<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1996
REGISTRATION NO. 333-8163
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 4
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
ARDEN REALTY, 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....... 21,674,500 $20.00 $433,490,000 $149,479(3)
</TABLE>
(1) Includes 2,827,000 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.
(3) This amount was previously paid.
------------------------
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>
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>
PROSPECTUS Subject to Completion, dated October 3, 1996
18,847,500 SHARES
G ARDEN REALTY, INC.
COMMON STOCK
----------------
Arden Realty, Inc. (the "Company") is a Maryland corporation which was
formed on May 1, 1996 to continue and expand the real estate business of Arden
Realty Group, Inc., a California corporation, formed on March 22, 1991, and
certain affiliated entities 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
containing approximately 4.0 million rentable square feet, all of which are
located in Southern California. 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.
All of the shares of the Company's common stock (the "Common Stock") offered
hereby are being sold by the Company and will represent approximately 86.69% of
all outstanding shares of the Company's Common Stock (or interests exchangeable
for Common Stock). The remaining approximately 13.31% of the equity will be held
by officers and directors of the Company and certain other parties,
substantially all of which is in the form of limited partnership interests ("OP
Units") of Arden Realty 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 between
$19.00 and $21.00 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 17 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING:
- - The possibility that the consideration paid by the Company for the Properties
and other assets contributed to the Company in its formation may exceed their
fair market value; no third-party appraisals were obtained by the Company
regarding these Properties and other assets;
- - The possibility that the Company may not be able to refinance outstanding debt
(initially expected to be approximately $104 million) upon maturity, that
indebtedness might be refinanced on less favorable terms, and that interest
rates might increase on variable rate indebtedness (including amounts drawn
under the Company's proposed $100 million credit facility); and the lack of
limitations in the Company's organizational documents on the amount of
indebtedness which the Company may incur;
- -Risk that the Company will not have sufficient cash available to make its
expected distributions for the 12 months following the offering, which
represent approximately 98.0% of estimated cash available for distributions;
- - Real estate investment and property management risks 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 and material benefits to officers and directors of
the Company, including receipt of an aggregate of approximately 2,740,718 OP
Units and stock options to purchase an aggregate of 868,500 shares of the
Common Stock, special allocations of interest deductions of approximately
$12.6 million and repayment of approximately $398 million of indebtedness;
- - The lack of operating history of the Properties under the management of the
Company; the majority of the Properties have been owned by the Company for
less than one year;
- - The possibility that the Board of Directors of the Company may in the future
amend or revise the investment, financing, borrowing, distribution and
conflicts of interest policies of the Company, without a vote of the Company's
stockholders;
- - 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 which currently includes earthquake coverage for
all of the Properties.
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 $6,224,750 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
2,827,000 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.
A.G. EDWARDS & SONS, INC.
SMITH BARNEY INC.
EVEREN SECURITIES, INC. LEGG MASON WOOD WALKER RAYMOND JAMES & ASSOCIATES, INC.
INCORPORATED
, 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]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 1
The Company............................................................. 1
Risk Factors............................................................ 2
Business and Growth Strategies.......................................... 4
The Properties.......................................................... 6
Structure and Formation of the Company.................................. 8
Financing Policies...................................................... 12
Mortgage Financing, CMBS Offering and Credit Facility................... 12
The Offering............................................................ 13
Distributions........................................................... 13
Tax Status of the Company............................................... 13
Summary Selected Combined Financial Data................................ 14
RISK FACTORS.............................................................. 17
Price to be Paid for Properties and Other Assets May Exceed Their Fair
Market Value........................................................... 17
Formation Transactions Not Arm's Length................................. 17
Risk of High Distribution Payout Percentage............................. 17
Real Estate Financing Risks............................................. 17
No Limitation on Debt................................................... 18
Real Estate Investment Risks............................................ 18
Concentration of Properties in Southern California...................... 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
Potential Risks Regarding Change-of-Control Consents on Ground Leases... 22
Changes in Policies Without Stockholder Approval........................ 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............................................ 24
Insurance............................................................... 24
Dependence on Key Personnel............................................. 24
Limits on Changes in Control............................................ 24
Historical Losses....................................................... 25
Possible Environmental Liabilities...................................... 26
<CAPTION>
PAGE
----
<S> <C>
Effect on Common Stock Price of Shares Available for Future Sale........ 27
Effect on Holders of Common Stock of an Issuance of Preferred Stock..... 27
Immediate and Substantial Dilution...................................... 27
Absence of Prior Public Market for Common Stock......................... 27
Influence of Executive Officers, Directors and Principal Stockholders... 27
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............................................................ 42
DILUTION.................................................................. 43
SELECTED COMBINED FINANCIAL DATA.......................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 47
Overview................................................................ 47
Results of Operations................................................... 47
Pro Forma Operating Results............................................. 52
Liquidity and Capital Resources......................................... 53
Cash Flows.............................................................. 55
Inflation............................................................... 55
SOUTHERN CALIFORNIA ECONOMY AND OFFICE MARKETS............................ 56
Southern California Economy............................................. 56
Southern California Office Markets...................................... 58
BUSINESS AND PROPERTIES................................................... 61
General................................................................. 61
Properties.............................................................. 61
Tenants................................................................. 63
Tenant Diversification.................................................. 63
Lease Distributions..................................................... 63
Lease Expirations - Portfolio Total..................................... 64
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Lease Expirations - Property by Property................................ 65
Tenant Retention and Expansions......................................... 70
Historical Lease Renewals............................................... 70
Historical Tenant Improvements and Leasing Commissions.................. 71
Historical Capital Expenditures......................................... 72
Historical Occupancy.................................................... 72
OFFICE SUBMARKETS AND PROPERTY INFORMATION................................ 72
Los Angeles County Office Market and Properties......................... 74
Los Angeles West Office Market Sector................................... 75
Los Angeles North Office Market Sector.................................. 79
Los Angeles South Office Market Sector.................................. 83
Orange County Office Market and Properties.............................. 86
San Diego County Office Market and Property............................. 88
C&W Market Study........................................................ 90
Competition............................................................. 91
Insurance............................................................... 91
Environmental Regulations............................................... 91
Legal Proceedings....................................................... 93
Employees............................................................... 93
MANAGEMENT................................................................ 94
Directors and Executive Officers........................................ 94
Committees of the Board of Directors.................................... 96
Compensation of Directors............................................... 97
Executive Compensation.................................................. 97
Employment Agreements................................................... 98
Stock Incentive Plan.................................................... 98
401(k) Plan............................................................. 99
Limitation of Liability and Indemnification............................. 99
STRUCTURE AND FORMATION OF THE COMPANY.................................... 100
The Operating Entities of the Company................................... 100
The Formation Transactions.............................................. 101
Consequences of the Offering and the Formation Transactions............. 102
Determination and Valuation of Ownership Interests...................... 102
Benefits of the Formation Transactions and the Offering to Affiliates of
the Company............................................................ 103
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............................... 104
Investment Policies..................................................... 104
Dispositions............................................................ 105
Financing Policies...................................................... 105
<CAPTION>
PAGE
----
<S> <C>
Conflict of Interest Policies........................................... 106
Policies with Respect to Other Activities............................... 107
CERTAIN TRANSACTIONS...................................................... 107
Formation Transactions.................................................. 107
Partnership Agreement; Redemption/ Exchange Rights...................... 107
Registration Rights..................................................... 107
Certain Transactions Involving Director Nominee......................... 107
PARTNERSHIP AGREEMENT..................................................... 108
Management.............................................................. 108
Transferability of Interests............................................ 108
Capital Contributions................................................... 109
Redemption/Exchange Rights.............................................. 109
Issuance of Additional OP Units, Common Stock or Convertible
Securities............................................................. 109
Tax Matters............................................................. 109
Operations.............................................................. 110
Duties and Conflicts.................................................... 110
Certain Voting Rights of Limited Partners............................... 110
Term.................................................................... 110
Indemnification......................................................... 110
PRINCIPAL STOCKHOLDERS.................................................... 111
CAPITAL STOCK............................................................. 112
General................................................................. 112
Common Stock............................................................ 112
Preferred Stock......................................................... 112
Power to Issue Additional Shares of Common Stock and Preferred Stock.... 113
Transfer Agent and Registrar............................................ 113
Restrictions on Transfer................................................ 113
CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S CHARTER AND BYLAWS... 115
Board of Directors - Number, Classification, Vacancies.................. 115
Removal of Directors.................................................... 116
Business Combinations................................................... 116
Control Share Acquisitions.............................................. 116
Amendment to the Charter................................................ 117
Dissolution of the Company.............................................. 117
Advance Notice of Director Nominations and New Business................. 117
Anti-takeover Effect of Certain Provisions of Maryland Law and of the
Charter and Bylaws..................................................... 117
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Rights to Purchase Securities and Other Property........................ 117
SHARES AVAILABLE FOR FUTURE SALE.......................................... 118
General................................................................. 118
Registration Rights..................................................... 119
FEDERAL INCOME TAX CONSEQUENCES........................................... 119
Taxation of the Company................................................. 119
Failure to Qualify...................................................... 124
Taxation of Taxable U.S. Stockholders Generally......................... 124
Backup Withholding...................................................... 125
Taxation of Tax-Exempt Stockholders..................................... 125
Taxation of Non-U.S. Stockholders....................................... 126
<CAPTION>
PAGE
----
<S> <C>
Tax Aspects of the Operating Partnership................................ 128
Other Tax Consequences.................................................. 130
ERISA CONSIDERATIONS...................................................... 130
Employment Benefit Plans, Tax-Qualified Pension, Profit Sharing or Stock
Bonus Plans and IRAs................................................... 131
Status of the Company and the Operating Partnership under ERISA......... 131
UNDERWRITING.............................................................. 133
EXPERTS................................................................... 134
LEGAL MATTERS............................................................. 135
ADDITIONAL INFORMATION.................................................... 135
GLOSSARY.................................................................. 136
</TABLE>
CAUTIONARY STATEMENT
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" RELATING TO, WITHOUT LIMITATION, FUTURE ECONOMIC PERFORMANCE, PLANS
AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS AND PROJECTIONS OF REVENUE
AND OTHER FINANCIAL ITEMS, 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 (THE MIDPOINT OF
THE PRICE RANGE SET FORTH ON THE COVER PAGE OF THIS PROSPECTUS), (II) THE
UNDERWRITERS' OVERALLOTMENT OPTION IS NOT EXERCISED, (III) THE TRANSACTIONS
DESCRIBED 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.
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 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 August
1, 1996, the Properties had a weighted average occupancy rate of approximately
89%. 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, as defined by the Company (and
not an independent third party). 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 although the determination of an office
property's class designation is subjective and consequently others may have a
different view. 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 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., Metropolitan Los Angeles (which includes Los
Angeles and Orange Counties), in which 23 of the Company's 24 Properties are
located, is projected to be the number one market in the United States for
primary office employment growth during the period from 1995 to 2005. In
addition, the Economic Development Corporation of Los Angeles County (the "Los
Angeles EDC") has 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 5.0% in Los
Angeles County as compared to 2.5% and 2.4% for 1996 and 1997 for the nation as
a whole. Finally, 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
1
<PAGE>
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 at a gain 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 primarily 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 82% (based on square feet renewed) from 1993 through
August 1, 1996 and management's on-going relationships with multi-site tenants.
The Company believes that it has been successful in implementing its
value-added strategy as evidenced by increased occupancy rates and rental
revenue at the Properties. As of August 1, 1996, the Properties owned by the
Company for more than one year had a weighted average occupancy rate of
approximately 88%, compared to a weighted average occupancy of approximately 80%
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 August 1, 1996, the weighted average
occupancy rate of the 21 Properties located in Los Angeles County was
approximately 90%, compared to weighted average occupancy rates, as of December
31, 1995, of approximately 81% for all office properties throughout Los Angeles
County and approximately 83% for all office properties in the Los Angeles County
submarkets in which such Properties are located (based in each case on the C&W
Market Study).
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; no third-party appraisals
were obtained by the Company regarding these Properties and other assets;
- the possibility that the Company may not be able to refinance outstanding
indebtedness upon maturity (including the $104 million interim Mortgage
Financing (as defined below) and the proposed $100 million Credit Facility
(as defined below) which will mature in one year and two years,
respectively), that interest rates might increase on variable rate
indebtedness, including any amounts outstanding under the Credit Facility,
and that such indebtedness might be refinanced at higher interest rates or
otherwise on terms less favorable to the Company than existing
indebtedness, which
2
<PAGE>
could adversely affect the Company's ability to make expected
distributions to stockholders and its ability to qualify as a REIT, and
the lack of limitations in the Company's organizational documents on the
amount of indebtedness which the Company may incur;
- the risk that the Company's cash available for distributions may be less
than the Company estimates or may decrease in future periods, adversely
affecting the Company's ability to make expected distributions for the 12
months following the Offering of $1.60 per share, which represents
approximately 98.0% of estimated cash available for distributions, or to
sustain such distribution rate in the future;
- real estate investment and property management risks 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 connection with the Formation Transactions and
the acquisition and refinancing of the Properties, including conflicts
relating to material benefits to officers, directors and affiliates of the
Company which include receipt of an aggregate of approximately 2,740,718
OP Units and stock options to purchase an aggregate of 868,500 shares of
Common Stock, special allocations of interest deductions of approximately
$12.6 million and repayment of approximately $398 million of indebtedness,
a substantial portion of which represents the repayment of mortgage debt
to an affiliate of the lead managing underwriter of the Offering out of
the net proceeds of the Offering and the Mortgage Financing;
- 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;
- the risks that, given the Company's recent acquisition of many of the
Properties and the lack of operating history of such Properties under the
Company's management (3 1/2 years or less for all Properties and less than
one year for a majority of the Properties), newly acquired properties may
have characteristics or deficiencies unknown to the Company affecting the
value or revenue potential thereof, may fail to perform as expected, or
may be difficult to integrate into the Company's existing management
operations;
- the possibility that the Board of Directors of the Company may in the
future amend or revise the investment, financing, borrowing, distribution
and conflicts of interest policies of the Company without a vote of the
Company's stockholders;
- 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 which currently includes earthquake
coverage for all of the Properties;
- dependence on certain key personnel;
3
<PAGE>
- anti-takeover effect of limiting actual or constructive ownership of
Common 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 have the effect of delaying,
deferring or preventing a transaction or change in control of the Company
that might involve a premium price for the Common Stock or otherwise be in
the best interests of the Company's stockholders;
- existence of net losses of the Arden Predecessors, on a combined basis, of
approximately $2.1 million for the six months ended June 30, 1996 and
approximately $576,000 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, 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 or properties which provide attractive yields
with stable cash flow 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.
Based on its historical activities and its knowledge of the local
marketplace, the Company believes that (i) the Southern California region offers
growth opportunities for companies like the Company that are 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 led to the increased occupancy
rates and rental revenue of its existing portfolio.
4
<PAGE>
GROWTH STRATEGIES
EXTERNAL GROWTH: Based on its own historical activities and its knowledge
of the local marketplace, the Company believes that 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 August 1, 1996,
the Properties owned by the Company for more than one year had a weighted
average occupancy rate of approximately 88%, compared to approximately 80% as of
the respective dates such Properties were acquired by the Company. Upon
completion of the Offering, the Company will have a debt-to-total market
capitalization ratio of approximately 19.3% and expects to finance acquisitions
through its proposed $100 million Credit Facility, although it may employ other
financing alternatives.
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 services to third parties as a means of identifying such
opportunities; (iv) its access to capital as a public company, including the
Company's proposed $100 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 also may 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.
5
<PAGE>
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 540,000 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 12.6 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 August 1, 1996, the Properties were leased to over 540 tenants, no
single tenant accounted for more than approximately 3.3% of the aggregate
Annualized Base Rent of the Company's portfolio and only 16 tenants individually
represented more than 1% of such aggregate Annualized Base Rent.
6
<PAGE>
The following table sets forth certain information about each of the
Properties as of August 1, 1996:
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
APPROXIMATE PORTFOLIO
YEAR BUILT/ RENTABLE RENTABLE PERCENT
SUBMARKET/PROPERTY LOCATION RENOVATED SQUARE FEET SQUARE FEET LEASED
- ---------------------------------------------- -------------------- --------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
LOS ANGELES COUNTY
- ----------------------------------------------
LOS ANGELES WEST
BEVERLY HILLS/CENTURY CITY
9665 Wilshire Beverly Hills 1972/92-3 158,684 3.9% 95.1%
Beverly Atrium Beverly Hills 1989 61,314 1.5 100.0
Century Park Center Los Angeles 1972/94 243,404 6.0 83.2
WESTWOOD/WEST LOS ANGELES
Westwood Terrace Los Angeles 1988 135,943 3.4 82.3
1950 Sawtelle Los Angeles 1988/95 103,772 2.6 77.5
MARINA AREA/CULVER CITY/LAX
400 Corporate Pointe Culver City 1987 164,598 4.1 90.2
Bristol Plaza Culver City 1982 84,014 2.1 78.6
Skyview Center Los Angeles 1981,87/95(3) 391,675 9.7 86.0
PARK MILE/WEST HOLLYWOOD
The New Wilshire Los Angeles 1986 202,704 5.0 83.9
LOS ANGELES NORTH
SIMI/CONEJO VALLEY
5601 Lindero Canyon Westlake 1989 105,830 2.6 100.0
Calabasas Commerce Center Calabasas 1990 123,121 3.1 100.0
WEST SAN FERNANDO VALLEY
Woodland Hills Financial Center Woodland Hills 1972/95 224,955 5.6 89.8
CENTRAL SAN FERNANDO VALLEY
16000 Ventura Blvd. Encino 1980/96 174,841 4.3 84.1
EAST SAN FERNANDO VALLEY/TRI-CITIES
425 West Broadway Glendale 1984 71,589 1.8 95.9
303 Glenoaks (4) Burbank 1983/96 175,449 4.3 97.4
70 South Lake Pasadena 1982/94 100,133 2.5 81.4
LOS ANGELES SOUTH
LONG BEACH
4811 Airport Plaza Drive Long Beach 1987/95 121,610 3.0 100.0
4900/10 Airport Plaza Drive Long Beach 1987/95 150,403 3.7 100.0
5000 East Spring Long Beach 1989/95 163,358 4.0 89.6
100 West Broadway Long Beach 1987/96 191,727 4.7 90.0
CERRITOS/NORWALK
12501 East Imperial Highway (4) Norwalk 1978/94 122,175 3.0 94.7
ORANGE COUNTY
- ----------------------------------------------
WEST COUNTY
5832 Bolsa Avenue Huntington Beach 1985 49,355 1.2 100.0
TRI-FREEWAY AREA
Anaheim City Centre Anaheim 1986/91 175,391 4.3 93.0
SAN DIEGO COUNTY
- ----------------------------------------------
SAN DIEGO MARKET
Imperial Bank Tower San Diego 1982/96 540,413 13.4 82.2
------------ ----- -----
Total/Weighted Average 4,036,458 100.0% 88.9%
Weighted Average Rent Per Leased Square Foot - All Leases
Weighted Average Rent Per Leased Square Foot - Full Service Gross Leases
Weighted Average Rent Per Leased Square Foot - Net Leases
<CAPTION>
ANNUALIZED
NET EFFECTIVE ANNUALIZED
RENT BASE RENT
PER LEASED PER LEASED
SUBMARKET/PROPERTY SQUARE FOOT (1) SQUARE FOOT (2)
- ---------------------------------------------- ----------------- ---------------
<S> <C> <C>
LOS ANGELES COUNTY
- ----------------------------------------------
LOS ANGELES WEST
BEVERLY HILLS/CENTURY CITY
9665 Wilshire $ 31.57 $ 31.45
Beverly Atrium 20.46 22.83
Century Park Center 19.86 21.38
WESTWOOD/WEST LOS ANGELES
Westwood Terrace 24.32 25.30
1950 Sawtelle 19.74 20.02
MARINA AREA/CULVER CITY/LAX
400 Corporate Pointe 23.24 19.91
Bristol Plaza 17.12 18.10
Skyview Center 16.76 17.01
PARK MILE/WEST HOLLYWOOD
The New Wilshire 20.30 20.35
LOS ANGELES NORTH
SIMI/CONEJO VALLEY
5601 Lindero Canyon 10.51 11.15
Calabasas Commerce Center 16.81 17.14
WEST SAN FERNANDO VALLEY
Woodland Hills Financial Center 20.52 22.29
CENTRAL SAN FERNANDO VALLEY
16000 Ventura Blvd. 19.55 20.21
EAST SAN FERNANDO VALLEY/TRI-CITIES
425 West Broadway 17.72 19.35
303 Glenoaks (4) 20.03 20.35
70 South Lake 18.65 20.80
LOS ANGELES SOUTH
LONG BEACH
4811 Airport Plaza Drive 9.12 8.64
4900/10 Airport Plaza Drive 8.22 7.80
5000 East Spring 18.41 18.76
100 West Broadway 22.08 20.42
CERRITOS/NORWALK
12501 East Imperial Highway (4) 16.71 16.27
ORANGE COUNTY
- ----------------------------------------------
WEST COUNTY
5832 Bolsa Avenue 13.20 13.35
TRI-FREEWAY AREA
Anaheim City Centre 15.47 15.07
SAN DIEGO COUNTY
- ----------------------------------------------
SAN DIEGO MARKET
Imperial Bank Tower 19.14 18.31
------ ------
Total/Weighted Average
Weighted Average Rent Per Leased Square Foot - $ 18.62 $ 18.70
Weighted Average Rent Per Leased Square Foot - $ 18.94(5) $ 20.03(5)
Weighted Average Rent Per Leased Square Foot - $ 11.99 $ 11.52
</TABLE>
- -----------------
(1) Annualized Net Effective Rent is calculated for each lease in effect at
August 1, 1996. For leases in effect at the time the relevant Property was
acquired, Annualized Net Effective Rent is calculated by dividing the
remaining lease payments under the lease by the number of months remaining
under the lease and multiplying the result by 12. For leases entered into
after the relevant Property was acquired, Annualized Net Effective Rent is
calculated by dividing all lease payments under the lease by the number of
months in the lease and multiplying the result by 12. For leases at the
Acquisition Properties (303 Glenoaks and 1250 East Imperial Highway),
Annualized Net Effective Rent is calculated by assuming the Properties were
acquired on August 1, 1996 and by dividing the remaining lease payments
under the lease by the number of months remaining under the lease and
multiplying the result by 12. The foregoing amounts were in all cases
adjusted for tenant improvements and leasing commissions, if any, paid or
payable by the Company and reflect adjustments for the Company's expected
future capital expenditures per square foot of $0.18 which is greater than
its historical capital expenditures per square foot.
(2) Annualized Base Rent is the monthly contractual base rent under existing
leases as of August 1, 1996 multiplied by 12. The amounts in this column
that exceed the counterpart amounts under the column headed Annualized Net
Effective Rent Per Leased Square Foot do so primarily because the amounts in
this column do not reflect future scheduled rent increases.
(3) 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.
(4) Acquisition Property to be acquired concurrently with the Offering.
(5) The weighted average rent per leased square foot is calculated based only on
rent which is received from tenants under full service gross leases, which
represent approximately 84% of the total portfolio leased square feet.
Excluded are 5601 Lindero Canyon, 4811 Airport Plaza Drive, 4900/10 Airport
Plaza Drive, 5832 Bolsa Avenue, 55.6% of leased space at 400 Corporate
Pointe leased to Pepperdine University, and 48.3% of leased space at
Calabasas Commerce Center leased to two net tenants.
7
<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 $26.8 million from the net proceeds of the Offering for such
interests which represent 31.7% of the ownership interests in the
Properties to be acquired by the Company.
- 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 86.69% 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 (a total of seven individuals and entities including Arden
and Messrs. Ziman and Coleman), will receive an aggregate of 2,889,071 OP
Units, with an estimated value of approximately $57.8 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 one year interim loan (the
"Mortgage Financing") which will be non-recourse to the Company and the
Operating Partnership and secured by fully cross-collateralized and
cross-defaulted first mortgage liens on nine of the Properties (the
"Mortgage Financing Properties"). The Mortgage Financing will require
monthly payments of interest only, with all principal due on the first
anniversary of the closing of the Mortgage Financing.
- Approximately $35 million of the net proceeds of the Offering will be used
by the Operating Partnership to purchase the Acquisition Properties.
- Approximately $398 million of the net proceeds of the Offering and the
$103 million net proceeds of 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, expects to enter into the
proposed $100 million Credit Facility at or shortly after the closing of
the foregoing Formation Transactions.
Additional information regarding the Formation Transactions is set forth
under "Structure and Formation of the Company."
8
<PAGE>
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 own substantially all of the outstanding Common Stock (or 86.69% 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 86.71% of the
interests in the Operating Partnership and (iii) Messrs. Ziman and Coleman will
beneficially own, directly or indirectly through affiliates (including Arden),
2,185,229 OP Units (representing a 10.05% 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 $84.6 million. The aggregate book value of the
interests and assets to be transferred to the Company and the Operating
Partnership is approximately $14.1 million, of which approximately $2,000
constitutes the aggregate book value of the interests and assets to be
transferred to the Operating Partnership by Messrs. Ziman and Coleman.
No independent third-party appraisals, valuations or fairness opinions have
been obtained by the Company 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." In connection with the refinancing of the Mortgage Financing, the
Company expects that it will form financing subsidiaries (as depicted below)
into which the Mortgage Financing Properties will be transferred. See "--
Mortgage Financing and Credit Facility."
9
<PAGE>
The following diagram depicts the ownership structure of the Company and the
Operating Partnership upon completion of the Offering and the Formation
Transactions and assuming the completion of the CMBS Offering (the entities
depicted with dotted lines represent the ownership structure of the financing
subsidiaries which the Company intends to form):
STRUCTURE OF THE COMPANY UPON
COMPLETION OF THE OFFERING AND THE FORMATION TRANSACTIONS
AND ASSUMING THE COMPLETION OF THE CMBS OFFERING
The chart entitled "Structure of the Company Upon Completion of the Offering
and the Formation Transactions" depicts the following:
(i) Arden Realty Group, Inc. (the "Company") is owned 100% by the public
stockholders;
(ii) the Company holds on 86.32% General Partner Interest in Arden Realty
Group Limited Partnership (the "Operating Partnership");
(iii) Richard S. Zimon and Victor J. Coleman collectively hold a 10.28%
Limited Partner Interest in the Operating Partnership; and
(iv) the Other Participants in the Formation Transactions held an aggregate
3.40% Limited Partner Interest in the Operating Partnership.
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 2,185,229 OP Units, with a total
value of approximately $43.7 million based on the assumed initial public
offering price of the Common Stock, which value may differ from the fair
market value of such interests and assets and compares to a book value of
such interests and assets of approximately $2,000 as of June 30, 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 $398 million of indebtedness secured by the Properties and
indebtedness outstanding under lines of credit, and the related additional
and accrued interest thereon, 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 deductions of approximately $12.6 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 employment
agreements providing for annual salaries, bonuses, severance packages,
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
proportional purchase 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
10
<PAGE>
"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 initial public offering price has been determined based 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 13.0% of the
outstanding shares of Common Stock. See "Risk Factors -- Limits on Changes in
Control" and "Capital Stock -- Restrictions on Transfer."
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 19.3% (17.6% if the
Underwriters' overallotment option is exercised in full). See "Policies With
Respect To Certain Transactions -- Financing Policies."
MORTGAGE FINANCING, CMBS OFFERING AND CREDIT FACILITY
MORTGAGE FINANCING. The Company has received a commitment for an interim
loan (the "Mortgage Financing") in the amount of $104 million from an affiliate
of Lehman Brothers Inc. The Mortgage Financing is expected to have a maturity of
one year and bear interest at a floating rate equal to one-month LIBOR plus
1.50% for the first six months increasing to one-month LIBOR plus 2.00%
thereafter through maturity. The proceeds of the Mortgage Financing will be used
primarily to refinance a portion of the
11
<PAGE>
Company's existing mortgage indebtedness. The Mortgage Financing will be
non-recourse and secured by fully cross-collateralized and cross-defaulted first
mortgage liens on the nine Mortgage Financing Properties. The Mortgage Financing
will require monthly payments of interest only, with all principal due on the
first anniversary of the closing of the Mortgage Financing.
The Company intends to refinance the Mortgage Financing through an offering
of commercial mortgage-backed securities (the "CMBS Offering") to be made by a
financing subsidiary which the Company intends to form for that purpose in an
amount of approximately $104 million with a term of seven years. The CMBS
offering is expected to bear interest at a floating rate based on one-month
LIBOR. The Company intends to enter into a swap agreement with a major money
center bank in the notional amount of $104 million upon completion of this
Offering and the Formation Transactions or shortly thereafter (the "Swap
Agreement"). The Swap Agreement will result in effective fixed interest payments
equal to the yield on U.S. Treasury Notes with a maturity of seven years plus a
spread which, if determined on the date hereof, would result in an interest rate
of 7.51%. The CMBS Offering is expected to require monthly payments of interest
only with all principal due in a balloon payment at maturity. The Company
expects to pursue the CMBS Offering promptly after the closing of this Offering
and the Formation Transactions, although there can be no assurance that the
Company will complete a CMBS Offering or enter into a Swap Agreement.
THE CREDIT FACILITY. The Company is currently negotiating with a commercial
bank, the terms of a two-year, $100 million revolving credit facility, with a
one-year extension option (the "Credit Facility"). The Credit Facility will be
used, among other things, to finance the acquisition of properties, provide
funds for tenant improvements and capital expenditures, and provide for working
capital and other corporate purposes. The Company intends to enter into the
Credit Facility contemporaneously with the Offering or shortly thereafter,
although there can be no assurance that the Company will enter into the Credit
Facility.
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... 18,847,500 shares
Common Stock Outstanding After the
Offering (1)........................ 18,852,500 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 21,741,571 shares of Common Stock
outstanding after the Offering.
12
<PAGE>
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 $0.21 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 $20.00. 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
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 six months ended June 30, 1996 and
June 30, 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
six months ended June 30, 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 June
30, 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 interests for OP
Units, as if
13
<PAGE>
these transactions occurred on June 30, 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.
14
<PAGE>
THE COMPANY (PRO FORMA) AND
ARDEN PREDECESSORS (COMBINED HISTORICAL)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
COMBINED
PRO FORMA HISTORICAL
--------- ------------------
1996 1996 1995
--------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
OPERATING DATA:
Revenue:
Rental.................................. $33,493 $ 19,404 $ 2,822
Tenant reimbursements................... 2,049 1,425 177
Parking................................. 3,090 2,121 220
Other................................... 1,304 1,521 649
--------- -------- --------
Total revenue......................... 39,936 24,471 3,868
EXPENSES:
Property operating expenses............. 14,124 8,252 934
General and administrative expenses..... 1,900 830 684
Depreciation and amortization........... 5,774 3,036 638
Interest expense........................ 4,058 14,741 1,403
--------- -------- --------
Total expenses........................ 25,856 26,859 3,659
--------- -------- --------
Equity in net income (loss) of noncombined
entities................................ -- (94) 108
--------- -------- --------
Income (loss) before minority interests... 14,080 (2,482) 317
Minority interests........................ (1,871) 344 (7)
--------- -------- --------
Net income (loss)......................... $12,209 $ (2,138) $ 310
--------- -------- --------
--------- -------- --------
Net income per common share............... $ .70
---------
---------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
COMBINED HISTORICAL
-------------------------------------------
THE
PERIOD
MARCH
22,
1991
PRO FORMA TO
--------- DECEMBER
1995 1995 1994 1993 1992 31, 1991
--------- --------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental.................................. $66,691 $ 8,832 $ 5,157 $ 3,034 $-- $--
Tenant reimbursements................... 2,910 403 217 35 -- --
Parking................................. 5,895 750 382 279 -- --
Other................................... 2,440 1,707 796 314 324 11
--------- --------- -------- -------- ----- -----
Total revenue......................... 77,936 11,692 6,552 3,662 324 11
EXPENSES:
Property operating expenses............. 30,091 3,339 2,191 1,480 -- --
General and administrative expenses..... 3,800 1,377 689 386 471 7
Depreciation and amortization........... 11,549 1,898 1,143 646 2 --
Interest expense........................ 8,076 5,537 1,673 499 9 --
--------- --------- -------- -------- ----- -----
Total expenses........................ 53,516 12,151 5,696 3,011 482 7
--------- --------- -------- -------- ----- -----
Equity in net income (loss) of noncombined
entities................................ -- (116) 201 4 -- --
--------- --------- -------- -------- ----- -----
Income (loss) before minority interests... 24,420 (575) 1,057 655 (158) 4
Minority interests........................ (3,245) (1) 1 -- -- --
--------- --------- -------- -------- ----- -----
Net income (loss)......................... $21,175 $ (576) $ 1,058 $ 655 $(158) $4
--------- --------- -------- -------- ----- -----
--------- --------- -------- -------- ----- -----
Net income per common share............... $ 1.23
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
JUNE 30, 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................... $410,160 $254,749 $160,874 $ 34,977 $25,404 $-- $--
Total assets................................. 436,581 286,165 182,379 46,090 27,911 134 10
Mortgage loans payable and unsecured lines of
credit..................................... 104,000 265,959 168,451 32,944 24,356 250 --
Total liabilities............................ 111,468 277,917 174,163 34,148 25,190 287 5
Minority interests........................... 43,231 718 100 99 -- -- --
Owners'/Stockholders' equity................. 281,882 7,530 8,116 11,843 2,721 (153) 5
</TABLE>
15
<PAGE>
THE COMPANY (PRO FORMA) AND
ARDEN PREDECESSORS (COMBINED HISTORICAL)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
COMBINED
PRO FORMA HISTORICAL
--------- ------------------
1996 1996 1995
--------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA, PERCENTAGES AND
NUMBER OF PROPERTIES)
OTHER DATA:
Funds from Operations (1):
Income (loss) before minority
interests............................. $14,080 $ (2,482) $ 317
Depreciation and amortization........... 5,774 3,036 638
--------- -------- --------
Funds from Operations................... 19,854 554 955
Company's Share Percentage................ 86.69%
Company's Share of Funds from
Operations.............................. 17,211 554 955
--------- -------- --------
Cash flows from operating activities...... -- 2,013 458
Cash flows from investing activities...... -- (96,827) (5,578)
Cash flows from financing activities...... -- 94,937 4,550
Number of Properties owned at period
end..................................... 24 21 10
Gross rentable square feet of Properties
owned at period end..................... 4,036 3,547 1,408
Occupancy at period end of Properties
owned at period end..................... -- 89% 84%
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
COMBINED HISTORICAL
-------------------------------------------
THE
PERIOD
MARCH
22,
1991
PRO FORMA TO
--------- DECEMBER
1995 1995 1994 1993 1992 31, 1991
--------- --------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations (1):
Income (loss) before minority
interests............................. $24,420 $ (575) $ 1,057 $ 655 $(158) $4
Depreciation and amortization........... 11,549 1,898 1,143 646 2 --
--------- --------- -------- -------- ----- -----
Funds from Operations................... 35,969 1,323 2,200 1,301 (156) 4
Company's Share Percentage................
Company's Share of Funds from
Operations.............................. 31,182 1,323 2,200 1,301 (156) 4
--------- --------- -------- -------- ----- -----
Cash flows from operating activities...... -- 2,830 834 1,186 (258) 7
Cash flows from investing activities...... -- (123,358) (17,921) (25,965) -- --
Cash flows from financing activities...... -- 120,707 16,845 25,632 250 1
Number of Properties owned at period
end..................................... 24 17 8 3 -- --
Gross rentable square feet of Properties
owned at period end..................... 4,036 2,634 1,130 530 -- --
Occupancy at period end of Properties
owned at period end..................... -- 88% 82% 84% -- --
</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 which may differ
from the methodology for calculating Funds from Operations utilized by other
equity REITs and, accordingly, may not be comparable to such other REITs.
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.
16
<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 third-party valuations, appraisals or fairness opinions were
obtained by the Company 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 initial public offering price has been determined by Messrs.
Ziman and Coleman and the Underwriters based 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
determining the initial public offering price of the Common Stock certain
assumptions were made concerning the estimate of revenue to be derived from the
Properties. See "Distributions." 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 assets owned by the Company. There
can be no assurance that there will not be discrepancies between assumed results
and actual results which could lead to a reduction in actual distributions
compared to assumed distributions. It is possible that the initial public
offering price per share of Common Stock may exceed the per share fair market
value of the Company's assets.
FORMATION TRANSACTIONS NOT ARM'S LENGTH
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.
RISK OF HIGH DISTRIBUTION PAYOUT PERCENTAGE
The Company's expected distributions of $1.60 per share for the 12 months
following the closing of the Offering are expected to be approximately 98.0% of
estimated cash available for distributions. If cash available for distributions
generated by the Company's assets for such 12-month period are less than the
Company's estimate or if such cash available for distributions decreases in
future periods from current levels, the Company's ability to make distributions
at expected levels would be adversely affected. Any such failure to make
expected distributions could result in a decrease in the market price of the
Common Stock.
REAL ESTATE FINANCING RISKS
INABILITY TO REPAY OR REFINANCE INDEBTEDNESS AT MATURITY. Upon consummation
of this Offering and the Formation Transactions, the Company will enter into the
one-year interim Mortgage Financing in the aggregate principal amount of $104
million. The Company intends to refinance the Mortgage Financing prior to
maturity through the CMBS Offering. The Company also intends to enter into and,
over time, make borrowings under the Credit Facility. 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 any indebtedness will not be able to be
refinanced or that the terms of any such refinancing will not be as favorable as
the terms of such indebtedness.
RISK OF FAILURE TO COVER DEBT SERVICE UNDER THE MORTGAGE FINANCING AND CMBS
OFFERING. Concurrently with the Offering, the Company, through the Operating
Partnership, will borrow approximately $104
17
<PAGE>
million in principal amount under the Mortgage Financing and intends to
refinance the Mortgage Financing prior to maturity through the CMBS Offering.
The payment and other obligations under the Mortgage Financing will be (and
under the CMBS Offering are expected to be) secured by fully
cross-collateralized and cross-defaulted first mortgage liens on the nine
Mortgage Financing Properties. The Mortgage Financing will require monthly
payments of interest only, with all principal due on the first anniversary of
the Mortgage Financing. If the Company is unable to meet its obligations under
the Mortgage Financing (or under the CMBS Offering), 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."
POTENTIAL EFFECT OF RISING INTEREST RATES ON COMPANY'S VARIABLE RATE
DEBT. Upon or shortly after consummation of the Offering and the Formation
Transactions, the Company intends to enter into the proposed $100 million Credit
Facility. See "Policies With Respect to Certain Activities -- Financing
Policies." Advances under the Credit Facility will bear interest at a variable
rate. In addition, the Company may incur other variable rate indebtedness in the
future. Increases in interest rates on such indebtedness would increase the
Company's interest expense (e.g., assuming the entire $100 million available
under the Credit Facility is outstanding, the Company would incur an additional
$250,000 in interest expense for each 0.25% increase in interest rates), which
could adversely affect the Company's cash flow and its ability to pay expected
distributions to stockholders. In addition, although the Mortgage Financing (and
CMBS Offering) will bear interest at a variable rate, the Company expects to
enter into the Swap Agreement or other hedging transactions to further limit its
exposure to rising interest rates as appropriate and cost effective, although
there can be no assurance that it will be able to do so on terms acceptable to
the Company. The Swap Agreement or other hedging transactions also may expose
the Company to the risk that the counter party may not perform, which could
cause the Company to lose the benefits of the hedging transaction. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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 19.3%
(17.6% 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 also will 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.
REAL ESTATE INVESTMENT RISKS
REAL ESTATE OWNERSHIP 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
18
<PAGE>
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.
RISK THAT COMPANY MAY BE UNABLE TO RETAIN TENANTS OR RENT SPACE UPON LEASE
EXPIRATIONS. 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 13% and 51% of the
occupied space in the Properties will expire through the end of 1997 and 2000,
respectively. During 1997, 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, the Company's cash flow and
ability to make expected distributions to stockholders could be adversely
affected.
RESTRAINTS ON COMPANY'S FLEXIBILITY TO LIQUIDATE 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.
IMPACT OF COMPETITION ON OCCUPANCY LEVELS AND RENTS CHARGED. 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.
POTENTIAL INCREASES IN CERTAIN TAXES AND REGULATORY COMPLIANCE
COSTS. 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. 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.
IMPACT OF FINANCIAL CONDITION AND SOLVENCY OF TENANTS ON COMPANY'S CASH
FLOW. 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.
19
<PAGE>
AMERICANS WITH DISABILITIES ACT COMPLIANCE COSTS. 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.
FINANCIAL DEPENDENCY AND MANAGEMENT CONFLICTS ASSOCIATED WITH PARTNERSHIP
AND JOINT VENTURE PROPERTY OWNERSHIP STRUCTURES. 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. While the Company currently does
not have any plans to invest in joint ventures or partnerships with affiliates
or promoters of the Company, Mr. Arthur Gilbert, a director of the Company, owns
one office property in Southern California that the Company may consider
acquiring 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.
CONCENTRATION OF PROPERTIES IN SOUTHERN CALIFORNIA
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 aggregate of
approximately 2,740,718 OP Units, and options to purchase an aggregate of
690,000 shares of Common Stock under the Stock Incentive Plan. Messrs. Ziman and
Coleman will beneficially own, directly or indirectly through affiliates
(including Arden), 2,185,229 OP Units (representing an 10.05% limited partner
interest in the Operating Partnership) in exchange for the transfer of interests
and assets having an aggregate book value of approximately $2,000 to the
Operating Partnership by Messrs. Ziman and Coleman. 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
20
<PAGE>
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. After giving effect to its participation in the
Mortgage Financing, Lehman Brothers Holdings Inc., an affiliate of Lehman
Brothers Inc., the lead managing underwriter for the Offering (which has also
provided financial advisory services to the Company in respect of the Formation
Transactions and the Offering), will receive a net amount of approximately $202
million of the net proceeds of the Offering as repayment of indebtedness and
related additional and accrued 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 $43.7 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, may incur
adverse tax consequences upon the repayment of mortgage indebtedness relating to
the Mortgage Financing Properties 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 repayment. While the Company will have the
exclusive authority under the Partnership Agreement to determine whether, when,
and on what terms to repay such mortgage indebtedness, 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 repayment of such mortgage indebtedness.
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 of Century Park Center, for a period of seven years following the
Offering, any sale of Century Park Center (other than in connection with the
sale of all or substantially all of the assets of the Company or a merger of the
Company) 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
properties. Subsequent to the consummation of this Offering, the Company may
consider the acquisition of the office property owned by Mr. Gilbert.
21
<PAGE>
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
and a majority of the Properties have been owned for less than one year (11
Properties) or will be acquired at the closing of this Offering (2 Properties).
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.
POTENTIAL RISKS REGARDING INABILITY TO OBTAIN CHANGE-OF-CONTROL CONSENTS ON
GROUND LEASES
Three of the Company's properties (4811 Airport Plaza Drive, 4900/4910
Airport Plaza Drive and 5000 East Spring) are subject to ground leases with the
City of Long Beach. These ground leases contain consent provisions which are
triggered by the Formation Transactions. Under the leases, the consents cannot
be unreasonably withheld. The city attorney and the city staff of the City of
Long Beach have advised the Company in writing that they will recommend that the
City Council of the City of Long Beach approve the necessary consents at their
next regular meeting which will occur on October 8, 1996. The Company's title
insurance companies have agreed to cover the risk if the City Council should
fail to approve the consents and such failure is upheld in litigation as
reasonable. Nevertheless, if the City Council should not approve the consent and
should prevail in court regarding the reasonableness of withholding consent in
light of the recommendation of the city attorney and the city staff and if the
title insurance companies prove unable to make the Company whole on the risk,
then the Company's results of operations and financial condition could be
materially and adversely affected.
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. In addition, the Board of Directors may change the Company's
policies with respect to conflicts of interest provided that such changes are
consistent with applicable legal requirements. 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."
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.
22
<PAGE>
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 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 involves 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
23
<PAGE>
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 cash available for distribution to the Company and its
stockholders. See "Federal Income Tax Considerations -- Tax Aspects of the
Operating Partnership."
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 $601,000 of damage 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.
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 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 (i) deter tender
offers for the Common Stock, which offers may be attractive to the stockholders,
or (ii) deter purchases of
24
<PAGE>
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 13.0% 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 Common Stock or
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."
HISTORICAL LOSSES
The Arden Predecessors had a combined historical net loss of approximately
$2.1 million for the six months ended June 30, 1996 and approximately $576,000
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"
25
<PAGE>
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
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 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
26
<PAGE>
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, 2,889,071 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 868,500 shares of Common Stock will be granted and stock
bonus awards for a total of 5,000 shares have been 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.
EFFECT ON HOLDERS OF COMMON STOCK OF AN ISSUANCE OF PREFERRED STOCK
The Board of Directors is empowered by the Company's Charter to designate
and issue from time to time one or more classes or series of Preferred Stock
without stockholder approval. The Board of Directors may determine the relative
rights, preferences and privileges of each class or series of Preferred Stock so
issued. See "Capital Stock -- Preferred Stock." Because the Board of Directors
has the power to establish the preferences and rights of each class or series of
Preferred Stock, it may afford the holders in any series or class of Preferred
Stock preferences, distributions, powers and rights, voting or otherwise, senior
to the rights of holders of Common Stock. The issuance of Preferred Stock could
also have the effect of delaying, deferring or preventing a change in control of
the Company. See "-- Limits on Changes in Control."
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 $5.24 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 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.
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
27
<PAGE>
12.61% 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.
28
<PAGE>
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 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 August 1, 1996, the
Properties had a weighted average occupancy rate of approximately 89%. 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, as defined by the Company (and
not an independent third party). 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 although the determination of an office
property's class designation is subjective and consequently others may have a
different view. 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. As of August 1, 1996, no single
tenant accounted for more than approximately 3.3% of the aggregate Annualized
Base Rent of the Company's portfolio and only 16 tenants individually
represented more than 1% of such aggregate 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.,
Metropolitan Los Angeles (which includes Los Angeles County and Orange
County), in which 23 of the Company's 24 Properties are located, is
projected to be the number one market in the United States for primary
office employment growth during the period from 1995 to 2005;
- 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 Los Angeles EDC has 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% in 1996 and
1997 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 at a gain 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 primarily 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 82% (based on square feet renewed) from 1993 through
August 1, 1996 and management's on-going relationships with multi-site tenants.
The Company believes that it has been successful in implementing its
value-added strategy as evidenced by increased occupancy rates and rental
revenue at the Properties. As of August 1, 1996, the Properties owned by the
Company for more than one year had a weighted average occupancy rate of
approximately 88%, compared to a weighted average occupancy of approximately 80%
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 August 1, 1996, the weighted average occupancy rate
of the 21 Properties located in Los Angeles County was approximately 90%,
compared to weighted average occupancy rates, as of December 31, 1995, of
approximately 81% for office properties throughout Los Angeles County and
approximately 83% 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 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, with respect to
the 1996 acquired properties, to 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 negotiating a $100 million Credit
Facility which the Company expects to use for acquiring properties and for
general corporate purposes, although there can be no assurance that the Company
will enter into the Credit Facility.
Upon completion of the Offering, the founders and executive officers of the
Company will beneficially own approximately 12.61% 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").
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 or properties which provide attractive yields
with stable cash flow 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.
Based on its own historical activities and its knowledge of the local
marketplace the Company believes that (i) the Southern California region offers
opportunities for companies like the Company that are 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 led to the increased occupancy rates 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.
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
31
<PAGE>
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 by controlling
corporate general and administrative expenses and assigning responsibility for
multiple submarkets to its four regional offices.
GROWTH STRATEGIES
EXTERNAL GROWTH: Based on its own historical activities and its knowledge
of the local marketplace, the Company believes that 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. Upon or shortly after completion of the Offering the Company will
have a debt-to-total market capitalization ratio of approximately 19.3% and
expects to finance acquisitions through its proposed $100 million Credit
Facility, although it may employ other financial alternatives. 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 August 1, 1996, the Properties owned by
the Company for more than one year had a weighted average occupancy rate of
approximately 88%, compared to approximately 80% as of the respective dates such
Properties were acquired by the Company. The Company also targets properties
which provide attractive yields with stable cash flow.
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 proposed $100 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.
Recent examples of the Company's ability to identify attractive acquisition
opportunities include the two Acquisition Properties, 303 Glenoaks and 12501
East Imperial Highway. 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
32
<PAGE>
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. Similarly, the Property at 12501 East
Imperial Highway is a 122,175 square foot, six-story building 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 82% (based on square feet renewed) from inception through
August 1, 1996. 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 August 1, 1996,
approximately 446,000 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 June
30, 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
$1.2 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).
(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
33
<PAGE>
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 $347 million (approximately $400
million if the Underwriters' overallotment option is exercised in full),
assuming a public offering price of $20.00 per share. The net cash proceeds of
the Offering will be used by the Company as follows: approximately $26.8 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 $320.2 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 $103 million from the Mortgage
Financing borrowed concurrently with the Offering and approximately $19.3
million in restricted cash that will be available upon conclusion of the
Formation Transactions, as follows: approximately $398 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, 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 2,827,000 shares of
Common Stock is exercised in full, the Company expects to use the additional net
proceeds (which will be approximately $52.6 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 and the Mortgage Financing, 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 8.541% before
consideration of additional interest and any lenders' participation and a
weighted average remaining term to maturity of approximately 2.86 years as of
June 30, 1996.
35
<PAGE>
MORTGAGE DEBT TO BE REPAID
<TABLE>
<CAPTION>
PRINCIPAL BALANCE
OF DEBT TO BE
REPAID UPON
CONSUMMATION
OF THE OFFERING
AND THE MORTGAGE
FINANCING (1)
-------------------
(IN THOUSANDS)
<S> <C>
PROPERTY
- ----------------------------------------------------------------------
9665 Wilshire......................................................... $ 30,716
Beverly Atrium........................................................ 15,631
Century Park Center................................................... 25,170
Westwood Terrace...................................................... 20,514
1950 Sawtelle......................................................... 10,200
400 Corporate Pointe.................................................. 21,885
Bristol Plaza......................................................... 5,200
Skyview Center........................................................ 40,242
The New Wilshire...................................................... 21,494
5601 Lindero Canyon................................................... 10,161
Calabasas Commerce Center............................................. 11,527
Woodland Hills Financial.............................................. 22,612
16000 Ventura Blvd.................................................... 17,151
425 West Broadway..................................................... 5,000
70 South Lake......................................................... 10,741
4811 Airport Plaza Drive.............................................. 14,261
4910 Airport Plaza Drive.............................................. (2)
5000 East Spring...................................................... 10,922
100 Broadway.......................................................... 20,250
5832 Bolsa............................................................ 4,618
Anaheim City Centre................................................... 9,880
Imperial Bank Tower................................................... 41,451
--------
Total............................................................. $369,626
--------
--------
</TABLE>
- ------------------------
(1) Exact repayment amounts may differ due to amortization. These figures are
estimated as of September 1, 1996 and exclude (a) accrued and additional
interest estimated to be approximately $25 million in the aggregate and (b)
$3.26 million under lines of credit to be assumed by the Operating
Partnership.
(2) Included in amount listed above for 4811 Airport Plaza Drive.
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 $0.21
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
June 30, 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 June 30, 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 June 30, 1996 or
during the 12 months ended June 30, 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 12.98% (or $0.21 per share) of the distributions anticipated to be
paid by the Company for 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 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 June 30, 1996 as adjusted for
certain items in the following table would have been approximately $28.8
million. The estimated Cash Available for Distribution is anticipated to be in
excess of the annual distribution requirements applicable to REITs. 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 June 30, 1996 and the adjustments to pro
forma Funds from Operations for the 12 months ended June 30, 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 interests for the year ended December
31, 1995............................................................ $24,420
Pro forma income before minority interests for the six months ended
June 30, 1995....................................................... (12,242)
Pro forma income before minority interests for the six months ended
June 30, 1996....................................................... 14,080
-------
Pro forma income before minority interests for the 12 months ended
June 30, 1996....................................................... 26,258
Plus pro forma real estate depreciation for the 12 months ended
June 30, 1996 (1)................................................... 10,461
Plus pro forma amortization of leasing commissions and tenant
improvements for the 12 months ended June 30, 1996 (2).............. 1,053
-------
Pro forma Funds from Operations for the 12 months ended June 30,
1996................................................................ 37,772
Adjustments:
Provision for assumed expiring leases (3)........................... (2,543)
Incremental pro forma lease adjustment (4).......................... 3,554
Net increase in tenant reimbursements (5)........................... 691
Net decrease in property operating expenses (6)..................... 2,049
Contractual net increases in parking income and other income (7).... 63
-------
Estimated pro forma Funds from Operations for the 12 months ended July
31, 1997............................................................ 41,586
Net effect of straight lining of rents (8).......................... (2,129)
Estimated recurring non-revenue enhancing tenant improvements and
leasing commissions (9)............................................ (3,217)
Estimated recurring non-revenue enhancing capital expenditures
(10)............................................................... (727)
-------
Total estimated Cash Available for Distribution for the 12 months
ended July 31, 1997................................................. $35,513
Total estimated cash distributions.................................... $34,786
Less: Minority interests' share of estimated cash distributions....... 4,627
-------
Estimated cash distributions to stockholders of the Company (11)...... $30,159
Estimated initial cash distribution per share (12).................... $ 1.60
Estimated Cash Available for Distribution payout ratio (13)........... 98.0%
</TABLE>
- ------------------------
(1) Pro forma depreciation for the year ended December 31, 1995 of $10,866 plus
pro forma depreciation for the six months ended June 30, 1996 of $5,021
minus pro forma depreciation for the six months ended June 30, 1995 of
$5,426.
(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 six months ended June
30, 1996 of $753 minus pro forma amortization of leasing commissions and
tenant improvements for the three months ended June 30, 1995 of $383.
(3) The provision for assumed expiring leases above assumes no lease renewals
for the period from August 16, 1996 to July 31, 1997. The Company's
historical renewal rate, based on square footage, from inception through
August 1, 1996 is 82%. The following table sets forth the estimated Funds
from Operations, the total estimated Cash Available for Distribution and the
estimated Cash Available for
38
<PAGE>
Distribution payout ratio that would be expected to result for the 12 months
ended July 31, 1997 if the renewal rate for leases expiring from August 16,
1996 through July 31, 1997 is 70% (which the Company reasonably expects to
achieve based on its historical renewal rates).
<TABLE>
<CAPTION>
Pro forma Funds from Operations for the 12 months ended June 30,
1996.................................................................. 37,772
<S> <C>
Adjustments:
Provision for assumed expiring leases................................ (1,110)(i)
Incremental pro forma lease adjustment (4)........................... 3,554
Net increase in tenant reimbursements (5)............................ 691
Net decrease in property operating expenses (6)...................... 1,914
Contractual net increases in parking income and other income (7)..... 63
------------
Estimated pro forma Funds from Operations for the 12 months ended July
31, 1997.............................................................. 42,884
Net effect of straight lining of rents (8)........................... (2,129)
Estimated recurring non-revenue enhancing tenant improvements and
leasing commissions (9)............................................. (3,217)
Estimated recurring non-revenue enhancing capital expenditures
(10)................................................................ (727)
------------
Total estimated Cash Available for Distribution for the 12 months ended
July 31, 1997......................................................... $ 36,811
Total estimated cash distributions..................................... $ 34,786
Less: Minority interests' share of estimated cash distribution......... 4,622
------------
Estimated cash distributions to stockholders of the Company (11)....... $ 30,164
Estimated initial cash distribution per share (12)..................... $ 1.60
Estimated Cash Available for Distribution payout ratio (13)............ 94.5%
</TABLE>
----------------------------
(i) This provision for assumed expiring leases represents adjustments for a
possible reduction in occupancy and in rental rates and consists of (i) a
reduction of $763 which represents 30% of the rent payable under all
leases expiring from August 16, 1996 through July 31, 1997 assuming that
30% 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 $347 for the 70% of leases assumed to be
renewed between August 16, 1996 and July 31, 1997 assuming that such
leases renew at the lower of the contractual rental rate of the lease at
the time of its expiration or the Company's analysis of the market rate.
(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 $2,726 representing additional minimum rent from new leases and renewals
executed between June 30, 1996 and August 16, 1996 to the extent such leases
generate additional minimum rents for the 12 months ended July 31, 1997,
(ii) a decrease of $137 representing the decrease in rental revenue for
leases that expired between June 30, 1996 and August 16, 1996 to the extent
such leases generated rent for the 12 months ended June 30, 1996 and (iii) a
net amount of $965 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 June
30, 1996 and the decrease in rental revenue for leases expired during the 12
months ended June 30, 1996 to the extent rental revenue was included in
rental revenue for the 12 months ended June 30, 1996.
(5) Represents (i) a $722 contractual increase in tenant reimbursements
attributable to leases executed prior to June 30, 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, and (ii) a $31
decrease in tenant reimbursements due to the reassessment of property taxes
and changes in insurance and property operating costs.
(6) Represents the estimated net decrease in operating expenses based on (i) an
increase of $132 assuming no lease renewals and $267 assuming 70% lease
renewals resulting from the net increase in the occupancy of space for
leases signed during the 12 months ended June 30, 1996, and between June 30,
1996 and August 16, 1996, offset by the decrease in occupancy from actual
lease terminations through
39
<PAGE>
June 30, 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, and (ii) a decrease in property operating costs of $2,181 due
to the reassessment of property taxes and reduction of insurance costs based
on current arrangements.
(7) Represents net additional parking revenue of $12 to be received for the 12
months ended July 31, 1997, relating to leases signed subsequent to June 30,
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
June 30, 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.
(8) Represents the effect of adjusting straight-line rental revenue included in
pro forma net income for the 12 months ended July 31, 1997 from the
straight-line accrual basis to amounts currently being paid or due from
tenants. Following is a table which shows the adjustments to straight-line
revenue for 1997-2001 related to leases in place at August 1, 1996.
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001
- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$(1,199) $(164) $602 $1,305 $1,651
</TABLE>
(9) Reflects non-revenue enhancing 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 expenditures per square foot for
renewed and re-tenanted space at the Properties since 1993 multiplied by the
average annual square feet of leased space for which leases expire during
the five year period ending December 31, 2001 (400,000 square feet).
<TABLE>
<CAPTION>
JANUARY
1-
YEAR ENDED DECEMBER 31, AUGUST
----------------------- 1, WEIGHTED
1993 1994 1995(I) 1996 AVERAGE
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
RENEWAL
TI per square foot................................ $3.58 $2.23 $ 4.67 $5.46 $4.19
LC per square foot................................ $ .09 $3.44 $ 1.11 $2.38 $2.37
----- ----- ------ ------ ------
Total TI and LC per square foot............... $3.67 $5.67 $ 5.78 $7.84 $6.56
----- ----- ------ ------ ------
----- ----- ------ ------ ------
RE-TENANTED (ii)
TI per square foot................................ $2.22 $9.04 $ 9.82 $7.04 $8.38
LC per square foot................................ $ .31 $2.72 $ 3.05 $3.66 $3.12
----- ----- ------ ------ ------
Total TI and LC per square foot............... $2.53 $11.76 $12.87 $10.70 $11.50
----- ----- ------ ------ ------
----- ----- ------ ------ ------
</TABLE>
---------------------
(i) Excludes tenant improvement and leasing commission 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 all leases renewed in 1995
equaled $8.05 per square foot.
(ii) Does not include shell space build out for 187,703 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................................. $ 6.56 x 400,000 x 70%(i) = $ 1,837
Re-tenanted............................. $11.50 x 400,000 x 30% = 1,380
----------
$ 3,217
----------
----------
</TABLE>
---------------------
(i) The historical weighted average renewal rate for the Company from
January 1, 1993 is 82%.
40
<PAGE>
(10) 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 $.18. The Company has calculated this reserve based upon its
estimates of replacement or renovation costs and actual lives of: parking
lots, roofs, heating, ventilation and air conditioning systems, elevators
and mechanical systems, lobbies, restrooms and corridors.
(11) The Company's share of estimated cash distributions is based on its
approximately 86.71% ownership of the aggregate equity capitalization of the
Operating Partnership.
(12) Based on a total of 18,852,500 shares to be outstanding following
consummation of the Offering. The Company estimates that approximately
12.98% of the estimated cash distributions for the 12 months ended July 31,
1997 will represent a return of capital for federal income tax purposes.
(13) Calculated as the total estimated cash distributions divided by the total
estimated Cash Available for Distribution for the 12 months ended July 31,
1997. The payout ratio of estimated pro forma Funds from Operations equals
83.6%.
41
<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 June 30, 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>
JUNE 30, 1996
-------------------
PRO FORMA
COMBINED AS
HISTORICAL ADJUSTED
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage Loans (1).................................................. $263,492 $104,000
Line of Credit...................................................... 2,467 --
Minority interests in Operating Partnership........................... 718 43,231
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;
18,852,500 issued and outstanding (2).............................. -- 189
Additional Paid-in Capital.......................................... -- 281,693
Owners' Equity...................................................... 7,530 --
-------- ---------
Total Owners'/Stockholders' Equity................................ 7,530 281,882
-------- ---------
Total Capitalization............................................ $274,207 $429,113
-------- ---------
-------- ---------
</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 and 5,000
shares issued to employees of the Company as a stock bonus. See "Management
-- Executive Compensation." Does not include (i) 2,889,071 shares of Common
Stock that may be issued upon the exchange of OP Units issued in connection
with the Formation Transactions, (ii) 2,827,000 shares of Common Stock
subject to the Underwriters' overallotment option or (iii) 868,500 shares of
Common Stock subject to options granted under the Company's Stock Incentive
Plan.
42
<PAGE>
DILUTION
At June 30, 1996, the Company had a net tangible book value of approximately
$6.6 million. After giving effect to (i) the sale of the shares of Common Stock
offered hereby (at an assumed initial public offering price of $20.00 per share)
and the receipt by the Company of approximately $347 million in net proceeds
from the Offering, after deducting underwriting discounts and commissions and
estimated Offering expenses, (ii) the repayment of approximately $398 million of
indebtedness under mortgage debt and unsecured lines of credit (including
approximately $25 million of accrued, deferred and additional interest, of which
approximately $17.9 million was not accrued as of June 30, 1996 on the combined
balance sheet of the Arden Predecessors), the pro forma net tangible book value
at June 30, 1996 would have been $321 million, or $14.76 per share of Common
Stock. This amount represents an immediate increase in net tangible book value
of $12.48 per share to the existing holders of OP Units and an immediate
dilution in pro forma net tangible book value of $2.28 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)......... $2.28
Increase in net tangible book value per share attributable to the
Offering (2)....................................................... $12.48
Pro forma net tangible book value after the Offering (3).............. $14.76
------
Dilution in net tangible book value per share of Common Stock to new
investors (4)....................................................... $ 5.24
------
------
</TABLE>
- ------------------------
(1) Net tangible book value per share prior to the Offering is determined by
dividing net tangible book value of the Company (based on the June 30, 1996
net book value of the assets less net book value of prepaid financing and
leasing costs to be contributed in connection with the Formation
Transactions, net of liabilities to be assumed) 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 $321 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 June 30, 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 SHARES/ 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......................................... 18,848 86.69% $376,950 98.28% $20.00(3)
OP Units and Common Shares issued to Continuing Investors (1)......... 2,894 13.31% $ 6,589(2) 1.72% $ 2.28
------ ------- -------- -------
Total............................................................... 21,742 100.00% $383,539 100.00%
------ ------- -------- -------
------ ------- -------- -------
</TABLE>
- ------------------------
(1) Common Shares represents 5,000 shares to be issued upon completion of the
Offering as a Common Stock Bonus to two officers of the Company.
(2) Based on the June 30, 1996 net book value of the assets less net book value
of prepaid financing and leasing costs to be contributed in connection with
the Formation Transactions, net of liabilities to be assumed.
(3) Before deducting underwriting discounts and commissions and estimated
expenses of the Offering.
43
<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 six months ended June 30, 1996 and
June 30, 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 six
months ended June 30, 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 June 30, 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 June 30, 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.
44
<PAGE>
THE COMPANY (PRO FORMA) AND
ARDEN PREDECESSORS (COMBINED HISTORICAL)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
COMBINED
PRO FORMA HISTORICAL
--------- ------------------
1996 1996 1995
--------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
OPERATING DATA:
Revenue:
Rental.................................. $33,493 $ 19,404 $ 2,822
Tenant reimbursements................... 2,049 1,425 177
Parking................................. 3,090 2,121 220
Other................................... 1,304 1,521 649
--------- -------- --------
Total revenue......................... 34,936 24,471 3,868
EXPENSES:
Property operating expenses............. 14,124 8,252 934
General and administrative expenses..... 1,900 830 684
Depreciation and amortization........... 5,774 3,036 638
Interest expense........................ 4,058 14,741 1,403
--------- -------- --------
Total Expenses........................ 25,856 26,859 3,659
--------- -------- --------
Equity in net income (loss) of noncombined
entities................................ -- (94) 108
--------- -------- --------
Income (loss) before minority interests... 14,080 (2,482) 317
Minority interests........................ (1,871) 344 (7)
--------- -------- --------
Net income (loss)......................... $12,209 $ (2,138) $ 310
--------- -------- --------
--------- -------- --------
Net income per common share............... $ .70
---------
---------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
COMBINED HISTORICAL
-------------------------------------------
THE
PERIOD
MARCH
22,
1991
TO
PRO FORMA DECEMBER
--------- 31,
1995 1995 1994 1993 1992 1991
--------- --------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental.................................. $66,691 $ 8,832 $ 5,157 $ 3,034 $-- $--
Tenant reimbursements................... 2,910 403 217 35 -- --
Parking................................. 5,895 750 382 279 -- --
Other................................... 2,440 1,707 796 314 324 11
--------- --------- -------- -------- ----- -----
Total revenue......................... 77,936 11,692 6,552 3,662 324 11
EXPENSES:
Property operating expenses............. 30,091 3,339 2,191 1,480 -- --
General and administrative expenses..... 3,800 1,377 689 386 471 7
Depreciation and amortization........... 11,549 1,898 1,143 646 2 --
Interest expense........................ 8,076 5,537 1,673 499 9 --
--------- --------- -------- -------- ----- -----
Total Expenses........................ 53,516 12,151 5,696 3,011 482 7
--------- --------- -------- -------- ----- -----
Equity in net income (loss) of noncombined
entities................................ -- (116) 201 4 -- --
--------- --------- -------- -------- ----- -----
Income (loss) before minority interests... 24,420 (575) 1,057 655 (158) 4
Minority interests........................ (3,245) (1) 1 -- -- --
--------- --------- -------- -------- ----- -----
Net income (loss)......................... $21,175 $ (576) $ 1,058 $ 655 $(158) $4
--------- --------- -------- -------- ----- -----
--------- --------- -------- -------- ----- -----
Net income per common share............... $ 1.23
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
JUNE 30, 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................... $410,160 $254,749 $160,874 $ 34,977 $25,404 $-- $--
Total assets................................. 436,581 286,165 182,379 46,090 27,911 134 10
Mortgage loans payable and unsecured lines of
credit..................................... 104,000 265,959 168,451 32,944 24,356 250 --
Total liabilities............................ 111,468 277,917 174,163 34,148 25,190 287 5
Minority interests........................... 43,231 718 100 99 -- -- --
Owners'/Stockholders' equity................. 281,882 7,530 8,116 11,843 2,721 (153) 5
</TABLE>
45
<PAGE>
THE COMPANY (PRO FORMA) AND
ARDEN PREDECESSORS (COMBINED HISTORICAL)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
COMBINED
PRO FORMA HISTORICAL
--------- ------------------
1996 1996 1995
--------- -------- --------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA, PERCENTAGES AND
NUMBER OF PROPERTIES)
OTHER DATA:
Funds from Operations (1):
Income (loss) before minority
interests.............................. $14,080 $ (2,482) $ 317
Depreciation and amortization........... 5,774 3,036 638
--------- -------- --------
Funds from Operations................. 19,854 554 955
Company's Share Percentage................ 86.69%
Company's Share of Funds from
Operations.............................. 17,211 554 955
--------- -------- --------
Cash flows from operating activities...... -- 2,013 458
Cash flows from investing activities...... -- (96,827) (5,578)
Cash flows from financing activities...... -- 94,937 4,550
Number of Properties owned at period
end..................................... 24 21 10
Gross rentable square feet of Properties
owned at period end..................... 4,036 3,547 1,408
Occupancy at period end of Properties
owned at period end..................... -- % 89% 84%
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
COMBINED
HISTORICAL
-------------------------------------------
THE
PERIOD
MARCH
31,
1991
TO
PRO FORMA DECEMBER
--------- 31,
1995 1995 1994 1993 1992 1991
--------- --------- -------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations (1):
Income (loss) before minority
interests.............................. $24,420 $ (575) $ 1,057 $ 655 $(158) $4
Depreciation and amortization........... 11,549 1,898 1,143 646 2 --
--------- --------- -------- -------- ----- -----
Funds from Operations................. 35,969 1,323 2,200 1,301 (156) 4
Company's Share Percentage................
Company's Share of Funds from
Operations.............................. 31,182 1,323 2,200 1,301 (156) 4
--------- --------- -------- -------- ----- -----
Cash flows from operating activities...... -- 2,830 834 1,186 (258) 7
Cash flows from investing activities...... -- (123,358) (17,921) (25,965) -- --
Cash flows from financing activities...... -- 120,707 16,845 25,632 250 1
Number of Properties owned at period
end..................................... 24 17 8 3 -- --
Gross rentable square feet of Properties
owned at period end..................... 4,036 2,634 1,130 530 -- --
Occupancy at period end of Properties
owned at period end..................... -- % 88% 82% 84% -- --
</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 which may differ
from the methodology for calculating Funds from Operations utilized by other
equity REITs and, accordingly, may not be comparable to such other REITs.
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.
46
<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 16% of the Properties (as a percentage of pro forma rental revenue
for the six months ended June 30, 1996) acquired in calendar year 1993,
approximately 13% of the Properties acquired in 1994, approximately 39% acquired
in 1995, and the balance (32%) acquired as of June 30, 1996. 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.
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 SIX MONTHS ENDED JUNE 30, 1996 TO SIX MONTHS ENDED JUNE 30,
1995. During the first half of 1996, the Arden Predecessors purchased four
Properties resulting in an increase in real estate investments of approximately
$95 million.
Rental revenue increased by $16.6 million or 588% for the six months ended
June 30, 1996 compared to the six months ended June 30, 1995. The increase in
rental revenue resulted principally from a full six months of rental revenue
from Properties acquired during calendar year 1995, six of which were acquired
after June 30, 1995, and rental revenue from Properties acquired during the six
months ended June 30, 1996. Rental revenue from the calendar year 1995 acquired
Properties increased to $10.0 million for the six months ended June 30, 1996,
representing a full six months of rental revenue, from $83,000 in the prior
period. Rental revenue associated with the 1996 acquired Properties added an
additional approximately $6.7 million to rental revenue during the six months
ended June 30, 1996.
Tenant reimbursements and other revenue increased by $2.1 million or 257%
for the six months ended June 30, 1996 compared to the six months ended June 30,
1995. The increase in tenant reimbursements and other revenue resulted
principally from a full six months of tenant reimbursements from Properties
acquired during calendar year 1995 and tenant reimbursements from Properties
acquired during the six months ended June 30, 1996. Tenant reimbursements from
the calendar year 1995 acquired Properties added an additional $745,000 for the
six months ended June 30, 1996, representing a full six months of tenant
reimbursements. Tenant reimbursements associated with the 1996 acquired
Properties added an additional $457,000 to revenue during the six months ended
June 30, 1996. Other revenue, representing primarily management fees from
third-party owned properties, increased by 134% for the six months ended June
30, 1996 compared to the prior period.
Parking revenue increased by $1.9 million or 864% for the six months ended
June 30, 1996 compared to the six months ended June 30, 1995. The increase
resulted principally from a full six months of parking revenue from Properties
acquired during calendar year 1995 and parking revenue from Properties acquired
during the six months ended June 30, 1996. Parking revenue from the calendar
year 1995 acquisition
47
<PAGE>
Properties increased to $1.3 million for the six months ended June 30, 1996,
representing a full six months of parking revenue, from $0 in the prior period.
Parking revenue associated with the 1996 acquired Properties added an additional
$597,000 to parking revenue during the six months ended June 30, 1996.
The Arden Predecessors hold noncontrolling investments in various entities,
the noncombined entities, which own commercial office properties. These entities
are accounted for in the financial statements of the Arden Predecessors using
the equity method. Equity in net income of noncombined entities decreased by
$202,000 for the six months ended June 30, 1996 compared to the six months ended
June 30, 1995. This 215% decrease is due principally to significant large
tenants vacating space in the first quarter of 1996 at two of the properties.
The following is a comparison of certain expenses of the Arden Predecessors
for the six months ended June 30, 1996 to the six months ended June 30, 1995:
<TABLE>
<CAPTION>
DOLLAR PERCENT
JUNE 30, 1996 JUNE 30, 1995 CHANGE CHANGE
------------- --------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Certain Expenses
Property operating and maintenance......... $ 4,998 $ 754 $ 4,244 563%
Real estate taxes.......................... 1,291 138 1,153 836%
Insurance.................................. 1,503 42 1,461 3,479%
Ground rent................................ 460 -- 460 --
------ ----- --------- -----
Total certain expenses................... $ 8,252 $ 934 $ 7,318 784%
------ ----- --------- -----
------ ----- --------- -----
</TABLE>
For the six months ended June 30, 1996 and 1995, total certain expenses were
$8.3 million, or 40% of rental revenue and tenant reimbursements, and $934,000,
or 31% of rental revenue and tenant reimbursements, respectively. The increase
in total certain expenses is primarily attributable to the Properties acquired
during calendar year 1995 and during the six months ended June 30, 1996 and the
expenses associated with the absorption of vacant rentable space. The increase
in total certain expenses from the six months ended June 30, 1995 to the six
months ended June 30, 1996 resulting from the acquisition of Properties during
the six months ended June 30, 1996 was approximately $3.1 million. In addition,
total certain expenses increased by $4.2 million as a result of a full six
months of operations for the Properties acquired in 1995, and the
above-described increase in occupancy at the Properties owned at both June 30,
1996 and 1995. Total certain expenses related to Properties owned by the Company
for the entire six months ended June 30, 1995 and 1996 decreased 2.2% or
$20,000.
General and administrative expenses increased by $146,000 or 21% for the six
months ended June 30, 1996 compared to the six months ended June 30, 1995.
However, general and administrative expenses during the 1996 period fell to 3.4%
of total revenue compared to 17.7% 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 current pay rate of
the mortgage loans, amortization of the loan fees paid at origination, and
accrual of additional interest due upon the retirement of the debt. Interest
expense for the six months ended June 30, 1996 was approximately $14.7 million,
including interest payable upon the retirement of certain mortgage loans.
Interest expense increased by approximately $13.3 million or 951% for the six
months ended June 30, 1996 compared to the six months ended June 30, 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
six months ended June 30, 1996. The interest expense associated with the
mortgage loans originated during the six months ended June 30, 1996 was
approximately $4.7 million. In addition, the six months ended June 30, 1996
included a full six months of interest expense for Properties acquired during
calendar year 1995, which increased interest expense by approximately $8.5
million.
48
<PAGE>
Depreciation and amortization increased by $2.4 million or 376% primarily
due to the calendar year 1995 acquisitions and the acquisitions during the six
months ended June 30, 1996.
As a result of the foregoing, the Company had a net loss of $2.1 million for
the six months ended June 30, 1996 compared to net income of $310,000 for the
prior period.
The following is a comparison of property operating data for the Properties
("Same Store Properties") that were owned for the entire six months ended June
30, 1995 and June 30, 1996:
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995
-------------- --------------
<S> <C> <C>
Revenue:
Rental.............................................................. $2,713,000 $2,739,000
Tenant reimbursements............................................... 224,000 176,000
Parking............................................................. 246,000 220,000
Other............................................................... 87,000 26,000
-------------- --------------
Total revenue..................................................... $3,270,000 $3,161,000
-------------- --------------
-------------- --------------
Expenses:
Property operating, taxes, insurance and ground rent................ $ 900,000 $ 919,000
-------------- --------------
-------------- --------------
</TABLE>
Rental revenues decreased during the six months ended June 30, 1996 compared
to the same period in 1995 due primarily to a net decrease in rental rate for
leases that renewed or were retenanted. For the six months ended June 30, 1996,
tenant reimbursements and other income increased by $109,000 over the same
period in 1995. In addition, operating expenses including taxes, insurance,
ground rent for these Same Store Properties decreased by $19,000 for the six
months ended June 30, 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 seven Properties resulting
in an increase in real estate investments of approximately $126 million.
Rental revenue increased by $3.7 million or 71% 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 the
property acquired in 1994 and partial year rental revenue from Properties
acquired in 1995. Rental revenue from the 1994 acquisition property increased to
$1.2 million for the year ended December 31, 1995, representing a full year of
rental revenue, from $977,000 for such property in the prior year. Rental
revenue associated with the 1995 acquisition Properties added an additional
approximately $3.2 million to rental revenue in 1995.
Tenant reimbursements and other revenue increased by $1.1 million or 108%
for the year ended December 31, 1995 compared to the year ended December 31,
1994. Other revenue increased by $911,000, 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 the property 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 property increased
to $239,000 for the year ended December 31, 1995, representing a full year of
tenant reimbursements, from $182,000 in the prior year. Tenant reimbursements
associated with the 1995 acquisition Properties added an additional
approximately $150,000 to tenant reimbursements during the year ended December
31, 1995.
Parking revenue increased by $368,000 or 96% 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
49
<PAGE>
the property acquired during calendar year 1994 and partial year parking revenue
from Properties acquired during the year ended December 31, 1995. Parking
revenue associated with the 1995 acquisition properties, added an additional
$319,000 to parking revenue during the year ended December 31, 1995.
At December 31, 1994 the Arden Predecessors held noncontrolling investments
in various entities, the noncombined entities, which own commercial office
properties. During 1995, the Arden Predecessors made an investment in an
additional entity which owns commercial office properties. These entities are
accounted for in the financial statements of the Arden Predecessors using the
equity method. Equity in net income of noncombined entities decreased by
$317,000 for the year ended December 31, 1995 compared to the year ended
December 31, 1994. This 273% decrease is due principally to significant tenant
losses in the 1995 investment.
The following is a comparison of certain expense of the Arden Predecessors
for the year ended December 31, 1995 to the year ended December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DOLLAR PERCENT
1995 1994 CHANGE CHANGE
------------- ------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Certain Expenses
Property operating and maintenance......... $ 2,539 $ 1,869 $ 670 36%
Real estate taxes.......................... 502 272 230 85%
Insurance.................................. 279 50 229 458%
Ground rent................................ 19 -- 19 --
------ ------ --------- ---
Total certain expenses................... $ 3,339 $ 2,191 $ 1,148 52%
------ ------ --------- ---
------ ------ --------- ---
</TABLE>
Total certain expenses were $3.3 million, or 36% of rental revenue and
tenant reimbursements, and $2.2 million, or 41% of rental revenue and tenant
reimbursements, for the years ended December 31, 1995 and December 31, 1994,
respectively. The increase in total certain expenses is primarily attributable
to a full year of operations for the 1994 acquisition property, the partial year
of operations for the 1995 Acquisition Properties and the expenses associated
with the absorption of vacant rentable space across the portfolio. The increase
in total certain expenses from 1994 to 1995 resulting from the 1995 acquisitions
was approximately $1.4 million. In addition, total certain expenses increased by
$44,000 for the year ended December 31, 1995 as a result of a full year of
operations for the property acquired in 1994, and the above-described increase
in occupancy at the Properties owned at both December 31, 1994 and 1995.
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 was 12% and 11% during 1995 and 1994, respectively. 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 current pay rate of
the mortgage loans, amortization of the loan fees paid at origination, and
accrual of additional interest due upon the retirement of the debt. Interest
expense for the year ended December 31, 1995 was approximately $5.5 million,
including interest payable of $2.5 million upon the retirement of certain
mortgage loans. Interest expense increased by $3.9 million, or 231% 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
$2.7 million. In addition, 1995 included a full year of interest expense for
debt incurred to acquire the property in 1994, which increased interest expense
by approximately $466,000.
Depreciation and amortization increased by $755,000 or 66% primarily due to
the 1995 acquisitions and the full year effect of the 1994 acquisitions.
As a result of the foregoing, the Company had a net loss of $576,000 for the
year ended December 31, 1995 compared to net income of $1.1 million for the
prior year.
50
<PAGE>
The following is a comparison of the property 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.............................................................. $ 4,417,000 $4,180,000
Tenant reimbursements............................................... 15,000 36,000
Parking............................................................. 431,000 382,000
Other............................................................... 152,000 108,000
------------ ------------
Total revenue..................................................... 5,015,000 4,706,000
------------ ------------
------------ ------------
Certain expenses:
Property operating, taxes, insurance and ground rent................ $ 1,724,000 $1,985,000
------------ ------------
------------ ------------
</TABLE>
For the year ended December 31, 1995, occupancy increased from 84% at
December 31, 1994 to 92% at December 31, 1995 and substantially all of the
revenue increase was due to this occupancy increase. Operating expenses before
depreciation and amortization, and interest including taxes, insurance, ground
rent expenses for these Same Store Properties decreased by $261,000 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 one Property resulting in an increase in
investments in Properties of approximately $8.7 million.
Rental revenue increased by $2.1 million 70% 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 the
property acquired in 1993 and partial year rental revenue from the property
acquired in 1994. Rental revenue from the 1993 acquisition property increased to
$4.2 million for the year ended December 31, 1994, representing a full year of
rental revenue from that property, from $3.0 million in the prior year. Rental
revenue associated with the 1994 acquisition property added an additional
$977,000 to rental revenue in 1994.
Tenant reimbursements and other revenue increased by $664,000 or 191% for
the year ended December 31, 1994 compared to the year ended December 31, 1993.
Tenant reimbursement increases represented $182,000 of this increase, and other
revenue, primarily representing management fees from third party-owned
properties, represented $482,000 of this increase. The increase in tenant
reimbursements resulted principally from a full year of tenant reimbursements
from the property acquired during 1993 and partial year tenant reimbursements
from the property acquired during 1994. Tenant reimbursements from the calendar
year 1993 acquisition property increased to $36,000 for the year ended December
31, 1994, representing a full year of such revenue, from $35,000 in the prior
year. Tenant reimbursements associated with the 1994 acquisition Properties
added an additional approximately $182,000 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 $103,000 or 37% 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 the property acquired during
calendar year 1993 and partial year parking revenue from the property acquired
during the year ended December 31, 1994. Parking revenue from the calendar year
1993 acquisition property increased to $382,000 for the year ended December 31,
1994, representing a full year of such revenue, from $279,000 in the prior year.
At December 31, 1993, the Arden Predecessors held a noncontrolling
investment in one joint venture which owns two commercial office properties.
During 1994, the Arden Predecessors made investments in two additional
noncombined entities which own commercial office properties. These entities are
accounted
51
<PAGE>
for in the financial statements of the Arden Predecessors using the equity
method. Equity in net income of noncombined entities increased by $197,000, from
$4,000 to $201,000, for the year ended December 31, 1994 compared to the year
ended December 31, 1993. This increase is due principally to significant income
generated from the additional properties.
The following is a comparison of certain expenses of the Arden Predecessors
for the year ended December 31, 1994 to the year ended December 31, 1993:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DOLLAR PERCENT
1994 1993 CHANGE CHANGE
------------- ------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Certain Expenses
Property operating and maintenance......... $ 1,869 $ 1,324 $ 545 41%
Real estate taxes.......................... 272 107 165 154%
Insurance.................................. 50 49 1 2%
Ground rent................................ -- -- -- --
------ ------ --------- ---
Total certain expenses................... $ 2,191 $ 1,480 $ 711 48%
------ ------ --------- ---
------ ------ --------- ---
</TABLE>
Total certain expenses were $2.2 million, or 41% of rental revenue and
tenant reimbursements, and $1.5 million, or 48% of rental revenue and tenant
reimbursements, for the years ended December 31, 1994 and 1993, respectively.
The increase in total certain expenses is primarily attributable to the addition
of the 1994 acquisition property and the expenses associated with the absorption
of vacant rentable space across the portfolio. The increase in total certain
expenses from 1993 to 1994 resulting from the 1994 acquisition was approximately
$206,000. In addition, total certain expenses increased by $505,000 as a result
of a full year of operations for the property acquired in 1993, and the
increases in the occupancy at such property. In addition, as a result of the
Northridge earthquake, the Company had some minor damage to three of its
buildings, resulting in $136,000 of property operating and maintenance expenses.
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 remained unchanged at 11% from 1994
and 1993.
Interest expense in 1994 increased by $1.0 million, or 159%, 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 $6.7 million loan used to fund the
1994 acquisition. The interest expense associated with the 1994 property
acquisition debt was approximately $491,000. Interest expense increased by
$516,000 as a result of a full year of interest expense for debt incurred to
acquire the property in 1993.
Depreciation and amortization increased by $644,000 or 129% primarily due to
the 1994 acquisition and the full year effect of the 1993 acquisition.
As a result of the foregoing, the Company had net income of $1.1 million for
the year ended December 31, 1994 compared to net income of $655,000 for the
prior year.
PRO FORMA OPERATING RESULTS
SIX MONTHS ENDED JUNE 30, 1996. On a pro forma basis, combined income
(before deduction of minority interests) would have been $14.1 million for the
six months ended June 30, 1996, or $12.2 million combined net income of the
Company (after deduction of minority interests), comparing positively to the
historical net loss of $2.1 million for the six months ended June 30, 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 six months of revenue
from the Properties acquired (and to be acquired) in 1996.
52
<PAGE>
Pro forma total revenue is $39.9 million representing a $15.4 million
increase over historical 1996, resulting primarily from an increase of $6.0
million in rental revenue associated with Properties acquired (and to be
acquired) in 1996. Pro forma revenue from tenant reimbursements and parking is
$5.1 million, representing a $1.5 million increase over historical results.
The historical 1996 interest expense of $14.7 million decreased
substantially to $4.1 million on a pro forma basis. Correspondingly, interest
expense as a percentage of total revenue dropped substantially, from 60% of
total revenue in historical 1996 to 10% of total revenue on a pro forma basis.
YEAR ENDED DECEMBER 31, 1995. On a pro forma basis, combined income (before
deduction of minority interests) would have been $24.4 million for the year
ended December 31, 1995, or $21.2 million combined net income of the Company
(after deduction of minority interests), comparing positively to the historical
net loss of $(576,000) 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 $66.3 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 $16.6 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.
LIQUIDITY AND CAPITAL RESOURCES
MORTGAGE FINANCING. The Company is currently negotiating an interim loan
(the "Mortgage Financing") in the amount of $104 million with an affiliate of
Lehman Brothers. The Mortgage Financing will have a maturity of one year and
bear interest at a floating rate equal to one month LIBOR plus 1.50% for the
first six months increasing to 2.00% through maturity. The proceeds of the
Mortgage Financing will be used primarily to refinance a portion of the
Company's existing mortgage indebtedness. The Mortgage Financing will be
non-recourse and secured by fully cross-collateralized and cross-defaulted first
mortgage liens on the nine Mortgage Financing Properties. The Mortgage Financing
will require monthly payments of interest only, with all principal due on the
first anniversary of the closing of the Mortgage Financing.
The Company intends to refinance the Mortgage Financing through an offering
of commercial mortgage-backed securities (the "CMBS Offering") to be made by a
financing subsidiary which the Company intends to form for that purpose in an
amount of approximately $104 million with a term of seven years. The CMBS
Offering is expected to bear interest at a floating rate based on one-month
LIBOR. The Company intends to enter into a swap agreement with a major money
center bank in the notional amount of $104 million upon completion of this
Offering and the Formation Transactions or shortly thereafter (the "Swap
Agreement"). The Swap Agreement will result in effective fixed interest payments
equal to the yield on U.S. Treasury Notes with a maturity of seven years plus a
spread which, if determined on the date hereof, would result in an interest rate
of 7.51%. The CMBS Offering is expected to require monthly payments of interest
only with all principal due in a balloon payment at maturity. The Company
expects to pursue the CMBS Offering promptly after the closing of this Offering
and the Formation Transactions, although there can be no assurance that the
Company will complete a CMBS Offering or enter into the Swap Agreement.
THE CREDIT FACILITY. The Company is currently negotiating with a commercial
bank, the terms of a two-year, $100 million revolving credit facility, with a
one-year extension option (the "Credit Facility"). The Credit Facility will be
used, among other things, to finance the acquisition of properties, provide
funds for tenant improvements and capital expenditures and provide for working
capital and other corporate purposes. The Company intends to enter into the
Credit Facility contemporaneously with the Offering or shortly thereafter.
The Credit Facility will have two tranches: an unsecured tranche of up to
$50 million, subject to the Company's ownership of an unencumbered pool of
qualifying properties with values (calculated as provided
53
<PAGE>
in the Credit Facility) of at least 100% of the Company's unsecured liabilities,
and a secured tranche of up to $100 million, subject to a borrowing base.
Aggregate outstanding loans may not exceed $100 million. The lenders must
approve the properties securing the facility and qualifying properties which are
included in the unencumbered pool. Outstanding loans will bear interest based on
the LIBOR rate or the bank's base rate, at the Company's option. The Credit
Facility will be subject to customary conditions to closing and borrowing, and
contain representations and warranties and defaults customary in REIT
financings. The Credit Facility is also anticipated to contain financial
covenants, including requirements for a minimum tangible net worth, maximum
liabilities to asset values, and minimum interest, unsecured interest and fixed
charge coverage ratios (all calculated as defined in the Credit Facility) and
requirements to maintain a pool of unencumbered properties approved by the
lenders and meeting certain defined characteristics. The Credit Facility will
also contain restrictions on, among other things, indebtedness, investments,
distributions, liens, and mergers, and will require Mr. Ziman to maintain
certain ownership interests and management roles in the Company. There can be no
assurance that the Company will be able to enter into the Credit Facility on
terms satisfactory to it. If it is not able to enter into the Credit Facility it
will have to find alternative means to finance its future acquisitions of
Properties.
ANALYSIS OF 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 floating rate debt in the principal amount of $104
million pursuant to the Mortgage Financing. Thus, total secured debt after the
Formation Transactions (assuming no advances under the Credit Facility) will be
reduced by approximately $266 million in principal. This will result in a
significant reduction of annual mortgage interest expense as a percentage of
total revenue (10.4% on a pro forma basis as compared to 47% 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 assumed 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 $538.8 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 19.3% (17.6% if the Underwriters' overallotment option is
exercised in full). The Credit Facility combined with this lower leveraged
capital structure should 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 $100 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 Mortgage Financing matures in 1997. 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."
The Company currently expects to refinance the Mortgage Financings through the
CMBS Offering.
The Company expects to make distributions from Cash Available for
Distribution, which the Company believes will exceed Cash Available for
Distribution historically available as a result of the reduction in debt service
expected to result from the repayment of indebtedness described above. Amounts
accumulated for
54
<PAGE>
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, including recurring non-revenue enhancing capital
expenditures, tenant improvements and leasing commissions.
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 SIX MONTHS ENDED JUNE 30, 1996 TO THE SIX MONTHS ENDED
JUNE 30, 1995. The increase in cash and cash equivalents of $872 from June 30,
1995 to June 30, 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 $1.6 million from $458,000 to
$2.0 million primarily due to an increase in rental revenue offset by higher
mortgage interest. Net cash used in investing activities increased by $91.2
million from $5.6 million to $96.8 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 $90.3 million from $4.6 million to
$94.9 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 $179,000 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 $2.0 million from $834,000 million
to $2.8 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 $105.5 million from $17.9 million to $123.4 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
$103.9 million from $16.8 million to $120.7 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 $242,000 from December
31, 1993 to December 31, 1994 is due to distributions from one Arden Predecessor
to its owners of $1.4 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 $352,000
from $1.2 million to $834,000 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 $8.1 million
from $26.0 million to $17.9 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 $8.8 million from $25.6 million to $16.8
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.
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.
55
<PAGE>
The Credit Facility is expected to 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 as set
forth in the C&W Market Study. 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 OF THE GOVERNOR
OF CALIFORNIA (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.
56
<PAGE>
HISTORICAL ANNUAL AVERAGE UNEMPLOYMENT RATES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
UNEMPLOYMENT RATE
<S> <C> <C> <C> <C> <C>
California Los Angeles County Orange County San Diego County U.S.
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 strong population growth, which, over the next
five years is expected to outpace the population growth in the United States as
shown below:
<TABLE>
<CAPTION>
POPULATION
POPULATION GROWTH
GROWTH 1995-2000
AREA 1990-1995(1) PROJECTED(2)
- -------------------------------------------------- ---------- -----------
<S> <C> <C>
Los Angeles County................................ 3.1% 5.8%
Orange County..................................... 6.4% 11.1%
San Diego County.................................. 5.8% 12.1%
California........................................ 6.2% 9.1%
United States..................................... 5.6% 5.1%
</TABLE>
- ------------------------
(1) Source: U.S. Bureau of the Census. 1990 population from 1990 Census and 1995
population from July 1, 1995 estimate of the U.S. Bureau of the Census.
(2) Source: 1995 population--U.S. Bureau of the Census. 2000 projected
population--Bureau of Economic Analysis (U.S. Department of Commerce).
As primary office employment grows, office demand is expected to increase.
According to AMERICA'S OFFICE ECONOMY prepared by Cognetics, Inc., Metropolitan
Los Angeles (which includes Los Angeles County and Orange County), in which 23
of the Company's 24 Properties are located, is projected to be the number one
market in the United States for primary office employment growth from 1995 to
2005, and San Diego is ranked 18th.
57
<PAGE>
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 affecting 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 sector (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 32% 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.
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 ranked number one in the nation in the number of business
establishments by county in 1992 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 over 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 the C&W Market Study: (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.
58
<PAGE>
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 the C&W Market Study, 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.
HISTORICAL YEAR-END DIRECT VACANCY RATES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DIRECT VACANCY RATE
<S> <C> <C> <C> <C>
U.S. Los Angeles County (suburban) Orange County Downtown San Diego
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: C&W Market Study
Note: U.S. vacancy is the weighted average of 44 markets.
PROJECTED DECLINING DIRECT VACANCY RATES. The C&W Market Study projects
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.
PROJECTED DIRECT VACANCY RATES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DIRECT VACANCY %
<S> <C>
1995 (A) 17.0%
1996 (P) 16.1%
1997 (P) 15.2%
1998 (P) 14.4%
</TABLE>
- ------------------------
Source: C&W Market Study
NO NEW SUPPLY OF OFFICE SPACE. According to the C&W Market Study, 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. Based on the C&W Market Study, the addition of
59
<PAGE>
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 COST 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 the C&W Market Study, market rental rates in Los Angeles County are
currently below the levels required to justify new Class A office development.
Based on estimates provided in the C&W Market Study, 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 net lease provisions) received by the Company in
each of its Properties which ranges from $15.07 per square foot to $31.45 per
square foot with a total weighted average annual base rental rate of $20.03 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 the C&W Market Study
there has been extremely limited office development (375,000 square feet out of
a total 83,533,998 square feet in the submarkets where the Company's Properties
are located) and no speculative office development in the Los Angeles submarkets
where the Company operates Properties in the past four years.
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.
60
<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 540,000 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 August 1, 1996, the Properties had a weighted average occupancy rate
of approximately 89% (compared to the C&W Peer Group weighted average occupancy
rate of approximately 83% as of April 30, 1996) and were leased to over 540
tenants. As of August 1, 1996, no one tenant represented more than approximately
3.3% of the aggregate Annualized Base Rent of the Company's portfolio and only
16 tenants individually represented more than 1% of such 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 August 1,
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.
The Company's Properties are regionally managed under active central
control. All administration (including the formation and implementation of
policies and procedures), leasing, capital expenditures and construction
decisions are centrally administered at the Company's corporate office. The
Company employs asset managers to oversee and direct the day-to-day operations
of the Properties, as well as the on-site personnel, which may include a
manager, assistant manager and other necessary staff. Asset managers communicate
daily with the Company's corporate offices to implement the Company's policies
and procedures.
The on-site staffing of each Property is dictated by each Property's size,
tenant profile, number of tenants and location. The Company contracts with third
parties for cleaning services, day porters, engineers and any other personnel
necessary to operate each Property.
PROPERTIES
The following table sets forth certain information regarding each of the
Properties as of August 1, 1996:
61
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENT
TOTAL LEASED
APPROXIMATE PORTFOLIO (AS OF ANNUALIZED
YEAR BUILT/ RENTABLE RENTABLE AUG. 1, BASE RENT
SUBMARKET/PROPERTY LOCATION RENOVATED SQUARE FEET SQUARE FEET 1996) ($000S)
- ---------------------------------------- ---------------- ------------- ----------- ------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
LOS ANGELES COUNTY
- ----------------------------------------
LOS ANGELES WEST
BEVERLY HILLS/CENTURY CITY
9665 Wilshire Beverly Hills 1972/92-3 158,684 3.9% 95.1% $ 4,745
Beverly Atrium Beverly Hills 1989 61,314 1.5 100.0 1,400
Century Park Center Los Angeles 1972/94 243,404 6.0 83.2 4,331
WESTWOOD/WEST LOS ANGELES
Westwood Terrace Los Angeles 1988 135,943 3.4 82.3 2,829
1950 Sawtelle Los Angeles 1988/95 103,772 2.6 77.5 1,609
MARINA AREA/CULVER CITY/LAX
400 Corporate Pointe Culver City 1987 164,598 4.1 90.2 2,954
Bristol Plaza Culver City 1982 84,014 2.1 78.6 1,195
Skyview Center Los Angeles 1981,87/95(4) 391,675 9.7 86.0 5,730
PARK MILE/WEST HOLLYWOOD
The New Wilshire Los Angeles 1986 202,704 5.0 83.9 3,458
<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 3.1 100.0 2,111
WEST SAN FERNANDO VALLEY
Woodland Hills Financial Center Woodland Hills 1972/95 224,955 5.6 89.8 4,501
CENTRAL SAN FERNANDO VALLEY
16000 Ventura Blvd. Encino 1980/96 174,841 4.3 84.1 2,970
EAST SAN FERNANDO VALLEY/TRI-CITIES
425 West Broadway Glendale 1984 71,589 1.8 95.9 1,328
303 Glenoaks(5) Burbank 1983/96 175,449 4.3 97.4 3,477
70 South Lake Pasadena 1982/94 100,133 2.5 81.4 1,695
<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 89.6 2,747
100 West Broadway Long Beach 1987/96 191,727 4.7 90.0 3,523
CERRITOS/NORWALK
12501 East Imperial Highway (5) Norwalk 1978/94 122,175 3.0 94.7 1,882
<CAPTION>
ORANGE COUNTY
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEST COUNTY
5832 Bolsa Avenue Huntington Beach 1985 49,355 1.2 100.0 659
TRI-FREEWAY AREA
Anaheim City Centre Anaheim 1986/91 175,391 4.3 93.0 2,458
<CAPTION>
SAN DIEGO COUNTY
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SAN DIEGO MARKET
Imperial Bank Tower San Diego 1982/96 540,413 13.4 82.2 8,136
----------- ------ ------- ----------
Total/Weighted Average 4,036,458 100.0% 88.9% $67,142
Weighted Average Rent Per Leased Square Foot - All Leases
Weighted Average Rent Per Leased Square Foot - Gross Leases
Weighted Average Rent Per Leased Square Foot - Net Leases
<CAPTION>
ANNUAL
NET
EFFECTIVE
PERCENTAGE OF RENT PER ANNUALIZED
PORTFOLIO LEASED BASE RENT PER C&W PEER GROUP
ANNUALIZED NUMBER SQUARE LEASED RENT PER
SUBMARKET/PROPERTY BASE RENT OF LEASES FOOT (1) SQUARE FOOT (2) SQUARE FOOT(3)
- ---------------------------------------- ------------- ---------- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
LOS ANGELES COUNTY
- ----------------------------------------
LOS ANGELES WEST
BEVERLY HILLS/CENTURY CITY
9665 Wilshire 7.1% 18 31$.57 $31.45 $28.32
Beverly Atrium 2.1 11 20.46 22.83 28.32
Century Park Center 6.5 80 19.86 21.38 22.80
WESTWOOD/WEST LOS ANGELES
Westwood Terrace 4.2 21 24.32 25.30 27.19
1950 Sawtelle 2.4 30 19.74 20.02 18.42
MARINA AREA/CULVER CITY/LAX
400 Corporate Pointe 4.4 14 23.24 19.91 17.52
Bristol Plaza 1.8 19 17.12 18.10 17.54
Skyview Center 8.5 49 16.76 17.01 19.23
PARK MILE/WEST HOLLYWOOD
The New Wilshire 5.2 31 20.30 20.35 21.97
LOS ANGELES NORTH
<S> <C> <C> <C> <C> <C>
SIMI/CONEJO VALLEY
5601 Lindero Canyon 1.8 2 10.51 11.15 19.03
Calabasas Commerce Center 3.1 11 16.81 17.14 19.16
WEST SAN FERNANDO VALLEY
Woodland Hills Financial Center 6.7 59 20.52 22.29 22.74
CENTRAL SAN FERNANDO VALLEY
16000 Ventura Blvd. 4.4 39 19.55 20.21 21.33
EAST SAN FERNANDO VALLEY/TRI-CITIES
425 West Broadway 2.0 13 17.72 19.35 20.11
303 Glenoaks(5) 5.2 22 20.03 20.35 21.57
70 South Lake 2.5 10 18.65 20.80 24.38
LOS ANGELES SOUTH
<S> <C> <C> <C> <C> <C>
LONG BEACH
4811 Airport Plaza Drive 1.6 1 9.12 8.64 24.54
4900/10 Airport Plaza Drive 1.7 1 8.22 7.80 24.54
5000 East Spring 4.1 26 18.41 18.76 24.67
100 West Broadway 5.2 26 22.08 20.42 19.55
CERRITOS/NORWALK
12501 East Imperial Highway (5) 2.8 4 16.71 16.27 18.40
ORANGE COUNTY
- ----------------------------------------
<S> <C> <C> <C> <C> <C>
WEST COUNTY
5832 Bolsa Avenue 1.0 1 13.20 13.35 16.06
TRI-FREEWAY AREA
Anaheim City Centre 3.7 13 15.47 15.07 19.29
SAN DIEGO COUNTY
- ----------------------------------------
<S> <C> <C> <C> <C> <C>
SAN DIEGO MARKET
Imperial Bank Tower 12.1 42 19.14 18.31 21.71
------ --- --------- ------- -------
Total/Weighted Average 100.0% 543
Weighted Average Rent Per Leased Square 18$.62 $18.70
Weighted Average Rent Per Leased Square 18$.94(6) $20.03(6) $21.61
Weighted Average Rent Per Leased Square 11$.99 $11.52
</TABLE>
- ----------------------------------------
(1) Annualized Net Effective Rent is calculated for each lease in effect at
August 1, 1996. For leases in effect at the time the relevant Property was
acquired, Annualized Net Effective Rent is calculated by dividing the
remaining lease payments under the lease by the number of months remaining
under the lease and multiplying the result by 12. For leases entered into
after the relevant Property was acquired, Annualized Net Effective Rent is
calculated by dividing all lease payments under the lease by the number of
months in the lease and multiplying the result by 12. For leases at the
Acquisition Properties (303 Glenoaks and 1250 East Imperial Highway),
Annualized Net Effective Rent is calculated by assuming the Properties were
acquired on August 1, 1996 and by dividing the remaining lease payments
under the lease by the number of months remaining under the lease and
multiplying the result by 12. The foregoing amounts were in all cases
adjusted for tenant improvements and leasing commissions, if any, paid or
payable by the Company and reflect adjustments for the Company's expected
future capital expenditures per square foot of $0.18 which is greater than
its historical capital expenditures per square foot.
(2) Annualized Base Rent is the monthly contractual base rent under existing
leases as of August 1, 1996 and multiplied by 12. The amounts in this column
that exceed the counterpart amounts under the column headed Annualized Net
Effective Rent Per Leased Square Foot do so primarily because the amounts in
this column do not reflect future scheduled rent increases.
(3) Represents the mid-point of the range of the weighted average annual asking
rents (for full service gross leases only, excluding leases subject to net
lease provisions) for the respective C&W Peer Group properties as of April
30, 1996. It should be noted for purposes of the Peer Group analyses
appearing in this Prospectus that reported asking rents do not purport to
necessarily reflect the rental rates at which properties may actually be
rented. In many instances, asking rents and actual rental rates differ
significantly.
(4) Skyview Center consists of two Class A 11- and 12-story office towers
completed in 1981 and 1987, respectively.
(5) Acquisition Property to be acquired concurrently with the Offering.
(6) The weighted average 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 are
5601 Lindero Canyon, 4811 Airport Plaza Drive, 4900/10 Airport Plaza Drive,
5832 Bolsa Avenue, 55.6% of leased space at 400 Corporate Pointe leased to
Pepperdine University, and 48.3% of leased space at Calabasas Commerce
Center leased to two tenants.
62
<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 Annualized Base Rent as of August 1, 1996:
TENANT DIVERSIFICATION
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF AGGREGATE
NUMBER REMAINING AGGREGATE AGGREGATE ANNUALIZED PORTFOLIO
OF LEASE TERM IN RENTABLE LEASED SQUARE BASE RENT ANNUALIZED
LEASES MONTHS SQUARE FEET FEET ($000S) BASE RENT
------ ------------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
McDonnell Douglas....................... 2 111 272,013 7.58% $ 2,224 3.31%
GTE California.......................... 2 38 113,127 3.15% 1,653 2.46%
Pepperdine University................... 2 75 82,441 2.30% 1,628 2.42%
Logicon, Inc............................ 1 71 74,174 2.07% 1,575 2.35%
Merrill Lynch........................... 2 51 47,818 1.33% 1,317 1.96%
Imperial Bank Realty Co................. 2 46 38,855 1.08% 1,275 1.90%
Earth Techonology....................... 2 80 44,122 1.23% 1,138 1.70%
Latham & Watkins........................ 1 91 56,425 1.57% 1,045 1.56%
Grey Advertising........................ 2 111 50,152 1.40% 993 1.48%
DiC Entertainment....................... 1 76 51,708 1.44% 993 1.48%
The Hearst Corporation.................. 1 45 25,731 0.72% 932 1.39%
NME Hospitals........................... 1 41 24,069 0.67% 829 1.24%
Gruntal & Company....................... 1 10 15,321 0.43% 739 1.10%
Intracorp............................... 1 24 54,179 1.51% 691 1.03%
Smith Barney, Inc....................... 2 66 24,736 0.69% 678 1.01%
XIRCOM, Inc............................. 1 11 46,321 1.29% 673 1.00%
Crawford & Company...................... 1 19 20,347 0.57% 623 0.93%
Candle Corporation...................... 1 74 52,130 1.45% 601 0.89%
JB Oxford Holdings...................... 1 74 18,796 0.52% 595 0.89%
Deloitte & Touche....................... 1 53 30,279 0.84% 581 0.87%
--
--- ----------- ----- ---------- -----
TOTAL/WEIGHTED AVERAGE.............. 28 71 (1) 1,142,744 31.83% $ 20,782 30.95%
</TABLE>
- ------------------------------
(1) Weighted average calculation based on aggregate rentable square footage
leased by each tenant.
LEASE DISTRIBUTIONS
The following table sets forth information relating to the distribution of
the Company's leases, based on rentable square feet under lease, as of August 1,
1996:
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE PERCENTAGE OF
PORTFOLIO AGGREGATE
NUMBER PERCENT LEASED ANNUALIZED PORTFOLIO
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>
2,500 or Less........................... 252 46.41 % 337,740 9.41% $ 6,350 9.46%
2,501--5,000............................ 114 20.99 % 400,329 11.15% 7,608 11.33%
5,001--7,500............................ 51 9.39 % 322,644 8.99% 6,382 9.51%
7,501--10,000........................... 39 7.18 % 340,700 9.49% 6,870 10.23%
10,001--20,000.......................... 54 9.94 % 777,549 21.66% 16,400 24.43%
20,001--40,000.......................... 20 3.68 % 508,278 14.16% 10,940 16.29%
40,001+................................. 13 2.39 % 903,137 25.15% 12,592 18.75%
------ ------- ------------ ------ ---------- ------
TOTAL............................... 543 100.00 % 3,590,377 100.00% $ 67,142 100.00%
</TABLE>
63
<PAGE>
LEASE EXPIRATIONS -- PORTFOLIO TOTAL
The following table sets forth a summary schedule of the lease expirations
for the Properties for leases in place as of August 1, 1996, assuming that none
of the tenants exercise renewal options or termination rights, if any, at or
prior to the scheduled expirations:
<TABLE>
<CAPTION>
YEAR OF NUMBER OF SQUARE FOOTAGE PERCENTAGE OF ANNUALIZED BASE PERCENTAGE OF
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 (1) 53 128,941 3.59% $ 2,514 3.74%
1997 93 336,683 9.38% 7,851 11.69%
1998 101 440,697 12.27% 8,561 12.75%
1999 89 429,673 11.97% 7,972 11.87%
2000 79 484,401 13.49% 10,290 15.33%
2001 55 310,952 8.66% 5,651 8.42%
2002 24 588,165 16.38% 10,601 15.79%
2003 13 132,428 3.69% 2,711 4.04%
2004 13 195,075 5.43% 3,595 5.35%
2005 14 416,441 11.60% 4,708 7.01%
2006 5 91,279 2.54% 1,973 2.94%
2008 3 28,238 0.79% 535 0.80%
2010 1 7,404 0.21% 179 0.27%
--- -------------- ------ ------- ------
TOTAL 543 3,590,377 100.00% $ 67,142 100.00%
</TABLE>
- ------------------------------
(1) Represents lease expirations data from August 1, 1996 to December 31, 1996.
64
<PAGE>
LEASE EXPIRATIONS - PROPERTY BY PROPERTY
The following table sets forth detailed lease expiration information for
each of the Properties for leases in place as of August 1, 1996, assuming that
none of the tenants exercise renewal options or termination rights, if any, at
or prior to the scheduled expirations.
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002 2003
- ---------------------------------------- -------- ---------- -------- -------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9665 WILSHIRE
Square Footage of Expiring Leases....... 1,151 33,586 8,362 19,296 35,869 1,296 34,117
Percentage of Total Leased Sq. Ft....... 0.76% 22.26% 5.54% 12.79% 23.77% 0.86% 22.61%
Annualized Base Rent of Expiring
Leases................................. $ 31,077 $1,457,826 $228,195 $489,933 $1,061,873 $ 33,437 $1,064,071
Percentage of Total Annualized Base
Rent................................... 0.65% 30.72% 4.81% 10.32% 22.38% 0.70% 22.42%
Number of Leases Expiring............... 1 3 2 2 6 1 2
BEVERLY ATRIUM
Square Footage of Expiring Leases....... 4,800 2,608 13,015 4,290 6,261 18,489
Percentage of Total Leased Sq. Ft....... 7.83% 4.25% 21.23% 7.00% 10.21% 30.15%
Annualized Base Rent of Expiring
Leases................................. $ 97,920 $ 63,739 $250,027 $124,317 $ 159,511 $399,362
Percentage of Total Annualized Base
Rent................................... 7.00% 4.55% 17.86% 8.88% 11.40% 28.53%
Number of Leases Expiring............... 1 1 2 2 2 1
CENTURY PARK CENTER
Square Footage of Expiring Leases....... 13,341 24,615 28,060 26,623 46,782 6,963 32,298 8,754
Percentage of Total Leased Sq. Ft....... 6.59% 12.15% 13.85% 13.14% 23.09% 3.44% 15.94% 4.32%
Annualized Base Rent of Expiring
Leases................................. $275,282 $ 532,553 $545,857 $553,555 $1,242,862 $ 88,212 $539,718 $167,702
Percentage of Total Annualized Base
Rent................................... 6.36% 12.30% 12.60% 12.78% 28.69% 2.04% 12.46% 3.87%
Number of Leases Expiring............... 14 16 15 13 8 5 3 3
WESTWOOD TERRACE
Square Footage of Expiring Leases....... 186 6,307 7,123 25,940 58,623 5,128 8,524
Percentage of Total Leased Sq. Ft....... 0.17% 5.64% 6.37% 23.20% 52.42% 4.59% 7.62%
Annualized Base Rent of Expiring
Leases................................. $ 2,902 $ 119,425 $144,011 $525,439 $1,743,193 $ 99,780 $194,347
Percentage of Total Annualized Base
Rent................................... 0.10% 4.22% 5.09% 18.57% 61.62% 3.53% 6.87%
Number of Leases Expiring............... 1 3 2 6 6 2 1
1950 SAWTELLE
Square Footage of Expiring Leases....... 4,150 24,457 40,032 775 7,624 1,853
Percentage of Total Leased Sq. Ft....... 5.16% 30.43% 49.81% 0.96% 9.49% 2.31%
Annualized Base Rent of Expiring
Leases................................. $ 87,230 $ 501,323 $792,397 $ 13,950 $ 150,955 $ 29,087
Percentage of Total Annualized Base
Rent................................... 5.42% 31.17% 49.26% 0.87% 9.38% 1.81%
Number of Leases Expiring............... 4 9 9 1 4 2
<CAPTION>
YEAR OF LEASE EXPIRATION 2004 2005 2006 2008 2010 TOTAL
- ---------------------------------------- ---------- ------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
9665 WILSHIRE
Square Footage of Expiring Leases....... 17,222 150,899
Percentage of Total Leased Sq. Ft....... 11.41% 100%
Annualized Base Rent of Expiring
Leases................................. $ 379,005 $4,745,417
Percentage of Total Annualized Base
Rent................................... 7.99% 100%
Number of Leases Expiring............... 1 18
BEVERLY ATRIUM
Square Footage of Expiring Leases....... 4,447 7,404 61,314
Percentage of Total Leased Sq. Ft....... 7.25% 12.08% 100%
Annualized Base Rent of Expiring
Leases................................. $ 125,405 $179,400 $1,399,681
Percentage of Total Annualized Base
Rent................................... 8.96% 12.82% 100%
Number of Leases Expiring............... 1 1 11
CENTURY PARK CENTER
Square Footage of Expiring Leases....... 11,938 3,207 202,581
Percentage of Total Leased Sq. Ft....... 5.89% 1.58% 100%
Annualized Base Rent of Expiring
Leases................................. $ 310,504 $75,044 $4,331,289
Percentage of Total Annualized Base
Rent................................... 7.17% 1.73% 100%
Number of Leases Expiring............... 2 1 80
WESTWOOD TERRACE
Square Footage of Expiring Leases....... 111,831
Percentage of Total Leased Sq. Ft....... 100%
Annualized Base Rent of Expiring
Leases................................. $2,829,097
Percentage of Total Annualized Base
Rent................................... 100%
Number of Leases Expiring............... 21
1950 SAWTELLE
Square Footage of Expiring Leases....... 1,476 80,367
Percentage of Total Leased Sq. Ft....... 1.84% 100%
Annualized Base Rent of Expiring
Leases................................. $ 33,653 $1,608,595
Percentage of Total Annualized Base
Rent................................... 2.09% 100%
Number of Leases Expiring............... 1 30
</TABLE>
- ----------------------------------
(1) Represents lease expirations data from August 1, 1996 to December 31, 1996.
65
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- ----------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
400 CORPORATE POINTE
Square Footage of Expiring Leases.............. 1,994 8,856 23,544 4,328 14,253 81,708
Percentage of Total Leased Sq. Ft.............. 1.34% 5.97% 15.87% 2.92% 9.61% 55.07%
Annualized Base Rent of Expiring Leases........ $ 39,349 $ 131,377 $ 675,670 $ 61,459 $ 217,783 $1,614,521
Percentage of Total Annualized Base Rent....... 1.33% 4.45% 22.87% 2.08% 7.37% 54.66%
Number of Leases Expiring...................... 2 3 3 2 2 1
BRISTOL PLAZA
Square Footage of Expiring Leases.............. 1,565 3,909 23,874 14,027 12,113 10,527
Percentage of Total Leased Sq. Ft.............. 2.37% 5.92% 36.16% 21.25% 18.35% 15.95%
Annualized Base Rent of Expiring Leases........ $ 22,800 $ 91,442 $ 470,786 $ 221,947 $ 187,246 $ 200,820
Percentage of Total Annualized Base Rent....... 1.91% 7.65% 39.39% 18.57% 15.67% 16.80%
Number of Leases Expiring...................... 1 3 6 3 5 1
SKYVIEW CENTER
Square Footage of Expiring Leases.............. 4,878 26,259 22,447 14,481 16,989 20,939 95,753
Percentage of Total Leased Sq. Ft.............. 1.45% 7.79% 6.66% 4.30% 5.04% 6.21% 28.42%
Annualized Base Rent of Expiring Leases........ $ 83,556 $ 452,873 $ 355,775 $ 209,263 $ 217,936 $ 314,404 $1,886,193
Percentage of Total Annualized Base Rent....... 1.46% 7.90% 6.21% 3.65% 3.80% 5.49% 32.92%
Number of Leases Expiring...................... 3 9 11 8 4 4 2
THE NEW WILSHIRE
Square Footage of Expiring Leases.............. 24,056 25,219 28,415 6,652 25,452
Percentage of Total Leased Sq. Ft.............. 14.15% 14.84% 16.72% 3.91% 14.98%
Annualized Base Rent of Expiring Leases........ $ 338,570 $ 527,241 $ 724,442 $ 119,830 $ 564,201
Percentage of Total Annualized Base Rent....... 9.79% 15.25% 20.95% 3.47% 16.32%
Number of Leases Expiring...................... 4 11 7 3 3
5601 LINDERO CANYON
Square Footage of Expiring Leases.............. 105,830
Percentage of Total Leased Sq. Ft.............. 100.00%
Annualized Base Rent of Expiring Leases........ $1,180,498
Percentage of Total Annualized Base Rent....... 100.00%
Number of Leases Expiring...................... 2
<CAPTION>
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 2008 2010 TOTAL
- ----------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
400 CORPORATE POINTE
Square Footage of Expiring Leases.............. 13,696 148,379
Percentage of Total Leased Sq. Ft.............. 9.23% 100%
Annualized Base Rent of Expiring Leases........ $ 213,658 $2,953,817
Percentage of Total Annualized Base Rent....... 7.23% 100%
Number of Leases Expiring...................... 1 14
BRISTOL PLAZA
Square Footage of Expiring Leases.............. 66,015
Percentage of Total Leased Sq. Ft.............. 100%
Annualized Base Rent of Expiring Leases........ $1,195,041
Percentage of Total Annualized Base Rent....... 100%
Number of Leases Expiring...................... 19
SKYVIEW CENTER
Square Footage of Expiring Leases.............. 34,603 40,089 34,145 26,334 336,917
Percentage of Total Leased Sq. Ft.............. 10.27% 11.90% 10.13% 7.82% 100%
Annualized Base Rent of Expiring Leases........ $ 651,495 $ 486,983 $ 446,617 $ 624,816 $5,729,911
Percentage of Total Annualized Base Rent....... 11.37% 8.50% 7.79% 10.90% 100%
Number of Leases Expiring...................... 3 2 1 2 49
THE NEW WILSHIRE
Square Footage of Expiring Leases.............. 12,513 47,652 169,959
Percentage of Total Leased Sq. Ft.............. 7.36% 28.04% 100%
Annualized Base Rent of Expiring Leases........ $ 240,250 $ 943,510 $3,458,044
Percentage of Total Annualized Base Rent....... 6.95% 27.28% 100%
Number of Leases Expiring...................... 2 1 31
5601 LINDERO CANYON
Square Footage of Expiring Leases.............. 105,830
Percentage of Total Leased Sq. Ft.............. 100%
Annualized Base Rent of Expiring Leases........ $1,180,498
Percentage of Total Annualized Base Rent....... 100%
Number of Leases Expiring...................... 2
</TABLE>
- ----------------------------------
(1) Represents lease expirations data from August 1, 1996 to December 31, 1996.
66
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002
- --------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CALABASAS COMMERCE CENTER
Square Footage of Expiring Leases............ 9,128 59,477 4,413 18,249 11,770 10,841
Percentage of Total Leased Sq. Ft............ 7.41% 48.31% 3.58% 14.82% 9.56% 8.81%
Annualized Base Rent of Expiring Leases...... $ 228,930 $ 863,606 $ 110,798 $ 325,385 $ 196,357 $ 208,147
Percentage of Total Annualized Base Rent..... 10.85% 40.92% 5.25% 15.42% 9.30% 9.86%
Number of Leases Expiring.................... 1 2 1 3 2 1
WOODLAND HILLS FINANCIAL CENTER
Square Footage of Expiring Leases............ 13,903 14,718 39,969 33,534 37,245 33,454
Percentage of Total Leased Sq. Ft............ 6.89% 7.29% 19.80% 16.61% 18.45% 16.57%
Annualized Base Rent of Expiring Leases...... $ 266,048 $ 327,937 $ 875,336 $ 703,753 $ 946,244 $ 684,216
Percentage of Total Annualized Base Rent..... 5.91% 7.29% 19.45% 15.64% 21.02% 15.20%
Number of Leases Expiring.................... 6 9 12 13 10 6
16000 VENTURA BLVD.
Square Footage of Expiring Leases............ 12,374 45,342 29,564 35,411 3,478 20,783
Percentage of Total Leased Sq. Ft............ 8.42% 30.85% 20.12% 24.10% 2.37% 14.14%
Annualized Base Rent of Expiring Leases...... $ 294,056 $1,062,848 $ 576,922 $ 561,993 $ 63,710 $ 410,569
Percentage of Total Annualized Base Rent..... 9.90% 35.78% 19.42% 18.92% 2.15% 13.82%
Number of Leases Expiring.................... 5 10 8 8 2 6
425 WEST BROADWAY
Square Footage of Expiring Leases............ 5,749 22,259 29,540 4,308 6,780
Percentage of Total Leased Sq. Ft............ 8.38% 32.43% 43.04% 6.28% 9.88%
Annualized Base Rent of Expiring Leases...... $ 106,546 $ 434,241 $ 573,892 $ 90,468 $ 123,209
Percentage of Total Annualized Base Rent..... 8.02% 32.69% 43.20% 6.81% 9.28%
Number of Leases Expiring.................... 2 4 4 1 2
303 GLENOAKS
Square Footage of Expiring Leases............ 739 2,700 8,570 5,418 35,045 54,527 51,708
Percentage of Total Leased Sq. Ft............ 0.43% 1.58% 5.01% 3.17% 20.51% 31.91% 30.26%
Annualized Base Rent of Expiring Leases...... $ 8,868 $ 55,053 $ 192,508 $ 105,280 $ 708,116 $1,164,262 $ 992,794
Percentage of Total Annualized Base Rent..... 0.26% 1.58% 5.54% 3.03% 20.37% 33.49% 28.55%
Number of Leases Expiring.................... 1 1 3 2 7 5 1
<CAPTION>
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 2008 2010 TOTAL
- --------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CALABASAS COMMERCE CENTER
Square Footage of Expiring Leases............ 9,243 123,121
Percentage of Total Leased Sq. Ft............ 7.51% 100%
Annualized Base Rent of Expiring Leases...... $ 177,466 $2,110,689
Percentage of Total Annualized Base Rent..... 8.41% 100%
Number of Leases Expiring.................... 1 11
WOODLAND HILLS FINANCIAL CENTER
Square Footage of Expiring Leases............ 19,600 489 8,983 201,895
Percentage of Total Leased Sq. Ft............ 9.71% 0.24% 4.45% 100%
Annualized Base Rent of Expiring Leases...... $ 505,680 $ 36,600 $ 155,226 $4,501,040
Percentage of Total Annualized Base Rent..... 11.23% 0.81% 3.45% 100%
Number of Leases Expiring.................... 1 1 1 59
16000 VENTURA BLVD.
Square Footage of Expiring Leases............ 146,952
Percentage of Total Leased Sq. Ft............ 100%
Annualized Base Rent of Expiring Leases...... $2,970,098
Percentage of Total Annualized Base Rent..... 100%
Number of Leases Expiring.................... 39
425 WEST BROADWAY
Square Footage of Expiring Leases............ 68,636
Percentage of Total Leased Sq. Ft............ 100%
Annualized Base Rent of Expiring Leases...... $1,328,356
Percentage of Total Annualized Base Rent..... 100%
Number of Leases Expiring.................... 13
303 GLENOAKS
Square Footage of Expiring Leases............ 1,039 11,142 170,888
Percentage of Total Leased Sq. Ft............ 0.61% 6.52% 100%
Annualized Base Rent of Expiring Leases...... $ 19,949 $ 229,971 $3,476,801
Percentage of Total Annualized Base Rent..... 0.57% 6.61% 100%
Number of Leases Expiring.................... 1 1 22
</TABLE>
- ----------------------------------
(1) Represents lease expiration data from August 1, 1996 to December 31, 1996.
67
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002 2003
- ------------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
70 SOUTH LAKE
Square Footage of Expiring Leases.......... 8,394 31,886 40,054 1,150
Percentage of Total Leased Sq. Ft.......... 10.30% 39.13% 49.16% 1.41%
Annualized Base Rent of Expiring Leases.... $ 151,092 $ 736,461 $ 783,166 $ 24,150
Percentage of Total Annualized Base Rent... 8.91% 43.45% 46.21% 1.42%
Number of Leases Expiring.................. 1 4 4 1
4811 AIRPORT PLAZA DRIVE
Square Footage of Expiring Leases..........
Percentage of Total Leased Sq. Ft..........
Annualized Base Rent of Expiring Leases....
Percentage of Total Annualized Base Rent...
Number of Leases Expiring..................
4900/10 AIRPORT PLAZA DRIVE
Square Footage of Expiring Leases..........
Percentage of Total Leased Sq. Ft..........
Annualized Base Rent of Expiring Leases....
Percentage of Total Annualized Base Rent...
Number of Leases Expiring..................
5000 EAST SPRING
Square Footage of Expiring Leases.......... 13,269 4,843 2,877 29,199 49,931 23,521 6,654 13,588
Percentage of Total Leased Sq. Ft.......... 9.06% 3.31% 1.96% 19.94% 34.10% 16.06% 4.54% 9.28%
Annualized Base Rent of Expiring Leases.... $ 289,048 $ 113,326 $ 51,786 $ 600,554 $ 948,059 $ 311,328 $ 128,555 $ 255,998
Percentage of Total Annualized Base Rent... 10.52% 4.13% 1.88% 21.86% 34.51% 11.33% 4.68% 9.32%
Number of Leases Expiring.................. 4 1 2 5 6 5 1 1
100 WEST BROADWAY
Square Footage of Expiring Leases.......... 1,725 8,147 17,012 8,434 4,806 17,222 47,184 20,385
Percentage of Total Leased Sq. Ft.......... 1.00% 4.72% 9.86% 4.89% 2.79% 9.98% 27.35% 11.82%
Annualized Base Rent of Expiring Leases.... $ 26,910 $ 231,712 $ 278,539 $ 140,105 $ 70,104 $ 270,081 $ 829,892 $ 463,465
Percentage of Total Annualized Base Rent... 0.76% 6.58% 7.91% 3.98% 1.99% 7.67% 23.56% 13.16%
Number of Leases Expiring.................. 1 2 5 5 2 3 3 2
<CAPTION>
YEAR OF LEASE EXPIRATION 2004 2005 2006 2008 2010 TOTAL
- ------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
70 SOUTH LAKE
Square Footage of Expiring Leases.......... 81,484
Percentage of Total Leased Sq. Ft.......... 100%
Annualized Base Rent of Expiring Leases.... $1,694,869
Percentage of Total Annualized Base Rent... 100%
Number of Leases Expiring.................. 10
4811 AIRPORT PLAZA DRIVE
Square Footage of Expiring Leases.......... 121,610 121,610
Percentage of Total Leased Sq. Ft.......... 100.00% 100%
Annualized Base Rent of Expiring Leases.... $1,050,710 $1,050,710
Percentage of Total Annualized Base Rent... 100.00% 100%
Number of Leases Expiring.................. 1 1
4900/10 AIRPORT PLAZA DRIVE
Square Footage of Expiring Leases.......... 150,403 150,403
Percentage of Total Leased Sq. Ft.......... 100.00% 100%
Annualized Base Rent of Expiring Leases.... $1,173,143 $1,173,143
Percentage of Total Annualized Base Rent... 100.00% 100%
Number of Leases Expiring.................. 1 1
5000 EAST SPRING
Square Footage of Expiring Leases.......... 2,532 146,414
Percentage of Total Leased Sq. Ft.......... 1.73% 100%
Annualized Base Rent of Expiring Leases.... $ 48,614 $2,747,268
Percentage of Total Annualized Base Rent... 1.77% 100%
Number of Leases Expiring.................. 1 26
100 WEST BROADWAY
Square Footage of Expiring Leases.......... 37,494 3,352 6,730 172,491
Percentage of Total Leased Sq. Ft.......... 21.74% 1.94% 3.90% 100%
Annualized Base Rent of Expiring Leases.... $1,034,834 $ 60,336 $ 117,000 $3,522,978
Percentage of Total Annualized Base Rent... 29.37% 1.71% 3.32% 100%
Number of Leases Expiring.................. 1 1 1 26
</TABLE>
- ----------------------------------
(1) Represents lease expirations data from August 1, 1996 to December 31, 1996.
68
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1996(1) 1997 1998 1999 2000 2001 2002 2003
- ---------------------------------------- --------- --------- --------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12501 EAST IMPERIAL HIGHWAY
Square Footage of Expiring Leases....... 27,913 63,772 23,986
Percentage of Total Leased Sq. Ft....... 24.13% 55.13% 20.74%
Annualized Base Rent of Expiring
Leases................................. $ 497,410 $ 993,778 $ 390,593
Percentage of Total Annualized Base
Rent................................... 26.43% 52.81% 20.76%
Number of Leases Expiring............... 1 1 2
5832 BOLSA AVENUE
Square Footage of Expiring Leases....... 49,355
Percentage of Total Leased Sq. Ft....... 100.00%
Annualized Base Rent of Expiring
Leases................................. $ 658,830
Percentage of Total Annualized Base
Rent................................... 100.00%
Number of Leases Expiring............... 1
ANAHEIM CITY CENTRE
Square Footage of Expiring Leases....... 4,732 56,397 48,768 12,477 32,373
Percentage of Total Leased Sq. Ft....... 2.90% 34.59% 29.91% 7.65% 19.85%
Annualized Base Rent of Expiring
Leases................................. $ 79,480 $ 730,269 $ 777,623 $ 212,144 $ 408,922
Percentage of Total Annualized Base
Rent................................... 3.23% 29.71% 31.64% 8.63% 16.64%
Number of Leases Expiring............... 2 2 4 2 2
IMPERIAL BANK TOWER
Square Footage of Expiring Leases....... 21,682 35,159 28,457 15,702 43,243 34,053 73,527 35,498
Percentage of Total Leased Sq. Ft....... 4.88% 7.91% 6.40% 3.53% 9.73% 7.66% 16.55% 7.99%
Annualized Base Rent of Expiring
Leases................................. $ 421,572 $1,133,019 $ 475,210 $ 253,268 $ 723,785 $ 522,359 $1,361,766 $ 666,911
Percentage of Total Annualized Base
Rent................................... 5.18% 13.93% 5.84% 3.11% 8.90% 6.42% 16.74% 8.20%
Number of Leases Expiring............... 4 6 5 3 4 4 5 3
PORTFOLIO TOTALS
Square Footage of Expiring Leases....... 128,941 336,683 440,697 429,673 484,401 310,952 588,165 132,428
Percentage of Total Leased Sq. Ft....... 3.59% 9.38% 12.27% 11.97% 13.49% 8.66% 16.38% 3.69%
Annualized Base Rent of Expiring
Leases................................. $2,514,118 $7,851,326 $8,561,271 $7,971,955 $10,290,028 $5,650,999 $10,600,639 $2,711,251
Percentage of Total Annualized Base
Rent................................... 3.74% 11.69% 12.75% 11.87% 15.33% 8.42% 15.79% 4.04%
Number of Leases Expiring............... 53 93 101 89 79 55 24 13
<CAPTION>
YEAR OF LEASE EXPIRATION 2004 2005 2006 2008 2010 TOTAL
- ---------------------------------------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
12501 EAST IMPERIAL HIGHWAY
Square Footage of Expiring Leases....... 115,671
Percentage of Total Leased Sq. Ft....... 100%
Annualized Base Rent of Expiring
Leases................................. $1,881,781
Percentage of Total Annualized Base
Rent................................... 100%
Number of Leases Expiring............... 4
5832 BOLSA AVENUE
Square Footage of Expiring Leases....... 49,355
Percentage of Total Leased Sq. Ft....... 100%
Annualized Base Rent of Expiring
Leases................................. $ 658,830
Percentage of Total Annualized Base
Rent................................... 100%
Number of Leases Expiring............... 1
ANAHEIM CITY CENTRE
Square Footage of Expiring Leases....... 8,310 163,057
Percentage of Total Leased Sq. Ft....... 5.10% 100%
Annualized Base Rent of Expiring
Leases................................. $ 249,300 $2,457,738
Percentage of Total Annualized Base
Rent................................... 10.14% 100%
Number of Leases Expiring............... 1 13
IMPERIAL BANK TOWER
Square Footage of Expiring Leases....... 78,838 56,641 21,508 444,308
Percentage of Total Leased Sq. Ft....... 17.74% 12.75% 4.84% 100%
Annualized Base Rent of Expiring
Leases................................. $1,155,718 $1,004,432 $ 418,116 $8,136,156
Percentage of Total Annualized Base
Rent................................... 14.20% 12.35% 5.14% 100%
Number of Leases Expiring............... 3 3 2 42
PORTFOLIO TOTALS
Square Footage of Expiring Leases....... 195,075 416,441 91,279 28,238 7,404 3,590,377
Percentage of Total Leased Sq. Ft....... 5.43% 11.60% 2.54% 0.79% 0.21% 100%
Annualized Base Rent of Expiring
Leases................................. $3,594,665 $4,708,227 $1,972,852 $ 535,116 $ 179,400 $67,141,847
Percentage of Total Annualized Base
Rent................................... 5.35% 7.01% 2.94% 0.80% 0.27% 100%
Number of Leases Expiring............... 13 14 5 3 1 543
</TABLE>
- ----------------------------------------
(1) Represents lease expirations data from August 1, 1996 to December 31, 1996.
69
<PAGE>
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.
HISTORICAL LEASE RENEWALS
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:
<TABLE>
<CAPTION>
TOTAL/
JAN. 1 WEIGHTED
TO AUGUST 1 AVERAGE
1993 1994 1995 1996 1993-1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Number of leases expired during calendar year........... 3 28 33 47 111
Number of lease renewals................................ 3 20 21 39 83
Percentage of leases renewed............................ 100% 71% 64% 83% 75%
Aggregate rentable square footage of expiring leases.... 2,870 112,539 99,577 134,520 349,506
Aggregate rentable square footage of lease renewals..... 2,870 92,057 75,213 116,699 286,839
Percentage of expiring rentable square footage
renewed............................................... 100% 82% 76% 87% 82%
</TABLE>
70
<PAGE>
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 (72%), while leases signed relating to Shell
Space comprised 28%. Shell Space remaining at the Properties is less than 2% of
the aggregate rentable square footage of the Properties.
<TABLE>
<CAPTION>
JANUARY 1 TOTAL/
TO AUGUST 1 WEIGHTED
1993 1994 1995 1996 AVERAGE
--------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
RENEWALS
Number of Leases 3 20 20(i) 39 82
Square Feet of Renewals 2,870 92,057 57,181(i) 116,699 268,807
TI per square foot.............................. $ 3.58 $ 2.23 $ 4.67(i) $ 5.46 $ 4.19
LC per square foot.............................. $ 0.09 $ 3.44 $ 1.11(i) $ 2.38 $ 2.37
--------- --------- --------- ----------- -----------
Total TI and LC per square foot............. $ 3.67 $ 5.67 $ 5.78(i) $ 7.84 $ 6.56
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
RE-TENANTED SPACE (II)
Number of Leases 7 13 47 33 100
Square Feet of Re-tenanted Space 9,910 22,265 108,430 81,367 221,972
TI per square foot.............................. $ 2.22 $ 9.04 $ 9.82 $ 7.04 $ 8.38
LC per square foot.............................. $ 0.31 $ 2.72 $ 3.05 $ 3.36 $ 3.12
--------- --------- --------- ----------- -----------
Total TI and LC per square foot............. $ 2.53 $11.76 $12.87 $10.70 $11.50
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
SHELL SPACE (III)
Number of Leases 5 8 10 17 40
Square Feet of Shell Space 17,389 16,130 53,876 100,308 187,703
TI per square foot.............................. $31.22 $36.25 $26.29 $21.17 $24.87
LC per square foot.............................. $ 3.65 $ 7.19 $ 4.83 $ 6.17 $ 5.64
--------- --------- --------- ----------- -----------
Total TI and LC per square foot............. $34.87 $43.44 $31.12 $27.34 $30.51
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
TOTAL
Number of Leases 15 41 77 89 222
Square Feet 30,169 130,452 219,487 298,374 678,482
TI per square foot.............................. $19.06 $ 7.60 $12.52 $11.17 $11.30
LC per square foot.............................. $ 2.22 $ 3.78 $ 2.98 $4.01 $ 3.54
--------- --------- --------- ----------- -----------
Total TI and LC per square foot............. $21.28 $11.38 $15.50 $15.18 $14.84
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
- ------------------------
(i)
Excludes tenant improvement and leasing commission 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.
(ii)
Does not include Shell Space build-out for 187,703 square feet.
(iii)
Shell Space remaining at the Properties is less than 2% of the aggregate
rentable space footage of the Properties.
71
<PAGE>
HISTORICAL CAPITAL EXPENDITURES
The following table sets forth information relating to the historical
capital expenditures of the Company's Properties:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ---------- ----------
<S> <C> <C> <C>
Number of Properties (1)..................................................... 3 8 10
Number of Square Feet........................................................ 529,673 1,129,855 2,634,057
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:
<TABLE>
<CAPTION>
APPROXIMATE AGGREGATE PERCENTAGE OF RENTABLE
DATE RENTABLE SQUARE FEET SQUARE FEET OCCUPIED
- ------------------------------------------------ --------------------- -------------------------
<S> <C> <C>
December 31, 1993............................... 529,673 84%
June 30, 1994................................... 635,503 87%
December 31, 1994............................... 1,129,855 82%
June 30, 1995................................... 1,408,468 84%
December 31, 1995............................... 2,634,057 88%
June 30, 1996................................... 3,547,107 89%
</TABLE>
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.
72
<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 OF PERCENTAGE
TOTAL OF
APPROXIMATE PORTFOLIO ADJUSTED PORTFOLIO
NUMBER OF RENTABLE RENTABLE BASE RENT ANNUALIZED
PROPERTIES SQUARE FEET SQUARE FEET ($000S) BASE RENT
---------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
LOS ANGELES COUNTY
LOS ANGELES WEST OFFICE MARKET SECTOR
West Los Angeles and Adjacent Submarkets...... 6 905,821 22.4% 18,372 27.4%
Culver City/Century Blvd. Submarkets.......... 3 640,287 15.9 9,879 14.7
LOS ANGELES NORTH OFFICE MARKET SECTOR
Simi/Conejo Valley Submarkets................. 2 228,951 5.7 3,291 4.9
West and Central San Fernando Valley
Submarkets................................... 2 399,796 9.9 7,471 11.1
East San Fernando Valley/Tri Cities
Submarkets................................... 3 347,171 8.6 6,500 9.7
LOS ANGELES SOUTH OFFICE MARKET SECTOR
Long Beach and Cerritos/Norwalk Submarkets.... 5 749,273 18.6 10,376 15.5
ORANGE COUNTY
Anaheim Submarket............................. 1 175,391 4.3 2,458 3.7
Huntington Beach Submarket.................... 1 49,355 1.2 659 1.0
SAN DIEGO COUNTY
Central City (downtown San Diego) Submarket... 1 540,413 13.4 8,136 12.1
--
----------- ----- ---------- -----
TOTAL......................................... 24 4,036,458 100.0% $ 67,142 100.0%
--
--
----------- ----- ---------- -----
----------- ----- ---------- -----
</TABLE>
73
<PAGE>
LOS ANGELES COUNTY OFFICE MARKET AND PROPERTIES
According to the C&W Market Study, 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.
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: C&W Market Study
* Does not include currently leased but available sublease space.
74
<PAGE>
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 the C&W Market Study, there are approximately
50,014,880 square feet of office space inventory in the Los Angeles West office
market sector which comprises approximately 31% 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.
Map of Los Angeles West office market sector.
<TABLE>
<S> <C>
1. 9665 WILSHIRE 6. 400 CORPORATE POINTE
2. BEVERLY ATRIUM 7. BRISTOL PLAZA
3. CENTURY PARK CENTER 8. SKYVIEW CENTER
4. WESTWOOD TERRACE 9. THE NEW WILSHIRE
5. 1950 SAWTELLE
</TABLE>
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, as of December
31, 1995, 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.
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 1,546,108 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:
75
<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: C&W Market Study
(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 in
the C&W Market Study 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 158,684 rentable square feet and 444
parking spaces. As of August 1, 1996 the Property was 95.1% leased with an
average Annualized Base Rent per leased square foot of $31.45. According to the
C&W Market Study, 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. (11,437 square feet). Aggregate square footage of
leases expiring in 1996, 1997, and 1998 represent 0.8%, 22.3% and 5.5% of the
Property's occupied square footage, respectively.
76
<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 August 1, 1996, the
Property was 100% leased with an average Annualized Base Rent per leased square
foot of $22.83. According to the C&W Market Study, 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 243,404 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 August 1, 1996, the
Property was 83.2% leased with an average Annualized Base Rent per leased square
foot of $21.38. According to the C&W Market Study, 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
6.6%, 12.2% and 13.9% 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 135,943 rentable square feet and 450 parking
spaces. As of August 1, 1996, the Property was 82.3% leased with an average
Annualized Base Rent per leased square foot of $25.30. According to the C&W
Market Study, 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 0.2%, 5.6% and 6.4% 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 103,772 rentable square feet and has
254 parking spaces. As of August 1, 1996, the Property was 77.5% leased with an
average Annualized Base Rent per leased square foot of $20.02. According to the
C&W Market Study, 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% of the Property's aggregate rentable square feet.
Aggregate square footage of leases expiring in 1996, 1997, and 1998 represent
5.2%, 30.4% and 49.8% of the Property's occupied square footage, respectively.
77
<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 164,598 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 August 1, 1996, the Property was 90.2% leased with an average Annualized Base
Rent per leased square foot of $19.91. According to the C&W Market Study, 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 (89,752 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%, 6.0% and
15.9% 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 August 1, 1996, the
Property was 78.6% leased with an average Annualized Base Rent per leased square
foot of $18.10. According to the C&W Market Study, 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 2.4%, 5.9%
and 36.2% 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 391,675 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 August 1, 1996, the Property was 86.0% leased
with an average Annualized Base Rent per leased square foot of $17.01. According
to the C&W Market Study, as of April 30, 1996, the Skyview Center Peer Group
contained approximately 2,449,177 square feet of office space inventory in 10
buildings located along the Century Boulevard and in El Segundo with weighted
average annual asking rental rates ranging from $17.70 to $20.75 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 1.4%, 7.8% and 6.7%
of the Property's occupied square footage, respectively.
78
<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 202,704 rentable
square feet and 398 parking spaces. As of August 1, 1996 the Property was
83.9% leased with an average Annualized Base Rent per leased square foot of
$20.35. According to the C&W Market Study, as of April 30, 1996, The New
Wilshire Peer Group contained approximately 3,098,886 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 (50,152 square feet), Muse Cordero (15,551 square feet) and
Hallmark Entertainment (12,453 square feet). Aggregate square footage of
leases expiring in 1996, 1997, and 1998 represent 14.2%, 14.8% 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 the C&W Market Study
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 the C&W Market
Study, 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.
<TABLE>
<S> <C>
10. 5601 LINDERO CANYON 14. 425 WEST BROADWAY
11. CALABASAS COMMERCE CENTER 15. 303 GLENOAKS
12. WOODLAND HILLS FINANCIAL
CENTER 16. 70 SOUTH LAKE
13. 16000 VENTURA BLVD.
</TABLE>
The distinct office submarkets within the Los Angeles North sector are
indicated in the table below. According to the C&W Market Study, 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 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 975,918 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.
79
<PAGE>
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: C&W Market Study
(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 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 August 1, 1996, the building was
100% triple net leased with an average Annualized Base Rate per leased
square foot of $11.15. According to the C&W Market Study, as of April 30,
1996, the 5601 Lindero Canyon Peer Group
80
<PAGE>
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 August 1, 1996, the Property was 100% leased with an average
Annualized Base Rent per leased square foot of $17.14. According to the C&W
Market Study, 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%, 48.3% 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 224,955
rentable square feet and 510 parking spaces. As of August 1, 1996, the
building was 89.8% leased with an average Annualized Base Rent per leased
square foot of $22.29. According to the C&W Market Study, 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 6.9%, 7.3%, and 19.8% 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
174,841 rentable square feet and 630 parking spaces. As of August 1, 1996,
the building was 84.1% leased with an average Annualized Base Rent per
leased square foot of $20.21. According to the C&W Market Study, 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 15.0%. Primary tenants at this
Property include Barrister Executive Suites (16,142 square feet),
Information Technology (8,638 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 8.4%, 30.9% and 20.1% 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 71,589 rentable square feet with 205 parking spaces.
As of August 1, 1996, the Property was 95.9% leased with an average
Annualized Base Rent per leased square foot of $19.35. According to the C&W
Market Study, as of April 30, 1996, the 425 West Broadway Peer
81
<PAGE>
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). No leases expire in 1996 and
the aggregate square footage of leases expiring in 1997 and 1998 represent
8.4% and 32.4% 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 August 1, 1996, the
Property was 97.4% leased with an average Annualized Base Rent per leased
square foot of $20.35. According to the C&W Market Study, 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 5.0% 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 August 1, 1996, the Property was 81.4% leased with an average
Annualized Base Rent per leased square foot of $20.80. According to the C&W
Market Study, as of April 30, 1996, the 70 South Lake Peer Group contained
approximately 1,651,840 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 (14,326 square feet) and Smith Barney (9,415 square
feet). No leases expire in 1996 or 1997 and 10.3% of the Property's occupied
square footage expires in 1998.
82
<PAGE>
LOS ANGELES SOUTH OFFICE MARKET SECTOR
The Los Angeles South office market sector, as defined by the C&W Market
Study, 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.
[LOGO]
<TABLE>
<S> <C>
17. 4811 AIRPORT PLAZA DRIVE 20. 100 WEST BROADWAY
18. 4900/10 AIRPORT PLAZA 21. 12501 EAST IMPERIAL
DRIVE HIGHWAY
19. 5000 EAST SPRING
</TABLE>
The Los Angeles South office market sector contains nine distinct office
submarkets as outlined in the table below. According to the C&W Market Study,
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 the C&W Market Study, as of December 31, 1995 the Long Beach 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:
83
<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 8.3% 40,366 $16.95
---------- --- ---------- ------- ------------ -----------
TOTAL..................... 27,336,900 240 4,813,583 17.6% 368,654 $18.14
---------- --- ---------- ------- ------------ -----------
---------- --- ---------- ------- ------------ -----------
</TABLE>
- ------------------------
Source: C&W Market Study
(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 August 1, 1996, the building was 100% triple net leased to
McDonnell Douglas at an Annualized Base Rent per leased square foot of
$8.64. According to the C&W Market Study, 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
August 1, 1996, the Property was 100% triple net leased to McDonnell Douglas
at an Annualized Base Rent per leased square foot of $7.80. According to the
C&W Market Study, 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 August 1, 1996, the building
was 89.6% leased with an average Annualized Base Rent per leased square foot
of $18.76. According to the C&W Market Study, 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
84
<PAGE>
(9,680 square feet) and IDS Financial Services (7,486 square feet).
Aggregate square footage of leases expiring in 1996, 1997 and 1998 represent
9.1%, 3.3% 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
August 1, 1996 the Property was 90.0% leased with an average Annualized Base
Rent per leased square foot of $20.42. According to the C&W Market Study, 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 (44,122 square feet), Inchcape
(28,925 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 1.0%, 4.7% and 9.9% 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 August 1, 1996, the Property was 94.7% leased with an average
Annualized Base Rent per leased square foot of $16.27. According to the C&W
Market Study, as of April 30, 1996, the 12501 East Imperial Highway Peer
Group contained approximately 1,889,992 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 1996 and 1997 and 24.1% of the Property's
occupied square footage expires in 1998.
85
<PAGE>
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 the C&W Market Study,
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.
[LOGO]
22. 5832 BOLSA AVENUE, HUNTINGTON BEACH
23. ANAHEIM CITY CENTRE
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
19.5% 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.
86
<PAGE>
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: C&W Market Study
* 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 August 1, 1996, the building was 100%
leased to GTE California at an Annualized Base Rent per leased square foot
of $13.35. According to the C&W Market Study, 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 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
August 1, 1996, the Property was 93.0% leased with an average Annualized
Base Rent per leased square foot of $15.07. According to the C&W Market
Study, as of April 30, 1996, the Anaheim City Centre Peer Group contained
approximately 3,165,279 square feet of office space inventory in 10
buildings and had weighted average annual asking rental rates ranging from
$19.26 to $19.32 per square foot with a direct vacancy rate of 12.1%.
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 2.9% and 34.6% of the Property's
occupied square footage, respectively.
87
<PAGE>
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 the C&W Market Study, 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%.
[LOGO]
24. IMPERIAL BANK TOWER
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
88
<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: C&W Market Study
* 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 540,413 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 89.4%, 89.4%, 85.5%, 81.9% and 83.0% 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 August 1,
1996, the building was 82.2% leased with an average Annualized Base Rent per
leased square foot of $18.31. According to the C&W Market Study, 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 4.9%, 7.9%, 6.4% of the
Property's occupied square footage, respectively.
89
<PAGE>
The following table sets forth a schedule of lease expirations as of August
1, 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>
SQUARE FOOTAGE PERCENTAGE OF ANNUALIZED BASE PERCENTAGE OF
NUMBER OF OF EXPIRING AGGREGATE PORTFOLIO RENT OF EXPIRING AGGREGATE PORTFOLIO
YEAR OF LEASE EXPIRATION LEASES EXPIRING LEASES LEASED SQUARE FEET LEASES ANNUALIZED BASE RENT
- ------------------------ --------------- -------------- ------------------- ------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996(1)................. 4 21,682 0.60% $ 421,572 0.6%
1997.................... 6 35,159 0.98 1,133,019 1.7
1998.................... 5 28,457 0.79 475,210 0.7
1999.................... 3 15,702 0.44 253,268 0.4
2000.................... 4 43,243 1.20 723,785 1.1
2001.................... 4 34,053 0.95 522,359 0.8
2002.................... 5 73,527 2.05 1,361,766 2.0
2003.................... 3 35,498 0.99 666,911 1.0
2004.................... 3 78,838 2.20 1,155,718 1.7
2005.................... 3 56,641 1.58 1,004,432 1.5
2008 and thereafter..... 2 21,508 0.60 418,116 0.6
--
------- ----- ------------------- -----
TOTAL............... 42 444,308 12.37% $ 8,136,154 12.12%
--
--
------- ----- ------------------- -----
------- ----- ------------------- -----
</TABLE>
- ------------------------
(1) Represents lease expirations data from August 1, 1996 to December 31, 1996.
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). This market study includes an historical
overview of the office market trends for the three southern California counties
of Los Angeles, Orange, and San Diego. The historical information compiled for
and referenced in this document was collected by Cushman & Wakefield of
California, Inc. from a variety of sources, including (but not limited to) the
Cushman & Wakefield Research Services Group, which conducts quarterly surveys of
competitive office buildings within numerous submarkets on a national basis,
telephone interviews with landlords and leasing agents representing the
competitive office properties and periodic surveys conducted on a
building-by-building basis for the markets analyzed. The scope of the work
conducted for the Peer Group Analyses included a brief physical inspection of
each Property by Cushman & Wakefield of California Valuation Advisory Services
personnel, a review of the competitive office market, and identification of
primary competitive properties for inclusion within the Peer Group based on
market criteria such as physical and locational characteristics, and an
inspection of the competitive office properties within the specific submarket.
The physical information, current occupancy levels, and asking rental rates for
available space in the identified Peer Group buildings were compiled from direct
interviews with the landlords or their leasing agents by Cushman & Wakefield of
California, Inc. personnel. 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.
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
90
<PAGE>
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 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 $601,000 of damage
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
91
<PAGE>
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
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 consultants' findings support
its recommendation and, therefore, has elected not to conduct a Phase II study
at the Imperial Bank Tower. While the Company is not aware of any release of
hazardous materials or environmental contamination at the Property's adjacent
parking garage relating to the possible previous or current presence thereunder
of underground storage tanks, or otherwise, if such a release of environmental
contamination has occurred or were to occur, and the lessor, who has primary
environmental liability as owner of the underlying land, has insufficient
financial resources to satisfy its potential environmental liability or any
indemnification obligations it owes the Company under the Company's lease of the
Property, the Company may incur remediation expenses that could adversely affect
the Company's ability to make expected distributions.
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.
92
<PAGE>
The Company believes that the Properties are in 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).
93
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company will be expanded immediately following
the 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
Diana M. Laing 41 Chief Financial Officer
Michele Byer 50 Chief Accounting Officer and Secretary
Brigitta B. Troy 56 Executive Vice President and Director of Acquisitions
Andrew J. Sobel 37 Executive Vice President and Director of Leasing
Herbert L. Porter 58 Senior Vice President and Director of Construction and Capital
Improvements
Arthur Gilbert 83 Director Nominee 1998
Steven C. Good 54 Director Nominee 1998
Jerry Asher 62 Director Nominee 1997
Carl D. Covitz 57 Director Nominee 1997
Kenneth B. Roath 60 Director Nominee 1997
</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
94
<PAGE>
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.
DIANA M. LAING. Ms. Laing will serve as Chief Financial Officer of the
Company. Prior to joining the Company, Ms. Laing served, from 1985 to 1996, as
Executive Vice President and Chief Financial Officer of South West Property
Trust, Inc., a publicly traded apartment properties real estate investment
trust, and its predecessor Southwest Realty, Ltd. Ms. Laing also served from
1982 to 1985 as Controller, Treasurer and Vice President-Finance of Southwest
Realty, Ltd. From 1981 to 1982, Ms. Laing was Controller of Crawford Energy,
Inc. and she served as a member of the audit staff of Arthur Andersen & Company
from 1978 to 1981. Ms. Laing is a Certified Public Accountant and a member of
the American Institute of CPAs and the Texas Society of Public Accountants. She
is also a Director of Sterling House Corporation, a publicly traded operator of
assisted living centers. Ms. Laing received her Bachelor of Science in
Accounting from Oklahoma State 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.
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,
including as a private investor for the last five years, and has developed over
6 million square feet of office, industrial and retail properties located
primarily in Southern California. He is 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
95
<PAGE>
Swartz & Berns, an accountancy corporation founded in 1993 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.
JERRY ASHER. Mr. Asher has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering. For
the past 27 years, Mr. Asher has been employed by CB Commercial Real Estate
Group, Inc. ("CB Commercial") where he has served in various capacities
involving the Southern California real estate industry. Most recently, since
1994, Mr. Asher has served as Executive Vice President, Director of Business
Development of CB Commercial with responsibility for implementing its business
development and marketing activities in both domestic and international markets.
Mr. Asher has also served in the following capacities, among others, since he
joined CB Commerical in 1969: Executive Vice President, Regional Manager for
Southern California (1991 to 1994); Southern California Regional Manager and
Senior Vice President (1984 to 1991); and National Director of Investment
Properties (1983 to 1984). Mr. Asher is currently the Chairman of the Cedars
Sinai Medical Center - Real Estate Industry Division. He received his Bachelor
of Science in Real Estate and Finance 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 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.
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
96
<PAGE>
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.
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 STOCK
NAME TITLE SALARY RATE ALLOCATED(1) BONUS
- -------------------- ----------------------------------------------------- ----------- ----------- ---------
<S> <C> <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 --
Diana M. Laing Chief Financial Officer 195,000 50,000 --
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 1,250(2)
Andrew J. Sobel Executive Vice President and Director of Leasing 110,000 40,000 3,750(2)
</TABLE>
- ------------------------
(1) All options will vest over three years (i.e., one-third of each executive's
options will vest and be exercisable on the first, second and third
anniversaries, respectively, of the closing of the Offering) and will be
exercisable at a price per share equal to the initial public offering price
per share of Common Stock offered hereby.
(2) Represents a one time Common Stock bonus.
97
<PAGE>
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 of Messrs. Ziman and Coleman will have an initial term
of three years 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 of Messrs. Ziman and Coleman 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.
In addition, Ms. Laing has entered into an employment agreement with the
Company effective August 1, 1996 which has an initial term of one year and is
subject to automatic one-year extensions following the expiration of the initial
term. Ms. Laing's employment agreement provides for an initial annual base
compensation in the amount set forth in the Executive Compensation table and
entitles her to an initial cash bonus in an amount to be determined by the
Compensation Committee but not to exceed 20% of her initial annual base
compensation. For any subsequent years in which the employment agreement is
extended beyond the initial term, the amount of Ms. Laing's base compensation
and any bonus will be determined by the Compensation Committee.
The employment agreements of Messrs. Ziman and Coleman and Ms. Laing 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 respective employment agreements), the terminated executive will
be entitled to (i) a single severance payment (the "Severance Amount") and (ii)
continued receipt of certain benefits including medical insurance, life and
disability insurance and participation in all pension, 401(k) and other employee
plans and benefits established by the Company for its executive employees for a
specified period of time following the date of termination (collectively, the
"Severance Benefits"). The Severance Amount of Messrs. Ziman and Coleman is
equal to the sum of two times the executive's average annual base compensation
and two times the highest annual bonus received during the preceding thirty-six
month period. The Severance Amount of Ms. Laing is equal to the executive's
annual base compensation for the preceding 12 month period. Receipt of the
Severance Benefits shall continue for two years commencing on the date of
termination in the case of Messrs. Ziman and Coleman and for one year commencing
on the date of termination in the case of Ms. Laing.
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, unless such termination was without cause.
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.
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,
98
<PAGE>
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 the Company, 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 obligate the Company, 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 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
99
<PAGE>
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 Bylaws, 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 86.69%. 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, 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,
a business combination 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."
100
<PAGE>
THE FORMATION TRANSACTIONS
OWNERSHIP OF THE PROPERTIES PRIOR TO THE FORMATION TRANSACTIONS
The Arden Predecessors own 16 of the Properties directly through fee simple
interests and four Properties which are subject to long term ground leases 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 owned by Messrs. Ziman and Coleman, and certain of
their relatives and affiliates and by other third parties. In addition, all of
the properties are managed by Messrs. Ziman and Coleman directly or through
affiliates of the Arden Predecessors.
Arden has been engaged in the property management, leasing and renovation
business for over five 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 Articles of Incorporation with the State Department of
Assessments and Taxation 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 $26.8 million from the
net proceeds of the Offering for such interests which represent 31.7% of
the ownership interests in the Properties to be acquired by the Company.
- 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 86.69% general partner interest in the
Operating Partnership.
- 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
101
<PAGE>
the Properties and the contract rights to purchase the Acquisition
Properties. The Participants making such contributions (a total of seven
individuals and entities including Messrs. Ziman, Coleman and Gilbert and
Ms. Byer) will receive an aggregate of 2,889,071 OP Units, with an
estimated value of approximately $57.8 million based on the assumed
initial public offering price of the Common Stock. The aggregate book
value of the interests and assets to be transferred to the Company and the
Operating Partnership is approximately $14.1 million of which $2,000
constitutes the aggregate book value of the interest and assets to be
transferred to the Operating Partnership by Messrs. Ziman and Coleman.
- The Company, through the Operating Partnership, will borrow approximately
$104 million aggregate principal amount pursuant to the Mortgage Financing
which will be secured by fully cross-collateralized, cross-defaulted first
mortgage liens on the Mortgage Financing Properties.
- Approximately $35 million of the net proceeds of the Offering will be used
by the Operating Partnership to purchase the Acquisition Properties.
- Approximately $398 million of the net proceeds of the Offering and the
$103 million net proceeds of 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, and the
related additional and accrued interest thereon, to be assumed by the
Operating Partnership in the Formation Transactions.
- The Company, through the Operating Partnership, is expected to enter into
the $100 million Credit Facility at or shortly after the closing of the
foregoing Formation Transactions.
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 all of the
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.
In connection with the CMBS Offering it is expected that the Operating
Partnership will transfer the Mortgage Financing Properties to a financing
subsidiary.
- 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 86.71% 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 13.29% of the outstanding Common Stock (of which
6.57%, 3.48%, 2.32% and 0.23% would be beneficially owned by Messrs. Ziman,
Coleman, 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,
assuming one annual distribution period, 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
102
<PAGE>
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."
Based on the issuance of 18,847,500 shares of Common Stock in the Offering,
the Company will hold a 86.71% ownership interest in the Operating Partnership
and the Participants will hold a 13.29% ownership interest in the Operating
Partnership. If the Underwriters' overallotment option is exercised in full, the
Company will hold a 88.24% ownership interest in the Operating Partnership and
the Participants will hold a 11.76% 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 initial
public offering price 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, book value 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 2,740,718 OP
Units, with a total value of $54.8 million based on the assumed initial
public offering price of the Common Stock, which value may differ from the
fair market values of such interests and assets and compares to a book
value of such interests and assets of approximately $6.8 million as of
June 30, 1996. The Company does not believe that the book values of the
interests and assets exchanged (which reflects the depreciated historical
cost of such interests and assets) are equivalent to the fair market
values of such interests and assets based on the valuation criteria
described under "-- Determination and Valuation of Ownership Interests."
- The Participants will realize an immediate accretion in the net tangible
book value of their investment in the Company of $12.48 per share of
Common Stock representing an aggregate accretion amount of $36.1 million.
- 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 $398 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, Gilbert and Ms. Byer, will
receive special allocations of interest deduction of approximately $12.6
million in the aggregate 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
proportional purchase rights which will enable him to maintain his overall
percentage ownership, assuming the exchange of all OP Units for Common
Stock, of the combined equity of the Company and the Operating Partnership
in
103
<PAGE>
the event there are future issuances of Common Stock or any convertible
securities by the Company or future issuances of OP Units by the Operating
Partnership. In each event, Mr. Ziman's proportional purchase rights may
be exercised at a price per share or other trading unit of such Common
Stock, convertible securities, or OP Units, as the case may be, to be
received by the Company or the Operating Partnership in such issuance,
less any underwriting discounts and commissions, and otherwise on the same
terms as may be applicable to such issuance. These proportional purchase
rights will not apply to transactions under any Company stock plan (such
as the Stock Incentive Plan), pursuant to an exchange of an OP Unit for a
share of Common Stock or in connection with any issuance of Common Stock
or OP Units incident to an acquisition of properties, assets or a
business.
- Commencing on the first anniversary of the Offering 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.
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 ACTIVITIES
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
INVESTMENT IN REAL ESTATE OR INTERESTS IN REAL ESTATE. 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 expects to pursue its investment objectives primarily through
the direct ownership by the Operating Partnership of the Properties and other
acquired office properties. The Company currently intends to invest primarily in
existing improved properties but may, if market conditions warrant, invest in
development projects as well. Furthermore, the Company currently intends to
invest in or develop commercial properties in Southern California, and primarily
in suburban Los Angeles County. However, future investment or development
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 geographic area. The Company intends to engage in
such future investment or development activities in a manner which is consistent
with the maintenance of its status as a REIT for federal income tax purposes. In
addition, 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.
While the Company currently does not have any plans to invest in joint ventures
or partnerships with affiliates or
104
<PAGE>
promoters of the Company, Mr. Gilbert, a director of the Company, owns one
office property in Southern California that the Company may consider in the
future. The Company will not, however, 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. 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").
INVESTMENTS IN REAL ESTATE MORTGAGES. 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 mortgages and other types of equity real estate interests
consistent with the Company's qualification as a REIT. The Company does not
presently intend to invest in mortgages or deeds of trust, but may invest in
participating or convertible mortgages if the Company concludes that it may
benefit from the cash flow or any appreciation in value of the property.
Investments in real estate mortgages run the risk that one or more borrowers may
default under such mortgages and that the collateral securing such mortgages may
not be sufficient to enable the Company to recoup its full investment.
SECURITIES OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS. 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.
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 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 of Century Park Center (other than
in connection with the sale of all or substantially all of the assets of the
Company or a merger of the Company) 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 19.3% (17.6% 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.
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
105
<PAGE>
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,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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 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 common directorship or interest, the presence of the
Director at the meeting at which the contract or transaction is authorized,
approved or ratified or the counting of the Director's vote in favor thereof if
(a) the transaction or contract is authorized, approved or ratified by the board
of directors or a committee of the board, 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.
106
<PAGE>
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 and such determination is approved by a two thirds vote of the
Company's stockholders as required by the Charter. 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."
CERTAIN TRANSACTIONS INVOLVING DIRECTOR NOMINEE
Mr. Jerry Asher, one of the Company's director nominees, is employed by CB
Commercial which has provided, from time to time, third-party leasing brokerage
services to the Company with respect to certain of its Properties. As of July
31, 1996, the Company had paid approximately $293,000 in leasing commissions to
CB Commercial for leasing brokerage services rendered during 1995 and 1996.
While the Company may engage CB Commercial in the future to provide additional
leasing brokerage services, it is not currently under any contractual obligation
to do so. Furthermore, Mr. Asher, as Director of Business Development at CB
Commercial, has no direct involvement in CB Commercial's leasing brokerage
services and does not have any personal interest in any leasing commissions
received by CB Commercial from the Company.
107
<PAGE>
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. See
"-- Certain Voting Rights of Limited Partners."
TRANSFERABILITY OF INTERESTS
Except for a transaction described in the following two paragraphs 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."
The Company may not engage in any merger, consolidation or other combination
with or into another person, sale of all or substantially all of its assets or
any reclassification, recapitalization or change of its outstanding equity
interests ("Termination Transaction"), unless the Termination Transaction has
been approved by holders of at least 66 2/3% of the OP Units (including OP Units
held by the Company which will represent 86.69% of all OP Units outstanding upon
consummation of the Offering) and in connection with which all Limited Partners
either will receive, or will have the right to elect to receive, for each OP
Unit an amount of cash, securities, or other property equal to the product of
the number of shares of Common Stock into which each OP Unit is then
exchangeable and the greatest amount of cash, securities or other property paid
to the holder of one share of Common Stock in consideration of one share of
Common Stock at any time during the period from and after the date on which the
Termination Transaction is consummated. If, in connection with the Termination
Transaction, a purchase, tender or exchange offer shall have been made to and
accepted by the holders of more than 50% of the outstanding shares of Common
Stock, each holder of OP Units will receive, or will have the right to elect to
receive, the greatest amount of cash, securities, or other property which such
holder would have received had it exercised its right to redemption and received
shares of Common Stock in exchange for its OP Units immediately prior to the
expiration of such purchase, tender or exchange offer and had thereupon accepted
such purchase, tender or exchange offer.
Notwithstanding the foregoing paragraph, the Company may merge, or otherwise
combine its assets, with another entity if, immediately after such merger or
other combination, substantially all of the assets of the surviving entity,
other than OP Units held by the Company, are contributed to the Operating
Partnership as a capital contribution in exchange for OP Units with a fair
market value, as reasonably determined by the Company, equal to the agreed value
of the assets so contributed.
In respect of any transaction described in the preceding two paragraphs, the
Company is required to use its commercially reasonable efforts to structure such
transaction to avoid causing the Limited Partners to recognize gain for federal
income tax purposes by virtue of the occurrence of or their participation in
such transaction.
108
<PAGE>
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 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 OR CONVERTIBLE SECURITIES
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 or
convertible securities. In each event, Mr. Ziman will have proportional purchase
rights which will enable him to maintain his overall percentage ownership of the
combined equity of the Company and the Operating Partnership, assuming the
exchange of all OP Units for Common Stock. Mr. Ziman's proportional purchase
rights may be exercised, in his sole discretion, at a price per share or other
trading unit of such OP Units, Common Stock or convertible securities, as the
case may be, to be received by the Company or the Operating Partnership in such
issuance, less any underwriting discounts and commissions, and otherwise on the
same terms as may be applicable to such issuances. These proportional purchase
rights will not apply to transactions under any Company stock plan (such as the
Stock Incentive Plan), pursuant to an exchange of an OP Unit for a share of
Common Stock or in connection with any issuance of Common Stock or OP Units
incident to an acquisition of properties, assets or a business.
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
109
<PAGE>
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.
CERTAIN VOTING RIGHTS OF LIMITED PARTNERS
So long as the Limited Partners own at least 5% of the outstanding OP units,
the Company shall not, on behalf of the Operating Partnership, take any of the
following actions without the prior consent of holders of at least 50% of the OP
Units representing limited partner interests: (1) dissolve the Operating
Partnership, other than incident to a merger or sale of substantially all of the
Company's assets; or (2) prior to the expiration of seven years from the
completion of the Offering, sell Century Park Center, other than incident to a
merger or sale of substantially all of the Company's assets.
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 as general partner (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 Bylaws, 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."
110
<PAGE>
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 97, 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
COMMON STOCK,
ASSUMING FULL
EXCHANGE OF OP PERCENTAGE OF COMMON
NAME AND ADDRESS(1) UNITS(2) STOCK OUTSTANDING(2)
- ---------------------------------------------------------------------- ------------------- ---------------------
<S> <C> <C>
Richard S. Ziman...................................................... 1,914,856(3) 7.04%
Victor J. Coleman..................................................... 1,308,812(4) 3.86%
Diane M. Laing........................................................ -- --
Michele Byer.......................................................... 51,032 *
Andrew J. Sobel....................................................... 3,750 *
Herbert L. Porter..................................................... 1,250 *
Arthur Gilbert........................................................ 517,319(5) 2.42%
Steven C. Good........................................................ -- --
Jerry Asher........................................................... -- --
Carl D. Covitz........................................................ -- --
Kenneth B. Roath...................................................... -- --
All directors and officers as a group (11 persons).................... 2,708,575 12.56%
</TABLE>
- ------------------------------
* Less than one percent.
(1) The address for each of the persons listed is 9100 Wilshire Boulevard, East
Tower, Suite 700, Beverly Hills, California 90212.
(2) Except for Messrs. Sobel and Porter, who hold shares of Common Stock,
beneficial ownership of Common Stock is currently held 100% in the form of
OP Units. In addition, amounts for individuals assume that all OP Units held
by the person are exchanged for shares of Common Stock and that none of the
OP Units held by other persons are exchanged for shares of Common Stock.
Amounts for all directors and officers as a group assume all OP Units are
exchanged for shares of Common Stock. See "Capital Stock -- Restrictions on
Transfer."
(3) Includes (a) 855,562 shares held by entities in which Messrs. Ziman and
Coleman have shared voting and investment power, of which shares Mr. Ziman
disclaims beneficial ownership in the 40% of such shares in which he has no
pecuniary interest, (b) 322,429 shares owned by entities directly and
indirectly owned 100% by Mr. Ziman, (c) 136,675 shares owned by a family
partnership of Mr. Ziman, in which Mr. Ziman has shared voting and
investment power and of which Mr. Ziman is a 20% general partner and
disclaims beneficial ownership of the remaining 80% in which he has no
pecuniary interest, and (d) 43,200 shares owned by an entity in which
Messrs. Ziman, Coleman and Gilbert have shared voting and investment power,
of which shares Mr. Ziman disclaims beneficial ownership of the 82% of such
shares in which he has no pecuniary interest.
(4) Includes (a) 855,562 shares held by entities in which Messrs. Ziman and
Coleman have shared voting and investment power, of which shares Mr. Coleman
disclaims beneficial ownership of the 60% of such shares in which he has no
pecuniary interest, (b) 84,108 shares owned by an entity owned 100% by Mr.
Coleman and (c) 43,200 shares owned by an entity in which Messrs. Ziman,
Coleman and Gilbert have shared voting and investment power, of which shares
Mr. Coleman disclaims beneficial ownership of the 88% of such shares in
which he has no pecuniary interest.
(5) Includes (a) 436,601 shares owned by the Arthur Gilbert and Rosalinde
Gilbert 1982 Trust, of which Mr. Gilbert is a trustee, (b) 43,200 shares
owned by an entity in which Messrs. Ziman, Coleman and Gilbert have shared
voting and investment power, of which shares Mr. Gilbert disclaims
beneficial ownership of the 30% of such shares in which he has no pecuniary
interest and (c) 37,518 shares owned by an entity in which Mr. Gilbert and
the Gilbert Foundation (of which Mr. Gilbert is the trustee) have shared
voting and investment power of which shares Mr. Gilbert disclaims beneficial
ownership of the 99% of such shares in which he has no pecuniary interest.
111
<PAGE>
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 CHARTER AND 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, 18,852,500 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, validly
issued, 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, with the exception of Mr.
Ziman's proportional purchase rights, 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 except that the
provisions of the Charter relating to authorized shares of stock and the
classification and reclassification of shares of Common Stock and Preferred
Stock may be amended by the affirmative vote of the holders of not less than a
majority of the votes entitled to be cast on the matter.
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
112
<PAGE>
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.
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 Common Stock and 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 The Bank of New
York.
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 these 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 of the Code 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 in the
aggregate, actually or constructively, up to 13% (by number of shares or by
value, whichever is more restrictive) of the Common Stock.
113
<PAGE>
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 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 and such determination is approved by a two thirds vote of the
Company's stockholders as required by the Charter.
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
114
<PAGE>
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.
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 five 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.
115
<PAGE>
REMOVAL OF DIRECTORS
The Charter provides that subject to the rights of one or more classes or
series of Preferred Stock to elect one or more directors, any 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 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. The Company's Board of Directors has resolved to opt out
of the business combination provisions of the MGCL and such resolutions also
require that any decision to opt back in be subject to the approval of holders
of a majority of the shares of Common Stock.
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
116
<PAGE>
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.
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. Although there can be no assurance that such
provision will not be amended or eliminated at any time in the future, the
Company's Board of Directors has resolved that the provision may not be amended
or eliminated without the approval of holders of at least a majority of the
shares of Common Stock.
AMENDMENT TO THE CHARTER
The Charter, including its provisions on classification of the Board of
Directors, restrictions on transferability of shares of Common Stock 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.
However, the provisions of the Charter relating to authorized shares of stock
and the classification and reclassification of shares of Common Stock and
Preferred Stock may be amended by the affirmative vote of the holders of not
less than a majority 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 the control share acquisition
provisions of the MGCL, in each case if they ever became applicable to the
Company, 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.
117
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
GENERAL
Upon the completion of the Offering, the Company will have outstanding
18,852,500 shares of Common Stock (21,679,500 shares if the Underwriters'
overallotment option is exercised in full). In addition, 2,889,071 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 868,500 shares of
Common Stock to directors, executive officers and certain key employees prior to
the completion of the Offering and has reserved 631,500 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
118
<PAGE>
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 CONSEQUENCES
The following summary of material federal income tax consequences 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.
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 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.
119
<PAGE>
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 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).
120
<PAGE>
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." 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
121
<PAGE>
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 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
122
<PAGE>
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.
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.
123
<PAGE>
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.
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
124
<PAGE>
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 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"
125
<PAGE>
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.
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
126
<PAGE>
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
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
127
<PAGE>
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, Latham & Watkins will deliver an opinion to the Company
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.
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
128
<PAGE>
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 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
129
<PAGE>
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.
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
130
<PAGE>
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."
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
131
<PAGE>
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.
132
<PAGE>
UNDERWRITING
The underwriters of the Offering (the "Underwriters"), for whom Lehman
Brothers Inc., Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc., A.G.
Edwards & Sons, Inc., Smith Barney Inc., EVEREN Securities, Inc., Legg Mason
Wood Walker, Incorporated 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........................................................
A.G. Edwards & Sons, Inc........................................................
Smith Barney Inc................................................................
EVEREN Securities, Inc..........................................................
Legg Mason Wood Walker, Incorporated............................................
Raymond James & Associates, Inc.................................................
------------
Total......................................................................... 18,847,500
------------
------------
</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 2,827,000 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
133
<PAGE>
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 change as a result of market conditions
and other factors.
The Underwriters do not intend to confirm sales of Common Stock to any
account over which they exercise discretionary authority.
After giving effect to Mortgage Financing, Lehman Brothers Holdings Inc., an
affiliate of Lehman Brothers Inc., will receive approximately $202 million of
the net proceeds from the Offering 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
and any OP Units or shares of Common Stock that may be issued in connection with
any acquisition of a property) 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
.50% 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 2710(c)(8) 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 Underwriter.
The Underwriters have reserved for sale at the public offering price up to
500,000 shares of Common Stock to directors, officers and employees of the
Company, their business affiliates and related parties who have expressed an
interest in purchasing shares. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares offered hereby.
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 16000 Ventura;
1950 Sawtelle; Westwood Terrace, Skyview Center, 4811 and 4900/10 Airport Plaza
Drive and New Wilshire; 70 South Lake and Calabasas Commerce Center; the 1996
Acquired
134
<PAGE>
Properties, the Acquisition Properties, and the balance sheet of Arden Realty,
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.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Latham &
Watkins and certain legal matters, including the validity of the shares of
Common Stock offered hereby, will be passed upon for the Company by Ballard
Spahr Andrews & Ingersoll. In addition, the description of federal income tax
consequences contained in this Prospectus under the heading "Federal Income Tax
Consequences" is based upon the opinion of Latham & Watkins. Certain legal
matters will be passed upon for the Underwriters by Hogan & Hartson L.L.P.
Latham & Watkins and Hogan & Hartson L.L.P. will rely upon the opinion of
Ballard Spahr Andrews & Ingersoll as to all 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.
135
<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.
"1995 ACQUIRED PROPERTIES" means the nine commercial office properties
located in Southern California which were acquired by the Arden Predecessors in
1995.
"1996 ACQUIRED PROPERTIES" means the five commercial office properties
located in Southern California which were acquired or are scheduled to be
acquired by the Arden Predecessors in 1996.
"401(K) PLAN" means the Arden Realty Group Section 401(k) Savings/Retirement
Plan.
"ACM" means asbestos-containing materials.
"ACQUISITION PROPERTIES" means the two additional Properties (303 Glenoaks
and 12501 East Imperial Highway) that will be acquired by the Company
concurrently with the Offering.
"ADA" means the Americans with Disabilities Act.
"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.
"AFFILIATES" means with respect to any individual or entity, any other
individual or entity directly or indirectly controlling, controlled by or under
common control with such individual or entity.
"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.
"BENEFICIARY" means a qualified charitable organization selected by the
Company to receive in trust any excess shares resulting from a transfer of
Common Stock in violation of the Ownership Limit or the Charter.
"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.
"BYLAWS" means the bylaws of the Company.
"C&W" means Cushman & Wakefield of California, Inc.
"C&W MARKET STUDY" means the Office Market Study of Three Southern
California Counties (Los Angeles, Orange, and San Diego Counties) prepared for
the Company by Cushman & Wakefield as of December 31, 1995.
"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.
"CHARTER" means the charter of the Company.
"CMBS OFFERING" means an offering of commercial mortgage-backed securities
in an amount of approximately $104 million which the Company intends to engage
in to refinance the Mortgage Financing.
"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.
136
<PAGE>
"COMPANY" means Arden Realty, Inc., a Maryland corporation. While 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.
"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 proposed $100 million credit facility being
restructured by the Company.
"CPI" means the Consumer Price Index.
"CUSHMAN & WAKEFIELD" means Cushman & Wakefield of California, Inc.
"DOL" means the Department of Labor.
"DOL REGULATION" means the regulation issued by the DOL defining Plan Assets
for certain purposes.
"DOMESTICALLY CONTROLLED REIT " means 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.
"DOUBLE TAXATION" means taxation at the corporate and stockholder levels
that generally results from investment in a corporation.
"DOWNTOWN/CBD" means the Los Angeles central business district.
"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.
"GAAP" means generally accepted accounting principles.
"INDEPENDENT UNDERWRITER" means Dean Witter Reynolds Inc. which will act as
qualified independent underwriter and will recommend the maximum initial public
offering price for the shares of Common Stock.
"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.
"LC" means leasing commissions.
"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.
"LOS ANGELES EDC" means the Los Angeles Economic Development Corporation.
"LOS ANGELES PMSA" means the Los Angeles/Long Beach Primary Metropolitan
Statistical Area.
"LOS ANGELES PMSA" means the Los Angeles Primary Metropolitan Statistical
Area.
"MGCL" means the Maryland General Corporation Law, as amended.
"MORTGAGE FINANCING" means the one year interim loan of approximately $104
million to the Company.
137
<PAGE>
"MORTGAGE FINANCING PROPERTIES" means the following nine Properties: Skyview
Center, 9665 Wilshire, Westwood Terrace, 425 West Broadway, 5000 East Spring,
Anaheim City Centre, 16000 Ventura Blvd., Imperial Bank Tower and 1950 Sawtelle.
"NAMED EXECUTIVE OFFICERS" means the Company's six most highly compensated
executive officers including the Chief Executive Officer.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"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, Inc..
"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 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 in the C&W Market
Study 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.
"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.
"PROPOSED REGULATIONS" means Treasury Regulations proposed by the IRS which
have not been issued in permanent form.
"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
138
<PAGE>
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., A.G. Edwards & Sons, Inc., Smith Barney
Inc., EVEREN Securities, Inc., Legg Mason Wood Walker Incorporated 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.
"SAME STORE PROPERTIES" means those Properties that were owned by the
Company for the entire six months ended June 30, 1995 and June 30, 1996.
"SFAS" means Statements of Financial Accounting Standards.
"STOCK INCENTIVE PLAN" means the 1996 Stock Incentive Plan of Arden Realty
Group, Inc. and Arden Realty Group, Ltd.
"SWAP AGREEMENT" means the forward swap agreement in the notional amount of
$104 million which the Company intends to enter into with an affiliate of Wells
Fargo Bank at the time of this Offering and the Formation Transactions or
shortly thereafter.
"TI" means tenant improvements.
"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., A.G.
Edwards & Sons, Inc., Smith Barney Inc., EVEREN Securities, Inc., Legg Mason
Wood Walker Incorporated, 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.
"WHITE PAPER" means the White Paper on Funds from Operations approved by the
Board of Governors of the NAREIT in March of 1995.
139
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
ARDEN REALTY, INC.
Pro Forma Condensed Combined Financial Statements (Unaudited):............................................ F-3
Pro Forma Condensed Combined Balance Sheet as of June 30, 1996.......................................... F-4
Pro Forma Condensed Combined Statement of Operations for the Six Months Ended June 30, 1996............. F-5
Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1995............... F-6
Notes to Pro Forma Condensed Combined Financial Statements.............................................. F-7
Historical:
Report of Independent Auditors.......................................................................... F-10
Balance Sheet as of May 1, 1996 and June 30, 1996 (Unaudited)........................................... F-11
Notes to Balance Sheet.................................................................................. F-12
ARDEN PREDECESSORS
Combined Financial Statements:
Report of Independent Auditors.......................................................................... F-15
Combined Balance Sheets as of June 30, 1996 (Unaudited) and December 31, 1995 and 1994.................. F-16
Combined Statements of Operations for the Six Months ended June 30, 1996 and 1995 (Unaudited) and the
Years Ended December 31, 1995, 1994 and 1993........................................................... F-17
Combined Statements of Owners' Equity for the Six Months ended June 30, 1996 (Unaudited) and the Years
Ended December 31, 1995, 1994 and 1993................................................................. F-18
Combined Statements of Cash Flows for the Six Months ended June 30, 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-29
16000 VENTURA
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................................................... F-31
Statement of Revenue and Certain Expenses for the Period January 1, 1995 to March 15, 1995.............. F-32
Notes to Statement of Revenue and Certain Expenses...................................................... F-33
1950 SAWTELLE
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................................................... F-34
Statement of Revenue and Certain Expenses for the Period January 1, 1995 to June 14, 1995............... F-35
Notes to Statement of Revenue and Certain Expenses...................................................... F-36
WESTWOOD TERRACE, SKYVIEW CENTER, 4811 AND 4900/10 AIRPORT PLAZA DRIVE AND NEW WILSHIRE
Combined Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................................................... F-37
Combined Statement of Revenue and Certain Expenses for the Period December 1, 1994 to November 22,
1995................................................................................................... F-38
Notes to Combined Statement of Revenue and Certain Expenses............................................. F-39
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
70 SOUTH LAKE AND CALABASAS COMMERCE CENTER
<S> <C>
Combined Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................................................... F-41
Combined Statement of Revenue and Certain Expenses for the Period January 1, 1995 to November 22,
1995................................................................................................... F-42
Notes to Combined Statement of Revenue and Certain Expenses............................................. F-43
1996 ACQUIRED PROPERTIES
Combined Statements of Revenue and Certain Expenses:
Report of Independent Auditors.......................................................................... F-45
Combined Statements of Revenue and Certain Expenses for the 1996 Interim Period Prior to Acquisition
(Unaudited) and the Year Ended December 31, 1995....................................................... F-46
Notes to Combined Statements of Revenue and Certain Expenses............................................ F-47
ACQUISITION PROPERTIES
Combined Statements of Revenue and Certain Expenses:
Report of Independent Auditors.......................................................................... F-49
Combined Statements of Revenue and Certain Expenses for the Six Months Ended June 30, 1996 and 1995
(Unaudited) and the Year Ended December 31, 1995....................................................... F-50
Notes to Combined Statements of Revenue and Certain Expenses............................................ F-51
</TABLE>
F-2
<PAGE>
ARDEN REALTY, INC.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial and operating information for the six
months ended June 30, 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 June 30, 1996 combined balance sheet and at the beginning of the
period presented for the combined statements of operations. The pro forma June
30, 1996 balance sheet information also gives effect to the recording of
minority interests for OP Units, as if these transactions occurred on June 30,
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-3
<PAGE>
ARDEN REALTY, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL INVESTMENTS
ARDEN IN NONCOMBINED PRO FORMA COMPANY
PREDECESSORS ENTITIES ADJUSTMENTS PRO FORMA
------------ --------------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial office properties-net.................. $ 254,749 $ 91,555 $ 54,831(F) $ 410,160
8,673(C)
352(I)
Cash and cash equivalents......................... 913 495 347,433(A) 12,658
(26,777)(C)
102,216(D)
(358,001)(E)
(54,831)(F)
1,210(B)
Restricted cash................................... 17,334 1,932 (19,266)(E) --
Rents and other receivables....................... 2,577 167 -- 2,744
Deferred rents.................................... 2,996 1,761 -- 4,757
Prepaid financing and leasing costs-net........... 1,659 1,588 (757)(G) 4,274
1085(D)
699(D)
Prepaid expenses and other assets................. 2,868 330 (1,210)(B) 1,988
Investments in noncombined entities............... 3,069 (3,069) -- --
------------ ------- ----------- -----------
Total assets.................................. $ 286,165 $ 94,759 $ 55,656 $ 436,581
------------ ------- ----------- -----------
------------ ------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage loans payable............................ $ 263,492 $ 86,420 $ 104,000(D) $ 104,000
(349,912)(E)
Unsecured lines of credit......................... 2,467 0 (2,467)(E) --
Accounts payable and accrued expenses............. 4,726 1,398 (1,397)(E) 4,727
Deferred interest................................. 5,318 281 (5,599)(E) --
Security deposits................................. 1,914 827 -- 2,741
------------ ------- ----------- -----------
Total liabilities............................. 277,917 88,926 (255,375) 111,468
------------ ------- ----------- -----------
Minority interests................................ 718 (718) 43,231(I) 43,231
Owners' Equity.................................... 7,530 6,551 (14,081)(H) --
Stockholders' Equity:
Common Stock.................................... -- -- 189(A) 189
Additional paid-in capital...................... -- -- 347,244(A) 281,693
(9,175)(C)
(757)(G)
5,599(E)
14,081(H)
(23,491)(E)
(42,879)(I)
(8,929)(C)
------------ ------- ----------- -----------
Total stockholders' equity.................... -- -- 281,882 281,882
------------ ------- ----------- -----------
Total liabilities and equity.................. $ 286,165 $ 94,759 $ 55,656 $ 436,580
------------ ------- ----------- -----------
------------ ------- ----------- -----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ARDEN REALTY, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
EQUITY IN PRE-ACQUISITION
HISTORICAL NET (LOSS) OF PERIOD FOR
ARDEN NONCOMBINED 1996 ACQUIRED ACQUISITION PRO FORMA COMPANY
PREDECESSORS ENTITIES PROPERTIES PROPERTIES ADJUSTMENTS PRO FORMA
------------ ------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Rental.................................. $ 19,404 $ 7,937 $ 3,923 $ 2,101 $ 128(J) $ 33,493
Tenant reimbursements................... 1,425 308 258 58 -- 2,049
Parking................................. 2,121 574 308 87 -- 3,090
Other................................... 1,521 166 144 174 (701)(K) 1,304
------------ ------ ------ ----------- ----------- -----------
Total revenue......................... 24,471 8,985 4,633 2,420 (573) 39,936
------------ ------ ------ ----------- ----------- -----------
EXPENSES
Property operating, taxes, insurance and
ground rent............................ 8,252 3,293 1,489 1,021 69(L) 14,124
General and administrative.............. 830 435 -- -- 635(M) 1,900
Interest................................ 14,741 4,317 -- -- (15,000)(N) 4,058
Depreciation and amortization........... 3,036 1,673 -- -- 1,065(O) 5,774
------------ ------ ------ ----------- ----------- -----------
Total expenses........................ 26,859 9,718 1,489 1,021 (13,231) 25,856
------------ ------ ------ ----------- ----------- -----------
Equity in net (loss) of noncombined
entities................................. (94) 94 -- -- -- --
------------ ------ ------ ----------- ----------- -----------
(Loss) income before minority interests... (2,482) (639) 3,144 1,399 12,658(P) 14,080
Minority interests........................ 344 (344) -- -- (1,871)(Q) (1,871)
------------ ------ ------ ----------- ----------- -----------
Net (loss) income......................... $ (2,138) $ (983) $ 3,144 $ 1,399 $ 10,787 $ 12,209
------------ ------ ------ ----------- ----------- -----------
------------ ------ ------ ----------- ----------- -----------
Pro forma common shares outstanding before
conversion of OP units................... 18,243
-----------
-----------
Net income per share...................... $.70
-----------
-----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ARDEN REALTY, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
EQUITY IN
NET (LOSS) PRE-ACQUISITION
HISTORICAL OF PERIOD FOR 1996
ARDEN NONCOMBINED 1995 ACQUIRED ACQUIRED ACQUISITION PRO FORMA
PREDECESSORS ENTITIES PROPERTIES PROPERTIES PROPERTIES ADJUSTMENTS
------------ ------------ -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Rental............................... $ 8,832 $ 15,610 $ 16,564 $ 19,391 $ 4,280 $ 2,014(J)
Tenant reimbursements................ 403 419 1,073 961 54 --
Parking.............................. 750 915 2,238 1,859 133 --
Other................................ 1,707 776 877 350 85 (1,355)(K)
------------ ------------ ------- ----------- ----------- -----------
Total revenue...................... 11,692 17,720 20,752 22,561 4,552 659
------------ ------------ ------- ----------- ----------- -----------
EXPENSES
Property operating, taxes, insurance
and ground rent..................... 3,339 6,927 7,813 8,848 2,228 936(L)
General and administrative........... 1,377 831 -- -- -- 1,592(M)
Interest............................. 5,537 8,243 -- -- -- (5,704)(N)
Depreciation and amortization........ 1,898 2,475 -- -- -- 7,176(O)
------------ ------------ ------- ----------- ----------- -----------
Total expenses..................... 12,151 18,476 7,813 8,848 2,228 4,000
------------ ------------ ------- ----------- ----------- -----------
Equity in net (loss) of noncombined
entities.............................. (116) 116 -- -- -- --
------------ ------------ ------- ----------- ----------- -----------
(Loss) income before minority
interests............................. (575) (640) 12,939 13,713 2,324 (3,341)
Minority interests..................... (1) 1 -- -- -- (3,245)(P)
------------ ------------ ------- ----------- ----------- -----------
Net (loss) income...................... $ (576) $ (639) $ 12,939 $ 13,713 $ 2,324 $ (6,586)(Q)
------------ ------------ ------- ----------- ----------- -----------
------------ ------------ ------- ----------- ----------- -----------
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................ 2,910
Parking.............................. 5,895
Other................................ 2,440
-----------
Total revenue...................... 77,936
-----------
EXPENSES
Property operating, taxes, insurance
and ground rent..................... 30,091
General and administrative........... 3,800
Interest............................. 8,076
Depreciation and amortization........ 11,549
-----------
Total expenses..................... 53,516
-----------
Equity in net (loss) of noncombined
entities.............................. --
-----------
(Loss) income before minority
interests............................. 24,420
Minority interests..................... (3,245)
-----------
Net (loss) income...................... $ 21,175
-----------
-----------
Pro forma common shares outstanding
before conversion of OP units......... 18,243
-----------
-----------
Net income per share................... $1.23
-----------
-----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ARDEN REALTY, 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 June
30, 1996 are as follows:
<TABLE>
<S> <C> <C>
(A) Sale of 18,848 shares of common stock in the offering
Proceeds from offering.............................................. $ 376,950
Costs associated with offering including prepaid offering costs..... (29,517)
----------
Net proceeds...................................................... $ 347,433
----------
----------
Par value of common stock to be issued.............................. $ 189
Additional paid in capital from proceeds of sale of common stock.... 347,244
----------
$ 347,433
----------
----------
(B) Reclassification of offering costs prepaid by the Arden Predecessors prior
to June 30, 1996......................................................... $ (1,210)
----------
----------
(C) Acquisition of certain interests of the Participants for cash
Reduction in additional paid-in capital for book value of interests
acquired........................................................... $ 9,175
Reduction in additional paid-in capital for distributions to
affiliates of cash paid in excess of book value of interests....... 8,929
Purchase price in excess of book value of interests in the
properties purchased from nonaffiliates............................ 8,673
----------
$ 26,777
----------
----------
(D) Mortgage financing and line of credit commitment fees
Proceeds from new debt.............................................. $ 104,000
Costs associated with new debt origination.......................... (1,085)
Prepaid commitment fees............................................. (699)
----------
$ 102,216
----------
----------
(E) Repayment of certain mortgage loans and unsecured lines of credit of the
Arden Predecessors
Payment of mortgage loans........................................... $ 349,912
Payment of unsecured lines of credit................................ 2,467
Payment of additional interest on debt (includes deferred interest
of $5,599 which was accrued as of June 30, 1996, and $17,892 of
additional interest currently due as a result of the prepayment)... 23,491
Payment of accrued interest......................................... 1,397
Release of restricted cash to repay mortgage loans.................. (19,266)
----------
$ 358,001
----------
----------
(F) Purchase price and actual and estimated additional closing costs of 100
Broadway and Acquisition Properties...................................... $ 54,831
----------
----------
(G) Write off of unamortized loan fees........................................ $ (757)
----------
----------
(H) Elimination of owners' equity............................................. $ (14,081)
----------
----------
</TABLE>
F-7
<PAGE>
ARDEN REALTY, INC.
NOTES TO PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
1. ADJUSTMENTS TO THE PRO FORMA CONDENSED COMBINED BALANCE SHEET (CONTINUED)
<TABLE>
<S> <C> <C>
(I) To establish minority interests in Operating Partnership based on units
issued................................................................... $ 43,231
Excess of fair value over book value related to issuance of Operating
Partnership units to nonaffiliates....................................... (352)
----------
$ 42,879
----------
----------
Total Equity before percentage allocable to minority interests................. $ 325,113
Percentage allocable to minority interests..................................... 13.29%
----------
$ 43,231
----------
----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
Minority OP Units.......................................... 2,889 13.29%
Total Shares Issued........................................ 18,853 86.71%
--------- ---------
Total...................................................... 21,742 100.00%
--------- ---------
--------- ---------
</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 six months ended June 30, 1996 and the year
ended December 31, 1995 are set forth below:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C> <C>
(J) Increase in rental revenue to adjust the 1995 Acquired Properties, the
1996 Acquired Properties and the Acquisition Properties to straight
line rental revenue based on the acquisition date of the Arden
Predecessors.......................................................... $ 128 $ 2,014
-------------- --------
-------------- --------
(K) Decrease in other income to eliminate non-recurring construction fees
which would not have been realized by the Company as a REIT and
certain property management fees that will not be earned.............. (701) (1,355)
-------------- --------
-------------- --------
(L) 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............... $ 69 $ 936
-------------- --------
-------------- --------
(M) Increase in general and administrative expense related to expected
level of operations as a public real estate investment trust.......... $ 635 $ 1,592
-------------- --------
-------------- --------
(N) Decrease in interest expense
Decrease in interest expense due to repayment of mortgage
loans........................................................... $ (19,058) $ (13,780)
Increase in interest expense related to the newly originated
non-amortizing debt with an interest rate of 7.43% due in seven
years........................................................... 3,864 7,688
Increase in amortization of finance costs related to the newly
originated debt................................................. 194 388
-------------- --------
Net decrease in interest expense............................... $ (15,000) $ (5,704)
-------------- --------
-------------- --------
</TABLE>
F-8
<PAGE>
ARDEN REALTY, INC.
NOTES TO PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
2. ADJUSTMENTS TO THE PRO FORMA CONDENSED COMBINED STATEMENTS OF
OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C> <C>
(O) Increase in depreciation expense to reflect a full period of
depreciation for the 1995 Acquired Properties, the 1996 Acquired
Properties and the Acquisition Properties utilizing a 40 year useful
life for buildings and a 10 year useful life for improvements......... $ 936 $ 6,918
Increase in depreciation due to the fair value of units or cash paid in
excess of book value of interests in the properties acquired from the
nonaffiliates......................................................... 129 258
-------------- --------
Net increase in depreciation expense........................... $ 1,065 $ 7,176
-------------- --------
-------------- --------
Historical depreciation of the Arden Predecessors...................... $ 4,709 $ 4,373
Additional depreciation of the 1995 and 1996 Acquired Properties:
Pro forma depreciation as if the 1995 and 1996 Acquired
Properties were purchased on January 1, 1995.................... 1,450 6,920
Historical depreciation recorded by the Arden Predecessors....... (922) (818)
-------------- --------
Net increase in depreciation expense (the pro forma adjustment
for the six months ended June 30, 1996 includes only the 1996
Acquired Properties).......................................... 528 6,102
Depreciation on the Acquisition Properties............................. 408 816
Depreciation on the price in excess of book value...................... 129 258
-------------- --------
$ 5,774 $ 11,549
-------------- --------
-------------- --------
(P) To reflect adjustment for minority interests of 13.29% in the Operating
Partnership........................................................... $ 1,871 $ 3,245
-------------- --------
-------------- --------
(Q) Pro forma common shares outstanding represents the 18,848 shares to be issued reduced by 610 shares the
proceeds of which result solely in an increase in cash to be used for reserves and working capital and
not used to repay debt or acquire property as part of the offering transaction.
</TABLE>
F-9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Arden Realty, Inc.
We have audited the accompanying balance sheet of Arden Realty, Inc., a
Maryland corporation, as of May 1, 1996. This balance sheet is the
responsibility of the management of Arden Realty, 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, 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, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MAY 1, 1996
-------------- JUNE 30, 1996
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS........................................................................... $ -- $ --
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commitments and contingencies.................................................... $ -- $ --
-------------- --------------
Preferred stock, $.01 par value, 20,000,000 shares authorized, none issued and
outstanding..................................................................... -- --
-------------- --------------
Common stock, $.01 par value, 100,000,000 shares authorized, 100 shares issued
and outstanding as of June 30, 1996 (unaudited)................................. -- --
-------------- --------------
$ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-11
<PAGE>
ARDEN REALTY, INC.
NOTES TO BALANCE SHEET
1. ORGANIZATION
Arden Realty, 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 affiliates and affiliated
partnerships. Substantial ownership interests in the entities (the "Arden
Predecessors") that own interests in the Properties are held by Richard Ziman,
Victor Coleman, Arthur Gilbert and their affiliates, consisting of related
individuals and entities controlled by them. The Arden Predecessors 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 86.7% of the ownership interests in the Operating Partnership. The
Operating Partnership will initially hold all the interests in the Properties.
It is expected that in connection with the Mortgage Financing discussed below
the Operating Partnership will transfer the particular Mortgage Financing
Properties to a financing subsidiary. 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
including certain unaffiliated investors (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 and unaffiliated participants. 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 the interests
owned by such Participants in certain of the Arden Predecessor entities
and in certain of the Properties. The Company will pay approximately $26.8
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 86.7% 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 Messrs. Ziman, Coleman and Gilbert) will receive
an aggregate of 2,889,071 OP Units, with an estimated value of
approximately $57.8 million based on the assumed initial public offering
price of the Common Stock.
F-12
<PAGE>
ARDEN REALTY, INC.
NOTES TO BALANCE SHEET -- (CONTINUED)
1. ORGANIZATION (CONTINUED)
- The Company, through the Operating Partnership, will borrow approximately
$104 million aggregate principal amount (the "Mortgage Financing") which
will be secured by cross-collateralized and cross-defaulted first mortgage
liens on nine 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 $398 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 a $100
million Credit Facility.
- The transfer of the properties and operating interests of Messrs. Ziman,
Coleman, Gilbert and their affiliates to the Operating Partnership for
cash or ownership units in the Operating Partnership will be accounted for
at the historical cost of their interests in the Arden Predecessors
similar to a pooling of interests. All transfers by nonaffiliates will be
accounted for at the fair value of the units issued and/ or cash
consideration paid.
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 revenue 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.
F-13
<PAGE>
ARDEN REALTY, INC.
NOTES TO BALANCE SHEET -- (CONTINUED)
5. STOCK INCENTIVE PLAN (CONTINUED)
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 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
JUNE 30, ---------- ---------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
Commercial office properties, net of accumulated depreciation of $6,248,
$3,296 and $1,530, respectively.............................................. $ 254,749 $ 160,874 $ 34,977
Cash and cash equivalents..................................................... 913 790 611
Restricted cash............................................................... 17,334 12,249 600
Rents and other receivables................................................... 2,577 1,095 21
Deferred rents................................................................ 2,996 1,778 1,106
Prepaid financing and leasing costs, net of accumulated amortization of $408,
$421 and $112, respectively.................................................. 1,659 1,359 746
Prepaid expenses and other assets............................................. 2,868 1,071 446
Investments in noncombined entities........................................... 3,069 3,163 7,583
----------- ---------- ---------
Total assets.............................................................. $ 286,165 $ 182,379 $ 46,090
----------- ---------- ---------
----------- ---------- ---------
LIABILITIES AND OWNERS' EQUITY
Mortgage loans payable........................................................ $ 263,492 $ 167,638 $ 32,196
Unsecured lines of credit..................................................... 2,467 813 748
Accounts payable and accrued expenses......................................... 4,726 3,398 897
Deferred interest............................................................. 5,318 884 --
Security deposits............................................................. 1,914 1,430 307
----------- ---------- ---------
Total liabilities......................................................... 277,917 174,163 34,148
Minority interests............................................................ 718 100 99
Owners' equity................................................................ 7,530 8,116 11,843
----------- ---------- ---------
Total liabilities and owners' equity...................................... $ 286,165 $ 182,379 $ 46,090
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
See accompanying notes.
F-16
<PAGE>
ARDEN PREDECESSORS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED FOR THE YEARS ENDED
JUNE 30, DECEMBER 31,
--------------- ------------------------
1996 1995 1995 1994 1993
------- ------ ------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Rental.................................................... $19,404 $2,822 $ 8,832 $ 5,157 $3,034
Tenant reimbursements..................................... 1,425 177 403 217 35
Parking................................................... 2,121 220 750 382 279
Other..................................................... 1,521 649 1,707 796 314
------- ------ ------- ------- ------
Total revenue......................................... 24,471 3,868 11,692 6,552 3,662
------- ------ ------- ------- ------
EXPENSES
Property operating and maintenance........................ 4,998 754 2,539 1,869 1,324
Real estate taxes......................................... 1,291 138 502 272 107
Insurance................................................. 1,503 42 279 50 49
Ground rent............................................... 460 -- 19 -- --
General and administrative................................ 830 684 1,377 689 386
Interest.................................................. 14,741 1,403 5,537 1,673 646
Depreciation and amortization............................. 3,036 638 1,898 1,143 499
------- ------ ------- ------- ------
Total expenses........................................ 26,859 3,659 12,151 5,696 3,011
------- ------ ------- ------- ------
Equity in net (loss) income of noncombined entities......... (94) 108 (116) 201 4
------- ------ ------- ------- ------
(Loss) income before minority interests..................... (2,482) 317 (575) 1,057 655
Minority interests.......................................... 344 (7) (1) 1 --
------- ------ ------- ------- ------
Net (loss) income........................................... $(2,138) $ 310 $ (576) $ 1,058 $ 655
------- ------ ------- ------- ------
------- ------ ------- ------- ------
</TABLE>
See accompanying notes.
F-17
<PAGE>
ARDEN PREDECESSORS
COMBINED STATEMENTS OF OWNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 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........................................................... 2,680
Owners' distributions........................................................... (460)
Net income - 1993............................................................... 655
---------
Balance at December 31, 1993...................................................... 2,722
Owners' contributions........................................................... 9,452
Owners' distributions........................................................... (1,389)
Net income - 1994............................................................... 1,058
---------
Balance at December 31, 1994...................................................... 11,843
Owners' contributions........................................................... 7,427
Owners' distributions........................................................... (10,578)
Net (loss) - 1995............................................................... (576)
---------
Balance at December 31, 1995...................................................... 8,116
Owners' contributions (unaudited)............................................... 2,500
Owners' distributions (unaudited)............................................... (948)
Net (loss) - six months ended June 30, 1996 (unaudited)......................... (2,138)
---------
Balance at June 30, 1996 (unaudited).............................................. $ 7,530
---------
---------
</TABLE>
See accompanying notes.
F-18
<PAGE>
ARDEN PREDECESSORS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS FOR THE YEARS ENDED DECEMBER
ENDED JUNE 30, 31,
------------------ ----------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income..................................................... $ (2,138) $ 310 $ (576) $ 1,058 $ 655
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Equity in net loss (income) of noncombined entities............... 94 (108) 116 (201) (4)
(Loss) income allocable to minority interests..................... (344) 7 1 (1) --
Depreciation and amortization..................................... 3,036 638 1,898 1,143 499
Amortization of loan costs and fees............................... 102 94 211 21 1
(Increase) decrease in rents and other receivables................ (1,482) (58) (1,074) 198 (98)
Increase in deferred rents........................................ (1,218) (247) (672) (746) (360)
Increase in prepaid financing and leasing costs................... (575) (70) (633) (582) (271)
(Increase) decrease in prepaid expenses and other assets.......... (1,709) 266 (947) (428) (21)
Increase (decrease) in accounts payable and accrued expenses...... 1,328 (501) 2,501 267 582
Increase in deferred interest..................................... 4,434 23 884 -- --
Increase in security deposits..................................... 485 104 1,121 105 203
-------- -------- -------- -------- --------
Net cash provided by operating activities............................. 2,013 458 2,830 834 1,186
-------- -------- -------- -------- --------
INVESTING ACTIVITIES
Acquisitions and improvements to commercial office properties......... (96,827) (9,466) (127,663) (10,622) (25,885)
Decrease (increase) in investments in noncombined entities............ -- 3,888 4,305 (7,299) (80)
-------- -------- -------- -------- --------
Net cash used in investing activities................................. (96,827) (5,578) (123,358) (17,921) (25,965)
-------- -------- -------- -------- --------
FINANCING ACTIVITIES
Proceeds from mortgage loans.......................................... 100,092 10,125 142,501 8,139 24,058
Repayments of mortgage loans.......................................... (4,238) (30) (7,060) -- --
Proceeds from unsecured lines of credit............................... 3,657 1,316 3,310 1,240 298
Repayments of unsecured lines of credit............................... (2,003) (1,275) (3,244) (791) (250)
(Increase) decrease in restricted cash................................ (5,085) (1,113) (11,649) 94 (694)
Contributions from minority interests................................. 1,000 -- -- 100 --
Distributions to minority interests................................... (38) -- -- -- --
Owners' contributions................................................. 2,500 1,474 7,427 9,452 2,680
Owners' distributions................................................. (948) (5,947) (10,578) (1,389) (460)
-------- -------- -------- -------- --------
Net cash provided by financing activities............................. 94,937 4,550 120,707 16,845 25,632
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents.................. 123 (570) 179 (242) 853
Cash and cash equivalents at beginning of period...................... 790 611 611 853 --
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period............................ $ 913 $ 41 $ 790 $ 611 $ 853
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Cash paid during the period for interest, net of interest
capitalized......................................................... $ 9,640 $ 1,367 $ 4,022 $ 1,547 $ 521
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
See accompanying notes.
F-19
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
The entities below are currently engaged in owning, acquiring, managing,
leasing and renovating office properties in Southern California. Substantial
ownership interests in the entities (the "Arden Predecessors") that own
interests in the properties are held by Richard Ziman, Victor Coleman, Arthur
Gilbert and their affiliates consisting of related individuals and entities
controlled by them.
The partners and members of the Arden Predecessors, which collectively
represent the "Participants", will, concurrently with a proposed public
offering, enter into a series of transactions with Arden Realty, Inc., a
Maryland corporation, to form a real estate investment trust (the "REIT") to
continue and expand the business of the Arden Predecessors. All of the
properties owned by the entities (the "Properties") have been managed by Arden
Realty Group, Inc., a California corporation, since their acquisition by the
Arden Predecessors.
The properties and entities are all managed by Messrs. Ziman and Coleman. In
connection with the proposed offering, in those instances where the financial
interests held by Messrs. Ziman, Coleman, Gilbert and their affiliates are also
controlling interests, the entities have been combined in the accompanying
financial statements. Minority interests have been recorded for those entities
that the affiliated Participants control but are not wholly-owned. Where
controlling interests are not held by these affiliated Participants, the
entities are accounted for as investments in noncombined entities utilizing
equity accounting. Although the affiliated Participants own a 77.5% interest in
5000 Spring Associates Tenancy in Common they do not have the unilateral right
to refinance the debt on the property. As a result, the affiliated Participants
have accounted for this investment utilizing equity accounting.
<TABLE>
<CAPTION>
PREDECESSORS
- -----------------------------------------------------------------------------------------------------------------
ENTITY NAME PROPERTY NAME CITY ACQUISITION DATE
- --------------------------------------- ---------------------------------- ------------------ ----------------
<S> <C> <C> <C>
COMBINED ENTITIES
- -----------------------------------------------------------------------------------------------
Arden Realty Group, Inc., a California
corporation Operating Management Company -- --
Century Center Tenancy in Common Century Park Center Los Angeles March 1993
1950 Sawtelle Associates, L.P. 1950 Sawtelle Los Angeles June 1995
Arden LAOP IV, LLC 70 South Lake Pasadena November 1995
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 9) 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 July 1996
INVESTMENTS IN NONCOMBINED ENTITIES
- -----------------------------------------------------------------------------------------------
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
222 Harbor Associates, LLC Anaheim City Centre Anaheim November 1994
425 West Broadway Glendale December 1994
5000 Spring Associates Tenancy in
Common 5000 East Spring Long Beach December 1994
</TABLE>
F-20
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION (CONTINUED)
<TABLE>
<CAPTION>
PREDECESSORS
- -----------------------------------------------------------------------------------------------------------------
ENTITY NAME PROPERTY NAME CITY ACQUISITION DATE
- --------------------------------------- ---------------------------------- ------------------ ----------------
REIT ACQUISITION PROPERTIES
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -- 303 Glenoaks Blvd. Burbank To be acquired
- -- 12501 East Imperial Highway Norwalk To be acquired
</TABLE>
All significant balances and transactions between the Arden Predecessors
have been eliminated in the combined financial statements.
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 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 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.
The transfer of the properties and operating interests of Messrs. Ziman,
Coleman, Gilbert and their affiliates to the Operating Partnership for cash or
ownership units in the Operating Partnership will be accounted for at the
historical cost of their interests in the Arden Predecessors similar to a
pooling of interests. All transfers by nonaffiliates will be accounted for at
the fair value of the ownership units issued and/or cash consideration paid.
2. SUMMARY OF OTHER 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. During
1995, the Arden Predecessors 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
F-21
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF OTHER SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 been determined 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 term 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
Prepaid leasing costs are amortized on a straight-line basis over the term
of the related lease.
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 with loan to value ratios in excess of conforming loans generally
offered by financial institutions. The loans provide for variable indexed rates
and, in most cases, significant additional interest due at maturity.
Accordingly, management believes it is not practical to determine fair values
due to the lack of availability of current market information on terms,
including information on appropriate discount rates for computing discounted
cash flows, of 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 combined and noncombined 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 operations of a group of companies and partnerships.
F-22
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF OTHER SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM STATEMENTS
The combined financial statements as of June 30, 1996 and for the six months
ended June 30, 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
The commercial office properties were acquired from nonaffiliated third
parties and consist of office buildings and related parking facilities, as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land................................................................... $ 24,216 $ 9,789
Buildings.............................................................. 125,252 23,313
Building improvements.................................................. 12,896 1,358
Tenant improvements.................................................... 1,806 2,047
---------- ---------
164,170 36,507
Accumulated depreciation............................................... (3,296) (1,530)
---------- ---------
$ 160,874 $ 34,997
---------- ---------
---------- ---------
</TABLE>
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 $8,000,
$265,000, and $319,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
All commercial office properties are encumbered by mortgages (Note 5).
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................................................... $41,928,000
1997................................................... 37,636,000
1998................................................... 31,743,000
1999................................................... 28,054,000
2000................................................... 23,069,000
Thereafter............................................. 64,872,000
</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 4811 Airport Plaza Drive and 4900/10 Airport Plaza Drive
from the city of Long Beach.
F-23
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. COMMERCIAL OFFICE PROPERTIES (CONTINUED)
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................................................... $1,294,000
1997................................................... 1,297,000
1998................................................... 1,297,000
1999................................................... 1,340,000
2000................................................... 942,000
Thereafter............................................. 60,307,000
</TABLE>
4. INVESTMENTS IN NONCOMBINED ENTITIES
The following are the Arden Predecessors' investments in various entities
which own commercial office properties in which Messrs. Ziman, Coleman, Gilbert
and their affiliates do not own controlling financial interests. These
investments are accounted for utilizing the equity method of accounting. Under
such accounting method, the net equity investment of the Arden Predecessors is
reflected on the combined balance sheets, and the combined statements of
operations include the Arden Predecessors' share of net income or loss from the
entities. The Arden Predecessors' stated ownership interest in each entity is as
follows:
<TABLE>
<CAPTION>
ARDEN PREDECESSORS'
ENTITY OWNERSHIP %
- -------------------------------------------------------------------------- ---------------------
<S> <C>
Bristol Encino Associates, LLC............................................ 20.9%
222 Harbor Associates, LLC................................................ 26.3%
Beverly Ventura Associates, L.P........................................... 50.0%
5000 Spring Associates Tenancy in Common.................................. 77.5%
</TABLE>
Condensed combined balance sheets and operating information is presented
below for all noncombined entities.
CONDENSED COMBINED BALANCE SHEETS OF NONCOMBINED ENTITIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
JUNE 30,
1996
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Assets:
Commercial office properties, net........................ $ 91,555 $ 91,208 $ 71,158
Other assets............................................. 6,273 7,220 3,389
----------- --------- ---------
Total assets........................................... $ 97,828 $ 98,428 $ 74,547
----------- --------- ---------
----------- --------- ---------
Liabilities and owners' equity:
Mortgage loans payable................................... $ 86,420 $ 85,545 $ 61,487
Other liabilities........................................ 2,506 3,248 1,445
Arden Predecessors' equity............................... 3,069 3,163 7,583
Other owners' equity..................................... 5,833 6,472 4,032
----------- --------- ---------
Total liabilities and owners' equity................... $ 97,828 $ 98,428 $ 74,547
----------- --------- ---------
----------- --------- ---------
</TABLE>
F-24
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS IN NONCOMBINED ENTITIES (CONTINUED)
CONDENSED COMBINED STATEMENTS OF OPERATIONS OF NONCOMBINED ENTITIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue....................................... $ 8,985 $ 8,355 $ 17,720 $ 7,736 $ 132
--------- --------- --------- --------- ---------
Expenses:
Property operating expenses................. 3,728 3,369 7,758 3,331 36
Interest.................................... 4,317 3,777 8,243 3,436 26
Depreciation and amortization............... 1,673 1,257 2,475 1,041 30
--------- --------- --------- --------- ---------
Total expenses............................ 9,718 8,403 18,476 7,808 92
--------- --------- --------- --------- ---------
Net (loss) income......................... $ (733) $ (48) $ (756) $ (72) $ 40
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
In 1994, the noncombined entities incurred losses totalling $466,000 on
Beverly Atrium and Woodland Hills Financial as a result of an earthquake in Los
Angeles, California. This amount is included in property operating expenses.
The significant accounting policies used by the noncombined entities are
similar to those used by the Arden Predecessors.
COMMERCIAL OFFICE PROPERTIES OF NONCOMBINED ENTITIES
The commercial office properties consist of office buildings and related
parking facilities, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................................... $ 16,229 $ 12,709
Buildings............................................................... 73,416 58,546
Building Improvements................................................... 1,960 10
Tenant Improvements..................................................... 2,957 939
--------- ---------
94,562 72,204
Accumulated Depreciation................................................ (3,354) (1,046)
--------- ---------
$ 91,208 $ 71,158
--------- ---------
--------- ---------
</TABLE>
MORTGAGE LOANS PAYABLE OF NONCOMBINED ENTITIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
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. Unpaid principal and interest of $22,283,000 is due on December
31, 1998. The remaining balance of $15,571,000 is due on December 31, 2000. $ 37,854,000 $ 36,747,000
</TABLE>
F-25
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENTS IN NONCOMBINED ENTITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
MORTGAGE LOANS DUE TO BANKS
Two mortgage loans, dated March 15, 1995, secured by two cross-collateralized
first trust deeds on real property, bearing interest at LIBOR plus 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 borrower had recorded $172,000 of
additional interest, resulting in an effective interest rate of 11.5%. The
borrower is required to maintain a debt service coverage ratio, as defined in
the Loan Agreement, of 1.20:1.0. 22,351,000 --
A mortgage loan, dated December 23, 1994, secured by a first trust deed,
$12.09 million of the balance bearing interest at LIBOR plus 3.75% or a
periodic fixed rate, the remaining $2.79 million bearing interest at LIBOR
plus 4.0% at the option of the borrower. 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 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 $ 85,545,000 $ 61,487,000
------------- -------------
------------- -------------
</TABLE>
5. 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 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
</TABLE>
F-26
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. MORTGAGE LOANS PAYABLE AND UNSECURED LINES OF CREDIT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
-------------- -------------
<S> <C> <C>
A mortgage loan, dated June 13, 1995, secured by a first trust deed on real
property, bearing interest at LIBOR plus 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 paid 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 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
plus 0.25%. 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
-------------- -------------
Total mortgage loans payable $ 167,638,000 $ 32,196,000
-------------- -------------
-------------- -------------
</TABLE>
The LIBOR rate was 5.72% at December 31, 1995.
One mortgage loan provides for additional funds to be drawn for qualified
and approved tenant improvements, leasing commissions and capital improvements.
The amount of funds available for disbursement from this lending institution is
$3,500,000. As of December 31, 1995, total funds drawn for these purposes was
$2,713,000, and the undisbursed portion was $787,000.
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.
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.................................................. 10,975,000
1998.................................................. 132,836,000
1999.................................................. 901,000
2000.................................................. 734,000
Thereafter............................................ 21,515,000
-----------
$168,451,000
-----------
-----------
</TABLE>
F-27
<PAGE>
ARDEN PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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
exceed 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 fees of $95,000, $213,000 and
$137,000 for 1995, 1994, and 1993, respectively, from various affiliated
partnerships.
Included in accounts receivable are $28,000, $58,000 and $56,000 at December
31, 1995, 1994, and 1993, respectively, from various affiliated partnerships.
8. EARTHQUAKE LOSSES
During 1994, the Arden Predecessors incurred losses totalling $136,000 on
Century Park Center as a result of an earthquake in Los Angeles, California.
This amount is included in property operating and maintenance expenses.
9. PROPERTY ACQUISITIONS
Subsequent to December 31, 1995, the Arden Predecessors purchased additional
properties from nonaffiliated third parties for an aggregate purchase price of
$94,665,000. The Participants incurred $100,000,000 of debt from an affiliate of
Lehman Brothers, Inc. as a result of financing the purchase, of which $5,335,000
was retained in a restricted cash account to be used for tenant improvements,
capital improvements and leasing commissions.
F-28
<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
COMBINED ENTITIES FOOTAGE LAND IMPROVEMENTS IMPROVEMENTS (4) LAND IMPROVEMENTS
- ----------------------------------------------- --------- --------- ------------- ----------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
PROPERTY NAME
- -----------------------------------------------
Century Park Center............................ 243,404 $ 7,189 $ 16,742 $ 4,472 $ 7,189 $ 21,214
1950 Sawtelle.................................. 103,772 1,988 7,263 107 1,988 7,370
70 South Lake.................................. 100,133 1,360 9,097 -- 1,360 9,097
New Wilshire................................... 202,704 1,200 19,902 4 1,200 19,906
Calabasas Commerce Center...................... 123,121 1,262 9,725 -- 1,262 9,725
Westwood Terrace............................... 135,943 2,103 16,850 37 2,103 16,887
Skyview Center................................. 391,675 6,514 33,701 -- 6,514 33,701
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
--------- --------- ------------- ------- --------- -------------
1,678,595 $ 24,216 $ 133,799 $ 6,155 $ 24,216 $ 139,954
--------- --------- ------------- ------- --------- -------------
--------- --------- ------------- ------- --------- -------------
NONCOMBINED ENTITIES
- -----------------------------------------------
PROPERTY NAME
- -----------------------------------------------
Beverly Atrium................................. 61,314 $ 4,127 $ 11,513 $ 600 $ 4,127 $ 12,113
Woodland Hills Financial....................... 224,955 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............................. 174,841 1,700 17,189 571 1,700 17,760
Anaheim City Centre............................ 175,391 515 11,199 240 515 11,439
425 West Broadway.............................. 71,589 1,500 4,436 187 1,500 4,623
5000 East Spring............................... 163,358 -- 11,658 707 -- 12,365
--------- --------- ------------- ------- --------- -------------
955,462 $ 16,228 $ 74,129 $ 4,205 $ 16,228 $ 78,334
--------- --------- ------------- ------- --------- -------------
--------- --------- ------------- ------- --------- -------------
<CAPTION>
ACCUMULATED YEAR
COMBINED ENTITIES TOTAL DEPRECIATION (1) ENCUMBRANCES BUILT
- ----------------------------------------------- --------- ----------------- ------------- -----
<S> <C> <C> <C> <C>
PROPERTY NAME
- -----------------------------------------------
Century Park Center............................ $ 28,403 $ 2,357 $ 25,438 1972
1950 Sawtelle.................................. 9,358 131 10,200 1988
70 South Lake.................................. 10,457 33 11,000(3) 1982
New Wilshire................................... 21,106 72 22,000(3) 1989
Calabasas Commerce Center...................... 10,987 42 11,800(3) 1990
Westwood Terrace............................... 18,990 67 21,000(3) 1988
Skyview Center................................. 40,215 128 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
--------- ------ -------------
$ 164,170 $ 3,296 $ 167,638
--------- ------ -------------
--------- ------ -------------
NONCOMBINED ENTITIES
- -----------------------------------------------
PROPERTY NAME
- -----------------------------------------------
Beverly Atrium................................. $ 16,240 $ 790 $ 15,570(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
Anaheim City Centre............................ 11,954 437 9,880 1986
425 West Broadway.............................. 6,123 163 5,000 1984
5000 East Spring............................... 12,365 360 10,460 1989
--------- ------ -------------
$ 94,562 $ 3,354 $ 85,545
--------- ------ -------------
--------- ------ -------------
</TABLE>
(1) The depreciable life for buildings and improvements ranges from ten 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-29
<PAGE>
A summary of activity of combined 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........................................ $ 36,507 $ 25,885 $ --
Improvements.......................................................... 2,245 1,955 1,954
Acquisition of land, building and improvements........................ 125,418 8,667 23,931
---------- --------- ---------
Balance at end of period.............................................. $ 164,170 $ 36,507 $ 25,885
---------- --------- ---------
---------- --------- ---------
<CAPTION>
ACCUMULATED DEPRECIATION
--------------------------------
DECEMBER 31,
--------------------------------
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period............................................... $ 1,530 $ 481 $ --
Depreciation expense......................................................... 1,766 1,049 481
--------- --------- ---------
Balance at end of period..................................................... $ 3,296 $ 1,530 $ 481
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Arden Realty, Inc.
We have audited the accompanying statement of revenue and certain expenses
of 16000 Ventura for the period January 1, 1995 to March 15, 1995. This
statement of revenue and certain expenses is the responsibility of the
management of 16000 Ventura. Our responsibility is to express an opinion on the
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 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 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, Inc. Certain expenses (described in Note 1) that would not be
comparable to those resulting from the proposed future operations of the
property are excluded and the statement is not intended to be a complete
presentation of the revenue and expenses of the property.
In our opinion, the statement of revenue and certain expenses presents
fairly, in all material respects, the revenue and certain expenses, as defined
above, of 16000 Ventura for the period January 1, 1995 to March 15, 1995.
Ernst & Young LLP
Los Angeles, California
April 10, 1996
F-31
<PAGE>
16000 VENTURA
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
FOR THE PERIOD JANUARY 1, 1995 TO MARCH 15, 1995
<TABLE>
<S> <C>
REVENUE:
Rental............................................................................. $ 674
Tenant reimbursements.............................................................. 24
Parking............................................................................ 36
Other.............................................................................. 7
---------
Total revenue.................................................................... 741
---------
CERTAIN EXPENSES:
Property operating and maintenance................................................. 192
Real estate taxes.................................................................. 77
---------
Total certain expenses........................................................... 269
---------
Excess of revenue over certain expenses........................................ $ 472
---------
---------
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-32
<PAGE>
16000 VENTURA
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE PERIOD JANUARY 1, 1995 TO MARCH 15, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying statement of revenue and certain expenses includes the
operations of 16000 Ventura, a 174,841 square foot commercial office property
located in Encino, California. 16000 Ventura was acquired by Bristol Encino
Associates, LLC on March 15, 1995 for $18,889,000. Substantial ownership
interests in the entity that owns the property are held by Richard Ziman, Victor
Coleman, Arthur Gilbert, and related individuals and entities controlled by
them, (the "Arden Predecessors"). The Arden Predecessors, along with other
unrelated parties which collectively represent the "Participants" will,
concurrently with a proposed public offering, enter into a series of
transactions with Arden Realty, Inc., a Maryland corporation, to form a real
estate investment trust (the "REIT") to continue and expand the business of the
Arden Predecessors. 16000 Ventura has been managed by Arden Realty Group, Inc.,
a California corporation, since its acquisition by the Arden Predecessors. 16000
Ventura was purchased from a nonaffiliated third party.
BASIS OF PRESENTATION
The accompanying statement was 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, Inc., a Maryland
corporation (the "Company").
The accompanying statement is not representative of the actual operations
for the period presented as certain expenses that may not be comparable to the
expenses expected to be incurred by the Company in the future operations of
16000 Ventura 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 16000 Ventura.
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 amount of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
2. COMMERCIAL OFFICE PROPERTIES
The future minimum lease payments to be received under existing operating
leases as of March 15, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................................ $2,790,000
1997............................................................ 2,132,000
1998............................................................ 1,275,000
1999............................................................ 602,000
2000............................................................ 282,000
Thereafter...................................................... --
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant reimbursements of operating expenses.
Office space in 16000 Ventura 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-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Arden Realty, Inc.
We have audited the accompanying statement of revenue and certain expenses
of 1950 Sawtelle for the period January 1, 1995 to June 14, 1995. This statement
of revenue and certain expenses is the responsibility of the management of 1950
Sawtelle. Our responsibility is to express an opinion on the 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 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 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, Inc. Certain expenses (described in Note 1) that would not be
comparable to those resulting from the proposed future operations of the
property are excluded and the statement is not intended to be a complete
presentation of the revenue and expenses of the property.
In our opinion, the statement of revenue and certain expenses presents
fairly, in all material respects, the revenue and certain expenses, as defined
above, of 1950 Sawtelle for the period January 1, 1995 to June 14, 1995.
Ernst & Young LLP
Los Angeles, California
April 10, 1996
F-34
<PAGE>
1950 SAWTELLE
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
FOR THE PERIOD JANUARY 1, 1995 TO JUNE 14, 1995
<TABLE>
<S> <C>
REVENUE:
Rental............................................................................. $ 847
Tenant reimbursements.............................................................. 33
Parking............................................................................ 68
---------
Total revenue.................................................................... 948
---------
CERTAIN EXPENSES:
Property operating and maintenance................................................. 204
Real estate taxes.................................................................. 83
---------
Total certain expenses........................................................... 287
---------
Excess of revenue over certain expenses........................................ $ 661
---------
---------
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-35
<PAGE>
1950 SAWTELLE
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE PERIOD JANUARY 1, 1995 TO JUNE 14, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying statement of revenue and certain expenses includes the
operations of 1950 Sawtelle, a 103,772 square foot commercial office property
located in Los Angeles, California. 1950 Sawtelle was acquired by 1950 Sawtelle
Associates, L.P. on June 14, 1995 for $9,251,000. Substantial ownership
interests in the entity that owns the property are held by Richard Ziman, Victor
Coleman, and related individuals and entities controlled by them (the "Owners").
The Owners of this property and other affiliates (the "Arden Predecessors") and
other unrelated parties, which collectively represent the "Participants," will,
concurrently with a proposed public offering, enter into a series of
transactions with Arden Realty, Inc., a Maryland corporation, to form a real
estate investment trust (the "REIT") to continue and expand the business of the
Arden Predecessors. 1950 Sawtelle has been managed by Arden Realty Group, Inc.,
a California corporation, since its acquisition by the Arden Predecessors. 1950
Sawtelle was purchased from a nonaffiliated third party.
BASIS OF PRESENTATION
The accompanying statement was 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, Inc., a Maryland
corporation (the "Company").
The accompanying statement is not representative of the actual operations
for the period presented as certain expenses that may not be comparable to the
expenses expected to be incurred by the Company in the future operations of 1950
Sawtelle 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 1950 Sawtelle.
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 amount of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
2. COMMERCIAL OFFICE PROPERTIES
The future minimum lease payments to be received under existing operating
leases as of June 14, 1995 are as follows:
<TABLE>
<S> <C>
1996............................................................ $1,568,000
1997............................................................ 1,338,000
1998............................................................ 610,000
1999............................................................ 173,000
2000............................................................ 110,000
Thereafter...................................................... 136,000
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant reimbursements of operating expenses.
Office space in 1950 Sawtelle 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, Inc.
We have audited the accompanying combined statement of revenue and certain
expenses of Westwood Terrace, Skyview Center, 4811 and 4900/10 Airport Plaza
Drive and New Wilshire for the period December 1, 1994 to November 22, 1995.
This combined statement of revenue and certain expenses is the responsibility of
the management of Westwood Terrace, Skyview Center, 4811 and 4900/10 Airport
Plaza Drive and New Wilshire. 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 rulesand regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Arden Realty, 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 Westwood Terrace, Skyview Center, 4811 and
4900/10 Airport Plaza Drive and New Wilshire for the period December 1, 1994 to
November 22, 1995.
Ernst & Young LLP
Los Angeles, California
September 10, 1996
F-37
<PAGE>
WESTWOOD TERRACE, SKYVIEW CENTER,
4811 AND 4900/10 AIRPORT PLAZA DRIVE
AND NEW WILSHIRE
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
FOR THE PERIOD DECEMBER 1, 1994 TO NOVEMBER 22, 1995
<TABLE>
<S> <C>
REVENUE:
Rental........................................................................... $ 12,675
Tenant reimbursements............................................................ 693
Parking.......................................................................... 2,162
Other............................................................................ 805
---------
Total revenue.................................................................... 16,335
---------
CERTAIN EXPENSES:
Property operating and maintenance............................................... 4,208
Real estate taxes................................................................ 1,505
Insurance........................................................................ 416
Ground rent...................................................................... 169
Bad debts........................................................................ 66
Other............................................................................ 107
---------
Total certain expenses........................................................... 6,471
---------
Excess of revenue over certain expenses........................................ $ 9,864
---------
---------
</TABLE>
See accompanying notes to combined statement of revenue and certain expenses.
F-38
<PAGE>
WESTWOOD TERRACE, SKYVIEW CENTER,
4811 AND 4900/10 AIRPORT PLAZA DRIVE
AND NEW WILSHIRE
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE PERIOD DECEMBER 1, 1994 TO NOVEMBER 22, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying combined statement of revenue and certain expenses includes
the operations of five commercial office properties located in Southern
California which were acquired by Arden LAOP IV, LLC on November 22, 1995 from
nonaffiliated third parties. The ownership interests in the entity that owns the
properties are held by Richard Ziman, Victor Coleman, Arthur Gilbert and related
individuals and entities controlled by them (the "Arden Predecessors"). The
Arden Predecessors, along with other unrelated parties, which collectively
represent the "Participants," will, concurrently with a proposed public
offering, enter into a series of transactions with Arden Realty, Inc., a
Maryland corporation, to form a real estate investment trust (the "REIT") to
continue and expand the business of the Arden Predecessors. All of the
properties have been managed by Arden Realty Group, Inc., a California
corporation, since acquisition by the Arden Predecessors.
The properties are as follows:
<TABLE>
<CAPTION>
SOUTHERN APPROXIMATE
CALIFORNIA RENTABLE ACQUISITION
PROPERTY NAME LOCATION SQUARE FOOTAGE ACQUISITION DATE PRICE
- -------------------- ------------------ -------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Westwood Terrace Los Angeles 135,943 November 1995 $ 18,953,000
Skyview Center Los Angeles 391,675 November 1995 40,215,000
4811 and 4900/10
Airport Plaza Dr. Long Beach 272,013 November 1995 14,452,000
New Wilshire Los Angeles 202,704 November 1995 21,102,000
-------------- ----------------
1,002,335 $ 94,722,000
-------------- ----------------
-------------- ----------------
</TABLE>
BASIS OF PRESENTATION
The accompanying statement was 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, Inc., a Maryland
corporation (the "Company"). The accompanying statement was prepared on a
combined basis because the properties are all currently owned and managed by the
Arden Predecessors. There are no interproperty accounts to be eliminated.
The accompanying statement is 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
Westwood Terrace, Skyview Center, 4811 and 4900/10 Airport Plaza Drive and New
Wilshire 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 Westwood Terrace, Skyview Center, 4811
and 4900/10 Airport Plaza Drive and New Wilshire.
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 amount of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-39
<PAGE>
WESTWOOD TERRACE, SKYVIEW CENTER,
4811 AND 4900/10 AIRPORT PLAZA DRIVE
AND NEW WILSHIRE
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
FOR THE PERIOD DECEMBER 1, 1994 TO NOVEMBER 22, 1995
2. COMMERCIAL OFFICE PROPERTIES
The future minimum lease payments to be received under the existing
operating leases as of November 22, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................... $15,290,000
1997........................................................... 13,880,000
1998........................................................... 11,456,000
1999........................................................... 9,396,000
2000........................................................... 8,271,000
Thereafter..................................................... 24,817,000
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant reimbursements of operating expenses.
Office space in Westwood Terrace, Skyview Center, 4811 and 4900/10 Airport
Plaza Drive and New Wilshire 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>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Arden Realty, Inc.
We have audited the accompanying combined statement of revenue and certain
expenses of 70 South Lake and Calabasas Commerce Center for the period January
1, 1995 to November 22, 1995. This combined statement of revenue and certain
expenses is the responsibility of the management of 70 South Lake and Calabasas
Commerce Center. 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, 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 70 South Lake and Calabasas Commerce Center for
the period January 1, 1995 to November 22, 1995.
Ernst & Young LLP
Los Angeles, California
April 10, 1996
F-41
<PAGE>
70 SOUTH LAKE AND CALABASAS COMMERCE CENTER
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
FOR THE PERIOD JANUARY 1, 1995 TO NOVEMBER 22, 1995
<TABLE>
<CAPTION>
REVENUE:
<S> <C>
Rental............................................................................ $ 3,411
Tenant reimbursements............................................................. 401
Parking........................................................................... 150
Other............................................................................. 77
---------
Total revenue..................................................................... 4,039
---------
CERTAIN EXPENSES:
Property operating and maintenance................................................ 968
Real estate taxes................................................................. 232
Insurance......................................................................... 43
Other............................................................................. 10
---------
Total certain expenses............................................................ 1,253
---------
Excess of revenue over certain expenses......................................... $ 2,786
---------
---------
</TABLE>
See accompanying notes to combined statement of revenue and certain expenses.
F-42
<PAGE>
70 SOUTH LAKE AND CALABASAS COMMERCE CENTER
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The accompanying combined statement of revenue and certain expenses includes
the operations of two commercial office properties located in Southern
California which were acquired by Arden LAOP IV, LLC on November 22, 1995. The
ownership interests in the entity that owns the properties are held by Richard
Ziman, Victor Coleman, Arthur Gilbert and related individuals and entities
controlled by them (the "Arden Predecessors"). The Arden Predecessors, along
with other unrelated parties, which collectively represent the "Participants,"
will, concurrently with a proposed public offering, enter into a series of
transactions with Arden Realty, Inc. a Maryland corporation, to form a real
estate investment trust (the "REIT") to continue and expand the business of the
Arden Predecessors. All of the properties have been managed by Arden Realty
Group, Inc., a California corporation, since acquisition by the Arden
Predecessors. The properties were purchased from nonaffiliated third parties.
The properties are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
SOUTHERN RENTABLE
CALIFORNIA SQUARE ACQUISITION
PROPERTY NAME LOCATION FOOTAGE ACQUISITION DATE PRICE
- ------------------------------------- ----------- ------------ ---------------------- -------------
<S> <C> <C> <C> <C>
70 South Lake........................ Pasadena 100,133 November 22, 1995 $ 10,457,000
Calabasas Commerce Center............ Calabasas 123,121 November 22, 1995 10,987,000
------------ -------------
223,254 $ 21,444,000
------------ -------------
------------ -------------
</TABLE>
BASIS OF PRESENTATION
The accompanying statement was 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, Inc., a Maryland
corporation (the "Company"). The accompanying statement was prepared on a
combined basis because the properties are all currently owned and managed by the
Arden Predecessors. There are no interproperty accounts to be eliminated.
The accompanying statement is not representative of the actual operations
for the period presented as certain expenses that may not be comparable to the
expenses expected to be incurred by the Company in the future operations of 70
South Lake and Calabasas Commerce Center 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 70
South Lake and Calabasas Commerce Center.
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 amount of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-43
<PAGE>
70 SOUTH LAKE AND CALABASAS COMMERCE CENTER
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
2. COMMERCIAL OFFICE PROPERTIES
The future minimum lease payments to be received under existing operating
leases as of November 22, 1995 are as follows:
<TABLE>
<CAPTION>
1996............................................................. 3,150,000
<S> <C>
1997............................................................. 2,749,000
1998............................................................. 2,133,000
1999............................................................. 1,870,000
2000............................................................. 731,000
Thereafter....................................................... 1,968,000
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant reimbursements of operating expenses.
Office space in 70 South Lake and Calabasas Commerce Center 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-44
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Arden Realty, 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, 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-45
<PAGE>
1996 ACQUIRED PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1995
FOR THE 1996 ------------
INTERIM PERIOD
PRIOR TO
ACQUISITION
---------------
(UNAUDITED)
<S> <C> <C>
REVENUE
Rental............................................................................ $ 3,923 $ 19,391
Tenant reimbursements............................................................. 258 961
Parking........................................................................... 308 1,859
Other............................................................................. 144 350
------ ------------
Total revenue................................................................... 4,633 22,561
------ ------------
CERTAIN EXPENSES
Property operating and maintenance................................................ 1,065 5,401
Real estate taxes................................................................. 151 1,753
Insurance......................................................................... 135 521
Ground rent....................................................................... 138 1,067
Bad debts......................................................................... -- 106
------ ------------
Total certain expenses.......................................................... 1,489 8,848
------ ------------
Excess of revenue over certain expenses....................................... $ 3,144 $ 13,713
------ ------------
------ ------------
</TABLE>
See accompanying notes to combined statements of revenue and certain expenses.
F-46
<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 in 1996 (the "1996 Acquired Properties") from
nonaffiliated third parties by entities in which substantial interests are owned
by Richard Ziman, Victor Coleman, Arthur Gilbert and related individuals and
controlled by them (the "Arden Predecessors"). The properties were purchased for
cash utilizing funds from new debt financing. Two of the properties (400
Corporate Pointe and 5832 Bolsa) were acquired from a single seller. The Arden
Predecessors, along with other unrelated parties, which collectively represent
the "Participants," will, concurrently with a proposed public offering, enter
into a series of transactions with Arden Realty, Inc., a Maryland corporation,
to form a real estate investment trust (the "REIT") to continue and expand the
business of the Arden Predecessors. All of the properties have been managed by
Arden Realty Group, Inc., a California corporation, since their acquisition by
the Arden Predecessors.
The 1996 Acquired Properties are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
RENTABLE
SOUTHERN CALIFORNIA SQUARE ACQUISITION ACQUISITION
PROPERTY NAME LOCATION FOOTAGE DATE PRICE
- ------------------------ -------------------- ------------ ---------------- --------------
<S> <C> <C> <C> <C>
5832 Bolsa Huntington Beach 49,355 February 1996 $ 4,654,000
400 Corporate Pointe Culver City 164,598 February 1996 21,206,000
9665 Wilshire Beverly Hills 158,684 February 1996 29,331,000
Imperial Bank Tower San Diego 540,413 February 1996 39,474,000
100 Broadway Long Beach 191,727 July 1, 1996 19,799,000
------------ --------------
1,104,777 $ 114,464,000
------------ --------------
------------ --------------
</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, Inc., a Maryland
corporation (the "Company"). The accompanying statements were prepared on a
combined basis because the properties are controlled by the Arden Predecessors.
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.
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.
F-47
<PAGE>
1996 ACQUIRED PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM STATEMENT
The combined interim financial statements for the 1996 interim period
includes the revenue and certain expenses for the period prior to acquisition by
the Arden Predecessors. 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.
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-48
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Arden Realty, 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, 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-49
<PAGE>
ACQUISITION PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED FOR THE YEAR
JUNE 30, ENDED
-------------------- DECEMBER 31,
1996 1995 1995
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUE
Rental........................................................................ $ 2,101 $ 2,240 $ 4,280
Tenant reimbursements......................................................... 58 26 54
Parking....................................................................... 87 55 133
Other......................................................................... 174 31 85
--------- --------- ------
Total revenue............................................................... 2,420 2,352 4,552
--------- --------- ------
CERTAIN EXPENSES
Property operating and maintenance............................................ 717 844 1,606
Real estate taxes............................................................. 190 205 412
Insurance..................................................................... 114 78 151
Bad debts..................................................................... -- 2 18
Other......................................................................... -- 20 41
--------- --------- ------
Total certain expenses...................................................... 1,021 1,149 2,228
--------- --------- ------
Excess of revenue over certain expenses................................... $ 1,399 $ 1,203 $ 2,324
--------- --------- ------
--------- --------- ------
</TABLE>
See accompanying notes to combined statements of revenue and certain expenses.
F-50
<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, Inc., a Maryland corporation (the "Company") from the same nonaffiliated
third party, concurrently with the consummation of a proposed initial public
offering of the Common Stock of the Company.
The Acquisition Properties are as follows:
<TABLE>
<CAPTION>
SOUTHERN APPROXIMATE
CALIFORNIA RENTABLE ACQUISITION
PROPERTY NAME LOCATION SQUARE FOOTAGE PRICE
- ---------------------- ------------------ -------------- -------------
<S> <C> <C> <C>
303 Glenoaks Blvd. Burbank 175,449 $ 24,854,000
12501 East Imperial Norwalk 122,175 9,978,000
------- -------------
297,624 $ 34,832,000
------- -------------
------- -------------
</TABLE>
BASIS OF PRESENTATION
The accompanying statements have been 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
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 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 six months
ended June 30, 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-51
<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-52
<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....................................... 17
The Company........................................ 29
Business and Growth Strategies..................... 31
Use of Proceeds.................................... 35
Distributions...................................... 36
Capitalization..................................... 42
Dilution........................................... 43
Selected Combined Financial Information............ 44
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 47
Southern California Economy and Office Markets..... 56
Business and Properties............................ 61
Office Submarkets and Property Information......... 72
Management......................................... 94
Structure and Formation of the Company............. 100
Policies With Respect to Certain Transactions...... 104
Certain Transactions............................... 107
Partnership Agreement.............................. 108
Principal Stockholders............................. 111
Capital Stock...................................... 112
Certain Provisions of Maryland law and the
Company's Charter and Bylaws..................... 115
Shares Available for Future Sale................... 118
Federal Income Tax Consequences.................... 119
ERISA Considerations............................... 130
Underwriting....................................... 133
Experts............................................ 134
Legal Matters...................................... 135
Additional Information............................. 135
Glossary........................................... 136
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.
18,847,500 SHARES
ARDEN REALTY, INC.
COMMON STOCK
-------------------
PROSPECTUS
, 1996
---------------------
LEHMAN BROTHERS
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
A.G. EDWARDS & SONS, INC.
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
LEGG MASON WOOD WALKER
INCORPORATED
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......... $ 150,344.00
NASD Fee...................................................... $ 30,500.00
New York Stock Exchange Listing Fee........................... $ 84,600.00
Transfer Agent and Registrar's Fees........................... $ 20,000.00
Printing and Engraving Expenses............................... $ 300,000.00
Legal Fees and Expenses (other than Blue Sky)................. $1,500,000.00
Accounting Fees and Expenses.................................. $1,800,000.00
Blue Sky Fees and Expenses.................................... $ 50,000.00
Miscellaneous Expenses........................................ $ 404,556.00
------------
Total..................................................... $4,340,000.00
------------
------------
</TABLE>
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 2,889,071 OP Units
will be issued to the following 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: Richard S. Ziman
(556,991 OP Units), Victor J. Coleman (325,992 OP Units), Michele Byer (51,032
OP Units), Jonathan Glaser (4,876 OP Units), Anaheim Properties Company (34,138
OP Units), Arden Century Associates (41,992 OP Units), Arden LAOP Two, LLC
(43,200 OP Units), Arden Sawtelle Associates (38,374 OP Units), Broad Base
Investments Two, LLC (37,518 OP Units), Coleman Enterprises, Inc. (84,108 OP
Units), Gilbert Trust (436,601 OP Units), Intercity Building Associates (39,801
OP Units), Metropolitan Falls Partners (68,918 OP Units), Montour Realty
Associates (213,710 OP Units), NAMIZ, Inc. (formerly Arden Realty Group, Inc., a
California corporation) (775,196 OP Units) and Ziman Realty Partners (136,674 OP
Units).
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
II-1
<PAGE>
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
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, INC.
Pro Forma Condensed Combined Financial Statements (Unaudited)
Pro Forma Condensed Combined Balance Sheet as of June 30, 1996
(Unaudited)
Pro Forma Condensed Combined Statement of Operations for the Six
Months Ended June 30, 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 and June 30, 1996 (Unaudited)
Notes to Balance Sheet
ARDEN PREDECESSORS
Combined Financial Statements:
Report of Independent Auditors
Combined Balance Sheets as of June 30, 1996 (Unaudited) and
December 31, 1995 and 1994
Combined Statements of Operations for the Six Months ended June
30, 1996 and 1995 (Unaudited) and the Years Ended December 31,
1995, 1994 and 1993
II-2
<PAGE>
Combined Statements of Owners' Equity for the Six Months ended
June 30, 1996 (Unaudited) and the Years Ended December 31, 1995,
1994 and 1993
Combined Statements of Cash Flows for the Six Months ended June
30, 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
16000 VENTURA
Statement of Revenue and Certain Expenses:
Report of Independent Auditors
Statement of Revenue and Certain Expenses for the Period January
1, 1995 to March 15, 1995
Notes to Statement of Revenue and Certain Expenses
1950 SAWTELLE
Statement of Revenue and Certain Expenses:
Report of Independent Auditors
Statement of Revenue and Certain Expenses for the Period January
1, 1995 to June 14, 1995
Notes to Statement of Revenue and Certain Expenses
WESTWOOD TERRACE, SKYVIEW CENTER, 4811 AND 4900/10 AIRPORT PLAZA DRIVE
AND NEW WILSHIRE
Combined Statement of Revenue and Certain Expenses:
Report of Independent Auditors
Combined Statement of Revenue and Certain Expenses for the Period
December 1, 1994 to November 22, 1995
Notes to Combined Statement of Revenue and Certain Expenses
70 SOUTH LAKE AND CALABASAS COMMERCE CENTER
Combined Statement of Revenue and Certain Expenses:
Report of Independent Auditors
Combined Statement of Revenue and Certain Expenses for the Period
January 1, 1995 to
November 22, 1995
Notes to Combined Statement 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 1996
Interim Period Prior to Acquisition (Unaudited) and the Year End
December 31, 1995
Notes to Combined Statements of Revenue and Certain Expenses
II-3
<PAGE>
ACQUISITION PROPERTIES
Combined Statements of Revenue and Certain Expenses:
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for the Six
Months Ended June 30, 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* Form of Articles of Amendment and Restatement of the Company's Charter.
3.2* Bylaws of the Company.
3.3* Specimen of certificate representing shares of Common Stock.
5.1* Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of the
securities being registered.
8.1* Opinion of Latham & Watkins regarding tax matters.
10.1* Form of 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.
10.5* Commitment Letter regarding Mortgage Financing.
10.6* Employment Agreement between the Company and Mr. Ziman.
10.7* Employment Agreement between the Company and Mr. Coleman.
10.8* Employment Agreement between the Company and Ms. Laing.
10.9* Miscellaneous Rights Agreement among the Company, the Operating Partnership,
NAMIZ, Inc. and Mr. Ziman.
10.10* Ground lease for Imperial Bank Tower.
10.11* Ground lease for parking structure at Imperial Bank Tower.
10.12* Master Ground Lease for Long Beach Airport Business Park.
10.13* Ground lease for parking structure at the Anaheim City Centre.
10.14* Option Agreement with Broad Base Investments Two, LLC.
10.15* Option Agreement with CIC Equities, Inc.
10.16* Option Agreement with TJB Investments, Inc.
10.17* Contribution Agreement with Richard S. Ziman.
10.18* Contribution Agreement with Victor J. Coleman.
10.19* Contribution Agreement with Michele Byer.
10.20* Contribution Agreement with Arden Century Associates.
10.21* Contribution Agreement with Arden LAOP Two, LLC.
10.22* Contribution Agreement with Arden Sawtelle Associates.
10.23* Contribution Agreement with Coleman Enterprises, Inc.
10.24* Partnership Interest Contribution Agreement with Arthur Gilbert and Rosalinde
Gilbert 1982 Trust.
10.25* Contribution Agreement with Intercity Building Associates.
10.26* Contribution Agreement with Metropolitan Falls Partners.
10.27* Contribution Agreement with Montour Realty Associates.
10.28* Contribution Agreement with Ziman Realty Partners.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.29* Contribution Agreement with Arthur Gilbert and Rosalinde Gilbert 1982 Trust.
10.30* Contribution Agreement with Arden Realty Group, Inc.
10.31* Office Market Study Prepared by Cushman & Wakefield of California, Inc.
10.32* Contribution Agreement with Broad Base Investments Two, LLC.
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 Exhibit 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.
23.8* Consent of Jerry Asher.
23.9* Consent of Ballard Spahr Andrews and Ingersoll (contained in Exhibit 5.1)
24.* Power of Attorney.
27. Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
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-5
<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 Amendment No. 4 to 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 3rd day of
October, 1996.
ARDEN REALTY, INC.
By: /s/ RICHARD S. ZIMAN
-----------------------------------
Richard S. Ziman
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this Amendment No. 4 to
Registration Statement has been signed below by the following persons in the
capacities indicated on October 3, 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
/s/ DIANA M. LAING* Chief Financial Officer
- ----------------------------------- (Principal Financial
Diana M. Laing Officer)
Chief Accounting Officer
/s/ MICHELE BYER* and Secretary
- ----------------------------------- (Principal Accounting
Michele Byer Officer)
*By: /s/ RICHARD S.
ZIMAN
- -----------------------------------
Richard S. Ziman,
as attorney-in-fact
II-6
<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* Form of Articles of Amendment and Restatement of the Company's Charter.
3.2* Bylaws of the Company.
3.3* Specimen of certificate representing shares of Common Stock.
5.1* Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of the securities
being registered.
8.1* Opinion of Latham & Watkins regarding tax matters.
10.1* Form of 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.
10.5* 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* Employment Agreement between the Company and Ms. Laing.
10.9* Miscellaneous Rights Agreement among the Company, the Operating Partnership, NAMIZ, Inc.
and Mr. Ziman.
10.10* Ground lease for Imperial Bank Tower.
10.11* Ground lease for parking structure of Imperial Bank Tower.
10.12* Master Ground Lease for Long Beach Airport Business Park.
10.13* Ground lease for parking structure at the Anaheim City Centre.
10.14* Option Agreement with Broad Base Investments Two, LLC.
10.15* Option Agreement with CIC Equities, Inc.
10.16* Option Agreement with TJB Investments, Inc.
10.17* Contribution Agreement with Richard S. Ziman.
10.18* Contribution Agreement with Victor J. Coleman.
10.19* Contribution Agreement with Michele Byer.
10.20* Contribution Agreement with Arden Century Associates.
10.21* Contribution Agreement with Arden LAOP Two, LLC.
10.22* Contribution Agreement with Arden Sawtelle Associates.
10.23* Contribution Agreement with Coleman Enterprises, Inc.
10.24* Partnership Interest Contribution Agreement with Arthur Gilbert and Rosalinde Gilbert
1982 Trust.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. EXHIBIT NUMBERED PAGE
- --------- ---------------------------------------------------------------------------------------- ---------------------
10.25* Contribution Agreement with Intercity Building Associates.
<S> <C> <C>
10.26* Contribution Agreement with Metropolitan Falls Partners.
10.27* Contribution Agreement with Montour Realty Associates.
10.28* Contribution Agreement with Ziman Realty Partners.
10.29* Contribution Agreement with Arthur Gilbert and Rosalinde Gilbert 1982 Trust.
10.30* Contribution Agreement with Arden Realty Group, Inc.
10.31* Office Market Study Prepared by Cushman & Wakefield of California, Inc.
10.32* Contribution Agreement with Broad Base Investments Two, LLC.
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 Exhibit 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.
23.8* Consent of Jerry Asher.
23.9* Consent of Ballard Spahr Andrews and Ingersoll (contained in Exhibit 5.1).
24.* Power of Attorney.
27. Financial Data Schedule.
</TABLE>
- ------------------------
* Previously filed.
<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) dated April 10, 1996, 16000 Ventura dated April 10, 1996, 1950 Sawtelle
dated April 10, 1996, Westwood Terrace, Skyview Center, 4811 and 4900/10 Airport
Plaza Drive and New Wilshire dated September 10, 1996, 70 South Lake and
Calabasas Commerce Center dated April 10, 1996, the 1996 Acquired Properties
dated April 10, 1996, the Acquisition Properties dated April 19, 1996, and Arden
Realty, Inc., a Maryland corporation, dated May 1, 1996, in Amendment No. 4 to
the Registration Statement filed by Arden Realty, Inc. on Form S-11 dated
October 3, 1996 and the related Prospectus.
/s/ ERNST & YOUNG LLP
------------------------------------------------------------------------------
Los Angeles, California
October 3, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ARDEN
PREDECESSORS COMBINED BALANCE SHEETS AND THE COMBINED STATEMENTS OF OPERATIONS,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 13,039 18,247
<SECURITIES> 0 0
<RECEIVABLES> 2,873 5,573
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 15,912 23,820
<PP&E> 164,170 260,997
<DEPRECIATION> (3,296) (6,248)
<TOTAL-ASSETS> 182,379 286,165
<CURRENT-LIABILITIES> 3,398 4,726
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 182,379 286,165
<SALES> 0 0
<TOTAL-REVENUES> 11,692 24,471
<CGS> 0 0
<TOTAL-COSTS> 4,716 9,082
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,537 14,741
<INCOME-PRETAX> (575) (2,482)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (576) (2,138)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
