As filed with the Securities and Exchange Commission on January 21, 1998
Registration No. 333-44141
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ARDEN REALTY, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
9100 Wilshire Boulevard
East Tower, Suite 700
Beverly Hills, California 90212
(310) 271-8600
(Address of principal executive offices)
Copies to:
Richard S. Ziman William J. Cernius, Esq.
9100 Wilshire Boulevard Laura I. Bushnell, Esq.
East Tower, Suite 700 Latham & Watkins
Beverly Hills, California 90212 650 Town Center Drive, Suite 2000
(310) 271-8600 Costa Mesa, California 92626
(Name and Address of Agent for Service) (714) 540-1235
Approximate date of commencement of the proposed sale of the securities
to the public: From time to time after the effective date of this
Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), other than
securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
Proposed Maximum
Proposed Maximum Aggregate
Title of Each Class of Amount to Offering Price Offering Amount of
Securities to be Registered be Registered Per Unit Price (1) Registration Fee
Common Stock, $.01 par $1,000,000,000.00 (2) $1,000,000,000.00 $295,000.00(3)
value per share(2)
(1) The aggregate maximum public offering price of all Common Stock issued
pursuant to this Registration Statement will not exceed
$1,000,000,000.00.
(2) The proposed maximum offering price per unit has been omitted pursuant
to General Instruction II.(D) of Form S-3 and will be determined, from
time to time, by the Registrant in connection with the issuance by the
Registrant of Common Stock hereunder.
(3) Calculated pursuant to Rule 457(o) of the rules and regulations under
the Securities Act. The Registrant paid the registration fee with its
initial filing on January 12, 1998.
</TABLE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to
said Section 8(a), may determine.
p r o s p e c t u s
$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 REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS January 21, 1998
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company can be
inspected and copied at the public reference facilities of the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Midwest Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; Northeast Regional Office, 7 World Trade Center, Suite 1300,
New York, New York 10048. Copies of such material may be obtained from the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission also maintains a website at http://www.sec.gov containing
reports, prospectuses and information statements and other information
regarding registrants, including the Company, that file electronically.
Copies of such materials and other information concerning the Company also
are available for inspection at The New York Stock Exchange, Inc., 20 Broad
Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on
Form S-3 (together with all amendments, exhibits and schedules, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered hereby. This
Prospectus and any accompanying Prospectus Supplement do not contain all of
the information included in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the
shares of Common Stock offered hereby, reference is hereby made to the
Registration Statement, including the exhibits and schedules thereto.
Statements contained in this Prospectus and any accompanying Prospectus
Supplement concerning the provisions or contents of any contract, agreement
or any other document referred to herein are not necessarily complete.
With respect to each such contract, agreement or document filed as an
exhibit to the Registration Statement, reference is made to such exhibit
for a more complete description of the matters involved, and each such
statement shall be deemed qualified in its entirety by such reference to
the copy of the applicable document filed with the Commission. The
Registration Statement may be inspected without charge at the Commission's
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and copies of it or any part thereof may be obtained from such
office, upon payment of the fees prescribed by the Commission. The
Registration Statement also may be retrieved from the Commission's website.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents which have previously been filed by the Company
with the Commission pursuant to the Exchange Act are incorporated herein by
reference:
(1) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(2) the Company's Quarterly Report on Form 10-Q for the 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.
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 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 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.
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 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 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 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 such property, may adversely affect the
owner's ability to sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or treatment
of hazardous or toxic substances at a disposal or treatment facility also
may be liable for the costs of removal or remediation of a release of
hazardous or toxic substances at such disposal or treatment facility,
whether or not such facility is owned or operated by such person. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs incurred in connection with
the contamination. Finally, the owner of a site may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from such site.
Certain federal, state and local laws, regulations and ordinances
govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACM") when such materials are in poor condition or in the event
of construction, remodeling, renovation or demolition of a building. Such
laws may impose liability for release of ACM and may provide for third
parties to seek recovery from owners or operators of real properties for
personal injury associated with ACM. In connection with its ownership and
operation of its properties, the Company may be potentially liable for such
costs. Except for two properties, one of which is currently undergoing
abatement activities, the Company is not aware of any friable ACM at any of
its properties.
In the past few years, independent environmental consultants have
conducted or updated Phase I Environmental Assessments and other
environmental investigations as appropriate ("Environmental Site
Assessments") at the Company's properties. These Environmental Site
Assessments have included, among other things, a visual inspection of the
properties and the surrounding area and a review of relevant state, federal
and historical documents. Soil and groundwater sampling were performed
where warranted and remediation, if necessary, has or is being conducted.
The Company's Environmental Site Assessments of its properties
identified several properties that may be impacted by known or suspected
regional contamination. The Environmental Site Assessments have not,
however, revealed any environmental liability that the Company believes
would have a material adverse effect on the Company's business, assets or
results of operations taken as a whole, nor is the Company aware of any
such material environmental liability. Nevertheless, it is possible that
the Company's Environmental Site Assessments do not reveal all
environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no
assurance that (i) future laws, ordinances or regulations will not impose
any material environmental liability or (ii) the current environmental
condition of its properties will not be affected by tenants, by the
condition of land or operations in the vicinity of its properties (such as
the presence of underground storage tanks), or by third parties unrelated
to the Company.
The Company believes that its properties are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances or petroleum products,
except as noted above. The Company has not been notified by any
governmental authority, and is not otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances
or petroleum products in connection with any of its present properties,
other than as noted above.
Possible Adverse Effect on Common Stock Price of Shares Available for
Future Sale
Sales of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could adversely affect prevailing
market prices of the Common Stock. The Company has reserved 2,971,756
shares of Common Stock for issuance upon the exchange of OP Units issued in
connection with the formation of the Company and in connection with
property acquisitions, which shares the Company has agreed to register
pursuant to contractual obligations. In addition, the Company has granted
to certain executive officers, employees and directors options to purchase
shares of Common Stock (and reserved for issuance additional shares of
Common Stock) under the Company's 1996 Stock Incentive Plan and stock bonus
awards, all of which the Company has registered. No prediction can be made
about the effect that future sales of Common Stock will have on the market
prices of shares.
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 approximately 100
full-time employees and in-house expertise in acquisitions, finance, asset
management, leasing and construction.
The Company seeks to grow by continuing to acquire office properties
that are located in submarkets with growth potential, are underperforming
or need renovation and which offer opportunities for the Company to
implement its value-added strategy to increase cash flow. This strategy
includes active management and aggressive leasing efforts, a focused
renovation and refurbishment program for underperforming assets, reduction
and containment of operating costs and emphasis on tenant satisfaction
(including efforts to maximize tenant retention at lease expiration and
programs to relocate tenants to other spaces within the Company's
portfolio). The Company's commitment to tenant satisfaction and retention
is evidenced by its retention rate of approximately 73% (based on square
feet renewed) from 1993 through October 31, 1997 and management's on-going
relationships with multi-site tenants.
The founders and executive officers of the Company beneficially own
approximately 6.16% of the outstanding shares of Common Stock of the
Company, assuming the exchange of all of their OP Units for Common Stock
and excluding shares of Common Stock subject to options granted under the
Company's 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 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 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."
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 two-
thirds of the votes entitled to be cast on the matter unless a lesser
percentage (but not less than a majority of all of the votes to be cast on
the matter) is set forth in the corporation's charter. The Company's
Charter does not provide for a lesser percentage in such situations except
that the provisions of the Charter relating to authorized shares of stock
and the classification and reclassification of shares of Common Stock and
Preferred Stock may be amended by the affirmative vote of the holders of
not less than a majority of the votes entitled to be cast on the matter.
Preferred Stock
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Stock and to reclassify any previously classified but
unissued shares of any series, as authorized by the Board of Directors.
Prior to issuance of shares of each series, the Board is required by the
MGCL and the Charter of the Company to set, subject to the provisions of
the Charter regarding the restrictions on transfer of stock, the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and
terms or conditions of redemption for each such series. Thus, the Board
could authorize the issuance of shares of Preferred Stock with terms and
conditions which could have the effect of delaying, deferring or preventing
a change in control of the Company or other transaction that might involve
a premium price for holders of Common Stock or otherwise be in their best
interest. As of the date hereof, no shares of Preferred Stock are
outstanding and the Company has no present plans to issue any Preferred
Stock.
Power to Issue Additional Shares of Common Stock and Preferred Stock
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred
Stock and to classify or reclassify unissued shares of Common Stock and
Preferred Stock and thereafter to cause the Company to issue such
classified or reclassified shares of stock will provide the Company with
increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. The additional
classes or series, as well as the Common Stock, will be available for
issuance without further action by the Company's stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which the Company's securities may be listed
or traded. Although the Board of Directors has no intention at the present
time of doing so, it could authorize the Company to issue a class or series
that could, depending upon the terms of such class or series, delay, defer
or prevent a transaction or a change in control of the Company that might
involve a premium price for holders of Common Stock or otherwise be in
their best interest.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is The Bank of
New York.
Restrictions on Transfer
For the Company to qualify as a REIT under the Code, no more than 50%
in value of its outstanding shares of stock may be owned, 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 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 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."
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 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."
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.
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
are prohibited for five years after the most recent date on which the
Interested Stockholder becomes an Interested Stockholder. Thereafter, any
such business combination must be recommended by the board of directors of
such corporation and approved by the affirmative vote of at least (a) 80%
of the votes entitled to be cast by holders of outstanding shares of voting
stock of the corporation and (b) two-thirds of the votes entitled to be
cast by holders of voting stock of the corporation other than shares held
by the Interested Stockholder with whom (or with whose affiliate) the
business combination is to be effected, unless, among other conditions, the
corporation's common stockholders receive a minimum price (as defined in
the MGCL) for their shares and the consideration is received in cash or in
the same form as previously paid by the Interested Stockholder for its
shares. These provisions of Maryland law do not apply, however, to
business combinations that are approved or exempted by the board of
directors of the corporation prior to the time that the Interested
Stockholder becomes an Interested Stockholder. The Company's Board of
Directors has resolved to opt out of the business combination provisions of
the MGCL, and such resolutions also require that any decision to opt back
in be subject to the approval of holders of a majority of the shares of
Common Stock.
Control Share Acquisitions
The MGCL provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to
the extent approved by a vote of two-thirds of the votes entitled to be
cast on the matter, excluding shares of stock owned by the acquiror, by
officers or by directors who are employees of the corporation. "Control
shares" are voting shares of stock which, if aggregated with all other such
shares of stock previously acquired by the acquiror or in respect of which
the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror
to exercise voting power in electing directors within one of the following
ranges of voting power: (i) one-fifth or more but less than one-third,
(ii) one-third or more but less than a majority, or (iii) a majority or
more of all voting power. Control shares do not include shares the
acquiring person is then entitled to vote as the result of having
previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors of the corporation to call a
special meeting of stockholders to be held within 50 days of demand to
consider the voting rights of the shares. If no request for a meeting is
made, the corporation may itself present the question at any stockholders
meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the
corporation may redeem any or all of the control shares (except those for
which voting rights have previously been approved) for fair value
determined, without regard to the absence of voting rights for the control
shares, as of the date of the last control share acquisition by the
acquiror or of any meeting of stockholders at which the voting rights of
such shares are considered and not approved. If voting rights for control
shares are approved at a stockholders meeting and the acquiror becomes
entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than
the highest price per share paid by the acquiror in the control share
acquisition.
The control share acquisition statute does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the corporation is
a party to the transaction or (b) to acquisitions approved or exempted by
the charter or bylaws of the corporation.
The Bylaws of the Company contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of
the Company's shares of stock. Although there can be no assurance that
such provision will not be amended or eliminated at any time in the future,
the Company's Board of Directors has resolved that the provision may not be
amended or eliminated without the approval of holders of at least a
majority of the shares of Common Stock.
Amendment to the Charter
The Charter, including its provisions on classification of the Board of
Directors, restrictions on transferability of shares of Common Stock and
removal of directors, may be amended only by the affirmative vote of the
holders of not less than two-thirds of all of the votes entitled to be cast
on the matter. However, the provisions of the Charter relating to
authorized shares of stock and the classification and reclassification of
shares of Common Stock and Preferred Stock may be amended by the
affirmative vote of the holders of not less than a majority of the votes
entitled to be cast on the matter.
Dissolution of the Company
Under Maryland law, the dissolution of the Company must be approved by
the affirmative vote of the holders of not less than two-thirds of all of
the votes entitled to be cast on the matter.
Advance Notice of Director Nominations and New Business
The Bylaws of the Company provide that (a) with respect to an annual
meeting of stockholders, nominations of persons for election to the Board
of Directors and the proposal of business to be considered by stockholders
may be made only (i) pursuant to the Company's notice of the meeting,
(ii) by or at the discretion of the Board of Directors or (iii) by a
stockholder who is entitled to vote at the meeting and has complied with
the advance notice procedures set forth in the Bylaws and (b) with respect
to special meetings of the stockholders, only the business specified in the
Company's notice of meeting may be brought before the meeting of
stockholders and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to the Company's notice of the
meeting, (ii) by or at the discretion of the Board of Directors or
(iii) provided that the Board of Directors has determined that directors
shall be elected at such meeting, by a stockholder who is entitled to vote
at the meeting and has complied with the advance notice provisions set
forth in the Bylaws.
Anti-takeover Effect of Certain Provisions of Maryland Law and of the
Charter and Bylaws
The business combination provisions and the control share acquisition
provisions of the MGCL, in each case if they ever became applicable to the
Company, the provisions of the Charter on classification of the Board of
Directors and removal of directors and the advance notice provisions of the
Bylaws could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for holders of Common
Stock or otherwise be in their best interest.
Rights to Purchase Securities and Other Property
The Charter authorizes the Board of Directors to create and issue
rights entitling the holders thereof to purchase from the Company shares of
stock or other securities or property. The times at which and terms upon
which such rights are to be issued would be determined by the Board of
Directors and set forth in the contracts or instruments that evidence such
rights. This provision is intended to confirm the Board of Directors'
authority to issue share purchase rights, which may have terms that could
impede a merger, tender offer or other takeover attempt, or other rights to
purchase shares or securities of the Company or any other corporation.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Company and the ownership of shares of Common Stock is based
on current law, is for general information only and is not tax advice. The
information set forth below, to the extent that it constitutes matters of
law, summaries of legal matters or legal conclusions, is the opinion of
Latham & Watkins, tax counsel to the Company. This discussion does not
purport to deal with all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or tax
circumstances, or to certain types of stockholders subject to special
treatment under the tax laws, including without limitation, certain
financial institutions, life insurance companies, dealers in securities or
currencies, stockholders holding Common Stock as part of a conversion
transaction, as part of a hedge or hedging transaction, or as a position in
a straddle for tax purposes, tax-exempt organizations (except to the extent
discussed under the heading "Taxation of Tax-Exempt Stockholders") or
foreign corporations or partnerships and persons who are not citizens or
residents of the United States. In addition, the summary below does not
consider the effect of any foreign, state, local or other tax laws that may
be applicable to stockholders.
The information in this section is based on the Code, current,
temporary and proposed Treasury Regulations promulgated under the Code, the
legislative history of the Code, current administrative interpretations and
practices of the IRS, and court decisions, all as of the date hereof. No
assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and practices and/or court decisions will
not adversely affect existing interpretations. Any such change could apply
retroactively to transactions preceding the date of the change. The
Company has not requested, and does not plan to request, any ruling from
the IRS concerning the tax treatment of the Company or the Operating
Partnership. Thus, no assurance can be provided that the statements set
forth herein (which are, in any event, not binding on the IRS or courts)
will not be challenged by the IRS or will be sustained by a court if so
challenged.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE
PURCHASE, OWNERSHIP AND SALE OF THE COMMON STOCK, INCLUDING THE FEDERAL,
STATE, LOCAL AND FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP AND SALE, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of the Company
General. The Company has elected to be taxed as a REIT under Sections
856 through 860 of the Code, commencing with its taxable year ended
December 31, 1996. The Company believes that, commencing with its taxable
year ended December 31, 1996, it has been organized and operated in such a
manner as to qualify for taxation as a REIT under the Code commencing with
such taxable year, and the Company intends to continue to operate in such a
manner. However, 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 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.
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 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 Operating Partnership intends
to hold the properties for investment with a view to long-term
appreciation, to engage in the business of acquiring, developing, owning,
and operating the properties (and other properties) and to make such
occasional sales of the properties as are consistent with the Operating
Partnership's investment objectives. There can be no assurance, however,
that the IRS might not contend that one or more of such sales is subject to
the 100% penalty tax.
Asset Tests. The Company, at the close of each quarter of its taxable
year, must also satisfy three tests relating to the nature of its assets.
First, at least 75% of the value of the Company's total assets (including
its allocable share of the assets held by the Operating Partnership) must
be represented by real estate assets including (i) its allocable share of
real estate assets held by partnerships in which the Company owns an
interest and (ii) stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company, cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third,
of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of
the Company's total assets and the Company may not own more than 10% of any
one issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter,
the Company will not lose its status as a REIT for failure to satisfy the
asset tests at the end of a later quarter solely by reason of changes in
asset values. If the failure to satisfy the asset tests results from an
acquisition of securities or other property during a quarter (including as
a result of the Company increasing its interest in the Operating
Partnership), the failure can be cured by disposition of sufficient
nonqualifying assets within 30 days after the close of that quarter. The
Company has and intends to continue to maintain adequate records of the
value of its assets in order to ensure compliance with the asset tests and
to take such other actions within 30 days after the close of any quarter as
may be required to cure any noncompliance. If the Company fails to cure
noncompliance with the asset tests within such time period, the Company
would cease to qualify as a REIT.
Annual Distribution Requirements. The Company, in order to maintain
its qualification as a REIT, is required to distribute dividends (other
than capital gain dividends) to its stockholders in an amount at least
equal to (i) the sum of (a) 95% of the Company's "REIT taxable income"
(computed without regard to the dividends paid deduction and the Company's
net capital gain) and (b) 95% of the excess of the net income, if any, from
foreclosure property over the tax imposed on such income, minus (ii) the
excess of the sum of certain items of noncash income (i.e., income
attributable to leveled stepped rents, original issue discount or purchase
money debt, or a like-kind exchange that is later determined to be taxable)
over 5% of the "REIT taxable income" as described in clause (i)(a) above.
In addition, if the Company disposes of any Built-In Gain Asset during its
Recognition Period, the Company will be required, pursuant to Treasury
Regulations which have not yet been promulgated, to distribute at least 95%
of the Built-in Gain (after tax), if any, recognized on the disposition of
such asset. Such distributions must be paid in the taxable year to which
they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before
the first regular dividend payment after such declaration. Such
distributions are taxable to holders of Common Stock (other than tax-exempt
entities, as discussed below) in the year in which paid, even though such
distributions relate to the prior year for purposes of the Company's 95%
distribution requirement. The amount distributed must not be preferential
- -- i.e., each holder of shares of Common Stock must receive the same
distribution per share. To the extent that the Company does not distribute
all of its net capital gain or distributes at least 95%, but less than
100%, of its "REIT taxable income," as adjusted, it will be subject to tax
thereon at regular ordinary and capital gain corporate tax rates. The
Company believes that it has and intends to continue to make timely
distributions sufficient to satisfy these annual distribution requirements.
In this regard, the Partnership Agreement authorizes the Company, as
general partner, to take such steps as may be necessary to cause the
Operating Partnership to distribute to its partners an amount sufficient to
permit the Company to meet these distribution requirements.
The Company's REIT taxable income has been and is expected to continue
to be less than its cash flow due to the allowance of depreciation and
other non-cash charges in computing REIT taxable income. Accordingly, the
Company anticipates that it will generally have sufficient cash or liquid
assets to enable it to satisfy the distribution requirements described
above. It is possible, however, that the Company, from time to time, may
not have sufficient cash or other liquid assets to meet these distribution
requirements due to timing differences between (i) the actual receipt of
income and actual payment of deductible expenses and (ii) the inclusion of
such income and deduction of such expenses in arriving at taxable income of
the Company. In the event that such timing differences occur, in order to
meet the distribution requirements, the Company may find it necessary to
arrange for short-term, or possibly long-term, borrowings or to pay
dividends in the form of taxable stock dividends.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying
"deficiency dividends" to stockholders in a later year, which may be
included in the Company's deduction for dividends paid for the earlier
year. Thus, the Company may be able to avoid being taxed on amounts
distributed as deficiency dividends; however, the Company will be required
to pay interest based upon the amount of any deduction taken for deficiency
dividends.
Furthermore, if the Company should fail to distribute during each
calendar year (or, in the case of distributions with declaration and record
dates falling in the last three months of the calendar year, by the end of
January immediately following such year) at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed. Any REIT
taxable income and net capital gain on which this excise tax is imposed for
any year is treated as an amount distributed that year for purposes of
calculating such tax.
Failure to Qualify
If the Company fails to maintain its qualification for taxation as a
REIT in any taxable year, and the relief provisions do not apply, the
Company will be subject to tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate rates.
Distributions to stockholders in any year in which the Company fails to
qualify will not be deductible by the Company nor will they be required to
be made. As a result, the Company's failure to maintain its qualification
as a REIT would significantly reduce the cash available for distribution by
the Company to its stockholders. In addition, if the Company fails to
maintain its qualification as a REIT, all distributions to stockholders
will be taxable as ordinary income, to the extent of the Company's current
and accumulated earnings and profits, and, subject to certain limitations
of the Code, corporate distributees may be eligible for the dividends
received deduction. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT
for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.
Taxation of Taxable U.S. Stockholders Generally
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation,
partnership, or other entity created or organized in or under the laws of
the United States or of any political subdivision thereof, (iii) is an
estate the income of which is subject to United States federal income
taxation regardless of its source or (iv) is a trust the administration of
which is subject to the primary supervision of a United States court and
which has one or more United States persons who have the authority to
control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in regulations, certain trusts
in existence on August 20, 1996, and treated as United States persons prior
to such date that elect to continue to be treated as United States persons,
shall also be considered U.S. Stockholders.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to
its taxable U.S. Stockholders as ordinary income. Such distributions will
not be eligible for the dividends received deduction otherwise available
with respect to dividends received by U.S. Stockholders that are
corporations. Distributions made by the Company that are properly
designated by the Company as capital gain dividends will be taxable to
taxable U.S. Stockholders as gains (to the extent that they do not exceed
the Company's actual net capital gain for the taxable year) from the sale
or disposition of a capital asset. Depending upon the period of time that
the Company held the assets to which such gains were attributable, and upon
certain designations, if any, which may be made by the Company, such gains
will be taxable to non-corporate U.S. Stockholders at a rate of either 20%,
25% or 28%. U.S. Stockholders that are corporations may, however, be
required to treat up to 20% of certain capital gain dividends as ordinary
income. To the extent that the Company makes distributions (not designated
as capital gain dividends) in excess of its current and accumulated
earnings and profits, such distributions will be treated first as a
tax-free return of capital to each U.S. Stockholder, reducing the adjusted
basis which such U.S. Stockholder has in his or her shares of Common Stock
for tax purposes by the amount of such distribution (but not below zero),
with distributions in excess of a U.S. Stockholder's adjusted basis in his
or her shares taxable as capital gains (provided that the shares have been
held as a capital asset). With respect to non-corporate U.S. Stockholders,
amounts described as being treated as capital gains in the preceding
sentence will be taxable as long-term capital gains if the shares to which
such gains are attributable have been held for more than eighteen months,
mid-term capital gains if such shares have been held for more than one year
but not more than eighteen months, or short-term capital gains if such
shares have been held for one year or less. Dividends declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be
treated as both paid by the Company and received by the stockholder on
December 31 of such year, provided that the dividend is actually paid by
the Company on or before January 31 of the following calendar year.
Stockholders may not include in their own income tax returns any net
operating losses or capital losses of the Company.
Distributions made by the Company and gain arising from the sale or
exchange by a U.S. Stockholder of shares of Common Stock will not be
treated as passive activity income, and, as a result, U.S. Stockholders
generally will not be able to apply any "passive losses" against such
income or gain. Distributions made by the Company (to the extent they do
not constitute a return of capital) generally will be treated as investment
income for purposes of computing the investment interest limitation. Gain
arising from the sale or other disposition of Common Stock (or
distributions treated as such), however, will not be treated as investment
income unless the U.S. Stockholder elects to reduce the amount of such U.S.
Stockholder's total net capital gain eligible for the capital gains rate by
the amount of such gain with respect to such Common Stock.
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.
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."
Taxation of Non-U.S. Stockholders
The preceding discussion does not address the rules governing United
States federal income taxation of the ownership and disposition of Common
Stock by persons that are not U.S. Stockholders ("Non-U.S. Stockholders").
In general, Non-U.S. Stockholders may be subject to special tax withholding
requirements on distributions from the Company and with respect to their
sale or other disposition of Common Stock of the Company, except to the
extent reduced or eliminated by an income tax treaty between the United
States and the Non-U.S. Stockholder's country. A Non-U.S. Stockholder who
is a stockholder of record and is eligible for reduction or elimination of
withholding must file an appropriate form with the Company in order to
claim such treatment. Non-U.S. Stockholders should consult their own tax
advisors concerning the federal income tax consequences to them of an
acquisition of shares of Common Stock, including the federal income tax
treatment of dispositions of interests in, and the receipt of distributions
from, the Company.
Tax Aspects of the Operating Partnership
General. Substantially all of the Company's investments are held
indirectly through the Operating Partnership. In general, partnerships are
"pass-through" entities which are not subject to federal income tax.
Rather, partners are allocated their proportionate shares of the items of
income, gain, loss, deduction and credit of a partnership, and are
potentially subject to tax thereon, without regard to whether the partners
receive a distribution from the partnership. The Company will include in
its income its proportionate share of the foregoing partnership items for
purposes of the various REIT income tests and in the computation of its
REIT taxable income. Moreover, for purposes of the REIT asset tests, the
Company will include its proportionate share of assets held by the
Operating Partnership. See "--Taxation of the Company."
Entity Classification. The Company's interest in the Operating
Partnership involves special tax considerations, including the possibility
of a challenge by the IRS of the status of the Operating Partnership as a
partnership (as opposed to an association taxable as a corporation) for
federal income tax purposes. If the Operating Partnership were treated as
an association, it would be taxable as a corporation and therefore be
subject to an entity-level tax on its income. In such a situation, the
character of the Company's assets and items of gross income would change
and preclude the Company from satisfying the asset tests and possibly the
income tests (see "--Taxation of the Company - Asset Tests" and "--Income
Tests"), and in turn would prevent the Company from qualifying as a REIT.
See "--Taxation of the Company - Failure to Qualify" above for a discussion
of the effect of the Company's failure to meet such tests for a taxable
year. In addition, a change in the Operating Partnership's status for tax
purposes might be treated as a taxable event in which case the Company
might incur a tax liability without any related cash distributions.
Prior to January 1, 1997, an organization formed as a partnership or a
limited liability company was treated as a partnership for Federal income
tax purposes rather than as a corporation only if it had no more than two
of the four corporate characteristics that the Treasury Regulations in
effect at that time used to distinguish a partnership from a corporation
for tax purposes. These four characteristics were (i) continuity of life,
(ii) centralization of management, (iii) limited liability and (iv) free
transferability of interests. Under final Treasury Regulations which
became effective January 1, 1997, the four factor test has been eliminated
and an entity formed as a partnership or as a limited liability company
will be taxed as a partnership for Federal income tax purposes unless it
specifically elects otherwise. These newly promulgated Treasury
Regulations provide that the IRS will not challenge the classification of
an existing partnership or limited liability company for tax periods prior
to January 1, 1997, so long as (a) the entity had a reasonable basis for
its claimed classification, (b) the entity and all its members recognized
the federal income tax consequences of any changes in the entity's
classification within the 60 months prior to January 1, 1997, and
(c) neither the entity nor any member of the entity had been notified in
writing on or before May 8, 1996, that the classification of the entity was
under examination by the IRS. Unless it elects otherwise, a domestic
business entity not otherwise classified as a corporation, which has at
least two members and was in existence prior to January 1, 1997, will have
the same classification for federal income tax purposes that it claimed
under the Treasury Regulations in effect prior to that date. The Operating
Partnership claimed classification as a partnership for its taxable year
ending December 31, 1996.
Partnership Allocations. Although a partnership agreement will
generally determine the allocation of income and loss among partners, such
allocations will be disregarded for tax purposes if they do not comply with
the provisions of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder. Generally, Section 704(b) and the Treasury
Regulations promulgated thereunder require that partnership allocations
respect the economic arrangement of the partners. If an allocation is not
respected under Section 704(b) of the Code for federal income tax purposes,
the item subject to the allocation will be reallocated in accordance with
the partners' interests in the partnership, which will be determined by
taking into account all of the facts and circumstances relating to the
economic arrangement of the partners with respect to such item. The
Operating Partnership's allocations of taxable income and loss are intended
to comply with the requirements of Section 704(b) of the Code and the
Treasury Regulations promulgated thereunder.
The Partnership Agreement provides that net income or net loss of the
Operating Partnership will generally be allocated to the Company and the
Limited Partners in accordance with their respective percentage interests
in the Operating Partnership. In addition, allocations of net income or
net loss will be subject to compliance with the provisions of Sections
704(b) and 704(c) of the Code and the Treasury Regulations promulgated
thereunder.
Tax Allocations with Respect to the Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss and deduction attributable
to appreciated or depreciated property (such as the 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
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 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 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.
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table itemizes the expenses incurred by Arden Realty,
Inc. (the "Registrant") in connection with the registration of the shares
of the Registrant's common stock, par value $.01 per share ("Common
Stock"), offered hereby. All amounts shown are estimates except the
Securities and Exchange Commission's registration fee.
Registration Fee - Securities and Exchange Commission $295,000
NASD Fee 30,500
NYSE Listing Fee 25,650
Blue Sky Fees and Expenses 20,000
Printing and Engraving Expenses 100,000
Legal Fees and Expenses 100,000
Accounting Fees and Expenses 30,000
Miscellaneous Expenses 75,000
Total $676,150
Item 15. Indemnification of Directors and Officers.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in
money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action.
The Charter of the Company contains such a provision which eliminates such
liability to the maximum extent permitted by Maryland law.
The Charter of the Company authorizes it, to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any individual who is a present or former director or
officer who is made a party to a proceeding by reason of his service in
that capacity or (b) any individual who, while a director of the Company
and at the request of the Company, serves or has served as a director,
officer, partner or trustee of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise from and against
any claim or liability to which such person may incur by reason of his
status as a present or former director or officer of the Company. The
Bylaws of the Company obligate it, to the maximum extent permitted by
Maryland law, without requiring a preliminary determination of the ultimate
entitlement to indemnification to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former director of officer who is made a party to the
proceeding by reason of his service in that capacity or (b) any individual
who, while a director of the Company and at the request of the Company,
serves or has served another corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his service in that capacity. The
Charter and Bylaws also permit the Company to indemnify and advance
expenses to any person who served a predecessor of the Company in any of
the capacities described above and to any employee or agent of the Company
or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer
who has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his services in that
capacity. The MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason
of their service in those or other capacities unless it is established that
(a) the act or omission of the director or officer was material to the
matter giving rise to the proceeding and (i) was committed in bad faith or
(ii) was the result of active and deliberate dishonesty, (b) the director
or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the
director or officer had reasonable cause to believe that the act or
omission was unlawful. However, a Maryland corporation may not indemnify
for an adverse judgment in a suit by or in the right of the corporation or
for a judgment of liability on the basis that a personal benefit was
improperly received, unless, in either case, a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon receipt by the
corporation of (a) a written affirmation by the director or officer of his
good faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by or on
his behalf to repay the amount paid or reimbursed by the corporation if it
shall ultimately be determined that the standard of conduct was not met.
The inclusion of the above provisions in the Charter and Bylaws may
have the effect of reducing the likelihood of stockholder derivative suits
against directors and may discourage or deter stockholders or management
from bringing a lawsuit against directors for breach of their duty of care,
even though such an action, if successful, might otherwise have benefitted
the Company and its stockholders. Furthermore, it is the position of the
Commission that indemnification of directors and officers for liabilities
arising under the Securities Act is against public policy and is
unenforceable pursuant to Section 14 of the Securities Act.
The Partnership Agreement also provides for indemnification and advance
of expenses of the Company and its officers and directors to the same
extent indemnification and advance of expenses is provided to officers and
directors of the Company in the Charter and Bylaws, and limits the
liability of the Company and its officers and directors to the Operating
Partnership and its partners to the same extent liability of officers and
directors of the Company and its stockholders is limited under the Charter.
Item 16. Exhibits
See attached exhibit index.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby further undertakes that, for purposes
of determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned Registrant hereby further undertakes to deliver or
cause to be delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to security holders
that is incorporated by reference in the prospectus and furnished pursuant
to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the
Exchange Act; and, where interim financial information required to be
presented by Article 3 of Regulation S-X is not set forth in the
prospectus, to deliver, or cause to be delivered to each person to whom the
prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such
interim financial information.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act, and will be governed by
the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused
this Amendment No. 1 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Los Angeles, State of California, on January 21, 1998.
ARDEN REALTY, INC.
By:/s/ Richard S. Ziman
Richard S. Ziman
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title
/s/Richard S. Ziman Chairman of the Board, Chief January 21, 1998
Richard S. Ziman Executive Officer and Director
(Principal Executive Officer)
/s/ * President, Chief Operating January 21, 1998
Victor J. Coleman Officer and Director
/s/ * Chief Financial Officer and January 21, 1998
Diana M. Laing Secretary (Principal Financial
and Accounting Officer)
/s/ * Director January 21, 1998
Carl D. Covitz
/s/ * Director January 21, 1998
Larry S. Flax
/s/ * Director January 21, 1998
Steven C. Good
/s/ * Director January 21, 1998
Kenneth B. Roath
* Power of Attorney by
/s/ Richard S. Ziman
Richard S. Ziman
EXHIBIT INDEX
EXHIBIT PAGE
1.1 Form of Underwriting Agreement(1) N/A
4.1 Charter of the Company(2) N/A
4.2 Bylaws of the Company(2) N/A
5.1 Opinion of Ballard Spahr Andrews & Ingersoll N/A
regarding the validity of the Common Stock
being registered(3)
8.1 Opinion of Latham & Watkins regarding certain
federal income tax matters
23.1 Consent of Ballard Spahr Andrews & Ingersoll (3) N/A
23.2 Consent of Latham & Watkins (included in Exhibit 8.1)
23.3 Consent of Ernst & Young LLP
24.2 Power of Attorney (3) N/A
(1) To be filed by amendment or incorporated by reference in connection
with the offering of common stock.
(2) Filed as an exhibit to the Company's Registration Statement on Form
S-11 (No. 333-08163) declared effective on October 3, 1996 and
incorporated herein by reference.
(3) Previously filed.
EXHIBIT 8.1
Opinion of Latham & Watkins regarding certain federal income tax matters
January 21, 1998
Arden Realty, Inc.
9100 Wilshire Boulevard
East Tower, Suite 700
Beverly Hills, California 90212
Re:Registration Statement on Form S-3 filed pursuant
to Rule 415;
Certain Federal Income Tax Consequences
Ladies and Gentlemen:
We have acted as tax counsel to Arden Realty, Inc., a
Maryland corporation (the "Company"), in connection with the
registration of $1,000,000,000 aggregate maximum offering price
of shares of common stock of the Company pursuant to a
registration statement (the "Registration Statement") on Form S-3
(File No. 333-44141) under the Securities Act of 1933, (the
"Act") filed with the Securities and Exchange Commission (the
"Commission") on January 12, 1998, pursuant to Rule 415
promulgated under the Act, as amended as of the date such
statement became final.
You have requested our opinion concerning certain of the
federal income tax consequences to the Company and the purchasers
of the securities described above in connection with the sale
described above. This opinion is based on various facts and
assumptions, including the facts set forth in the Registration
Statement concerning the business, properties and governing
documents of the Company and Arden Realty Limited Partnership
(the "Operating Partnership"). We have also been furnished with,
and with your consent have relied upon, certain representations
made by the Company and subsidiaries of the Company (including
the Operating Partnership) with respect to certain factual
matters through a certificate of an officer of the Company (the
"Officer's Certificate").
In our capacity as tax counsel to the Company, we have
made such legal and factual examinations and inquiries, including
an examination of originals or copies certified or otherwise
identified to our satisfaction of such documents, corporate
records and other instruments as we have deemed necessary or
appropriate for purposes of this opinion. In our examination, we
have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures thereon, the legal
capacity of natural persons executing such documents and the
conformity to authentic original documents of all documents
submitted to us as copies.
We are opining herein as to the effect on the subject
transaction only of the federal income tax laws of the United
States and we express no opinion with respect to the
applicability thereto, or the effect thereon, of other federal
laws, the laws of any state or other jurisdiction or as to any
matters of municipal law or the laws of any other local agencies
within any state.
Based on such facts, assumptions and representations, it
is our opinion that the statements in the Registration Statement
set forth under the caption "Federal Income Tax Considerations"
to the extent such information constitutes matters of law,
summaries of legal matters, or legal conclusions, have been
reviewed by us and are accurate in all material respects.
No opinion is expressed as to any matter not discussed
herein.
This opinion is based on various statutory provisions,
regulations promulgated thereunder and interpretations thereof by
the Internal Revenue Service and the courts having jurisdiction
over such matters, all of which are subject to change either
prospectively or retroactively. Also, any variation or
difference in the facts from those set forth in the Registration
Statement or the Officer's Certificate may affect the conclusions
stated herein. Moreover, the Company's qualification and
taxation as a real estate investment trust depends upon the
Company's ability to meet (through actual annual operating
results, distribution levels and diversity of stock ownership)
the various qualification tests imposed under the Code, the
results of which have not been and will not be reviewed by Latham
& Watkins. Accordingly, no assurance can be given that the
actual results of the Company's operation for any one taxable
year will satisfy such requirements.
This opinion is rendered only to you, and is solely for
your use in connection with the transactions set forth in the
Registration Statement. This opinion may not be relied upon by
you for any other purpose, or furnished to, quoted to, or relied
upon by any other person, firm or corporation, for any purpose,
without our prior written consent. We hereby consent to the
filing of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement.
Very truly yours,
/s/ Latham & Watkins
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the
caption "Experts" in the Registration Statement (Form S-3
No. 333-44141) and related prospectus of Arden Realty, Inc.
for the registration of up to an aggregate amount of
$1,000,000,000 of shares of its common stock, and to the
incorporation by reference therein of our report dated
January 31, 1997, with respect to the consolidated financial
statements and schedule of Arden Realty, Inc. and the
combined financial statements of the Arden Predecessors
included in the Annual Report (Form 10-K) of Arden Realty,
Inc. for the year ended December 31, 1996; and to the
incorporation by reference therein of our report dated
February 5, 1997 with respect to the statement of revenue
and certain expenses of 5200 West Century for the period
from January 1, 1996 to December 19, 1996, and to the
incorporation by reference therein of our reports dated
February 5, 1997 with respect to the statements of revenue
and certain expenses of 10351 Santa Monica and 2730 Wilshire
for the 12 months ended October 31, 1996, and to the
incorporation by reference therein of our report dated
February 5, 1997 with respect to the statement of revenue
and certain expenses of Center Promenade for the period from
January 1, 1996 to December 17, 1996, and to the
incorporation by reference therein of our report dated
February 5, 1997 with respect to the statement of revenue
and certain expenses of 10350 Santa Monica for the period
from January 1, 1996 to December 27, 1996, and to the
incorporation by reference therein of our report dated
February 5, 1997 with respect to the statement of revenue
and certain expenses of L.A. Corporate Center for the period
from January 1, 1996 to December 18, 1996, and to the
incorporation by reference therein of our report dated
February 5, 1997 with respect to the statement of revenue
and certain expenses of Sumitomo Bank Building for the
period from January 1, 1996 to December 20, 1996, and to the
incorporation by reference therein of our report dated
February 7, 1997 with respect to the statement of revenue
and certain expenses of Burbank Executive Center for the 12
months ended October 31, 1996 all of which were included in
the current reports filed on Form 8-K/A of Arden Realty,
Inc. dated February 28, 1997 and included in the Annual
Report (Form 10-K) of Arden Realty, Inc. for the year ended
December 31, 1996; and to the incorporation by reference
therein of our report dated March 4, 1997 with respect to
the statement of revenue and certain expenses of 535 Brand
for each of the three years in the period ended December 31,
1996, and to the incorporation by reference therein of our
report dated February 24, 1997 with respect to the combined
statement of revenue and certain expenses of Whittier
Financial Center, Clarendon Crest, and California Twin
Centre for the year ended December 31, 1996, and to the
incorporation by reference therein of our report dated
February 28, 1997 with respect to the statement of revenue
and certain expenses of 10780 Santa Monica for the year
ended December 31, 1996, and to the incorporation by
reference therein of our report dated March 7, 1997 with
respect to the statement of revenue and certain expenses of
Noble Professional Center for the year ended December 31,
1996, and to the incorporation by reference therein of our
report dated May 7, 1997 with respect to the statement of
revenue and certain expenses of South Bay Centre for the
year ended December 31, 1996, and to the incorporation by
reference therein of our report dated April 24, 1997 with
respect to the statement of revenue and certain expenses of
8383 Wilshire for the year ended December 31, 1996 all of
which were included in the current report filed on Form
8-K/A of Arden Realty, Inc. dated July 8, 1997; and to the
incorporation by reference therein of our report dated April
30, 1997 with respect to the statement of revenue and
certain expenses of Centerpointe La Palma for the year ended
December 31, 1996, and to the incorporation by reference
therein of our report dated June 6, 1997 with respect to the
statement of revenue and certain expenses of Pacific Gateway
II for the year ended December 31, 1996 all of which were
included in the current report filed on Form 8-K of Arden
Realty, Inc. dated July 9, 1997; and to the incorporation by
reference therein of our report dated April 2, 1997 with
respect to the combined statement of revenue and certain
expenses of 1000 Town Center and Mariner Court for the year
ended December 31, 1996, and to the incorporation by
reference therein of our report dated May 6, 1997 with
respect to the statement of revenue and certain expenses of
Parkway Center for the year ended December 31, 1996, and to
the incorporation by reference therein of our report dated
April 2, 1997 with respect to the statement of revenue and
certain expenses of Crown Cabot for the year ended December
31, 1996 all of which were included in the current report
filed on Form 8-K of Arden Realty, Inc. dated August 13,
1997; and to the incorporation by reference therein of our
report dated August 20, 1997 with respect to the statement
of revenue and certain expenses of 120 South Spalding for
the year ended December 31, 1996, and to the incorporation
by reference therein of our report dated September 5, 1997
with respect to the statement of revenue and certain
expenses of Foremost Professional Plaza for the year ended
December 31, 1996, and to the incorporation by reference
therein of our report dated August 25, 1997 with respect to
the statement of revenue and certain expenses of 1370 Valley
Vista for the year ended December 31, 1996 all of which were
included in the current report filed on Form 8-K/A of Arden
Realty, Inc. dated November 14, 1997; and to the
incorporation by reference therein of our report dated
October 21, 1997 with respect to the statement of revenue
and certain expenses of Northpoint for the year ended
December 31, 1996, and to the incorporation by reference
therein of our report dated November 19, 1997 with respect
to the statement of revenue and certain expenses of 145
South Fairfax for the year ended December 31, 1996, and to
the incorporation by reference therein of our report dated
October 14, 1997 with respect to the statement of revenue
and certain expenses of Bernardo Regency for the year ended
December 31, 1996, and to the incorporation by reference
therein of our report dated October 3, 1997 with respect to
the combined statement of revenue and certain expenses of
Thousand Oaks Portfolio for the year ended December 31, 1996
all of which were included in the current report filed on
Form 8-K/A of Arden Realty, Inc. dated November 24, 1997
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Los Angeles, California
January 21, 1998
