As filed with the Securities and Exchange Commission on December 4, 1997
Registration No. 333-40451
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-3
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:
Mark W. Seneca
Latham & Watkins
650 Town Center Drive
Suite 2000
Costa Mesa, California 92626
(714) 540-1235
Approximate date of commencement of the proposed sale of the securities to
the public: From time to time after the effective date of this
Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 (the "Securities Act"), other than securities
offered only in connection with dividend or interest reinvestment plans,
check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering.
[ ] _______________________________.
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
[ ] ____________________________.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
P R O S P E C T U S
2,971,756 Shares
ARDEN REALTY, INC.
Common Stock
__________
Arden Realty, Inc., a Maryland corporation (the "Company"), is
a self-administered and self-managed real estate investment trust
("REIT") engaged in owning, acquiring, managing, leasing and
renovating office properties in Southern California. The Company
currently owns 67 office properties (the "Properties") containing
approximately 9.2 million rentable square feet, all of which are
located in Southern California.
The Company concurrently conducts all of its operations
through Arden Realty Limited Partnership, a Maryland limited
partnership (the "Operating Partnership"). The Company is the
sole general partner of the Operating Partnership and as of
October 31, 1997 owned a 92.3% interest in the Operating
Partnership. Although the Company and the Operating Partnership
are separate entities, for ease of reference and unless the
context requires, all references in this Prospectus to the
"Company" refer to the Company and the Operating Partnership,
collectively.
This Prospectus relates to the offer and sale (the "Offering")
from time to time of up to 2,971,756 shares of common stock of
the Company, par value $.01 per share ("Common Stock"), that may
be issued to holders of up to 2,971,756 units of limited
partnership interest in the Operating Partnership ("OP Units") if
such holders (the "Selling Stockholders") tender their OP Units
for cash redemption and the Company elects, in its sole and
absolute discretion, to exchange the tendered OP Units on a
one-for-one basis for shares of Common Stock (the "Exchange
Shares") in lieu of a cash redemption. The OP Units were issued,
and the Exchange Shares were reserved for issuance, in connection
with the formation of the Company and the Operating Partnership
in October 1996 and certain subsequent property acquisitions by
the Operating Partnership. The Company will not receive any
proceeds from the sale of the Exchange Shares by the Selling
Stockholders. See "Plan of Distribution." The Company is
registering the offer and sale of Exchange Shares by the Selling
Stockholders, but the registration of such shares does not
necessarily mean that any of such shares will be offered or sold
by the holders thereof.
The Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "ARI." On November 28, 1997, the last
reported sales price of the Common Stock on the NYSE was $30.44
per share.
The registration statement of which this Prospectus is a part
is being filed pursuant to contractual obligations of the
Company.
__________
See "Risk Factors" beginning on page 4 for certain factors
relevant to an investment in the Common Stock.
__________
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.
THE DATE OF THIS PROSPECTUS IS DECEMBER 4, 1997
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, files reports, proxy
statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements
and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following Regional Offices of the Commission: Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511; Northeast Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048. Copies
of such material may be obtained from the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
The Commission also maintains a website at http://www.sec.gov
containing reports, prospectuses and information statements and
other information regarding registrants, including the Company,
that file electronically. Copies of such materials and other
information concerning the Company also are available for
inspection at The New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005.
The Company has filed with the Commission a Registration
Statement on Form S-3 (together with all amendments, exhibits and
schedules, the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the
securities offered hereby. This Prospectus and any accompanying
Prospectus Supplement do not contain all of the information
included in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company
and the shares of Common Stock offered hereby, reference is
hereby made to the Registration Statement, including the exhibits
and schedules thereto. Statements contained in this Prospectus
and any accompanying Prospectus Supplement concerning the
provisions or contents of any contract, agreement or any other
document referred to herein are not necessarily complete. With
respect to each such contract, agreement or document filed as an
exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matters involved,
and each such statement shall be deemed qualified in its entirety
by such reference to the copy of the applicable document filed
with the Commission. The Registration Statement may be inspected
without charge at the Commission's principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and copies
of it or any part thereof may be obtained from such office, upon
payment of the fees prescribed by the Commission. The
Registration Statement also may be retrieved from the
Commission's website.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents which have previously been filed by
the Company with the Commission pursuant to the Exchange Act are
incorporated herein by reference:
(1) the Company's Annual Report on Form 10-K for the year
ended December 31, 1996;
(2) the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997;
(3) the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1997;
(4) the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1997;
(5) the Company's Current Report on Forms 8-K and related
Form 8-K/A, filed by the Company with the Commission on
January 8, 1997 and February 28, 1997, respectively;
(6) the Company's Current Report on Form 8-K and related
Form 8-K/A, filed by the Company with the Commission on
May 22, 1997 and July 8, 1997, respectively;
(7) the Company's Current Report on Form 8-K, filed by
the Company with the Commission on July 10, 1997;
(8) the Company's Current Report on Form 8-K, filed by
the Company with the Commission on August 14, 1997;
(9) the Company's Current Report on Form 8-K and related
Form 8-K/A, filed by the Company with the Commission on
October 15, 1997 and November 14, 1997, respectively;
(10) the Company's Current Report on Form 8-K and related
Form 8-K/A, filed by the Company with the Commission on
November 12, 1997 and November 24, 1997, respectively;
(11) the description of the Company's Common Stock
contained in the Company's Registration Statement on
Form 8-A filed with the Commission on September 18,
1996;
(12) the Company's Proxy Statement with respect to its
Annual Meeting of Shareholders held on July 8, 1997.
All documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering of the
Securities made hereby will be deemed to be incorporated in this
Prospectus by reference and to be a part hereof from the date of
filing of such documents. Any statement contained herein, or in
a document incorporated or deemed to be incorporated by reference
herein, will be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained
herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or
superseded will not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus
is delivered, on the written request of any such person, a copy
of any or all of the documents incorporated herein by reference,
except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents).
Requests for such copies should be addressed to Arden Realty,
Inc., at 9100 Wilshire Boulevard, East Tower, Suite 700, Beverly
Hills, California 90212, Attention: Diana M. Laing; telephone
number (310) 271-8600.
This Prospectus, including the documents incorporated herein
by reference, contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"). Also, documents subsequently filed by
the Company with the Securities and Exchange Commission and
incorporated herein by reference will contain forward-looking
statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of the
risk factors set forth below and the matters set forth or
incorporated in this Prospectus generally. The Company cautions
the reader, however, that this list of factors may not be
exhaustive, particularly with respect to future filings.
Prospective investors should carefully consider, among other
factors, the risk factors described below.
RISK FACTORS
In addition to the other information contained or incorporated
by reference in this Prospectus or in an accompanying Prospectus
Supplement, prospective investors should carefully consider the
following factors before investing in the securities offered
hereby.
Real Estate Financing Risks
Inability to Repay or Refinance Indebtedness at Maturity. 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 current indebtedness. As of
November 10, 1997, the Company had outstanding indebtedness of
approximately $304 million, of which $175 million is secured by
18 of the Properties and is anticipated to be repaid by June 10,
2004, $17 million is secured by four properties and is
anticipated to be repaid between July 1, 2002 and July 1, 2015,
and approximately $112 million is unsecured with $107 million
maturing on June 1, 2000 and $5 million maturing on August 1,
1998. If the Company's indebtedness cannot be refinanced at
maturity, extended or paid with proceeds of other capital
transactions, such as the issuance of new equity capital, the
Company expects that its cash flow will not be sufficient in all
years to pay distributions at expected levels and to repay all
maturing debt. Furthermore, if prevailing interest rates or
other factors at the time of refinancing result in higher
interest rates, the interest expense relating to such refinanced
indebtedness would increase, adversely affecting the Company's
cash flow and the amounts available for distributions to its
stockholders.
Risk of Failure to Cover Debt Service of Current
Collateralized Debt Under the Mortgage Financing. The Company,
through a special purpose entity, has outstanding a $175 million
mortgage financing (the "Mortgage Financing"). The payment and
other obligations under the Mortgage Financing are secured by
fully cross-collateralized and cross-defaulted first mortgage
liens on 18 of the Properties (collectively, the "Mortgage
Financing Properties") and $4 million in cash collateral. The
Mortgage Financing requires monthly payments of interest only,
with all principal anticipated to be repaid on the seventh
anniversary of the Mortgage Financing (i.e., July 2009). If the
Mortgage Financing is not repaid or refinanced within
seven years, the interest rate increases by at least 2% and all
excess cash flow from the Mortgage Financing Properties must be
used to pay down principal. If the Company is unable to meet its
obligations under the Mortgage Financing, the Mortgage Financing
Properties securing such debt could be foreclosed on, which would
have a material adverse effect on the Company and its ability to
make expected distributions. Similarly, any future indebtedness
of the Company secured by any of the Properties will be subject
to this risk of foreclosure.
Potential Effect of Rising Interest Rates on Company's
Variable Rate Debt. The Company currently has an outstanding
balance of $107 million under its $300 million unsecured line of
credit (the "Credit Facility") from a group of banks led by Wells
Fargo, which bears 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, which could adversely affect the
Company's cash flow and the amounts available for distributions
to its stockholders.
No Limitation on Debt. While 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, the
organizational documents of the Company contain no 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 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 may 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
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 the potential increase in 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 is and 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 12% and 51% of the leased space in the Properties
will expire through the end of 1997 and 2000, respectively. If
the Company is unable to promptly relet or renew leases for all
or a substantial portion of this space, or 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 Internal Revenue Code of
1986, as amended (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 stockholders.
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 and that any
noncompliance would not have a material adverse effect on the
Company. 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.
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 owns 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. The Company
currently does not have any plans to invest in joint ventures or
partnerships with affiliates or promoters of the Company.
Nonetheless, 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 any such
partnerships or joint ventures with which it may become involved
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 49 of the 67 Properties located in suburban Los
Angeles County. Los Angeles County just recently began to
recover from an economic recession that 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
Failure to Enforce Terms of Formation Agreements. As partners
and members in the entities that owned certain of the Properties
which were acquired by the Company pursuant to the transactions
(the "Formation Transactions") consummated in connection with the
Company's initial public offering of Common Stock on
October 9, 1996 (the "IPO") and as recipients of cash and OP
Units in the Formation Transactions, certain members of the
Company's management, including Richard S. Ziman and Victor J.
Coleman, 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
such Properties and related 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 NAMIZ, Inc.,
the Company's immediate predecessor ("Namiz"), 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 IPO price of the Common Stock), 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 of the Operating Partnership
(individually, a "Limited Partner" and collectively, the "Limited
Partners"), including Messrs. Ziman and Coleman, may incur
adverse tax consequences upon the repayment of mortgage
indebtedness relating to certain of the Mortgage Financing
Properties and other recently acquired Properties which are
different from the tax consequences to the Company and its
stockholders. Consequently, such Limited Partners may have
different objectives regarding the appropriate timing of any such
repayment. While the Company has the exclusive authority under
the amended and restated agreement of limited partnership of the
Operating Partnership (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 and Coleman, as executive
officers and directors of the Company, 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 of the Operating Partnership which may result from a
sale of Century Park Center prior to October 9, 2003, any sale of
Century Park Center prior to such date (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 and Coleman hold
certain real estate interests that were not contributed to the
Company as part of the Formation Transactions although none of
such real estate interests relate to office properties.
Risks Associated with Rapid Growth, the Recent Acquisition of
Many of the New Properties and the Lack of Operating History
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.
All of the Properties had relatively short or no operating
history under management by the Company prior to their
acquisition by the Company. The Company has had limited control
over the operation of the Properties which 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 these properties may decline
under the Company's management.
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.
Risk of Acquisition, Renovation and Development Activities
The Company intends to continue acquiring office properties.
Acquisitions of office properties entail risks that investments
will fail to perform in accordance with expectations. Estimates
of renovation costs and costs of improvements to bring an
acquired property up to standards established for the market
position intended for that property may prove inaccurate. In
addition, there are general investment risks associated with any
new real estate investment.
The Company intends to expand and/or renovate its properties
from time to time. Expansion and renovation projects generally
require expenditure of capital as well as various government and
other approvals, the receipt of which cannot be assured. While
policies with respect to expansion and renovation activities are
intended to limit some of the risks otherwise associated with
such activities, the Company will nevertheless incur certain
risks, including expenditures of funds on, and devotion of
management's time to, projects which may not be completed. The
Company anticipates that future acquisitions and renovations will
be financed through a combination of advances under the Credit
Facility, other lines of credit and other forms of secured or
unsecured financing. If new developments are financed through
construction loans, there is a risk that, upon completion of
construction, permanent financing for newly developed properties
may not be available or may be available only on disadvantageous
terms.
While the Company has generally limited its acquisition,
renovation, management and leasing business primarily to the
Southern California market, it is possible that the Company will
in the future expand its business to new geographic markets. The
Company will not initially possess the same level of familiarity
with new markets outside of Southern California, which could
adversely affect its ability to acquire, develop, manage or lease
properties in any new localities. Changing market conditions,
including competition from other purchasers of 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. 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.
Potential Adverse Tax Consequences of Failure to Qualify as a REIT
The Company has operated and intends to continue to operate so
as to qualify as a REIT under the Code, commencing with its
taxable year ended December 31, 1996. Although management
believes that the Company is and will continue to be organized
and has operated and will continue to operate in such a manner,
no assurance can be given that the Company is now or will
continue to be organized or operated 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, however, is not aware of any pending
legislation that would adversely affect the Company's ability to
operate as a REIT. The Company's qualification and taxation as a
REIT depend on 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, the results of which will not be reviewed by tax
counsel to the Company. See "Federal Income Tax
Considerations-Taxation of the Company."
If the Company were to fail to qualify as a REIT in any
taxable year, the Company would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Moreover, unless entitled to
relief under certain statutory provisions, the Company also would
be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost.
This treatment would significantly reduce the net earnings of the
Company available for investment or distribution to stockholders
because of the additional tax liability to the Company for the
years involved. In addition, distributions to stockholders would
no longer be required to be made. See "Federal Income Tax
Considerations-Taxation of the Company-Requirements for
Qualification."
Other Tax Liabilities
Even if the Company qualifies for and maintains its REIT
status, it will be subject to certain federal, state and local
taxes on its income and property. If the Company has net income
from a prohibited transaction, such income will be subject to a
100% tax. See "Federal Income Tax Considerations."
Insurance
The Operating Partnership carries comprehensive liability,
fire, extended coverage and rental loss insurances which
currently cover all of the Properties with policy specifications
and insured limits that 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.
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 the sole 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 67
Properties, 33 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. 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 and Ms. Diana M.
Laing. The loss of their services could have a material adverse
effect on the operations of the Company. Each of Messrs. Ziman
and Coleman and Ms. Laing have entered into an employment
agreement with the Company.
Limits on Changes in Control
Certain provisions of the charter of the Company (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 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
"Description of 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 under the Code, 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) at any time during the last half of the Company's
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 (the
"Ownership Limit") limits actual or constructive ownership of the
outstanding shares of Common Stock by any single stockholder to
9.0% (by value or by number of shares, whichever is more
restrictive) of the then outstanding shares of Common Stock. See
"Description of 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
counsel or a ruling from the Internal Revenue Service, 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 exclusive benefit of one or more
qualified charitable organizations. 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
"Description of Capital Stock-Restrictions on Transfer" for
additional information regarding the Ownership Limit.
Additional Common Stock and Preferred Stock Issuances. 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 reclassify any unissued shares of Common Stock or
classify any unissued and reclassify any previously classified
but unissued shares of Preferred Stock and to set the
preferences, rights and other terms of such classified or
unclassified shares. See "Description of 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 expire in 1997, 1998 and 1999,
respectively. Beginning in July 1997, directors of each class
are 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."
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. Except for 535 North Brand
Boulevard, which is currently undergoing abatement activities,
the Company is not aware of any friable ACM at any of the
Properties.
In the past few years, independent environmental consultants
have conducted or updated Phase I Environmental Assessments and
other environmental investigations as appropriate ("Environmental
Site Assessments") at the Properties. These Environmental Site
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. Soil
and groundwater sampling were performed where warranted and
remediation, if necessary, has or is being conducted.
The Company's Environmental Site Assessments of the Properties
identified 10351 Santa Monica, Burbank Executive Plaza,
California Federal Building, South Bay Centre, 8383 Wilshire,
Carlsberg Corporate Center, Imperial Bank Tower, Skyview Center
and Pacific Gateway II as properties that may be impacted by
known or suspected regional contamination. The Environmental
Site Assessments have not, however, 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 Environmental Site 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 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.
Possible Adverse 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. The Company
has reserved 2,971,756 shares of Common Stock for issuance upon
the exchange of OP Units issued in connection with the formation
of the Company and in connection with property acquisitions,
which shares the Company has agreed to register pursuant to
contractual obligations. In addition, the Company has granted to
certain executive officers, employees and directors options to
purchase a total of 1,436,000 shares of Common Stock (and
reserved for issuance an additional 50,667 shares of Common
Stock) under the Company's 1996 Stock Incentive Plan and stock
bonus awards for a total of 5,000 shares of Common Stock, all of
which the Company has registered. No prediction can be made
about the effect that future sales of Common Stock will have on
the market prices of shares.
Possible Adverse Effect on Holders of Common Stock Upon an
Issuance of Preferred Stock
The Board of Directors is empowered by the Company's Charter
to designate and cause the Company to 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 "Description of 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."
Influence of Executive Officers, Directors and Principal Stockholders
The directors and executive officers of the Company as a group
beneficially own approximately 76.18% of the OP Units issued in
the Formation Transactions which, as of October 9, 1997 (the
first anniversary of the closing of the IPO), are 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 Exchange
Shares, all directors and executive officers as a group would
beneficially own approximately 6.18% of the total issued and
outstanding shares of Common Stock. Mr. Ziman currently serves
as Chairman and Chief Executive Officer and serves, along with
Mr. Coleman, who currently serves as President and Chief
Operating Officer, on the Board of Directors of the Company.
Accordingly, such persons 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 in the Formation Transactions who received OP Units
to act together on any matter, such 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.
THE COMPANY
General
The Company is a self-administered and self-managed REIT
engaged in owning, acquiring, managing, leasing and renovating
commercial office properties in Southern California. The Company
currently owns a portfolio of 67 office properties containing
approximately 9.2 million rentable square feet.
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 below those required to make new construction economically
feasible. The Company's portfolio is comprised primarily of
suburban office properties which have high quality finishes, are
situated in desirable locations, 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.
The Company also believes, based upon its evaluation of market
conditions, that certain economic fundamentals are present in
Southern California which enhance its ability to achieve its
business objectives by providing an attractive environment for
owning, acquiring and operating suburban office properties.
Specifically, the Company believes that the limited construction
of new office properties in the Southern California region since
1992 coupled with an improving Southern California economy will
continue to result in increased demand for office space and
positive net absorption in the Southern California region,
particularly in the selected submarkets where most of the
Properties are located.
The Company operates from its Beverly Hills, California
headquarters and is a fully-integrated real estate company with
approximately 100 full-time employees and in-house expertise in
acquisitions, finance, asset management, leasing and
construction.
The Company seeks to grow by continuing to acquire office
properties that are located in submarkets with growth potential,
are underperforming or need renovation and which offer
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 73% (based on square feet renewed) from
1993 through October 31, 1997 and management's on-going
relationships with multi-site tenants.
The founders and executive officers of the Company
beneficially own approximately 6.16% of the outstanding shares of
Common Stock of the Company, assuming the exchange of all of
their OP Units for Common Stock and excluding shares of Common
Stock subject to options granted under the Company's Stock
Incentive Plan.
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 by capitalizing on external
and internal growth opportunities. The Company's primary
business strategies are to actively manage its portfolio and to
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. 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 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
such properties' cash flow and value through active management
and aggressive leasing.
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 and existing rental rates at levels
below those required to make new construction economically
feasible. The Company also believes, based upon its evaluation
of market conditions, that certain economic fundamentals are
present in Southern California which enhance its ability to
achieve its business objectives by providing an attractive
environment for owning, acquiring and operating suburban office
properties. Specifically, the Company believes that the limited
construction of new office properties in the Southern California
region since 1992 coupled with an improving Southern California
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.
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) the Company's fully
integrated real estate operations which allow it to respond
quickly to acquisition opportunities; (iv) the Company's access
to capital as a public company; (v) the Company's ability to
acquire properties in exchange for OP Units or Common Stock if
the sellers so desire; and (vi) management's reputation as an
experienced purchaser of office properties in Southern
California, which has the ability to effectively close
transactions.
The Company may also seek to take advantage of management's
development expertise to develop office space when market
conditions support office building development. The Company,
however, currently intends to focus primarily on acquisitions
rather than development given its belief that opportunities to
acquire office properties at less than replacement cost continue
to exist within selected submarkets in Southern California.
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; (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; and (v)
capitalizing on economies of scale arising from the size of its
portfolio.
The Operating Partnership
Since the closing of the IPO, substantially all of the
Company's assets have been held directly or indirectly by, and
its operations conducted through, the Operating Partnership. The
Company is the sole general partner of the Operating Partnership
and, as of October 31, 1997, owned a 92.3% interest therein. The
Company's interest in the Operating Partnership entitles it to
share in cash distributions from, and in the profits and losses
of, the Operating Partnership in proportion to such percentage
ownership. Certain individuals and entities own the remaining OP
Units, including Messrs. Ziman and Coleman and Namiz, together
with two entities which were issued OP Units in connection with
the Company's acquisition of certain Properties previously owned
by such entities. One such entity, CalTwin Investors, L.L.C., a
Delaware limited liability company ("CalTwin"), was issued 26,880
OP Units as partial consideration for its transfer of California
Twin Centre to the Operating Partnership in March 1997. The OP
Units held by CalTwin have a special redemption right which
provides CalTwin the option to tender all or part of its OP Units
to the Operating Partnership on January 2, 1998 for a cash
redemption based on the value of such OP Units at the time of
their issuance. Any OP Units held by CalTwin after January 2,
1998 may be tendered to the Operating Partnership for a cash
redemption based on the then current value of the Common Stock.
In lieu of such cash redemption, the Company may elect to
exchange OP Units tendered by CalTwin after January 2, 1998 for
shares of Common Stock of the Company (on a one-for-one basis),
subject to certain limitations. All other holders of OP Units
are entitled to cause the Operating Partnership to redeem its OP
Units for cash beginning on October 9, 1997, the first
anniversary of the consummation of the IPO. The Company may
similarly elect to 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 (all other factors remaining unchanged).
As the sole general partner of the Operating Partnership, the
Company generally has 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."
DESCRIPTION OF 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 filed in
connection with the Company's IPO in October 1996. 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").
As of October 31, 1997 35,442,833 shares of Common Stock were
issued and outstanding and no shares of Preferred Stock were
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
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 (see "Partnership AgreementCIssuance of
Additional OP Units, Common Stock or Convertible Securities") ,
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 Maryland General Corporation Law (the "MGCL"), a
Maryland 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 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 change in
control of the Company or other transaction that might involve a
premium price for holders of Common Stock or otherwise be in
their best interest. As of the date hereof, no shares of
Preferred Stock are outstanding and the Company has no present
plans to issue any Preferred Stock.
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, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last
half of a taxable year (other than 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 continue to qualify as a REIT,
the Charter, subject to certain exceptions, 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 the Ownership Limit (i.e., 9.0%, by number or value,
whichever is more restrictive, of the outstanding shares of
Common Stock). 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, 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 is
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, a ruling from the Internal Revenue
Service 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 are 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.
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
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. Except as otherwise described above, any change in
the Ownership Limit would require an amendment to the Charter.
Amendments to the Charter require the affirmative vote of holders
owning at least two-thirds of the shares of the Company's capital
stock outstanding and entitled to be cast on the matter.
Pursuant to 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 such other limit as
provided in 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, or such other 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 excess shares
(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 (the "Beneficiary") selected by the
Company. Such automatic transfer will be deemed to be effective
as of the close of business on the business day 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 or such other limit as provided by the
Charter or as otherwise permitted by the Board of Directors, and
distribute to the Prohibited Transferee or Prohibited Owner an
amount equal to the lesser of the price paid by the Prohibited
Transferee or Prohibited Owner 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 or Prohibited Owner, as applicable,
prior to the discovery by the Company that such shares had 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
will be deemed to have been offered for sale to the Company, or
its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that 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 will have the right to accept such offer
until the trustee of the trust has sold the shares of stock held
in the trust. Upon such a sale to the Company, the interest of
the Beneficiary in the shares sold will terminate and the trustee
of the trust shall distribute the net proceeds of the sale to the
Prohibited Transferee or Prohibited Owner.
If any purported transfer of shares of Common Stock would
cause the Company to be beneficially owned by fewer than 100
persons, such transfer will be null and void in its entirety, and
the intended transferee shall acquire no rights to the stock.
All certificates representing shares of Common Stock will bear
a legend referring to the restrictions described above. The
foregoing ownership limitations 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.
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 or such other limit as provided by the Charter or
as otherwise permitted by the Board of Directors.
Registration Rights
Pursuant to a miscellaneous rights agreement, the Company has
agreed to file this shelf registration statement and to use its
best efforts to maintain its effectiveness. The Company will
bear expenses incident to its registration requirements under the
miscellaneous rights agreement, except that such expenses shall
not include any underwriting discounts or commissions or transfer
taxes, if any, relating to the resale of the Exchange Shares.
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.
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, has 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 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 all the holders of the OP Units
representing limited partner interests. In addition,
Messrs. Ziman and Coleman have agreed not to sell any Exchange
Shares they may acquire until October 9, 1998 (the second
anniversary of the IPO) without the consent of Lehman Brothers,
the lead underwriter in the IPO.
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) 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 was
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 (as defined in the Partnership Agreement) 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. The sole remedy for a breach by the Company of
the obligations specified in the foregoing sentence is a claim
for monetary damages.
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. See "-Issuance of Additional OP Units, Common Stock or
Convertible Securities"
Redemption/Exchange Rights
Limited Partners receive rights which 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 in its sole and absolute
discretion, 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.
Of the 2,971,756 OP Units issued and outstanding, 2,889,071 OP
Units were issued in connection with the Formation Transactions
and the consummation of the Company's IPO, 55,805 OP Units were
issued in connection with the Company's acquisition of a property
from Hapsmith-Praxis Partners, a California limited partnership
("Hapsmith"), in December 1996, and 26,880 OP Units were issued
in connection with the Company's acquisition of a property from
CalTwin Investors, L.L.C., a Delaware limited liability company
("CalTwin"), in March 1997.
Beginning on October 9, 1997, the first anniversary of the
consummation of the IPO, each of the holders of OP Units issued
in the Formation Transactions or the Hapsmith transaction may
tender all or a portion of its OP Units ("Tendered Units") to the
Operating Partnership for a cash redemption (based upon the fair
market value of an equivalent number of shares of Common Stock at
the time of such redemption) by delivering to the Company, as
general partner of the Operating Partnership, a Notice of
Redemption substantially in the form of Exhibit B to the
Partnership Agreement. Upon receipt of a Notice of Redemption
from a holder of OP Units (the "Tendering Partner"), the Company
may, in its sole and absolute discretion (subject to the
limitations on ownership and transfer of Common Stock set forth
in the Charter), elect to acquire some or all of the Tendered
Units from the Tendering Partner in exchange for shares of Common
Stock (on a one-for-one basis, subject to adjustment in the event
of stock splits, stock dividends, issuances of certain rights,
warrants or options, certain extraordinary distributions and
similar events), in which case the Tendering Partner shall have
no right to cause the Operating Partnership to redeem the OP
Units for cash.
The OP Units held by CalTwin have a special redemption right
which provides CalTwin the option to tender all or a portion of
its OP Units to the Operating Partnership on January 2, 1998 for
cash redemption only based on the value of such OP Units at the
time of their issuance, by delivering written notice to the
Operating Partnership between December 1, 1997 and December 15,
1997 of its intention to exercise such option. Any OP Units held
by CalTwin after January 2, 1998 are subject to the general
redemption rights described above, including the Company's right
to elect to acquire some or all of the Tendered Units in exchange
for shares of Common Stock.
All Tendered Units acquired by the Company upon redemption or
exchange will automatically be converted into general partner
interests thereby increasing the Company's percentage interest in
the Operating Partnership.
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 are conditioned upon Mr. Ziman being the Chief Executive
Officer of the Company at the time of the exercise and do not
apply to transactions under any Company stock plan (such as the
1996 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 is the tax
matters partner of the Operating Partnership and, as such, has
authority, in its sole and absolute discretion, to make tax
elections under the Code on behalf of the Operating Partnership.
The net income or net loss of the Operating Partnership is
generally allocated to the Company and the Limited Partners in
accordance with their respective percentage interests in the
Operating Partnership, subject to compliance with the provisions
of Sections 704(b) and 704(c) of the Code and the Treasury
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
aggregate 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 (excluding any
holders of limited partner interest 50% or more of whose equity
is owned, directly or indirectly, by the Company): (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 IPO,
sell Century Park Center, other than incident to a merger,
consolidation, reorganization 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, the sale or other disposition of
all or substantially all the assets of the Operating Partnership
or redemption of all OP Units or otherwise provided by law.
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.
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 to the Charter and Bylaws of the
Company. See "Available Information."
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. See also "Description
of 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 (although such
majority may be less than a quorum), 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 currently has one vacancy on its seven director 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 expire in 1997, 1998 and 1999, respectively. Beginning
in July 1997, directors of each class are chosen for three-year
terms upon the expiration of their current terms and each year
one class of directors will be elected by the stockholders. The
staggered terms of directors may reduce the possibility of a
tender offer or an attempt to change control of the Company even
though a tender offer or change in control might be in the best
interest of the stockholders.
The classified board provision could have the effect of making
the replacement of incumbent directors more time consuming and
difficult. At least two annual meetings of stockholders, instead
of one, will generally be required to effect a change in a
majority of the Board of Directors. Thus, the classified board
provision could increase the likelihood that incumbent directors
will retain their positions. The staggered terms of directors
may reduce the possibility of a tender offer or an attempt to
change control of the Company, even though a tender offer or
change in control might be in the best interest of the
stockholders.
Removal of Directors
The Charter provides that, 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
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
Under Maryland law, 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 or at the discretion
of 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 or at the discretion of
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.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax
considerations regarding the Company and the ownership of shares
of Common Stock 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, certain financial institutions,
life insurance companies, dealers in securities or currencies,
stockholders holding Common Stock as part of a conversion
transaction, as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes, tax-exempt organizations
(except to the extent discussed under the heading "Taxation of
Tax-Exempt Stockholders") or foreign corporations or partnerships
and persons who are not citizens or residents of the United
States. In addition, the summary below does not consider the
effect of any foreign, state, local or other tax laws that may be
applicable to stockholders.
The information in this section is based on the Code, current,
temporary and proposed Treasury Regulations promulgated under the
Code, the legislative history of the Code, current administrative
interpretations and practices of the IRS, and court decisions,
all as of the date hereof. No assurance can be given that future
legislation, Treasury Regulations, administrative interpretations
and practices and/or court decisions will not adversely affect
existing interpretations. Any such change could apply
retroactively to transactions preceding the date of the change.
The Company has not requested, and does not plan to request, any
ruling from the IRS concerning the tax treatment of the Company
or the Operating Partnership. Thus, no assurance can be provided
that the statements set forth herein (which are, in any event,
not binding on the IRS or courts) will not be challenged by the
IRS or will be sustained by a court if so challenged.
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 AND 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 has elected to be taxed as a REIT under
Sections 856 through 860 of the Code, commencing with its taxable
year ended December 31, 1996. The Company believes that,
commencing with its taxable year ended December 31, 1996, it has
been organized and operated 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, however, the Company=s qualification and taxation as a
real estate investment trust 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. Accordingly, no
assurance can be given that it will continue to operate in such a
manner so as to qualify or remain qualified. 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."
These sections of the Code and the corresponding Treasury
Regulations, are highly technical and complex. The following
sets forth the material aspects of the sections that govern the
federal income tax treatment of a REIT and its stockholders.
This summary is qualified in its entirety by the applicable Code
provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof.
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" (defined generally as
property acquired by the Company through foreclosure or otherwise
after a default on a loan secured by the property or a lease of
the 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
Treasury Regulations that have not yet been promulgated. The
results described above with respect to the recognition of
Built-In Gain assume that the Company will make an election
pursuant to IRS Notice 88-19.
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) do 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). In addition, a corporation may not elect to
become a REIT unless its taxable year is the calendar year. The
Company has a calendar taxable year.
The Company believes that it has issued sufficient shares of
Common Stock with sufficient diversity of ownership 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
StockCRestrictions on Transfer." These restrictions, however, may
not in all cases ensure that the Company will 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."
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 has and intends to
continue to operate it in a manner that is 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, subject to certain exceptions in the year in which the
Company is liquidated, 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 is deemed to have commenced on the date of
acquisition.
Rents received by the Company 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 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, (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. Notwithstanding the
foregoing, the Company may take certain of the actions described
in (i) through (iv) above to the extent the Company determines,
based on the advice of tax counsel, that such actions will not
jeopardize the Company's status as a REIT.
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. The Company has not and does not expect to
derive significant amounts of interest that fail to qualify under
the 75% and 95% gross income tests.
The Company has received since the IPO certain 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, however, has recently discontinued all management
activities with respect to third party owned properties and
believes that the aggregate amount of its nonqualifying income in
any taxable year, including the aforementioned management fees,
will not exceed the limit on nonqualifying income under the gross
income tests.
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 "CTaxation of the Company-General," even if these relief
provisions apply, a 100% tax would be imposed on an amount equal
to (a) the gross income attributable to the greater of the amount
by which the Company failed the 75% or 95% test multiplied by
(b) a fraction intended to reflect the Company's profitability.
No similar mitigation provision provides relief if the Company
fails the 30% income test, in which 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
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 has and intends to continue to maintain
adequate records of the value of its assets in order 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
maintain its qualification 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 excess of the net income, if any, from foreclosure
property over the tax imposed on such income, minus (ii) the
excess of the sum of certain items of noncash income (i.e.,
income attributable to leveled stepped rents, original issue
discount or purchase money debt, or a like-kind exchange that is
later determined to be taxable) over 5% of the "REIT taxable
income" as described in clause (i)(a) above. 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. Such
distributions are taxable to holders of Common Stock (other than
tax-exempt entities, as discussed below) in the year in which
paid, even though such distributions relate to the prior year for
purposes of the Company's 95% distribution requirement. The
amount distributed must not be preferential -- i.e., each holder
of shares of Common Stock must receive the same distribution per
share. 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 believes that it has and
intends to continue 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.
The Company's REIT taxable income has been and is expected to
continue to 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 (or, in the case of distributions with
declaration and record dates falling in the last three months of
the calendar year, by the end of January immediately following
such 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. Any REIT taxable income and net capital
gain on which this excise tax is imposed for any year is treated
as an amount distributed that year for purposes of calculating
such tax.
Failure to Qualify
If the Company fails to maintain its qualification 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 maintain its qualification as a
REIT would significantly reduce the cash available for
distribution by the Company to its stockholders. In addition, if
the Company fails to maintain its qualification 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, (iii) is an estate the income of
which is subject to United States federal income taxation
regardless of its source or (iv) is a trust the administration of
which is subject to the primary supervision of a United States
court and which has one or more United States persons who have
the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in
regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to such date that elect to
continue to be treated as United States persons, shall also be
considered U.S. Stockholders.
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 otherwise available with respect to
dividends received by 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 gains (to the extent that they do not exceed
the Company's actual net capital gain for the taxable year) from
the sale or disposition of a capital asset. Depending upon the
period of time that the Company held the assets to which such
gains were attributable, and upon certain designations, if any,
which may be made by the Company, such gains will be taxable to
non-corporate U.S. Stockholders at a rate of either 20%, 25% or
28%. 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 or her 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 or her shares taxable as
capital gains (provided that the shares have been held as a
capital asset). With respect to non-corporate U.S. Stockholders,
amounts described as being treated as capital gains in the
preceding sentence will be taxable as long-term capital gains if
the shares to which such gains are attributable have been held
for more than eighteen months, mid-term capital gains if such
shares have been held for more than one year but not more than
eighteen months, or short-term capital gains if such shares have
been held for one year or less. 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 interest limitation. Gain
arising from the sale or other disposition of Common Stock (or
distributions treated as such), 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 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 been held
by the U.S. Stockholder as a capital asset, and with respect to
non-corporate U.S. Stockholders, will be mid-term or long-term
gain or loss if such shares have been held for more than one year
or eighteen months, respectively. 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 (generally, shares of Common Stock, the
acquisition of which was financed through a borrowing by the tax
exempt stockholder) and such shares are not otherwise used in a
trade or business, dividend income received 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
properly to 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, 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 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 if the percentage is less than 5% for any year.
The provisions requiring qualified trusts to treat a portion of
REIT distributions as UBTI will not apply if the REIT is able to
satisfy the "not closely held" requirement without relying upon
the "look-through" exception with respect to qualified trusts.
As a result of certain limitations on transfer and ownership of
Common Stock contained in the Charter, the Company is not now,
and does not in the future expect to be classified as a "pension
held REIT."
Taxation of Non-U.S. Stockholders
The preceding discussion does not address the rules governing
United States federal income taxation of the ownership and
disposition of Common Stock by persons that are not U.S.
Stockholders ("Non-U.S. Stockholders"). In general, Non-U.S.
Stockholders may be subject to special tax withholding
requirements on distributions from the Company and with respect
to their sale or other disposition of Common Stock of the
Company, except to the extent reduced or eliminated by an income
tax treaty between the United States and the Non-U.S.
Stockholder's country. A Non-U.S. Stockholder who is a
stockholder of record and is eligible for reduction or
elimination of withholding must file an appropriate form with the
Company in order to claim such treatment. Non-U.S. Stockholders
should consult their own tax advisors concerning the federal
income tax consequences to them of an acquisition of shares of
Common Stock, including the federal income tax treatment of
dispositions of interests in, and the receipt of distributions
from, the Company.
Tax Aspects of the Operating Partnership
General. Substantially all of the Company's investments are
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.
Prior to January 1, 1997, an organization formed as a
partnership or a limited liability company was treated as a
partnership for Federal income tax purposes rather than as a
corporation only if it had no more than two of the four corporate
characteristics that the Treasury Regulations in effect at that
time used to distinguish a partnership from a corporation for tax
purposes. These four characteristics were (i) continuity of
life, (ii) centralization of management, (iii) limited liability
and (iv) free transferability of interests. Under final Treasury
Regulations which became effective January 1, 1997, the four
factor test has been eliminated and an entity formed as a
partnership or as a limited liability company will be taxed as a
partnership for Federal income tax purposes unless it
specifically elects otherwise. These newly promulgated Treasury
Regulations provide that the IRS will not challenge the
classification of an existing partnership or limited liability
company for tax periods prior to January 1, 1997, so long as
(a) the entity had a reasonable basis for its claimed
classification, (b) the entity and all its members recognized the
federal income tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and
(c) neither the entity nor any member of the entity had been
notified in writing on or before May 8, 1996, that the
classification of the entity was under examination by the IRS.
Unless it elects otherwise, a domestic business entity not
otherwise classified as a corporation, which has at least two
members and was in existence prior to January 1, 1997, will have
the same classification for federal income tax purposes that it
claimed under the Treasury Regulations in effect prior to that
date. The Operating Partnership claimed classification as a
partnership for its taxable year ending December 31, 1996.
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 respected under Section 704(b) of the Code 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. 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
who contributed assets having an adjusted tax basis less than
their fair market value at the time of contribution are 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 contributing 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 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 elected to account for Book-Tax Differences
with respect to the Properties initially contributed to the
Operating Partnership using the "traditional method."
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 sufficient adjusted
tax basis in its interest in the Operating Partnership to offset
the loss. 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.
Recently Enacted Legislation. On August 5, 1997, President
Clinton signed into law the Taxpayer Relief Act of 1997 (P.L.
105-34), which will have the effect of modifying certain REIT-
related Code provisions for tax years beginning on or after
January 1, 1998. Some of the potentially significant changes
contained in this legislation include: (i) the rule
disqualifying a REIT for any year in which it fails to comply
with certain regulations requiring the REIT to monitor its stock
ownership is replaced with an intermediate financial penalty;
(ii) the rule disqualifying a REIT in any year that it is
"closely held" does not apply if during such year the REIT
complied with certain regulations which require the REIT to
monitor its stock ownership, and the REIT did not know or have
reason to know that it was closely held; (iii) a REIT is
permitted to render a de minimis amount of impermissible services
to tenants in connection with the management of property and
still treat amounts received with respect to such property (other
than certain amounts relating to such services) as qualified
rent; (iv) the rules regarding attribution to partnerships for
purposes of defining qualified rent and independent contractors
are modified so that attribution occurs only when a partner owns
a 25% or greater interest in the partnership; (v) the 30% gross
income test is repealed; (vi) any corporation wholly-owned by a
REIT is permitted to be treated as a qualified REIT subsidiary
regardless of whether such subsidiary has always been owned by
the REIT; (vii) certain rules regarding the taxation of net long-
term capital gains received by REITs are modified; (viii) the
rules relating to foreclosure property are altered; (ix) property
that is involuntarily converted is excluded from the prohibited
transaction rules; and (x) certain other Code provisions relating
to REITs are amended. Some or all of the provisions could affect
both the Company's operations and its ability to maintain its
REIT status for its taxable years beginning in 1998.
Other Tax Considerations
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.
SELLING STOCKHOLDERS
As described elsewhere herein, "Selling Stockholders" are only
those persons who receive Exchange Shares upon exchange of their
OP Units. In connection with such exchange, the Company agreed
to file a registration statement with the Securities and Exchange
Commission covering the resale of the Exchange Shares issued to
each Selling Stockholder and to indemnify each Selling
Stockholder against claims made against them arising out of,
among other things, statement made in such registration
statement. The following table provides the names of and the
maximum number of Exchange Shares that may be owned and offered
from time to time under this Prospectus by each Selling
Stockholder. Because the Selling Stockholders may sell all or
part of their Exchange Shares pursuant to this Prospectus, and
the Offering is not being underwritten on a firm commitment
basis, no estimate can be given as to the number and percentage
of shares of Common Stock that will be held by each Selling
Stockholder upon termination of the Offering.
<TABLE>
<S> <C> <C> <C> <C> <C>
Maximum Number
of Exchange Shares Aggregate Percentage of
Shares of Issuable in the Shares of Outstanding
Common Stock Exchange and Common Stock Common Stock
Owned Prior Available Owned Following Owned Following
Name Title to the Exchange(1) for Resale(1) the Exchange(1)(2) the Exchange(1)(2)
Richard S. Ziman Chairman and 100 1,338,888(8) 1,338,988(8) 3.49%
Chief Executive
Officer
Curtis J. Ziman (3) 0 27,335(9) 27,335(9) *
Larry D. Ziman (3) 0 27,335(9) 27,335(9) *
Allan W. Ziman (3) 0 27,335(9) 27,335(9) *
Allan W. Ziman Trustee 0 44,481 44,481 *
FBO Jenna Support Trust (4)
Allan Ziman Trustee 0 44,481 44,481 *
FBO Todd Support Trust (4)
Phyllis Ziman Cutler (3) 0 27,335(9) 27,335(9) *
Victor J. Coleman President and 0 752,648(10) 752,648 (10) 1.96%
Chief Operating
Officer
Mark J. Coleman (5) 0 1,600 1,600 *
Hugh A. Coleman (5) 0 1,600 1,600 *
Alex S. Coleman (5) 0 1,600 1,600 *
Arthur Gilbert (6) 0 504,387(11) 504,387(11) 1.31%
Herbert Glaser 0 33,138(12) 33,138(12) *
Jonathon Glaser 0 4,876 4,876 *
Michele Byer (7) 3,533 51,032(13) 54,565(13) *
Hapsmith-Praxis 0 55,805 55,805 *
Partners
CalTwin Investors, 0 26,880 26,880 *
L.L.C.
The Jewish Community 0 1,000 1,000 *
Foundation
</TABLE>
* Less than 1%
(1) Based on information available to the Company as of October 31, 1997.
(2) Assumes all OP Units held by the Selling Stockholders are
exchanged for Exchange Shares. Also assumes that no
transactions with respect to the shares of Common Stock or the
OP Units occur other than the exchange.
(3) Curtis J. Ziman, Larry D. Ziman, Allan W. Ziman and Phyllis
Ziman Cutler are the siblings of Richard S. Ziman, Chairman of
the Board and Chief Executive Officer of the Company.
(4) Jenna Ziman and Todd Ziman are the children of Richard S.
Ziman, Chairman of the Board and Chief Executive Officer of
the Company.
(5) Mark J. Coleman, Hugh A. Coleman and Alex S. Coleman are
brothers of Victor J. Coleman, President and Chief Operating
Officer of the Company.
(6) Former Director of the Company.
(7) Former Secretary of the Company.
(8) Includes (a) 465,118 OP Units representing Mr. Ziman's 60%
ownership interest in an entity which holds 775,196 OP Units,
(b) 353,212 OP Units held by entities directly and indirectly
owned 100% by Mr. Ziman, (c) 27,334 OP Units representing Mr.
Ziman's 20% ownership interest in a Ziman family partnership
which holds 136,674 OP Units, and (d) 493,224 OP Units held by
Mr. Ziman individually.
(9) Represents each of these individuals' 20% ownership
interest in the 136,674 OP Units held by a Ziman family
partnership.
(10) Includes (a) 310,078 OP Units representing Mr. Coleman's
40% ownership interest in an entity which holds 775,196 OP
Units, (b) 99,458 OP Units held by an entity 100% owned by Mr.
Coleman, and (c) 343,112 OP Units held by the Victor and Wendy
Coleman Family Trust dated March 26, 1997.
(11) Includes (a) 466,869 OP Units held by The Arthur Gilbert
and Rosalinde Gilbert 1982 Trust, and (b) 37,518 OP Units held
by an entity owned 100% by Mr. Gilbert.
(12) Represents the 33,138 OP Units held by an entity owned 100%
by Herbert Glaser.
(13) Represents the 51,032 OP Units held by the Michele Byer Trust.
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to
time by the Selling Stockholders of up to 2,971,756 Exchange
Shares that they may be issued in connection with the tendering
by the Selling Stockholders of the OP Units for cash redemption
and the Company=s election, in its sole and absolute discretion,
to exchange the tendered OP Units for the Exchange Shares in lieu
of a cash redemption. The Company is registering the offer and
sale of Exchange Shares by the Selling Stockholders, but the
registration of such shares does not necessarily mean that any of
such shares will be offered or sold by any of the Selling
Stockholders.
The Company will not receive any proceeds from the sale of the
Exchange Shares by the Selling Stockholders, or by any of their
donees or transferees. The Exchange Shares may be sold from time
to time to purchasers directly by any of the Selling Stockholders
or through underwriters, dealers or agents, who may receive
compensation in the form of commissions from the Selling
Stockholders and/or the purchasers of Exchange Shares for whom
they may act as agent. The Selling Stockholders and any dealers
or agents that participate in the distribution of Exchange Shares
may be deemed to be "underwriters" within the meaning of the
Securities Act and any profit on the sale of Exchange Shares by
them and any commissions received by any such dealers or agents
might be deemed to be underwriting commissions under the
Securities Act. The Exchange Shares or any part of the Exchange
Shares may be sold in amounts and on terms to be determined at
the time of sale, including, without limitation, block trades, in
the over-the-counter market, through an exchange or otherwise, at
negotiated prices or at or relating to quoted market prices then
prevailing. The Selling Stockholders reserve the sole right to
accept and, together with any agent of the Selling Stockholders,
to reject in whole or in part any proposed purchase of the
Exchange Shares.
At a time a particular offer of Exchange Shares is made by the
Selling Stockholders, a Prospectus Supplement, if required, will
be distributed that will set forth the name and names of any
dealers or agents and any commissions and other terms
constituting compensation from the Selling Stockholders and any
other required information.
Offers or sales of the Exchange Shares have not been
registered or qualified under the laws of any country, other than
the United States. In order to comply with the securities laws
of certain states, if applicable, the Exchange Shares may be sold
by the Selling Stockholders only through registered or licensed
brokers or dealers. In addition, in certain states, the Exchange
Shares may not be sold unless they have been registered or
qualified for sale in such state or an exemption from such
registration or qualification requirement is available and is
complied with.
Pursuant to an agreement with the Selling Stockholders, the
Company will pay substantially all of the expenses incident to
the registration of the resale of the Exchange Shares, estimated
to be approximately $50,854. Under agreements entered into with
the Company, the Selling Stockholders, and any underwriter they
may utilize will be indemnified by the Company against certain
civil liabilities, including liabilities under the Securities
Act.
EXPERTS
The consolidated financial statements and schedule of Arden
Realty, Inc. and the combined financial statements of the Arden
Predecessors appearing in Arden Realty, Inc.'s Annual Report
(Form 10-K) for the year ended December 31, 1996; the statement
of revenue and certain expenses of 5200 West Century for the
period from January 1, 1996 to December 19, 1996, and the
statements of revenue and certain expenses of 10351 Santa Monica
and 2730 Wilshire for the 12 months ended October 31, 1996, and
the statement of revenue and certain expenses of Center Promenade
for the period from January 1, 1996 to December 17, 1996, and the
statement of revenue and certain expenses of 10350 Santa Monica
for the period from January 1, 1996 to December 27, 1996, and the
statement of revenue and certain expenses of L.A. Corporate
Center for the period from January 1, 1996 to December 18, 1996,
and the statement of revenue and certain expenses of Sumitomo
Bank Building for the period from January 1, 1996 to December 20,
1996, and the statement of revenue and certain expenses of
Burbank Executive Center for the 12 months ended October 31,
1996, all of which were included in the current report filed on
Form 8-K/A of Arden Realty, Inc. dated February 28, 1997 and
appearing in Arden Realty, Inc.=s Annual Report (Form 10-K) for
the year ended December 31, 1996, the statement of revenue and
certain expenses of 535 Brand for each of the three years in the
period ended December 31, 1996, and the combined statement of
revenue and certain expenses of Whittier Financial Center,
Clarendon Crest, and California Twin Centre for the year ended
December 31, 1996, and the statement of revenue and certain
expenses of 10780 Santa Monica for the year ended December 31,
1996, and the statement of revenue and certain expenses of Noble
Professional Center for the year ended December 31, 1996, and the
statement of revenue and certain expenses of South Bay Centre for
the year ended December 31, 1996, and the statement of revenue
and certain expenses of 8383 Wilshire for the year ended December
31, 1996, all of which were included in the current report filed
on Form 8-K/A of Arden Realty, Inc. dated July 8, 1997; the
statement of revenue and certain expenses of Centerpointe La
Palma for the year ended December 31, 1996, and the statement of
revenue and certain expenses of Pacific Gateway II for the year
ended December 31, 1996, all of which were included in the
current report filed on Form 8-K of Arden Realty, Inc. dated July
9, 1997; the combined statement of revenue and certain expenses
of 1000 Town Center and Mariner Court for the year ended December
31, 1996, and the statement of revenue and certain expenses of
Parkway Center for the year ended December 31, 1996, and the
statement of revenue and certain expenses of Crown Cabot for the
year ended December 31, 1996, all of which were included in the
current report filed on Form 8-K of Arden Realty, Inc. dated
August 13, 1997; the statement of revenue and certain expenses of
120 South Spalding for the year ended December 31, 1996, and the
statement of revenue and certain expenses of Foremost
Professional Plaza for the year ended December 31, 1996, and the
statement of revenue and certain expenses of 1370 Valley Vista
for the year ended December 31, 1996, all of which were included
in the current report filed on Form 8-K/A of Arden Realty, Inc.
dated November 14, 1997; the statement of revenue and certain
expenses of Northpoint for the year ended December 31, 1996, and
the statement of revenue and certain expenses of 145 South
Fairfax for the year ended December 31, 1996, and the statement
of revenue and certain expenses of Bernardo Regency for the year
ended December 31, 1996, and the combined statement of revenue
and certain expenses of Thousand Oaks Portfolio for the year
ended December 31, 1996, all of which were included in the
current report filed on Form 8-K/A of Arden Realty, Inc. dated
November 24, 1997, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon and
incorporated herein by reference. Such consolidated and combined
financial statements and statements of revenue and certain
expenses are incorporated by reference in reliance upon such
report given upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
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, Baltimore, Maryland. In
addition, the description of federal income tax consequences
contained in this Prospectus under the heading "Federal Income
Tax Considerations" is based upon the opinion of Latham &
Watkins. Latham & Watkins will rely upon the opinion of Ballard
Spahr Andrews & Ingersoll as to certain matters of Maryland law.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland General Corporation Law ("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 (the "Charter") 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 indemnity
and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any individual who is a
present or former director or officer who is made a party to a
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 as a director,
officer, partner or trustee of 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 director or
officer of the Company. The Bylaws of the Company obligate it,
to the maximum extent permitted by Maryland law, without
requiring a preliminary determination of the ultimate entitlement
to indemnification 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 as a
director, officer, partner or trustee and who is made a party to
the proceeding by reason of his service in that capacity. 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 or for a judgment of
liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL permits a
corporation to advance reasonable expenses to a director or
officer upon the corporation's receipt of (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 corporation as authorized by the Bylaws
and (b) a written undertaking by or on his behalf to repay the
amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not
met.
The inclusion of the above provisions in the Charter and
Bylaws may have the effect of reducing the likelihood of
stockholder derivative suits against directors and may discourage
or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though
such an action, if successful, might otherwise have benefitted
the Company and its stockholders. Furthermore, it is the
position of the Commission that indemnification of directors and
officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14
of the Securities Act.
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."
No person has been authorized
in connection with the
offering made hereby to give
any information or to make any 2,971,756 Shares
representations not contained
in this prospectus and, if ARDEN REALTY, INC.
given or made, such
information or representations Common Stock
must not be relied upon as
having been authorized by the
Company or any underwriter.
This Prospectus does not
constitute an offer to sell or
a solicitation of any offer to
buy any of the securities
offered hereby to any person
or by anyone in any
jurisdiction in which it is
unlawful to make such offer or
solicitation. 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 date
subsequent to the date hereof.
____________________
__________________
PROSPECTUS
____________________
SUMMARY TABLE OF CONTENTS
PAGE
December 4, 1997
Available Information 2
Incorporation of Certain
Information by Reference 3
Risk Factors 4
The Company 13
Description of Capital Stock 16
Partnership Agreement 20
Certain Provisions of Maryland
Law and the Company's Charter
and Bylaws 24
Federal Income Tax
Considerations 26
Selling Stockholders 37
Plan of Distribution 38
Experts 39
Legal Matters 39
Limitation of Liability and
Indemnification 40
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table itemizes the expenses incurred by Arden
Realty, Inc. (the "Registrant") in connection with the
registration of the shares of the Registrant's common stock, par
value $.01 per share ("Common Stock"), offered hereby. All
amounts shown are estimates except the Securities and Exchange
Commission=s registration fee.
Registration Fee - Securities and Exchange Commission $27,584
Legal Fees and Expenses 10,000
Accounting Fees and Expenses 10,000
Miscellaneous Expenses 3,000
Total $50,854
Item 15. 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 individual who is a
present or former director or officer who is made a party to a
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 as a director,
officer, partner or trustee of 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 director or
officer of the Company. The Bylaws of the Company obligate it, to
the maximum extent permitted by Maryland law, without requiring a
preliminary determination of the ultimate entitlement to
indemnification to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to
(a) any present or former director of officer who is made a party
to the proceeding by reason of his service in that capacity or
(b) any individual who, while a director of the Company and at
the request of the Company, serves or has served another
corporation, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a director, officer, partner or
trustee of such corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party
to the proceeding by reason of his service in that capacity. 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 or for a judgment of
liability on the basis that a personal benefit was improperly
received, unless, in either case, a court orders indemnification
and then only for expenses. In addition, the MGCL permits a
corporation to advance reasonable expenses to a director or
officer upon receipt by the corporation of (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 corporation and (b) a written undertaking
by or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the
standard of conduct was not met.
The inclusion of the above provisions in the Charter and
Bylaws may have the effect of reducing the likelihood of
stockholder derivative suits against directors and may discourage
or deter stockholders or management from bringing a lawsuit
against directors for breach of their duty of care, even though
such an action, if successful, might otherwise have benefitted
the Company and its stockholders. Furthermore, it is the
position of the Commission that indemnification of directors and
officers for liabilities arising under the Securities Act is
against public policy and is unenforceable pursuant to Section 14
of the Securities Act.
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 and its stockholders is limited under
the Charter.
Item 16. Exhibits
See attached exhibit index.
ITEM 17. Undertaking.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
provided, however, that paragraphs (a)(i) and (a)(ii) do
not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained
in periodic reports filed by the registrant pursuant to
Section 13 or 15(d)j of the Securities Exchange Act of 1934
that are incorporated be reference in the registration
statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the
Registration statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to deliver or
cause to be delivered with the prospectus, to each person to whom
the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the
prospectus and furnished pursuant to and meeting the requirements
of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be
presented by Article 3 of Regulation S-X are not set forth in the
prospectus, to deliver, or cause to be delivered to each person
to whom the prospectus is sent or given, the latest quarterly
report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to
directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public
policy as expressed in the Securities Exchange Act of 1934, as
amended, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Exchange Act
of 1934, as amended, and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds
to believe that it meets all of the requirements for filing on
Form S-3 and has duly caused this Amendment No. 2 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 December 4, 1997.
ARDEN REALTY, INC.
By:/s/Richard S. Ziman
Richard S. Ziman
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 2 to Registration Statement has been
signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/Richard S. Ziman Chairman of the Board, December 4, 1997
Richard S. Ziman Chief Executive Officer
and Director (Principal
Executive Officer)
/s/Victor J. Coleman* President, Chief December 4, 1997
Victor J. Coleman Operating Officer and
Director
/s/Diana M. Laing* Chief Financial Officer December 4, 1997
Diana M. Laing and Secretary (Principal
Financial and Accounting
Officer)
/s/Carl D. Covitz* Director December 4, 1997
Carl D. Covitz
/s/Larry S. Flax* Director December 4, 1997
Larry S. Flax
/s/Steven C. Good* Director December 4, 1997
Steven C. Good
/s/Kenneth B. Roath* Director December 4, 1997
Kenneth B. Roath
* By: /s/Richard S. Ziman
Richard S. Ziman
as Attorney-in-Fact
EXHIBIT INDEX
EXHIBIT PAGE
4.1(1) Restated Charter of the Company N/A
4.2(1) Bylaws of the Company N/A
5.1 Opinion of Ballard Spahr Andrews & Ingersoll 40
regarding the validity of the Common Stock
being registered
8.1 Opinion of Latham & Watkins regarding certain 52
federal income tax matters
10.1(1) Agreement of Limited Partnership of the N/A
Operating Partnership
23.1 Consent of Ballard Spahr Andrews & Ingersoll ___
(included in Exhibit 5.1)
23.2 Consent of Latham & Watkins (included in ___
Exhibit 8.1)
23.3 Consent of Ernst & Young LLP 54
24.1(2) Power of Attorney N/A
(1) Filed as an exhibit to the Company's Registration Statement
on Form S-11 (No. 333-8163) declared effective on October 3,
1996 and incorporated herein by reference.
(2) Incorporated herein by reference to the Company=s
Registration Statement on Form S-3 (Registration No. 333-
40451) as filed with the Securities and Exchange Commission on
November 18, 1997.
EXHIBIT 5.1
[Letterhead of Ballard Spahr Andrews & Ingersoll]
File Number
864166
December 4, 1997
Arden Realty, Inc.
9100 Wilshire Boulevard
East Tower, Suite 700
Beverly Hills, California 90212
Re: Registration Statement on Form S-3
(Registration No. 333-40451
Ladies and Gentlemen:
We have served as Maryland counsel to Arden Realty, Inc., a
Maryland corporation (the "Company"), in connection with certain
matters of Maryland law arising out of the offer and sale form
time to time of up to 2,971,756 shares (the "Exchange Shares") of
common stock, par value $.01 per share ("Common Stock"), of the
Company that may be issued to holders of up to 2,971,756 units of
limited partnership interest in the Operating Partnership ("OP
Units") if such holders (the "Selling Stockholders") tender their
OP Units for cash redemption and the Company elects, in its sole
and absolute discretion, to exchange the tendered OP Units on a
one-for-one basis for the Exchange Shares in lieu of a cash
redemption. The Op Units were issued, and the Exchange Shares
were reserved for issuance, in connection with the formation of
the Company and the Operating Partnership in October 1996 and
certain subsequent property acquisitions by the Operating
Partnership. The Exchange Shares are covered by the above-
referenced Registration Statement, and all amendments thereto
(the "Registration Statement"), under the Securities Act of 1933,
as amended (the "1933 Act"). Unless otherwise defined herein,
capitalized terms used herein shall have the meanings assigned to
them in the Registration Statement.
In connection with our representation of the Company, and
as a basis for the opinion hereinafter set forth, we have
examined originals, or copies certified or otherwise identified
to our satisfaction, of the following documents (hereinafter
collectively referred to as the "Documents"):
1. The Registration Statement and the related form of
prospectus included therein in the form in which it was
transmitted to the Securities and Exchange Commission under the
1933 Act;
2. The charter of the Company, certified as of a recent
date by the State Department of Assessments and Taxation of
Maryland (the "SDAT");
3. The Bylaws of the Company, certified as of a recent date
by its Secretary;
4. Resolutions adopted by the Board of Directors and
stockholders of the Company relating to the sale, issuance and
registration of the Exchange Shares, certified as of a recent
date by the Secretary of the Company;
5. The Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, dated as of October 9,
1996 (the "Partnership Agreement");
6. The form of certificate representing a share of Common
Stock, certified as of a recent date by the Secretary of the
Company;
7. A certificate of the SDAT as to the good standing of the
Company, dated November 18, 1997;
8. A certificate executed by Diana M. Laing, Secretary of
the Company, dated November 18, 1997; and
9. Such other documents and matters as we have deemed
necessary or appropriate to express the opinion set forth in this
letter, subject to the assumptions, limitations and
qualifications stated herein.
In expressing the opinion set forth below, we have assumed,
and so far as is known to us there are no facts inconsistent
with, the following:
1. Each of the parties (other than the Company) executing
any of the Documents has duly and validly executed and delivered
each of the Documents to which such party is a signatory, and
such party's obligations set forth therein are legal, valid and
binding.
2. Each individual executing any of the Documents on behalf
of a party (other than the Company) is duly authorized to do so.
3. Each individual executing any of the Documents, whether
on behalf of such individual or any other person, is legally
competent to do so.
4. All Documents submitted to us as originals are
authentic. All Documents submitted to us as certified or
photostatic copies conform to the original documents. All
signatures on all such Documents are genuine. All public records
reviewed or relied upon by us or on our behalf are true and
complete. All statements and information contained in the
Documents are true and complete. There are no oral or written
modifications or amendments to the Documents, by action or
conduct of the parties or otherwise.
5. The Exchange Shares will not be issued or transferred in
violation of any restriction or limitation contained in the
Charter.
The phrase "known to us" is limited to the actual
knowledge, without independent inquiry, of the lawyers at our
firm who have performed legal services in connection with the
issuance of this opinion.
Based upon the foregoing, and subject to the assumptions,
limitations and qualifications stated herein, it is our opinion
that:
1. The Company is a corporation duly incorporated and
existing under and by virtue of the laws of the State of Maryland
and is in good standing with the SDAT.
2. The Exchange Shares, upon the due execution,
countersignature and delivery of certificates representing the
Exchange Shares and assuming that the sum of (a) all shares of
Common Stock issued as of the date hereof, (b) any shares of
Common Stock issued between the date hereof and the date on which
any of the Exchange Shares are actually issued (not including any
of the Exchange Shares), and (c) the Exchange Shares will not
exceed the total number of shares of Common Stock that the
Company is then authorized to issue, the Exchange Shares are duly
authorized and, when and if delivered in accordance with the
Partnership Agreement and the resolutions of the Board of
Directors authorizing their issuance, will be validly issued,
fully paid and nonassessable.
The foregoing opinion is limited to the substantive laws of
the State of Maryland and we do not express any opinion herein
concerning any other law. We express no opinion as to compliance
with the securities (or "blue sky") laws or the real estate
syndication laws of the State of Maryland.
We assume no obligation to supplement this opinion if any
applicable law changes after the date hereof or if we become
aware of any fact that might change the opinion expressed herein
after the date hereof.
This opinion is being furnished to you solely for
submission to the Securities and Exchange Commission as an
exhibit to the Registration Statement and, accordingly, may not
be relied upon by, quoted in any manner to, or delivered to any
other person or entity (other than Latham & Watkins, counsel to
the Company) without, in each instance, our prior written
consent.
We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the use of the name
of our firm therein. In giving this consent, we do not admit
that we are within the category of persons whose consent is
required by Section 7 of the 1933 Act.
Very truly yours,
/s/Ballard Spahr Andrews & Ingersoll
EXHIBIT 8.1
[L&W Letterhead]
December 4, 1997
Arden Realty, Inc.
9100 Wilshire Boulevard
East Tower, Suite 700
Beverly Hills, California 90212
Re: Registration Statement on Form S-3 filed pursuant to Rule 415;
Certain Federal Income Tax Consequences
Ladies and Gentlemen:
We have acted as tax counsel to Arden Realty, Inc., a
Maryland corporation (the "Company"), in connection with its
issuance of up to 2,971,756 additional shares of common stock of
the Company pursuant to a registration statement (the
"Registration Statement") on Form S-3 (File No. 333-40451) under
the Securities Act of 1933, (the "Act") filed with the Securities
and Exchange Commission (the "Commission") on November 18, 1997,
pursuant to Rule 415 promulgated under the Act, as amended as of
the date such statement became final.
You have requested our opinion concerning certain of the
federal income tax consequences to the Company and the purchasers
of the securities described above in connection with the sale
described above. This opinion is based on various facts and
assumptions, including the facts set forth in the Registration
Statement concerning the business, properties and governing
documents of the Company and Arden Realty Limited Partnership
(the "Operating Partnership"). We have also been furnished with,
and with your consent have relied upon, certain representations
made by the Company and subsidiaries of the Company (including
the Operating Partnership) with respect to certain factual
matters through a certificate of an officer of the Company (the
"Officer's Certificate").
In our capacity as tax counsel to the Company, we have made
such legal and factual examinations and inquiries, including an
examination of originals or copies certified or otherwise
identified to our satisfaction of such documents, corporate
records and other instruments as we have deemed necessary or
appropriate for purposes of this opinion. In our examination, we
have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures thereon, the legal
capacity of natural persons executing such documents and the
conformity to authentic original documents of all documents
submitted to us as copies.
We are opining herein as to the effect on the subject
transaction only of the federal income tax laws of the United
States and we express no opinion with respect to the
applicability thereto, or the effect thereon, of other federal
laws, the laws of any state or other jurisdiction or as to any
matters of municipal law or the laws of any other local agencies
within any state.
Based on such facts, assumptions and representations, it is
our opinion that the statements in the Registration Statement set
forth under the caption "Federal Income Tax Considerations" to
the extent such information constitutes matters of law, summaries
of legal matters, or legal conclusions, have been reviewed by us
and are accurate in all material respects.
No opinion is expressed as to any matter not discussed
herein.
This opinion is based on various statutory provisions,
regulations promulgated thereunder and interpretations thereof by
the Internal Revenue Service and the courts having jurisdiction
over such matters, all of which are subject to change either
prospectively or retroactively. Also, any variation or
difference in the facts from those set forth in the Registration
Statement or the Officer's Certificate may affect the conclusions
stated herein. Moreover, the Company's qualification and
taxation as a real estate investment trust 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, the
results of which have not been and will not be reviewed by Latham
& Watkins. Accordingly, no assurance can be given that the
actual results of the Company's operation for any one taxable
year will satisfy such requirements.
This opinion is rendered only to you, and is solely for
your use in connection with the transactions set forth in the
Registration Statement. This opinion may not be relied upon by
you for any other purpose, or furnished to, quoted to, or relied
upon by any other person, firm or corporation, for any purpose,
without our prior written consent. We hereby consent to the
filing of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption ALegal
Matters@ in the Registration Statement.
Very truly yours,
/s/Latham & Watkins
Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption
"Experts" in the Registration Statement on Form S-3 (File
No. 333-40451) and related prospectus of Arden Realty, Inc. for
registration of 2,971,756 shares of its common stock, and to the
incorporation by reference therein of our report dated January
31, 1997, with respect to the consolidated financial statements
and schedule of Arden Realty, Inc. and the combined financial
statements of the Arden Predecessors included in the Annual
Report (Form 10-K) of Arden Realty, Inc. for the year ended
December 31, 1996; and to the incorporation by reference therein
of our report dated February 5, 1997 with respect to the
statement of revenue and certain expenses of 5200 West Century
for the period from January 1, 1996 to December 19, 1996, and to
the incorporation by reference therein of our reports dated
February 5, 1997 with respect to the statements of revenue and
certain expenses of 10351 Santa Monica and 2730 Wilshire for the
12 months ended October 31, 1996, and to the incorporation by
reference therein of our report dated February 5, 1997 with
respect to the statement of revenue and certain expenses of
Center Promenade for the period from January 1, 1996 to December
17, 1996, and to the incorporation by reference therein of our
report dated February 5, 1997 with respect to the statement of
revenue and certain expenses of 10350 Santa Monica for the period
from January 1, 1996 to December 27, 1996, and to the
incorporation by reference therein of our report dated February
5, 1997 with respect to the statement of revenue and certain
expenses of L.A. Corporate Center for the period from January 1,
1996 to December 18, 1996, and to the incorporation by reference
therein of our report dated February 5, 1997 with respect to the
statement of revenue and certain expenses of Sumitomo Bank
Building for the period from January 1, 1996 to December 20,
1996, and to the incorporation by reference therein of our report
dated February 7, 1997 with respect to the statement of revenue
and certain expenses of Burbank Executive Center for the 12
months ended October 31, 1996 all of which were included in the
current report filed on Form 8-K/A of Arden Realty, Inc. dated
February 28, 1997 and included in the Annual Report (Form 10-K)
of Arden Realty, Inc. for the year ended December 31, 1996, and
to the incorporation by reference therein of our report dated
March 4, 1997 with respect to the statement of revenue and
certain expenses of 535 Brand for each of the three years in the
period ended December 31, 1996; and to the incorporation by
reference therein of our report dated February 24, 1997 with
respect to the combined statement of revenue and certain expenses
of Whittier Financial Center, Clarendon Crest, and California
Twin Centre for the year ended December 31, 1996, and to the
incorporation by reference therein of our report dated February
28, 1997 with respect to the statement of revenue and certain
expenses of 10780 Santa Monica for the year ended December 31,
1996, and to the incorporation by reference therein of our report
dated March 7, 1997 with respect to the statement of revenue and
certain expenses of Noble Professional Center for the year ended
December 31, 1996, and to the incorporation by reference therein
of our report dated May 7, 1997 with respect to the statement of
revenue and certain expenses of South Bay Centre for the year
ended December 31, 1996, and to the incorporation by reference
therein of our report dated April 24, 1997 with respect to the
statement of revenue and certain expenses of 8383 Wilshire for
the year ended December 31, 1996 all of which were included in
the current report filed on Form 8-K/A of Arden Realty, Inc.
dated July 8, 1997; and to the incorporation by reference therein
of our report dated April 30, 1997 with respect to the statement
of revenue and certain expenses of Centerpointe La Palma for the
year ended December 31, 1996, and to the incorporation by
reference therein of our report dated June 6, 1997 with respect
to the statement of revenue and certain expenses of Pacific
Gateway II for the year ended December 31, 1996 all of which were
included in the current report filed on Form 8-K of Arden Realty,
Inc. dated July 9, 1997; and to the incorporation by reference
therein of our report dated April 2, 1997 with respect to the
combined statement of revenue and certain expenses of 1000 Town
Center and Mariner Court for the year ended December 31, 1996,
and to the incorporation by reference therein of our report dated
May 6, 1997 with respect to the statement of revenue and certain
expenses of Parkway Center for the year ended December 31, 1996,
and to the incorporation by reference therein of our report dated
April 2, 1997 with respect to the statement of revenue and
certain expenses of Crown Cabot for the year ended December 31,
1996 all of which were included in the current report filed on
Form 8-K of Arden Realty, Inc. dated August 13, 1997; and to the
incorporation by reference therein of our report dated August 20,
1997 with respect to the statement of revenue and certain
expenses of 120 South Spalding for the year ended December 31,
1996, and to the incorporation by reference therein of our report
dated September 5, 1997 with respect to the statement of revenue
and certain expenses of Foremost Professional Plaza for the year
ended December 31, 1996, and to the incorporation by reference
therein of our report dated August 25, 1997 with respect to the
statement of revenue and certain expenses of 1370 Valley Vista
for the year ended December 31, 1996 all of which were included
in the current report filed on Form 8-K/A of Arden Realty, Inc.
dated November 14, 1997; and to the incorporation by reference
therein of our report dated October 21, 1997 with respect to the
statement of revenue and certain expenses of Northpoint for the
year ended December 31, 1996, and to the incorporation by
reference therein of our report dated November 19, 1997 with
respect to the statement of revenue and certain expenses of 145
South Fairfax for the year ended December 31, 1996, and to the
incorporation by reference therein of our report dated October
14, 1997 with respect to the statement of revenue and certain
expenses of Bernardo Regency for the year ended December 31,
1996, and to the incorporation by reference therein of our report
dated October 3, 1997 with respect to the combined statement of
revenue and certain expenses of Thousand Oaks Portfolio for the
year ended December 31, 1996 all of which were included in the
current report filed on Form 8-K/A of Arden Realty, Inc. dated
November 24, 1997, filed with the Securities and Exchange
Commission.
/s/Ernst & Young LLP
Los Angeles, California
December 3, 1997
