 13,912 3,790
------- ------ ------- ------- ------
OPERATING EXPENSES
Property operating and maintenance........................ 2,577 1,149 6,310 2,980 1,002
Property general and administrative....................... 732 282 1,588 735 349
Real estate taxes......................................... 958 286 1,590 695 112
Insurance................................................. 872 64 627 120 49
Ground rent............................................... 172 33 152 15 --
------- ------ ------- ------- ------
Total property operating expenses..................... 5,311 1,814 10,267 4,545 1,512
------- ------ ------- ------- ------
9,743 3,574 18,315 9,367 2,278
------- ------ ------- ------- ------
General and administrative.................................. 364 373 1,377 689 386
Interest.................................................... 8,832 2,241 13,780 5,109 673
------- ------ ------- ------- ------
9,196 2,614 15,157 5,798 1,059
------- ------ ------- ------- ------
Income before depreciation and amortization and
extraordinary loss......................................... 547 960 3,158 3,569 1,219
Depreciation and amortization............................... 2,396 879 4,373 2,184 528
------- ------ ------- ------- ------
(Loss) income before extraordinary loss..................... (1,849) 81 (1,215) 1,385 691
Extraordinary loss.......................................... -- -- -- (601) --
------- ------ ------- ------- ------
Net (loss) income..................................... $(1,849) $ 81 $(1,215) $ 784 $ 691
------- ------ ------- ------- ------
------- ------ ------- ------- ------
</TABLE>
See accompanying notes.
F-17
<PAGE>
ARDEN PREDECESSORS
COMBINED STATEMENTS OF OWNERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at January 1, 1993......................................................... $ (153)
<S> <C>
Owners' contributions............................................................ 3,400
Owners' distributions............................................................ (460)
Net income - 1993................................................................ 691
---------
Balance at December 31, 1993....................................................... 3,478
Owners' contributions............................................................ 13,164
Owners' distributions............................................................ (1,453)
Net income - 1994................................................................ 784
---------
Balance at December 31, 1994....................................................... 15,973
Owners' contributions............................................................ 8,613
Owners' distributions............................................................ (8,683)
Net (loss) - 1995................................................................ (1,215)
---------
Balance at December 31, 1995....................................................... 14,688
Owners' contributions (unaudited)................................................ 3,500
Owners' distributions (unaudited)................................................ (562)
Net (loss) - three months ended March 31, 1996 (unaudited)....................... (1,849)
---------
Balance at March 31, 1996 (unaudited).............................................. $ 15,777
---------
---------
</TABLE>
See accompanying notes.
F-18
<PAGE>
ARDEN PREDECESSORS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS FOR THE YEARS ENDED DECEMBER
ENDED MARCH 31, 31,
------------------ ----------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income..................................................... $ (1,849) $ 81 $ (1,215) $ 784 $ 691
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization..................................... 2,396 879 4,373 2,184 528
Amortization of loan costs and fees............................... 161 76 478 29 2
(Increase) decrease in rents and other receivables................ (309) 157 (1,022) (350) (90)
Increase in deferred rents........................................ (748) (455) (1,539) (1,195) (392)
Increase in prepaid financing and leasing costs................... (503) (742) (1,938) (1,000) (350)
Decrease (increase) in prepaid expenses and other assets.......... 62 117 (1,216) (550) (15)
(Decrease) increase in accounts payable and accrued expenses...... (439) (250) 3,925 996 712
Increase in deferred interest..................................... 2,100 99 1,056 -- --
Increase in security deposits..................................... 499 147 1,329 298 595
-------- -------- -------- -------- --------
Net cash provided by operating activities............................. 1,370 109 4,231 1,196 1,681
-------- -------- -------- -------- --------
INVESTING ACTIVITIES
Acquisitions and improvements to commercial office properties......... (95,854) (20,086) (150,022) (45,804) (62,907)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES
Proceeds from mortgage loans.......................................... 100,946 23,039 181,832 33,329 60,677
Repayments of mortgage loans.......................................... (1,324) (290) (22,333) (322) --
Proceeds from unsecured lines of credit............................... 26 185 3,310 1,240 298
Repayments of unsecured lines of credit............................... (250) (418) (3,245) (790) (250)
Increase in restricted cash........................................... (8,330) (732) (12,963) (1,314) (694)
Owners' contributions................................................. 3,500 3,380 8,613 13,164 3,400
Owners' distributions................................................. (562) (5,815) (8,683) (1,453) (460)
-------- -------- -------- -------- --------
Net cash provided by financing activities............................. 94,006 19,349 146,531 43,854 62,971
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash equivalents.................. (478) (628) 740 (754) 1,745
Cash and cash equivalents at beginning of period...................... 1,731 991 991 1,745 --
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period............................ 1,253 363 $ 1,731 $ 991 $ 1,745
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Cash paid during the period for interest, net of interest
capitalized......................................................... $ 4,920 $ 2,340 $ 11,069 $ 4,590 $ 520
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
See accompanying notes.
F-19
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
The following entities (the "Arden Predecessors") are commonly controlled
and are currently engaged in owning, acquiring, managing, leasing and renovating
office properties in Southern California. Arden Realty Group, Inc., a Maryland
corporation, will be formed as a real estate investment trust (the "REIT") to
continue and expand the business of the Arden Predecessors.
<TABLE>
<CAPTION>
PREDECESSORS
- -----------------------------------------------------------------------------------------------------------------
ENTITY NAME PROPERTY NAME CITY ACQUISITION DATE
- --------------------------------------- ---------------------------------- ------------------ ----------------
<S> <C> <C> <C>
Arden Realty Group, Inc., a California
Corporation Operating Management Company -- --
Century Center Associates, L.P. Century Park Center Los Angeles March 1993
Beverly Ventura Associates, L.P. Beverly Atrium Beverly Hills December 1993
Woodland Hills Financial Woodland Hills December 1993
Bristol Encino Associates, LLC Bristol Plaza Culver City August 1994
16000 Ventura Blvd. Encino March 1995
1950 Sawtelle Associates, L.P. 1950 Sawtelle Los Angeles June 1995
222 Harbor Associates, LLC Anaheim City Centre Anaheim November 1994
425 West Broadway Glendale December 1994
5000 Spring Associates, LLC 5000 East Spring Long Beach December 1994
Arden LAOP IV, LLC 70 South Lake Pasadena November 1995
The New Wilshire Los Angeles November 1995
Calabasas Commerce Center Calabasas November 1995
Westwood Terrace Los Angeles November 1995
Skyview Center Los Angeles November 1995
5601 Lindero Canyon Westlake Village March 1994
4811 Airport Plaza Drive Long Beach November 1995
4900/10 Airport Plaza Drive Long Beach November 1995
Arden LAOP V, LLC (Note 8) 5832 Bolsa Huntington Beach February 1996
400 Corporate Pointe Culver City February 1996
9665 Wilshire Beverly Hills February 1996
Imperial Bank Tower San Diego February 1996
Arden Broadway Associates, LLC 100 West Broadway Long Beach To be acquired
REIT Acquisition Properties 303 Glenoaks Blvd. Burbank To be acquired
12501 East Imperial Highway Norwalk To be acquired
</TABLE>
PRINCIPLES OF COMBINATION
The financial statements include the accounts of the Arden Predecessors on a
combined basis. All significant balances and transactions between the Arden
Predecessors have been eliminated in combination.
PROPOSED TRANSACTIONS
Concurrently with the consummation of an initial public offering of the
REIT's Common Stock (the "Offering"), which is expected to be completed in 1996,
the REIT and a newly formed limited partnership (the "Operating Partnership"),
together with the partners and members of the Arden Predecessors and other
parties which hold ownership interests in the properties (collectively, the
"Participants"), will engage in certain formation transactions (the "Formation
Transactions"). The Formation Transactions are designed to (i) enable the REIT
to raise the necessary capital to acquire the properties and repay certain
mortgage debt relating thereto, (ii) provide a vehicle for future acquisitions,
(iii) enable the REIT to comply with
F-20
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION (CONTINUED)
certain requirements under the federal income tax laws and regulations relating
to real estate investment trusts, (iv) facilitate potential securitized mortgage
financings and (v) preserve certain tax advantages for certain Participants.
The operations of the REIT will be carried on primarily through the
Operating Partnership and its subsidiaries in order to assist the REIT and the
Participants in forming the REIT under the Internal Revenue Code of 1986.
The REIT will be the sole general partner in the Operating Partnership and
the Participants will transfer their property and operating interests in the
Arden Predecessors in exchange for limited partnership interests in the
Operating Partnership and/or cash.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RISKS AND UNCERTAINTIES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMMERCIAL OFFICE PROPERTIES AND FURNITURE, FIXTURES AND EQUIPMENT
The properties are recorded at cost less accumulated depreciation. The Arden
Predecessors have adopted the new accounting pronouncement, Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Under this
standard, if impairment conditions exist, the Arden Predecessors make an
assessment of the recoverability of the carrying amounts of the properties by
estimating the future undiscounted cash flows, excluding interest charges. If
the carrying amount exceeds the aggregate future cash flows, the Arden
Predecessors would recognize an impairment loss to the extent the carrying
amount exceeds the fair value of the property. Any long-lived assets to be
disposed of are to be valued at estimated fair value less costs to sell. Based
on such periodic assessments, no impairments have or currently exist and,
therefore, no real estate carrying amounts have been adjusted.
Repairs and maintenance are expensed as incurred. Replacements and
betterments in excess of $500 are capitalized and depreciated over their
estimated useful lives.
Depreciation is calculated using the straight-line method and forty year
lives for buildings and ten year lives for building improvements. Amortization
of tenant improvements is calculated using the straight-line method over the
estimated life of the related lease.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with original
maturities of three months or less when acquired.
RESTRICTED CASH
Restricted cash consists of cash held as collateral to provide credit
enhancement for certain mortgage loans payable and cash reserves for capital
expenditures, tenant improvements, security deposits and property taxes. All
restricted cash is controlled directly or indirectly by the related mortgage
lenders.
PREPAID COSTS
Deferred leasing commissions are amortized on a straight-line basis over the
life of the related lease.
F-21
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fees and costs incurred in obtaining long-term financing are amortized over
the terms of the related loan agreements.
REVENUE RECOGNITION
Minimum rent, including rental abatements and contractual fixed increases
attributable to operating leases, is recognized on a straight-line basis over
the term of the related lease. Amounts expected to be received in later years
are included in deferred rents. Property operating cost reimbursements due from
tenants for common area maintenance, real estate taxes and other recoverable
costs are recognized in the period the expenses are incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The mortgage loans payable of the Arden Predecessors consist primarily of
mortgage loans which provide for variable indexed rates and in most cases
participation or significant additional interest due at maturity. Accordingly,
management believes the carrying values of such loans either approximate fair
values or it is not practical to determine fair values due to the lack of
availability of market information for similar financial instruments. Other than
the mortgage loans payable, the Arden Predecessors believe the carrying amounts
of their financial instruments approximate their fair values.
INCOME TAXES
The entities that make up the Arden Predecessors consist of a Subchapter S
corporation, limited liability companies and partnerships. Taxable income is
recorded on the separate tax returns of the membership unit holders and
individual partners and, accordingly, no provision for income taxes has been
recorded in the accompanying financial statements.
PER SHARE DATA
Per share data is not relevant since the Arden Predecessors represents a
presentation of the combined operations of a group of companies and
partnerships.
UNAUDITED INTERIM STATEMENTS
The combined financial statements as of March 31, 1996 and for the three
months ended March 31, 1996 and 1995 are unaudited. In the opinion of
management, such financial statements reflect all adjustments necessary for a
fair presentation of the results of the respective interim periods. All such
adjustments are of a normal, recurring nature.
3. COMMERCIAL OFFICE PROPERTIES
Commercial office properties, including office buildings and related parking
facilities, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................................. $ 40,445 $ 22,498
Building.............................................................. 198,669 81,859
Building improvements................................................. 14,856 1,368
Tenant improvements................................................... 4,763 2,986
---------- ----------
258,733 108,711
Accumulated depreciation.............................................. (6,651) (2,576)
---------- ----------
$ 252,082 $ 106,135
---------- ----------
---------- ----------
</TABLE>
F-22
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. COMMERCIAL OFFICE PROPERTIES (CONTINUED)
The Arden Predecessors capitalize interest and taxes related to buildings
under construction and renovation, including tenant improvements, to the extent
such assets qualify for capitalization. Total interest capitalized was $39,000,
$270,000, and $319,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
All commercial office properties are encumbered by mortgages (Note 4).
Office space in the properties is generally leased to tenants under lease
terms which provide for the tenants to pay for increases in operating expenses
in excess of specified amounts.
Noncancelable operating leases with tenants expire on various dates through
2011. The future minimum lease payments to be received under leases existing as
of December 31, 1995, are as follows:
<TABLE>
<S> <C>
1996................................................... $57,330,000
1997................................................... 52,441,000
1998................................................... 44,008,000
1999................................................... 36,741,000
2000................................................... 28,364,000
Thereafter............................................. 73,593,000
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant reimbursements of operating expenses.
The Arden Predecessors lease the land underlying the office buildings and
parking structures of 5000 East Spring Street, 4811 Airport Plaza Drive and
4900/10 Airport Plaza Drive from the city of Long Beach. They also lease the
land under the parking structure at the Anaheim City Centre from the Anaheim
Redevelopment Agency.
Future minimum ground lease payments due under existing ground leases,
including properties acquired subsequent to December 31, 1995 (Note 8), are as
follows:
<TABLE>
<S> <C>
1996................................................... $1,437,000
1997................................................... 1,440,000
1998................................................... 1,440,000
1999................................................... 1,506,000
2000................................................... 1,130,000
Thereafter............................................. 60,419,000
</TABLE>
F-23
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. MORTGAGE LOANS PAYABLE AND UNSECURED LINES OF CREDIT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
-------------- -------------
<S> <C> <C>
MORTGAGE LOANS DUE TO LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS
INC. (LEHMAN)
A mortgage loan, dated November 20, 1995, secured by seven first trust deeds
and one second trust deed on real property, bearing interest at LIBOR (with a
floor on LIBOR of 5.5%) plus a margin of 3.0%. Interest only payments are to
be made monthly and all principal and unpaid interest is due on November 20,
1998. The loan agreement provides for additional interest to be deferred and
paid at maturity in the amount of $10,560,000 (Tier I Additional Interest)
which increases the day after each of the first and second anniversary dates
of the loan by $2,640,000, or 2% of the original principal balance (Tier II
and Tier III Additional Interest, respectively). At December 31, 1995, the
Arden Predecessors had recorded $586,000 of additional interest, resulting in
an effective interest rate of approximately 11.3%. Effective on the first
anniversary date of the loan, the Arden Predecessors are required to maintain
a debt service coverage ratio of 1.25:1.0 $ 132,000,000 $ 6,741,000
A mortgage loan, dated June 13, 1995, secured by a first trust deed on real
property, bearing interest at LIBOR, plus a margin of 4.5%. Interest only
payments are due monthly and all principal and unpaid interest is due on June
13, 1997. The loan agreement provides for additional interest of $1,100,000
to be deferred and repaid at maturity (Tier I Additional Interest). If the
loan is extended for an additional twelve months, the Arden Predecessors are
to pay an additional interest amount of $600,000 (Tier II Additional
Interest). As of December 31, 1995, the Arden Predecessors had recorded
$298,000 of additional interest, resulting in an effective interest rate of
15.6%. Effective on the first anniversary date of the loan, the Arden
Predecessors are required to maintain a debt service coverage ratio 1.15:1.0 10,200,000 --
MORTGAGE LOANS DUE TO MORTGAGE BANKERS
Two mortgage loans, dated December 23, 1993, secured by two cross-
collateralized first trust deeds on real property, bearing interest at the
lender's composite commercial rate, which was 5.53% at December 31, 1995,
plus a margin of 3.25%. Interest only payments are due monthly and principal
payments are due periodically based on a portion of operating cash flows from
the property. All unpaid principal and interest is due on December 31, 2000 37,854,000 36,748,000
</TABLE>
F-24
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. MORTGAGE LOANS PAYABLE AND UNSECURED LINES OF CREDIT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
-------------- -------------
<S> <C> <C>
Two mortgage loans, dated March 15, 1995, secured by two cross-collateralized
first trust deeds on real property, bearing interest at LIBOR, plus a margin
of 4.5%. Interest only payments are due monthly, and all principal and
interest is due on March 15, 1997. This loan has an additional interest
requirement of $434,000 or approximately 2.0% of the principal balance to be
deferred and paid at maturity. At December 31, 1995, the Arden Predecessors
had recorded $172,000 of additional interest, resulting in an effective
interest rate of 11.5%. The Arden Predecessors are required to maintain a
debt service coverage ratio, as defined in the Loan Agreement, of 1.20:1.0 22,351,000 --
MORTGAGE LOANS DUE TO BANKS
A mortgage loan, dated March 1, 1993, secured by a first trust deed on real
property, bearing interest, at the Arden Predecessor's option, at LIBOR plus
a margin of 1.0%, the treasury rate plus a margin of 1.75%, or the Prime
Rate. Interest only payments are due monthly. Monthly payments of principal,
begin March 1, 1996. The mortgage loan matures March 1, 2003 25,438,000 25,455,000
A mortgage loan, dated December 23, 1994, secured by a first trust deed,
bearing interest at LIBOR, plus a margin of 3.75%, or a periodic fixed rate,
at the option of the Arden Predecessors. Interest only payments are due
monthly, and the principal and all unpaid interest is due on December 23,
1997 14,880,000 14,880,000
A mortgage loan, dated December 14, 1994, secured by a first trust deed,
bearing interest at the Eleventh District Monthly Weighted Average Cost of
Funds Rate, as calculated by the Federal Home Loan Bank of San Francisco,
which was 5.059% at December 31, 1995, plus a margin of 3.75%. Interest only
payments are due monthly, and principal and all unpaid interest are due on
January 1, 2005 10,460,000 9,860,000
-------------- -------------
Total mortgage loans payable $ 253,183,000 $ 93,684,000
-------------- -------------
-------------- -------------
</TABLE>
The LIBOR rate was 5.72% at December 31, 1995.
Two of the mortgage loans provide for participation by the lender in cash
flow upon sale or other disposition, as defined by the Loan Agreements, of the
properties.
Certain mortgage loans provide for additional funds to be drawn for
qualified and approved tenant improvements, leasing commissions and capital
improvements. The aggregate amount of funds available for disbursement from all
lending institutions was approximately $9,790,000. As of December 31, 1995,
total funds drawn for these purposes was $6,537,000, and the undisbursed portion
was $3,253,000.
The Arden Predecessors have three unsecured lines of credit, with a total
commitment of $2,713,000, from two domestic banks. The aggregate outstanding
balance was $813,000 at December 31, 1995. The lines accrue interest at the
Prime Rate. The undisbursed portion at December 31, 1995 was $1,900,000.
F-25
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. MORTGAGE LOANS PAYABLE AND UNSECURED LINES OF CREDIT (CONTINUED)
As of December 31, 1995, the scheduled principal payments for the mortgage
loans payable and unsecured lines of credit are as follows:
<TABLE>
<S> <C>
1996 $ 1,490,000
1997.................................................. 48,206,000
1998.................................................. 155,119,000
1999.................................................. 901,000
2000.................................................. 16,305,000
Thereafter............................................ 31,975,000
-----------
$253,996,000
-----------
-----------
</TABLE>
5. EXTRAORDINARY LOSS
During 1994, the Arden Predecessors incurred losses on certain properties as
a result of an earthquake in Los Angeles, California.
6. COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK
The Arden Predecessors' maintain their cash and cash equivalents at
financial institutions. The combined account balances at each institution
periodically exceeds FDIC insurance coverage, and, as a result, there is a
concentration of credit risk related to amounts on deposit in excess of FDIC
insurance coverage. Management of the Arden Predecessors believes that the risk
is not significant.
OFFICE RENT EXPENSE
The Arden Predecessors lease office space for its corporate offices. The
future minimum rental payments due under the terms of the lease are $123,000 for
each of the next four years and $62,000 in the final year. The lease expires
June 30, 2000. The Arden Predecessors have the right to renew the lease for two,
one-year terms prior to expiration of the initial lease term.
LITIGATION
Management of the Arden Predecessors does not believe there is any
litigation threatened against the Arden Predecessors other than routine
litigation arising out of the ordinary course of business, some of which is
expected to be covered by liability insurance and all of which is not expected
to have a material adverse effect on the combined financial statements of the
Arden Predecessors.
7. RELATED PARTY TRANSACTIONS
Included in other income are management overhead fees of $95,000, $213,000
and $137,000 for 1995, 1994, and 1993, respectively, from various affiliated
partnerships.
Included in accounts receivable are $27,900, $57,800 and $56,000 at December
31, 1995, 1994, and 1993, respectively, from various affiliated partnerships.
8. PROPERTY ACQUISITIONS
Subsequent to December 31, 1995, the Participants' purchased additional
properties with an aggregate purchase price of $93,740,000. The Participants'
incurred $100,000,000 of debt from Lehman Brothers, Inc. as a result of
financing the purchase, of which $8,053,000 was retained in a restricted cash
account to be used for tenant improvements, capital improvements and leasing
commissions.
F-26
<PAGE>
ARDEN PREDECESSORS
SCHEDULE III
COMMERCIAL OFFICE PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SQUARE FOOT DATA)
<TABLE>
<CAPTION>
COSTS
CAPTIALIZED
INITIAL COSTS SUBSEQUENT TO TOTAL COSTS
------------------------ ACQUISITION ------------------------
SQUARE BUILDINGS AND ----------------- BUILDINGS AND
PROPERTY NAME FOOTAGE LAND IMPROVEMENTS IMPROVEMENTS (4) LAND IMPROVEMENTS
- ----------------------------------------------- --------- --------- ------------- ----------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Century Park Center............................ 247,310 $ 7,189 $ 16,742 $ 4,472 $ 7,189 $ 21,214
Beverly Atrium................................. 61,314 4,127 11,513 600 4,127 12,113
Woodland Hills Financial....................... 223,523 6,566 14,754 1,715 6,566 16,469
Bristol Plaza.................................. 84,014 1,820 3,380 185 1,820 3,565
16000 Ventura Blvd............................. 77,304 1,700 17,189 571 1,700 17,760
1950 Sawtelle.................................. 103,620 1,988 7,263 107 1,988 7,370
Anaheim City Centre............................ 175,391 515 11,199 240 515 11,439
425 West Broadway.............................. 71,489 1,500 4,436 187 1,500 4,623
5000 Spring Street............................. 163,358 -- 11,658 707 -- 12,365
70 South Lake.................................. 100,133 1,360 9,097 -- 1,360 9,097
The New Wilshire............................... 202,565 1,200 19,902 4 1,200 19,906
Calabasas Commerce Center...................... 123,121 1,262 9,725 -- 1,262 9,725
Westwood Terrace............................... 135,584 2,103 16,850 37 2,103 16,887
Skyview Center................................. 386,294 6,514 33,702 -- 6,514 33,702
5601 Lindero Canyon............................ 105,830 2,600 6,067 1,535 2,600 7,602
4811 Airport Plaza Drive and 4900\10 Airport
Plaza Drive................................... 272,013 -- 14,452 -- -- 14,452
--------- --------- ------------- ------- --------- -------------
2,632,863 $ 40,444 $ 207,929 $ 10,360 $ 40,444 $ 218,289
--------- --------- ------------- ------- --------- -------------
--------- --------- ------------- ------- --------- -------------
<CAPTION>
ACCUMULATED YEAR
PROPERTY NAME TOTAL DEPRECIATION (1) ENCUMBRANCES BUILT
- ----------------------------------------------- --------- ----------------- ------------- -----
<S> <C> <C> <C> <C>
Century Park Center............................ $ 28,403 $ 2,357 $ 25,437 1972
Beverly Atrium................................. 16,240 790 15,571(2) 1989
Woodland Hills Financial....................... 23,035 1,177 22,284(2) 1972
Bristol Plaza.................................. 5,385 114 5,200 1982
16000 Ventura Blvd............................. 19,460 313 17,151 1980
1950 Sawtelle.................................. 9,358 131 10,200 1988
Anaheim City Centre............................ 11,954 437 9,880 1986
425 West Broadway.............................. 6,123 163 5,000 1984
5000 Spring Street............................. 12,365 360 10,460 1989
70 South Lake.................................. 10,457 33 11,000(3) 1982
The New Wilshire............................... 21,106 72 22,000(3) 1989
Calabasas Commerce Center...................... 10,987 42 11,800(3) 1990
Westwood Terrace............................... 18,990 68 21,000(3) 1988
Skyview Center................................. 40,216 128 41,200(3) 1981
5601 Lindero Canyon............................ 10,202 427 10,400(3) 1989
4811 Airport Plaza Drive and 4900\10 Airport
Plaza Drive................................... 14,452 39 14,600(3) 1987
--------- ------ ------------- -----
$ 258,733 $ 6,651 $ 253,183
--------- ------ ------------- -----
--------- ------ ------------- -----
</TABLE>
(1) The depreciable life for buildings and improvements ranges from five to
forty years.
(2) Each of these properties is collateral for both loans.
(3) All of these properties are collateral for a mortgage loan totaling
$132,000,000. The encumbrance allocated to an individual property is based
on the related individual release price.
(4) Includes total capitalized interest of $628,000
F-27
<PAGE>
A summary of activity of commercial office properties and accumulated
depreciation is as follows:
<TABLE>
<CAPTION>
COMMERCIAL OFFICE PROPERTIES
---------------------------------
DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Balance at beginning of period....................................... $ 108,711 $ 62,902 $ --
Improvements......................................................... 5,715 2,797 1,848
Acquisition of land, building and improvements....................... 144,307 43,012 61,054
---------- ---------- ---------
Balance at end of period............................................. $ 258,733 $ 108,711 $ 62,902
---------- ---------- ---------
---------- ---------- ---------
<CAPTION>
ACCUMULATED DEPRECIATION
---------------------------------
DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
Balance at beginning of period....................................... $ 2,529 $ 510 $ --
Depreciation expense................................................. 4,122 2,065 $ 510
---------- ---------- ---------
Balance at end of period............................................. $ 6,651 $ 2,575 $ 510
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
F-28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Arden Realty Group, Inc.
We have audited the accompanying combined statement of revenue and certain
expenses of the 1995 Acquired Properties for the year ended December 31, 1995.
This combined statement of revenue and certain expenses is the responsibility of
the management of the 1995 Acquired Properties. Our responsibility is to express
an opinion on the combined statement of revenue and certain expenses based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying combined statement of revenue and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Arden Realty Group, Inc. Certain expenses (described in Note 1)
that would not be comparable to those resulting from the proposed future
operations of the properties are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the properties.
In our opinion, the combined statement of revenue and certain expenses
presents fairly, in all material respects, the combined revenue and certain
expenses, as defined above, of the 1995 Acquired Properties for the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
April 10, 1996
F-29
<PAGE>
1995 ACQUIRED PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FOR THE YEAR
MARCH 31, 1995 ENDED
-------------------- DECEMBER 31,
1996 1995 1995
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUE
Rental.................................................................. $ 5,549 $ 5,159 $ 21,791
Tenant reimbursements................................................... 413 318 1,233
Parking................................................................. 799 732 2,822
Other................................................................... 118 119 972
--------- --------- ------------
Total revenue......................................................... 6,879 6,328 26,818
--------- --------- ------------
CERTAIN EXPENSES
Property operating and maintenance...................................... 1,193 1,378 5,808
Property general and administrative..................................... 169 145 952
Real estate taxes....................................................... 418 579 2,288
Insurance............................................................... 421 118 809
Ground rent............................................................. 44 44 174
Bad debts............................................................... 0 97 885
Other................................................................... 0 50 118
--------- --------- ------------
Total certain expenses................................................ 2,245 2,411 11,034
--------- --------- ------------
Excess of revenue over certain expenses............................. $ 4,634 $ 3,917 $ 15,784
--------- --------- ------------
--------- --------- ------------
</TABLE>
See accompanying notes to combined statements of revenue and certain expenses.
F-30
<PAGE>
1995 ACQUIRED PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying combined statements of revenue and certain expenses include
the combined operations of nine commercial office properties located in Southern
California which were acquired by the Arden Predecessors in 1995 (the "1995
Acquired Properties") and are currently owned or controlled by the Arden
Predecessors.
The 1995 Acquired Properties are as follows:
<TABLE>
<CAPTION>
SOUTHERN APPROXIMATE
CALIFORNIA RENTABLE
PROPERTY NAME LOCATION SQUARE FOOTAGE ACQUISITION DATE
- --------------------------------- ------------------ -------------- ------------------
<S> <C> <C> <C>
16000 Ventura Blvd. Encino 178,341 March 1995
1950 Sawtelle Los Angeles 103,620 June 1995
Westwood Terrace Los Angeles 135,583 November 1995
Skyview Center Los Angeles 386,294 November 1995
4811 Airport Plaza Drive and
4900\10 Airport Plaza Drive Long Beach 272,013 November 1995
The New Wilshire Los Angeles 202,544 November 1995
70 South Lake Pasadena 100,133 November 1995
Calabasas Commerce Center Calabasas 123,121 November 1995
--------------
1,501,649
--------------
--------------
</TABLE>
BASIS OF PRESENTATION
The accompanying statements were prepared to comply with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-11 of Arden Realty Group, Inc., a Maryland
corporation (the "Company").
The accounts of each of the 1995 Acquired Properties are combined in the
statements of revenue and certain expenses and there are no interproperty
accounts to be eliminated. The accompanying statements are not representative of
the actual operations for the periods presented as certain expenses that may not
be comparable to the expenses expected to be incurred by the Company in the
future operations of the 1995 Acquired Properties have been excluded. Excluded
expenses consist of interest, depreciation and amortization and property general
and administrative costs not directly comparable to the future operations of the
1995 Acquired Properties.
REVENUE RECOGNITION
Rental revenue is recognized on a straight-line basis over the terms of the
related leases.
RISKS AND UNCERTAINTIES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM STATEMENT
The combined statements of revenue and certain expenses for the three months
ended March 31, 1996 and 1995 are unaudited. In the opinion of management, such
financial statements reflect all adjustments necessary for a fair presentation
of the results of the respective interim periods. All such adjustments are of a
normal, recurring nature.
F-31
<PAGE>
1995 ACQUIRED PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
2. COMMERCIAL OFFICE PROPERTIES
The future minimum lease payments to be received under existing operating
leases as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................... $22,798,000
1997........................................................... 20,099,000
1998........................................................... 15,474,000
1999........................................................... 12,042,000
2000........................................................... 9,394,000
Thereafter..................................................... 27,609,000
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant reimbursements of operating expenses.
Office space in the 1995 Acquired Properties is generally leased to tenants
under lease terms which provide for the tenants to pay for increases in
operating expenses in excess of specified amounts.
F-32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Arden Realty Group, Inc.
We have audited the accompanying combined statement of revenue and certain
expenses of the 1996 Acquired Properties for the year ended December 31, 1995.
This combined statement of revenue and certain expenses is the responsibility of
the management of the 1996 Acquired Properties. Our responsibility is to express
an opinion on the combined statement of revenue and certain expenses based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying combined statement of revenue and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Arden Realty Group, Inc. Certain expenses (described in Note 1)
that would not be comparable to those resulting from the proposed future
operations of the properties are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the properties.
In our opinion, the combined statement of revenue and certain expenses
presents fairly, in all material respects, the combined revenue and certain
expenses, as defined above, of the 1996 Acquired Properties for the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
April 10, 1996
F-33
<PAGE>
1996 ACQUIRED PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEAR
MARCH 31, ENDED
-------------------- DECEMBER 31,
1996 1995 1995
--------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUE
Rental........................................................................ $ 5,019 $ 4,856 $ 19,391
Tenant reimbursements......................................................... 309 182 961
Parking....................................................................... 459 449 1,859
Other......................................................................... 73 78 350
--------- --------- ------------
Total revenue............................................................... 5,860 5,565 22,561
--------- --------- ------------
--------- --------- ------------
CERTAIN EXPENSES
Property operating and maintenance............................................ 1,206 1,156 4,888
Property general and administrative........................................... 133 75 513
Real estate taxes............................................................. 360 470 1,753
Insurance..................................................................... 471 156 521
Ground rent................................................................... 232 267 1,067
Bad debts..................................................................... 0 0 106
--------- --------- ------------
Total certain expenses...................................................... 2,402 2,124 8,848
--------- --------- ------------
Excess of revenue over certain expenses................................... $ 3,458 $ 3,441 $ 13,713
--------- --------- ------------
--------- --------- ------------
</TABLE>
See accompanying notes to combined statements of revenue and certain expenses.
F-34
<PAGE>
1996 ACQUIRED PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying combined statements of revenue and certain expenses include
the combined operations of five commercial office properties located in Southern
California which were acquired or are scheduled to be acquired by the Arden
Predecessors in 1996 (the "1996 Acquired Properties") and are or will be
currently owned or controlled by the Arden Predecessors prior to the Offering.
The 1996 Acquired Properties are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
SOUTHERN CALIFORNIA RENTABLE ACQUISITION
PROPERTY NAME LOCATION SQUARE FOOTAGE DATE
- -------------------------- -------------------- -------------- -----------------
<S> <C> <C> <C>
5832 Bolsa Huntington Beach 49,355 February 1996
400 Corporate Pointe Culver City 164,845 February 1996
9665 Wilshire Beverly Hills 158,345 February 1996
Imperial Bank Tower San Diego 547,578 February 1996
100 Broadway Long Beach 191,727 To be acquired
--------------
1,111,850
--------------
--------------
</TABLE>
BASIS OF PRESENTATION
The accompanying statements were prepared to comply with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-11 of Arden Realty Group, Inc., a Maryland
corporation (the "Company").
The accounts of each of the 1996 Acquired Properties are combined in the
statements of revenue and certain expenses and there are no interproperty
accounts to be eliminated. The accompanying statements are not representative of
the actual operations for the periods presented as certain expenses that may not
be comparable to the expenses expected to be incurred by the Company in the
future operations of the 1996 Acquired Properties have been excluded. Excluded
expenses consist of interest, depreciation and amortization and property general
and administrative costs not directly comparable to the future operations of the
1996 Acquired Properties.
The property known as 100 Broadway will be acquired by the Arden Predecessor
prior to the Offering and Formation Transactions.
REVENUE RECOGNITION
Rental revenue is recognized on a straight-line basis over the terms of the
related leases.
RISKS AND UNCERTAINTIES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM STATEMENT
The combined statements of revenue and certain expenses for the three months
ended March 31, 1996 and 1995 are unaudited. In the opinion of management, such
financial statements reflect all adjustments necessary for a fair presentation
of the results of the respective interim periods. All such adjustments are of a
normal, recurring nature.
F-35
<PAGE>
1996 ACQUIRED PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
2. COMMERCIAL OFFICE PROPERTIES
The future minimum lease payments to be received under existing operating
leases as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................... $19,849,000
1997........................................... 18,159,000
1998........................................... 16,405,000
1999........................................... 15,866,000
2000........................................... 14,204,000
Thereafter..................................... 34,774,000
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant reimbursements of operating expenses.
Office space in the 1996 Acquired Properties is generally leased to tenants
under lease terms which provide for the tenants to pay for increases in
operating expenses in excess of specified amounts.
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Arden Realty Group, Inc.
We have audited the accompanying combined statement of revenue and certain
expenses of the Acquisition Properties for the year ended December 31, 1995.
This combined statement of revenue and certain expenses is the responsibility of
the management of the Acquisition Properties. Our responsibility is to express
an opinion on the combined statement of revenue and certain expenses based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying combined statement of revenue and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Arden Realty Group, Inc. Certain expenses (described in Note 1)
that would not be comparable to those resulting from the proposed future
operations of the properties are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the properties.
In our opinion, the combined statement of revenue and certain expenses
presents fairly, in all material respects, the combined revenue and certain
expenses, as defined above, of the Acquisition Properties for the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
April 19, 1996
F-37
<PAGE>
ACQUISITION PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEAR
MARCH 31, ENDED
-------------------- DECEMBER 31,
1996 1995 1995
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUE
Rental........................................................................ $ 942 $ 1,165 $ 4,280
Tenant reimbursements......................................................... 17 3 54
Parking....................................................................... 41 23 133
Other......................................................................... 110 5 85
--------- --------- ------
Total revenue............................................................... 1,110 1,196 4,552
--------- --------- ------
CERTAIN EXPENSES
Property operating and maintenance............................................ 330 302 1,498
Property general and administrative........................................... 23 17 108
Real estate taxes............................................................. 58 104 412
Insurance..................................................................... 66 44 151
Bad debts..................................................................... 0 37 18
Other......................................................................... 0 16 41
--------- --------- ------
Total certain expenses...................................................... 477 520 2,228
--------- --------- ------
Excess of revenue over certain expenses................................... $ 633 $ 676 $ 2,324
--------- --------- ------
--------- --------- ------
</TABLE>
See accompanying notes to combined statements of revenue and certain expenses.
F-38
<PAGE>
ACQUISITION PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying combined statements of revenue and certain expenses include
the combined operations of two commercial office properties located in Southern
California (the "Acquisition Properties") which are to be acquired by Arden
Realty Group, Inc., a Maryland corporation (the "Company"), concurrently with
the consummation of a proposed initial public offering of its Common Stock.
The Acquisition Properties are as follows:
<TABLE>
<CAPTION>
SOUTHERN APPROXIMATE
CALIFORNIA RENTABLE
PROPERTY NAME LOCATION SQUARE FOOTAGE
- ------------------------- ------------------ --------------
<S> <C> <C>
303 Glenoaks Blvd. Burbank 171,943
12501 East Imperial Norwalk 122,172
-------
294,115
-------
-------
</TABLE>
BASIS OF PRESENTATION
The accompanying statements were prepared to comply with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-11 of the Company.
The accounts of the Acquisition Properties are combined in the statements of
revenues and certain expenses and there are no interproperty accounts to be
eliminated. The accompanying statements are not representative of the actual
operations for the periods presented as certain expenses that may not be
comparable to the expenses expected to be incurred by the Company in the future
operations of the Acquisition Properties have been excluded. Excluded expenses
consist of interest, depreciation and amortization and property general and
administrative costs not directly comparable to the future operations of the
Acquisition Properties.
REVENUE RECOGNITION
Rental revenue is recognized on a straight-line basis over the terms of the
related leases.
RISKS AND UNCERTAINTIES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED INTERIM STATEMENT
The combined statements of revenue and certain expenses for the three months
ended March 31, 1996 and 1995 are unaudited. In the opinion of management, such
financial statements reflect all adjustments necessary for a fair presentation
of the results of the respective interim periods. All such adjustments are of a
normal, recurring nature.
F-39
<PAGE>
ACQUISITION PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
2. COMMERCIAL OFFICE PROPERTY
The future minimum lease payments to be received under existing operating
leases as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................ $5,310,000
1997............................................ 5,185,000
1998............................................ 4,175,000
1999............................................ 2,789,000
2000............................................ 1,770,000
Thereafter...................................... 1,739,000
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant reimbursements of operating expenses.
Office space in the Acquisition Properties is generally leased to tenants
under lease terms which provide for the tenants to pay for increases in
operating expenses in excess of specified amounts.
F-40
<PAGE>
Map of California showing the locations of Arden Realty Group, Inc.
properties in Los Angeles County (including a blow up of Los Angeles County),
Orange County and San Diego County.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or any of the Underwriters. This
Prospectus does not constitute an offer of any securities other than those to
which it relates or an offer to sell, or a solicitation of an offer to buy, to
any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.
---------------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---
<S> <C>
Prospectus Summary................................. 1
Risk Factors....................................... 18
The Company........................................ 29
Business and Growth Strategies..................... 31
Use of Proceeds.................................... 35
Distributions...................................... 36
Capitalization..................................... 41
Dilution........................................... 42
Selected Combined Financial Information............ 43
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 45
Southern California Economy and Office Markets..... 53
Business and Properties............................ 58
Management......................................... 84
Structure and Formation of the Company............. 89
Policies With Respect to Certain Transactions...... 93
Certain Transactions............................... 96
Partnership Agreement.............................. 97
Principal Stockholders............................. 99
Capital Stock...................................... 100
Certain Provisions of Maryland law and the
Company's Charter and Bylaws..................... 103
Shares Available for Future Sale................... 106
Federal Income Tax Considerations.................. 107
ERISA Considerations............................... 118
Underwriting....................................... 121
Experts............................................ 122
Legal Matters...................................... 123
Additional Information............................. 123
Glossary........................................... 124
Index to Financial Statements...................... F-1
</TABLE>
---------------------
Until , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the securities offered hereby, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
18,725,000 SHARES
ARDEN REALTY GROUP, INC.
COMMON STOCK
-------------------
PROSPECTUS
, 1996
---------------------
LEHMAN BROTHERS
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
RAYMOND JAMES &
ASSOCIATES, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fee - Securities and Exchange Commission.......... $148,504.00
NASD Fee....................................................... $30,500.00
New York Stock Exchange Listing Fee............................ *
Transfer Agent and Registrar's Fees............................ *
Printing and Engraving Expenses................................ *
Legal Fees and Expenses (other than Blue Sky).................. *
Accounting Fees and Expenses................................... *
Blue Sky Fees and Expenses..................................... *
Miscellaneous Expenses......................................... *
----------
Total...................................................... $ *
----------
----------
</TABLE>
- --------------
* To be completed by Amendment.
ITEM 31. SALES TO SPECIAL PARTIES.
See Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
As part of the Formation Transactions an aggregate of 2.7 million OP Units
will be issued to certain Participants in return for (i) the contribution of
certain interests in the Arden Predecessors and in certain of the Properties to
the Operating Partnership and (ii) the contribution by Arden of certain of its
assets, including management contracts relating to certain of the Properties and
the contract rights to purchase the Acquisition Properties. The issuance of the
OP Units will be effected in reliance upon an exemption from registration under
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering. The descriptions of the foregoing transactions in the
Prospectus under the headings "Formation Transactions," "Management" and
"Certain Transactions" are incorporated herein by reference.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders 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 Charter of the
Company contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
The Charter 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 director or officer or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
incur by reason of his status as a present or former stockholder, director or
officer of the Company. 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 director of officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
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 against any claim or liability to which he may become subject by
reason of such
II-1
<PAGE>
service. The Charter 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 MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director 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 services in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
ARDEN REALTY GROUP, INC.
Pro Forma Condensed Combined Financial Statements (Unaudited)
Pro Forma Condensed Combined Balance Sheet as of March 31, 1996
(Unaudited)
Pro Forma Condensed Combined Statement of Operations for the Three
Months Ended March 31, 1996 (Unaudited)
Pro Forma Condensed Combined Statement of Operations for the Year
Ended December 31, 1995 (Unaudited)
Notes to Pro Forma Condensed Combined Financial Statements
(Unaudited)
Historical:
Report of Independent Auditors
Balance Sheet as of May 1, 1996
Notes to Balance Sheet
ARDEN PREDECESSORS
Combined Financial Statements:
Report of Independent Auditors
Combined Balance Sheets as of March 31, 1996 (Unaudited), December
31, 1995 and 1994
Combined Statements of Operations for the Three Months ended March
31, 1996 and 1995 (Unaudited) the Years Ended December 31, 1995,
1994 and 1993
II-2
<PAGE>
Combined Statements of Owners' Equity for the Three Months ended
March 31, 1996 (Unaudited) and the Years Ended December 31,1995,
1994 and 1993
Combined Statements of Cash Flows for the Three Months ended March
31, 1996 and 1995 (Unaudited) and the Years Ended December 31,
1995, 1994 and 1993
Notes to Combined Financial Statements
Schedule III -- Commercial Office Properties and Accumulated
Depreciation
1995 ACQUIRED PROPERTIES
Combined Statements of Revenue and Certain Expenses:
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for the Three
Months ended March 31, 1996 and 1995 (Unaudited) Year Ended
December 31, 1995
Notes to Combined Statements of Revenue and Certain Expenses
1996 ACQUIRED PROPERTIES
Combined Statements of Revenue and Certain Expenses:
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for the Three
Months Ended March 31, 1996 and 1995 (Unaudited) and the Year End
December 31, 1995
Notes to Combined Statements of Revenue and Certain Expenses
ACQUISITION PROPERTIES
Combined Statements of Revenue and Certain Expenses:
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for the Three
Months Ended March 31, 1996 and 1995 (Unaudited) and the Year
Ended December 31, 1995
Notes to Combined Statements of Revenue and Certain Expenses
(b) Schedules Included in Part II: None.
All other schedules have been omitted because they are either not applicable
or the information required has been disclosed in the financial statements and
related notes included in this Prospectus.
(c) Exhibits.
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement between the Company and the Representatives.
3.1* Restated Charter of the Company.
3.2* Bylaws of the Company.
3.3* Specimen of certificate representing shares of Common Stock.
5.1* Opinion of Latham & Watkins regarding the validity of the securities being
registered.
8.1* Opinion of Latham & Watkins regarding tax matters.
10.1* Agreement of Limited Partnership of the Operating Partnership.
10.2* 1996 Stock Option and Incentive Plan.
10.3* Form of Officers and Directors Indemnification Agreement.
10.4* Credit Facility Agreement.
10.5* Mortgage Financing Agreement.
10.6* Employment Agreement between the Company and Mr. Ziman.
10.7* Employment Agreement between the Company and Mr. Coleman.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.8* Registration Rights Agreement between the Company and the Participants.
10.9* Ground lease for Imperial Bank Tower.
10.10* Ground lease for 5000 East Spring Street.
10.11* Ground lease for 4811 Airport Plaza Drive.
10.12* Ground lease for 4900/10 Airport Plaza Drive.
10.13* Ground lease for parking structure at the Anaheim City Centre.
10.14* Contribution Agreement with Richard S. Ziman.
10.15* Contribution Agreement with Victor J. Coleman.
10.16* Contribution Agreement with Arden Realty Group, Inc.
21.1 Subsidiary of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Cushman & Wakefield of California, Inc.
23.3* Consent of Latham & Watkins (contained in Exhibits 5.1 and 8.1).
23.4 Consent of Carl D. Covitz.
23.5 Consent of Kenneth B. Roath.
23.6 Consent of Arthur Gilbert.
23.7 Consent of Steven C. Good
24. Power of Attorney (see Page II-5).
27. Financial Data Schedule.
</TABLE>
- --------------
* To be filed by amendment.
ITEM 36. UNDERTAKINGS.
The undersigned Company hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 33 above, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a Director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
Director, Officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue. The undersigned Company hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in the form of
Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
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, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-11 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Los Angeles, State of California on the sixteenth day of July, 1996.
ARDEN REALTY GROUP, INC.
By: /s/ RICHARD S. ZIMAN
-----------------------------------
Richard S. Ziman
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Richard S. Ziman or Victor J. Coleman or
any one of them, his or her attorneys-in-fact and agents, each with full power
of substitution and resubstitution for him or her in any and all capacities, to
sign any or all amendments or post-effective amendments to this Registration
Statement or a Registration Statement prepared in accordance with Rule 462 of
the Securities Act, and to file the same, with exhibits thereto and other
documents in connection herewith or in connection with the registration of the
Common Stock under the Securities Exchange Act of 1934, as amended, with the
Securities and Exchange Commission, granting unto each of such attorneys-in-fact
and agents full power and authority to do and perform each and every act and
thing requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his or her substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities
indicated on July 16, 1996.
TITLE
-------------------------
Chairman of the Board of
/s/ RICHARD S. ZIMAN Directors and
- ----------------------------------- Chief Executive Officer
Richard S. Ziman (Principal Executive
Officer)
/s/ VICTOR J. COLEMAN President, Chief
- ----------------------------------- Operating Officer and
Victor J. Coleman Director
Chief Accounting Officer
/s/ MICHELE BYER and Secretary
- ----------------------------------- (Principal Financial and
Michele Byer Accounting Officer)
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT NUMBERED PAGE
- --------- ---------------------------------------------------------------------------------------- ---------------------
<S> <C> <C>
1.1* Form of Underwriting Agreement between the Company and the Representatives.
3.1* Restated Charter of the Company.
3.2* Bylaws of the Company.
3.3* Specimen of certificate representing shares of Common Stock.
5.1* Opinion of Latham & Watkins regarding the validity of the securities being registered.
8.1* Opinion of Latham & Watkins regarding tax matters.
10.1* Agreement of Limited Partnership of the Operating Partnership.
10.2* 1996 Stock Option and Incentive Plan.
10.3* Form of Officers and Directors Indemnification Agreement.
10.4* Credit Facility Agreement.
10.5* Mortgage Financing Agreement.
10.6* Employment Agreements between the Company and Mr. Ziman.
10.7* Employment Agreement between the Company and Mr. Coleman.
10.8* Registration Rights Agreement between the Company and the Participants.
10.9* Ground lease for Imperial Bank Tower.
10.10* Ground lease for 5000 East Spring Street.
10.11* Ground lease for 4811 Airport Plaza Drive.
10.12* Ground lease for 4900/10 Airport Plaza Drive.
10.13* Ground lease for parking structure at the Anaheim City Centre.
10.14* Contribution Agreement with Richard S. Ziman.
10.15* Contribution Agreement with Victor J. Coleman.
10.16* Contribution Agreement with Arden Realty Group, Inc.
21.1 Subsidiary of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Cushman & Wakefield of California, Inc.
23.3* Consent of Latham & Watkins (contained in Exhibits 5.1 and 8.1).
23.4 Consent of Carl D. Covitz.
23.5 Consent of Kenneth B. Roath.
23.6 Consent of Arthur Gilbert.
23.7 Consent of Steven C. Good.
24. Power of Attorney (see Page II-5).
27. Financial Data Schedule.
</TABLE>
- --------------
* To be filed by amendment.
<PAGE>
EXHIBIT 21
SUBSIDIARY OF THE REGISTRANT
Arden Realty Group Limited Partnership, a Maryland limited partnership
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference of our firm under the caption "Experts" and to
the use of our reports on the Arden Predecessors (as defined in the Notes
thereto), the 1995 Acquired Properties (as defined in the Notes thereto) and the
1996 Acquired Properties (as defined in the Notes thereto) dated April 10, 1996,
the Acquisition Properties (as defined in the Notes thereto) dated April 19,
1996 and Arden Realty Group, Inc., a Maryland Corporation, dated May 1, 1996, in
the Registration Statement filed by Arden Realty Group, Inc. on Form S-11 dated
July 16, 1996 and the related Prospectus.
/s/ ERNST & YOUNG LLP
------------------------------------------------------------------------------
Los Angeles, California
July 15, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF CUSHMAN & WAKEFIELD OF CALIFORNIA, INC.
We hereby consent to the use of our name and the references to the "C&W
Market Study" wherever appearing in this Registration Statement filed by Arden
Realty Group, Inc. on Form S-11 and the related Prospectus and any amendments
thereto, including but not limited to the references to our company under the
headings "C&W Market Study" and "Experts" in the Prospectus.
Dated: July 16, 1996
Cushman & Wakefield of California,
Inc.
By: /s/ JAMES W. MYERS
-----------------------------------
Name: James W. Myers
Title: SENIOR DIRECTOR
<PAGE>
EXHIBIT 23.4
CONSENT OF CARL D. COVITZ
I hereby consent to being named a proposed director of Arden Realty Group,
Inc. and to the use of my name under the heading "MANAGEMENT" in the Prospectus
which is part of this Registration Statement filed by Arden Realty Group, Inc.
on Form S-11, and to the use of my name wherever appearing in this Registration
Statement and the related Prospectus, and any amendments thereto.
Dated: July 16, 1996
By: /s/ CARL D. COVITZ
-----------------------------------
Carl D. Covitz
<PAGE>
EXHIBIT 23.5
CONSENT OF KENNETH B. ROATH
I hereby consent to being named a proposed director of Arden Realty Group,
Inc. and to the use of my name under the heading "MANAGEMENT" in the Prospectus
which is part of this Registration Statement filed by Arden Realty Group, Inc.
on Form S-11, and to the use of my name wherever appearing in this Registration
Statement and the related Prospectus, and any amendments thereto.
Dated: July 16, 1996
/s/ KENNETH B. ROATH
--------------------------------------
Kenneth B. Roath
<PAGE>
EXHIBIT 23.6
CONSENT OF ARTHUR GILBERT
I hereby consent to being named a proposed director of Arden Realty Group,
Inc. and to the use of my name under the heading "MANAGEMENT" in the Prospectus
which is part of this Registration Statement filed by Arden Realty Group, Inc.
on Form S-11, and to the use of my name wherever appearing in this Registration
Statement and the related Prospectus, and any amendments thereto.
Dated: July 16, 1996
/s/ ARTHUR GILBERT
--------------------------------------
Arthur Gilbert
<PAGE>
EXHIBIT 23.7
CONSENT OF STEVEN C. GOOD
I hereby consent to being named a proposed director or Arden Realty Group,
Inc. and to the use of my name under the heading "MANAGEMENT" in the Prospectus
which is part of this Registration Statement filed by Arden Realty Group, Inc.
on Form S-11, and to the use of my name wherever appearing in this Registration
Statement and the related Prospectus, and any amendments thereto.
Dated: July 16, 1996
/s/ STEVEN C. GOOD
--------------------------------------
Steven C. Good
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> MAR-31-1996 DEC-31-1995
<CASH> 24554 16702
<SECURITIES> 0 0
<RECEIVABLES> 5766 4709
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 30320 21411
<PP&E> 354587 258733
<DEPRECIATION> (8954) (6651)
<TOTAL-ASSETS> 380290 277643
<CURRENT-LIABILITIES> 7963 7903
<BONDS> 353394 253996
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 380290 277643
<SALES> 0 0
<TOTAL-REVENUES> 15054 78582
<CGS> 0 0
<TOTAL-COSTS> 5675 11644
<OTHER-EXPENSES> 2396 4373
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8832 13780
<INCOME-PRETAX> (1849) (1215)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1849) (1215)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1849) (1215)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
