<PAGE> 1
As filed pursuant to Rule 424(b)(2)
under the Securities Act of 1933
Registration No. 333-44141
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN DECLARED EFFECTIVE
BY THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME A FINAL PROSPECTUS SUPPLEMENT IS
DELIVERED. THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BY ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL.
Subject To Completion, dated February 2, 1998
PROSPECTUS SUPPLEMENT
(To Prospectus dated January 21, 1998)
17,000,000 SHARES [LOGO]
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 commercial properties in
Southern California. As of January 31, 1998, the Company owned a portfolio of 77
office properties (the "Properties") containing approximately 11.2 million
rentable square feet. All of the Properties are located in Southern California.
In addition, the Company has entered into a contract to acquire a portfolio of
50 primarily office and R&D/industrial properties located in Southern California
(the "LBA Portfolio"), aggregating approximately 5.2 million rentable square
feet, for a purchase price of approximately $614.5 million. In connection with
the acquisition of the LBA Portfolio (the "LBA Acquisition"), the Company will
also issue warrants to purchase 2.5 million shares of the Company's common
stock, at a price of $29.59 per share, subject to adjustment. Upon completion of
the LBA Acquisition, the Company will be the largest publicly traded owner of
office space in Southern California, as measured by total net rentable square
feet owned.
All of the shares of the Company's common stock (the "Common Stock")
offered hereby are being sold by the Company. To assist the Company in complying
with certain qualification requirements applicable to REITs, the Company's
charter provides that no stockholder may actually or constructively own more
than 9.0% of the outstanding Common Stock, subject to certain specified
exceptions. See "Capital Stock -- Restrictions on Transfer" in the accompanying
Prospectus.
The Common Stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "ARI." On January 29, 1998, the last reported sales price of the
Common Stock on the NYSE was $28 1/2 per share.
---------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 4 OF THE ACCOMPANYING PROSPECTUS FOR
CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
======================================================================================================
Underwriting
Price to Discounts Proceeds to
Public and Commissions(1) Company(2)
- ------------------------------------------------------------------------------------------------------
Per Share........................... $ $ $
- ------------------------------------------------------------------------------------------------------
Total(3)............................ $ $ $
======================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $500,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
2,550,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover overallotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
---------------------------
The shares of Common Stock offered by this Prospectus Supplement are
offered by the several Underwriters, subject to prior sale, to withdrawal,
cancellation or modification of the offer without notice, to delivery to and
acceptance by the Underwriters and to certain further conditions. It is expected
that delivery of the shares of Common Stock will be made at the offices of
Lehman Brothers Inc., New York, New York on or about , 1998.
---------------------------
LEHMAN BROTHERS
BT ALEX. BROWN
A.G. EDWARDS & SONS, INC.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
EVEREN SECURITIES, INC. RAYMOND JAMES & ASSOCIATES, INC.
February , 1998
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK PRIOR TO PRICING
OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK,
THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO
COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF
MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus or incorporated therein by reference. Unless indicated
otherwise, the information contained in this Prospectus Supplement assumes that
(i) the Underwriters' overallotment option is not exercised, (ii) the offering
price for the Common Stock offered hereby is $28.50, (iii) the sellers of the
LBA Portfolio (defined below) do not elect to receive a portion of their
consideration in OP Units (defined below) and (iv) none of the limited
partnership interests ("OP Units") of Arden Realty Limited Partnership, a
Maryland limited partnership (the "Operating Partnership"), redeemable for cash
or, at the election of the Company, exchangeable for Common Stock have been so
redeemed or exchanged. Although the Company and the Operating Partnership are
separate entities, for ease of reference and unless the context otherwise
requires, all references in this Prospectus Supplement to the "Company" refer to
the Company, the Operating Partnership and their subsidiaries, collectively. All
references in this Prospectus Supplement to "Namiz" refer to NAMIZ, Inc., a
California corporation formerly known as Arden Realty Group, Inc. and the
Company's immediate predecessor. All references in this Prospectus Supplement to
the activities of the Company prior to October 9, 1996 refer to the activities
of the "Arden Predecessors" which include Namiz and certain of its affiliated
entities that were engaged in the real estate business in Southern California
prior to the Company's formation and the consummation of its initial public
offering (the "IPO").
THE COMPANY
The Company is a self-administered and self-managed REIT engaged in owning,
acquiring, managing, leasing and renovating commercial properties in Southern
California. As of January 31, 1998, the Company owned a portfolio of 77 office
properties containing approximately 11.2 million rentable square feet. All of
the Properties are located in Southern California, with 63 in suburban Los
Angeles County, six in Orange County, four in San Diego County, two in Ventura
County and two in Kern County. As of January 1, 1998, the Company's portfolio of
77 Properties was approximately 82.6% leased (86.1% leased if the four
properties under renovation are excluded).
In addition, the Company has entered into a contract to acquire a portfolio
of 50 primarily office and R&D/industrial properties located in Southern
California (the "LBA Portfolio"), aggregating approximately 5.2 million rentable
square feet, for a purchase price of approximately $614.5 million. In connection
with the acquisition of the LBA Portfolio, the Company will also issue warrants
to purchase 2.5 million shares of Common Stock at a price of $29.59 per share,
subject to adjustment. The LBA Portfolio consists of 34 office properties
containing approximately 3.6 million rentable square feet, 15 R&D/industrial
properties containing approximately 1.5 million rentable square feet, and one
retail property containing 144,225 rentable square feet. As of January 1, 1998,
the office and R&D/industrial properties in the LBA Portfolio were 86.6% and
94.2% leased, respectively.
Upon completion of the acquisition of the LBA Portfolio (the "LBA
Acquisition"), the Company will be the largest publicly traded owner of office
space in Southern California as measured by total net rentable square feet
owned, with a portfolio of 127 properties containing approximately 16.4 million
rentable square feet. The Company intends to fund the LBA Acquisition in part
with the proceeds of this Offering and expects to complete such acquisition in
the first quarter of 1998.
The Company's primary business and growth strategies are to actively manage
its portfolio and to acquire underperforming office and R&D/industrial
properties, properties in need of renovation 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. The Company
implements its business and growth strategies by seeking to:
- acquire properties in submarkets where the Company already has a
significant concentration of owned assets;
- enter selected new submarkets that the Company believes have strong
economic fundamentals and prospects for additional growth;
- capitalize on economies of scale resulting from the size and geographic
focus of its portfolio;
- maintain low operating expenses through active property management and
cost control systems;
- aggressively lease its portfolio to maintain and improve occupancy rates
and renew or re-lease space as leases expire at increased market rents;
and
- utilize to its advantage its long-standing relationships with local
tenants, real estate brokers, and institutional and other owners of
office and R&D/industrial properties.
S-1
<PAGE> 4
From January 1, 1997, through January 31, 1998, the Company acquired 43
office properties containing 5.8 million rentable square feet in Southern
California for a Total Acquisition Cost (as defined below) of approximately
$792.9 million. The following table lists the acquisitions made by the Company
during such period, excluding the pending LBA Acquisition:
<TABLE>
<CAPTION>
TOTAL
APPROXIMATE ACQUISITION
NET RENTABLE COST(1) MONTH
PROPERTY NAME LOCATION SQUARE FEET (MILLIONS) ACQUIRED
- ---------------------------- ----------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
LOS ANGELES COUNTY
LOS ANGELES WEST
10780 Santa Monica Los Angeles 92,486 $ 10.6 April 1997
8383 Wilshire Beverly Hills 417,463 59.1 May 1997
Carlsberg Corporate Center Santa Monica 103,506 11.8 August 1997
120 Spalding Beverly Hills 60,656 11.3 August 1997
Northpoint Los Angeles 104,235 21.9 October 1997
145 South Fairfax Los Angeles 54,429 7.4 October 1997
Wilshire Pacific Plaza Los Angeles 100,122 15.3 December 1997
World Savings Center Los Angeles 469,115 83.2(2) December 1997
9201 Sunset Los Angeles 158,585 28.8 December 1997
9100 Wilshire Beverly Hills 326,227 65.1 January 1998
1100 Glendon(3) Los Angeles 282,013 49.9(4) January 1998
LOS ANGELES SOUTH
South Bay Centre Gardena 202,830 19.1 April 1997
Harbor Corporate Center Gardena 63,925 4.5 July 1997
Pacific Gateway II Torrance 223,731 25.2 July 1997
Mariner Court Torrance 105,436 11.8 July 1997
South Bay Technology Center Torrance 104,815 6.5 September 1997
LOS ANGELES NORTH
535 Brand(3) Glendale 109,187 15.1 March 1997
6800 Owensmouth Canoga Park 80,014 7.5 March 1997
Clarendon Crest Woodland Hills 43,063 5.2 April 1997
Noble Professional Center Sherman Oaks 51,828 6.7 April 1997
299 Euclid(3) Pasadena 73,400 8.1 July 1997
Renaissance Court Westlake Village 61,245 7.1 September 1997
Conejo Business Park Thousand Oaks 69,017 9.4 October 1997
Pennsfield Plaza Thousand Oaks 21,202 3.0 October 1997
Marin Corporate Center Thousand Oaks 51,360 7.5 October 1997
Rancho Plaza Thousand Oaks 24,057 2.8 October 1997
Thousand Oaks Plaza Thousand Oaks 13,434 1.7 October 1997
Evergreen Plaza Thousand Oaks 75,722 10.7 October 1997
Glendale Corporate Center Glendale 108,209 15.5 December 1997
Sunset Pointe Plaza Newhall 58,105 8.5 January 1998
Westlake Gardens Westlake Village 49,639 7.3 January 1998
LOS ANGELES CENTRAL
Whittier Financial Center Whittier 135,415 14.4 March 1997
1370 Valley Vista Diamond Bar 84,081 10.8 September 1997
ORANGE COUNTY
Centerpointe La Palma La Palma 597,550 80.2 June 1997
1821 Dyer Irvine 115,061 7.3 August 1997
Crown Cabot Laguna Niguel 172,900 28.3 August 1997
City Centre Fountain Valley 302,519 33.3 December 1997
SAN DIEGO COUNTY
Foremost Professional Center San Diego 60,534 8.3 September 1997
Bernardo Regency San Diego 47,916 6.6 October 1997
Activity Business Center San Diego 167,045 14.9 January 1998
KERN COUNTY
California Twin Center Bakersfield 155,189 19.6 March 1997
Parkway Center Bakersfield 61,333 7.5 May 1997
VENTURA COUNTY
1000 Town Center Oxnard 107,653 14.1 July 1997
-------------- -----------
Total 5,766,252 $ 792.9
============= ==========
</TABLE>
- ---------------
(1) "Total Acquisition Cost" includes all purchase costs, closing costs and
anticipated capital expenditures for, and carrying costs during, renovation.
(2) The Company currently owns a 75% interest in the property and has an option
to purchase the remaining 25% interest for $27,500,000 which may be
exercised beginning March 15, 1998.
(3) Property currently under renovation.
(4) The Company owns a 97.5% interest in the property.
S-2
<PAGE> 5
Based upon its evaluation of market conditions, the Company believes that
certain economic fundamentals are present in Southern California which enhance
the Company's 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 and
the LBA Portfolio are located. Unemployment in Los Angeles and Orange Counties,
where 69 of the Company's 77 Properties are located, reached 6.6% and 3.5%,
respectively, in September 1997, as compared to 9.8% and 6.8% in 1992. These
positive employment trends have contributed to continued reductions in the
office vacancy rate for Southern California which, according to Cushman &
Wakefield of California, Inc. ("Cushman & Wakefield"), has decreased since 1992
from 19.1% to 15.0% as of September 1997.
The Company operates from its Beverly Hills, California headquarters and is
a fully integrated real estate company with in-house expertise in acquisitions,
finance, asset management, leasing and construction. The Company's founders,
Richard S. Ziman and Victor J. Coleman, along with the other eight senior
officers of the Company, have an average of more than 14 years of experience in
the real estate industry. See "Management."
RECENT DEVELOPMENTS
PENDING LBA ACQUISITION
The LBA Acquisition is expected to close by the end of the first quarter of
1998 at a purchase price of approximately $614.5 million (including up to $35.0
million in OP Units). In connection with the LBA Acquisition, the Company will
also issue warrants to purchase 2.5 million shares of the Common Stock at a
price of $29.59 per share, subject to adjustment. The following table sets forth
certain data regarding the LBA Portfolio:
<TABLE>
<CAPTION>
APPROXIMATE NET RENTABLE PERCENT LEASED AT
SQUARE FEET JANUARY 1, 1998
--------------------------------------- --------------------------------
R&D/INDUSTRIAL R&D/INDUSTRIAL
LOCATION OFFICE AND RETAIL TOTAL OFFICE AND RETAIL TOTAL
----------------------------- --------- --------------- --------- ------ --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Los Angeles County........... 687,175 -- 687,175 76.3% -- 76.3%
Orange County................ 1,267,120 637,406 1,904,526 86.8% 98.5% 90.7%
San Diego County............. 1,077,098 437,942 1,515,040 97.7% 93.9% 96.6%
Ventura County............... 154,216 -- 154,216 78.9% -- 78.9%
Riverside and San Bernardino
Counties................... 447,114 532,200 979,314 77.6% 86.2% 82.3%
--------- --------- --------- ----- ----- -----
Total/Weighted
Average.......... 3,632,723 1,607,548 5,240,271 86.6% 93.2% 88.6%
========= ========= ========= ===== ===== =====
</TABLE>
The Company believes that the LBA Acquisition will be accretive to funds
from operations per share and will provide the Company with additional
opportunities to enhance long-term shareholder value.
STRATEGIC BENEFITS. The LBA Portfolio provides the Company with a number of
strategic benefits including:
- Increased Size. The LBA Portfolio solidifies the Company's position as
the largest publicly traded owner of office space in Southern California,
as measured by total net rentable square feet owned. The Company believes
it would take several years to acquire an equivalent concentration of
similar properties in these markets through single-property transactions.
- Concentration in Selected Markets. Through the LBA Acquisition, the
Company will expand its presence in Los Angeles and Ventura counties and
create a significant concentration of properties in each of Orange, San
Diego, Riverside and San Bernardino counties.
S-3
<PAGE> 6
- Economies of Scale. By increasing the size of its portfolio in Southern
California, the Company should further benefit from the competitive
advantages associated with economies of scale and submarket strength,
including negotiating discounts in the purchase of goods and services
from third parties, superior knowledge of local tenant space needs and
the potential for additional leverage in the landlord-tenant
relationship. Furthermore, the Company expects to integrate the LBA
Portfolio with minimal additions to senior management, allowing it to
take advantage of efficiencies associated with its existing
infrastructure.
- New Property Type. The LBA Portfolio includes 1.5 million rentable square
feet of R&D/industrial properties in markets where the Company already
owns office properties, allowing the Company to access new growth
opportunities and offer more space alternatives to meet tenant needs.
- Complementary Properties. The properties in the LBA Portfolio are similar
to the Company's existing portfolio in their average building size and
average lease size. Over 65% of the leases in the LBA Portfolio are less
than 5,000 rentable square feet.
MARKET FUNDAMENTALS. The Company believes that Orange and San Diego
counties, where over 65% of the total square footage of the LBA Portfolio is
located, exhibit strong economic and demographic trends which should lead to
increased revenues from property operations. Unemployment in Orange and San
Diego counties reached 3.5% and 4.6%, respectively, in September 1997, as
compared to 6.8% and 7.3% in 1992. These strong employment trends have
contributed to increased absorption and decreasing vacancies, with direct
vacancy rates in September 1997 of 14.3% and 9.5% in Orange and San Diego
counties, respectively, as compared to 17.0% and 15.9% in December 1993. With
the addition of the LBA Portfolio, 96% of the Company's square footage will be
located in four of the country's ten fastest growing metropolitan areas (as
measured by population growth projected for the period 1993 - 2005 by the U.S.
Department of Commerce in 1996).
HIGH QUALITY PROPERTIES AND LOCATIONS. The average age of the LBA
Properties is 11 years, with 21 of the 50 properties having been renovated since
1992. The Company believes the properties are generally in good condition with
no significant deferred maintenance. In addition, the Company believes the
properties are well located within their submarkets, with freeway access and
high visibility.
UPSIDE OPPORTUNITIES. The Company believes the LBA Portfolio presents
numerous opportunities to increase property value and cash flow through:
- Increasing Occupancy. As of January 1, 1998, the properties in the LBA
Portfolio were approximately 88.6% leased, providing the Company with
growth opportunities through increases in occupancy.
- Re-Leasing of Expiring Leases. The Company believes that in-place rents
for the properties in the LBA Portfolio are generally below the rates for
new leases in their markets, which allows for revenue growth as existing
leases expire and the space is renewed or re-leased at higher rental
rates.
PENDING FINANCING TRANSACTIONS
The Company is negotiating a 12-month, $375 million bridge loan facility to
finance a portion of the LBA Acquisition (the "Bridge Facility"). The Bridge
Facility is expected to bear interest at a floating rate based on the London
Interbank Offered Rate plus 140 basis points. The Company intends, as soon as it
deems practicable, to repay the Bridge Facility with proceeds from the issuance
of long-term, fixed-rate debt. While the Company is negotiating the terms of the
Bridge Facility and has received preliminary indications of interest to provide
long-term, fixed rate debt, there can be no assurance as to when or whether such
financings will occur. See "Risk Factors -- Real Estate Financing Risks" in the
accompanying Prospectus.
In addition, the Company is considering the issuance of approximately 1.4
million shares of Common Stock to two institutional buyers at the prevailing
market price of the Common Stock. There can be no assurance as to when or
whether these transactions will occur.
S-4
<PAGE> 7
INTERIM AND ANNUAL FINANCIAL RESULTS
The Company reported funds from operations of approximately $21.4 million
for the fourth quarter of 1997 (compared to $19.3 million for the third quarter
of 1997) and $67.3 million for the year ended December 31, 1997. Revenues
totaled approximately $43.8 million for the fourth quarter of 1997 (compared to
$36.9 million for the third quarter of 1997) and $135.4 million for the year
ended December 31, 1997. Net income was approximately $13.2 million for the
fourth quarter of 1997 (compared to $10.1 million for the third quarter of 1997)
and $39.6 million for the year ended December 31, 1997. On a same-store basis
for Properties owned by the Company at January 1, 1996, property net operating
income for 1997 increased approximately 7% over 1996.
PROPERTY OPERATIONS
The Company performs all property management for its portfolio. Since the
IPO, the Company has significantly increased the size of its property management
team to accommodate its recent and expected growth, including the addition of
three regional offices to bring its total to seven. Each regional office is run
by an asset or general manager who is responsible for the oversight of the
day-to-day operations of that region's properties. By maintaining a regionally
focused organizational structure, the Company believes it can achieve greater
economies of scale across its portfolio while continuing to improve its local
market expertise and knowledge of submarket trends.
In connection with the integration of the LBA Portfolio and other recent
acquisitions, the Company has upgraded its information and accounting systems
and hired a Chief Accounting Officer with over 12 years of experience in real
estate accounting. See "Management." The Company expects to hire additional
corporate and property level employees, including current on-site personnel
involved with the LBA Portfolio, to further facilitate the integration of the
LBA Acquisition. In addition, the Company's construction and development
department includes seven specialists devoted exclusively to renovations,
expansions, and improvements of the Properties.
Since the IPO, the Company has added ten leasing professionals and 80% of
its Properties are currently leased in-house. The Company believes that its
in-house leasing program will continue to generate cost savings and revenue
increases by reducing third-party leasing commissions and allowing the Company
to closely monitor its asking rents and leasing terms. Following the closing of
the LBA Acquisition, the Company expects to bring a substantial portion of the
third-party leasing of the LBA Portfolio in-house.
S-5
<PAGE> 8
The following chart shows the current management structure for the
Company's property operations:
LOGO
THE OFFERING
All of the shares of Common Stock offered hereby are being sold by the
Company.
<TABLE>
<S> <C>
Common Stock offered........................... 17,000,000 shares
Common Stock outstanding after the Offering.... 53,023,584 shares (1)
Use of Proceeds................................ Purchase of the LBA Portfolio, repayment of
indebtedness and working capital. See "Use of
Proceeds."
New York Stock Exchange Symbol................. "ARI"
</TABLE>
- ---------------
(1) Does not include (i) 3,346,738 shares of Common Stock that may be issued
upon the exchange of OP Units which are issued and outstanding, (ii)
1,302,667 shares of Common Stock subject to options granted under the
Company's Stock Incentive Plan, (iii) the 2,500,000 shares that will be
issuable upon exercise of the warrants to be issued in connection with the
LBA Acquisition or (iv) shares of Common Stock that may be issued upon the
exchange of up to $35.0 million of OP Units which may be issued as part of
the purchase price of the LBA Acquisition.
S-6
<PAGE> 9
THE COMPANY
GENERAL
The Company is a self-administered and self-managed REIT engaged in owning,
acquiring, managing, leasing and renovating commercial properties in Southern
California. As of January 31, 1998, the Company owned a portfolio of 77
Properties containing approximately 11.2 million rentable square feet. All of
the Properties are located in Southern California, with 63 in suburban Los
Angeles County, six in Orange County, four in San Diego County, two in Ventura
County and two in Kern County. As of January 1, 1998, the Company's portfolio of
77 Properties was approximately 82.6% leased (86.1% leased if the four
properties under renovation are excluded).
In addition, the Company has entered into a contract to acquire a portfolio
of 50 primarily office and R&D/industrial properties located in Southern
California, aggregating approximately 5.2 million rentable square feet, for a
purchase price of approximately $614.5 million (of which up to $35.0 million may
be paid, at the seller's option, in OP units). In connection with the
acquisition of the LBA Portfolio, the Company will also issue warrants to
purchase 2.5 million shares of Common Stock, at a price of $29.59 per share,
subject to adjustment. The LBA Portfolio consists of 34 office properties
containing approximately 3.6 million rentable square feet, 15 R&D/industrial
properties containing approximately 1.5 million rentable square feet, and one
retail property containing 144,225 rentable square feet. As of January 1, 1998,
the office and R&D/industrial properties in the LBA Portfolio were approximately
86.6% and 94.2% leased, respectively.
Management of the Company believes that the LBA Acquisition will provide a
number of important strategic benefits to the Company. Upon completion of the
LBA Acquisition, the Company will be the largest publicly traded owner of office
space in Southern California, as measured by total net rentable square feet
owned, with a portfolio of 127 properties containing approximately 16.4 million
rentable square feet. Many of the properties in the LBA Portfolio are located in
submarkets where the Company already has a significant concentration of owned
assets, allowing the Company to further benefit from the competitive advantages
associated with economies of scale and submarket strength, including superior
knowledge of local tenant space needs and the potential for additional leverage
in the landlord-tenant relationship. In addition, the LBA Portfolio provides the
Company with a significant concentration of R&D/industrial properties in markets
where it already owns office properties, allowing the Company to access new
growth opportunities in a complementary property sector and to offer more space
alternatives to meet tenant needs.
The Company intends to fund the LBA Acquisition in part with the proceeds
of this Offering and expects to complete this acquisition in the first quarter
of 1998. The completion of the LBA Acquisition is subject to customary closing
conditions and, therefore, there can be no assurance that the LBA Acquisition
will close.
From January 1, 1997, through January 31, 1998, the Company acquired 43
office properties consisting of 5.8 million rentable square feet in Southern
California, for a Total Acquisition Cost of approximately $792.9 million.
Based upon its evaluation of market conditions, the Company believes that
certain economic fundamentals are present in Southern California which enhance
the Company's 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 in-house expertise in acquisitions,
finance, asset management, leasing and construction. The Company's founders,
Richard S. Ziman and Victor J. Coleman, along with the other eight senior
officers of the Company, have an average of more than 14 years of experience in
the real estate industry. See "Management."
S-7
<PAGE> 10
The following table sets forth certain information regarding the Properties
and the LBA Portfolio, combined by region:
<TABLE>
<CAPTION>
PERCENTAGE OF
APPROXIMATE PERCENTAGE OF TOTAL
NUMBER OF NET RENTABLE TOTAL NET RENTABLE ANNUALIZED ANNUALIZED
LOCATION PROPERTIES SQUARE FEET SQUARE FEET OCCUPANCY BASE RENT(1) BASE RENT
- --------------------------------- ------------ ------------------ --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Los Angeles County
Los Angeles West..... 26 4,536,913 27.6% 79.1% $ 77,722 32.9%
Los Angeles North.... 27 2,358,388 14.3% 83.2% 36,959 15.6%
Los Angeles South.... 13 1,664,765 10.1% 83.8% 21,957 9.3%
Los Angeles
Central........... 3 608,789 3.7% 88.6% 10,964 4.6%
Orange County.......... 21 3,317,302 20.2% 87.1% 41,067 17.4%
San Diego County....... 20 2,330,948 14.2% 93.1% 28,773 12.2%
Ventura County......... 3 436,706 2.7% 83.2% 5,747 2.4%
Riverside and San
Bernardino
Counties............. 12 979,314 5.9% 82.3% 8,770 3.7%
Kern County............ 2 216,522 1.3% 94.4% 4,444 1.9%
--- ---------- ----- ---- -------- -----
Total/Weighted
Average......... 127 16,449,647 100.0% 84.5% $236,403 100.0%
=== ========== ===== ==== ======== =====
</TABLE>
- ---------------
(1) Annualized base rent is calculated as monthly contractual base rent under
existing leases as of January 1, 1998, multiplied by 12; for those leases
where rent has not yet commenced or which are in a free rent period, the
first month in which rent is received is used to determine Annualized Base
Rent.
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 the
external and internal growth opportunities described below. The Company also
believes, based on its evaluation of market conditions, that a number of factors
will enhance its ability to achieve its business objectives, including (i) the
continuing improvement of the Southern California economy and (ii) the limited
construction of new office properties in the Southern California region due to
the substantial cost to develop new office properties compared to current
acquisition prices and substantial building construction limitations in many
submarkets, which provides opportunities to maximize occupancy rates, rental
rates and overall portfolio value.
BUSINESS STRATEGIES
The Company's primary business strategies are to actively manage its
portfolio and to acquire underperforming office and R&D/industrial properties,
properties in need of renovation 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 historical activities and its knowledge of the local
marketplace, the Company believes that the Southern California region offers
opportunities for well-capitalized, experienced owners of real estate with
extensive local market expertise to take advantage of opportunities to acquire
additional office properties at attractive prices and develop office properties,
when feasible, at attractive returns. Through seven regional offices, the
Company implements its business strategies by: (i) emphasizing tenant
satisfaction and retention and employing intensive property marketing programs;
(ii) utilizing a multidisciplinary approach to acquisition, management, leasing
and renovation activities that is designed to coordinate decision-making and
enhance responsiveness to market opportunities and tenant needs; and (iii)
implementing cost control management and systems that capitalize on economies of
scale arising from the size and location of the Company's portfolio. The Company
believes that the implementation of these operating practices has led to the
increased occupancy rates and rental revenue of its existing portfolio.
S-8
<PAGE> 11
Aggressive Leasing. The concentration of many of the Properties within
certain office submarkets and the Company's relationships with a broad array of
tenants and brokers enable the Company to pursue aggressive leasing strategies,
to effectively monitor the office space requirements of existing and potential
tenants, and to offer tenants a variety of space alternatives across its
portfolio. In an effort to realize cost savings and exercise more control over
lease negotiations the Company has implemented in-house leasing programs for
approximately 80% of the Properties in selected submarkets in which it has a
substantial market presence. The Company continues, however, to employ
third-party broker listings in the submarkets in which it has a less significant
market presence.
Integrated Decision-making and Responsiveness. In addition to the location
and quality of the Properties, management generally credits its ability to
maintain its occupancy levels to the coordination of its decision-making team.
Acquisition, renovation, management and leasing activities are coordinated to
enhance responsiveness to market opportunities and tenant needs. The
acquisition, leasing and renovation teams work closely with the Company's senior
management, from the initial meetings with prospective tenants or sellers and
throughout the negotiation process. This integrated approach permits the Company
to analyze the economic terms and costs (including tenant build-out and
retrofitting costs) for each lease on a timely and efficient basis throughout
lease negotiations. With respect to acquisitions, the Company can quickly
analyze the costs of upgrades and lease-up potential. The Company is able to
commit to leasing and acquisition terms quickly, facilitate timely deal
execution and build-out of space for prospective tenants and minimize downtime
between lease rollovers.
Cost Control Operating Efficiencies. The size and geographic location of
the Company's portfolio permit it to enhance portfolio value by lowering
operating costs and expenses, in comparison to single-site ownership and
management. The Company seeks to capitalize on the economies of scale which
result from the geographic focus of the portfolio, the ownership of multiple
properties within certain submarkets and the maintenance of a centralized
accounting system for cost control at each of the Properties.
GROWTH STRATEGIES
External Growth: Based on its own historical activities and its knowledge
of the local marketplace, the Company believes that opportunities continue to
exist to acquire additional office properties that: (i) provide attractive
initial yields with significant potential for growth in cash flow; (ii) are in
desirable locations within submarkets which the Company believes have economic
growth potential; and/or (iii) are underperforming or need renovation, and
therefore provide opportunities for the Company to increase the cash flow and
value of such properties through renovation, active management and aggressive
leasing. Since January 1, 1997, the Company has acquired 43 office properties
containing 5.8 million rentable square feet for a Total Acquisition Cost of
approximately $792.9 million.
The Company intends to continue to acquire office properties within
submarkets in Southern California which the Company believes present
opportunities for long-term stable and rising rental rates due to employment
growth, population movements within the region and restrictions on new
development. The Company generally targets properties which are underperforming
or need renovation and offer opportunities for the Company to implement its
value-added strategy to increase cash flow.
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 office and R&D/industrial
properties; (iii) its fully integrated real estate operations which allow the
Company to respond quickly to acquisition opportunities; (iv) its access to
capital as a public company; (v) its ability to acquire properties in exchange
for OP Units or Common Stock if the sellers so desire; and (vi) management's
reputation as an experienced purchaser of commercial 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 and R&D/industrial space in selected submarkets when market conditions
support such development.
S-9
<PAGE> 12
Internal Growth: The Company believes that opportunities exist to increase
cash flow from its existing portfolio and that such opportunities will be
enhanced as the Southern California office market continues to improve. The
Company intends to pursue internal growth by: (i) continuing to maintain and
improve occupancy rates through active management and aggressive leasing; (ii)
realizing fixed contractual base rental increases or increases tied to indices
such as the Consumer Price Index; (iii) re-leasing space as leases expire 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 its cost control management and systems; (v) capitalizing on
economies of scale arising from the size and geographic focus of its portfolio;
and (vi) increasing revenue generated from parking facilities at certain
Properties where the Company is currently offering free parking as an amenity or
charging below market rates.
(i) Maintaining and improving occupancy rates: The Company believes that
it has been successful in attracting, expanding and retaining a
diverse tenant base by actively managing its office properties with an
emphasis on tenant retention and satisfaction. The Company strives to
be responsive to the needs of individual tenants through its on-site
professional management staff and by providing tenants with
alternative space within the Company's portfolio to accommodate their
changing space requirements. The Company's success in maintaining and
improving occupancy rates is demonstrated, in part, by the number of
existing tenants which have renewed or released their space, leased
additional space to support their expansion needs, or moved to other
space within the Company's portfolio. The Company also seeks to
improve occupancies by aggressively marketing available space within
its portfolio. In 1997, the Company signed 315 leases for
approximately 1.1 million rentable square feet.
(ii) Re-leasing space as leases expire at increasing market
rents: Although there can be no assurances in this regard, the
Company believes that as the office space market in Southern
California continues to improve, there will be increasing demand for
office space and declining vacancies which are expected to result
over time in increasing market rents. The Company believes it will
have significant opportunities to increase cash flow during such
periods of increasing market rents by renewing or re-leasing space as
leases expire at the increased market rents.
(iii) Cost control management and systems: The Company seeks to lower
operating expenses through cost control management that capitalizes
on economies of scale opportunities resulting from the size and
location of the Company's portfolio. The Company focuses on cost
control in various areas of operations. For example, the Company is
seeking to significantly lower its utility costs, which constitute
over 25% of the operating costs of most of the Properties, through
the portfolio-wide installation of energy enhancement technologies,
which include lighting retrofit, replacement of heating, ventilation
and air conditioning systems, and computer-driven energy management
systems which monitor and react to the climatic requirements of
individual Properties.
(iv) Capitalizing on economies of scale: In order to capitalize on
economies of scale arising from the size and geographic focus of the
Company's portfolio, the Company's property and asset managers are
responsible for several Properties, which spreads administrative
costs over such Properties and reduces per square foot administrative
expense. In addition, the Company believes that parking operations,
building and other services and tenant improvements purchased on a
portfolio-wide basis will facilitate further economies of scale.
(v) Revenue from parking facilities: The Company owns or leases parking
facilities which are attached or adjacent to many of the Properties.
The Company currently provides free parking to tenants at several of
the Properties as an amenity, and charges tenants at the remaining
Properties at or below market rates for parking. If the demand for
Southern California office space increases and occupancy rates rise,
which the Company believes is the trend, the Company believes that
there may be opportunities to generate additional revenue from the
parking facilities associated with its Properties by charging for
parking which is currently provided for free, increasing below market
rates and maintaining its arrangements with a limited number of
third-party operators of the Company's parking facilities.
S-10
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting the
underwriting discounts and commissions and estimated expenses of the Offering,
are estimated to be approximately $459.8 million (approximately $528.8 million
if the Underwriters' overallotment option is exercised in full). The Company
intends to use all of the net proceeds from the Offering along with the
approximately $375 million of proceeds from the Bridge Facility to fund the
purchase of the LBA Portfolio and to repay a portion of the Company's lines of
credit.
If the Underwriters' overallotment option to purchase 2,550,000 shares of
Common Stock is exercised in full, the Company expects to use the additional net
proceeds for debt repayment and working capital.
Pending application of net proceeds, the Company will invest such portion
of the net proceeds in interest-bearing accounts and short-term,
interest-bearing securities, which are consistent with the Company's continuing
to qualify for taxation as a REIT.
PRICE RANGE OF COMMON STOCK AND DISTRIBUTION HISTORY
The Common Stock began trading on the NYSE on October 4, 1996 under the
symbol "ARI." On January 29, 1998, the last reported sales price per share of
Common Stock on the NYSE was $28 1/2, and there were approximately 137 holders
of record of the Common Stock. The table below sets forth the quarterly high and
low closing sales price per share of Common Stock reported on the NYSE and the
distributions declared per share by the Company with respect to each such
period.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
--- --- -------------
<S> <C> <C> <C>
1996
Fourth Quarter (from October 9)...................... $27 5/8 $22 $0.36(1)
1997
First Quarter........................................ 29 1/2 26 1/4 0.40
Second Quarter....................................... 27 3/8 23 3/4 0.40
Third Quarter........................................ 27 25 3/16 0.40
Fourth Quarter....................................... 32 3/8 28 1/4 0.40
1998
First Quarter (through January 29)................... 31 1/8 27 3/4
</TABLE>
- ---------------
(1) The Company paid a distribution of $.36 per share of Common Stock on January
15, 1997, to stockholders of record on December 31, 1996, for the period
from October 9, 1996 (the closing of the IPO) through December 31, 1996,
which is approximately equivalent to a quarterly distribution of $.40 and an
annual distribution of $1.60 per share of Common Stock.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for federal income tax purposes, other than capital gain
dividends, will be taxable to stockholders as ordinary dividend income. Capital
gain dividends generally will be treated as long-term capital gain. The Company
has determined that for federal income tax purposes, approximately $1.45 per
share (or approximately 91%) of the $1.60 per share distribution paid for 1997
represented ordinary dividend income to stockholders in 1997, with the remainder
of the distribution to be attributed to 1998. In order to avoid corporate income
taxation of the earnings that it distributes, the Company must make annual
distributions to stockholders of at least 95% of its REIT taxable income
(determined by excluding any net capital gain), which the Company anticipates
will be less than its share of cash available for distribution. Under certain
circumstances, the Company may be required to make distributions in excess of
cash available for distribution in order to meet such distribution requirements.
In such a case, the Company may find it necessary to arrange for short-term (or
possibly long-term) borrowings or to raise funds through the issuance of
preferred shares or additional shares of Common Stock.
Future distributions by the Company will be at the discretion of the Board
of Directors and will depend on the actual funds from operations of the Company,
its financial condition, capital requirements, the annual
S-11
<PAGE> 14
distribution requirements under the REIT provisions of the Internal Revenue Code
of 1986, as amended (see "Federal Income Tax Considerations -- Taxation of the
Company" in the accompanying Prospectus), economic conditions and such other
factors as the Board of Directors deems relevant. See "Risk Factors -- Changes
in Policies Without Stockholder Approval" in the accompanying Prospectus.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 on a historical and pro forma basis to give effect to (i) the
acquisition of properties acquired subsequent to September 30, 1997 and through
January 30, 1998; (ii) the LBA Acquisition; (iii) borrowings under the Bridge
Facility; (iv) the completion of this Offering and (v) repayments of the
Company's lines of credit. See "Use of Proceeds." The information set forth in
the table should be read in connection with the financial statements and notes
thereto, the pro forma financial information and notes thereto incorporated by
reference in the accompanying Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
CONSOLIDATED PRO FORMA
HISTORICAL AS ADJUSTED
------------ -----------
<S> <C> <C>
Debt:
Mortgage loans.................................................... $180,000 $ 695,870
Lines of credit................................................... 45,900(1) 31,687
Minority interests.................................................. 47,178 100,139
Stockholders' equity
Preferred stock, $.01 par value; 20,000,000 shares authorized;
none issued and outstanding.................................... -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
35,442,833 issued and outstanding on a historical basis; and
52,442,833 issued and outstanding on a pro forma basis......... 354 524
Additional paid-in capital........................................ 667,493 1,131,173
------- ---------
Total stockholders' equity..................................... 667,847 1,131,697
------- ---------
Total capitalization...................................... $940,925 $ 1,959,393
======= =========
</TABLE>
- ---------------
(1) Balance on the lines of credit as of January 31, 1998 was $287,950,000.
S-12
<PAGE> 15
SELECTED FINANCIAL DATA
The following table sets forth (i) selected consolidated historical
financial data for the Company as of and for the nine months ended September 30,
1997, as of December 31, 1996 and for the period October 9, 1996 (the date of
the Company's commencement of operations as a public REIT) to December 31, 1996,
(ii) selected combined historical financial data for the Arden Predecessors for
the period January 1, 1996 to October 8, 1996, and (iii) selected pro forma
consolidated financial data for the Company as of and for the nine months ended
September 30, 1997 and for the year ended December 31, 1996.
The selected consolidated historical balance sheet and operating data of
the Company as of December 31, 1996 and for the period from October 9, 1996,
(the date of the Company's commencement of operations as a public REIT) to
December 31, 1996 and the selected combined historical operating data of the
Arden Predecessors for the period January 1, 1996 to October 8, 1996 have been
derived from the respective historical consolidated and combined financial
statements audited by Ernst & Young LLP, independent auditors. The selected
financial data as of and for the nine months ended September 30, 1997 was
derived from unaudited financial statements. The following data should be read
in conjunction with (i) the pro forma condensed consolidated financial
statements and notes thereto of the Company; (ii) the historical consolidated
and combined financial statements and related notes thereto for the Company and
the Arden Predecessors; and (iii) "Management's Discussion and Analysis of
Financial Condition and Results of Operations," each included in the Company's
filings under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), which are incorporated by reference in the accompanying Prospectus.
The selected pro forma consolidated financial operating data for the nine
months ended September 30, 1997 and the year ended December 31, 1996 is
presented as if the IPO, the formation transactions relating to the IPO, the
closings of the Company's mortgage financing and its credit facility, the
acquisition of the Properties acquired in 1996 prior to the consummation of the
IPO, 303 Glenoaks and 12501 East Imperial Highway, the Properties acquired in
1996 subsequent to the IPO, the Properties acquired in 1997, the Properties
acquired in 1998, the completion of previous offerings of Common Stock, the
completion of this Offering, the borrowings under the Bridge Facility, the LBA
Acquisition and the repayment of a portion of the Company's lines of credit had
occurred at January 1, 1996 for the statements of operations. The selected pro
forma balance sheet data as of September 30, 1997 is presented as if the
completion of the Offering, the borrowings under the Bridge Facility, the
acquisition of the properties acquired subsequent to September 30, 1997, the LBA
Acquisition and the repayment of a portion of the Company's lines of credit had
occurred on September 30, 1997. The selected pro forma consolidated financial
data is based upon certain assumptions that are included in the notes to the pro
forma condensed consolidated financial statements included in the Company's
filings under the Exchange Act, which are incorporated by reference in the
accompanying Prospectus. The selected pro forma consolidated financial data is
not necessarily indicative of what the financial position and results of
operations of the Company would have been as of the dates and for the periods
indicated, nor does it purport to represent or project the financial position
and results of operations for future periods.
S-13
<PAGE> 16
<TABLE>
<CAPTION>
COMPANY ARDEN PREDECESSORS
--------------------------------------------------------------- ------------------
NINE MONTHS OCTOBER 9, 1996 JANUARY 1, 1996
ENDED YEAR ENDED TO TO
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1996 OCTOBER 8, 1996
----------------------- ----------------- ----------------- ------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL HISTORICAL
--------- ---------- ----------------- ----------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUE:
Rental....................... $175,014 $ 80,740 $ 223,002 $ 17,041 $ 32,287
Tenant reimbursements........ 8,792 3,593 11,553 803 2,031
Parking, net of expenses..... 8,533 5,267 11,901 1,215 3,692
Other........................ 4,460 2,014 6,157 513 2,455
------- ------- ------- -------- -------
Total revenue......... 196,799 91,614 252,613 19,572 40,465
------- ------- ------- -------- -------
EXPENSES:
Property expenses............ 66,782 29,175 92,842 6,005 14,224
General and administrative... 3,750 2,828 5,000 753 1,758
Interest..................... 30,084 13,723 40,833 1,280 24,521
Loss on valuation of
derivative................. 3,111 3,111 -- -- --
Depreciation and
amortization............... 34,334 13,261 44,692 3,108 5,264
------- ------- ------- -------- -------
Total expenses........ 138,061 62,098 183,367 11,146 45,767
------- ------- ------- -------- -------
Equity in net (loss) income of
noncombined entities......... -- -- -- -- (336)
------- ------- ------- -------- -------
Income (loss) before minority
interest and extraordinary
items........................ 58,738 29,516 69,246 8,426 (5,638)
Minority interests' share of
loss of Arden Predecessors... -- -- -- -- 721
Minority interest.............. (5,563) (3,105) (6,784) (993) --
------- ------- ------- -------- -------
Income (loss) before
extraordinary item........... 53,175 26,411 62,462 7,433 (4,917)
------- ------- ------- -------- -------
Extraordinary (loss) gain on
early extinguishment of debt,
net of minority interests'
share........................ -- -- -- (13,105) 1,877
------- ------- ------- -------- -------
Net income (loss).............. $ 53,175 $ 26,411 $ 62,462 $ (5,672) $ (3,040)
======= ======= ======= ======== =======
Weighted average number of
shares outstanding........... 52,443 25,440 52,430 21,680
======= ======= ======= ========
Net income (loss) per common
share:
Income before extraordinary
item....................... $ 1.01 $ 1.04 $ 1.19 $ 0.34
Extraordinary item-loss on
early extinguishment of
debt....................... -- -- -- (0.60)
------- ------- ------- --------
Net income (loss) per common
share...................... $ 1.01 $ 1.04 $ 1.19 $ (0.26)
======= ======= ======= ========
Cash distributions declared per
common share................. $ 1.20 $ 0.36
======= ========
</TABLE>
S-14
<PAGE> 17
<TABLE>
<CAPTION>
COMPANY
-----------------------------------------------
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------------- -----------------
PRO FORMA HISTORICAL HISTORICAL
---------- ---------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Commercial office properties-net of accumulated
depreciation............................................... $1,945,602 $925,539 $ 529,568
Total assets................................................. 1,996,569 978,101 551,256
Mortgage loans payable and unsecured lines of credit......... 727,557 225,900 155,000
Total liabilities............................................ 764,733 263,076 173,612
Minority interest............................................ 100,139 47,178 45,667
Total stockholders' equity................................... 1,131,697 667,847 331,977
</TABLE>
<TABLE>
<CAPTION>
COMPANY ARDEN PREDECESSORS
--------------------------------------------------------------- ------------------
NINE MONTHS OCTOBER 9, 1996 JANUARY 1, 1996
ENDED YEAR ENDED TO TO
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1996 OCTOBER 8, 1996
----------------------- ----------------- ----------------- ------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL HISTORICAL
--------- ---------- ----------------- ----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations(1):
Income (loss) before
minority interest and
extraordinary items....... $58,738 $ 29,516 $ 69,246 $ 8,426 $ (5,638)
Depreciation and
amortization.............. 34,334 13,261 44,692 3,108 5,264
------- --------- -------- --------- ---------
Funds from Operations....... 93,072 42,777 113,938 11,534 (374)
Company's percentage share.... 93.4% 89.5% 93.5% 88.2% --
------- --------- -------- --------- ---------
Company's share of Funds from
Operations.................. $86,929 $ 38,285 $ 106,532 $ 10,173 $ (374)
======= ========= ======== ========= =========
Weighted average number of
shares outstanding (in
thousands).................. 52,443 25,440 52,430 21,680 N/A
Cash flows from operating
activities.................. -- 27,682 -- 8,665 5,221
Cash flows from investing
activities.................. -- (407,613) -- (164,763) (119,083)
Cash flows from financing
activities.................. -- 379,244 -- 163,730 122,074
Number of Properties owned at
period end.................. 127 58 127 34 22
Gross rentable square feet of
Properties owned at end of
period (in thousands)....... 16,423 8,726 16,423 5,443 3,739
Leased percentage for
Properties owned at end of
period...................... -- 85% -- 85% 88%
</TABLE>
- ---------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 (the "White Paper") defines Funds from Operations as net income
(loss) (computed in accordance with generally accepted accounting principles
("GAAP"), excluding gains (or losses) from debt restructuring, plus real
estate related depreciation and amortization. Management believes Funds from
Operations is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors with an
understanding of the ability of the Company to incur and service debt, to
make capital expenditures and to fund other cash needs. The Company's
computation of Funds from Operations may differ from the methodology for
calculating Funds from Operations utilized by other equity REITs and,
accordingly, may not be comparable to such other REITs. Funds from
Operations should not be considered as an alternative to net income
(determined in accordance with GAAP), as an indication of the Company's
financial performance or as an alternative to cash flows from operating
activities (determined in accordance with GAAP) as a measure of the
Company's liquidity.
S-15
<PAGE> 18
SOUTHERN CALIFORNIA ECONOMY AND OFFICE MARKETS
The Company believes that current and forecast trends affecting Southern
California have created and will continue to create a favorable economic
environment in the suburban Southern California office markets where
substantially all of the Properties are located. First, the Company believes
that the supply of office space in Southern California is unlikely to
significantly increase over the short term in large part because it is not
economically feasible to develop new office space based on rental rates
currently attainable in Southern California office markets. Second, the recent
economic restructuring of many of Southern California's primary office-using
sectors including the entertainment, export/import, managed health care, high
technology, telecommunications, and civilian and military aerospace and defense
industries has caused growth in demand for office space. Third, demand for
suburban office space relative to the level of supply has led to higher
occupancy rates and a trend towards higher rental rates which are supportable in
the office markets where the Properties and the LBA Portfolio are located.
Finally, patterns of residential relocation to suburban areas due in part to the
public perception of greater personal security and to the availability of
greater recreational and residential amenities in suburban areas, coupled with a
heightened preference for living in close proximity to work and employers'
resultant access to a broader, more skilled local labor force have fueled growth
of suburban office property demand. The Company believes that these factors and
other specific economic indicators discussed below suggest a continued
strengthening of the Southern California economy. Given the quality and location
of its Properties and the LBA Portfolio, the Company believes it is
competitively positioned to capitalize on these economic trends and the
resulting increasing demand for suburban office space.
SOUTHERN CALIFORNIA ECONOMY
Overview. The Company believes that the office markets in Southern
California, and particularly suburban Los Angeles County, Orange County and San
Diego County have improved and will be excellent markets in which to own and
operate office and R&D/industrial properties over the long term.
The seven counties in which the Properties and the LBA Portfolio are
located include Los Angeles, Orange, San Diego, Ventura, Kern, Riverside and San
Bernardino which collectively comprise over 50% of the statewide population and
employment base in California. Data from the U.S. Bureau of Labor Statistics
indicates that the unemployment rate in these counties peaked in 1993 during the
height of the 1990 to 1993 recessionary period in Southern California. Recently,
however, these counties experienced a gradual economic recovery marked by
falling unemployment rates beginning in 1994 which, according to The 1996
Economic Report of the Governor of California (the "1996 Economic Report"), was
precipitated by growth in the services and trade employment sectors, among
others, and a less pronounced rate of decline in defense related activities in
Southern California. Since 1993, the five-county Los Angeles area economy has
grown at an annual rate of over 3.9%, and, according to the Economic Development
Corporation of Los Angeles (the "LAEDC") is forecast to have grown at a 6.3%
rate during 1997 (as compared to 3.5% for the United States as a whole).
S-16
<PAGE> 19
GROSS DOMESTIC PRODUCT
FOR FIVE-COUNTY LOS ANGELES AREA
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1990 1991.0 1992.0 1993.0 1994.0 1995.0 1996.0 1997.0
372.6 376.4 389.0 296.2 405.0 421.5 445.2 473.4
</TABLE>
Source: California Department of Finance, LAEDC
According to the U.S. Bureau of Labor Statistics, Los Angeles County,
Orange County and San Diego County added 179,389 non-farm jobs between January
1, 1997, and September 30, 1997, bringing total employment in these three
counties to approximately 6.8 million. Accordingly, trends of decreasing
unemployment continued in Southern California during 1997. In Los Angeles County
the September 1997 unemployment rate was 6.6%, down 4.2% from its recessionary
high of 10.8% (not seasonally adjusted) in July 1992.
SOUTHERN CALIFORNIA UNEMPLOYMENT RATES
<TABLE>
<CAPTION>
MEASUREMENT PERIOD LOS ANGELES
(FISCAL YEAR COVERED) COUNTY ORANGE COUNTY SAN DIEGO COUNTY
<S> <C> <C> <C>
1992 9.80 6.80 7.30
1993 9.80 6.80 7.70
1994 9.40 5.70 7.00
1995 7.90 5.10 6.40
1996 8.20 4.10 5.30
1997 6.60 3.50 4.60
</TABLE>
Source: Bureau of Labor Statistics
The LAEDC has forecast a total increase in non-farm employment for the
period from 1996 to 2005 of 19.9% and 19.5% for Los Angeles County and Orange
County, respectively, representing an average annual growth rate of 2.0% for
each. Overall, the five-county Los Angeles region is expected to experience
similar growth with an 18.6% increase in employment over the same time period.
The current economic expansion, in particular, differs from previous Southern
California expansions in that the defense industry is no longer the
S-17
<PAGE> 20
driving force for growth. Instead, employment growth has been driven primarily
by the service sectors of the economy. The following chart summarizes the
historical and projected employment growth for Southern California.
SOUTHERN CALIFORNIA EMPLOYMENT TRENDS
1980-1996 (ACTUAL)--1996-2000 (FORECASTS)
<TABLE>
<CAPTION>
'FINANCE,
INSURANCE
MEASUREMENT PERIOD WHOLESALE AND REAL
(FISCAL YEAR COVERED) SERVICES MANUFACTURING RETAIL TRADE TRADE ESTATE'
<S> <C> <C> <C> <C> <C>
1980 1700.00 1350.00 1150.00 400.00 625.00
1982 1970.00 1360.00 1220.00 425.00 660.00
1984 2240.00 1370.00 1290.00 450.00 695.00
1986 2510.00 1380.00 1360.00 475.00 730.00
1988 2780.00 1390.00 1430.00 500.00 765.00
1990 3050.00 1400.00 1500.00 525.00 800.00
1992 3116.67 1250.00 1475.00 512.50 775.00
1994 3183.33 1100.00 1450.00 500.00 750.00
1996 3250.00 1150.00 1475.00 525.00 766.67
1998 3350.00 1150.00 1487.50 525.00 783.33
2000 3450.00 1150.00 1500.00 525.00 800.00
</TABLE>
Source: Cushman & Wakefield
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<PAGE> 21
As primary office employment grows, office demand is expected to increase.
According to America's Office Economy prepared by Cognetics, Inc., Metropolitan
Los Angeles (which includes Los Angeles County, Ventura County and Orange
County), in which 71 of the Company's 77 Properties are located, is projected to
be the number one market in the United States for primary office employment
growth from 1996 to 2005, and San Diego is ranked 17th.
TOP 20 MARKETS FOR PRIMARY OFFICE
EMPLOYMENT GROWTH (1996-2005)
<TABLE>
<S> <C>
1. LOS ANGELES 11. Minneapolis-St. Paul
2. San Francisco-Oakland-San Jose 12. Boston
3. Atlanta 13. Denver-Boulder
4. Dallas-Ft. Worth 14. Seattle
5. Washington, DC-MD-VA 15. Miami-Ft. Lauderdale
6. Chicago 16. Orlando
7. Phoenix 17. SAN DIEGO
8. New York 18. Detroit
9. Houston-Galveston 19. Las Vegas
10. Tampa-St. Petersburg 20. Austin
</TABLE>
Source: Cognetics, Inc.
In addition to becoming a more diversified economy with a stronger emphasis
on the services and government sectors, according to the LAEDC, Los Angeles
County is a major center of international trade. According to the 1996 Economic
Report, Los Angeles County is also the nation's leading manufacturing center.
The five-county Los Angeles area is home to 26 Fortune 500 companies, and Los
Angeles County itself comprises over 40% of the nondurable manufacturing
employment, 95% of the motion picture employment and 56% of the aerospace
employment in California. The Los Angeles PMSA is the largest PMSA in the United
States (larger than both the New York City PMSA and the Chicago PMSA) and
accounts for approximately 28% of California's population and employment base.
Demand for office space in Los Angeles County is expected to remain strong as a
result of these characteristics.
International trade is another major component of the Los Angeles economy,
and while growth in international trade is difficult to attribute to specific
employment sectors, it is an indicator of the general strength of the local
economy. In 1994 the Los Angeles Customs District (which is primarily comprised
of the Los Angeles/Long Beach port complex and the Los Angeles International
Airport) surpassed New York/New Jersey as the nation's leading port. According
to the U.S. Department of Commerce, international trade passing through the Los
Angeles Customs District has increased from approximately $90.0 billion in 1988
to approximately $167.6 billion in 1996, representing over 12.0% of the total
trading volume in the United States.
S-19
<PAGE> 22
INTERNATIONAL TRADE THROUGH LOS ANGELES CUSTOMS DISTRICT
<TABLE>
<CAPTION>
TOTAL TRADING VOLUME (BILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997e 1998e
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----- -----
$90.0 $101.4 $106.6 $112.7 $121.6 $128.5 $145.9 $164.7 $167.6 $173.5 $179.1
</TABLE>
SOUTHERN CALIFORNIA OFFICE MARKETS
In the past five years the underlying fundamentals of supply and demand in
the Southern California office markets have improved. The peak in available
supply occurred at the midpoint of the recession in 1991. Since that time, the
local economies have been recovering and the relationship between supply and
demand has resulted in declining direct vacancy rates in these markets. In each
of 1995 and 1996, net office absorption has more than doubled in the region, and
in the first two quarters of 1997 net office absorption was greater than the
average annual absorption for the last five years. With virtually no new office
construction in the region between 1994 and 1996, an influx of new companies and
growth of existing companies has led directly to lower vacancy rates and higher
absorption.
S-20
<PAGE> 23
The following chart illustrates absorption and vacancy rates in the
Southern California market between 1992 and September 1997:
SOUTHERN CALIFORNIA OFFICE MARKET
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
ANNUAL ABSORPTION -
SQUARE FEET 1,150,000 2,550,000 275,000 975,000 3,200,000 3,200,000
PERCENT VACANT 19.1% 17.8% 17.6% 17.4% 16.0% 15.0%
</TABLE>
Source: Cushman & Wakefield
The current trend of net absorption and declining vacancy rates followed a
period during the late 1980s which was characterized by excess supply of
commercial real estate due, in part, to over-building. A variety of factors,
including the real estate recession and new federal banking regulations that
caused a reduction in available capital for real estate development, virtually
halted new office construction in Southern California for nearly five years. The
following chart illustrates the total office construction in Southern California
between 1987 and 1996.
SOUTHERN CALIFORNIA OFFICE CONSTRUCTION
<TABLE>
<CAPTION>
SQUARE FEET (MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
19.4 13.6 15.1 12.9 11.9 2.7 0.2 0.0 0.4 0.3
</TABLE>
Source: Cushman & Wakefield
S-21
<PAGE> 24
PROPERTIES
GENERAL
The Company's Properties consist of 77 office properties containing
approximately 11.2 million rentable square feet. The Properties consist
primarily of suburban office properties and individually range from
approximately 13,400 to 598,000 rentable square feet. All of the Properties are
located in Southern California, with 63 located in suburban Los Angeles County,
six in Orange County, four in San Diego County, two in Ventura County, and two
in Kern County. The Company believes that the Properties have desirable
locations within established business communities and are well maintained. Of
the Company's 77 Properties, 58 have been built since 1980 and 18 have been
substantially renovated within the last five years. The average age of the
buildings is approximately 15 years. The Properties offer an array of amenities
including security, parking, conference facilities, on-site management, food
services and health clubs.
In addition, the Company has executed a contract to acquire the LBA
Portfolio, consisting of 50 properties including 34 office properties containing
approximately 3.6 million square feet, 15 R&D/industrial properties containing
approximately 1.5 million rentable square feet, and one retail property
containing 144,225 rentable square feet. All the properties in the LBA Portfolio
are located in Southern California, with six in Los Angeles County, 15 in Orange
County, 16 in San Diego County, one in Ventura County, and 12 in Riverside and
San Bernardino Counties. The properties included in the LBA Portfolio range from
approximately 12,000 to 451,000 rentable square feet and have an average age of
11 years. Of the 50 properties included in the LBA Portfolio, 45 have been built
since 1980 and 21 have been substantially renovated within the last five years.
Upon closing of the LBA Acquisition the Company will own a total of 127
primarily office and R&D/industrial properties consisting of approximately 16.4
million rentable square feet.
Management believes that the location, quality of construction and building
amenities, as well as the Company's reputation for providing a high level of
tenant service, have enabled the Company to attract and retain a diverse tenant
base. As of January 1, 1998, the Properties were 82.6% leased (86.1% leased if
the four properties under renovation are excluded) to approximately 2,050
tenants and the LBA Portfolio was 88.6% leased to approximately 570 tenants. As
of January 1, 1998, no one tenant represented more than 1.5% of the aggregate
Annualized Base Rent (as defined herein) of the Properties and the LBA Portfolio
combined and only four tenants individually represented more than 1.0% of such
aggregate Annualized Base Rent.
The Properties and LBA Portfolio are leased to a variety of local, national
and foreign businesses. Leases are typically structured for terms of three, five
or 10 years. Most of the leases are full service, gross leases under which
tenants typically pay for all real estate taxes and operating expenses above
those for an established base year or expense stop. Leases typically contain
provisions permitting tenants to renew at prevailing market rates. Under the
lease, the landlord is generally responsible for structural repairs. Most leases
do not permit early termination, however, certain leases permit the tenant to
terminate upon six months' notice after the third year of a five-year lease or
the fifth year of a 10-year lease, subject to the tenant's obligation to pay all
unamortized tenant improvements and leasing commissions, a penalty of three to
six months of additional rent, and any rent concessions provided, depending on
the lease terms. Finally, tenants generally pay directly (without regard to a
base year or expense stop) for overtime use of air conditioning and for on site
monthly employee and visitor parking.
Although the leases at the Properties and the LBA Portfolio primarily
consist of gross leases (which represented approximately 82% of the total
portfolio leased square footage as of January 1, 1998), they also include triple
net leases with a number of tenants. In general, the triple net leases require
the tenants to pay all real property taxes, insurance and expenses of
maintaining the leased space or property and have renewal and termination
provisions similar to those described above.
The Company's Properties are regionally managed under active central
control. All administration (including the formation and implementation of
policies and procedures), leasing, capital expenditures and construction
decisions are centrally administered at the Company's corporate office. The
Company employs asset managers to oversee and direct the day-to-day operations
of the Properties, as well as the on-site personnel, which may include a
manager, assistant manager and other necessary staff. Asset managers communicate
frequently with the Company's corporate offices to implement the Company's
policies and procedures.
The on-site staffing of each property is dictated by the property's size,
tenant profile, number of tenants and location. The Company contracts with third
parties for cleaning services, day porters, engineers and any other personnel
necessary to operate the Properties.
S-22
<PAGE> 25
The following table sets forth certain information regarding the Properties
and the LBA Portfolio as of January 1, 1998:
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
APPROXIMATE PORTFOLIO
YEAR(S) NET RENTABLE NET RENTABLE
PROPERTY NAME SUBMARKET LOCATION BUILT/RENOVATED SQUARE FEET SQUARE FEET
- -------------------------------- ---------------------------- ----------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OFFICE
LOS ANGELES COUNTY
LOS ANGELES WEST
9665 Wilshire Beverly Hills/Century City Beverly Hills 1972/92-93 158,684 1.0%
Beverly Atrium Beverly Hills/Century City Beverly Hills 1989 61,314 0.4%
8383 Wilshire Beverly Hills/Century City Beverly Hills 1971/93 417,463 2.5%
120 Spalding Beverly Hills/Century City Beverly Hills 1984 60,656 0.4%
9100 Wilshire Beverly Hills/Century City Beverly Hills 1971/90 326,227 2.0%
Century Park Center Beverly Hills/Century City Los Angeles 1972/94 243,404 1.5%
10350 Santa Monica Beverly Hills/Century City Los Angeles 1979 42,292 0.3%
10351 Santa Monica Beverly Hills/Century City Los Angeles 1984 96,251 0.6%
Westwood Terrace Westwood/West Los Angeles Los Angeles 1988 135,943 0.8%
1950 Sawtelle Westwood/West Los Angeles Los Angeles 1988/95 103,772 0.6%
10780 Santa Monica Westwood/West Los Angeles Los Angeles 1984 92,486 0.6%
Wilshire Pacific Plaza Westwood/West Los Angeles Los Angeles 1976/1987 100,122 0.6%
World Savings Center(2) Westwood/West Los Angeles Los Angeles 1983 469,115 2.8%
1100 Glendon(3) Westwood/West Los Angeles Los Angeles 1965 282,013 1.7%
2730 Wilshire(4) Westwood/West Los Angeles Santa Monica 1985 55,080 0.3%
Carlsberg Corporate Center Westwood/West Los Angeles Santa Monica 1979 103,506 0.6%
1919 Santa Monica* Westwood/West Los Angeles Santa Monica 1991 44,096 0.3%
400 Corporate Pointe Marina Area/Culver City/LAX Culver City 1987 164,598 1.0%
600 Corporate Pointe* Marina Area/Culver City/LAX Culver City 1989 273,339 1.7%
Bristol Plaza Marina Area/Culver City/LAX Culver City 1982 84,014 0.5%
Skyview Center Marina Area/Culver City/LAX Los Angeles 1981,87/95 391,675 2.4%
5200 West Century(3) Marina Area/Culver City/LAX Los Angeles 1982 310,910 1.9%
Northpoint Marina Area/Culver City/LAX Los Angeles 1991 104,235 0.6%
The New Wilshire Park Mile/West Hollywood Los Angeles 1986 202,704 1.2%
145 South Fairfax Park Mile/West Hollywood Los Angeles 1984 54,429 0.3%
9201 Sunset Park Mile/West Hollywood Los Angeles 1963/92-95 158,585 1.0%
---------- ----
Subtotal/Weighted 4,536,913 27.6%
Average -- Los Angeles West
<CAPTION>
ANNUALIZED
BASE RENT
PERCENT LEASED ANNUALIZED PER LEASED
AS OF BASE RENT(1) NUMBER SQUARE
PROPERTY NAME JANUARY 1, 1998 ($000S) OF LEASES FOOT
- -------------------------------- --------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
OFFICE
LOS ANGELES COUNTY
LOS ANGELES WEST
9665 Wilshire 90.4% $ 4,151 22 $ 28.95
Beverly Atrium 89.1% 1,341 10 24.55
8383 Wilshire 80.8% 6,668 124 19.78
120 Spalding 45.5% 1,054 12 38.22
9100 Wilshire 84.9% 5,289 73 19.10
Century Park Center 84.6% 4,326 79 21.01
10350 Santa Monica 93.6% 700 16 17.68
10351 Santa Monica 94.9% 1,584 16 17.33
Westwood Terrace 88.4% 3,117 23 25.94
1950 Sawtelle 92.2% 1,863 32 19.46
10780 Santa Monica 90.4% 1,610 30 19.26
Wilshire Pacific Plaza 68.1% 1,218 29 17.86
World Savings Center(2) 86.1% 11,277 43 27.93
1100 Glendon(3) 42.5% 2,974 136 24.81
2730 Wilshire(4) 78.9% 924 27 21.25
Carlsberg Corporate Center 94.6% 1,889 40 19.30
1919 Santa Monica* 96.3% 941 6 22.14
400 Corporate Pointe 95.4% 3,435 16 21.87
600 Corporate Pointe* 86.3% 4,293 20 18.21
Bristol Plaza 82.5% 1,213 22 17.52
Skyview Center 89.5% 5,699 42 16.25
5200 West Century(3) 30.2% 1,096 17 11.68
Northpoint 99.0% 3,261 6 31.62
The New Wilshire 84.7% 3,607 33 21.02
145 South Fairfax 96.7% 992 12 18.85
9201 Sunset 63.8% 3,200 57 31.64
----- ------- ----- -----
Subtotal/Weighted 79.1% 77,722 943 21.67
Average -- Los Angeles West
</TABLE>
S-23
<PAGE> 26
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
APPROXIMATE PORTFOLIO
YEAR(S) NET RENTABLE NET RENTABLE
PROPERTY NAME SUBMARKET LOCATION BUILT/RENOVATED SQUARE FEET SQUARE FEET
- -------------------------------- ---------------------------- ----------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
LOS ANGELES NORTH
Calabasas Commerce Center Simi/Conejo Valley Calabasas 1990 123,121 0.7%
Thousand Oaks Plaza Simi/Conejo Valley Thousand Oaks 1988 13,434 0.1%
Rancho Plaza Simi/Conejo Valley Thousand Oaks 1987 24,057 0.1%
Pennsfield Plaza Simi/Conejo Valley Thousand Oaks 1989 21,202 0.1%
Conejo Business Park Simi/Conejo Valley Thousand Oaks 1991 69,017 0.4%
Marin Corporate Center Simi/Conejo Valley Thousand Oaks 1986 51,360 0.3%
Evergreen Plaza Simi/Conejo Valley Thousand Oaks 1979/96 75,722 0.5%
5601 Lindero Canyon Simi/Conejo Valley Westlake 1989 105,830 0.6%
Renaissance Court Simi/Conejo Valley Westlake 1981/92 61,245 0.4%
Westlake Gardens Simi/Conejo Valley Westlake 1998 49,639 0.3%
6800 Owensmouth West San Fernando Valley Canoga Park 1986 80,014 0.5%
Woodland Hills Financial Center West San Fernando Valley Woodland Hills 1972/95 224,955 1.3%
Clarendon Crest West San Fernando Valley Woodland Hills 1990 43,063 0.3%
16000 Ventura Central San Fernando Valley Encino 1980/96 174,841 1.1%
Sumitomo Bank Building Central San Fernando Valley Sherman Oaks 1970/90-91 110,641 0.7%
Noble Professional Center Central San Fernando Valley Sherman Oaks 1985/93 51,828 0.3%
Sunset Pointe Plaza Valencia Newhall 1988 58,105 0.4%
303 Glenoaks East San Fernando Valley/ Burbank 1983/96 175,449 1.0%
Tri-Cities
Burbank Executive Plaza East San Fernando Valley/ Burbank 1983 60,395 0.4%
Tri-Cities
California Federal Building East San Fernando Valley/ Burbank 1978 82,467 0.5%
Tri-Cities
425 West Broadway East San Fernando Valley/ Glendale 1984 71,589 0.4%
Tri-Cities
535 Brand(3) East San Fernando Valley/ Glendale 1973/92 109,187 0.7%
Tri-Cities
Glendale Corporate Center East San Fernando Valley/ Glendale 1985 108,209 0.7%
Tri-Cities
70 South Lake East San Fernando Valley/ Pasadena 1982/94 100,133 0.6%
Tri-Cities
299 Euclid(3) East San Fernando Valley/ Pasadena 1983 73,400 0.4%
Tri-Cities
150 East Colorado* East San Fernando Valley/ Pasadena 1979/97 61,168 0.4%
Tri-Cities
5161 Lankershim* East San Fernando Valley/ North Hollywood 1985/97 178,317 1.1%
Tri-Cities
---------- ----
Subtotal/Weighted 2,358,388 14.3%
Average -- Los Angeles North
<CAPTION>
ANNUALIZED
BASE RENT
PERCENT LEASED ANNUALIZED PER LEASED
AS OF BASE RENT(1) NUMBER SQUARE
PROPERTY NAME JANUARY 1, 1998 ($000S) OF LEASES FOOT
- -------------------------------- --------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
LOS ANGELES NORTH
Calabasas Commerce Center 100.0% $ 1,499 13 $ 12.17
Thousand Oaks Plaza 100.0% 208 6 15.46
Rancho Plaza 95.8% 344 19 14.93
Pennsfield Plaza 100.0% 375 11 17.67
Conejo Business Park 83.3% 1,024 24 17.80
Marin Corporate Center 98.6% 998 31 19.70
Evergreen Plaza 80.3% 1,066 37 17.52
5601 Lindero Canyon 100.0% 1,206 2 11.39
Renaissance Court 61.1% 710 13 18.97
Westlake Gardens 22.1% 262 3 23.85
6800 Owensmouth 84.1% 1,173 19 17.42
Woodland Hills Financial Center 88.1% 4,472 60 22.57
Clarendon Crest 84.7% 677 8 18.56
16000 Ventura 89.6% 2,917 45 18.62
Sumitomo Bank Building 89.4% 1,933 48 19.54
Noble Professional Center 92.3% 1,063 17 22.22
Sunset Pointe Plaza 95.7% 1,171 27 21.06
303 Glenoaks 98.3% 3,601 24 20.88
Burbank Executive Plaza 83.8% 1,090 9 21.54
California Federal Building 96.3% 1,661 9 20.91
425 West Broadway 95.2% 1,321 13 19.38
535 Brand(3) 33.6% 293 6 8.00
Glendale Corporate Center 72.6% 1,462 13 18.60
70 South Lake 94.4% 1,971 16 20.87
299 Euclid(3) 29.4% 402 1 18.60
150 East Colorado* 75.3% 796 15 17.29
5161 Lankershim* 83.5% 3,263 5 21.93
----- ------- ----- -----
Subtotal/Weighted 83.2% 36,958 494 18.84
Average -- Los Angeles North
</TABLE>
S-24
<PAGE> 27
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
APPROXIMATE PORTFOLIO
YEAR(S) NET RENTABLE NET RENTABLE
PROPERTY NAME SUBMARKET LOCATION BUILT/RENOVATED SQUARE FEET SQUARE FEET
- -------------------------------- ---------------------------- ----------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
LOS ANGELES SOUTH
4811 Airport Plaza(2) Long Beach Long Beach 1987/95 121,610 0.7%
4900/10 Airport Plaza(2) Long Beach Long Beach 1987/95 150,403 0.9%
5000 Spring(2) Long Beach Long Beach 1989/95 163,358 1.0%
100 West Broadway Long Beach Long Beach 1987/96 191,727 1.2%
1501 Hughes Way* Long Beach Long Beach 1983/97 77,060 0.5%
3901 Via Oro* Long Beach Long Beach 1986/97 53,195 0.3%
12501 East Imperial Highway Long Beach Norwalk 1978/94 122,175 0.7%
Grand Avenue Plaza El Segundo El Segundo 1979,80 84,500 0.5%
South Bay Centre Torrance Gardena 1984 202,830 1.3%
Harbor Corporate Center Torrance Gardena 1985 63,925 0.4%
Pacific Gateway II Torrance Torrance 1982/90 223,731 1.4%
Mariner Court Torrance Torrance 1989 105,436 0.6%
South Bay Technology Center Torrance Torrance 1984 104,815 0.6%
---------- ----
Subtotal/Weighted Average 1,664,765 10.1%
-- Los Angeles South
LOS ANGELES CENTRAL
Los Angeles Corporate Center San Gabriel Valley Monterey Park 1984,86 389,293 2.4%
Whittier Financial Center San Gabriel Valley Whittier 1967,82 135,415 0.8%
1370 Valley Vista San Gabriel Valley Diamond Bar 1988 84,081 0.5%
---------- ----
Subtotal/Weighted Average 608,789 3.7%
-- Los Angeles Central
ORANGE COUNTY
5832 Bolsa West County Huntington Beach 1985 49,355 0.3%
Huntington Beach Plaza I & II* West County Huntington Beach 1984/96 52,186 0.3%
City Centre West County Fountain Valley 1982 302,519 1.7%
Fountain Valley Plaza* West County Fountain Valley 1982 107,252 0.7%
3300 Irvine Avenue* Greater Airport Area Newport Beach 1981/97 74,224 0.5%
1821 Dyer Greater Airport Area Irvine 1980/88 115,061 0.7%
Von Karman Corporate Center* Greater Airport Area Irvine 1981/84 451,477 2.7%
1503 South Coast* Greater Airport Area Costa Mesa 1979/97 60,605 0.4%
Crown Cabot South County Laguna Niguel 1989 172,900 1.1%
One Venture* South County Irvine 1990/97 43,324 0.3%
Anaheim City Centre(2) Tri-Freeway Area Anaheim 1986/91 175,391 1.1%
625 The City* Tri-Freeway Area Orange 1985/97 139,806 0.8%
Orange Financial Center* Central County Orange 1985/95 305,439 1.9%
Centerpointe La Palma North County La Palma 1986,88,90 597,550 3.6%
Lambert Office Plaza* North County Brea 1986/97 32,807 0.2%
---------- ----
Subtotal/Weighted Average -- 2,679,896 16.3%
Orange County
<CAPTION>
ANNUALIZED
BASE RENT
PERCENT LEASED ANNUALIZED PER LEASED
AS OF BASE RENT(1) NUMBER SQUARE
PROPERTY NAME JANUARY 1, 1998 ($000S) OF LEASES FOOT
- -------------------------------- --------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
LOS ANGELES SOUTH
4811 Airport Plaza(2) 100.0% $ 1,051 1 $8.64
4900/10 Airport Plaza(2) 100.0% 1,173 1 7.80
5000 Spring(2) 95.5% 3,010 28 19.30
100 West Broadway 94.4% 3,677 29 20.31
1501 Hughes Way* 59.5% 592 2 12.91
3901 Via Oro* 9.9% 71 1 13.44
12501 East Imperial Highway 99.6% 2,081 6 17.10
Grand Avenue Plaza 88.2% 1,106 5 14.84
South Bay Centre 82.4% 2,910 32 17.40
Harbor Corporate Center 80.2% 721 17 14.07
Pacific Gateway II 69.9% 2,953 29 18.87
Mariner Court 84.5% 1,523 31 17.09
South Bay Technology Center 71.5% 1,089 7 14.54
----- ------- ----- -----
Subtotal/Weighted Average 83.8% 21,957 189 15.74
-- Los Angeles South
LOS ANGELES CENTRAL
Los Angeles Corporate Center 85.3% 7,085 37 21.33
Whittier Financial Center 89.1% 2,395 39 19.86
1370 Valley Vista 88.8% 1,484 14 19.88
----- ------- ----- -----
Subtotal/Weighted Average 86.6% 10,964 90 20.79
-- Los Angeles Central
ORANGE COUNTY
5832 Bolsa 100.0% 679 1 13.75
Huntington Beach Plaza I & II* 87.9% 607 13 13.25
City Centre 90.3% 3,921 24 14.36
Fountain Valley Plaza* 100.0% 1,732 4 16.15
3300 Irvine Avenue* 88.7% 1,129 24 17.15
1821 Dyer 0.0% -- -- --
Von Karman Corporate Center* 82.7% 4,905 21 13.13
1503 South Coast* 95.1% 838 23 14.55
Crown Cabot 78.4% 2,704 32 19.95
One Venture* 39.4% 351 5 20.57
Anaheim City Centre(2) 94.6% 2,745 13 16.54
625 The City* 100.0% 2,412 33 17.18
Orange Financial Center* 84.9% 5,001 35 19.29
Centerpointe La Palma 90.0% 8,914 74 16.58
Lambert Office Plaza* 99.8% 583 8 17.81
----- ------- ----- -----
Subtotal/Weighted Average -- 84.4% 36,521 310 16.15
Orange County
</TABLE>
S-25
<PAGE> 28
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
APPROXIMATE PORTFOLIO
YEAR(S) NET RENTABLE NET RENTABLE
PROPERTY NAME SUBMARKET LOCATION BUILT/RENOVATED SQUARE FEET SQUARE FEET
- --------------------------------- ---------------------------- ----------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
SAN DIEGO COUNTY
Imperial Bank Tower(2) Downtown San Diego 1982/96 540,413 3.3%
Foremost Professional Plaza I-15 Corridor San Diego 1992 60,534 0.4%
Activity Business Center I-15 Corridor San Diego 1987 167,045 1.0%
Bernardo Regency I-15 Corridor San Diego 1986 47,916 0.3%
Carlsbad Corporate Center* North Coast Carlsbad 1996 125,000 0.8%
Balboa Corporate Center* Mission Valley/Kearny Mesa San Diego 1990 69,890 0.4%
Panorama Corporate Center* Mission Valley/Kearny Mesa San Diego 1991 133,245 0.8%
Ruffin Corporate Center* Mission Valley/Kearny Mesa San Diego 1990 45,059 0.3%
Skypark Office Plaza* Mission Valley/Kearny Mesa San Diego 1986 202,164 1.2%
Governor Park Plaza* North City San Diego 1986 104,065 0.6%
5120 Shoreham* North City San Diego 1984 37,759 0.2%
Sorrento Valley Science Park* North City San Diego 1984 181,207 1.1%
Torreyanna Science Park* North City La Jolla 1980/97 81,204 0.5%
Uniden Builden* North City San Diego 1990 28,119 0.2%
10251 Vista Sorrento* North City San Diego 1981/95 69,386 0.4%
---------- ----
Subtotal/Weighted Average -- 1,893,006 11.5%
San Diego County
VENTURA COUNTY
Center Promendate West County Ventura 1982 174,837 1.1%
1000 Town Center West County Oxnard 1989 107,653 0.7%
Camarillo Business Center* West County Camarillo 1984/1997 154,216 0.9%
---------- ----
Subtotal/Weighted Average -- 436,706 2.7%
Ventura County
<CAPTION>
ANNUALIZED
BASE RENT
PERCENT LEASED ANNUALIZED PER LEASED
AS OF BASE RENT(1) NUMBER SQUARE
PROPERTY NAME JANUARY 1, 1998 ($000S) OF LEASES FOOT
- --------------------------------- --------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
SAN DIEGO COUNTY
Imperial Bank Tower(2) 81.4% $ 7,437 50 $ 16.90
Foremost Professional Plaza 93.9% 1,094 53 19.25
Activity Business Center 97.7% 1,691 44 10.36
Bernardo Regency 95.1% 743 19 16.31
Carlsbad Corporate Center* 100.0% 819 1 6.55
Balboa Corporate Center* 100.0% 693 1 9.92
Panorama Corporate Center* 99.9% 2,157 1 16.20
Ruffin Corporate Center* 100.0% 387 1 8.60
Skypark Office Plaza* 99.7% 2,712 11 13.45
Governor Park Plaza* 91.2% 1,342 18 14.14
5120 Shoreham* 84.5% 476 1 14.93
Sorrento Valley Science Park* 95.2% 2,447 9 14.17
Torreyanna Science Park* 100.0% 1,633 1 20.11
Uniden Builden* 100.0% 321 2 11.40
10251 Vista Sorrento* 100.0% 1,029 1 14.83
----- ------- ----- -----
Subtotal/Weighted Average -- 92.9% 24,981 213 14.21
San Diego County
VENTURA COUNTY
Center Promendate 76.7% 1,939 46 14.46
1000 Town Center 100.0% 2,041 13 18.96
Camarillo Business Center* 78.9% 1,767 16 14.51
----- ------- ----- -----
Subtotal/Weighted Average -- 83.2% 5,747 75 15.81
Ventura County
RIVERSIDE AND SAN BERNARDINO
COUNTIES
Centrelake Plaza* Inland Empire West Ontario 1989 110,763 0.7%
Tower Plaza I* Temecula Temecula 1988 72,350 0.4%
Tower Plaza II* Temecula Temecula 1983 19,301 0.1%
Tower Plaza III* Temecula Temecula 1983 12,483 0.1%
Chicago Avenue Business Park* Inland Empire East Riverside 1986 47,482 0.3%
Havengate Center* Inland Empire East Rancho Cucamonga 1985 80,557 0.5%
HDS Plaza* Inland Empire East San Bernardino 1987 104,178 0.6%
----------- ---
Subtotal/Weighted Average -- 447,114 2.7%
Riverside and San Bernardino
Counties
KERN COUNTY
Parkway Center Bakersfield Bakersfield 1992,95 61,333 0.4%
California Twin Center Bakersfield Bakersfield 1983 155,189 0.9%
----------- ---
Subtotal/Weighted Average -- 216,522 1.3%
Kern County
Total/Weighted Average -- Office 14,842,099 90.2%
----------- ---
Total -- Office (Excluding 14,066,589 85.5%
properties
under renovation) ----------- ---
<CAPTION>
RIVERSIDE AND SAN BERNARDINO
Centrelake Plaza* 63.2% 1,166 14 16.65
Tower Plaza I* 78.8% 853 15 14.95
Tower Plaza II* 76.7% 153 17 10.32
Tower Plaza III* 69.1% 90 18 10.45
Chicago Avenue Business Park* 76.3% 489 6 13.49
Havengate Center* 92.7% 1,142 12 15.29
HDS Plaza* 82.2% 1,395 13 16.29
----- ---------- ------- ---------
Subtotal/Weighted Average -- 77.6% 5,288 95 15.24
Riverside and San Bernardino
Counties
KERN COUNTY
Parkway Center 99.5% 1,092 10 17.88
California Twin Center 92.4% 3,352 9 23.39
----- ---------- ------- ---------
Subtotal/Weighted Average -- 94.4% 4,444 19 21.75
Kern County
Total/Weighted Average -- Office 83.6% $224,584 2,428 $ 18.10
----- ---------- ------- ---------
Total -- Office (Excluding 86.3% $219,818 2,268 $ 18.12
properties
under renovation) ----- ---------- ------- ---------
<CAPTION>
COUNTIES
</TABLE>
S-26
<PAGE> 29
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
APPROXIMATE PORTFOLIO
YEAR(S) NET RENTABLE NET RENTABLE
PROPERTY NAME SUBMARKET LOCATION BUILT/RENOVATED SQUARE FEET SQUARE FEET
- --------------------------------- ---------------------------- ----------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
R&D/INDUSTRIAL
ORANGE COUNTY
5602 Bolsa* West County Huntington Beach 1987/97 27,731 0.2%
5672 Bolsa* West County Huntington Beach 1987 11,968 0.1%
5632 Bolsa* West County Huntington Beach 1987 21,568 0.1%
Huntington Commerce Center* West County Huntington Beach 1987 67,551 0.4%
Savi Tech Center* North County Yorba Linda 1989 341,446 2.0%
Yorba Linda Business Park* North County Yorba Linda 1988 167,142 1.0%
---------- -----
Subtotal/Weighted Average --
Orange County 637,406 3.8%
SAN DIEGO COUNTY
Cymer Technology Center* I-15 Corridor Rancho Bernardo 1986 155,612 0.9%
Poway Industrial* I-15 Corridor Poway 1991/96 112,000 0.7%
10180 Scripps Ranch* I-15 Corridor San Diego 1978/96 43,560 0.3%
10965-93 Via Frontera* I-15 Corridor Rancho Bernardo 1982/97 77,920 0.5%
Westridge* North City San Diego 1984/96 48,850 0.3%
---------- -----
Subtotal/Weighted
Average -- San Diego County 437,942 2.7%
RIVERSIDE AND SAN BERNARDINO
COUNTY
Ontario Airport Commerce Center* Inland Empire West Ontario 1987/97 213,127 1.3%
Highlands I* Temecula Temecula 1988 26,856 0.2%
Highlands II* Temecula Temecula 1990 41,210 0.3%
Hunter Business Park* Inland Empire East Riverside 1990 106,782 0.6%
---------- -----
Subtotal/Weighted Average --
Riverside and San Bernardino
County 387,975 2.4%
Total/Weighted Average --
R&D/Industrial 1,463,323 8.9%
---------- -----
RETAIL
SAN DIEGO AREA
Tower Plaza Retail* Temecula Temecula 1970/97 144,225 0.9%
---------- -----
Total/Weighted Average -- Retail 144,225 0.9%
---------- -----
Portfolio Total 16,449,647 100.0%
========== =====
Portfolio Total (excluding
properties under renovation) 15,674,137 95.3%
========== =====
<CAPTION>
ANNUALIZED
BASE RENT
PERCENT LEASED ANNUALIZED PER LEASED
AS OF BASE RENT(1) NUMBER SQUARE
PROPERTY NAME JANUARY 1, 1998 ($000S) OF LEASES FOOT
- --------------------------------- --------------- ------------ --------- -----------
<S> <C> <C> <C> <C>
R&D/INDUSTRIAL
ORANGE COUNTY
5602 Bolsa* 100.0% $ 189 2 $ 6.81
5672 Bolsa* 100.0% 75 1 6.24
5632 Bolsa* 100.0% 155 1 7.20
Huntington Commerce Center* 94.1% 413 19 6.50
Savi Tech Center* 100.0% 2,556 4 7.48
Yorba Linda Business Park* 96.5% 1,158 60 7.18
----- ------- ----- -----
Subtotal/Weighted Average --
Orange County 98.5% 4,546 87 7.24
SAN DIEGO COUNTY
Cymer Technology Center* 88.1% 1,742 2 12.71
Poway Industrial* 100.0% 605 1 5.40
10180 Scripps Ranch* 100.0% 366 1 8.40
10965-93 Via Frontera* 89.4% 529 4 7.59
Westridge* 100.0% 550 4 11.25
----- ------- ----- -----
Subtotal/Weighted
Average -- San Diego County 93.9% 3,792 12 9.22
RIVERSIDE AND SAN BERNARDINO
COUNTY
Ontario Airport Commerce Center* 97.7% 1,189 44 5.71
Highlands I* 94.7% 218 8 8.57
Highlands II* 84.9% 387 12 11.06
Hunter Business Park* 65.8% 436 12 6.21
----- ------- ----- -----
Subtotal/Weighted Average --
Riverside and San Bernardino
County 87.3% 2,230 76 6.58
Total/Weighted Average --
R&D/Industrial 94.2% $ 10,568 175 $ 7.67
----- ------- ----- -----
RETAIL
SAN DIEGO AREA
Tower Plaza Retail* 83.3% 1,252 21 10.41
----- ------- ----- -----
Total/Weighted Average -- Retail 83.3% $ 1,252 21 $ 10.41
----- ------- ----- -----
Portfolio Total 84.5% $236,403 2,624 $ 17.00
===== ======= ===== =====
Portfolio Total (excluding
properties under renovation) 87.0% $231,638 2,464 $ 16.99
===== ======= ===== =====
</TABLE>
- ---------------
* Indicates LBA Portfolio property
(1) Annualized base rent is calculated as monthly contractual base rent under
existing leases as of January 1, 1998, multiplied by 12; for those leases where
rent has not yet commenced or which are in a free rent period, the first month
in which rent is received is used to determine Annualized Base Rent.
(2) The land underlying these Properties and/or their parking structures is
leased by the Company pursuant to long term ground leases.
(3) Property is currently under renovation.
(4) Above amounts for 2730 Wilshire exclude the 100%-occupied 12,740 square
foot, 16-unit apartment complex which is also owned by the Company.
S-27
<PAGE> 30
TENANT INFORMATION
The Properties and LBA Portfolio are leased to over 2,600 tenants which are
engaged in a variety of businesses, including financial services, entertainment,
health care services, accounting, law, computer technology, education and
publishing. The following table sets forth the Annualized Base Rent as of
January 1, 1998 derived from the 20 largest tenants at the Properties and LBA
Portfolio:
<TABLE>
<CAPTION>
WEIGHTED PERCENTAGE
AVERAGE PERCENTAGE OF
REMAINING OF AGGREGATE
NUMBER LEASE AGGREGATE AGGREGATE ANNUALIZED PORTFOLIO
OF TERM RENTABLE LEASED BASE RENT ANNUALIZED
TENANT LEASES IN MONTHS SQUARE FEET SQUARE FEET ($000S) BASE RENT
- ------------------------------------ ------ --------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
State of California................. 25 131 214,860 1.53% $ 3,581 1.46%
Chevron USA, Inc.................... 1 45 103,887 0.74% 2,755 1.12%
State Compensation Insurance Fund... 1 2 113,513 0.81% 2,634 1.07%
Eastman Kodak Company............... 1 48 69,536 0.50% 2,462 1.00%
Foote, Cone & Belding -- Honig,
Inc............................... 1 71 62,003 0.44% 2,325 0.95%
Atlantic Richfield Company.......... 2 106 125,609 0.90% 2,266 0.92%
Walt Disney Pictures & Television,
Inc............................... 1 68 98,802 0.71% 2,241 0.91%
McDonnell Douglas Corporation....... 1 95 272,013 1.94% 2,224 0.90%
Community Healthcare Alliance....... 1 69 133,149 0.95% 2,157 0.88%
Pepperdine University............... 1 61 89,752 0.64% 2,075 0.84%
Sony Pictures Entertainment, Inc.... 4 70 114,211 0.82% 2,037 0.83%
Needham Harper & Steers/USA, Inc.... 1 71 50,814 0.36% 2,028 0.83%
Southern Pacific Transportation..... 1 15 83,017 0.59% 1,942 0.79%
Donnelley Information Publishing,
Inc............................... 1 9 71,946 0.51% 1,856 0.76%
GTE Directories Sales, Inc.......... 2 21 113,124 0.81% 1,772 0.72%
Aurora Biosciences Corporation...... 1 131 81,204 0.58% 1,633 0.66%
Cymer, Inc.......................... 1 146 137,164 0.98% 1,610 0.66%
Logicon, Inc........................ 1 55 74,174 0.53% 1,575 0.64%
Systems Tax Service................. 3 53 87,958 0.63% 1,262 0.51%
ITT Financial Corporation........... 1 27 63,604 0.45% 1,250 0.51%
--- --- --------- ------ ------- ------
Total/Weighted Average(1)...... 51 52 2,160,340 15.42% $ 41,685 16.96%
=== === ========= ====== ======= ======
</TABLE>
- ---------------
(1) Weighted average calculation based on rentable square footage leased by each
tenant.
LEASE DISTRIBUTIONS
The following table sets forth information relating to the distribution of
the leases for the Properties and LBA Portfolio, based on rentable square feet
under lease, as of January 1, 1998:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF AGGREGATE ANNUALIZED AVERAGE BASE OF AGGREGATE
PERCENTAGE SQUARE PORTFOLIO BASE RENT OF RENT PER PORTFOLIO
SQUARE FEET UNDER NUMBER OF OF ALL FOOTAGE OF LEASED LEASES SQUARE FOOT ANNUALIZED
LEASE LEASES LEASES LEASES SQUARE FEET ($000S) OF LEASES BASE RENT
- ----------------- --------- ---------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
2,500 or less... 1,461 55.68% 1,890,317 13.60% $ 36,061 $19.08 14.13%
2,501-5,000..... 529 20.16% 1,822,145 13.11% 34,039 18.68 13.34%
5,001-7,500..... 204 7.77% 1,257,125 9.04% 23,240 18.49 9.10%
7,501-10,000.... 143 5.45% 1,235,202 8.88% 21,525 17.43 8.43%
10,001-20,000.... 169 6.44% 2,324,244 16.72% 44,792 19.27 17.55%
20,001-40,000.... 68 2.59% 1,881,925 13.53% 33,531 17.82 13.14%
40,001 and
over........... 50 1.91% 3,492,770 25.12% 62,063 17.77 24.31%
----- ------ ---------- ------ -------- ------ ------
Total....... 2,624 100.00% 13,903,728 100.00% $255,251 $18.36 100.00%
===== ====== ========== ====== ======== ====== ======
</TABLE>
S-28
<PAGE> 31
LEASE EXPIRATIONS
The following table sets forth a summary schedule of the total lease
expirations for the Properties and LBA Portfolio for leases in place as of
January 1, 1998, assuming that none of the tenants exercise renewal options or
termination rights, if any, at or prior to the scheduled expirations:
<TABLE>
<CAPTION>
PERCENTAGE ANNUALIZED AVERAGE BASE PERCENTAGE
SQUARE OF AGGREGATE BASE RENT OF RENT PER OF AGGREGATE
NUMBER OF FOOTAGE OF PORTFOLIO EXPIRING SQUARE FOOT PORTFOLIO
YEAR OF LEASE LEASES EXPIRING LEASED LEASES OF EXPIRING ANNUALIZED
EXPIRATION EXPIRING LEASES SQUARE FEET ($000S)(2) LEASES BASE RENT
------------- --------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1998(1)................. 835 2,394,079 17.22% $ 40,076 $16.74 15.70%
1999.................... 463 1,913,648 13.76% 31,292 16.35 12.26%
2000.................... 453 1,769,745 12.73% 33,249 18.79 13.02%
2001.................... 300 1,658,704 11.93% 33,004 19.90 12.92%
2002.................... 288 1,942,068 13.97% 36,667 18.88 14.35%
2003.................... 96 1,170,055 8.42% 25,310 21.63 9.93%
2004.................... 62 894,246 6.43% 16,203 18.12 6.35%
2005.................... 47 849,659 6.11% 12,471 14.68 4.89%
2006.................... 29 416,567 3.00% 9,210 22.11 3.62%
2007.................... 29 263,586 1.90% 5,492 20.84 2.15%
2008.................... 8 260,948 1.88% 6,017 23.06 2.36%
2009.................... 4 130,648 0.94% 2,024 15.49 0.79%
2010+................... 10 239,775 1.71% 4,236 17.67 1.66%
----- ---------- ------ -------- ------ ------
Total........... 2,624 13,903,728 100.00% $255,251 $18.36 100.00%
===== ========== ====== ======== ====== ======
</TABLE>
- ---------------
(1) All month-to-month leases are assumed to expire during 1998.
(2) Base rent is as of the date of lease expiration, including all fixed
contractual base rent increases; increases tied to indices such as the
Consumer Price Index are not included.
S-29
<PAGE> 32
MANAGEMENT
DIRECTORS AND EXECUTIVE AND SENIOR OFFICERS
The following table sets forth certain current information with respect to
the directors and executive and senior officers of the Company:
<TABLE>
<CAPTION>
EXPIRATION
OF TERM AS
NAME AGE POSITION DIRECTOR
- -------------------- --- ------------------------------------------------------ ----------
<S> <C> <C> <C>
Richard S. Ziman 55 Chairman of the Board and Chief Executive Officer 1999
Victor J. Coleman 36 President, Chief Operating Officer and Director 1999
Diana M. Laing 43 Chief Financial Officer and Secretary
Executive Vice President and Director of Property
Andrew J. Sobel 38 Operations
Jeffrey A. Berger 35 Senior Vice President -- Acquisitions
Daniel S. Bothe 32 Senior Vice President -- Finance
Richard S. Davis 39 Chief Accounting Officer
Randy J. Noblitt 41 Senior Vice President -- Asset Management
Robert C. Peddicord 36 Senior Vice President -- Leasing
Herbert L. Porter 59 Senior Vice President -- Construction and Development
Carl D. Covitz 58 Director 2000
Larry S. Flax 55 Director 2000
Steven C. Good 55 Director 1998
Kenneth B. Roath 62 Director 2000
</TABLE>
The following is a biographical summary of the experience of the directors
and executive and senior officers of the Company:
RICHARD S. ZIMAN. Mr. Ziman is a founder of the Company and has served as
the Chairman of the Board and Chief Executive Officer since its inception. He
has been involved in the real estate industry for over 25 years. In 1990, Mr.
Ziman formed Namiz and served as its Chairman of the Board and Chief Executive
Officer from its inception until the formation of the Company. In 1979 he
co-founded Pacific Financial Group, a diversified real estate investment and
development firm headquartered in Beverly Hills, of which he was the Managing
General Partner. Mr. Ziman received his Bachelor's Degree and his Juris Doctor
Degree from the University of Southern California and practiced law as a partner
of the law firm of Loeb & Loeb from 1971 to 1980, specializing in transactional
and financing aspects of real estate.
VICTOR J. COLEMAN. Mr. Coleman is a founder of the Company and has served
as the President and Chief Operating Officer and as a Director of the Company
since its inception. He was the President, Chief Operating Officer and cofounder
of Namiz from 1990 to 1996. From 1987 to 1989, Mr. Coleman was Vice President of
Los Angeles Realty Services, Inc. and earlier in his career from 1985 to 1987
was Director of Marketing/Investment Advisor of Development Systems
International and an associate at Drexel Burnham Lambert specializing in private
placements with institutional and individual investors. Mr. Coleman received his
Bachelor's Degree from the University of California at Berkeley and received his
Master of Business Administration from Golden Gate University.
DIANA M. LAING. Ms. Laing has served as Chief Financial Officer of the
Company since August 1996 and as Secretary of the Company since February 1997.
Prior to joining the Company, Ms. Laing served, from 1985 to 1996, as Executive
Vice President and Chief Financial Officer of South West Property Trust, Inc., a
publicly traded apartment properties real estate investment trust, and its
predecessor Southwest Realty, Ltd. Ms. Laing also served from 1982 to 1985 as
Controller, Treasurer and Vice President -- Finance of Southwest Realty, Ltd.
From 1981 to 1982, Ms. Laing was Controller of Crawford Energy, Inc. and she
served as a member of the audit staff of Arthur Andersen & Company from 1978 to
1981. Ms. Laing is a Certified Public
S-30
<PAGE> 33
Accountant and a member of the American Institute of CPAs and the Texas Society
of Public Accountants. Ms. Laing received her Bachelor of Science in Accounting
from Oklahoma State University.
ANDREW J. SOBEL. Mr. Sobel served as Executive Vice President and Director
of Leasing of the Company since its formation through July 1997 and Executive
Vice President, Director of Property Operations since August 1997. He served as
Director of Leasing for Namiz from 1992 to 1996. Mr. Sobel is an attorney
admitted to the State Bar of California in 1985 with 11 years experience in the
practice of real estate law. From 1990 to 1992, Mr. Sobel was a sole
practitioner. From 1987 to 1990 he was an attorney with the law firm of Pircher,
Nichols & Meeks specializing in all aspects of its real estate transactional
practice including acquisitions, leasings and financings. Mr. Sobel received his
Bachelor's Degree from State University of New York at Oswego and his Juris
Doctor Degree from the University of California, Berkeley (Boalt Hall).
JEFFREY A. BERGER. Mr. Berger has served as Senior Vice
President -- Acquisitions of the Company since October 1997. Prior to joining
the Company, Mr. Berger served as Vice President and Director of Berger Realty
Group, a privately held real estate company in Chicago, Illinois. Berger Realty
Group managed and leased approximately 1,000 apartments, and over two million
rentable square feet of office, retail, and R&D/industrial properties. Mr.
Berger was responsible for all acquisitions and finance and for managing a staff
of 75 people. Prior to joining Berger Realty Group, Mr. Berger served as
Assistant Vice President of Real Estate Acquisitions for Heitman Financial.
DANIEL S. BOTHE. Mr. Bothe served as Vice President -- Finance of the
Company from December 1996 to December 1997 and Senior Vice President -- Finance
since January 1998. From 1993 to 1996, Mr. Bothe was a management consultant
with the E&Y Kenneth Leventhal Real Estate Group of Ernst & Young LLP. From 1988
to 1991, Mr. Bothe served as a member of the audit staff of KPMG Peat Marwick
LLP specializing in real estate. Mr. Bothe is a Certified Public Accountant in
the State of California and a member of the America Institute of CPAs. Mr. Bothe
received his Bachelor of Science in Accounting from San Diego State University
and his Master of Business Administration from the University of Southern
California.
RICHARD S. DAVIS. Mr. Davis has served as Chief Accounting Officer of the
Company since January 1998. From 1996 to 1997, Mr. Davis was with Catellus
Development Corporation where he was responsible for accounting and finance of
the asset management and development divisions. From 1985 to 1996, Mr. Davis
served as a member of the audit staff of both KPMG Peat Marwick LLP and Price
Waterhouse LLP specializing in real estate. Mr. Davis is a Certified Public
Accountant in the states of California and Missouri and a member of the American
Institute of CPAs. Mr. Davis received his Bachelor of Science in Accounting from
the University of Missouri at Kansas City.
RANDY J. NOBLITT. Mr. Noblitt has served as Senior Vice President -- Asset
Management of the Company since November 1997. From 1995 to 1997, Mr. Noblitt
established a management consulting practice serving the real estate industry.
From 1993 to 1995, Mr. Noblitt served as Senior Vice President of Tishman West
in charge of the Southern California operation. In 1992 and 1993 Mr. Noblitt
served as Senior Portfolio Manager and Director of Management Services for
Cushman & Wakefield in Southern California. Mr. Noblitt's career includes
extensive experience in asset management, leasing and development of all
commercial property types. Mr. Noblitt received his Bachelor of Science degree
in Business Administration from California State University, Northridge.
ROBERT C. PEDDICORD. Mr. Peddicord has served as Vice President -- Leasing
of the Company from December 1996 to September 1997 and Senior Vice
President -- Leasing since October 1997. From 1987 to 1996, Mr. Peddicord was a
Managing Director in the West Los Angeles office of Julien J. Studley,
representing landlords and tenants in the leasing of office space. From 1984 to
1986, Mr. Peddicord served as a branch Vice President for Great Western
Financial Corporation. Mr. Peddicord received his Bachelor's Degree in Economics
from the University of California at Los Angeles.
HERBERT L. PORTER. Mr. Porter has served as Senior Vice
President -- Construction and Development of the Company since its formation. He
served as Director of Construction and Capital Improvements for Namiz from 1993
to 1996. From 1973 to 1992, Mr. Porter was a partner/owner in his own real
estate development and property management company specializing in medium to
high-rise commercial office buildings.
S-31
<PAGE> 34
Mr. Porter's over 24 years in commercial office development include planning,
financing, acquisition, entitlements and approvals, design, construction,
marketing, leasing, tenant improvements and outright sale. Mr. Porter received
his Bachelor's Degree from the University of Southern California.
CARL D. COVITZ. Mr. Covitz has served as a member of the Board of Directors
of the Company since its inception as a public company in October 1996. For 18
of the past 23 years, Mr. Covitz has served as the owner and President of
Landmark Capital, Inc., a national real estate development and investment
company involved in the construction, financing, ownership and management of
commercial, residential and warehouse properties. Mr. Covitz has also previously
served, from 1990 to 1993, as Secretary of the Business, Transportation &
Housing Agency of the State of California as well as Under Secretary and Chief
Operating Officer of the U.S. Department of Housing and Urban Development from
1987 to 1989. Mr. Covitz is currently the Chairman of the Board of Directors of
Century Housing Corporation and is the past Chairman of the Board of several
organizations including the Federal Home Loan Bank of San Francisco and the Los
Angeles City Housing Authority. Mr. Covitz received his Bachelor's Degree from
the Wharton School at the University of Pennsylvania and his Master of Business
Administration from the Columbia University Graduate School of Business.
LARRY S. FLAX. Mr. Flax has served as a member of the Board of Directors of
the Company since December 1996. Mr. Flax is Co-Founder and Co-Chairman of the
Board of California Pizza Kitchen. Prior to becoming a restaurateur in 1985, Mr.
Flax served in Los Angeles as Assistant U.S. Attorney from 1968 to 1972, Chief
of Civil Rights from 1970 to 1971 and Assistant Chief of the Criminal Division
for the United States Department of Justice from 1971 to 1972. Mr. Flax attended
the University of Washington as an undergraduate and received his Juris Doctor
from the University of Southern California Law School in 1967.
STEVEN C. GOOD. Mr. Good has served as a member of the Board of Directors
of the Company since its inception as a public company in October 1996. Mr. Good
is the senior partner in the firm of Good Swartz & Berns, an accountancy
corporation founded in 1993 which evolved from the firm of Block, Good and
Gagerman, which he founded in 1976. Prior to 1976, Mr. Good was a partner first
at Laventhol & Horwath, a national accounting firm, and later at Horowitz &
Good. Mr. Good is a founder and past Chairman of CU Bancorp, where he directed
the bank's operations from 1982 through 1989. For the past seven years he has
been a member of the Board of Directors of Opto Sensors, Incorporated. Mr. Good
received his Bachelor of Science in Business Administration from the University
of California at Los Angeles and attended UCLA's Graduate School.
KENNETH B. ROATH. Mr. Roath has served as a member of the Board of
Directors of the Company since its inception as a public company in October
1996. Mr. Roath is currently Chairman, President and Chief Executive Officer of
Health Care Property Investors, Inc., a leader in the health care REIT industry.
Mr. Roath is past Chairman of the National Association of Real Estate Investment
Trusts ("NAREIT") and also serves as a member of the Board of Governors and
Executive Committee of NAREIT. He is a director of Franchise Finance Corporation
of America. Mr. Roath received his Bachelor's Degree in accounting from San
Diego State University.
S-32
<PAGE> 35
UNDERWRITING
The underwriters of the Offering (the "Underwriters"), for whom Lehman
Brothers Inc. ("Lehman"), BT Alex. Brown Incorporated, A.G. Edwards & Sons,
Inc., Morgan Stanley & Co. Incorporated, Smith Barney Inc., EVEREN Securities,
Inc. and Raymond James & Associates, Inc. are acting as representatives (the
"Representatives"), have severally agreed, subject to the conditions contained
in the Underwriting Agreement (the form of which is filed as an exhibit to the
Registration Statement of which the accompanying Prospectus forms a part), to
purchase from the Company and the Company has agreed to sell to each
Underwriter, the aggregate number of shares of Common Stock set forth opposite
the name of each such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
----------
<S> <C>
Lehman Brothers Inc. ....................................
BT Alex. Brown Incorporated..............................
A.G. Edwards & Sons, Inc ................................
Morgan Stanley & Co. Incorporated........................
Smith Barney Inc. .......................................
EVEREN Securities, Inc. .................................
Raymond James & Associates, Inc. ........................
----------
Total.......................................... 17,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to certain
conditions, and that if any of the shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all of the shares agreed to
be purchased by the Underwriters under the Underwriting Agreement must be so
purchased.
The Company has been advised that the Underwriters propose to offer shares
of Common Stock directly to the public initially at the public offering price
set forth on the cover page of this Prospectus Supplement, and to certain
selected dealers who may include the Underwriters at such public offering price
less a selling concession not in excess of $ per share. The selected
dealers may reallow a concession not in excess of $ per share to
certain brokers or dealers. After the Offering, the public offering price, the
concession to selected dealers, and the reallowance may be changed by the
Representatives.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to the payments they may be required to make in respect
thereto.
The Company has granted to the Underwriters an option to purchase up to an
additional 2,550,000 shares of Common Stock, at the public offering price, less
the aggregate underwriting discounts and commissions, shown on the cover page of
this Prospectus Supplement, solely to cover overallotments, if any. Such option
may be exercised at any time within 30 days after the date of this Prospectus
Supplement. To the extent that such option is exercised, each Underwriter will
be committed, subject to certain conditions, to purchase a number of the
additional shares of Common Stock proportionate to such Underwriter's initial
commitment as indicated in the preceding table.
In connection with the IPO, Messrs. Ziman and Coleman agreed not to sell
any shares of Common Stock acquired by them upon exchange of OP Units for a
period of two years after the completion of the IPO without the consent of
Lehman. Such restrictions do not apply to any OP Units or other shares of Common
Stock purchased or otherwise acquired by Messrs. Ziman or Coleman following the
IPO.
The Company has agreed for a period of 90 days from the date of this
Prospectus Supplement, not to, directly or indirectly, offer for sale, sell or
otherwise dispose of (or enter into any transaction or device which is designed
to, or could be expected to, result in the disposition by any person at any time
in the future of) shares of Common Stock (other than the shares offered hereby
and shares issued pursuant to the Stock Incentive Plan existing on the date
hereof and any OP Units or shares of Common Stock that may be issued in
S-33
<PAGE> 36
connection with any acquisition of a property) or sell or grant options, rights
or warrants with respect to any shares of Common Stock (other than the grant of
options pursuant to the Company's Stock Incentive Plan existing on the date
hereof), without the prior written consent of Lehman.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the
Representatives may reduce that short position by purchasing Common Stock in the
open market. The Representatives also may elect to reduce any short position by
exercising all or part of the overallotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Certain of the Underwriters and their affiliates have from time to time
performed, and may continue to perform in the future, various investment banking
and commercial services for the Company, for which they received and will
receive customary compensation. On January 21, 1998, the Company entered into a
$60 million mortgage financing with an affiliate of Lehman. The Company may
enter into similar agreements with affiliates of Lehman in the future, for which
Lehman would receive customary fees.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Latham &
Watkins and certain legal matters, including the validity of the shares of
Common Stock offered hereby, will be passed upon for the Company by Ballard
Spahr Andrews & Ingersoll. In addition, the description of federal income tax
consequences contained in the accompanying 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. Certain legal matters will be passed upon for
the Underwriters by Hogan & Hartson L.L.P.
S-34
<PAGE> 37
PROSPECTUS
$1,000,000,000
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 conducts all of its operations through Arden
Realty Limited Partnership, a Maryland limited partnership (the "Operating
Partnership"), of which it is the sole general partner. 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.
The Company may from time to time offer in one or more series shares of its
Common Stock, $.01 par value per share (the "Common Stock" or the "Securities"),
with an aggregate public offering price of up to $1,000,000,000.00 on terms to
be determined at the time of offering. The Common Stock may be offered in
separate series, in amounts, at prices and on terms to be set forth in one or
more supplements to this Prospectus (each, a "Prospectus Supplement").
The specific terms of the Common Stock in respect of which this Prospectus
is being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable, any initial public offering price. In addition,
such specific terms will include limitations on actual, beneficial or
constructive ownership and restrictions on transfer of the Common Stock, as set
forth in the charter of the Company (the "Charter"). See "Description of Capital
Stock -- Restrictions on Transfer."
The Common Stock may be offered directly, through agents designated from
time to time by the Company, or to or through underwriters or dealers. If any
agents or underwriters are involved in the sale of any of the Common Stock,
their names, and any applicable purchase price, fee, commission or discount
arrangement between or among them, will be set forth, or will be calculable from
the time the information set forth, in the applicable Prospectus Supplement. See
"Plan of Distribution." No Common Stock may be sold without delivery of the
applicable Prospectus Supplement describing the method and terms of the offering
of such Common Stock.
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 JANUARY 21, 1998
<PAGE> 38
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.
2
<PAGE> 39
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 fiscal quarter
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 Company's Current Report on Form 8-K, filed by the Company with
the Commission on December 18, 1997;
(12) 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; and
(13) 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.
3
<PAGE> 40
This Prospectus, including the documents incorporated herein by reference,
contain forward-looking statements within the meaning of Section 27A of the
Securities Act. Also, documents subsequently filed by the Company with the
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. 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, currently
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
Company's 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 a $300 million unsecured line of credit (the
"Credit Facility") from a group of banks led by Wells Fargo, under which
borrowings bear interest at a variable rate. In addition, the Company may incur
other variable rate indebtedness in the future. Increases in interest rates on
such indebtedness would increase the Company's interest expense, 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
4
<PAGE> 41
Company's cash flow and, consequently, the amount available for distribution to
stockholders, and could increase the risk of default on the Company's
indebtedness.
The Company has established its debt policy relative to the total market
capitalization of the Company rather than relative to the book value of its
assets. The Company has used total market capitalization because it believes
that the book value of its assets (which to a large extent is the depreciated
original cost of real property, the Company's primary tangible assets) does not
accurately reflect its ability to borrow and to meet debt service requirements.
The market capitalization of the Company, however, is more variable than book
value, and 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 Company's 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. 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 Company's 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
5
<PAGE> 42
these requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants. The Company believes that
its 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 Company's 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 its 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 its 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. 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.
6
<PAGE> 43
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 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 units of limited partnership
interest in the Operating Partnership (the "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 $40.1
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 CERTAIN SALES OR PREPAYMENTS 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 sale of certain
properties or 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 sale or 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 make property sales or 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.
RISKS ASSOCIATED WITH ACQUISITION, RENOVATION AND DEVELOPMENT ACTIVITIES
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.
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
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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.
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.
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
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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 Company's
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 Company's
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 its 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. The
Company believes that all of its 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 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
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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, with respect
to the Preferred Stock, 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. 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
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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 its
properties, the Company may be potentially liable for such costs. Except for two
properties, one of which is currently undergoing abatement activities, the
Company is not aware of any friable ACM at any of its 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
Company's 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 its properties identified
several 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 its properties will not be affected by tenants, by
the condition of land or operations in the vicinity of its properties (such as
the presence of underground storage tanks), or by third parties unrelated to the
Company.
The Company believes that its 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 shares of Common Stock (and reserved for issuance additional
shares of Common Stock) under the Company's 1996 Stock Incentive Plan and stock
bonus awards, 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.
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<PAGE> 48
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 71 office
properties containing approximately 10.2 million rentable square feet, as of the
date of this Prospectus.
The Company believes that its 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 its properties are
located.
The Company operates from its Beverly Hills, California headquarters and is
a fully integrated real estate company with 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 1996 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
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<PAGE> 49
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 its 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 its 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 Company's 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 December 31, 1997, owned a 90.9% 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 Units, including entities which were
issued OP Units in connection with the Company's acquisition of certain
properties previously owned by such entities. In general, 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
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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 of the Operating Partnership)
until the year 2096 without a vote of the partners of the Operating Partnership.
For further information regarding the Operating Partnership, see "Partnership
Agreement."
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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 January 9, 1998, 35,796,704 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 Richard
S. Ziman's proportional purchase rights (see "Partnership Agreement -- Issuance
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 twothirds 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 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 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
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<PAGE> 52
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, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which an election to be treated as a REIT has been made). In addition,
if the Company, or an owner of 10% or more of the Company, actually or
constructively owns 10% or more of a tenant of the Company (or a tenant of any
partnership in which the Company is a partner), the rent received by the Company
(either directly or through any such partnership) from such tenant will not be
qualifying income for purposes of the REIT gross income tests of the Code. A
REIT's stock must also be beneficially owned by 100 or more persons during at
least 335 days of a taxable year of twelve months or during a proportionate part
of a shorter taxable year (other than the first year for which an election to be
treated as a REIT has been made).
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
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family and certain affiliated entities. 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
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<PAGE> 54
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.
USE OF PROCEEDS
Unless otherwise described in the applicable Prospectus Supplement, the
Company intends to use the net proceeds from the sale of the Common Stock for
general corporate purposes, which may include the construction, renovation and
acquisition of additional properties and other acquisition transactions, the
expansion and improvement of certain properties in the Company's portfolio, and
the repayment of indebtedness.
PARTNERSHIP AGREEMENT
The following summary of the amended and restated agreement of limited
partnership of the Operating Partnership (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 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."
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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.
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
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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.
In connection with the Company's IPO and several subsequent acquisitions,
the Company issued 2,971,756 OP Units, all of which are currently outstanding.
Holders of OP Units received in connection with the Company's IPO may at
any time tender their OP 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). Holders of OP Units issued
subsequent to the Company's IPO are generally subject to a one-year holding
period before they may tender their OP Units. 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 such OP
Units from the holder 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 holder shall have no right
to cause the Operating Partnership to redeem such OP Units for cash.
All OP 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, the Chairman of the
Board and Chief Executive Officer of the Company, 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."
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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 (i) 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), (ii) by election of the Company and the Limited Partners, (iii)
pursuant to an entry of decree of judicial dissolution, (iv) upon the sale or
other disposition of all or substantially all the assets of the Operating
Partnership or redemption of all OP Units or (v) as 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.
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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. 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
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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.
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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
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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, no assurance
can be given that it has operated or will continue to operate in such a manner
so as to qualify or remain qualified.
These sections of the Code and the corresponding Treasury Regulations, are
highly technical and complex. The following sets forth the material aspects of
the sections that govern the federal income tax treatment of a REIT and its
stockholders. This summary is qualified in its entirety by the applicable Code
provisions, rules and regulations promulgated thereunder, and administrative and
judicial interpretations thereof.
As a condition to the closing of each offering of Common Stock and as
otherwise specified in the applicable Prospectus Supplement, tax counsel to the
Company will render an opinion to the underwriters of such offering to the
effect that, commencing with the Company's taxable year ended December 31, 1996,
the Company has been organized in conformity with the requirements for
qualification as a REIT, and its proposed method of operation will enable it to
continue to meet the requirements for qualification and taxation as a REIT under
the Code. It must be emphasized that this opinion will be based on various
assumptions and will be conditioned upon certain representations to be made by
the Company as to factual matters, and that such tax counsel to the Company
undertakes no obligation hereby to update any such opinion subsequent to its
date. In addition, such opinion will be based upon the factual representations
of the Company as set forth in this Prospectus and any Prospectus Supplement and
assumes that the actions described in this Prospectus and any such Prospectus
Supplement will be completed in a timely fashion. Moreover, such qualification
and taxation as a REIT depends upon the Company's ability to meet (through
actual annual operating results, distribution levels and diversity of stock
ownership) the various qualification tests imposed under the Code and discussed
below, the results of which have not been and will not be reviewed by such tax
counsel to the Company. Accordingly, no assurance can be given that the actual
results of the Company's operation for any particular taxable year will satisfy
such requirements. See "-- Failure to Qualify" below. Further, the
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anticipated income tax treatment described in this Prospectus may be changed,
perhaps retroactively, by legislative, administrative or judicial action at any
time.
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 required to pay tax 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 and the amount of its
distributions. 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.
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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
"Description of Capital Stock -- Restrictions 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; provided, however, if the Company complies with the rules contained
in the applicable Treasury Regulations requiring the Company to attempt to
ascertain the actual ownership of its shares, and the company does not know, and
would not have known through the exercise of reasonable diligence, whether it
failed to meet the requirement set forth in condition (vi) above, the Company
will be treated as having met such requirement. See "-- Failure to Qualify." In
addition, a corporation may not elect to become a REIT unless its taxable year
is the Calendar year. The Company has a calendar taxable year.
Ownership of a Partnership Interest. In the case of a REIT which is a
partner in a partnership, Treasury Regulations provide that the REIT will be
deemed to own its proportionate share of the assets of the partnership and will
be deemed to be entitled to the income of the partnership attributable to such
share. In addition, the character of the assets and gross income of the
partnership shall retain the same character in the hands of the REIT for
purposes of Section 856 of the Code, including satisfying the gross income tests
and the asset tests. Thus, the Company's proportionate share of the assets and
items of income of the Operating Partnership (including the Operating
Partnership's share of such items of any subsidiary partnerships) will be
treated as assets and items of income of the Company for purposes of applying
the requirements described herein. A summary of the rules governing the federal
income taxation of partnerships and their partners is provided below in "-- Tax
Aspects of the Operating Partnership." The Company has direct control of the
Operating Partnership and 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, for taxable years beginning prior to August 5, 1997,
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 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. The 30% gross income test was repealed and
will not apply beginning with the Company's 1998 taxable year.
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
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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 (subject to a 1% de minimus exception applicable to the Company for its
taxable years beginning in 1998), other than through an independent contractor
from whom the REIT derives no revenue; provided however, the REIT may 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, and as general partner of the Operating Partnership will not permit
the Operating Partnership to, (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 "-- Taxation 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
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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 (ie., 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
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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 failing
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
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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.
The Company may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, the Company would pay
tax on such retained net long-term capital gains. In addition to the extent
designated by the Company, a U.S. Stockholder generally would (i) include its
proportionate share of such undistributed long-term capital gains in computing
its long-term capital gains in its return for its taxable year in which the last
day of the Company's taxable year falls (subject to certain limitations as to
the amount so includable), (ii) be deemed to have paid the capital gains tax
imposed on the Company on the designated amounts included in such U.S.
Stockholder's long-term capital gains, (iii) receive a credit or refund for such
amount of tax deemed paid by it, (iv) increase the adjusted basis of its Shares
by the difference between the amount of such includable gains and the tax deemed
to have been paid by it, and (v), in the case of a U.S. Stockholder that is a
corporation, appropriately adjust its earnings and profits for the retained
capital gains in accordance with Treasury Regulations to be prescribed by the
IRS.
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.
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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.
Backup withholding is not an additional tax; 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."
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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.
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<PAGE> 70
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 Company's 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 Company's 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
previously contributed to the Operating Partnership using the "traditional
method," The selection of this method will cause the Company to be allocated
depreciation deductions for tax purposes which are lower than such deductions
would be if the Company directly had acquired its pro rata share of the
Operating
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<PAGE> 71
Partnership property in exchange for cash or if other methods were chosen to
eliminate Book-Tax Differences. The Operating Partnership and the Company have
not yet decided which method will be used to account for Book-Tax Differences
with respect to properties acquired or to be acquired by the Operating
Partnership in the future.
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.
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.
PLAN OF DISTRIBUTION
The Company may sell the Common Stock to one or more underwriters for
public offering and sale by them or may sell the Common Stock to investors
directly or through agents. Any such underwriter or agent involved in the offer
and sale of the Common Stock will be named in the applicable Prospectus
Supplement.
Underwriters may offer and sell the Common Stock at a fixed price or
prices, which may be changed, at prices relating to the prevailing market prices
at the time of sale or at negotiated prices. The Company also may, from time to
time, authorize underwriters acting as the Company's agents to offer and sell
the Common Stock upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of Common Stock,
underwriters may be deemed to have received compensation from the Company in the
form of underwriting discounts or commissions and may also receive commissions
from purchasers of Common Stock for whom they may act as agent. Underwriters may
sell Common Stock to or through dealers, and such dealers may receive
compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from the purchasers for whom they may act as
agent. Any underwriting compensation paid by the Company to underwriters or
agents in connection with the offering of Common Stock, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Common Stock may be deemed
to be underwriters, and any discounts and commissions received by them and any
profit realized by them on resale of the Common Stock may be deemed to be
underwriting discounts and commissions, under the Securities Act. Any such
35
<PAGE> 72
underwriter or agent will be identified, and such compensation received from the
Company will be described, in the applicable Prospectus Supplement.
Underwriters, dealers and agents may be entitled, under agreements entered
into with the Company, to indemnification against and contribution toward
certain civil liabilities, including liabilities under the Common Stock Act.
Certain of the underwriters, dealers and agents and their affiliates may be
customers of, engage in transactions with and perform services for the Company
and its subsidiaries in the ordinary course of business.
The Common Stock is currently listed on the NYSE. Unless otherwise
specified in the related Prospectus Supplement, any shares of Common Stock sold
pursuant to a Prospectus Supplement will be listed on the NYSE, subject to
official notice of issuance. It is possible that one or more underwriters may
make a market in a series of Common Stock, but will not be obligated to do so
and may discontinue any market making at any time without notice. Therefore,
there can be no assurance as to the liquidity of, or the trading market for, the
Common Stock.
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
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<PAGE> 73
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 report thereon and incorporated herein by reference. Such consolidated
and combined financial statements and statement 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.
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======================================================
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus Supplement or the accompanying
Prospectus in connection with the offer made by this Prospectus Supplement and
the Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or any Underwriter.
neither this Prospectus Supplement nor the accompanying Prospectus constitutes
an offer to sell, or a solicitation or an offer to buy, to any person in any
jurisdiction where such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus Supplement nor the accompanying Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
the information contained herein or therein is correct as of any time subsequent
to the date hereof.
---------------------------
SUMMARY TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Supplement Summary........ S-1
The Company.......................... S-7
Use of Proceeds...................... S-11
Price Range of Common Stock and
Distribution History............... S-11
Capitalization....................... S-12
Selected Financial Data.............. S-13
Southern California Economy and
Office Markets..................... S-16
Properties........................... S-22
Management........................... S-30
Underwriting......................... S-33
Legal Matters........................ S-34
PROSPECTUS
Available Information................ 2
Incorporation of Certain Information
by Reference....................... 3
Risk Factors......................... 4
The Company.......................... 12
Description of Capital Stock......... 15
Use of Proceeds...................... 18
Partnership Agreement................ 18
Certain Provisions of Maryland Law
and the Company's Charter and
Bylaws............................. 22
Federal Income Tax Considerations.... 24
Plan of Distribution................. 35
Experts.............................. 36
Legal Matters........................ 37
</TABLE>
======================================================
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17,000,000 SHARES
[ARDEN LOGO]
COMMON STOCK
---------------------------
PROSPECTUS SUPPLEMENT
FEBRUARY , 1998
---------------------------
LEHMAN BROTHERS
BT ALEX. BROWN
A.G. EDWARDS & SONS, INC.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
EVEREN SECURITIES, INC.
RAYMOND JAMES & ASSOCIATES, INC.
======================================================
