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As filed pursuant to Rule 424(b)(2)
under the Securities Act of 1933
Registration No. 333-44141
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 21, 1998)
1,110,132 SHARES
ARDEN REALTY, INC. [ARDEN LOGO]
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 March 31, 1998, the Company owned a portfolio of 128
commercial properties (the "Properties") containing approximately 16.5 million
rentable square feet. All of the Properties are located in Southern California.
All of the shares of the Company's common stock (the "Common Stock")
offered hereby (the "Offering") 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 "Description of 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 April 23, 1998, the last reported sales price of the Common
Stock on the NYSE was $28 3/8 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.
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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.
---------------------------
The Underwriter has agreed to purchase the shares from the Company at a
price of $26.8853 per share, resulting in aggregate proceeds to the Company of
$29,846,232 before payment of expenses by the Company estimated to be $100,000,
subject to the terms and conditions set forth in an Underwriting Agreement. The
Underwriter intends to deposit the shares, valued at the last reported sales
price, with the trustee of the Equity Investor Fund Cohen & Steers Realty Majors
Portfolio (A Unit Investment Trust) (the "Trust") in exchange for units in the
Trust. The units of the Trust will be sold to investors at a price based upon
the net asset value of the securities in the Trust. For purposes of this
calculation, the value of the shares as of the evaluation time for units of the
Trust on April 23, 1998 was $28.3750 per share. See "Underwriting."
The shares of Common Stock offered hereby are being offered by the
Underwriter, subject to prior sale when, as and if issued by the Company and
delivered to and accepted by the Underwriter, subject to approval of certain
legal matters by counsel for the Underwriter and certain other conditions. It is
expected that delivery of the shares of Common Stock will be made in New York,
New York on or about April 29, 1998.
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MERRILL LYNCH & CO.
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The date of this Prospectus Supplement is April 23, 1998
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS AND
IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
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The following information is qualified in its entirety by the more detailed
information appearing elsewhere in the accompanying Prospectus or incorporated
therein by reference. Substantially all of the Company's assets are held
directly or indirectly by, and its operations are conducted through, Arden
Realty Limited Partnership, a Maryland limited partnership (the "Operating
Partnership"). The Company is the sole general partner of the Operating
Partnership and, as of March 31, 1998, owned a 6.78% interest therein. 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.
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 March 31, 1998, the Company owned a portfolio of 128
Properties containing approximately 16.5 million rentable square feet. All of
the Properties are located in Southern California, with 70 in suburban Los
Angeles County, 21 in Orange County, 20 in San Diego County, 12 in Riverside and
San Bernardino Counties, three in Ventura County and two in Kern County. As of
March 31, 1998, the Company's portfolio of 128 Properties was approximately
84.5% leased (86.8% leased if the 4 Properties under renovation are excluded).
From January 1, 1998, through March 31, 1998, the Company acquired 56
commercial properties, all of which are located in Southern California,
consisting of approximately 6.4 million rentable square feet for a total
acquisition cost of approximately $754.6 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.
RECENT DEVELOPMENTS
The Company has reported Funds From Operations ("FFO") for the first
quarter of 1998 of $28.7 million, compared with FFO of $13.1 million for the
first quarter of 1997. Revenues for the first quarter of 1998 were $56.2
million, compared with $25.0 million for the first quarter of 1997. Net income
for the first quarter of 1998 was $16.2 million, or $.34 per share, compared
with $8.4 million, or $.38 per share for the first quarter of 1997.
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting the
underwriting discounts, commissions and estimated expenses of the Offering, are
estimated to be approximately $29.8 million. The Company intends to use all of
the net proceeds from the Offering to repay a portion of the Company's
indebtedness and for working capital.
Pending application of net proceeds, the Company will invest such portion
of the net proceeds in interest-bearing accounts and short-term,
interest-bearing securities, which are consistent with the Company's continuing
to qualify for taxation as a REIT.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Underwriter"), and the Underwriter has
agreed to purchase from the Company, 1,110,132 shares of Common Stock. The
Underwriting Agreement provides that the obligations of the Underwriter are
subject to certain conditions precedent, and that the Underwriter will be
obligated to purchase all of such shares if any are purchased.
The Underwriter intends to deposit the shares offered hereby with the
Trust, a registered unit investment trust under the Investment Company Act of
1940, as amended, for which the Underwriter acts as sponsor and depositor, in
exchange for units of the Trust. The Underwriter is an affiliate of the Trust.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriter may be required to
make in respect thereof.
In connection with the Offering, the rules of the Securities and Exchange
Commission permit the Underwriter 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 Underwriter creates 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
Underwriter may reduce that short position by purchasing shares of Common Stock
in the open market.
In general, purchases of a security for the purposes of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might otherwise be in the absence of such purchases.
Neither the Company nor the Underwriter 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 the Underwriter makes any representation that the Underwriter
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
The Common Stock is listed on the NYSE under the symbol "ARI." The Company
has applied for listing of the shares of Common Stock offered hereby on the
NYSE.
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-2
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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> 6
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.
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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.
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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
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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
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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.
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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. As of January 21, 1998 the Company has reserved 3,373,618
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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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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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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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> 22
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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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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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> 40
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> 41
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 the 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.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Company.......................... S-1
Use of Proceeds...................... S-1
Underwriting......................... S-2
Legal Matters........................ S-2
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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1,110,132 SHARES
[ARDEN LOGO]
COMMON STOCK
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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
APRIL 23, 1998
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