<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1998
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CAREY DIVERSIFIED LLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT)
<TABLE>
<S> <C> <C>
DELAWARE 6798 13-3912578
(State or Jurisdiction of (Primary Standard Industrial (IRS Employer
Organization or Incorporation) Classification Code Number) Identification Number)
</TABLE>
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
FRANCIS J. CAREY
CAREY DIVERSIFIED LLC
50 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
MICHAEL B. POLLACK, ESQUIRE
REED SMITH SHAW & MCCLAY LLP
2500 ONE LIBERTY PLACE
PHILADELPHIA, PENNSYLVANIA 19103
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of the Registration Statement.
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, 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 of 1933, 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 of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
<PAGE> 2
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF SECURITIES BEING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER SHARE PRICE(1) FEE
--------- ------ ----------- -------
<S> <C> <C> <C> <C>
Limited Liability Company
Listed Shares 4,500,000 $21.32 $95,940,000 $28,303
</TABLE>
(1) Estimated solely for calculation of the registration fee in
accordance with Rule 457(c) of the Securities Act of 1933
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4,500,000 LISTED SHARES
CAREY DIVERSIFIED LLC
LIMITED LIABILITY COMPANY LISTED SHARES
This Prospectus relates to 4,500,000 limited liability company interests, (the
"Listed Shares"), of Carey Diversified LLC, a Delaware limited liability Company
(the "Company") which may be offered and issued from time to time in connection
with acquisition of real estate properties either directly or through the
acquisition of entities owning such properties. See "BUSINESS and PROPERTIES -
Acquisition Strategies".
The Company anticipates that acquisitions, if any, occurring in the future will
consist principally of real estate investments related to or complementary to
the Company's current business. The Company contemplates that the terms of an
acquisition will be determined by negotiations between the Company and the
owners or controlling persons of the property to be acquired. The Company
anticipates that Listed Shares issued in any such acquisition will be valued at
a price reasonably related to the value of the Listed Shares, either at the time
the terms of the acquisition are tentatively agreed upon, or at or about the
time of closing, or during the periods or periods prior to delivery of the
Listed Shares. The Company does not expect that underwriting discounts or
commissions will be paid.
SEE "RISK FACTORS" COMMENCING ON PAGE [--] OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE LISTED SHARES OFFERED HEREBY.
THE USE OF FORECASTS IN THIS OFFERING IS PROHIBITED. ANY REPRESENTATIONS TO THE
CONTRARY AND ANY PREDICTIONS, WRITTEN OR ORAL, AS TO THE AMOUNT OR CERTAINTY OF
ANY PRESENT OR FUTURE CASH BENEFIT OR TAX BENEFIT WHICH MAY FLOW FROM AN
INVESTMENT IN THE COMPANY IS NOT PERMITTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION. NEITHER THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Listed Shares are listed on the New York Stock Exchange ("NYSE") under the
symbol "CDC". See "GLOSSARY OF TERMS" for definitions of certain key terms used
in this Prospectus.
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount Company(1)
----------------- ----------- -----------------
<S> <C> <C> <C>
Per Share $ 21.32 $ N/A $ 21.32
Total $ 95,940,000 $ N/A $ 95,940,000
</TABLE>
(1) The Listed Shares covered by this Prospectus are being registered for
issuance in connection the acquisition of real estate investments.
Consequently, the Company will not receive any cash proceeds from any
offerings.
The date of this Prospectus is February ___, 1998
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<PAGE> 4
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). This Prospectus
constitutes part of a Registration Statement on Form S-1 (the "Registration
Statement") filed with the Commission by the Company under the Securities Act of
1933, as amended (the "Act"). Reports, proxy statements and other information
filed with the Commission by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission: Midwest Regional Office, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of
such materials may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. at prescribed rates. In
addition, information may be obtained from the Commission's internet site at
http:/www.sec.gov. This site contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.
This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Listed Shares being offered, reference is made to
the Registration Statement and the financial statements and exhibits filed as
part thereof. Statements contained in this Prospectus as to the contents of any
contract or other documents are not necessarily complete and, in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference.
The Company intends to distribute to holders of Listed Shares annual
reports containing audited consolidated financial statements and a report
thereon by the Company's independent certified public accountants and quarterly
reports containing unaudited consolidated financial information for each of the
first three quarters of each fiscal year.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
PROSPECTUS SUMMARY
The following Summary is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in this
Prospectus and supplements thereto. Investors should carefully consider the
information set forth under "Risk Factors" prior to making a decision to acquire
any of the Listed Shares offered hereby. This prospectus contains certain
forward- looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from the results anticipated in these
forward-looking statements as a result of certain of the factors set forth in
the following Prospectus Summary and elsewhere in this Prospectus. Capitalized
terms not otherwise defined in this Summary shall have the meanings set forth in
the "GLOSSARY OF TERMS."
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THE COMPANY
The Company was formed as a Delaware limited liability company under
the laws of the State of Delaware on October 15, 1996. On January 1, 1998, the
Company completed its merger with the nine CPA(R) Partnerships and now is the
general partner and owner of substantially all of the limited partner interests
in those partnerships. The Company is expected to be treated as a partnership
for tax purposes. See "INCOME TAX CONSEQUENCES--Classification as
"Partnerships'." As of January 1, 1998, the Company through its subsidiaries
owned 198 properties in 37 states. The Company's principal executive offices are
located at 50 Rockefeller Plaza, New York, New York 10020.
The Company's objective is to increase shareholder value and its
Funds from Operations through prudent management of its real estate assets and
opportunistic investments. The Company intends to capitalize on its status as a
publicly-traded real estate investment company to access capital at a lower cost
and to take immediate advantage of the significant opportunities to make net
lease and other investments at attractive returns. The Company expects to
evaluate a number of different opportunities and to pursue the most attractive
based upon its analysis of the risk/return tradeoffs.
The Company is a dynamic, growth-oriented organization which intends
to acquire additional net leased properties and make additional opportunistic
investments utilizing the core competencies of the Company's management (which
include in-depth credit analysis, asset valuation and creative structuring). The
Company also intends to optimize its existing portfolio through the expansion of
existing properties and strategic property sales. As a perpetual life,
growth-oriented company, the Company will continue to own Properties as long as
it believes ownership helps the Company attain its objectives. See "BUSINESS AND
PROPERTIES."
MANAGEMENT OF THE COMPANY
The Manager provides both strategic and day-to-day management for the
Company, including research, investment analysis, acquisition and development
services, asset management, capital funding services, disposition of assets and
administrative services. The Manager has dedicated senior executives in each
area of its organization so that the Company functions as a fully integrated
operating company.
The Board of Directors monitors the performance of the Manager. The
Board consists of ten members, including five directors who are not employees of
the Company or the Manager. Initially, the Directors were appointed by the
Manager and thereafter will be elected by holders of Listed Shares. For the
background of the individuals responsible for the management of the Company and
a more detailed description of the responsibilities of the Manager, please see
the "MANAGEMENT" section of this Prospectus. For more information on fees
payable to the Manager or its Affiliates, please see the "COMPENSATION,
REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNER AND MANAGER" section of
this Prospectus.
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<PAGE> 6
The following organizational chart illustrates the organizational
structure of the Company.
[WORK FLOW CHART]
(1) Affiliates include CCP, Seventh Carey, Eighth Carey and Ninth Carey
(2) Carey Management LLC owns 661,718 Listed Shares and is a Limited Partner of
each Subsidiary Partnership. See "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND MANAGER" for the interest by Carey Management LLC in
each Subsidiary Partnership.
(3) Carey Diversified LLC is the General Partner of all of the Subsidiary
Partnerships.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.................... 4,500,000 Limited Liability Company
Listed Shares which are being offered
by the Company.
Number of Listed Shares............... 23,953,165 Listed Shares
Outstanding as of the
date of this Prospectus
Use of Proceeds....................... The Company will issue the Listed
Shares to acquire interests in
properties or other assets.
</TABLE>
6
<PAGE> 7
BUSINESS PLAN
The Company's objective is to increase shareholder value and its
Funds from Operations through prudent management of its real estate assets and
opportunistic investments. The Company intends to capitalize on its status as a
publicly-traded real estate investment company to take immediate advantage of
the significant opportunities to make net lease and other investments at
attractive returns. The Company expects to evaluate a number of different
opportunities in a variety of property types and geographic locations and to
pursue the most attractive based upon its analysis of the risk/return tradeoffs.
The Company presently intends to:
- Seek additional investment and other opportunities that
leverage core management skills (which include in-depth
credit analysis, asset valuation and sophisticated
structuring techniques);
- optimize the current portfolio of properties through
expansion of existing properties, timely dispositions and
favorable lease modifications;
- utilize its enhanced size and access to capital to
refinance existing debt; and
- increase the Company's access to capital.
The Company is a perpetual life, growth-oriented company and,
therefore, will continue to own properties as long as it believes ownership
helps attain the Company's objectives.
DESCRIPTION OF PROPERTIES
SEE THE SECTION ENTITLED "BUSINESS AND PROPERTIES" ON PAGE __.
INCOME TAX ASPECTS
SEE THE SECTION ENTITLED "INCOME TAX CONSEQUENCES" ON PAGE __.
SUMMARY SELECTED COMBINED FINANCIAL INFORMATION
The following table sets forth summary selected combined operating
and balance sheet information on a consolidated pro forma basis for the Company
and on a combined historical basis, assuming 100 percent participation for the
CPA(R) Partnerships. The following information should be read in conjunction
with the financial statements and notes thereto for the Company and the CPA(R)
Partnerships included elsewhere in this Prospectus. The combined historical
operating and balance sheet information of the CPA(R) Partnerships as of
December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and
1996 has been derived from the historical Combined
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<PAGE> 8
Financial Statements audited by Coopers & Lybrand L.L.P., independent
accountants, whose report with respect thereto is included elsewhere in this
Prospectus. The combined historical operating information for the nine months
ended September 30, 1996 and 1997 and the years ended December 31, 1992 and 1993
and the historical balance sheet information as of September 30, 1997 and
December 31, 1992, 1993 and 1994 have been derived from the unaudited combined
financial statements of the CPA(R) Partnerships. In the opinion of management,
the combined historical operating information for the nine months ended
September 30, 1996 and 1997 and the historical balance sheet information as of
September 30, 1997 include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein.
The unaudited pro forma consolidated operating and balance sheet
information is presented as if the Consolidation and the related issuance of
Listed Shares occurred on September 30, 1997 for the consolidated balance sheet
and January 1, 1996 for the consolidated statements of income. The pro forma
financial information is not necessarily indicative of what the actual financial
position and results of operations of the Company would have been as of and for
the periods indicated, nor does it purport to represent the Company's future
financial position and results of operations.
CPA(R) PARTNERSHIPS
SUMMARY SELECTED COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
As of and for the Nine Months
As of and for the Year Ended December 31, Ended September 30, 1997
--------------------------------------------------------------------- --------------------------------
Historical(1) Historical
--------------------------------------------------------- ---------------------
1996 1997
(Pro (Pro
1992 1993 1994 1995 1996 Forma(2)) 1996 1997 Forma(2))
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 102,936 $ 109,027 $ 109,137 $ 107,946 $ 102,731 $ 102,731 $ 78,548 $ 74,577 $ 74,577
Income before 32,245 33,790 38,456 49,363 45,547 43,508 34,698 30,979 29,273
extraordinary items,
attributable to
Listed Shares(3)
Pro forma income 1.81 1.21
before extraordinary
items per Listed
Shares(4)
Distributions $ 41,363 $ 50,638 $ 35,589 $ 57,216 $ 34,173 $ 25,910 $ 25,610
OTHER DATA:
Cash provided by 43,706 45,673 45,131 63,276 50,983 38,416 37,621
operating activities
Cash provided by 6,098 21,051 37,136 24,327 19,545 15,579 (413)
(used in) investing
activities
Cash used in (46,444) (66,071) (70,045) (105,578) (69,686) (46,639) (36,415)
financing activities
BALANCE SHEET
DATA:
Real estate, net(5) $ 342,641 $ 345,199 $ 330,671 $ 301,505 $ 271,660 $ 242,426 $ 372,630
Investment in direct 302,181 260,663 244,746 218,922 215,310 216,577 268,370
financing leases
Total assets 706,676 679,284 659,047 582,324 544,728 540,005 754,431
Mortgages and notes 373,549 358,768 325,886 274,737 227,548 216,751 216,751
payable
</TABLE>
Notes:
(1) See the Combined Financial Statements of the CPA(R) Partnerships
included elsewhere herein.
(2) See Pro Forma Condensed Consolidated Financial Statements of the
Company included elsewhere herein. Assumes 100% participation by the
CPA(R) Partnerships and the issuance of approximately 2% of
Subsidiary Partnership Units.
(3) See Note 13 to the Combined Financial Statements of the Group
included elsewhere herein.
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(4) Computed based on a weighted average number of shares outstanding:
24,053,403 Listed Shares for the year ended December 31, 1996 and
24,223,289 Listed Shares for the nine months ended September 30,
1997, as if the Consolidation transaction had been consummated as of
January 1, 1996.
(5) Real estate includes assets leased under operating leases and
operating real estate.
RISK FACTORS
An investment in the Listed Shares offered hereby is speculative and
involves a high degree of risk, including, but not necessarily limited to, the
risk factors described below. Prior to investing in the Listed Shares, each
prospective investor should carefully consider the following risk factors
inherent in and affecting the business of the Company before making an
investment decision.
Uncertainty Regarding Trading Price for the Listed Shares. There has
been no long-term prior market for the Listed Shares, and it is possible that
the Listed Shares will trade at prices substantially below the value of the
assets of the Company. The market price of the Listed Shares may be subject to
significant volatility and could substantially decrease as a result of increased
selling activity by investors who have held their interests for extended
periods, the interest level of investors in purchasing the Listed Shares, the
amount of distributions to be paid by the Company and the acceptance by the
securities markets of a limited liability company as an investment vehicle.
No IRS Ruling with Respect to Partnership Status. Neither the Company
nor any of the Subsidiary Partnerships will apply for an IRS ruling that they
will be classified as partnerships rather than associations taxable as
corporations for federal income tax purposes. The Company and each Subsidiary
Partnership have received the opinion of Reed Smith Shaw & McClay LLP that they
will be classified as partnerships for federal income tax purposes. An opinion
of counsel is not, however, binding upon the IRS or the courts. In addition,
such opinion is subject to certain conditions. See "INCOME TAX
CONSEQUENCES--Classification as 'Partnerships'." The treatment of the Company as
a partnership is also dependent upon the present provisions of the Code, the
regulations thereunder and existing administrative and judicial interpretations
thereof, all of which are subject to change. The Manager intends to operate the
Company and the Subsidiary Partnerships so that they will be taxed as
partnerships. If the Company were treated as a corporation: (i) the income,
deductions and losses of the Company would not pass through to the holders of
Listed Shares; (ii) the Company would be required to pay federal income taxes on
its taxable income, thereby substantially reducing the amount of cash available
to be distributed to holders of Listed Shares; (iii) state and local taxes could
be imposed on the Company; and (iv) any distributions to holders of Listed
Shares would be taxable to them as dividends to the extent of current and
accumulated earnings and profits of the Company. Finally, the change from
treatment as a partnership to treatment as a corporation for federal income tax
purposes could be treated as a taxable event in which case holders of Listed
Shares could have a tax liability without receiving a distribution from the
Company. Similar tax consequences would result with respect to any Subsidiary
Partnership found to be an association taxable as a corporation.
Restrictions on Changes in Control. Certain provisions of the
Organizational Documents and the Shareholder Rights Plan may restrict changes in
control of the Company's management. These include provisions which: (i) permit
the issuance of additional classes and series of shares which, depending on its
terms, may impede a merger, tender offer or other transaction; (ii) staggered
terms for members of the Board of Directors which may affect the ability of the
holders of Listed Shares to change control of the Company; (iii) apply
restrictions on certain business combinations involving Interested Parties which
may deter potential purchasers who seek control of the Company; (iv) apply
control share acquisition restrictions which may make it more difficult or
costly for another party to acquire and exercise control of the Company or to
remove the existing management of the Company; (v) apply Shareholder Rights Plan
provisions which may have certain anti-takeover effects; and (vi) require a
Termination Fee payable to the Manager, in the event the Manager is terminated
in connection with a change in control, which will make it more costly to
acquire control of the Company
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and may discourage third parties from seeking control of the Company. See
"DESCRIPTION OF LISTED SHARES--Restricting Changes in Control and Business
Combination Provisions" and "COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO
THE GENERAL PARTNERS AND MANAGER--Amounts Payable by the Company."
General Risks Related to Investments in Real Estate. Real property
investments are subject to varying degrees of risk. Values of commercial and
industrial properties are affected by changes in the general economic climate,
local conditions such as an oversupply of space or reduction in demand for real
estate in the area and competition from other available commercial and
industrial space. Real estate values are also affected by such factors as
government regulations and changes in zoning or tax laws, interest rate levels,
the availability of financing and potential liability under environmental and
other laws. The yields available on equity investments in commercial and
industrial real estate of the kind that will be owned by the Company depend in
part upon the amount of net income generated from the property. Upon the
termination of a tenant lease, the Company may not be able to re-lease the
property at comparable rents. If the property is leased at a lower rent, the
income of the Company will be reduced.
Risk of Leverage. Many of the Company's properties are subject to
limited recourse debt, and the Company has recourse debt outstanding. The Board
of Directors may authorize additional borrowing by the Company. The Company may
become more highly leveraged and, thereby, increase its debt service, which may
adversely affect the Company's ability to make distributions to holders of
Listed Shares and increase the Company's risk of default on its obligations.
If the Company incurs substantial debt, it will be subject to the
following risks: (i) the Company could lose its interests in Properties given as
collateral for secured borrowing if the required principal and interest payments
are not made when due; (ii) the Company's cash flow from operations may not be
sufficient to retire these obligations upon their maturity, making it necessary
for the Company to raise additional debt and/or equity for the Company or
dispose of some of the Company's assets to retire the obligations; and (iii) the
Company's ability to borrow additional funds (except for the purpose of
refinancing existing indebtedness) may be restricted.
Rent Income Dependent Upon Creditworthiness of Tenants. Substantially
all of the Properties are single tenant properties. The financial failure of a
tenant could result in the termination of its lease with the Company which, in
turn, might cause a reduction of the cash flow of the Company and/or decrease
the value of the Property leased to such tenant. If a tenant defaults on its
lease payments to the Company, the Company would lose not only the net cash flow
from such tenant, but also might use cash generated from other Properties to
meet expenses, including the mortgage payments, if any, on such Property in
order to maintain ownership and prevent a foreclosure. If a lease is terminated,
there can be no assurance that the Company will be able to re-lease the Property
for the same amount of rent previously received or will be able to sell the
Property without incurring a loss. The Company could also experience delays in
enforcing its rights against tenants.
In addition, the Company may enter into or acquire net leases with
tenants for properties that are specially suited to the particular needs of a
tenant as is the case with certain of the Properties. Such a property may
require renovations or lease payment concessions in order to re-lease it to
another tenant upon the expiration or termination of the current lease. The
Company may also have difficulty selling a special purpose property to a party
other than the tenant for which the property was designed.
The financial failure of a tenant could cause the tenant to become
the subject of bankruptcy proceedings. Under bankruptcy law, a tenant has the
option of continuing or terminating an unexpired lease. If the tenant continues
its lease with the Company, the tenant must cure all defaults under the lease
and provide the Company with adequate assurance of its future performance under
the lease. If the tenant terminates the lease, the Company's claim for breach of
the lease would (absent collateral securing the claim) be treated as a general
unsecured claim. The amount of the claim would be capped
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at the amount owed for unpaid pre-petition lease payments unrelated to the
termination plus the greater of one year's lease payments or 15 percent of the
remaining lease payments payable under the lease (but not to exceed three years'
lease payments).
Although the Company believes that each of its net lease transactions
is a "true lease" for purposes of bankruptcy law, depending on the terms of the
lease transaction, including the length of the lease and terms providing for the
repurchase of a property by the tenant, it is possible that a bankruptcy court
could recharacterize a net lease transaction as a secured lending transaction.
If a transaction were recharacterized as a secured lending transaction, the
Company would not be treated as the owner of the property and could lose certain
rights as the owner in the bankruptcy proceeding.
Losses From Uninsured Liabilities or Casualty. The Company requires
tenants to maintain liability and casualty insurance of the kind that is
customarily obtained for similar properties. However, certain disaster-type
insurance (covering events of a catastrophic nature, such as earthquakes) may
not be available or may only be available at rates that, in the opinion of the
Company, are prohibitive. In the event that an uninsured disaster occurs or a
tenant does not maintain the required insurance and a loss occurs, the Company
could suffer a loss of the capital invested in, as well as anticipated profits
from, the damaged or destroyed Property. If the loss involves a liability claim,
the loss may extend to the other assets of the Company.
Losses From Casualty and Condemnation related Lease Terminations. The
Company's leases may permit the tenant to terminate its lease in the event of a
substantial casualty or a taking by eminent domain of a substantial portion of a
Property. Should these events occur, the Company generally will be compensated
by insurance proceeds in the case of insured casualties or a condemnation award
in the case of a taking by eminent domain. There can be no assurance that any
such insurance proceeds or condemnation award will equal the value of the
Property or the Company's investment in the Property. Any such lease termination
could adversely affect the Company's income and cash flow.
Risks of Joint Ventures. The Company may participate in joint
ventures. See "BUSINESS AND PROPERTIES." An investment by the Company in a joint
venture which owns properties, rather than a direct investment in such
properties, may involve certain risks, including the possibility that the
Company's joint venture partner may become bankrupt, may have economic or
business interests or goals which are inconsistent with the business interests
or goals of the Company or may be in a position to take action contrary to the
instructions or the requests of the Company or contrary to the Company's
policies or objectives. Actions by the Company's joint venture partner might,
among other things, result in subjecting property owned by the joint venture to
liabilities in excess of those contemplated by the terms of the joint venture
agreement, exposing the Company to liabilities of the joint venture in excess of
its proportionate share of such liabilities or having other adverse consequences
for the Company. In a case where the joint venturers each own a 50 percent
interest in a venture, they may not be able to agree on matters relating to the
properties owned by the venture. Although each joint venturer may have a right
of first refusal to purchase the other venturer's interest in a property if a
sale is desired, the joint venturer may not have sufficient resources to
exercise its right of first refusal.
The Company may from time to time participate jointly with
publicly-registered investment programs or other entities sponsored by the
Manager or one of its Affiliates in investments as tenants-in-common or in some
other joint venture arrangement. The risks of such joint ownership may be
similar to those mentioned above for joint ventures and, in the case of a
tenancy-in-common, each co-tenant normally has the right, if an unresolvable
dispute arises, to seek partition of the property, which partition might
decrease the value of each portion of the divided property. The Company or the
Manager may also experience difficulty in enforcing the rights of the Company in
a joint venture with an Affiliate due to the fiduciary obligation the Manager or
the Board may owe to the other partner in such joint venture.
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Competition with Affiliates May Reduce Available Properties, Tenants
and Purchasers of Properties. The CPA(R) REITs have investment policies similar
to those of the Company. The CPA(R) REITs, therefore, may be in competition with
the Company for properties, purchasers and sellers of properties, tenants and
financing. Affiliates of the General Partners and the Manager may sponsor
additional REITs or other investment entities, public and/or private or may
provide acquisition or management services to third parties, some of which may
have the same investment objectives and may be in a position to acquire
properties in competition with the Company.
In the event that a potential investment might be suitable for the
Company and an Affiliate, the decision as to which entity will make the
investment will be made by the Investment Committee. The Investment Committee
also serves as the investment committee of the CPA(R) REITs. The Investment
Committee of the Manager will review the investment portfolios of each entity
and other factors such as cash flow, the effect of the acquisition on the
diversification of each entity's portfolio, the length of the term of the lease,
renewal options, the estimated income tax effects of the purchase on each
entity, the policies of each entity relating to leverage, the funds of each
entity available for investment, the length of time such funds have been
available for investment and the various ways in which the potential investment
can be structured. Consideration will be given to joint ownership (e.g.,
tenancy-in-common or joint venture arrangement) of a particular property
determined to be suitable for the Company and an Affiliate in order to achieve
diversification of each entity's portfolio. In any joint ownership, the
investment by each entity will be on substantially the same economic terms and
conditions, and each investment entity may have a right of first refusal to
purchase the interest of the other, if a sale of that interest is contemplated.
To the extent that a particular property might be determined to be suitable for
more than one investment entity, the investment will be made by the most
appropriate investment entity after consideration of the factors identified
above.
Growth of Company Dependent on Borrowing Capacity and Ability to
Raise Capital. The Company's ability to acquire additional properties and make
other investments will be subject to the availability of suitable investments
and the Company's ability to obtain debt and/or equity capital to make such
investments. The Company could be delayed or prevented from structuring
transactions and acquiring desirable properties by an inability to obtain
capital, either because the financial or other terms of the available financing
are unacceptable or because debt or equity financing is unavailable on any
terms.
Possible Environmental Liabilities. Under various federal, state and
local environmental laws, ordinances and regulations, a current or former owner
of real estate may be required to investigate and clean up hazardous or toxic
substances or petroleum product releases at such property or may be held liable
to governmental entities or to third parties for property or natural resource
damage and for investigation, clean up and other 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 contamination, and the liability under such laws has
been interpreted to be joint and several, unless the harm is capable of
apportionment and there is a reasonable basis for allocation of responsibility.
The Company's leases generally provide that the tenant is responsible for
compliance with applicable laws and regulations. This contractual arrangement
does not eliminate the Company's statutory liability or preclude claims against
the Company by governmental authorities or persons who are not parties to such
arrangement. Contractual arrangements in the Company's leases may provide a
basis for the Company to recover from the tenant damages or costs for which the
Company has been found liable. The cost of an investigation and clean-up of site
contamination can be substantial, and the fact that the property is or has been
contaminated, even if remediated, may adversely affect the value of the property
and the owner's ability to sell or lease the property or to borrow using the
property as collateral. In addition, some environmental laws create a lien on
the contaminated site in favor of the government for damages and costs that it
incurs in connection with the contamination, and certain state laws provide that
such lien has priority over all other encumbrances on the property or that a
lien can be imposed on any other property owned by the liable party. Finally,
the owner of a site may be subject to common law claims
12
<PAGE> 13
by third parties based on damages and costs resulting from the environmental
contamination emanating from the site.
Other federal, state and local laws, regulations and ordinances
govern the removal or encapsulation of asbestos-containing material when such
material is either in poor condition or in the event of building remodeling,
renovation or demolition. Still other federal, state and local laws, regulations
and ordinances may require the removal or upgrade of underground storage tanks
that are out of service or are out of compliance. In addition, federal, state
and local laws, regulations and ordinances may impose prohibitions, limitations
and operational standards on, or require permits, licenses or approvals in
connection with, the discharge of wastewater and other water pollutants, the
emission of air pollutants, the operation of air or water pollution equipment,
the generation, storage, transportation, disposal and management of materials
classified as hazardous or nonhazardous waste, the use of electrical equipment
containing polychlorinated biphenyls, the storage or release of toxic or
hazardous chemicals and workplace health and safety. Noncompliance with
environmental or health and safety requirements may also result in the need to
cease or alter operations at a Property which could affect the financial health
of a tenant and its ability to make lease payments. Furthermore, if there is a
violation of such a requirement in connection with the tenant's operations, it
is possible that the Company, as the owner of the Property, could be held
accountable by governmental authorities for such violation and could be required
to correct the violation. See "BUSINESS AND PROPERTIES-- Environmental Matters"
for a discussion of certain environmental matters relating to the Properties and
the measures the Company currently undertakes by means of prepurchase site
assessments, financial assurances and indemnification provisions and other
protective lease terms to address potential liabilities.
It was not customary business practice to obtain environmental audits
in connection with the acquisition of the Properties prior to 1988, and
therefore, no environmental audits were obtained by CPA(R):1-7 at the time their
properties were acquired. Phase I audits were performed for the properties and
by CPA(R):1-6 in 1994. Based upon the results of the Phase I investigations
conducted in 1993 and 1994 on the CPA(R):1-6 Properties, Phase II investigations
were recommended for 30 Properties. Phase II investigations have been or are in
the process of being performed on 21 of the 30 Properties. Of the remaining nine
Properties, the particular CPA(R) Partnership determined not to proceed with a
Phase II investigation on five Properties and the tenants would not permit a
Phase II investigation on the remaining four.
Environmental audits were conducted on many of the properties
acquired by CPA(R):8 and CPA(R):9 at the time they were acquired. There may,
however, be environmental problems that may have developed since the properties
were acquired or since environmental testing was performed.
Limitation of Director Liability. The Delaware Limited Liability
Company Act (the "LLCA"), as well as the Organizational Documents, limit the
liability of Directors and officers to Shareholders. In addition, the
Organizational Documents generally provide for (i) greater indemnification of
Directors and officers than is available to the General Partners under the
Partnership Agreements and (ii) the ability to relieve Directors and officers of
certain monetary liabilities not available to the General Partners under the
Partnership Agreements. See "FIDUCIARY RESPONSIBILITY AND
INDEMNIFICATION--Limitation on Liability of Directors and Officers of the
Company."
Other Potential Tax Risks. A potential investor should consider the
tax consequences of owning Listed Shares which include, among others, the
following: (i) the possibility that taxable income or gain allocable to a holder
of Listed Shares will exceed the cash distributed by the Company to the holder
of Listed Shares, resulting in tax payments being required from individual
assets of a holder of Listed Shares; (ii) the possibility that the IRS will not
give effect to the allocation of profits and losses provided by the Operating
Agreement or the Subsidiary Partnerships' Partnership Agreements and reallocate
profits and losses so as to cause a holder of Listed Shares or Subsidiary
Partnership Units' taxable income or loss to be different from that reported by
the Company or the
13
<PAGE> 14
Subsidiary Partnership; (iii) the possibility that the IRS will disallow as
current deductions certain payments made for management and other services in
connection with the Company's or Subsidiary Partnerships' Properties, especially
where such payments are made to the Manager, the General Partner or its
Affiliates, and, thereby, increase the Company's taxable income or decrease the
Company's tax loss; (iv) the possibility that the IRS will challenge the
allocations of acquisition costs of real property between land and depreciable
improvements, the characterization and purpose of various payments made to
sellers of properties or Affiliates of the Manager or the General Partner or the
legal characterization of the Company's or Subsidiary Partnerships' interest in
a Property and, thereby, increase the Company's taxable income or decrease the
Company's tax loss; (v) the possibility that the "at risk" rules could limit the
deductibility of Company losses, if any; (vi) the possibility that an audit of
the Company's or a Subsidiary Partnership's information return may result in an
audit of an individual tax return; (vii) the possibility that an IRA or a
qualified pension or profit-sharing plan (including a Keogh) or stock bonus plan
which invests in Listed Shares may receive "unrelated business taxable income"
and could become subject to federal income tax. See "INCOME TAX CONSEQUENCES"
for further details with respect to the above and other possible tax
consequences of the ownership of Shares.
Holders of Listed Shares should be aware that federal income taxation
rules are constantly under review by the IRS, resulting in revised
interpretations of established concepts. The IRS pays close attention to the
proper application of tax laws to partnerships. The present federal income tax
treatment of an investment in the Company may be modified by legislative or
judicial action at any time, and any such action may adversely affect
investments and commitments previously made.
The Operating Agreement may be modified from time to time by the
Manager, without the consent of the holders of Listed Shares, in order to
achieve compliance with certain changes in federal income tax regulations and
legislation. In some circumstances, such revisions could have an adverse impact
on some or all of the holders of Listed Shares.
Tax Risks of Trading of Listed Shares. Since the Listed Shares are
traded on an established securities market, the Company will be treated as a
publicly traded partnership as defined in the Code. See "INCOME TAX
CONSEQUENCES--Classification as 'Partnerships'." As a publicly traded
partnership, net passive income from the Company allocable to the holders of
Listed Shares will probably be treated as portfolio income, except that passive
activity losses from the Company may offset such income. See "INCOME TAX
CONSEQUENCES--Passive Activity Loss Limitations." Additionally, if less than 90
percent of its gross income consists of, among other things, interest,
dividends, real property rents and gain from the sale or exchange of real
property, the Company will be treated as a corporation for federal income tax
purposes. It is anticipated that the Company will not be treated as a
corporation for federal income tax purposes.
Risk of Investment in Real Property Located Outside the United
States. The Company may invest in property located outside the United States.
Such investments may be affected by factors peculiar to the laws of the
jurisdiction in which such property is located, including but not limited to,
land use and zoning laws, environmental laws, laws relating to the foreign
ownership of property and laws relating to the ability of foreign persons or
corporations to remove profits earned from activities within such country to the
person's or corporation's country of origin. These laws may expose the Company
to risks that are different from and in addition to those commonly found in the
United States. In addition, such foreign investments could be subject to the
risks of adverse market conditions due to changes in national or local economic
conditions, currency fluctuation, changes in interest rates and in the
availability, cost and terms of mortgage funds resulting from varying national
economic policies, changes in real estate and other tax rates and other
operating expenses in particular countries and changing governmental rules and
policies.
Dependence on Key Personnel. The Company is dependent on the efforts
of the executive officers of the Manager and the members of the Investment
Committee. While the Company believes
14
<PAGE> 15
that the Manager could find replacements for its executive officers and
Investment Committee members from either within or outside the Company, the loss
of their services could have a temporary adverse affect on the operations of the
Company.
Competition for Investments. The Company faces competition to
purchase net leased properties or provide alternative sources of real estate
financing to businesses from insurance companies, commercial banks, credit
companies, pension funds, private individuals, investment companies, REITs and
other real estate finance companies. There can be no assurance that the Company
will find suitable net leased properties in the future.
Status of the Company under ERISA. The Company has received an
opinion of counsel to the effect that based on certain assumptions concerning
the public ownership and transferability of the Listed Shares, the Listed Shares
should be "publicly-offered securities" for purposes of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and that, consequently, the
assets of the Company should not be deemed "plan assets" of an ERISA plan,
individual retirement account or other non-ERISA plan that invests in the Listed
Shares. If the Company's assets were deemed to be plan assets of any such plan,
then, among other consequences, certain persons exercising discretion as to the
Company's assets would be fiduciaries under ERISA, transactions involving the
Company undertaken at their direction or pursuant to their advice might violate
ERISA, and certain transactions that the Company might enter into in the
ordinary course of its business might constitute "prohibited transactions" under
ERISA and the Code.
If a prohibited transaction were to occur, the Code imposes an excise
tax equal to 15 percent of the amount involved and authorizes the IRS to impose
an additional 100 percent excise tax if the prohibited transaction is not
"corrected." Such taxes would be imposed on any disqualified person who
participates in the prohibited transaction. In addition, certain persons subject
to ERISA, exercising discretion as to the Company's assets who permitted such
prohibited transaction to occur or who otherwise breached their fiduciary
responsibilities, would be required to restore to the plan any profits realized
by these fiduciaries as a result of the transaction or breach and to make good
to the plan any losses incurred by the plan as a result of such transaction or
breach. With respect to an IRA that invests in the Company, the occurrence of a
prohibited transaction involving the individual who established the IRA or his
beneficiary would cause the IRA to lose its tax-exempt status under Section
408(e)(2) of the Code.
THE COMPANY
The Company was formed as a Delaware limited liability company under
the laws of the State of Delaware on October 15, 1996. On January 1, 1998, the
Company completed its merger with the nine CPA(R) Partnerships and now is the
General Partner and owner of substantially all of the limited partner interests
in those partnerships. The Company is expected to be treated as a partnership
for tax purposes. See "INCOME TAX CONSEQUENCES--Classification as
'Partnerships'." The Company, through its subsidiaries, currently owns 198
properties in 37 states. The Company's principal executive offices are located
at 50 Rockefeller Plaza, New York, New York 10020.
The Company's objective is to increase shareholder value and its
Funds from Operations through prudent management of its real estate assets and
opportunistic investments. The Company intends to capitalize on its status as a
publicly-traded real estate investment company to access capital at a lower cost
and to take immediate advantage of the significant opportunities to make net
lease and other investments at attractive returns. The Company expects to
evaluate a number of different opportunities and to pursue the most attractive
based upon its analysis of the risk/return tradeoffs.
The Company is a dynamic, growth-oriented organization which intends
to acquire additional net leased properties and make additional opportunistic
investments utilizing the core competencies of
15
<PAGE> 16
the Company's management (which include in-depth credit analysis, asset
valuation and creative structuring). The Company also intends to optimize its
existing portfolio through the expansion of existing properties and strategic
property sales. As a perpetual life, growth-oriented company, the Company will
continue to own Properties as long as it believes ownership helps attain the
Company's objectives. See "BUSINESS AND PROPERTIES."
The Manager provides both strategic and day-to-day management for the
Company, including research, investment analysis, acquisition and development
services, asset management, capital funding services, disposition of assets and
administrative services. The Manager has dedicated senior executives in each
area of its organization so that the Company functions as a fully integrated
operating company.
The Board of Directors monitors the performance of the Manager. The
Board consists of ten members, including five directors who are not employees of
the Company or the Manager. Initially, the Directors were appointed by the
Manager and thereafter will be elected by holders of Listed Shares. For the
background of the individuals responsible for the management of the Company and
a more detailed description of the responsibilities of the Manager, please see
the "MANAGEMENT" section of this Prospectus. For more information on fees
payable to the Manager or its Affiliates, please see the "COMPENSATION,
REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNER AND MANAGER" section of
this Prospectus.
USE OF PROCEEDS
This Prospectus relates to the Company's Listed Shares which may be
offered and issued by the Company from time to time in the acquisition of real
estate or other investments. Other than any real estate or other interests
acquired, there will be no proceeds to the Company from the issuance or sale of
any of the Shares offered hereby. The Company will bear all expenses of the
offering.
MARKET FOR REGISTRANT'S LISTED SHARES
The Listed Shares are traded on the New York Stock Exchange under the
symbol "CDC". Trading of Listed Shares began on January 21, 1998. The following
table presents the high and low sales prices for the period reflected. On
February 9, 1998, the high and low sales prices were $21 5/8 and $21,
respectively.
<TABLE>
<CAPTION>
Low High
-------- ---------
<S> <C> <C>
January 21 - February 9, 1998 $20 7/16 $22 15/16
</TABLE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as
of September 30, 1997 on a combined historical and pro forma basis in thousands,
respectively.
<TABLE>
<CAPTION>
Pro Forma
September 30 September 30,
1997 1997
------------ -------------
<S> <C> <C>
Mortgage notes payable $192,042 $192,042
Notes payable to affiliate -- --
Notes payable 24,709 24,709
</TABLE>
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<PAGE> 17
<TABLE>
<S> <C> <C>
Partners' Capital
Listed Shares Outstanding 309,465 517,113
-------- --------
Total capitalization $526,216 $733,864
======== ========
</TABLE>
SELECTED COMBINED FINANCIAL INFORMATION
The following table sets forth selected combined operating and
balance sheet information on a consolidated pro forma basis for the Company and
on a combined historical basis. The following information should be read in
conjunction with the financial statements and notes thereto for the Company and
the Group included elsewhere in this Prospectus. The combined historical
operating and balance sheet information of the CPA(R) Partnerships as of
December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995 and
1996 have been derived from the historical Combined Financial Statements audited
by Coopers & Lybrand L.L.P., independent accountants, whose report with respect
thereto is included elsewhere in this Prospectus. The combined historical
operating information for the nine months ended September 30, 1996 and 1997 and
the years ended December 31, 1992 and 1993 and the historical balance sheet
information as of September 30, 1997, and December 31, 1992, 1993 and 1994, have
been derived from the unaudited combined financial statements of the Group. In
the opinion of Management, the combined historical operating information for the
nine months ended September 30, 1996 and 1997 and the historical balance sheet
information as of September 30, 1997 include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the information set
forth therein.
The unaudited pro forma consolidated operating and balance sheet
information is presented as if the Consolidation transaction and the related
issuance of Listed Shares occurred on September 30, 1997 for the consolidated
balance sheet and January 1, 1996 for the consolidated statements of income. The
pro forma financial information is not necessarily indicative of what the actual
financial position and results of operations of the Company would have been as
of and for the periods indicated, nor does it purport to represent the Company's
future financial position and results of operations.
CPA(R) PARTNERSHIPS
SELECTED COMBINED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
As of and for the Nine Months
As of and for the Year Ended December 31, Ended September 30, 1997
--------------------------------------------------------------------- --------------------------------
Historical(1) Historical
--------------------------------------------------------- ---------------------
1996 1997
(Pro (Pro
1992 1993 1994 1995 1996 Forma(2)) 1996 1997 Forma(2))
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 102,936 $ 109,027 $ 109,137 $ 107,946 $ 102,731 $ 102,731 $ 78,548 $ 74,577 $ 74,577
Income before 32,245 33,790 38,456 49,363 45,547 43,508 34,698 30,979 29,273
extraordinary items,
attributable to
Listed Shares(3)
Pro forma income 1.81 1.21
before extraordinary
items per Listed
Shares(4)
Distributions $ 41,363 $ 50,638 $ 35,589 $ 57,216 $ 34,173 $ 25,910 $ 25,610
OTHER DATA:
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
As of and for the Nine Months
As of and for the Year Ended December 31, Ended September 30, 1997
--------------------------------------------------------------------- --------------------------------
Historical(1) Historical
--------------------------------------------------------- ---------------------
1996 1997
(Pro (Pro
1992 1993 1994 1995 1996 Forma(2)) 1996 1997 Forma(2))
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash provided by 43,706 45,673 45,131 63,276 50,983 38,416 37,621
operating activities
Cash provided by
(used in) investing 6,098 21,051 37,136 24,327 19,545 15,579 (413)
activities
Cash used in (46,444) (66,071) (70,045) (105,578) (69,686) (46,639) (36,415)
financing activities
BALANCE SHEET
DATA:
Real estate, net(5) $ 342,641 $ 345,199 $ 330,671 $ 301,505 $ 271,660 $ 242,426 $ 372,630
Investment in direct 302,181 260,663 244,746 218,922 215,310 216,577 268,370
financing leases
Total assets 706,676 679,284 659,047 582,324 544,728 540,005 754,431
Mortgages and notes 373,549 358,768 325,886 274,737 227,548 216,751 216,751
payable
</TABLE>
Notes:
(1) See the Combined Financial Statements of the CPA(R) Partnerships
included elsewhere herein.
(2) See Pro Forma Condensed Consolidated Financial Statements of the Company
included elsewhere herein. Assumes 100% participation by the CPA(R)
Partnerships and the issuance of approximately 2% of Subsidiary
Partnership Units.
(3) See Note 13 to the Combined Financial Statements of the Group included
elsewhere herein.
(4) Computed based on a weighted average number of shares outstanding:
24,053,403 Listed Shares for the year ended December 31, 1996 and
24,223,289 Listed Shares for the nine months ended September 30, 1997,
as if the Consolidation transaction had been consummated as of January
1, 1996.
(5) Real estate includes assets leased under operating leases and operating
real estate.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OVERVIEW
Carey Diversified is in the business of investing in commercial and
industrial real estate. Most of the existing properties owned by Carey
Diversified are net leased to corporations throughout the United States. A net
lease is typically structured so that the lessee is responsible during the
initial term of the lease for all operating expenses of the leased properties
including property taxes, insurance and maintenance and repairs. Each investment
was made pursuant to an extensive evaluation of the lessee's credit, management,
position within its industry, operating history and profitability. Carey
Diversified's real estate portfolio is diversified by type of property,
geographic location and industry. Net lease investments are structured to
provide stable cash flow by entering into long-term net leases that require
lessees to pay all operating expenses of the properties. Leases may also include
operational and financial covenants that lessees must satisfy in order to
protect Carey Diversified's investments.
As described in Note 19 to the Combined Financial Statements, Carey
Diversified completed a transaction on January 1, 1998 which resulted in it
owning a majority interest in the CPA(R) Partnerships, as limited partner, and
also serves as general partner. Carey Diversified is listed and traded on the
New York Stock Exchange.
The CPA(R) Partnerships financed property acquisitions with limited
recourse mortgage debt where the cost of such financing was favorable. The real
estate portfolio consists of the properties acquired with the proceeds of the
initial offerings of the CPA(R) Partnerships. Pursuant to their Partnership
Agreements, the CPA(R) Partnerships were not able to reinvest the proceeds from
the sale of properties in new investments. Subsequent to the consummation of the
consolidation, Carey Diversified will have the ability to reinvest proceeds from
sales and will have greater operating flexibility to achieve its growth
objectives. Depending on prevailing market conditions, the
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<PAGE> 19
portfolio's leverage may be restructured to reduce financing costs and increase
cash flow. A substantial portion of the financing used by the CPA(R)
Partnerships has been in the form of amortizing limited recourse mortgage debt.
As a publicly traded entity, Carey Diversified is expected to have other
financing options available for its capital needs. Proceeds from property
dispositions may be reinvested to increase the portfolio's rate of return. In
addition, Carey Diversified will have the option of raising new equity capital
in order to expand the portfolio and increase revenues.
RESULTS OF OPERATIONS
As noted above, the CPA(R) Partnerships have generally structured
leases so that the lessee is responsible for all operating expenses relating to
the leased properties, including property taxes, insurance, maintenance and
repairs. The leases generally include provisions that have rent increases based
on formulas indexed to increases in the Consumer Price Index ("CPI"), periodic
mandated increases or, for certain retail business, percentage rents on sales
above an established benchmark.
The CPA(R) Partnerships acquired the operations of five hotels
subsequent to the CPA(R) Partnerships entering into lease termination agreements
with the two lessees which had operated the hotels. Since December 31, 1995, the
CPA(R) Partnerships have exchanged an interest in a hotel in Kenner, Louisiana
for units in the operating partnership of a publicly traded real estate
investment trust and sold a hotel in Rapid City, South Dakota.
Comparison of Nine Months Ended September 30, 1997 and 1996
Net income decreased by $3,467 for the nine-month period ended
September 30, 1997 as compared with the similar period ended September 30, 1996.
Income before noncash writedowns, net gains and extraordinary items
reflected for the comparable nine-month periods an increase of $2,890 due to an
increase in lease revenues and other income and reductions in interest expense
and depreciation and amortization. Lease revenues increased by $1,147 primarily
as the result of a lease modification and the commencement of new leases. The
1996 lease extension agreement with Hughes Markets and new leases provided
$1,321 and $924, respectively, of additional revenues for the nine-month period.
Of such increase, $1,186 was offset by the expiration of a lease on June 30,
1997. The lease with Hughes Markets is scheduled to expire in April 1998. The
Company has entered into a net lease agreement with Copeland Beverage Group,
Inc. for the property currently occupied by Hughes Markets. Copeland's right of
possession of the property and the date which it will be required to commence
paying annual rent of $1,800 shall be the date, on or after April 30, 1998, that
Hughes Markets vacates the property. Scheduled rent increases contributed
additional revenues of $530 and were partially offset by a reduction in rents
due to property sales in 1996 and 1997. Other income increased by $2,842
primarily due to distributions of proceeds received in connection with
bankruptcy claims against two former tenants.
The trend of decreasing expenses for interest and depreciation has
continued as a result of the retirement of debt and property sales,
respectively. Of the $2,684 decrease in interest expense, $674 was due to
satisfaction of mortgage loans in connection with the sales of properties,
$1,090 from the prepayment of debt on properties which remain under lease, with
the remaining reductions due to the continuing amortization of existing mortgage
debt and the benefits of refinancing mortgage loans at lower rates of interest.
Depreciation and amortization expense decreased by $458 primarily due to the
sale of properties. General and administrative expenses increased due to higher
accruals for state and local taxes and an increase in administrative costs
related to the consolidation. Property expenses increased by $1,228 due to an
increase in charges for uncollected rents and receivables, a litigation
settlement of $237 and increased legal costs related to a bankruptcy claim being
pursued against a former tenant.
19
<PAGE> 20
Operating income for the hotel properties decreased by $2,424 for the
nine months ended September 30, 1997 as compared to the similar period in 1996
due to the sale of the Group's hotel property in Rapid City, South Dakota and
the exchange of another hotel property in Kenner, Louisiana in 1996 for limited
partnership units in the operating partnership of American General Hospitality
Corporation, a publicly-traded real estate investment trust. Excluding the
operations from the two hotels disposed of in 1996, operating income from the
three remaining properties, Holiday Inn hotels in Alpena, Petoskey and Livonia,
Michigan, increased by $369 or 14%. Revenues from the three hotels increased by
4% while expenses were stable. The growth in revenues is due to a strategy of
increasing room rates while occupancy rates generally remained constant. For the
nine-month period, the average room rate increased by 10% in Livonia, 6% in
Alpena and 3% in Petoskey.
Comparison of the Years Ended December 31, 1996 and 1995. Net income
decreased by 14%, due to the realization of nonrecurring gains in 1995. A
gain of $11,500 was recognized in 1995 on the settlement of litigation with a
former tenant. In addition, an extraordinary gain of $3,207 was also recognized
in 1995 on the extinguishment of debt. Income before net gains, extraordinary
items and noncash charges for property writedowns would have reflected an
increase of 12 percent for the comparable periods.
Lease revenues decreased by 1.8%, primarily due to the sales
of Properties. The sale of Properties leased to Industrial General Corporation,
Genesco, IBM, GATX and AutoZone resulted in a $3,000 reduction in lease
revenues. The Gibson lease restructuring in 1995 resulted in an additional
$2,250 reduction in lease revenues for the comparable periods. Annual rent
payments on the Gibson lease were reduced in exchange for receipt of a lump sum
payment of $12,200, severing one of the Properties from the lease and an
extension of the lease term on the remaining properties until November 2013. The
severed property was subsequently leased to a subsidiary of CSS Industries, Inc.
in connection with the lease restructuring. The decrease in lease revenues was
partially offset by rent increases during 1996, which amounted to approximately
$3,306. Scheduled rent increases of $965 affected 17 of the CPA(R) Partnerships'
leases accounting for annual revenues of $16,200. A negotiated rent increase
with Hughes Markets, Inc. resulted in additional lease revenues of $2,341 in
1996. In addition, lease revenues for 1996 increased by $677 due to the
commencement of new leases.
Interest expense decreased by $5,642 in 1996, as compared to 1995,
while total debt decreased by approximately $47,189 during the same period. The
decrease in interest expense has also been affected by the accelerating
amortization of limited recourse mortgage loans. General and administrative
expenses decreased by $762, due to costs associated with state taxes in 1995 and
certain non-recurring costs related to the relocation of the CPA(R) Partnerships
offices in 1995. Property expenses decreased by two percent, due to certain
non-recurring costs incurred in 1995 in connection with assessing liquidity
alternatives for the limited partners of the CPA(R) Partnerships.
Income from hotel operations decreased by $1,000, due to the
disposition of two hotel properties. Operating income from each of the three
remaining hotel properties increased by seven percent to 13% in 1996. The
increases in operating income are generally due to higher occupancy rates or
increases in average room rates.
Gains realized in 1996 include a gain of $4,400 on the sale of a
property in Hodgkins, Illinois leased to GATX Logistics, Inc. and a gain of $785
on the sale of a hotel in Rapid City, South Dakota.
20
<PAGE> 21
The sale of the Hodgkins, Illinois property was influenced by Management's
belief that the future value of the property would be affected by the scheduled
expiration of the lease with GATX in 1999. The Rapid City hotel property was
sold pursuant to Management's decision that the hotel would not generate an
adequate return on an additional investment of funds required to maintain the
hotel's affiliation with Holiday Inn. During 1996, a writedown of $1,300 was
recorded based on an evaluation of the net realizable value of the Rapid City
hotel.
Comparison of the Years Ended December 31, 1995 and 1994. Net income
for 1995 reflected an increase of 40% primarily due to gains and
extraordinary items. Excluding the effect of such nonrecurring items, income
would have reflected an increase of 13%, primarily due to decreases in
expenses for interest, property operations, depreciation and amortization. The
decrease in interest expense is due to the accelerating amortization (scheduled
principal payments) of limited recourse mortgage loans, the satisfaction of
other mortgage loans in connection with property sales or lease restructurings
and the refinancing of selected loans at lower rates of interest. The decrease
in expenses for depreciation and amortization is due to the sale of properties
and the full depreciation of certain components on older properties. Property
expenses for 1994 include nonrecurring costs incurred in connection with
assessing liquidity alternatives for the limited partners of the CPA(R)
Partnerships and costs incurred in successfully resolving disputes with lessees.
Costs involving disputes with lessees decreased in 1995 as a result of the
successful settlement of litigation with The Leslie Fay Company ("Leslie Fay")
and Anthony's Manufacturing Company, Inc. ("Anthony's").
The decrease in lease revenues of four percent was solely due to the
sale of properties in 1994 and 1995. This decrease was partially offset by rent
increases on certain leases. Annualized lease revenues increased by
approximately $1,000 as a result of such rent increases. Hotel operating results
reflected increases of 11% in revenues and earnings. Although several
factors contributed to these increases, the most significant factor was due to
the CPA(R) Partnerships' engagement of a new hotel management company to operate
all five of the hotels in January 1995. The hotel management company raised room
rates at the Kenner, Louisiana and Livonia, Michigan hotels, both of which are
operated as Holiday Inns, with no detrimental impact on occupancy rates. The
Kenner property was transferred to an unaffiliated entity in July 1996 in
exchange for an equity interest in such entity.
Gains in 1995 include a gain on settlement with Leslie Fay, gains
from the completion of several sale transactions which are more fully described
in Note 13 to the accompanying Combined Financial Statements and gains on the
extinguishment of debt. The gain on the settlement with Leslie Fay concluded a
dispute which commenced in 1992 after Leslie Fay challenged the previously
agreed to method for determining the purchase price for the property pursuant to
a purchase option. The CPA(R) Partnerships recognized a gain of $11,499 on the
settlement of the dispute and retained ownership of the property. The property,
which was purchased by the CPA(R) Partnerships in 1982 for $9,400, was
subsequently sold in January 1996.
LIQUIDITY AND CAPITAL RESOURCES
There was no material change in the Group's financial condition since
December 31, 1996. Cash balances increased by $793 to $29,346. For the
nine-month period ended September 30, 1997, cash flow from operations of $37,621
was sufficient to pay distributions of $25,610, scheduled principal payment
installments of $6,262 on the Group's mortgage debt and fund capital
improvements of $1,455. In addition, the Group paid off mortgage loan balances
of $16,735 of which $12,700 was funded by refinancing a limited recourse loan at
a lower rate of interest.
The capital expenditures were comprised of $1,076 used to meet an
obligation to improve a property in Reno, Nevada in connection with the
commencement of a lease, in December 1996, and to replace furniture, fixtures
and equipment at the hotel properties. As of September 30, 1997, the Group had
no significant commitments to fund improvements at leased properties. The Group
is considering funding improvements for several lessees. Such improvements would
be committed to
21
<PAGE> 22
in exchange for either increased rents, extensions of existing lease terms or
both. The Group is committed to funding improvements over the next several years
for the hotel properties in order to meet the requirements of the Holiday Inn
Product Improvement Plan.
The Group expects to meet certain long-term liquidity requirements,
such as capital improvements, scheduled debt maturities and new property
acquisitions by obtaining long-term secured and unsecured financing, the
issuance of equity securities and operating cash flow. The Group has a real
estate portfolio with an appraised value of approximately $682,000, limited
recourse mortgage debt of approximately $190,000 and recourse debt of $24,709.
Management believes that a refinancing of debt will provide an opportunity to
enhance cash flow and future growth. Historically, a significant amount of cash
flow has been used to fund scheduled amortization of mortgage principal.
Scheduled mortgage principal amortization paid in 1996 and for the nine-month
period ended September 30, 1997 was $8,844 and $6,088, respectively. The Group
may use non-amortizing debt in the future to reduce debt service levels and
provide additional cash flow for funding capital improvements or the unsecured
financing, in addition to nonrecourse mortgage financing, to lower financing
costs and improve operating flexibility. Management believes that the Group will
have additional borrowing capacity that can be used to fund capital needs.
The CPA(R) Partnerships have historically distributed a significant
portion of cash flow to their partners. The Group currently plans initially to
continue distributing a significant portion of its cash flow to holders of
Subsidiary Partnership Units and shareholders.
The Group expects to meet its short-term liquidity requirements,
including general and administrative and property expenses, scheduled principal
payment installment obligations and distribution objectives from cash generated
from operations and from existing cash balances. The CPA(R) Partnerships
maintained working capital reserves in order to fund their non-recurring needs,
including capital improvements and maturing debt. The Group's cash balance may
decrease in the future to the extent the Group uses lines of credit to
supplement cash flow from operations to fund short-term liquidity needs.
BUSINESS AND PROPERTIES
The Company (or their representatives) from time to time may make or
may have made certain forward-looking statements, whether orally or in writing,
including, without limitation, statements in this Prospectus and otherwise,
regarding the business plan of the Company, estimates of future cash flows of
the Company, the types of investments to be made by the Company and hypothetical
distribution and returns to Unitholders. Such statements are qualified in their
entirety by reference to, and are accompanied by, the factors disclosed under
the heading "RISK FACTORS." Such factors could cause actual results to differ
materially from those projected in such forward-looking statements. Accordingly,
forward-looking statements should not be relied upon as a prediction of actual
results.
THE COMPANY'S BUSINESS
The Company's objective is to increase shareholder value and its
Funds from Operations through prudent management of its real estate assets and
opportunistic investments. The Company intends to capitalize on its status as a
publicly-traded real estate investment company to take immediate advantage of
the significant opportunities to make net lease and other investments at
attractive returns. The Company expects to evaluate a number of different
opportunities in a variety of property types and geographic locations and to
pursue the most attractive based upon its analysis of the risk/return tradeoffs.
22
<PAGE> 23
The Company presently intends to:
- Seek additional investment and other opportunities that
leverage core management skills (which include in-depth
credit analysis, asset valuation and sophisticated
structuring techniques);
- optimize the current portfolio of properties through
expansion of existing properties, timely dispositions and
favorable lease modifications;
- utilize its enhanced size and access to capital to
refinance existing debt; and
- increase the Company's access to capital.
The Company is a perpetual life, growth-oriented company and,
therefore, will continue to own properties as long as it believes ownership
helps attain the Company's objectives. The Board of Directors will have the
ability to change investment financing, distribution and other policies of the
Company without the consent of the Shareholders.
MANAGEMENT OF THE COMPANY
The Manager provides both strategic and day-to-day management for the
Company, including research, investment analysis, acquisition and development
services, asset management, capital funding services, disposition of assets and
administrative services. The Manager has dedicated senior executives in each
area of its organization so that the Company will function as a fully integrated
operating company.
ACQUISITION STRATEGIES
The Manager has a well-developed process with established procedures
and systems for acquiring net leased property. As a result of its reputation and
experience in the industry and the contacts maintained by its professionals, the
Manager has a presence in the net lease market that has provided it with the
opportunity to invest in a significant number of transactions on an ongoing
basis. The Company seeks to utilize the Manager's presence in the net lease
market to acquire additional properties in transactions with both new and
current tenants. In evaluating opportunities for the Company, the Manager
carefully examines the credit, management and other attributes of the tenant and
the importance of the property under consideration to the tenant's operations.
Careful credit analysis is a crucial aspect of every transaction. The Company
believes that the Manager has one of the most extensive underwriting processes
in the industry and has an experienced staff of professionals involved with
underwriting transactions. The Manager seeks to identify those prospective
tenants whose creditworthiness is likely to improve over time. The Company
believes that the experience of its management in structuring sale-leaseback
transactions to meet the needs of a prospective tenant enables the Manager to
obtain a higher return for a given level of risk than would typically be
available by purchasing a property subject to an existing lease.
The Manager's strategy in structuring its net lease investments for
the Company is to:
(i) combine the stability and security of long-term lease
payments, including rent increases, with the appreciation
potential inherent in the ownership of real estate;
(ii) enhance current returns by utilizing varied lease
structures;
(iii) reduce credit risk by diversifying its investments by
tenant, type of facility, geographic location and tenant
industry; and
23
<PAGE> 24
(iv) increase potential returns by obtaining equity enhancements
from the tenant when possible, such as warrants to purchase
tenant common stock.
FINANCING STRATEGIES
Consistent with its investment policies, the Company intends to use
leverage when available on favorable terms. The Company plans to have in place a
credit facility, which it intends to use primarily to acquire additional
properties and refinance existing debt. The Manager will continually seek
opportunities and consider alternative financing techniques to refinance debt,
reduce interest expense or improve its capital structure.
TRANSACTION ORIGINATION
In analyzing potential acquisitions, the Manager reviews and
structures many aspects of a transaction, including the tenant, the real estate
and the lease, to determine whether a potential acquisition can be structured to
satisfy the Company's acquisition criteria. The aspects of a transaction which
are reviewed and structured by the Manager include the following:
- Tenant Evaluation. The Manager subjects each potential
tenant to an extensive evaluation of its credit,
management, position within its industry, operating
history and profitability. The Manager seeks tenants it
believes will have stable or improving credit. By leasing
properties to such tenants, the Company can generally
charge rent that is higher than the rent charged to
tenants with recognized credit and, thereby, enhance its
current return from such properties as compared with
properties leased to companies whose credit potential has
already been recognized by the market. Furthermore, if a
tenant's credit does improve, the value of the Company's
properties leased to such tenants will likely increase (if
all other factors affecting value remain unchanged). The
Manager may also seek to enhance the likelihood of a
tenant's lease obligations being satisfied, such as
through a letter of credit or a guaranty of lease
obligations from the tenant's corporate parent. Such
credit enhancement provides the Company with additional
financial security.
- Leases with Increasing Rents. The Manager seeks to include
clauses in the Company's leases that provide for increases
in rent over the term of the leases. These increases are
generally tied to increases in certain indices such as the
consumer price index, in the case of retail stores
participation in gross sales above a stated level,
mandated rental increases on specific dates and by other
methods. The Company seeks to avoid entering into leases
that provide for contractual reductions in rents during
their primary term.
- Properties Important to Tenant Operations. The Manager, on
behalf of the Company, generally seeks to acquire
properties with operations that are essential or important
to the ongoing operations of the tenant. The Company
believes that such properties provide better protection in
the event that a tenant files for bankruptcy, because
leases on properties essential or important to the
operations of a bankrupt tenant are less likely to be
rejected and, thereby, terminated by a bankrupt tenant.
The Manager also seeks to assess the income, cash flow and
profitability of the business conducted at the property,
so that, if the tenant is unable to operate its business,
the Company can either continue operating the business
conducted at the property or re-lease the property to
another entity in the industry which can operate the
property profitably.
24
<PAGE> 25
- Lease Provisions that Enhance and Protect Value. When
appropriate, the Manager attempts to include provisions in
the Company's leases that require the Company's consent to
certain tenant activity or require the tenant to satisfy
certain operating tests. These provisions include, for
example, operational and financial covenants of the
tenant, prohibitions on a change in control of the tenant
and indemnification from the tenant against environmental
and other contingent liabilities. Including these
provisions in its leases enables the Company to protect
its investment from changes in the operating and financial
characteristics of a tenant that may impact its ability to
satisfy its obligations to the Company or could reduce the
value of the Company's Properties.
- Diversification. The Manager attempts to diversify the
Company's portfolio of properties to avoid dependence on
any one particular tenant, type of facility, geographic
location and tenant industry. By diversifying its
portfolio, the Company reduces the adverse effect on the
Company of a single underperforming investment or a
downturn in any particular industry.
The Manager employs a variety of other strategies and practices in
connection with the Company's acquisitions. These strategies include attempting
to obtain equity enhancements in connection with transactions. Typically, such
equity enhancements involve warrants to purchase stock of the tenant to which
the property is leased or the stock of the parent of the tenant. In certain
instances, the Company grants to the tenant a right to purchase the property
leased by the tenant, but generally the option purchase price will be not less
than the fair market value of the property. The Manager's practices include
performing evaluations of the physical condition of properties and performing
environmental surveys in an attempt to determine potential environmental
liabilities associated with a property prior to its acquisition.
ACQUISITION AND UNDERWRITING PROCESS
The Manager's Acquisition and Asset Management Department has the
primary responsibility for the origination and negotiation of acquisitions of
properties. Members of this Department will identify potential acquisitions and
conduct negotiations with sellers and tenants. Members of the Acquisition and
Asset Management Department generally structure the terms of any financing the
Company may use to acquire a property.
As a transaction is structured, it is evaluated by the Chairman of
the Investment Committee with respect to the potential tenant's credit, business
prospects, position within its industry and other characteristics important to
the long-term value of the property and the capability of the tenant to meet its
lease obligations. Before a property is acquired, the transaction is reviewed by
the Investment Committee to ensure that it satisfies the Company's investment
criteria. Aspects of the transaction that are typically reviewed by the
Investment Committee include the expected financial returns, the
creditworthiness of the tenant, the real estate characteristics and the lease
terms.
The Investment Committee is not directly involved in originating or
negotiating potential acquisitions, but instead functions as a separate and
final step in the acquisition process. The Manager places special emphasis on
having experienced individuals serve on its Investment Committee and does not
invest in a transaction unless it is approved by the Investment Committee.
The Company believes that the Investment Committee review process
gives it a unique, competitive advantage over other unaffiliated net lease
companies because of the substantial experience and perspective that the
Investment Committee has in evaluating the blend of corporate credit, real
estate and lease terms that combine to make an acceptable risk.
25
<PAGE> 26
The following people serve on the Investment Committee:
- George E. Stoddard, Chairman, was formerly responsible for the
direct corporate investments of The Equitable Life Assurance
Society of the United States and has been involved with the
CPA(R) Programs for over 16 years.
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman,
Director and Chief Investment Officer of The Prudential
Insurance Company of America. As Chief Investment Officer, Mr.
Hoenemeyer was responsible for all of Prudential's investments,
including stocks, bonds, private placements, real estate and
mortgages.
- Lawrence R. Klein is Benjamin Franklin Professor of Economics
Emeritus at the University of Pennsylvania and its Wharton
School. Dr. Klein has been awarded the Alfred Nobel Memorial
Prize in Economic Sciences and currently advises various
governments and government agencies.
The Company invests in properties subject to Triple Net Leases (i.e.,
leases in which the tenant is responsible for real estate taxes and assessments,
repairs and maintenance, insurance and other expenses relating to the property
and has the duty to restore in case of casualty). However, the Company may, in
its discretion, acquire properties subject to leases under which it has more
responsibilities than would normally be the case under a Triple Net Lease and
may make other investments.
ASSET MANAGEMENT
The Company believes that effective management of net lease assets is
essential to maintain and enhance property values. Important aspects of asset
management include restructuring transactions to meet the evolving needs of
current tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process. The Company believes that the Manager's
knowledgeable and experienced professionals are well qualified in these areas of
asset management.
The Manager monitors, on an ongoing basis, compliance by tenants with
their lease obligations and other factors that could affect the financial
performance of any of its Properties. Such monitoring includes receiving
assurances that each tenant has paid real estate taxes, assessments and other
expenses relating to the Properties it occupies and confirming that appropriate
insurance coverage is being maintained by the tenant. The Manager reviews
financial statements of its tenants and undertakes regular physical inspections
of the condition and maintenance of its Properties. Additionally, the Manager
periodically analyzes each tenant's financial condition, the industry in which
each tenant operates and each tenant's relative strength in its industry.
PROPERTIES
As of January 1, 1998, the Company, through its subsidiaries, owned
198 Properties, 191 of which are currently net leased. The following table
provides certain information with respect to the Properties.
<TABLE>
<CAPTION>
PROPERTY PROPERTY SQUARE ANNUAL INCREASE LEASE MAXIMUM % OF
LESSEE LEASE GUARANTOR LOCATION TYPE FOOTAGE RENT FACTOR EXPIRATION TERM REVENUES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Santee Dairies,
Inc. (2)
Hughes Markets Los Angeles, 1 390,000 $5,783,992 Stated Apr-98 Oct-98 7.61%
CA
Dr Pepper
Bottling Company
of Texas
Dr Pepper Holdings, Inc. Irving, TX 2 459,497
Houston, TX 2 262,450
---------
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
721,947 $3,998,000 CPI Jun-14 Jun-14 5.26%
Detroit Diesel
Corporation
Detroit, MI 1 2,730,750 $3,658,059 PPI Jun-10 Jun-30 4.81%
Barnstead
Thermolyne
Corporation
Ormco Corporation Sybron International Corp. Dubuque, IA 1 144,300 $452,956 CPI Dec-13 Dec-38
Erie Scientific Glendora, CA 3 25,000 $369,186 CPI Dec-13 Dec-38
Company
Nalge Company Portsmouth, 1 95,000 $537,058 CPI Dec-13 Dec-38
NH
Kerr Corporation Rochester, NY 1 221,600 $985,378 CPI Dec-13 Dec-38
Romulus, MI 1 220,000 $966,504 CPI Dec-13 Dec-38
--------- ----------
705,900 $3,311,082 4.36%
Gibson Greetings,
Inc.
Cincinnati, 1 593,340
OH
Berea, KY 2 601,500
---------
1,194,840 $3,100,000 Stated Nov-13 Nov-23 4.08%
Stoody Deloro
Stellite, Inc.
Industry, CA 1 325,800 $2,234,190 CPI Feb-10 Feb-35
Goshen, IN 1 54,270 $500,212 CPI Feb-10 Feb-35
--------- ----------
380,070 $2,734,402 3.60%
AmerSig
Southeast, Inc.
AS Memphis, Inc. Quebecor Printing Inc. Doraville, GA 1 432,559 $1,522,498 CPI Dec-09 Dec-34
Olive 1 270,500 $980,643 CPI Jun-08 Jun-33
Branch, MS
--------- ----------
703,059 $2,503,141 3.29%
Furon Company
New Haven, CT 1 110,389
Mickleton, NJ 1 86,175
Aurora, OH 1 147,848
Mantua, OH 1 150,544
Bristol, RI 1 105,642
Aurora, OH 1 26,692
---------
1 627,290 $2,416,049 PPI Jul-07 Jul-37 3.18%
Pre Finish Metals
Incorporated
Material Sciences Walbridge, OH 1 313,704 $2,263,395 CPI Jun-03 Jun-28 2.98%
Corporation
AutoZone, Inc.
Fleming Companies, Inc. 31 Locations: 4 185,990 $540,815 % Sales Jan-11 Jan-26
NC, TX, AL, $844,164 % Sales Feb-11 Feb-26
GA,
AutoZone, Inc. IL, LA, MO
13 Locations: 4 70,425 $311,686 % Sales Aug-12 Aug-37
FL, LA, MO,
AutoZone, Inc. NC, TN
11 Locations: 4 59,400 $529,760 % Sales Aug-13 Aug-38
--------- ----------
FL, GA, NM,
SC, TX 315,815 $2,226,425 2.93%
Orbital Sciences
Corporation
Chandler, AZ 1 280,000 $2,153,739 CPI Sep-09 Sep-29 2.83%
The Gap, Inc.
Erlanger, KY 2 391,000 $1,225,994 CPI Feb-03 Feb-43
Erlander, KY 2 362,750 $927,568 CPI Feb-03 Feb-43
--------- ----------
753,750 $2,153,562 2.83%
Simplicity
Manufacturing,
Inc.
Port 1 414,236
Washington,
WI
Port 1 5,440
Washington,
WI
---------
419,676 $1,996,712 CPI Mar-03 Mar-13 2.63%
AP Parts
Manufacturing
AP Parts International Toledo, OH 1 1,160,000
Inc.
Pinconning, 1 220,588
MI
---------
1,380,588 $1,836,534 CPI Dec-07 Dec-22 2.42%
NVR, Inc.
NVR L.P. Thurmont, MD 1 150,468 $729,114 CPI Mar-14 Mar-39
Farmington, 1 29,273
NY
Pittsburgh, 3 42,000 $938,046 CPI Mar-14 Mar-18
PA
Pittsburgh, 3 36,000
PA
--------- ----------
257,741 $1,667,160 2.19%
Unisource
Worldwide, Inc.
Commerce, CA 2 411,579 $1,292,800 Stated Apr-10 Apr-30
Anchorage, AK 2 44,712 $312,700 Stated Dec-09 Dec-29
--------- ----------
456,291 $1,605,500 2.11%
Cleo Inc.
CSS Industries, Inc. Memphis, TN 1 1,006,566 $1,500,000 CPI Dec-05 Dec-15 1.97%
Peerless Chain
Company
Winona, MN 1 357,760 $1,463,425 CPI Jun-11 Jun-26 1.93%
Information
Resources, Inc.
(33.33% Chicago, IL 3 159,600
ownership)
Chicago, IL 3 92,400
---------
252,000 $1,457,788 CPI Oct-10 Oct-15 1.92%
Red Bank
Distribution, Inc.
Cincinnati, 2 589,150 $1,400,567 CPI Jul-15 Jul-35 1.84%
OH
Brodart Co.
Williamsport, 3 309,030
PA
Williamsport, 3 212,201
PA
---------
521,231 $1,344,764 CPI Jun-08 Jun-28 1.77%
Gould, Inc.
Ohmeda Medical Oxnard, CA 3 142,796 $1,215,000 Stated Nov-99 Nov-19 1.60%
Devices Division
Inc. (Sublessee)
Datcon Instrument
Company
High Voltage Lancaster, PA 1 70,712 $600,262 CPI Nov-13 Nov-38
Engineering Corp.
(Lessee for Sterling, MA 1 70,000 $578,757 CPI Nov-13 Nov-38
Sterling/Guarantor
for Lancaster)
--------- ----------
140,712 $1,179,019 1.55%
Seven Up Bottling
Co. of St. Louis,
Inc.
KSG, Inc. St. Louis, MO 3 148,100 $1,132,310 CPI Mar-12 Mar-37 1.49%
</TABLE>
27
<PAGE> 28
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States
Postal Service
Bloomington, 3 116,000 $1,089,982 Stated 1-Apr 30-Apr 1.43%
IL
Duff-Norton
Company, Inc.
Yale International, Inc. Forrest 1 265,000 $1,020,717 CPI Dec-12 Dec-32 1.34%
City, AR
Armel, Inc.
Kinney Shoe Corporation Ft. 2 80,540 $964,941 CPI Sep-01 Sep-16 1.27%
Lauderdale,
FL
DeVlieg-Bullard,
Inc.
McMinnville, 1 276,991
TN
Frankenmuth, 1 132,400
MI
---------
409,391 $953,803 CPI Apr-06 Apr-26 1.26%
General Electric
Company
King of 3 88,578 $934,186 Market Jul-98 Jul-08 1.23%
Prussia, PA
Wal-Mart Stores,
Inc.
West 4 118,125 $891,129 CPI Jan-07 Jan-37 1.17%
Mifflin, PA
Anthony's
Manufacturing
Company, Inc.
San 1 95,420
Fernando, CA
San 1 7,220
Fernando, CA
San 1 40,285
Fernando, CA
San 1 39,920
Fernando, CA
---------
182,845 $876,000 CPI May-07 May-12 1.15%
Hotel Corporation
of America
Holiday Inn Topeka, KS 5 117,590 $833,457 Stated Sep-03 Sep-03 1.10%
Franchisee
Varo Inc.
IMO Industries, Inc. Garland, TX 1 150,203 $822,750 Stated Sep-02 Sep-07 1.08%
United Stationers
Supply Co.
United Stationers, Inc. New Orleans, 2 59,000
LA
Memphis, TN 2 75,000
San Antonio, 2 63,321
TX
---------
197,321 $812,500 CPI Mar-10 Mar-30 1.07%
Agency Management
Services, Inc.
Continental Casualty College 3 98,552 $771,666 Stated Oct-98 Oct-03 1.02%
Company Station, TX
Winn-Dixie
Montgomery, Inc.
Winn-Dixie Stores, Inc. Montgomery, 4 32,690 $191,534 % Sales Mar-08 Mar-38
AL
Panama City, 4 34,710 $170,399 % Sales Mar-08 Mar-38
FL
Leeds, AL 4 25,600 $144,713 % Sales Mar-04 Mar-34
Bay Minette, 4 34,887 $128,472 % Sales Jun-07 Jun-37
AL
Brewton, AL 4 30,625 $134,500 % Sales Oct-10 Oct-30
--------- ----------
158,512 $769,618 1.01%
AT&T Corp.
Bridgeton, MO 3 55,810 $794,764 Stated Nov-01 Nov-11 1.05%
General Cinema
Corp. of Minnesota
General Cinema Harcourt General, Inc. Burnsville, 4 31,837 $467,500 % Sales Jul-06 Jul-31
Corp. of Michigan MN
Canton, MI 4 29,818 $233,750 % Sales Jul-05 Jul-30
--------- ----------
61,655 $701,250 0.92%
Western Union FSI
Bridgeton, MO 3 78,080 $656,882 Stated Nov-01 Nov-11 0.86%
Exide Electronics
Corporation
Exide Electronics Group, Raleigh, NC 3 27,770 $572,130 CPI Apr-97 Apr-98 0.74%
Inc.
Family Dollar
Services, Inc.
Salisbury, NC 2 311,182 $561,600 CPI Dec-00 Dec-20 0.74%
Swiss-M-Tex, L.P.
Travelers 1 178,693
Rest, SC
Liberty, SC 1 16,500
---------
195,193 $546,095 CPI Aug-07 Aug-31 0.74%
Motorola, Inc.
Urbana, IL 3 46,350 $540,000 Stated Dec-00 Dec-20 0.71%
EXCEL
Teleservices, Inc.
EXCEL Communications, Inc. Reno, NV 3 53,158 $532,800 Stated Dec-00 Dec-20 0.70%
Penn Virginia
Resources
Corporation
Pennsylvania Penn Virginia Corporation Cuyahoga 1 80,445
Crusher Falls, OH
Corporation
(Joint Broomall, PA 3 22,810
Tenants)
Duffield, VA 3 12,804
---------
116,059 $498,750 Market Aug-99 Aug-34 0.66%
Titan Corporation
(18.54% San Diego, CA 3 166,403 $485,084 CPI Jul-07 Jul-31 0.64%
ownership)
Wozniak
Industries, Inc.
Schiller 1 84,197 $452,400 Stated Dec-03 Dec-23 0.60%
Park, IL
Childtime
Childcare, Inc.
(33.93% 12 Locations: 6 83,694 $413,638 CPI Jan-16 Jan-41 0.54%
ownership)
AZ, CA, MI,TX
Yale Security Inc.
Lemont, IL 1 130,000 $399,000 Stated Apr-11 Apr-11 0.53%
CSK Auto, Inc.
Denver, CO 4 8,129 $51,709 CPI Jan-08 Jan-38
Glendale, AZ 4 3,406 $58,564 CPI Jan-02 Jan-22
Apache 4 5,055 $43,316 CPI Jan-02 Jan-22
Junction, AZ
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Casa Grande, 4 11,588 $56,695 CPI Jan-02 Jan-22
AZ
Scottsdale, 4 8,000 $118,586 CPI Jan-02 Jan-22
AZ
Mesa, AZ 4 3,401 $59,955 CPI Jan-02 Jan-22
--------- ----------
39,579 $388,825 0.51%
B&G Contract
Packaging, Inc.
Maumelle, AR 1 80,000 $168,000 Stated Dec-97 Dec-03 0.22%
80,000 $162,000
160,000 $330,000
Lockheed Martin
Corporation
Glen Burnie, 2 45,804 $310,000 Stated Apr-01 Apr-21 0.41%
MD
Jumbo Sports, Inc.
Moorestown, 3 74,066 $308,750 Stated Jun-12 Jun-42 0.41%
NJ
Broomfield Tech
Center Corporation
Broomfield, 3 60,660 $180,081 None Dec-01 Dec-01 0.39%
CO
Broomfield, 3 40,440 $120,054 None May-02 May-02
CO
--------- ----------
101,100 $300,135 0.24%
Payless
ShoeSource, Inc.
(8 Stores)
Fontana, CA 4 4,500 $183,146 None Dec-06 Dec-36
Rialto, CA 4 4,500
Reynoldsburg, 4 3,840
OH
Tallmadge, OH 4 4,000
Anderson, IN 4 4,500
Cuyahoga 4 3,792
Falls, OH
Marion, OH 4 3,900
The Southland Fremont, OH 4 4,000
Corporation (1
Store)
Chief Auto Parts, Merced, CA 4 4,500 $20,370 None Dec-06 Dec-36
Inc. (3 Stores)
Sacramento, 4 4,400 $63,798 None Dec-06 Dec-36
CA
Stockton, CA 4 4,500
The Kobacker Sacramento, 4 4,400
Company (Obligor CA
for all 12 Stores)
--------- ----------
50,832 $267,314 0.35%
Petrocon
Engineering, Inc.
(One Lease Beaumont, TX 3 48,700 $118,800 Stated Dec-98 Dec-00
applies to three
portions of
Facility.)
$103,740 None Jun-97 Jun-01
$43,200 None Nov-97 Nov-01
----------
$265,740 0.35%
Federal Express
Corporation
Corpus 2 30,212 $189,986 Market May-99 May-09
Christi, TX
College 2 12,080 $56,700 Market Feb-99 Feb-09
Station, TX
----------
$246,686 0.32%
NYNEX
Milton, VT 3 30,624 $215,600 Stated Feb-03 Feb-13 0.28%
Penberthy, Inc.
PCC Flow Technologies, Prophetstown, 1 161,878 $209,507 CPI Apr-06 Apr-26 0.28%
Inc. IL
Allied Plywood
Corporation
Manassas, VA 1 60,446 $185,000 Stated Mar-02 Mar-02 0.24%
Rochester Button
Company
South 1 43,387
Boston, VA
Kenbridge, VA 1 38,000
---------
81,387 $180,000 None Dec-16 Dec-36 0.24%
Sunds Defibrator
Woodhandling, Inc.
Carthage, NY 1 76,000 $144,239 CPI Aug-05 Jul-07 0.19%
2
Pepsi-Cola
Metropolitan
Bottling Company,
Inc.
Serivce Houston, TX 2 17,725 $97,568 Stated Oct-04 Oct-04 0.13%
Corporation
International
(sublease)
Popular Stores,
Inc.
Scottsdale, 4 11,800 $95,810 % Sales Jul-00 Jul-10 0.13%
AZ
Stair Pans of
America, Inc.
Fredericksburg, 1 45,821 $89,810 Stated Jul-98 Jul-98 0.12%
VA
Inno Tech
Industries, Inc.
Elyria, OH 1 183,000 $60,000 None Apr-98 Apr-03 0.08%
Cent Stores, Inc.
Mesa, AZ 4 11,039 $54,000 Stated Jan-13 Jan-13 0.07%
Family Bargain
Center
Colville, WA 4 15,300 $49,255 CPI Jan-00 Jan-15 0.06%
The Crafters
Mall, Inc.
Glendale, AZ 4 11,760 $47,964 None 0.06%
Quarterly
Renewals
Kinko's, Inc.
Canton, OH 4 1,700 $47,067 % Sales Aug-00 Aug-10 0.06%
Capin Mercantile
Corporation
Silver City, 4 11,280 $36,660 None May-00 May-05 0.05%
NM
Building 7
Corporation
Apache 4 9,945 $23,100 CPI Jun-01 Jun-06 0.03%
Junction, AZ
Moise L. Wexler,
Scott Wexler
New Orleans, 4 1,641 $19,692 % Sales Oct-05 Oct-15 0.03%
LA
Scallon's Carpet
Castle, Inc.
Casa Grande, 4 3,134 $17,710 Stated Dec-03 Dec-03 0.02%
AZ
Arthur L. Jones
Greensboro, 4 1,700 $10,725 CPI Apr-99 Apr-01 0.01%
NC
Petosky Holiday
Inn
Petoskey, MI 5 83,462
Alpena Holiday Inn
Alpena, MI 5 96,333
Livonia Holiday
Inn
Livonia, MI 3 158,000
Vacant
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Columbus, SC 1 168,600
Vacant
Sumter, SC 1 87,000
Vacant
Garland, TX 1 52,241
Vacant
Canton 4 4,800
Total $75,996,924 100.00%
Revenue
</TABLE>
(1) Property types are coded as follows: 1 -
Industrial/Manufacturing; 2 - Distribution/Warehouse; 3 -
Office/Research; 4 - Retail; 5 - Hotel; 6 - Day Care
Center.
(2) A lease has been entered into with Copeland Beverage Group
Inc. which will commence when the lease with Santee
Dairies expires. The lease with Copeland provides for an
annual rent of $1,800,000 with increase based on the CPI
and is for a term of 9 years.
(A) Simplicity has exercised its option to purchase
the property. The said is expected to be
completed by no later than April 1998.
(B) A suite has been brought to enforce Red Bank's
obligations under this lease. Red Bank is not
currently paying the equity portion of the rent
due under the lease.
As of September 30, 1997, three Properties owned by the CPA(R)
Partnerships, through a subsidiary, are Holiday Inn hotels which are not leased.
All of these Holiday Inn hotels (the "Hotels") are licensed to operate as
Holiday Inns. The following table provides certain information with respect to
the Hotels.
<TABLE>
<CAPTION>
Number Square
Name Location of Rooms Feet
- ---- -------- -------- -------
<S> <C> <C> <C>
Petroskey Holiday Inn Petroskey, MI 142 83,452
Livonia Holiday Inn Livonia, MI 226 158,000
Alpena Holiday Inn Alpena, MI 148 96,333
</TABLE>
The Operating results of the Alpena and Petroskey Hotels for the year
ended December 31, 1996 and for the nine months ended September 30, 1997 are as
follows:
30
<PAGE> 31
<TABLE>
<CAPTION>
Alpena Petroskey Livonia
------- ------- -------
(in thousands)
<S> <C> <C> <C>
For the year ended December 31, 1996:
Revenues $ 3,074 $ 2,247 $ 8,716
Management fees* (59) (43) (195)
Other operating expenses (2,347) (1,953) (6,108)
------- ------- -------
Operating income $ 668 $ 251 $ 2,413
======= ======= =======
For the nine months ended June 30, 1997:
Revenues $ 2,422 $ 1,902 $ 6,619
Management fees (63) (30) (194)
Other operating expenses (1,709) (1,513) (4,469)
------- ------- -------
Operating income $ 650 $ 351 $ 1,956
======= ======= =======
</TABLE>
*Paid to unaffiliated third parties.
In January 1998, the hotel located in Livonia, Michigan was leased to
Livho, Inc. ("Livho"), a corporation wholly owned by Francis J. Carey, Livho,
will own the Holiday Inn license and the other licenses necessary for the
operation of the hotel. Livho will rent the hotel from CD for a base rent of
$175,000 per year plus a percentage of the gross receipts at the hotel, CD
expects to spend approximately $4,000,000 to upgrade the hotel so that it will
qualify as a Holiday Inn Select hotel.
DESCRIPTION OF MOST SIGNIFICANT TENANTS
The following is a brief description of the tenants which will pay
the most rent to the Company on an annual basis.
Santee Dairies, Inc., the largest processor of milk products in the
West, processes 235,000 to 260,000 gallons of milk per day. Owned by Hughes
Markets, Inc. and Stake Brothers Markets, the company also processes, bottles
and distributes yogurt, sour cream, ice cream, cottage cheese and fruit juices.
The highlights of Santee's 1996 fiscal year include net sales of $194 million,
total assets of approximately $66 million and a net worth of $26 million.
Hughes, the guarantor of the Santee lease, operates a chain of 51 supermarkets
in the Southern California area, wholly owns a real estate holding company and
owns 50 percent of Santee. The highlights of Hughes' fiscal year ending March
1997 included net sales of approximately $1.0 billion, total assets of
approximately $279 million and a net worth of approximately $160 million.
Dr Pepper Bottling Company of Texas is the largest independent
franchise bottler of Dr Pepper brand products, accounting for approximately 13
percent of the total domestic volume of such products. One of the largest
independent soft drink bottlers in the United States, the Company bottles the
following products: Dr Pepper, Seven-Up, Canada Dry, Sunkist soft drinks, A&W
Root Beer, A&W Cream Soda, Squirt and Countrytime lemonade. For the 1996 fiscal
year, its net sales totaled over $390 million and its assets totaled over $237
million.
Detroit Diesel is a leading designer and producer of heavy-duty
diesel engines and a broad range of new replacement and re-manufactured parts
and components. The company's markets include on-highway vehicles (truck, bus
and coach), construction, industrial, power generation, military and marine. For
the year ending December 31, 1996, Detroit Diesel's net revenues totaled $1,963
million; its total assets were $1,113 million; its long-term debt was $93
million; and its stockholders' equity was $321 million.
31
<PAGE> 32
Sybron International Corporation is the parent company of four
operating subsidiaries which hold leadership product positions in laboratory and
professional orthodontic and dental markets in the United States and abroad. The
Sybron companies have become market leaders by developing, manufacturing and
marketing an expanding array of value-added products which meet their customers'
needs. The highlights of Sybron's fiscal year ending September 30, 1996 included
total assets of over $975 million and a net worth of over $283 million.
Gibson Greetings, Inc. designs, manufactures and sells greeting
cards, gift-wrapping paper, stationery, candles, calendars and related gift
items. Most of the greeting cards are designed and printed at the Cincinnati
location and then sent to the Berea facility for shipment to retail stores. In
mid-November 1995, the company sold Cleo, Inc., its wholly-owned gift wrap
subsidiary, to CSS Industries, Inc., but continues to produce gift wrapping
accessories. In 1996, Gibson's net sales totaled $390 million; its assets
totaled $425 million; its long-term debt totaled $41 million; and its net worth
totaled $256 million.
Started by Charles Stoody in 1921, Stoody Deloro Stellite, Inc. is
the global leader in the application, design and manufacturing of consumable
welding products, products that protect equipment and parts from wear and
erosion. SDS's coatings for metals and formed products are significant due to
abrasion, impact, heat and corrosive environments in industries such as
construction, mining, agriculture, chemical, military and transportation. The
company is a profitable division of Thermadyne Holdings Corporation which
manufactures and sells worldwide a broad range of welding apparatus, commercial
and industrial maintenance equipment and coatings. Thermadyne operates
facilities in the U.S., Canada, England, Germany, Italy, Japan, Singapore,
Mexico and Malaysia. For the 1996 fiscal year, Thermadyne had net sales of $440
million and total assets of $353 million.
Furon designs and manufactures highly engineered products composed of
high performance polymer materials. The company's parts and components are used
primarily by original equipment manufacturers who reach a broad spectrum of
markets: hydrocarbon processing, utilities, pulp and paper, automotive, truck,
beverage equipment, food processing, semiconductors, electronic assembly and
medical devices and equipment. Most of the components are designed to meet the
particular specifications of each customer. For the fiscal year ended February
5, 1997, Furon's net sales totaled over $390 million; its assets totaled over
$344 million; and its stockholders' equity totaled over $61 million.
Quebecor Printing Inc. is the largest commercial printer in the
United States, Canada and Europe. Based in Canada, the Company has over 23,000
employees and operates approximately 100 printing facilities in the U.S.,
Canada, France, the U.K., Spain, Mexico and India. For the 1996 fiscal year,
Quebecor Printing Inc. had revenues of over $3.1 billion and total assets of
over $2.9 billion.
Material Sciences Corporation is a technology based manufacturer of
continuously processed specialty coated materials and services. The company is a
market leader in its four principal product groups: laminates and composites,
metalizing and coating, coil coating and electrogalvanizing. For its fiscal year
ending February 28, 1997, the company's net sales totaled over $236 million; its
assets totaled over $202 million; and its stockholders' equity totaled over $121
million.
AutoZone, Inc. currently operates 1,423 auto-part stores in 27
states, primarily in the Sunbelt and Midwest regions. The "Do-It-Yourself"
stores sell replacement parts (from spark plugs to complete engines), entire
lines of accessories and motor oils for domestic and foreign cars, vans and
light trucks.
Orbital Sciences Corporation designs, manufactures and operates a
broad range of space-related products and services, including small and
medium-sized satellites and personal navigation equipment.
32
<PAGE> 33
The company is the world's leading provider of small launch vehicles, including
the Pegasus and Taurus vehicles.
The Gap, Inc. is one of the largest specialty and private-label
clothing retailers in the United States. Over the past ten years, the company
has enjoyed significant growth through trade names including Gap, GapKids, Baby
Gap, Banana Republic and Old Navy. As of March 1996, The Gap, Inc. operated
1,701 stores including some outside of the U.S. For the fiscal year ended
February 1997, the company's sales increased 20 percent to $5.3 billion.
MORTGAGE DEBT
The Company presently has debt of approximately $219 million,
excluding the debt of unconsolidated joint ventures. Approximately $194 million
of such debt is limited recourse mortgage debt secured by mortgages on 108
properties. Substantially all of the mortgage debt is fixed rate and
self-amortizing, and the weighted average annual interest rate on the mortgage
debt is 8.9%. The following table provides certain information with respect to
the Company's debt, including its proportionate share of the debt of
unconsolidated joint ventures:
<TABLE>
<CAPTION>
As of
Number December 31, Interest Maturity
Tenant/Guarantor Name Properties 1997 Rate Date
---- ------------ ------- --------
<S> <C> <C> <C> <C>
Broomfield Tech Center Corporation 2 $ 2,173,949 9.00% 9/11
Varo Inc. 1 2,080,176 10.00% 10/02
The Gap, Inc. 1 6,003,499 7.25% 5/99
Unisource Worldwide, Inc. 1 6,527,118 7.24% 2/10
Pre Finish Metals Incorporated 1 910,435 Floating 7/98
Simplicity Manufacturing, Inc. 2 4,471,529 10.52% 7/98
Brodart Co. 1 3,054,518 7.60% 1/04
Alpena Holiday Inn 1 7,150,000 (1) (1)
Petoskey Holiday Inn 1 7,150,000 (1) (1)
Motorola, Inc. 1 2,051,702 10.50% 10/96(2)
AutoZone, Inc. 32 8,618,075 9.51% 8/98
General Cinema Corp. of
Minnesota, Inc. 1 1,895,864 8.50% 7/06
Armel, Inc. 1 11,058 Floating 1/98
AP Parts Manufacturing Company 2 5,397,705 7.63% 2/01
Wal-Mart Stores, Inc. 1 3,351,280 8.25% 8/03
Livonia Holiday Inn 1 7,446,222 Floating 11/97
Svbron Acquisition Company 5 14,018,604 11.25% 1/99
NVR 2 6,700,000 7.50% 12/02
Topeka Holiday Inn 1 8,414,629 6.75% 10/06
7.75% 9/03
High Voltage Engineering Corp. 2 4,165,253 6.05% 12/98
General Electric Company 1 3,307,693 10.50% 5/98
United Stationers Supply Co. 3 2,307,669 7.56% 12/99
Dr. Pepper Bottling Company of Texas 2 15,360,466 11.85% 7/99
Orbital Sciences Corporation 1 8,494,188 10.00% 9/20
AmerSig Southeast, Inc. 1 6,154,031 Floating 5/01
AS Memphis, Inc. 1 3,856,956 Floating 5/01
Furon Company 6 12,558,672 8.42% 7/12
Detroit Diesel Corporation 1 22,658,392 7.16% 6/10
Red Bank Distribution, Inc. 1 5,161,768 10.00% 8/10
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
As of
Number December 31, Interest Maturity
Tenant/Guarantor Name Properties 1997 Rate Date
---- ------------ ------- --------
<S> <C> <C> <C> <C>
Floating
Information Resources, Inc. 2 7,449,554 10.70% 10/00
Childtime Childcare, Inc. 12 1,266,933 9.55% 12/06
Titan Corporation 1 1,918,777 9.75% 7/03
Unsecured recourse debt -- 24,708,981 Floating
--- ------------
108 $216,795,696
============
</TABLE>
(1) Series of bonds maturing between September 1998 and September 2015
with interest rates ranging from 6.60% to 9.00%.
(2) Lender continues to accept monthly payments.
ENVIRONMENTAL MATTERS
The Company will generally undertake a third party Phase I
investigation of potential environmental risks when evaluating an acquisition. A
"Phase I investigation" is an investigation for the presence or likely presence
of hazardous substances or petroleum products under conditions which indicate an
existing release, a post release or a material threat of a release. A Phase I
investigation does not typically include any sampling. The Company may acquire a
property with environmental contamination, subject to a determination of the
level of risk and potential cost of remediation. The Company generally will
require property sellers to fully indemnify it against any environmental problem
or condition existing as of the date of purchase. In some instances, the Company
will be the assignee of or successor to the buyer's indemnification rights.
Additionally, the Company will generally structure its leases to require the
tenant to assume all responsibility for environmental compliance or
environmental remediation and to provide that non-compliance with environmental
laws be deemed a lease default. In certain instances, the Company may also
require a cash reserve, a letter of credit or a guarantee from the tenant, the
parent company or a third party to assure funding of remediation. The value of
these protections depend upon the financial strength of the entity providing the
protection. Where warranted, further assessments are performed by third-party
environmental consulting and engineering firms.
Phase I investigations were performed by the CPA(R) Partnerships on
all CPA(R):1-6 Properties between July 1993 and February 1994. Except as
specified in the following sentence, a Phase I investigation or its substantial
equivalent was conducted on all CPA(R):8-9 Properties around the time of
acquisition of such properties. The CPA(R) Partnerships did not undertake
investigations at Tandem Holdings (St. Louis, MO); Winn-Dixie (Bay Minette and
Brewton, AL); M-Tex (Traveler's Rest and Liberty, SC); Northern Automotive
Corporation (Mesa, Glendale, Apache Junction and Casa Grande, AZ and Denver,
CO); Family Bargain Center (Colville, WA); Capin Mercantile Corporation
(Silver City, NM) and the 25 AutoZone stores in Florida, Georgia, Louisiana,
Missouri, New Mexico, North Carolina, South Carolina, Tennessee and Texas.
Based upon the results of the Phase I investigations conducted in
1993 and 1994 on the CPA(R):1-6 Properties, Phase II investigations were
recommended for 30 properties. Phase II investigations have been or are in the
process of being performed on 21 of the 30 properties. On five of the properties
the particular CPA(R) Partnership determined not to proceed with a Phase II
investigation and on four of the properties the tenants would not permit a Phase
II investigation. The issues for which Phase II investigations were recommended
with respect to each of the nine properties are: (a) PicWay Shoes, Cleveland, OH
(records review to determine the existence of any underground storage tanks
("UST") due to former use of property as gas station), (b) Waterbed Outlet,
Merced, CA (records review to determine existence of any USTs due to former use
of property as gas station), (c) Santee Dairies, Los Angeles, CA (geophysical
survey to locate potential USTs), (d) Arley Merchandise,
34
<PAGE> 35
Sumter, SC (tightness test on existing UST), (e) Stoody Deloro, Goshen, IN
(subsurface investigation to determine if any release from abandoned UST), (f)
Industrial General, Belleville, OH (removal and closure of inactive UST), (g)
Industrial General, Bald Knob, AR (soil testing for potential contamination),
(h) Industrial General, Newburyport, MA (testing of concrete underground
leaching pit) and (i) Industrial General, Forrest City, AR (general housekeeping
and regulatory compliance issues). The Company believes that if any remediation
is indicated as a result of Phase II investigations, the cost of any material
remediation would be born by the lessees pursuant to the terms of the existing
leases.
COMPETITION
The Company faces competition from insurance companies, commercial
banks, credit companies, pension funds, private individuals, investment
companies, REITs and other real estate finance companies. The Company also faces
competition from institutions or investors that provide or arrange for other
types of financing through private or public offerings of equity or debt and
from traditional bank financings. The Company believes that its 20 years of
continuous market presence through the CPA(R) Partnerships, the experience of
its management and its ability to underwrite credit and asset-based investment
opportunities allow it to compete effectively.
EMPLOYEES
The Company has one employee. The Manager has over 60 officers,
employees and directors who will be involved in the operations of the Company.
INSURANCE
Under their leases, the Company's tenants will generally be
responsible for providing adequate insurance on the properties leased. The
Company believes the Properties are covered by adequate fire, flood and property
insurance provided by reputable companies. However, some of the Properties are
not covered by disaster-type insurance with respect to certain hazards (such as
earthquakes) for which coverage is not available or available only at rates
which, in the opinion of the Company, are prohibitive.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The individuals who serve as Directors and executive officers of the
Company are listed below.
<TABLE>
<CAPTION>
Name Office
---- ------
<S> <C>
Francis J. Carey Chairman of the Board, Chief Executive Officer and Director
Gordon F. DuGan President, Chief Acquisitions Officer and Director
Steven M. Berzin Vice Chairman, Chief Legal Officer and Director
Donald E. Nickelson Chairman of the Audit Committee and Director
William P. Carey Chairman of the Executive Committee and Director
Eberhard Faber, IV Director
Barclay G. Jones III Director
Dr. Lawrence R. Klein Director
Charles C. Townsend Jr. Director
Reginald Winssinger Director
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
Name Office
---- ------
<S> <C>
Claude Fernandez Executive Vice President--Financial Operations
John J. Park Executive Vice President, Chief Financial Officer
and Treasurer
H. Augustus Carey Senior Vice President and Secretary
Samantha K. Garbus Vice President--Asset Management
Susan C. Hyde Vice President--Shareholder Services
Robert C. Kehoe Vice President--Accounting
Edward V. LaPuma Vice President--Acquisitions
</TABLE>
The following is a biographical summary of the experience of the
Directors and executive officers of the Company:
Francis J. Carey, age 71, was elected in 1997 as Chairman, Chief
Executive Officer and a Director of the Company, at which time he resigned his
positions as a Director of CPA(R):10, CIP(TM) and CPA(R):12. He served as
President of W.P. Carey & Co. from 1987 to 1997 and as a Director from its
founding in 1973 until 1997. Prior to 1987, he was senior partner in
Philadelphia, head of the real estate department nationally and a member of the
executive committee of the Pittsburgh-based firm of Reed Smith Shaw & McClay
LLP, counsel for W.P. Carey & Co. and the Company. He served as a member of the
executive committee and Board of Managers of the Western Savings Bank of
Philadelphia from 1972 until its takeover by another bank in 1982, and is former
chairman of the Real Property, Probate and Trust Section of the Pennsylvania Bar
Association. Mr. Carey served as a member of the Board of Overseers of the
School of Arts and Sciences at the University of Pennsylvania from 1983 to 1990.
He has also served as a member of the Board of Trustees and executive committee
of the Investment Program Association since 1990 and on the Business Advisory
Council of the Business Council for the United Nations since 1994. He holds A.B.
and J.D. degrees from the University of Pennsylvania and completed executive
programs in corporate finance and accounting at Stanford University Graduate
School of Business and the Wharton School of the University of Pennsylvania. Mr.
Carey is the father of H. Augustus Carey and the brother of William P. Carey.
Gordon F. DuGan, age 31, was elected Executive Vice President and a
Managing Director of W.P. Carey & Co. in June 1997. Mr. DuGan rejoined W.P.
Carey & Co. as Deputy Head of Acquisitions in February 1997. Mr. DuGan was until
September 1995 a Senior Vice President in the Acquisitions Department of W.P.
Carey & Co. Mr. DuGan jointed W.P. Carey & Co. as Assistant to the Chairman in
May 1988, after graduating from the Wharton School at the University of
Pennsylvania where he concentrated in Finance. From October 1995 until February
1997, Mr. DuGan was Chief Financial Officer of Superconducting Core
Technologies, Inc., a Colorado-based wireless communications equipment
manufacturer.
Steven M. Berzin, age 47, was elected Executive Vice President, Chief
Financial Officer and a Managing Director of W.P. Carey & Co. in July 1997. From
1993 to 1997, Mr. Berzin was Vice President--Business Development of General
Electric Capital Corporation in the office of the Executive Vice President and,
more recently, in the office of the President, where he was responsible for
business development activities and acquisitions. From 1985 to 1992, Mr. Berzin
held various positions with Financial Guaranty Insurance Company, the last two
being Managing Director, Corporate Development and Senior Vice President and
Chief Financial Officer. Mr. Berzin was associated with the law firm of Cravath,
Swaine & Moore from 1977 to 1985 and from 1976 to 1977, he served as law clerk
to the Honorable Anthony M. Kennedy, then a United States Circuit Judge. Mr.
Berzin received a B.A. and M.A. in Applied Mathematics from Harvard University,
a B.A. in Jurisprudence and an M.A. from Oxford University and a J.D. from
Harvard Law School.
Donald E. Nickelson, age 65, was elected to the Board of Directors of
the Company in 1998 and serves as Chairman of the Board and a Director of
Greenfield Industries, Inc. and a Director of
36
<PAGE> 37
Allied Healthcare Products, Inc. Mr. Nickelson is Vice-Chairman and a Director
of the Harbor Group, a leverage buy-out firm. He is also a Director of Sugen
Corporation and D.T.I. Industries, Inc. and a Trustee of Mainstay Mutual Fund
Group. From 1986 to 1988, Mr. Nickelson was President of PaineWebber
Incorporated; from 1988 to 1990, he was President of the PaineWebber Group; and,
from 1980 to 1993 a Director. Prior to 1986, Mr. Nickelson served in various
capacities with affiliates of PaineWebber Incorporated and its predecessor firm.
From 1988 to 1989, Mr. Nickelson was a Director of a diverse group of
corporations in the manufacturing, service and retail sectors, including Wyndham
Baking Co., Inc., Hoover Group, Inc., Peebles, Inc. and Motor Wheel Corporation.
He is a former Chairman of National Car Rentals, Inc. Mr. Nickelson is also a
former Director of the Chicago Board Options Exchange and is the former Chairman
of the Pacific Stock Exchange.
William P. Carey, age 67, Chairman, President and Chief Executive
Officer of W.P. Carey & Co., has been active in lease financing since 1959 and a
specialist in net leasing of corporate real estate property since 1964. Before
founding W.P. Carey & Co., in 1973, he served as Chairman of the Executive
Committee of Hubbard, Westervelt & Mottelay (now Merrill Lynch Hubbard), head of
Real Estate and Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers),
head of Real Estate and Private Placements, Director of Corporate Finance and
Vice Chairman of the Investment Banking Board of duPont Glore Forgan Inc. A
graduate of the University of Pennsylvania's Wharton School of Finance, Mr.
Carey is a Governor of the National Association of Real Estate Investment Trusts
(NAREIT) and a Trustee of The Johns Hopkins University and of other educational
and philanthropic institutions. He has served for many years on the Visiting
Committee to the Economics Department of the University of Pennsylvania and
co-founded with Dr. Lawrence R. Klein the Economics Research Institute at the
University. Mr. Carey also serves as Chairman of the Board and Chief Executive
Officer of CPA(R):10, CIP(TM), CPA(R):12 and CPA(R):14. Mr. Carey is the brother
of Francis J.
Carey and the uncle of H. Augustus Carey.
Eberhard Faber, IV, age [61], was elected to the Board of Directors
of the Company in 1998 and is currently a Director of PNC Bank, N.A., Chairman
of the Board and Director of the newspaper Citizens Voice, a Director of
Ertley's Motorworld, Inc., Vice-Chairman of the Board of Kings College and a
Director of Geisinger Wyoming Valley Hospital. Mr. Faber served as Chairman and
Chief Executive officer of Eberhard Faber, Inc., from 1973 to 1987. Mr. Faber
also served as the Director of the Philadelphia Federal Reserve Bank, including
service as the Chairman of its Budget and Operations Committee from 1980 to
1986. Mr. Faber has served on the boards of several companies, including First
Eastern Bank from 1980 to 1993.
Barclay G. Jones III, age 37, was elected to the Board of Directors
of the Company in 1998 and is Vice Chairman and a Managing Director of W.P.
Carey & Co. Mr. Jones joined W.P. Carey & Co. as Assistant to the President in
July 1982, after his graduation from the Wharton School of the University of
Pennsylvania where he majored in Finance and Economics. Mr. Jones has served as
a Director of W.P. Carey & Co. since April 1992 and as a Director of the Wharton
School Club of New York. Mr. Jones is a director of CIP(TM) and CPA(R):14.
Dr. Lawrence R. Klein, age 77, was elected to the Board of Directors
of the Company in 1998 and is Benjamin Franklin Professor Emeritus of Economics
and Finance at the University of Pennsylvania and its Wharton School, having
joined the faculty of the University in 1958. He is a holder of earned degrees
from the University of California at Berkeley and the Massachusetts Institute of
Technology and has been awarded the Alfred Nobel Memorial Prize in Economic
Sciences, as well as a number of honorary degrees. Founder of Wharton
Econometric Forecasting Associates, Inc., Dr. Klein has been counselor to
various corporations, governments and government agencies, including the Federal
Reserve Board and the President's Council of Economic Advisers. Dr. Klein joined
W.P. Carey & Co. in 1984 as Chairman of the Economic Policy Committee and as a
Director.
Charles C. Townsend, Jr., age 70, was elected to the Board of
Directors of the Company in 1998 and currently is an Advisory Director of Morgan
Stanley & Co., having held such position since
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<PAGE> 38
1979. Mr. Townsend was a Partner and a Managing Director of Morgan Stanley & Co.
from 1963 to 1978 and served as Chairman of Morgan Stanley Realty Corporation
from 1977 to 1982. Mr. Townsend holds a B.S.E.E. from Princeton University and
an M.B.A. from Harvard University. Mr. Townsend serves as Director of CIP(TM),
CPA(R):12 and CPA(R):14
Reginald Winssinger, age [55], was elected to the Board of Directors
of the Company in 1998 and is currently Chairman of the Board and Director of
Horizon Real Estate Group, Inc. Mr. Winssinger has managed portfolios of
diversified real estate assets exceeding $500 million throughout the United
States for more than 20 years. Mr. Winssinger is active in the planning and
development of major land parcels and has developed 20 commercial properties.
Mr. Winssinger is a native of Belgium with more than 25 years of real estate
practice, including 10 years based in Brussels, overseeing appraisals,
construction and management. Mr. Winssinger holds a B.S. in Geography from the
University of California at Berkeley and received a degree in Appraisal and
Survey in Belgium. Mr. Winssinger presently serves as Honorary Belgium Consul to
the State of Arizona, a position he has held since 1991.
Claude Fernandez, age 45, is a Managing Director, Executive Vice
President and Chief Administrative Officer of W.P. Carey & Co. Mr. Fernandez
joined W.P. Carey & Co. as Assistant Controller in March 1983, was elected
Controller in July 1983, a Vice President in April 1986, a First Vice President
in April 1987, a Senior Vice President in April 1989 and Executive Vice
President in April 1991. Prior to joining W.P. Carey & Co., Mr. Fernandez was
associated with Coldwell Banker, Inc. in New York for two years and with Arthur
Andersen & Co. in New York for over three years. Mr. Fernandez, a Certified
Public Accountant, received a B.S. in Accounting from New York University in
1975 and an M.B.A. in Finance from Columbia University Graduate School of
Business in 1981.
John J. Park, age 33, is a Senior Vice President, Treasurer and a
Managing Director of W.P. Carey & Co. Mr. Park became a First Vice President of
W.P. Carey & Co. in April 1993 and a Senior Vice President in October 1995. Mr.
Park joined W.P. Carey & Co. as an Investment Analyst in December 1987 and
became a Vice President in July 1991. Mr. Park received B.S. in Chemistry from
Massachusetts Institute of Technology in 1986 and an M.B.A. in Finance from the
Stern School of New York University in 1991.
H. Augustus Carey, age 40, is a Senior Vice President and a Managing
Director at W.P. Carey & Co. He returned to W.P. Carey & Co. as a Vice President
in August 1988 and was elected a First Vice President in April 1992. Mr. Carey
previously worked for W.P. Carey & Co. from 1979 to 1981 as Assistant to the
President. From 1984 to 1987, Mr. Carey served as a loan officer in the North
American Department of Kleinwort Benson Limited in London, England. He received
his A.B. in Asian Studies from Amherst College in 1979 and a M.Phil. in
Management Studies from Oxford University in 1984. He is the son of Francis J.
Carey and the nephew of William P. Carey.
Samantha K. Garbus, age 30, is a Vice President and a Director of
Property Management of W.P. Carey & Co. Ms. Garbus became a Second Vice
President of W.P. Carey & Co. in April 1995 and a Vice President in April 1997.
Ms. Garbus joined W.P. Carey & Co. as a Property Management Associate in January
1992. Ms. Garbus received a B.A. in History from Brown University in 1990 and an
M.B.A. from the Stern School of New York University in January 1997.
Susan C. Hyde, age 29, is a Vice President and a Director of Investor
Relations of W.P. Carey & Co. Ms. Hyde joined W.P. Carey & Co. in 1990, became a
Second Vice President in April 1995 and a Vice President in April 1997. Ms. Hyde
graduated from Villanova University in 1990 where she received a B.S. in
Business Administration with a concentration in marketing and a B.A. in English.
Robert C. Kehoe, age 37, a Vice President of W.P. Carey & Co., joined
W.P. Carey & Co. as a Senior Accountant in 1987. Mr. Kehoe became a Second Vice
President of W.P. Carey & Co. in
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<PAGE> 39
April 1992 and a Vice President in July 1997. Prior to joining W.P. Carey & Co.,
Mr. Kehoe was associated with Deloitte Haskins & Sells for three years and was
Manager of Financial Controls at CBS Educational and Professional Publishing for
two years. Mr. Kehoe received his B.S. in Accounting from Manhattan College in
1982 and his M.B.A. from Pace University in 1993.
Edward V. LaPuma, age 25, is a Vice President and Research Officer
for W.P. Carey & Co. Mr. LaPuma joined W.P. Carey & Co. as an Assistant to the
Chairman in July 1995, became a Second Vice President in July 1996 and a Vice
President in April 1997. A graduate of the University of Pennsylvania, Mr.
LaPuma received a B.A. in Global Economic Strategies from The College of Arts
and Sciences and a B.S. in Economics with a concentration in Finance from the
Wharton School.
DIRECTORS AND PRINCIPAL OFFICERS OF THE MANAGER
The Directors and principal officers of the Manager who will have
responsibility for providing services to the Company are as follows:
<TABLE>
<CAPTION>
Name Office
---- ------
<S> <C>
William P. Carey Chairman of the Board and Director
Barclay G. Jones III President and Director
Frank J. Hoenemeyer Vice Chairman of the Investment Committee and Director
Dr. Lawrence R. Klein Chairman of the Economic Policy Committee and Director
George E. Stoddard Chairman of the Investment Committee and Director
Steven M. Berzin Executive Vice President, Chief Financial Officer,
Chief Legal Officer and Director
Gordon F. DuGan Executive Vice President
Claude Fernandez Executive Vice President
H. Augustus Carey Senior Vice President and Secretary
Anthony S. Mohl Senior Vice President--Property Management
John J. Park Senior Vice President and Treasurer
Michael D. Roberts First Vice President and Controller
Gordon J. Whiting First Vice President--Acquisitions
</TABLE>
Information regarding Messrs. W. P. Carey, Jones, Klein, Berzin,
DuGan, Fernandez, Park and H.A. Carey is set forth under "Management--Directors
and Principal Officers of the Company."
George E. Stoddard, age 81, was until 1979 Officer-in-Charge of the
Direct Placement Department of The Equitable Life Assurance Society of the
United States ("Equitable") with responsibility for all activities related to
Equitable's portfolio of corporate investments acquired through direct
negotiation. Mr. Stoddard was associated with Equitable for over 30 years. He
holds an A.B. from Brigham Young University, an M.B.A. from Harvard Business
School and an LL.B. from Fordham University Law School. Mr. Stoddard also serves
as Managing Director of W.P. Carey & Co.
Frank J. Hoenemeyer, age 78, is the former Vice Chairman and Chief
Investment Officer of the Prudential Insurance Company of America, where he was
responsible for Prudential's real estate and securities portfolio. Mr.
Hoenemeyer graduated with a B.S. in Economics from Xavier University,
Cincinnati, Ohio and an M.B.A. from the Wharton School of the University of
Pennsylvania. Mr. Hoenemeyer serves on the Boards of American International
Group and Mitsui Trust Bank (U.S.A.) and is formerly a director of Corporate
Property Investors, a private real estate investment trust. He has also been
active in community affairs and at present is chairman of the Turrell Fund and a
trustee and chairman of the Finance Committee of the Robert Wood Johnson
Foundation.
Anthony S. Mohl, age 36, is a Senior Vice President of W.P. Carey &
Co. Mr. Mohl joined W.P. Carey & Co. as Assistant to the President in September
1987 after receiving an M.B.A. from the
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<PAGE> 40
Columbia University Graduate School of Business and became a Second Vice
President in January 1990. Mr. Mohl was employed as an analyst in the strategic
planning group of Kurt Salmon Associates after receiving a B.A. in History from
Wesleyan University.
Michael D. Roberts, age 46, a First Vice President and the Controller
of W.P. Carey & Co., joined W.P. Carey & Co. in April 1989 as a Second Vice
President and Assistant Controller, was named a Vice President and the
Controller in October 1989 and a First Vice President in July 1990. From August
1980 to February 1983 and from September 1983 to April 1989, he was employed by
Coopers & Lybrand, LLP and held the position of Audit Manager at the time of his
departure. A Certified Public Accountant, Mr. Roberts received a B.A. in
Sociology from Brandeis University and an M.B.A. from Northeastern University.
Gordon J. Whiting, age 32, is a First Vice President of W.P. Carey &
Co. Mr. Whiting became a First Vice President of W.P. Carey & Co. in April 1997
and a Vice President in October 1995. Prior to joining W.P. Carey & Co. as a
Second Vice President in September 1994, after Mr. Whiting received an M.B.A.
from the Columbia University Graduate School of Business where he concentrated
in finance. Mr. Whiting founded an import/export Company based in Hong Kong
after receiving a B.S. in Business Management and Marketing from Cornell
University.
TERMS OF DIRECTORS OF THE COMPANY
Pursuant to the Organizational Documents, the Board of Directors of
the Company is divided into three classes serving staggered three-year terms.
The terms of the first, second and third classes will expire in 1998, 1999 and
2000, respectively. The term of Messrs. Berzin, DuGan and Winssinger will expire
in 1998; the term of Messrs. F. Carey, Faber and Jones will expire in 1999; and
the term of Messrs. W. Carey, Klein, Townsend and Nickelson will expire in 2000.
Directors for each class will be chosen for a three-year term upon the
expiration of the current class' term beginning in 1998. The staggered terms for
Directors may affect the holder of Listed Shares ability to change control of
the Company, even if a change of control were in the interests of the
Shareholders. An individual who has been elected to fill a vacancy will hold
office only for the unexpired term of the Director being replaced.
The Organizational Documents provide that the number of Directors of
the Company will be fixed by the Board of Directors, but must consist of not
fewer than five nor more than 15 members. One class of Directors will be elected
annually by the affirmative vote of the holders of at least a majority of the
Listed Shares present at a meeting at which a quorum is present. Directors can
be removed from office only by the affirmative vote of the holders of at least a
majority of the Listed Shares. In addition, any vacancy (other than a vacancy
created by an increase in the number of Directors) may be filled, at any regular
meeting or at any special meeting of the Directors called for that purpose, by
the affirmative vote of a majority of the remaining Directors, though less than
a quorum. A vacancy created by an increase in the number of Directors shall be
filled by a majority of the entire Board of Directors. Accordingly, the Board of
Directors could temporarily prevent any holder of Listed Shares from enlarging
the Board of Directors and filling the new Directorships with such holders' own
nominees.
The Board of Directors expects to hold meetings at least quarterly
and may take action on behalf of the Company by unanimous written consent
without a meeting. Directors may participate in meetings by conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other.
COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY
Executive Committee. The Executive Committee may authorize the
execution of contracts and agreements, including those related to the borrowing
of money by the Company. The Executive
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<PAGE> 41
Committee will exercise, during intervals between meetings of the Board of
Directors and subject to ertain limitations, all of the powers of the full Board
of Directors and will monitor and advise the Board of Directors on strategic
business planning for the Company.
Audit Committee. The Audit Committee has been established to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls. Messrs. Nickelson
(Chairman), Townsend and Faber serve on the Audit Committee.
COMPENSATION OF THE BOARD OF DIRECTORS
The Company intends to pay its Directors who are not officers of the
Company fees for their services as Directors. Such Directors will receive annual
compensation of $35,000. Initially, compensation will be paid in the form of
restricted Listed Shares. This compensation may be changed by the Board of
Directors. Officers or employees of the Company or Manager who are Directors
will not be paid any director fees.
EXECUTIVE COMPENSATION
The Company was organized as a Delaware limited liability company in
October 1996. The following table sets forth the base compensation to be awarded
to Francis J. Carey, the Company's Chief Executive Officer during 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Annual Compensation
Salary(1) Awards & Options(2)
-------- -------
<S> <C> <C>
Francis J. Carey $250,000 121,000
Chairman & Chief Executive Officer
</TABLE>
(1) Amount specified does not include bonuses that may be paid.
(2) On January 1, 1998, Mr. Carey received options to purchase 38,500
Listed Shares at $20 per share and a grant of 7,500 Listed Shares as
part of his annual compensation. The transferability of the Listed
Shares will be restricted. Mr. Carey also received a one-time grant
of options to purchase 75,000 Listed Shares at $20 per Listed Share.
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<PAGE> 42
OPTION GRANT IN FISCAL YEAR 1998(1)
<TABLE>
<CAPTION>
Percent Potential
of Realizable Value
Total at Assumed Annual
Options Rate of Share
Granted to Exercise Price Appreciation
Options Employers in Price per Expiration for Option Term
-----------------------
Granted(1) Fiscal Year Share Date 5% 10%
---------- ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Francis J. Carey 113,500 100% $20 01/01/08 $1,427,591 $3,617,795
</TABLE>
* Expiration Date will be 10 years from the date of grant, which will
be the date the Consolidation is completed.
(1) The options will become exercisable for one-third of the covered
shares on each of the first, second and third anniversary of the date
of grant.
1997 LISTED SHARE INCENTIVE PLAN
The Board of Directors have adopted and the initial shareholders of
the Company have approved the 1997 Plan for the purpose of attracting and
retaining executive officers, Directors and employees. The 1997 Plan will be
administered by the Compensation Committee of the Board of Directors or its
delegate. The Compensation Committee may not delegate its authority with respect
to grants and awards to individuals subject to Section 16 of the Exchange Act.
As used in this summary, the term "Administrator" means the Compensation
Committee or its delegate, as appropriate.
Officers and other employees of the Company and its Affiliates
generally will be eligible to participate in the 1997 Plan. The Administrator
selects the individuals who will participate in the 1997 Plan ("Participants").
The 1997 Plan authorizes the issuance of up to 700,000 Listed Shares.
The Plan provides for the grant of (i) share options which may or may not
qualify as incentive stock options under Section 422 of the Code, (ii)
performance shares, (iii) dividend equivalent rights ("DERs"), issued alone or
in tandem with options, and (iv) restricted shares, which are contingent upon
the attainment of performance goals or subject to vesting requirements or other
restrictions. The Administrator shall prescribe the conditions which must occur
for restricted shares or performance shares to vest and incentive awards to be
earned.
In connection with the grant of options under the 1997 Plan, the
Administrator will determine the option exercise period and any vesting
requirements. The initial options granted under the Plan will have 10-year terms
and will become exercisable for one-third of the covered shares (disregarding
fractional shares, if any) on the first and second anniversaries of the date of
grant and, for the balance of the shares, on the third anniversary of the date
of grant subject to acceleration of vesting upon a change in control of the
Company (as defined in the 1997 Plan). An option may be exercised for any number
of whole shares less than the full number for which the option could be
exercised. A Participant will have no rights as a shareholder with respect to
Listed Shares subject to his or her option until the option is exercised. If a
Participant is terminated due to dishonesty or similar reasons, all unexercised
options, whether vested or unvested, will be forfeited. Any Listed Shares
subject to options which are forfeited (or expire without exercise) pursuant to
the vesting requirement or other terms established at the time of grant will
again be available for grant under the 1997 Plan. The exercise price of options
granted under the 1997 Plan may not be less than the fair market value of the
Listed Shares on the date of grant. Payment of the exercise price of an option
granted under the 1997 Plan may be made in cash, cash equivalents acceptable to
the Compensation Committee or, if permitted by the option agreement, by
exchanging Common Shares having a fair market value equal to the option exercise
price.
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<PAGE> 43
On January 1, 1998, options for 113,500 Listed Shares and 7,500
restricted Listed Shares were granted to the sole employee of the Company. The
options have an exercise price equal to $20 per Listed Share.
No option, DER, restricted Listed Shares or performance shares may be
granted under the 1997 Plan after December 31, 2006. The Board may amend or
terminate the 1997 Plan at any time, but an amendment will not become effective
without shareholder approval if the amendment materially (i) increases the
number of shares that may be issued under the 1997 Plan (other than an
adjustment or automatic increase described above), (ii) changes the eligibility
requirements or (iii) increases the benefits that may be provided under the 1997
Plan. No amendment will affect a Participant's outstanding award without the
Participant's consent.
INCENTIVE COMPENSATION
The Company may award incentive compensation to employees of the
Company and its subsidiaries, including incentive awards under the 1997 Plan
that may be earned on the attainment of performance objectives stated with
respect to criteria described above or other performance-related criteria. The
Compensation Committee may, in its discretion, approve bonuses to executive
officers and certain other officers and key employees based on criteria which
may include achievement of certain performance objectives.
THE NON-EMPLOYEE DIRECTOR PLAN
The Board of Directors have adopted, and the initial Shareholders
have approved, the Non-Employee Directors' Plan to provide incentives to attract
and retain Independent Directors.
The Directors' Plan provides for the grant of options and the award
of Listed Shares to each eligible Director of the Company. No Director who is an
employee of the Company or an employee of the Manager is eligible to participate
in the Non-Employee Directors' Plan. The Non-Employee Directors' Plan authorizes
the issuance of up to 300,000 Listed Shares.
Pursuant to the Director's Plan, each Independent Director who was a
member of the Board of Directors on the first day of trading of the Listed
Shares was granted an option to purchase 4,000 Listed Shares at an exercise
price of $20 per Listed Share and 1,250 Listed Shares. The exercise price of
options granted under the Directors' Plan may be paid in cash, acceptable cash
equivalents, Listed Shares or a combination thereof. Options issued under the
Directors' Plan are exercisable for ten years from the date of grant.
The option granted under the Directors' Plan shall become exercisable
for 1,333 Listed Shares on each of the first and second anniversaries of the
date of grant and for 1,334 Listed Shares on the third anniversary of the date
of grant provided that the Director is a member of the Board of Directors on
such anniversary date. To the extent an option has become exercisable under the
Directors' Plan, it may be exercised whether or not the Director is a member of
the Board on the date or dates of exercise. An option may be exercised for any
number of whole shares less than the full number of which the option could be
exercised. A Director will have no rights as a Shareholder with respect to
Listed Shares subject to his option, until the option is exercised.
In subsequent annual periods, each Independent Director may also
receive quarterly an award of options to purchase Listed Shares or Restricted
Listed Shares. Awards will be made on each April 1, July 1, October 1 and
January 1 (each date, a "Quarterly Award Date") during the term of the
Directors' Plan. Each Independent Director may receive, on each Quarterly Award
Date on which he is a member of the Board of Directors, the number of options to
purchase Listed Shares or restricted Listed Shares having a fair market value on
that date that as nearly as possible equals, but does not exceed $6,250.
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<PAGE> 44
Restrictions on the exercisability of the options shall lapse or vest over a
three year period. The transfer of Listed Shares granted to Directors may be
restricted, and the restriction will lapse as specified at the time of the
grant.
The terms of outstanding options, the number of Listed Shares for
which options will thereafter be awarded and the number of Listed Shares to be
awarded on a Quarterly Award Date shall be subject to adjustment in the event of
a share dividend, share split, combination, reclassification, recapitalization
or other similar event.
The Directors' Plan provides that the Board of Directors may amend or
terminate the Directors' Plan, but the Directors' Plan may not be amended more
than once every six months, other than to comply with changes in the Code, ERISA
or the rules thereunder. An amendment will not become effective without
shareholder approval if the amendment materially changes the eligibility
requirements or increases the benefits that may be provided under the Directors'
Plan. No options for Listed Shares may be granted, and no Listed Shares may be
awarded under the Directors' Plan after December 31, 2006.
THE MANAGER
Carey Management LLC, the Manager, will serve as the manager of the
Company. The Manager is a limited liability company and its members are W.P.
Carey & Co., CCP, Seventh Carey and Eighth Carey. The Company has entered into a
management agreement with the Manager (the "Management Agreement") pursuant to
which the Manager will manage the Company's day-to-day affairs. This will
include the purchase and disposition of Company investments and the management
of the Properties. The Manager and its Affiliates will receive certain fees and
compensation pursuant to the Management Agreement. See "COMPENSATION,
REIMBURSEMENT AND DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER."
SHAREHOLDINGS
The Manager owns 661,718 Listed Shares, which constitutes
approximately 2.76 percent of the outstanding Listed Shares as of such date.
Furthermore, any resale of the 661,718 Listed Shares that the Manager will own
and the resale of any Shares which may be acquired by Affiliates of the Company
are subject to the provisions of Rule 144 promulgated under the Securities Act,
which limits the number of Shares that may be sold at any one time and the
manner of such resale. There is no limitation on the ability of the Manager or
its Affiliates to resell any Shares they may acquire in the future.
In addition, the Manager has received Warrants to purchase 2,284,800
Listed Shares at $21 per Listed Share and 725,930 Listed Shares at $23 per
Listed Share.
MANAGEMENT DECISIONS
The primary responsibility for the selection of Company investments
and the negotiation for such investments will reside in Francis J. Carey,
Chairman and Chief Executive Officer of the Company and Steven M. Berzin,
William P. Carey, Gordon F. DuGan, Barclay G. Jones III and George E. Stoddard,
all of whom are officers or Directors of the Manager. Each potential Company
investment will be submitted for review to the Investment Committee. George E.
Stoddard, Chairman, Frank J. Hoenemeyer and Lawrence R. Klein currently serve as
members of the Investment Committee. The Board of Directors of the Manager has
empowered the Investment Committee to authorize and approve Company investments
on behalf of the Manager. However, the Board of Directors of the Manager retains
ultimate authority to authorize and approve Company investments on behalf of the
Manager and may make such investments on behalf of the Company without the
approval of, and irrespective of any
44
<PAGE> 45
adverse recommendation by, the Investment Committee or any other Person, except
the Board of Directors of the Company.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS OF THE COMPANY
Pursuant to the Organizational Documents, no Directors or officers of
the Company will be liable, responsible or accountable in damages or otherwise
to the Company or any of the Shareholders for any act or omission performed or
omitted by such Director or officer, except in the case of fraudulent or illegal
conduct of such person.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
According to the Organizational Documents, all Directors and officers
of the Company are entitled to indemnification from the Company. See "FIDUCIARY
RESPONSIBILITY AND INDEMNIFICATION--Indemnification of Directors and Officers of
the Company."
MANAGEMENT SERVICES PROVIDED BY MANAGER
The Manager provides both strategic and day-to-day management for the
Company, including acquisition services, research, investment analysis, asset
management, capital funding services, disposition of assets and administrative
services. The Manager will also provide office and other facilities for the
Company's needs. Through the Manager and its Affiliates, the Company will
function as a fully integrated operating company.
The Board has authorized the Manager to make investments in any
property on behalf of the Company. Certain types of transactions, however,
require the prior approval of the Board and a majority of the Independent
Directors, including the following: (i) the allocation of interests in
investments made through joint venture arrangements with Affiliates of the
Manager that are public companies, (ii) the terms of any investment made with
the Manager or any affiliate of the Manager that is not a public company, (iii)
transactions that present issues which involve conflicts of interest for the
Manager (other than conflicts involving the payment of fees or the reimbursement
of expenses or joint investments) and (iv) the lease of assets to the Manager,
any Director or an Affiliate of the Manager.
The Company will reimburse the Manager for all of the costs that it
incurs in connection with the services it provides to the Company, including,
but not limited to (i) the cost of goods and services used by the Company and
obtained from entities not affiliated with the Manager, including brokerage fees
paid in connection with the purchase and sale of securities, (ii) administrative
services (including personnel costs; provided, however, that no reimbursement
shall be made for costs of personnel to the extent that such personnel are used
in transactions for which the Manager receives a separate transactional fee),
(iii) rent, depreciation, leasehold improvement costs, utilities or other
administrative items and (iv) Acquisition Expenses, which are defined to include
expenses related to the selection and acquisition of Properties.
The term of the Management Agreement ends on December 31, 1998 and
thereafter will be automatically renewed for successive one-year periods, unless
either party shall give the other party notice of non-renewal not less than 60
days before the end of any such period. Additionally, the Management Agreement
may be terminated (i) immediately by the Company for "Cause" or upon the
bankruptcy of the Manager or a material breach of the Management Agreement by
the Manager or (ii) immediately with "Good Reason" by the Manager. "Good Reason"
is defined in the Management Agreement to mean either (i) any failure to obtain
a satisfactory agreement from any successor to the Company to assume and agree
to perform the Company's obligations under the Management Agreement or (ii) any
material breach of the Management Agreement of any nature whatsoever by the
Company. "Cause" is defined in the Management Agreement to mean fraud, criminal
conduct, willful
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<PAGE> 46
misconduct or willful or negligent breach of fiduciary duty by the Manager or a
breach of the Management Agreement by the Manager.
Following the termination of the Management Agreement by the Company,
the Manager shall be entitled to receive payment of any earned, but unpaid,
compensation and expense reimbursements accrued as of such date and an incentive
fee based on the appraised value of the properties owned by the CPA(R)
Partnership. If the Management Agreement is terminated in connection with a
Change of Control of the Company by the Company for any reason other than Cause
or by the Manager for Good Reason, the Manager also shall be entitled to the
payment of the Termination Fee. The Manager shall be entitled to receive all
accrued, but unpaid, compensation and expense reimbursements and the Termination
Fee in cash within 30 days of the effective date of the termination.
The Manager and its Affiliates expect to engage in other business
ventures, and, as such, their resources will not be dedicated exclusively to the
business of the Company. However, pursuant to the Management Agreement, the
Manager must devote sufficient resources to the administration of the Company to
discharge its obligations. The Management Agreement is not assignable or
transferable by either party without the consent of the other party, except that
the Manager may assign the Management Agreement to an Affiliate that has a net
worth of $3,000,000 or more or for whom the Manager agrees to guarantee its
obligations to the Company, and either the Manager or the Company may assign or
transfer the Management Agreement to a successor entity.
The Manager or its Affiliates will be paid certain fees in connection
with services provided to the Company. In the event the Management Agreement is
not renewed by the Company or is terminated without Cause by the Company or with
Good Reason by the Manager, the Manager will be paid all accrued and unpaid fees
and expense reimbursements and, in certain circumstances, will also be paid a
Termination Fee. The Company will not reimburse the Manager or its Affiliates
for services for which the Manager or its Affiliates are entitled to
compensation in the form of a separate fee. See "COMPENSATION, REIMBURSEMENT AND
DISTRIBUTIONS TO THE GENERAL PARTNERS AND MANAGER."
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION
INDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY
The Directors and officers of the Company, in exercising the powers
and responsibilities of managing the Company, owe the Company and its
Shareholders a duty of care and a duty of loyalty. However, under the so-called
"business judgment rule," which could apply by analogy to the Directors and
officers of the Company, the Directors and officers of the Company may not be
liable for errors in judgment or other acts or omissions made in good faith
which are done in a manner they believe to be in the best interests of the
Company and are performed with the care that an ordinarily prudent person in a
like position will use under similar circumstances. In the event any legal
action were brought against the Directors or officers of the Company, they may
be able to assert defenses based on the business judgment rule.
According to the Organizational Documents, all Directors and officers
of the Company are entitled to indemnification from the Company for any loss,
damage or claim (including any reasonable attorney's fees incurred by such
person in connection therewith) due to any act or omission made by him, except
in the case of fraudulent or illegal conduct of such person, provided that any
indemnity shall be paid out of, and to the extent of, the assets of the Company
only (or any insurance proceeds available therefor) and no Shareholder shall
have any personal liability on account thereof. The termination of any action,
suit or proceeding by judgment, order, settlement or conviction or upon a plea
of nolo contendere or its equivalent, shall not of itself create a presumption
that the Director or officer acted fraudulently or illegally.
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<PAGE> 47
The indemnification provided by the Organizational Documents is not
deemed to be exclusive of any other rights to which those indemnified may be
entitled under any agreement, vote of Shareholders or Directors or otherwise and
shall inure to the benefit of the heirs, executors and administrators of such a
person. Any repeal or modification of the indemnification provisions contained
in the Organizational Documents will not adversely affect any right or
protection of a Director or officer of the Company existing at the time of such
repeal or modification.
The Company has entered into indemnification agreements with each of
its Directors. The indemnification agreements require, among other things, that
the Company indemnify its officers and Directors to the fullest extent permitted
by Delaware law and advance to the Directors all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. The Company must also indemnify and advance all expenses incurred by
officers and Directors seeking to enforce their rights under the indemnification
agreements and cover officers and Directors under the Company's Directors and
officers liability insurance. Although the form of indemnification agreement
offers substantially the same scope of coverage afforded by provisions in the
Organizational Documents, it provides greater assurance to officers and
Directors that indemnification will be available, because, as a contract, it
cannot be modified unilaterally in the future by the Board of Directors or by
the Shareholders to eliminate the rights that it provides.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to Directors, officers or persons controlling
the Company pursuant to any provisions described in this Consent
Solicitation/Prospectus, in the opinion of the Commission, such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
DIRECTORS AND OFFICERS INSURANCE
According to the Organizational Documents, the Company may, if the
Directors of the Company deem it appropriate in their sole discretion, obtain
insurance for the benefit of the Company's Directors and officers, relating to
the liability of such persons. The Directors and officers liability insurance
would insure (i) the officers and Directors of the Company from any claim
arising out of an alleged wrongful act by such persons while acting as Directors
and officers of the Company and (ii) the Company to the extent that it has
indemnified the Directors and officers for such loss.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of Listed Shares as of January 21, 1998 by all Directors
and executive officers of the Company as a group. The business address of the
individuals listed is 50 Rockefeller Plaza, New York, NY 10020.
<TABLE>
<CAPTION>
Number of Listed Number Attributable Percent of Percent of
Shares Beneficially to Options Exercisable Class Class
Owned as of January Within 60 Days of Before After
Name 21, 1998 (1) January 21, 1998 Offering* Offering*
---- ------------ ---------------- --------- ---------
<S> <C> <C> <C> <C>
Francis J. Carey 12,080 --
Steven M. Berzin -- --
Gordon F. DuGan -- --
William P. Carey 793,956 -- 3.31 2.79
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
Number of Listed Number Attributable Percent of Percent of
Shares Beneficially to Options Exercisable Class Class
Owned as of January Within 60 Days of Before After
Name 21, 1998 (1) January 21, 1998 Offering* Offering*
---- ------------ ---------------- --------- ---------
<S> <C> <C> <C> <C>
Eberhard Faber, IV 1,250 --
Barclay G. Jones III 323 --
Lawrence R. Klein 1,250 --
Donald E. Nickelson 8,173 --
Charles C. Townsend 1,250 --
Reginald Winssinger 1,250 --
All Executive 826,186 -- 3.45 2.90
Officers and Directors
as a Group (17
persons)
</TABLE>
*Less than one percent unless otherwise indicated.
(1) Beneficial ownership has been determined in accordance with the rules
of the Securities and Exchange Commission. Except as noted, and
except for any community property interests owned by spouses, the
listed individuals have sole investment power and sole voting power
as to all Listed Shares which they are identified as being the
beneficial owners.
DESCRIPTION OF LISTED SHARES
The following summary of certain provisions of the Organizational
Documents does not purport to be complete. Reference is made to the full text of
the Organizational Documents for their entire terms.
The Company will pay distributions to holders of the Listed Shares
when declared by its Board of Directors out of funds legally available therefor.
While the initial policy of the Company will be to make quarterly distributions
to the holders of Listed Shares, the level and timing of distributions will
depend on, among other things, the cash flow and earnings of the Company, its
financial condition, debt covenants, reinvestment policies and such other
factors as the Board of Directors deems relevant. Distributions to the holders
of Listed Shares may be subject to preferences on distributions on securities
which may be issued by the Company in the future. The Company does not intend to
distribute to the holders of Listed Shares net cash receipts from sales or
refinancings of assets, but, instead, to retain such funds to make new
investments or for other purposes, taking into account the income tax impact, if
any, of reinvesting such proceeds rather than distributing them. These policies
are within the discretion of the Board of Directors and may be changed from time
to time. It is expected that the Board of Directors, in setting the level of the
distributions to the holders of Listed Shares, will take into account, among
other things, the Company's financial performance, need of funds for working
capital reserves, capital improvements, tax consequences to holders of Listed
Shares and new investment opportunities. See "DISTRIBUTION POLICY."
The Listed Shares are not redeemable, except pursuant to certain
anti-takeover provisions adopted by the Company. See "Restricting Changes in
Control and Business Combination Provisions."
Upon the liquidation of the Company, the holders of Listed Shares
will be entitled to share ratably in any assets remaining after satisfaction of
obligations to creditors, payment of expenses and
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<PAGE> 49
any liquidation preferences on any Shares that may then be outstanding.
Therefore, holders of Listed Shares will be entitled to a distribution based
proportionately on their ownership of the Company.
Any matter submitted to the holders of Listed Shares generally
requires the affirmative vote of holders of a majority of the Listed Shares for
approval. There are no cumulative voting rights with respect to the election of
Directors. Listed Shareholders have voting rights with respect to (i) the
election and removal of Directors, (ii) the sale or disposition of all or
substantially all of the assets of the Company at any one time (other than sales
or dispositions, the proceeds of which are needed to redeem the Partnership
Shares), (iii) the merger or consolidation of the Company (where the Company is
not the surviving entity), (iv) the dissolution of the Company and (v) certain
anti-takeover provisions. The holders of Listed Shares will be entitled to one
vote for each Listed Share owned. Any action that may be taken at a meeting may
be taken by written consent in lieu of a meeting executed by holders of Shares
sufficient to authorize such action at a meeting. At any meeting, a holder of
Listed Shares may vote in person, by written proxy or by a signed writing
directing the manner in which his vote should be cast. Proxies are revocable at
the pleasure of the holder of Listed Shares executing it.
No holders of any Listed Shares have any preemptive rights or any
rights to convert their Listed Shares into any other securities of the Company.
Since a public market for the Listed Shares is a condition to the consummation
of the Consolidation, the Company has applied for listing of the Listed Shares
on the NYSE.
RESTRICTING CHANGES IN CONTROL AND BUSINESS COMBINATION PROVISIONS
Certain provisions of the Organizational Documents and the
Shareholder Rights Plan could make more difficult a change of control of the
Company by means of a tender offer, a proxy contest or otherwise. These
provisions are intended to enhance the likelihood of continuity and stability in
the composition of the Company's Board of Directors and management and in the
policies formulated by the Board of Directors and to discourage an unsolicited
takeover of the Company, if the Board of Directors determines that such takeover
is not in the best interests of the Company and its Shareholders. However, these
provisions could have the effect of discouraging certain attempts to acquire the
Company or remove incumbent management, even if some or a majority of
Shareholders deemed such an attempt to be in their best interests.
Additional Classes and Series of Shares. The Organizational Documents
of the Company authorize the Board of Directors (subject to certain
restrictions) to provide for the issuance of Shares in other classes or series,
to establish the number of Shares in each class or series and to fix the
preference, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications or terms or conditions of
redemption of such class or series. The Company believes that the ability of the
Board of Directors to issue one or more classes or series will provide the
Company with increased flexibility in structuring possible future financing and
acquisitions and in meeting other needs which might arise. The additional
classes or series, as well as the Listed Shares and Partnership Shares, will be
available for issuance without further action by the Company's Shareholders,
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 issue a class or series that could, depending
on the terms of such class or series, impede a merger, tender offer or other
transaction that some or a majority of the Shareholders might believe to be in
their best interests or in which the Shareholders might receive a premium for
their Shares over the then current market price of such Shares.
Staggered Board of Directors. Pursuant to the Organizational
Documents, the Board of Directors of the Company is divided into three classes,
serving staggered three-year terms. See "MANAGEMENT." The terms of the first,
second and third classes will expire in 1998, 1999 and 2000, respectively.
Directors for each class will be chosen for a three-year term upon the
expiration of the current class's term, beginning in 1998. The staggered terms
for Directors may affect the
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<PAGE> 50
Company's Shareholders' ability to change control of the Company even if a
change of control were in the interests of the Shareholders. An individual who
has been elected to fill a vacancy will hold office only for the unexpired term
of the Director he is replacing.
Number of Directors; Removal; Filling Vacancies. The Organizational
Documents provide that the number of Directors of the Company will be fixed by
the Board of Directors, but must consist of not fewer than five nor more than 15
Directors. After consummation of the Consolidation, the Board will consist of 11
Directors. One class of Directors will be elected annually by the affirmative
vote of the holders of at least a majority of the then-outstanding Listed Shares
present at a meeting at which a quorum is present. Directors can be removed from
office only by the affirmative vote of the holders of at least a majority of the
then-outstanding Listed Shares. In addition, any vacancy (other than a vacancy
created by an increase in the number of Directors) may be filled, at any regular
meeting or at any special meeting of the Directors called for that purpose, by
the affirmative vote of a majority of the remaining Directors, though less than
a quorum. A vacancy created by an increase in the number of Directors shall be
filled by a majority of the entire Board of Directors.
Business Combination Provisions. The Organizational Documents of the
Company contain certain business combination provisions (the "Business
Combination Provisions"). The Business Combination Provisions, in general,
provide that the transactions described in paragraphs (i) through (vi) below
(each, a "Business Combination") involving an Interested Party (as defined
below) are not permitted earlier than five years following the most recent date
on which an Interested Party became an Interested Party (the "Five-Year Tolling
Period"), unless either (A) the Business Combination or the transaction which
resulted in the Interested Party becoming an Interested Party is approved by the
Board of Directors prior to the most recent date on which the Interested Party
became an Interested Party (the "Determination Date") or (B) on or subsequent to
the Determination Date, but before the expiration of the Five-Year Tolling
Period, the transaction is approved by two-thirds of the Board of Directors and
two-thirds in interest of the Listed Shareholders other than the Interested
Party.
In addition, the Business Combination Provisions provide that,
following the Five-Year Tolling Period, unless the Business Combination was
approved by the Board of Directors prior to the Determination Date, or the
minimum price criteria and procedural requirements described in paragraphs (a)
and (b) below have been met (collectively, the "Fair Price and Procedural
Requirements"), a Business Combination is permitted only if the Business
Combination is recommended to the Shareholders by the Board of Directors and
then approved by (i) 80 percent in interest of the Listed Shareholders and (ii)
two-thirds in interest of the Listed Shareholders other than the Interested
Party (the voting requirements of clauses (i) and (ii) to be referred to herein
as the "Special Approval Vote").
An "Interested Party" is defined as any person (other than (a) the
Company, (b) any subsidiary of the Company, (c) the General Partners, and (d)
the Original Shareholders and (e) any affiliate or associate of any person in
(c) or (d) above) that (i) is the beneficial owner, directly or indirectly, of
10 percent or more of the voting power of the then outstanding Shares, (ii) is
an affiliate or associate of the Company and within two years prior to the date
in question was the beneficial owner, directly or indirectly, of 10 percent or
more of the then outstanding Shares or (iii) is an affiliate or associate of any
person described in clauses (i) or (ii) above.
A "Business Combination" includes the following transactions:
(i) Unless the merger, consolidation or exchange of interests
does not alter the contractual rights of the Shares as
expressly set forth in the Company Organizational
Documents or change or convert in whole or in part the
outstanding Shares, any merger, consolidation or exchange
of interests of the Company or any subsidiary with (a) any
Interested Party or (b) any other entity (whether or not
itself an Interested Party) which is, or after the merger,
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<PAGE> 51
consolidation or exchange of interests will be, an
affiliate of an Interested Party that was an Interested
Party prior to the transaction;
(ii) Any sale, lease, transfer or other disposition, other than
in the ordinary course of business, in one transaction or
a series of transactions in any 12-month period to any
Interested Party or any affiliate of any Interested Party
(other than the Company or any of its subsidiaries) of any
assets of the Company or any subsidiary having, measured
as of the time the transaction or transactions are
approved by the Board of Directors of the Company, an
aggregate book value as of the end of the Company's most
recently ended fiscal quarter of 10 percent or more of the
total market value of the outstanding Shares or of its net
worth as of the end of its most recently ended fiscal
quarter;
(iii) The issuance or transfer by the Company or any subsidiary,
in one transaction or a series of transactions, of any of
the Shares or any equity securities of a subsidiary which
have an aggregate market value of 5 percent or more of the
total market value of the outstanding Shares to any
Interested Party or any affiliate of any Interested Party
(other than the Company or any of its subsidiaries) except
pursuant to the exercise of warrants or rights to purchase
securities offered pro rata to all Shareholders or any
other method affording substantially proportionate
treatment to the Shareholders;
(iv) The adoption of any plan or proposal for the liquidation
or dissolution of the Company in which anything other than
cash will be received by an Interested Party or any
affiliate of any Interested Party;
(v) Any reclassification of securities or recapitalization of
the Company, or any merger, consolidation or exchange of
Shares with any of its subsidiaries which has the effect,
directly or indirectly, in one transaction or a series of
transactions, of increasing by five percent or more of the
total number of outstanding Shares, the proportionate
amount of the outstanding Shares or the outstanding number
of any class of equity securities of any subsidiary which
is directly or indirectly owned by any Interested Party or
any affiliate of any Interested Party; or
(vi) The receipt by any Interested Party or any affiliate of
any Interested Party (other than the Company or any of its
subsidiaries) of the benefit, directly or indirectly
(except proportionately as a Shareholder), of any loan,
advance, guarantee, pledge or other financial assistance
or any tax credit or other tax advantage provided by the
Company or any of its subsidiaries.
(a) Minimum Price Criteria. A Business Combination proposed by an
Interested Party after the expiration of the Five-Year Tolling Period
must obtain the Special Approval Vote unless the Interested Party
complies with the Fair Price and Procedural Requirements or the Board
of Directors approves the Business Combination or the transaction in
which the Interested Party became an Interested Party prior to the
Determination Date.
The Fair Price and Procedural Requirements provide that, in a
Business Combination involving cash or other consideration being paid to the
Shareholders, the consideration will be required to be either in cash or in the
same form as the Interested Party paid in acquiring the largest number of Shares
that it has acquired in any one transaction or series of related transactions,
except to the extent that the Shareholders otherwise elect in connection with
their approval of the proposed transaction. In addition, the transaction
constituting the Business Combination must provide for payment of consideration
per
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<PAGE> 52
Share at least equal to the highest of the following: (i) the highest per Share
price paid by the Interested Party for any of the Shares of the same class or
series acquired by it (A) within the five-year period immediately prior to the
first public announcement of the proposed Business Combination (the
"Announcement Date") or (B) within the five-year period immediately before the
Determination Date, (ii) the highest preferential amount per Share to which the
holders of the Shares of such class or series are entitled in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
(iii) the fair market value per Share of the same class or series on the
Announcement Date or the Determination Date, whichever is higher or (iv) the
price per Share equal to the fair market value per Share on the Announcement
Date or on the Determination Date, whichever is higher, multiplied by a fraction
equal to (A) the highest per Share price paid by the Interested Party for any of
the Shares of the same class or series acquired by it within the five-year
period immediately prior to the Announcement Date over (B) the fair market value
per Share of the same class or series on the first day in such five-year period
on which the Interested Party acquired any of the Shares.
For purposes of the Fair Price and Procedural Requirements, the fair
market value of the Shares on the Announcement Date or the Determination Date
will be the highest closing sale price during the 30-day period immediately
preceding the date in question of a Share of the same class or series on the
composite tape for NYSE-listed stocks, or, if Shares of the same class or series
are not quoted on the composite tape, on the NYSE, or, if the Shares of the same
class or series are not listed on the NYSE, on the principal United States
securities exchange registered under the Exchange Act on which the Shares of the
same class or series are listed, or, if the Shares of the same class or series
are not listed on any such exchange, the highest closing bid quotation with
respect to a Share of the same class or series during the 30-day period
preceding the date in question on the NASD automated quotation system or any
system then in use, or, if no such quotations are available, the fair market
value on the date in question of a Share of the same class or series as
determined by the Board of Directors in good faith.
(b) Procedural Requirements. The Fair Price and Procedural Requirements
also provide that, in order to avoid the Special Approval Vote, after
an Interested Party becomes an Interested Party, it will have to
comply with certain procedural requirements, as well as the minimum
price requirements, unless the Business Combination is approved by
the Board of Directors prior to the Determination Date.
Under the Fair Price and Procedural Requirements, the Special
Approval Vote applies after the expiration of the Five Year Tolling Period
(unless the Board of Directors approves the Business Combination prior to the
Determination Date) if the Company, after the Interested Party has proposed a
Business Combination and after the Determination Date but prior to consummation
of such Business Combination, (A) fails to pay in a timely manner the full
amount of any distributions on any preferred Shares (including any Partnership
Shares) then outstanding, (B) fails to increase the annual rate of distributions
made with respect to any Shares to reflect any recapitalization, reorganization
or similar transaction which has the effect of reducing the number of
outstanding Shares or (C) reduces the annual rate of distributions paid on any
class or series of Shares that are not preferred. The provisions of clauses (A),
(B) and (C) do not apply if no Interested Party or an affiliate or associate of
an Interested Party voted as a member of the Board of Directors in a manner
inconsistent with clauses (A), (B) and (C) and the Interested Party, within 10
days after any act or failure to act inconsistent with such items, notifies the
Board of Directors that the Interested Party disapproves thereof and requests in
good faith that the Board of Directors rectify such act or failure to act. This
provision is designed to prevent an Interested Party who controls the necessary
voting power from attempting to depress the market price of the Shares prior to
consummating a Business Combination by reducing distributions thereon and
thereby reducing the consideration required to be paid pursuant to the minimum
price criteria.
The Special Approval Vote also applies to a proposed Business
Combination after the expiration of the Five Year Tolling Period (unless the
Board of Directors approves the Business Combination prior to the Determination
Date) if the Interested Party acquired any additional Shares (except as part of
the transaction in which it became an Interested Party or by virtue of
proportionate
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<PAGE> 53
Share splits or distributions) in any transaction subsequent to the time it
proposes a Business Combination. This provision is intended to prevent an
Interested Party from purchasing additional Shares at prices that are lower than
those set by the minimum price criteria after it proposes a Business
Combination.
The Interested Party will be required to meet the Fair Price and
Procedural Requirements with respect to each class or series of Shares, whether
or not the Interested Party owned Shares of that class or series prior to
proposing the Business Combination. If the Fair Price and Procedural
Requirements are not met with respect to each class or series of Shares, the
Special Approval Vote will be applicable unless the Business Combination was
approved by the Board of Directors prior to the Determination Date. In addition,
if the transaction is not of a type which involves the receipt of any cash,
securities or other consideration by Shareholders generally, such as a sale of
assets or an issuance of Company interests to an Interested Party, the minimum
price criteria discussed in paragraph (a) above could not be met and the Special
Approval Vote will be applicable unless the transaction is approved by the Board
of Directors prior to the Determination Date.
Advantages and Disadvantages of the Business Combination Provisions.
The Business Combination Provisions are designed to prevent certain of the
potential inequities of Business Combinations that involve two or more steps. In
the first instance, in order to complete a Business Combination within the
Five-Year Tolling Period, the Interested Party must either (i) obtain the
approval by the Board of Directors prior to the Determination Date or (ii)
obtain the approval of two-thirds of the Board of Directors and two-thirds in
interest of the Shareholders (excluding the vote of the Interested Party). The
effect of these provisions is to place a veto power over certain transactions in
the hands of the Board of Directors and Shareholders, other than the Interested
Party.
In the second instance, after the expiration of the Five-Year Tolling
Period, the Interested Party must either assure itself of obtaining the
affirmative votes of at least (i) 80 percent in interest of all Shareholders and
(ii) two-thirds in interest of the Shareholders (excluding the vote of the
Interested Party) prior to the vote on the Business Combination, or be prepared
to meet the Fair Price and Procedural Requirements. The Fair Price and
Procedural Requirements are designed to protect those Shareholders who have not
tendered or otherwise sold their Shares to a third party who is attempting to
acquire control, by helping to assure that at least the same price and form of
consideration is paid to such Shareholders in a Business Combination as were
paid to Shareholders in the initial step of the acquisition. In the absence of
these provisions, an Interested Party who acquires control of the Company could
subsequently, by virtue of such control, force minority Shareholders to sell or
exchange their Shares at a price that may not reflect any premium the Interested
Party may have paid in order to acquire its interest. Such a price could be
lower than the price paid by the Interested Party in acquiring control and could
also be in a less desirable form of consideration (e.g., equity or debt
securities of the Interested Party instead of cash).
In many situations, the Fair Price and Procedural Requirements will
require that an Interested Party pay Shareholders a higher price for their
Shares and/or structure the transaction differently from what would be the case
without the provision. Accordingly, the Board of Directors believes that, to the
extent a Business Combination is involved as part of a plan to acquire control
of the Company, the Business Combination Provisions may increase the likelihood
that an Interested Party will negotiate directly with the Board of Directors.
The Board of Directors believes that it is in a better position than individual
Shareholders of the Company to negotiate effectively on behalf of all
Shareholders, in that the Board of Directors is likely to be more knowledgeable
than most individual Shareholders in assessing the business and prospects of the
Company. Therefore, the Board of Directors is of the view that negotiations
between the Board of Directors and an Interested Party will increase the
likelihood that Shareholders in general will receive a higher price for their
Shares than otherwise might be obtained.
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<PAGE> 54
Although some substantial acquisitions of equity securities are made
without the objective of effecting a subsequent Business Combination, in many
cases a purchaser acquiring control desires to have the option to consummate
such a Business Combination. Assuming that to be the case, the Business
Combination Provisions will tend to deter a potential purchaser whose objective
is to seek control of the Company at a relatively low price, since acquiring the
remaining equity interest will not be assured unless the applicable voting
requirements were met, the Fair Price and Procedural Requirements were satisfied
or the Board of Directors were to approve the transaction prior to the
Determination Date. The Business Combination Provisions also should help to
deter the accumulation of large blocks of the Shares, which the Board of
Directors believes to be potentially disruptive to the stability of the Company
and which could precipitate a change of control of the Company on terms
unfavorable to other Shareholders.
Tender offers or other non-open market acquisitions of equity
securities usually are made at prices above their prevailing market price. In
addition, acquisitions of equity securities by persons attempting to acquire
control through market purchases may cause the market price of the securities to
reach levels that are higher than might otherwise be the case. The presence of
the Business Combination Provisions may deter such purchases, particularly those
of less than all of the Shares, and may, therefore, deprive the Company's
Shareholders of an opportunity to sell their Shares at a temporarily higher
market price. Because of the Special Approval Vote for approval of any
subsequent Business Combination and the possibility of having to pay a price to
other Shareholders in such a Business Combination that is not less than the
price paid for its initial holdings, the Business Combination Provisions may
make it more costly for a third party to acquire control of the Company. It
should be noted that the Business Combination Provisions will not necessarily
deter persons who might be willing to seek control by acquiring a substantial
portion of the Shares when they have no intention of acquiring the remaining
Shares.
In certain cases, the Fair Price and Procedural Requirements' minimum
price provisions, while providing objective pricing criteria, could be arbitrary
and not indicative of value. In addition, an Interested Party may be unable, as
a practical matter, to comply with all of the procedural requirements. In these
circumstances, unless an Interested Party were assured of obtaining the required
number of affirmative votes from the other Shareholders, it will be forced
either to negotiate with the Board of Directors and offer terms acceptable to
the Board of Directors or to abandon such proposed Business Combination.
Amendments to Business Combination Provisions. The Organizational
Documents provide that the Business Combination Provisions may be amended or
repealed only by a vote of 80 percent in interest of all Listed Shareholders,
voting together as a single class, excluding Shares held by any Interested Party
or any affiliate of an Interested Party.
Control Share Acquisition Provisions. The Organizational Documents
also contain control Share acquisition provisions (the "Control Share
Acquisition Provisions"). The Control Share Acquisition Provisions, in general,
provide that any person or entity that acquires one-fifth or more of the
outstanding Shares of any class or series acquires voting rights with respect to
the acquired Shares only to the extent approved by the affirmative vote of
two-thirds in interest of the Listed Shareholders, but excluding any votes cast
with respect to Shares in respect of which the acquirer is entitled to exercise
or direct the exercise of the voting power.
The Control Share Acquisition Provisions provide that a person or
entity acquires Control Shares whenever it acquires Shares that, but for the
operation of the Control Share Acquisition Provisions, will bring its voting
power within any of the following ranges: (i) one-fifth to one-third, (ii)
one-third to a majority or (iii) a majority or more. A "Control Share
Acquisition" generally means the acquisition of Shares that will entitle the
acquiring person immediately after the acquisition to exercise or direct the
exercise of the voting power of Shares within one of these ranges of voting
power. Excepted from the definition of Control Share Acquisition is an
acquisition of Shares from any person
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<PAGE> 55
whose previous acquisition of Shares was pursuant to the laws of descent or
distribution or the satisfaction of a pledge or other security interest created
in good faith and not for the purpose of circumventing the Control Share
Acquisition Provisions or a merger, consolidation or exchange of interests if
the Company is a party thereto. Subject to certain exceptions, a Control Share
Acquisition does not include the acquisition of Shares in good faith and not for
the purpose of circumventing the Control Share Acquisition Provisions by or from
any person whose voting rights have previously been authorized by the Listed
Shareholders in compliance with the Control Share Acquisition Provisions or any
person whose previous acquisition of the Shares will have constituted a Control
Share Acquisition but for the exclusions in the preceding sentence. In addition,
a Control Share Acquisition does not include the acquisition of Shares by (a)
any subsidiary of the Company, (b) the General Partners and the Original
Shareholders and (c) any affiliate or associate of any person in (b) above.
Voting Rights of Control Shares. Under the Control Share Acquisition
Provisions, a person or entity that acquires Control Shares pursuant to a
Control Share Acquisition acquires voting rights with respect to those control
Shares only to the extent approved by the affirmative vote of two-thirds in
interest of the Listed Shareholders, but excluding any votes cast with respect
to Shares in respect of which the acquirer is entitled to exercise or direct the
exercise of the voting power.
The acquirer may require the Company to hold a meeting of the Listed
Shareholders for the purpose of considering the status of its voting rights by
complying with the requirements of the Organizational Documents. The acquirer
must deliver to the Company an acquiring person statement, which must set forth,
among other things, the terms of the proposed acquisition and representations
that the proposed Control Share Acquisition, if consummated, will not be
contrary to law, and that the acquirer has the financial capacity to make such
acquisition. If the acquirer so requests at the time of delivery of the
acquiring person statement and gives a written undertaking to pay the expenses
of a meeting, the Board of Directors is generally required to call and hold,
within 50 days after receipt of the acquiring person statement and undertaking,
a meeting of the Listed Shareholders to consider the voting rights to be
accorded the Shares to be acquired in the Control Share Acquisition. In
connection with calling the meeting, the Company must send a notice to the
Listed Shareholders which includes or is accompanied by both the acquiring
person statement and a statement by the Board of Directors setting forth its
position or recommendation or stating that it is taking no position or making no
recommendation with respect to the issue of voting rights to be accorded the
Shares acquired in the Control Share Acquisition.
Redemption of Control Shares. If an acquiring person statement has
been delivered on or before the tenth day after the Control Share Acquisition
and the Listed Shareholders do not vote to approve voting rights to the Control
Shares, the Company may redeem the Control Shares from the acquirer at any time
during the 60-day period commencing on the day of a meeting at which the voting
rights of the Control Shares were considered and not approved. If the acquirer
fails to deliver an acquiring person statement on or before the tenth day after
the Control Share Acquisition, the Company may redeem the Control Shares (except
Control Shares for which voting rights have been approved) at any time during
the period commencing on the 11th day after the Control Share Acquisition and
ending 60 days after the acquiring person statement has been delivered. Any
redemption of Control Shares shall be at the fair value of the Control Shares as
of the date of the last acquisition of Control Shares by the acquirer or, if a
meeting is held to consider the voting rights of the Control Shares, as of the
date of the meeting.
Advantages and Disadvantages of the Control Share Acquisition
Provisions. The Control Share Acquisition Provisions will permit the Listed
Shareholders to review, on a collective basis, the merits of a proposed
acquisition of control of the Company without the time pressure and coercive
atmosphere often present with tender offers and other non-negotiated
transactions. Although a change of control may in certain circumstances be
beneficial to security holders, the Control Share Acquisition Provisions are
intended to provide the Listed Shareholders with the continued ability to make a
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<PAGE> 56
reasoned, thoughtful decision on proposed acquisitions of significant voting
power. It also may enhance the Company's bargaining power with a potential
acquirer.
The Control Share Acquisition Provisions also may make it more
difficult or costly for another party to acquire and exercise control of the
Company. To the extent that it has the effect of discouraging a future takeover
attempt, it could prevent Shareholders from realizing any premium over the
prevailing market price that might be involved in any such transaction. The
Control Share Acquisition Provisions also may discourage gradual market
purchases by an acquirer, thereby depriving some Listed Shareholders of an
opportunity to sell their Shares at a temporarily higher market price, though
the provisions of the Control Share Acquisition Provisions may force an acquirer
to pay a higher price for control and Shareholders will thereby benefit.
Finally, to the extent that the Control Share Acquisition Provisions enable the
Company to resist a takeover or a change of control or removal of the Board of
Directors, it could make it more difficult to remove the existing management of
the Company, even if such removal will be beneficial to the Shareholders.
Amendments to Control Share Acquisition Provisions. The
Organizational Documents provide that the Control Share Acquisition Provisions
may be amended or repealed only by a vote of 80 percent in interest of all
Listed Shareholders, excluding any votes cast with respect to Control Shares
held by an acquirer.
Shareholder Rights Plan. The Company intends to enter into the
Shareholder Rights Plan with a rights agent that will provide for the issuance
of one right (a "Right") for each outstanding Share to the Company's Listed
Shareholders of record on a record date to be established by the Board of
Directors (the "Rights Record Date"). Each Right will entitle the holder thereof
to buy one Share at a specified exercise price, which will be subject to
adjustment.
Set forth below is a description of the proposed terms of the Listed
Shareholder Rights Plan.
Distribution Date. Until the close of business on the tenth day after
the earlier to occur of (i) the date a person (an "Acquiring Person") (other
than the Company, any subsidiary of the Company, the General Partners, any
Affiliate of the General Partners, the Original Shareholders and any employee
benefit plan of the Company) alone or together with affiliates and associates,
has become the beneficial owner of five percent or more of the outstanding
Shares or (ii) the date of the commencement of, or announcement of, an intention
to make a tender offer or exchange offer the consummation of which will result
in the beneficial ownership by a person or group (other than the Company, any
subsidiary of the Company, the General Partners, any Affiliate of the General
Partners, the Original Shareholders and any employee benefit plan of the
Company) of 10 percent or more of the outstanding Shares (the earlier of (i) or
(ii) being called the "Rights Distribution Date"), the Rights will be evidenced
by the Shares registered in the name of the holders of the Shares and not be
separate Right certificates.
The Shareholder Rights Plan is expected to provide that, until the
Rights Distribution Date, the Rights will be transferred with and only with the
Shares. Until the Rights Distribution Date (or earlier termination or expiration
of the Rights), the transfer of any Shares outstanding as of the Rights Record
Date will also constitute the transfer of the Rights associated with such
Shares. As soon as practicable following the Rights Distribution Date, separate
certificates evidencing the Rights (a "Rights Certificate") will be mailed to
holders of record of the Shares as of the close of business on the Rights
Distribution Date and such separate Rights Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Rights Distribution Date.
The Rights will expire on the tenth anniversary of the Rights Record Date (the
"Final Expiration Date") unless the Final Expiration Date is extended or unless
the Rights are earlier redeemed by the Company, as described below.
Adjustments to Purchase Price. The purchase price payable (the
"Exercise Price"), and the number of the Shares or other securities or property
issuable, upon exercise of the Rights are subject to
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<PAGE> 57
adjustment from time to time to prevent dilution in the event the Company (i)
declares or pays any distribution on the Shares payable in Shares or other
securities, (ii) subdivides or splits the outstanding Shares into a greater
number of interest or (iii) combines or consolidates the outstanding Shares into
a smaller number of interests or effects a reverse split of the outstanding
Shares.
Exercise of Rights. In the event that on or after the Rights
Distribution Date, the Company is acquired in a merger or other business
combination transaction or 50 percent or more of its consolidated assets or
earning power are sold (in one transaction or a series of transactions other
than in the ordinary course of business), proper provision will be made so that
each holder of a Right will thereafter have the right to receive, upon the
exercise thereof at the then current Exercise Price, that number of partnership
interests, common shares or other equity securities of the acquiring entity
which at the time of such transaction will have a market value of two times the
Exercise Price. In the event that any person, together with its affiliates and
associates, becomes the beneficial owner of five percent or more of the Shares
then outstanding, unless such acquisition is approved by the Board of Directors,
each holder of a Right, other than Rights beneficially owned by the Acquiring
Person (which will thereafter be void), will thereafter have the right to
receive upon exercise thereof and payment of the Exercise Price, the greater of
(i) the number of Shares for which such Right was exercisable immediately prior
to such event or (ii) that number of Shares having a market value of two times
the Exercise Price.
Redemption of Rights. At any time prior to the earlier to occur of
(i) the acquisition by a person, together with its affiliates and associates of
beneficial ownership of five percent or more of the outstanding Shares or (ii)
the Final Expiration Date, the Board of Directors may cause the Company to
redeem the Rights in whole, but not in part, at a redemption price of $.01 per
Right. Immediately upon any redemption of the Rights, all rights relating to the
Rights (except the right to receive the redemption price for each Right),
including the right to exercise the Rights, will terminate.
Amendment of Rights Plan. The terms of the Rights may be amended by
the Board of Directors in any manner without the consent of the holders of the
Rights, except that from and after such time as any person becomes an Acquiring
Person, no such amendment may adversely affect the interest of the holders of
the Rights (other than Acquiring Persons).
Effect of the Rights Plan. Although the Rights will not prevent a
takeover of the Company, the Rights may have certain anti-takeover effects. The
Rights could cause substantial dilution to a person or group that attempts to
acquire the Company in a manner or on terms not approved by the Board of
Directors. The Rights, however, should not deter any prospective offerer willing
to negotiate in good faith with the Company.
RESALE OF SHARES
The Listed Shares received by the General Partners and their
affiliates are be restricted shares which may only be resold pursuant to an
effective registration statement or pursuant to Rule 144 under the Securities
Act. The General Partners and their affiliates have the ability to compel the
Company to register the Listed Shares they received in the Consolidation. The
costs of this registration would be borne by the Company.
Listed Shares received by persons who may be deemed to be
"affiliates" of the Company may be sold by those persons only in accordance with
the provisions of Rule 144 under the Securities Act, pursuant to an effective
registration under the Securities Act, or in transactions that are exempt from
registration under the Securities Act. Rule 144 provides, in general, that those
Listed Shares may be sold by the affiliate only if (i) the number of Listed
Shares sold within any three-month period does not exceed the greater of one
percent of the total number of outstanding Shares or the average weekly trading
volume of the shares during the four calendar weeks immediately preceding the
date on which
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<PAGE> 58
the notice of sale is filed with the Commission and (ii) the Shares are sold in
transactions directly with a "market maker" or in "brokers' transactions" within
the meaning of Rule 144 under the Securities Act.
DISTRIBUTION POLICY
The following summarizes the Company's current distribution policy
with respect to Listed Shares and the Subsidiary Partnership Units. The Board of
Directors of the Company will have the ability to change the Company's
distribution policy with respect to the Listed Shares without the consent of the
Shareholders. The Board of Directors of the Company will have the discretion to
adopt a distribution reinvestment plan in the future which would permit holders
of Listed Shares to reinvest the distributions they receive from the Company in
additional Listed Shares.
LISTED SHARES
The Company intends to make regular quarterly distributions to the
Shareholders. The Company has declared a dividend of $0.4125 per Listed Share to
shareholders of record on March 31, 1998 and is payable on April 15, 1998.
The following table illustrates the adjustments made to the Company's
pro forma net income before extraordinary items for the 12 months ended
September 30, 1997, in estimating its cash available for distribution for the 12
month period ending September 30, 1998 and in establishing its estimated initial
annual distribution:
<TABLE>
<S> <C>
Pro forma net income for the 12 months
ended September 30, 1997 before
extraordinary items(1) $ 41,367
Adjustments:
Non-cash expenses and other adjustments(2) 12,350
Gains on sales of properties and securities (884)
Excess of minority interest income over
distributions to minority interest 434
Decrease in interest expense(3) 6,119
Contractual rent increases and new leases(4) 2,004
Lease expirations(5) (3,146)
Estimated adjusted cash generated before
debt repayments and capital expenditures
for the 12 months ending September 30, 1998 58,244
Capital expenditures (3,705)
--------
Estimated adjusted cash generated before
debt repayments 54,539
Principal amortization of mortgage debt(7) (6,553)
--------
Estimated adjusted cash generated
after debt repayments $ 47,986
========
Expected initial annual distribution(8) $ 39,688
========
Expected initial annual distribution
per Listed Share $ 1.65
========
(1) Reflects the following:
Pro forma net income for the 12 months
ended December 31, 1996 $ 43,508
</TABLE>
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<PAGE> 59
<TABLE>
<S> <C>
Add: Pro forma net income for the 9
months ended September 30, 1997 30,490
Less: Pro forma net income for the 9
months ended September 30, 1996 (32,631)
Pro forma net income for the 12
months ended September 30, 1997 before
extraordinary items $ 41,367
========
(2) Reflects the following:
Depreciation and amortization $ 8,933
Non-cash writedown of real estate assets 3,806
Vested portion of performance fees paid in stock 1,272
Directors' and employee's compensation paid in stock 531
Operating and financing lease adjustments (2,192)
--------
$ 12,350
========
</TABLE>
Performance fees and a portion of the compensation of Directors and
the Company's sole employee will be paid in the form of Listed
Shares.
Operating and financing lease adjustments represent the effect of
adjusting straight-line rents on operating leases and interest income
on direct financing leases included in pro forma net income, to a
cash basis.
(3) Represents the estimated decrease in interest expense on amortizing
debt for the 12 months ending September 30, 1998.
(4) Represents the estimated increase in lease revenues due to
contractually scheduled rental adjustments and the commencement of
new leases. Scheduled rental adjustments are based on increases in
the Consumer Price Index or fixed increases.
(5) Represents the reduction in lease revenues due to scheduled lease
expirations.
(6) Represents scheduled principal amortization on mortgage debt for the
12 months ending September 30, 1998, excluding balloon payments on
maturing debt.
(7) Based on estimated average outstanding Listed Shares for the 12
months ending September 30, 1998.
The Company will consider various factors in determining future
distributions including expected cash flows generated from operating activities,
cash requirements to fund property improvements and expansions, debt service
requirements, the level of cash balances on hand and the Company's ability to
generate funds from operations. These factors will be taken into account in
determining the Company's ability to pay a sustainable level of distributions.
In addition the Company expects to commence acquiring new investments to meet
its growth objectives and such acquisition strategy may affect the Company's
ability to maintain or increase future distribution levels.
The Company intends to utilize cash generated from operations to fund
distributions to Shareholders and pay regularly scheduled principal amortization
on mortgage debt. For the three years ended December 31, 1994, 1995 and 1996
cash generated from operations of approximately $45,131,000, $63,276,000 and
$50,983,000, exceeded distributions to the Limited Partners of
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<PAGE> 60
approximately $35,589,000, $57,216,000 and $34,173,000, respectively. The
increase in cash generated from operations of approximately $18,145,000 in 1995
is primarily due to receipt of approximately $15,188,000 in connection with the
restructuring of certain leases. The increase in distributions in 1995 of
approximately $21,627,000 is due to the distribution of proceeds from the sale
of certain properties. For the nine months ended September 30, 1996 and 1997
cash generated from operations of approximately $38,416,000 and $37,621,000
exceeded distributions of approximately $25,910,000 and $25,610,000,
respectively.
Cash flows provided by investing activities for the three years ended
December 31, 1994, 1995 and 1996 amounted to approximately $37,136,000,
$24,327,000 and $19,545,000, respectively, primarily due to the sale of
properties. Most of the Company's properties are subject to net leases under
which the lessees are required to pay all operating expenses of the properties
and structural repairs. Consequently, historical cash needs for capital
expenditures on the properties have not been material. Capital expenditures for
the three years ended December 31, 1994, 1995 and 1996 are approximately
$2,492,000, $2,095,000 and $3,420,000, respectively. For the nine months ended
September 30, 1996 and 1997 capital expenditures totaled approximately
$2,816,000 and $1,455,000 respectively. Future capital expenditures may be
expected to increase as many of the Company's leases are over 10 years old and
are scheduled to approach their initial expiration dates. If cash generated from
operating activities is not sufficient to fund future capital expenditures, such
expenditures could be funded from the Company's working capital reserves or from
additional borrowing of secured or unsecured debt.
Cash flows from financing activities primarily consists of payment of
mortgage principal in connection with loan prepayments or scheduled principal
amortization, payment of distributions to partners and the refinancing of
mortgage loans. Net cash used in financing activities totaled approximately
$70,045,000, $105,578,000 and $69,686,000 for the three years ended December 31,
1994, 1995 and 1996, respectively, and $46,639,000 and $36,415,000 for the nine
months ended September 30, 1996 and 1997 respectively. Scheduled principal
payments on debt for the years ended December 31, 1997, 1998 and 1999 are
expected to be approximately $40,771,000, $28,012,000 and $37,832,000,
respectively, consisting primarily of balloon payments on mortgage loans
currently in place. Such payments can be funded partially but not entirely from
cash generated from operations. The Company intends to establish unsecured bank
lines of credit or may refinance loans on selected properties to fund these
obligations.
The Company's lease revenues from existing properties are expected to
decrease due to the modification of leases with Policy Management Systems and
Hughes Markets. The modification of those leases resulted in a temporary
increase in lease revenues during 1995, 1996 and the first quarter of 1997. In
July 1994 the Company agreed to accelerate the term of a lease with Policy
Management Systems from the originally scheduled expiration in June 2003 to June
1997, resulting in a corresponding acceleration of the rental income that would
have been paid over the original remaining term of the lease. Annual rents
subsequent to the acceleration increased from approximately $1,850,000 to
approximately $5,200,000. The lease with Policy Management Systems expired in
June 1997. The Company has leased a portion of the property at an annual rental
of approximately $723,000 and is currently re-marketing the remaining space. The
Company believes that annual rents on the property, when fully leased, will
approximate the annual rents received prior to acceleration of the term of the
lease with Policy Management Systems.
The lease with Hughes Markets, Inc. for a property in Los Angeles,
California, expired in April 1996 and was extended for a period of two years
with a significant increase in rent. In connection with the lease extension the
Company was able to increase annual rents during the extension period from
approximately $1,800,000 to approximately $4,000,000. Hughes Markets agreed to
make a lump sum payment of approximately $3,500,000 upon the expiration of the
extended lease term in April 1998, and such amount is recognized on a pro rata,
straight-line basis over the extension term. The Company has entered into an
agreement to lease the Los Angeles property upon termination of the lease with
Hughes Markets for an annual rent of approximately $1,800,000 for a term of nine
years.
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The Company intends to commence purchasing additional investments.
Such acquisitions may be financed with funds provided by unsecured lines of
credit, additional borrowing on unleveraged properties or the issuance of
additional equity. Acquisitions of new properties are expected to increase
future lease revenues.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Shares is ChaseMellon
Shareholder Services, L.L.C.
COMPENSATION, REIMBURSEMENT AND DISTRIBUTIONS TO THE
GENERAL PARTNERS AND MANAGER
AMOUNTS PAYABLE TO THE MANAGER
Amounts Payable by the Company.
The following is a description of the fees payable by the Company to
the Manager in connection with the services to be provided by the Manager.
Management Fee. The Manager will be paid a monthly management fee at
an annual rate of .5 percent of the Total Capitalization of the Company. The
Management Fee and Performance Fee will each be reduced by one-half of the
amount received by the Manager from the Subsidiary Partnerships for property
management or leasing fees and distributions of Cash from Operations. The Total
Capitalization of the Company will be measured each month by adding (i) the
average of total principal amount of the debt owed by the Company (measured as
of the first and last day of each month) and (ii) the Average Market
Capitalization of the Company (measured by multiplying the closing price of the
Listed Shares on each trading day of the month by the total number of Listed
Shares issued and outstanding each trading day, adding the product for each day
and dividing the sum by the number of trading days in the month).
Performance Fee. The Manager will be paid a monthly Performance Fee
at an annual rate of .5 percent of the Total Capitalization of the Company. This
fee will be paid in the form of restricted Listed Shares which will vest ratably
over five years. Before such shares are vested, the restricted Listed Shares
will not be transferable and will be subject to forfeiture in the event the
Manager is terminated for cause or resigns. The restricted Listed Shares will
vest immediately in the event of a change of control and certain other
circumstances. The Management Fee and Performance Fee will each be reduced by
one-half of the amount received by the Manager from the Subsidiary Partnerships
for property management or leasing fees and distributions of Cash from
Operations. The sale of the Listed Shares will be restricted pursuant to Rule
144 of the '33 Act. The fee amount will be divided by the closing price of the
Listed Shares on the last trading day of the month to determine the number of
Listed Shares to be paid to the Manager.
Termination Fee. If the Management Agreement is terminated in
connection with a change of control, by the Company without cause or by the
Manager with Good Reason, the Manager will be entitled to receive a Termination
Fee. The Termination Fee equals the sum of (A) any fees that would be earned by
the Manager upon the disposition of the assets of the Company and the Subsidiary
Partnerships at their appraised value as of the date the Management Agreement is
terminated (the "Termination Date") and (B)(1) if the agreement is terminated by
the Company after a change in control, $50 million if the change in control
occurs on or before December 31, 1998 and thereafter, five times the total fees
paid to the Manager by the Company and the Subsidiary Partnerships in the 12
months preceding the change in control and (2) if the agreement is terminated
without cause or for Good Reason, $50 million if the agreement is terminated
before December 31, 1999; $40 million if the
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<PAGE> 62
agreement is terminated before December 31, 2000; $30 million if the agreement
is terminated before December 31, 2001; $20 million if the agreement is
terminated before December 31, 2002 and $10 million if the agreement is
terminated before December 31, 2003.
The Manager may also be paid fees on a transactional basis for
acquisitions, dispositions and other similar transactions. The terms of such
fees will be negotiated with the Board of Directors.
Amounts Payable by the Subsidiary Partnerships.
The Manager will be entitled to the distributions from the respective
Subsidiary Partnerships described below. Distributions paid to the Manager by
the Subsidiary Partnerships described in the following table will reduce the
management fee and performance fee otherwise payable to the Manager by the
Company each by one-half of the amount paid by the Subsidiary Partnership:
<TABLE>
<CAPTION>
Percent of
Subsidiary Property Management/ Distribution of Cash
Partnership Leasing Fee from Operations
- ----------- ----------- ---------------
<S> <C> <C>
CPA(R):1 5% of Adjusted Cash from Operations 1%
CPA(R):2 5% of Adjusted Cash from Operations 1%
CPA(R):3 5% of Adjusted Cash from Operations 2%
CPA(R):4 1% of gross lease payments(1) 6%
CPA(R):5 1% of gross lease payments(1) 6%
CPA(R):6 1% of gross lease payments(1) 6%
CPA(R):7 1% of gross lease payments(1) 6%
CPA(R):8 3% of gross lease payments over first
five years of original term of each lease 10%
CPA(R):9 3% of gross lease payments over first
five years of original term of each lease. 10%
</TABLE>
(1) The management fee for properties not subject to leases with an
initial term of less than 10 years is (i) six percent of the gross
revenues of such leases where such Affiliate performs leasing,
re-leasing and leasing related services, or (ii) three percent of
gross revenues of such leases where such services are not performed;
provided, however, that in no event shall such management fee exceed
an amount which is competitive for similar services in the same
geographic area and further provided that bookkeeping services and
fees paid to non-Affiliates for management services shall be included
in the management fee.
Incentive Fee. The Manager will be paid an Incentive Fee equal to 15
percent of the amount of the net proceeds received from the sale of a property
previously held by a CPA(R) Partnership in excess of the appraised value of the
equity interest in such property used in the Consolidation less an adjustment
for the share of such net proceeds in excess of the appraised value of the
equity interest attributable to the Manager's interest in the Listed Shares.
Preferred Return. The Manager will be paid a Preferred Return of
$[1,067,133] if the closing price of the Listed Shares exceeds $23.11 for five
consecutive days. This payment is for services rendered in connection with prior
sales of properties owned by one of the Subsidiary Partnerships.
FEES PAYABLE OVER PAST THREE YEARS
The following table sets forth the amounts of compensation and
distributions that would have been payable to the Manager and its affiliates by
the CPA(R) Partnerships over the last three fiscal years if the Consolidation
had taken place effective January 1, 1995. This comparison assumes that the
Company
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would have conducted its business the same way as the CPA(R) Partnerships
conducted their business over the same period.
MANAGER'S COMPENSATION
<TABLE>
<CAPTION>
Pro Forma(1)
-------------------------------------------------------------
Management Total Cash Performance Total
Fee(2) Compensation Fee-Stock (2) Compensation
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1995 $3,940,000 $3,940,000 $ 788,000 $4,728,000
1996 3,695,000 3,695,000 1,527,000 5,222,000
1997 3,527,000 3,527,000 2,232,000 5,759,000
</TABLE>
(1) Reflects estimated management fees that would have been paid to the
Manager if the Consolidation had been completed as of January 1,
1995, assuming maximum participation without the issuance of
Subsidiary Partnership Units. Actual fees would have depended on the
market price of the Listed Shares (see Note 4).
(2) Management fees and Performance Fees are equal to 0.5 percent of the
Company's Total Capitalization payable in cash and 0.5 percent
thereof payable in the form of Listed Shares of the Company,
respectively, but shall not in any event be less than the total
amount of leasing fees and distributions otherwise paid to the
General Partners of the CPA(R): Partnerships. Total Capitalization
equals the Company's average market capitalization plus the average
outstanding debt for the relevant period. For purposes of the
presentation, in the absence of applicable market values for the
Listed Shares, pro forma Total Capitalization is deemed to be equal
to the sum of the Total Exchange Value and the average outstanding
debt of the CPA(R) Partnerships. The Company's actual market
capitalization may increase or decrease depending on the Company's
operating performance and market conditions; management fees actually
paid would increase or decrease accordingly. The performance fee will
be paid in the form of restricted Listed Shares which will vest
ratably over five years. The sale of the Listed Shares by the Manager
will be restricted pursuant to Rule 144 of the Securities Act. The
amounts shown under "Performance Fee--Stock" represent amounts of
restricted Listed Shares that would have vested in each of the years
1995, 1996 and 1997.
INCOME TAX CONSEQUENCES
The following is a discussion of the material tax considerations that
may be relevant to a prospective Shareholder. It is impractical to set forth in
this Prospectus all aspects of federal, state, local and foreign tax law which
may impact upon a Shareholder's participation in the Company. Furthermore, the
discussion of various aspects of federal, state, local and foreign taxation
contained herein is based on the Internal Revenue Code of 1986 (the "Code"),
existing laws, judicial decisions and administrative regulations
("Regulations"), rulings and practice, all of which are subject to change. Any
change could be retroactive so as to apply to the Company and/or its properties.
The following discussion is generally directed to the federal tax
treatment of a U.S. resident individual Shareholder subject to regular federal
income tax. Separate sections herein describe in summary form the federal tax
treatment of certain other classes of potential Shareholders including IRAs,
Keoghs, corporate pension and profit-sharing trusts and other tax-exempt
entities. There is no discussion of the federal tax treatment of non-resident
aliens and foreign corporations. The discussion herein of the particular tax
concerns of these classes of potential Shareholders is only a general summary.
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To the extent that the discussion involves matters of law, it
represents the opinion of Reed Smith Shaw & McClay LLP as to all material
federal income tax aspects of the offering. The Company has received an opinion
from its counsel Reed Smith Shaw & McClay LLP that (i) the Company will be
classified as partnerships for federal tax purposes, provided that, (a) each
Participating Partnership is not a publicly traded partnership for Federal
income tax purposes or 90 percent or more of its gross income consists of
qualifying income as defined in Code Section 7704(d) and 90 percent or more of
the Company's gross income consists of qualifying income as described in Code
Section 7704(d), and (b) the Company and each Participating Partnership are
organized as described in, and operate in compliance with their governing
agreements, (ii) confirms the opinions attributed to it in this Prospectus and
(iii) which concludes that in the aggregate, the remaining federal income tax
consequences of owning Shares in the Company referred to in this Prospectus will
occur or be realized by the Shareholders. No rulings have been sought from the
IRS with respect to any of the tax matters described in this Prospectus. The
opinions of counsel are dependent upon the present provisions of the Code,
Regulations and existing administrative and judicial interpretations thereof,
all of which are subject to change. [A copy of the opinion of counsel filed as
exhibit 8.1 to the Company's Registration Statement filed with the Commission on
October 15, 1997 (333-37901), can be obtained without charge by contacting
Director of Shareholder Services of Carey Diversified LLC, 50 Rockefeller Plaza,
New York, NY 10020 or by calling 1-800-733-8481 ext. CPA.
INVESTORS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THEIR
INDIVIDUAL TAX SITUATIONS WITH RESPECT TO THE FEDERAL, STATE AND LOCAL
TAX CONSEQUENCES ARISING FROM OWNING SHARES.
NEW TAX LAW PROVISIONS
The Taxpayer Relief Act of 1997 (the "1997 Tax Act") became law on
August 6, 1997. Among the changes relevant to Unitholders are the following:
The maximum capital gain rate applicable to the sale of a capital asset (not
including gain attributable to depreciation on real estate) held
for more than 18 months is 20 percent.
- - The maximum capital gain rate applicable to the sale of a capital
asset held for more than 12 months but not more than 12 months is 28
percent.
- - In general, gain attributable to depreciation on real estate is
subject to tax at a maximum rate of 25 percent.
- - For tax years beginning in 1998, a partnership's tax year will close
with respect to a partner on the date of that partner's death. As a
result, a portion of the partnership's items of income, loss, gain,
deduction or credit flow through to the decedent's last life time
income tax return and the remainder of the partnership's items are
included on the estate's and/or beneficiaries' income tax returns.
- - A large partnership, like the Company, beginning in 1998, may elect
to be an "electing large partnership." In general, an electing large
partnership separately reports to its partners its (a) passive
activity income and loss, (b) income and loss from other than passive
activities, (c) net capital gain allocable to (i) passive activity
sources and (ii) other sources, (d) tax exempt interest, (e) net
alternative minimum tax adjustments separately reported for passive
activity loss limitations, other activities and credits, (f) income
tax credits, (g) cancellation of indebtedness income, and (h) other
items as to be provided in the Regulations.
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Other special rules also will apply to electing large partnerships.
Seventy percent of an electing large partnership's deductions that would be
miscellaneous itemized deductions are disallowed and the remaining 30 percent
pass through to the partners and are not subject to the two percent floor. See
"Deductibility of Fees" below. An electing large partnership will not terminate
if 50 percent or more of its interests are sold or exchanged in a 12-month
period. Also, if the IRS changes an item of partnership income, gain, loss,
deduction or credit, the partnership generally will be liable for interest and
penalties, and (i) the change will affect the partners in the year that the IRS
makes the change, as opposed to the partners in the year the partnership
originally reported the item (thus, a partner's prior year's return would not be
affected) or (ii) the partnership can pay tax on the item at the highest rate
(corporate or individual). In addition, the partnership's K-1s must be mailed to
the partners by March 15th of each year.
The Company currently is evaluating whether to elect to be treated as
an electing large partnership.
The 1997 Tax Act is complicated and many of its provisions
potentially are subject to varying interpretation. There are no judicial
decisions, administrative regulations, rulings, or practice addressing the 1997
Tax Act. As a result, there are uncertainties concerning interpretations of the
1997 Tax Act.
CLASSIFICATION AS "PARTNERSHIPS"
The federal income tax consequences described herein of owning Shares
in the Company are dependent upon the classification of the Company and the
Participating Partnerships as partnerships for federal income tax purposes
rather than as associations taxable as corporations. For federal tax purposes, a
limited liability company, like the Company, is treated as a partnership and its
shareholders are treated as partners if certain conditions are satisfied. The
Company intends to satisfy those conditions.
No ruling will be sought from the IRS that the Company or the
Participating Partnerships will be treated as partnerships for federal income
tax purposes. The Company and the Participating Partnerships will rely on an
opinion of counsel that they will be classified as partnerships for federal tax
purposes. The opinion of counsel is not binding on the IRS or the courts.
Counsel's opinion as to partnership status assumes and is conditioned
on the following: (i) the Company is organized and will operate throughout its
existence in compliance with the LLCA and in accordance with the terms and
provision of the Operating Agreement (ii) the Participating Partnerships were
organized and will continue to operate throughout their existence in substantial
compliance with applicable state statutes concerning limited partnerships and in
accordance with the terms and provisions of their Partnership Agreements, all as
presently in effect and as amended. The Company believes that such conditions
will be satisfied.
If for any reason any Participating Partnership were treated for
federal income tax purposes as an association taxable as a corporation in any
taxable year (i) the income, deductions and losses of such Participating
Partnership would not pass through to the Company and then the Shareholders;
(ii) the Participating Partnership would be required to pay federal income taxes
on its taxable income at rates up to a maximum of 35 percent, thereby
substantially reducing the amount of cash available for distribution to the
Company and then the Shareholders; (iii) state and local taxes also could be
imposed on such Participating Partnership; and (iv) any distributions to the
Company from such Participating Partnership would be treated as taxable
dividends to the extent of the current and accumulated earnings and profits of
that Participating Partnership. In addition, the change in a Participating
Partnership's status for tax purposes could be treated by the IRS as a taxable
event, in which case the Company and the Shareholders could have a tax liability
under circumstances in which they would not receive any
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cash distributions. Similar consequences would result if the Company were
treated as a corporation in any taxable year.
Effective January 1, 1997, in general, a noncorporate domestic entity
with two or more owners will be treated as partnership for federal income tax
purposes unless the entity affirmatively elects to be treated as a corporation.
Neither the Company nor any Participating Partnership will elect to be treated
as a corporation.
An entity qualifying as a partnership could be taxed as a corporation
under special rules applicable to a publicly traded partnership. If a publicly
traded partnership does not satisfy income tests set forth in the Code, it will
be taxed as a corporation. The Company will be deemed a publicly traded
partnership, but the Participating Partnerships are not expected to be publicly
traded partnerships.
For federal income tax purposes, a publicly traded partnership is
treated as a corporation unless 90 percent or more of its gross income for each
tax year of its existence is "qualifying income." Qualifying income, in relevant
part, includes rents from real property, gain from the sale or other disposition
of real property, gain from the sale or disposition of a capital asset or
depreciable property held for more than one year, real property held for more
than one year used in the trade or business that is not inventory, all interest
and dividends and gain from the sale or other disposition of stock, securities
or foreign currencies, or other income, including but not limited to, gains from
options, futures or forward contacts derived with respect to the business of
investing in such stock, securities or currencies.
With few exceptions, the properties owned by the Participating
Partnerships produce income that will be qualifying income for the Company.
Because it anticipates that at least 90 percent of its gross income will be
qualifying income, the Company anticipates that it will be taxable for federal
income tax purpose as a partnership and not as a corporation.
TAX CONSEQUENCES OF CONTRIBUTION OF PROPERTY
A prospective investor who contributes property to the Company in
exchange for Listed Shares and would recognize taxable income in the amount by
which (a) the excess of (i) the investor's share of liabilities immediately
before the contribution over (ii) that investor's share of the liabilities of
the Company immediately after the contribution that exceeds (b) the investor's
basis of the property contributed to the Company immediately before the
contribution. Any such gain will generally be treated as gain from the sale of a
capital asset. See "Treatment of Gain or Loss on Disposition of Shares ," below
and "New Tax Law Provisions", above. If the Company were to merge with, combine
with, convert into, or otherwise engage in a transaction whereby a Shareholder's
Shares are converted into or exchanged for shares of a company that is a real
estate investment trust for Federal income tax purposes (a "REIT"), a
shareholder who contributed Property with debt in excess of the basis therefore
to CD could recognize gain on such transaction notwithstanding that the
transaction otherwise might not result in gain or loss to most Shareholders.
The tax consequence of a contribution of property to the Company by
an investor are dependent on the facts and circumstances relating to the
property (for example, the amount of debt to which it is subject and when the
debt was incurred). As a result, any discussion herein is not intended as a
substitute for careful planning and a prospective investor who is contemplating
contributing property to the Company should look to, and rely on, his
professional tax advisors with respect to the tax consequences of such a
transaction.
If the Company were to merge with, combine with, convert into, or
otherwise engage in a transaction whereby a Shareholder's Shares are converted
into or exchanged for shares of a company that is a real estate investment trust
for Federal income tax purposes (a "REIT"), a Shareholder who
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contributed Property with debt in excess of the basis therefore to CD could
recognize gain on such transaction notwithstanding that the transaction
otherwise might not result in gain or loss to most Shareholders.
The tax consequences of a contribution of property to the Company by
an investor are dependent on the facts and circumstances relating to the
Property (for example, the amount of debt to which it is subject and when that
debt was incurred). As a result, any discussion herein is not intended as a
substitute for careful planning and a prospective investor who is contemplating
contributing property to the Company should look to, and rely on, his
professional tax advisor with respect to the tax consequences of such a
transaction.
SHAREHOLDERS NOT COMPANY, SUBJECT TO TAX
The Company and each Subsidiary Partnership, is required to report to
the IRS each item of its income, gain, loss, deduction and items of tax
preference, if any. The Company and each Subsidiary Partnership will file a
federal and may file a Delaware partnership return of income but the Company
will not itself be subject to any federal or Delaware income taxes. See
"Classification as a "Partnership," and "New Tax Law Provisions," above and
"State and Local Tax Consequences" below.
Each Shareholder will report on his personal income tax return his
distributive share of each item of the Company's income, gain, loss, deduction,
credit and tax preference. Each Shareholder will be taxed on his pro rata share
of the Company's taxable income, whether or not he has received or will receive
any cash distributions from the Company. A Shareholder's share of the taxable
income of the Company and the income tax payable by such Shareholder with
respect to such taxable income may exceed the cash actually distributed to him.
The income tax returns of the Company may be audited by the IRS, and
such audit may result in the audit of the returns of the Shareholders. Various
deductions claimed by the Company or the Subsidiary Partnership Unitholders on
its returns could be disallowed in whole or in part on audit, which would result
in an increase in the taxable income or a decrease in the taxable loss of the
Company or the Subsidiary Partnership with no associated increase in
distributions with which to pay any resulting increase in tax liabilities of the
Shareholders or holders of Subsidiary Partnership Units.
But see "New Tax Law Provisions," above.
Each Shareholder is required to treat partnership items on his return
consistently with their treatment on the Company's return, unless a Shareholder
files a statement with the IRS identifying the inconsistency. Failure to satisfy
this requirement could result in an adjustment to conform the treatment of the
items by such Shareholder with its treatment on the Company's return and may
cause such Shareholder to be subject to penalties.
Audits of partnership items are conducted at the Company level in a
single proceeding, rather than in separate proceedings with each Shareholder.
Administrative adjustment of determinations of the Company items made on audit
can be initiated by the Tax Matters Partners (the "TMP") or by any other
Shareholder. Suits challenging IRS determinations may be brought by the Manager,
who has been designated by the Company as the TMP or, if the TMP fails to act,
by other Shareholders owning certain minimum interests. Only one such action may
be litigated. All Shareholders generally will be bound (subject to certain
exceptions) by the outcome of final partnership administrative adjustments by
the IRS resulting from an audit handled by the TMP, as well as by the outcome of
judicial review of such adjustments. The Company will be the TMP of each
Participating Partnership, and these audit rules apply to such Partnerships in
the same manner as they apply to the Company. See "New Tax Law Provisions" above
for a discussion of electing large partnerships.
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ALLOCATIONS OF PROFITS AND LOSSES
A portion of each Participating Partnership's income, gain, loss and
deduction will be allocated to the Manager as Limited Partner of each
Participating Partnership, and the remainder will be allocated to the Company
and the Subsidiary Partnership Unitholders. Items allocated by the Company to
the owners of Listed Shares will be shared among them according to the
respective number of Listed Shares owned by each Shareholder. These allocation
provisions will be recognized for federal income tax purposes only if they are
considered to have "substantial economic effect" and are not retroactive
allocations or are determined to be in accordance with the Partners' interests
in the Partnership.
Certain special allocations are required by the Code and the
Regulations for contributed property (Code Section 704(c) allocations) and other
tax compliance items such as the basis adjustments required under a Code Section
754 election. See "Tax Elections" below. Allocations under Section 704(c) of the
Code will require that gain inherent in contributed property be allocated to the
person or persons who contributed it and may require the allocation of
depreciation deductions from property contributed or deemed to be contributed to
a partnership, or property whose book value is adjusted by a partnership on
admission of new partners, away from the contributing or previously admitted
partner where there is unrealized gain inherent in such property. As a
consequence of the Consolidation, the Shareholders will be deemed to have
contributed their Units to the Company. The Manager will select the method for
making allocations under Section 704(c) of the Code.
The Company will allocate its taxable income and losses among the
Shareholders in proportion to the number of Shares owned by them, based on the
number of months during the year for which the Shareholder was a record owner of
the Shares. The Company will treat the Shareholder who is the record owner of
such Share, as of the close of business on the last day of the month, as having
been the owner of such Share for the entire month. Hence, in the case of a sale
or other transfer of a Share recorded before the last day of a calendar month,
the transferor Shareholder will not be allocated any taxable income for the
month in which the record transfer occurs, and the transferee Shareholder will
be allocated all taxable income for such month. Therefore, taxable income or
loss may be allocated to a Shareholder even though such income or loss was not
actually realized by such Shareholder. Furthermore, transferees of Shares may
recognize income during a period for which they did not receive distributions.
The Code generally requires that items of partnership income and
deduction be allocated among transferors and transferees of partnership
interests, as well as among partners whose interests otherwise vary during a
taxable period, on a daily basis. The Company's proposed allocation method will
not comply with this requirement. In the event a monthly convention is not
allowed by the Regulations (or only applies to transfers of less than all of a
partner's interest), the IRS may contend that taxable income or losses of the
Company must be reallocated among the Shareholders. If the IRS were to sustain
any such contention, the Shareholders respective tax liabilities would be
adjusted to the possible detriment of certain Shareholders. The Manager is
authorized to revise the Company's method of allocation between transferors and
transferees (as well as among partners whose interests otherwise vary during a
taxable period) to comply with any future Regulations. Similarly, the IRS could
challenge the allocations made by the Subsidiary Partnerships.
The Company believes that the allocations under the Participating
Partnership Agreements and the Operating Agreement should be regarded as meeting
the standards of Section 704(b) of the Code. Counsel is unable to opine to that
effect, however, because, among other things, allocations to preserve uniformity
as among Shares are not in technical compliance with the Regulations.
PASSIVE ACTIVITY LOSS LIMITATIONS
The Code provides that deductions from passive trade or business
activities, to the extent they exceed income from all such passive activities
(exclusive of portfolio income), generally may not be
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deducted against other income of individuals, estates, trusts, closely held C
corporations or personal service corporations.
Passive income, gain, losses and credits from a publicly traded
partnership, such as the Company, may only be applied against other items of
income, gain and loss from that publicly traded partnership. Any unused passive
activity losses and credits are treated as suspended losses and credits and can
be carried forward and treated as deductions and credits from passive activities
in the next taxable year. Suspended losses and credits attributable to passive
trade or business activities are allowed in full upon a fully taxable
disposition of the taxpayer's entire interest in the activity to an unrelated
party. Suspended passive activity losses of a publicly traded partnership, such
as the Company, are allowed only upon a disposition of all of a Shareholder's
interest in the publicly traded partnership. If an interest in a passive
activity is transferred by reason of death, the amount of suspended passive
activity losses that may be deducted are reduced to the extent of any step-up in
the basis of the interest in the passive activity which occurs at the time. A
gift of an interest in a passive activity does not trigger recognition of
suspended passive activity losses, but permits the donee to increase his basis
in the interest by the amount of those losses up to the fair market value of
such interest.
Pursuant to the legislative history of the legislation that included
the passive activity loss rules in the Code, income generated by the Company
will constitute portfolio income to the Shareholders, not passive activity
income. Shareholders will not be able to offset passive activity losses from
other sources with income generated by the Company. See "Investment and Other
Limitations on the Deduction of Interest" below. However, suspended passive
activity losses from the Company can offset passive income from the Company.
DEDUCTIBILITY OF FEES
All expenditures of the Company and the Participating Partnerships
must constitute ordinary and necessary business expenses in order to be
deductible, unless the deduction of any such item is otherwise expressly
permitted by the Code (e.g., interest and certain taxes). In addition, all
expenditures for personal services must be reasonable in amount and, in order to
be deductible, must represent payment for services actually rendered during the
current taxable year rather than in future years.
The Company and the Participating Partnerships intend to claim
deductions both for property management fees and for expense reimbursements
payable to the Manager or its Affiliates. The Company believes, on advice of
counsel, that the management fees and reimbursements payable to the Manager will
be deductible as ordinary and necessary business expenses by the Company and/or
the Participating Partnerships. However, because the Company's belief depends
upon essentially factual determinations, no assurance can be given that the
deduction of any of the fees paid to the Manager will not be successfully
challenged by the IRS. These issues are essentially questions of fact with
respect to which counsel cannot opine. If all or a portion of such deductions
were to be disallowed, the Company's taxable income would be increased or its
losses would be reduced.
The Company may pay acquisition fees to the Manager, its Affiliates
or others in connection with the acquisition of properties. The Company intends
to add Acquisition Fees paid to the basis of the property acquired. Also, the
Participating Partnership Agreements permit and the Operating Agreement permits
the Participating Partnerships and the Company to pay a fee to the Manager or
its Affiliates in connection with the sale of a partnership property. The
Participating Partnerships and the Company intend to treat these expenses as
expenses of sale of the property involved, thereby decreasing any gain or
increasing any loss recognized thereupon.
The Code limits the deductibility of an individual's miscellaneous
itemized deductions, including investment expenses, to the amount by which such
deductions exceed two percent of his
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adjusted gross income. Individual Shareholders will be subject to this
limitation in determining their deductibility of their allocable share of the
Company's management fees and other expenses unless the Company or the
Participating Partnerships are deemed to be engaged in a trade or business. If
the Company elects to be treated as an electing large partnership, this
limitation no longer will apply to Shareholders. See "New Tax Law Provisions"
above.
START-UP EXPENDITURES
Section 195 of the Code provides that "start-up expenditures" may, at
the election of the taxpayer, be amortized ratably over a period of not less
than 60 months (beginning with the month that the business begins). The
determination of whether an item is a start-up expenditure is based on the facts
and circumstances in each case.
The Company may seek to deduct certain expenses incurred by it prior
to the commencement of any rental activity or of its ownership interest in the
Participating Partnerships. The IRS may disallow any such deductions as not
having been incurred in connection with an existing trade or business of the
Participating Partnerships and/or the Company. If the IRS were successful in
such disallowance, such disallowed expenses would be available as deductions
only through amortization over the applicable start-up expenditure period (to
the extent a proper election is in place and such expenses qualify as start-up
expenditures).
The Participating Partnerships and the Company intend to take steps
to preserve their right to amortize start-up expenses commencing with the date
of the Consolidation, in the event it is ultimately determined that the Company
began business at that time. Although the Participating Partnerships and the
Company are advised by counsel and tax accountants, because of the uncertainty
that presently surrounds these matters, no opinion of counsel will be received
with respect to these deductions and there can be no assurance that, despite the
Participating Partnerships' or the Company's best efforts, they will be able to
preserve their right to amortize the above described expenses.
TAX AND "AT RISK" BASIS OF SHARES
The tax basis of the Shares received by an investor will equal the
adjusted tax basis of any property contributed to the Company immediately prior
to the contribution plus any cash contributed by the investor (i) increased by
his share, if any, of the liabilities of the Company and the taxable gains, if
any, on the contribution and (ii) decreased (but not below zero) by his share
of, if any, of the liabilities to which the property contributed by the investor
to the Company was subject to immediately prior to the contribution. The holding
period of Shares will include the holding period of such investor for the
property contributed to the Company.
Each Shareholder's initial adjusted basis for his Share(s) will be
increased by the amount of (i) his share of items of income and gain of the
Company and (ii) any increase in his proportionate share of the Company's share
of nonrecourse indebtedness to which the Participating Partnerships' or the
Company's Properties are subject (limited to the fair market value of the
property securing such indebtedness) and reduced, but not below zero, by (a) the
amount of his share of items of the Company loss and deduction and expenditures
which are neither properly deductible nor properly chargeable to his capital
account, (b) the amount of any cash distributions (including any decrease in his
share of liabilities) and (c) the basis of any property distributions received
by such Shareholder. See "Treatment of Gain or Loss on Disposition of Shares"
and "New Tax Law Provisions."
The amount of the Company's losses that may be deducted by a
Shareholder is limited to the adjusted basis of the Shareholder's Shares. Any
excess losses are carried over until the Shareholder has sufficient basis to
deduct such losses. Deductibility of a Shareholder's share of the Company's
losses is further limited by his "at risk" basis as determined pursuant to the
"at risk" rules found in Section 465 of the Code. The "at risk" rules provide
that a taxpayer may not deduct losses from an activity for a
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taxable year to the extent such losses exceed the aggregate amount for which the
taxpayer is considered "at risk" with respect to the activity. Any loss in
excess of a taxpayer's amount "at risk" will be allowed as a deduction in
succeeding taxable years if and to the extent that the taxpayer is "at risk"
with respect to the activity in such subsequent year. The "at risk" rules apply
to essentially all Shareholders except those that are C corporations owned by
more than five individuals during the last half of the corporation's taxable
year. If the Company's "at risk" basis in the Participating Partnerships or a
Shareholder's "at risk" basis in the Company is decreased below zero in any year
(e.g., due to the Company's or the Shareholder's receipt of a cash distribution
or a decrease in its or his share of liabilities included in its or his "at
risk" basis), the Company and the Shareholder will recognize income to the
extent his or its "at risk" basis is below zero. However, the amount of income
which must be recognized in these circumstances is limited to the net losses
previously allowed to the Company from the Participating Partnerships or to the
Shareholder from the Company.
A Shareholder will be deemed to be "at risk" with respect to its
share of qualified nonrecourse financing secured by real property. However, a
Shareholder will not be considered to have amounts "at risk" to the extent he is
protected against losses through guarantees, stop-loss agreements or other
similar arrangements. To the extent that any borrowing by a Participating
Partnership or the Company is qualified nonrecourse financing, the "at risk"
rules should not limit the deductibility of any Participating Partnership and/or
Company losses, if any. However, to the extent that any borrowings by a
Participating Partnership or the Company is not qualified nonrecourse financing,
the "at risk" rules could apply to limit the deductibility of losses by the
Company or Shareholders, respectively.
The passive activity loss limitations are applied after the "at risk"
rules are applied. Therefore, a loss not currently deductible under the "at
risk" rules would be suspended pursuant to the "at risk" rules, not the passive
activity loss rules. Any such suspended losses could later become subject to the
passive activity loss rules when they would otherwise be deductible under the
"at risk" rules. See "Passive Activity Loss Limitations" above.
TREATMENT OF CASH DISTRIBUTIONS FROM THE COMPANY
Cash distributions (which are considered to include any reduction in
Participating Partnership and/or the Company nonrecourse indebtedness) made to
Shareholders, other than those in exchange for or in redemption of all or part
of their Shares, generally will not affect a Shareholder's distributive share of
income or loss from the Company. Such distributions may represent distributions
of income, returns of capital or both. A distribution of income or a return of
capital generally does not result in any recognition of gain or loss for federal
income tax purposes but reduces a Shareholder's adjusted basis in his Shares.
See "Tax and "At Risk Basis of Shares," above and "Treatment of Gain or Loss on
Disposition of Shares," below.
TREATMENT OF GAIN OR LOSS ON DISPOSITION OF SHARES
Any gain or loss recognized by a Shareholder upon the sale or
exchange of his Shares will generally be treated as capital gain or loss, except
that the portion of any proceeds of sale which is attributable to any unrealized
receivables (which term includes, for these purposes, allocable depreciation
recapture attributable to underlying partnership property (see "Depreciation
Recapture," below) or appreciated inventory items (to the extent that the value
of such inventory items of the Company exceeds the basis of such property, had
such property been disposed of by the Company prior to the sale of such
Shareholder's share) will generally be treated as ordinary income. See "New Tax
Law Provisions" above for a discussion of capital gains tax rates. Shareholders
which are corporations or trusts are taxable on amounts representing
depreciation recapture attributable to underlying Participating Partnership or
Company property upon distribution of Shares to their shareholders or
beneficiaries.
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The installment method of reporting income or gain is not available
for a sale or exchange of Listed Shares because the Code prohibits use of the
"installment method" to report gain on the sale or exchange of publicly traded
property. See "Installment Sales" and "Depreciation Recapture" below.
In determining the amount received upon the sale or exchange of a
Share, a Shareholder must include, among other things, his allocable share of
non-recourse indebtedness. Therefore, it is possible that the gain or other
income recognized on the sale of a Share may exceed the cash proceeds of the
sale and, in some cases, the income taxes payable with respect to the sale may
exceed such cash proceeds. The same rules apply to the sale by a Subsidiary
Partnership Unitholder of his Units.
The IRS has ruled that a partner must maintain an aggregate adjusted
tax basis in his aggregate partnership interest (consisting of all interests
acquired in separate transactions). On the sale of a portion of such aggregate
interest, a partner would be required to allocate, on the basis of the relative
fair market values of such interests on the date of sale, his aggregate tax
basis between the portion of the interest sold and the portion of the interest
retained. This requirement, if applicable to the Company, effectively would
preclude a Shareholder owning Shares that were acquired at different prices on
different dates from controlling the timing of the recognition of the inherent
gain or loss in his Shares by selecting the specific Shares that he would sell.
The ruling does not address whether this aggregation requirement, if applicable,
results in the tacking of the holding period of older Shares on the holding
period of more recently acquired Shares. Because the application of this ruling
in the context of a publicly traded partnership, such as the Company, is not
clear, a person acquiring Shares and considering the subsequent purchase of
additional Shares should consult his professional tax advisor as to the possible
tax consequences of the ruling.
When a Shareholder subject to the passive activity loss limitations
disposes of his entire interest in a fully taxable disposition to an unrelated
party, his suspended passive activity losses, if any, from the partnership will
be deductible. If a Shareholder subject to the passive activity loss limitations
disposes of less than his entire interest in his respective partnership or
disposes of his interests in a transaction which is not fully taxable, any
suspended passive activity will remain suspended. See "Passive Activity Loss
Limitations" above.
TREATMENT OF GIFTS OF SHARES
Generally, no gain or loss is recognized for income tax purposes as a
result of a gift of property. However, in the event that a gift of a Share is
made at a time when a Shareholder's allocable share of nonrecourse indebtedness
exceeds the adjusted basis for his Share, such Shareholder will recognize gain
upon the transfer of such Share to the extent of such excess. Any such gain will
generally be treated as capital gain. Gifts of Shares may also be subject to a
gift tax imposed pursuant to the rules generally applicable to all gifts of
property.
A gift of a Share will not cause any suspended passive activity
losses to be deductible. The donee's basis for the Share is the donor's basis
immediately before the gift plus any suspended passive activity losses allocable
to the gifted Share. However, the donee's basis for purposes of determining loss
on a later disposition cannot exceed the fair market value of the Share on the
date of the gift. Consequently, if the sum of the donor's basis for the Share
and suspended passive activity losses exceed the Share's fair market value, a
portion of the suspended passive activity losses could be lost and would never
be deductible.
ISSUANCE OF ADDITIONAL SHARES
The Company may issue new Shares to finance the acquisition of
additional properties or for other purposes. On any issuance of additional
Shares, the capital accounts of the existing Shareholders will be adjusted to
reflect a revaluation of the Company's properties (based on their then fair
market value, net of liabilities, to which they are then subject). Any resulting
unrealized gain or loss will be
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allocated among the existing Shareholders and subsequent allocations of taxable
income, gain, loss and deduction will be made in accordance with the
Regulations. See "Allocations of Profits and Losses" above.
The issuance of additional Shares also could result in a decrease in
a Shareholder's share of nonrecourse debt. Any such reduction would be treated
as a distribution of cash. See "Treatment of Cash Distributions from the
Company" above.
TREATMENT OF GAIN OR LOSS ON SALE OF PROPERTY
Gains or losses realized by the Company on sales of property held for
more than one year will be treated as long-term capital gain or loss, (i) unless
it is determined that the Company or the Participating Partnership that owns the
property is a "dealer" in real estate for federal income tax purposes, (ii)
except to the extent that the properties sold constitute Section 1231 assets
(real property assets used in a trade or business and held for more than one
year), and (iii) except to the extent the company sells personal property and
has depreciation recapture. See "New Tax Law Provisions" above. Section 1231
assets include depreciable real property of the type which the Company and/or
the Participating Partnerships own or intend to acquire. If the properties sold
constitute Section 1231 assets, a Shareholder's proportionate share of gains and
losses from the sale of such assets would be combined with any other Section
1231 gains or losses recognized by him during the year. The net Section 1231
gain would be taxed as capital gain, except that if the Shareholder has reported
net Section 1231 losses in any of the five years prior to such sale, any net
Section 1231 gains would be reported as ordinary income to the extent of such
reported losses. Net Section 1231 losses would be taxed as ordinary losses. See
"New Tax Law Provisions" for a discussion of capital gains rates.
In the event that the entity owning the property is determined to be
a "dealer," any gain or loss on the sale or other disposition of a property by
such entity would be treated as ordinary income or loss. Although none of the
Participating Partnerships nor the Company anticipates being deemed a "dealer"
in real estate, there can be no assurance that the proposed course of activities
of the Company may not result in it being deemed a "dealer." The Company intends
to conduct its activities and to consult with a tax professional from time to
time with regard to the structuring of its operations and transactions, to avoid
being deemed a "dealer." However, since the determination of "dealer" status is
essentially factual and will depend upon the nature of the properties acquired
and the conduct of activities by the Company, counsel is unable to express an
opinion as to whether the Company or any Participating Partnership might be
deemed a "dealer."
A foreclosure of a mortgage on a property or the acceptance of a deed
in lieu of foreclosure is deemed to be a disposition of such property. In such
transactions, the Company or a Participating Partnership may recognize gain in
an amount equal to the excess, if any, of the outstanding mortgage over the
adjusted basis of such property.
In certain other circumstances, the gain allocable to the
Shareholders upon a sale, exchange or other disposition of Partnership property
may exceed any resulting cash distributable to the Shareholders and in some
cases the income taxes payable by the Shareholders with respect to such gain may
exceed the cash distributable, if any, to such Shareholders.
SALE-LEASEBACK TRANSACTIONS
Many of the Participating Partnerships Investments are and a number
of the Company's investments may be in the form of sale-leaseback transactions
wherein the Participating Partnership or the Company either (i) purchased or
will purchase property free of encumbrances, net lease such property back to the
seller and obtain separate mortgage financing or (ii) purchase property subject
to a mortgage and/or an existing net lease. If a sale-leaseback transaction were
recharacterized as a financing arrangement, the Participating Partnership or the
Company, as the case may be, would not be
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entitled to depreciation deductions with respect to the property, and the lease
payments received by the Participating Partnership or the Company and, in
certain circumstances, any gain on the sale of such property could be treated,
at least in part, as interest income. Such a recharacterization could increase a
Shareholder's share of ordinary income and decrease such Shareholder's share of
capital gain. The Participating Partnerships and the Company will attempt to
structure each net lease transaction to be recognized as a leasing arrangement
for federal income tax purposes and not treated as a financing arrangement or
conditional sale.
On June 3, 1996, the IRS proposed Regulations under Code Section 467.
Code Section 467 applies to rental agreements that have increasing or decreasing
rents or prepaid or deferred rents. For lease-backs or long term agreements
entered into for tax avoidance purposes ("disqualified lease-backs or long term
agreements"), the proposed Regulations under Code Section 467 provide that the
rent effectively must be leveled and accrued economically. Both rent and
interest would be accrued for each period similar to a mortgage. These
Regulations do not define what constitutes a tax avoidance purpose. For leases
other than disqualified lease-backs or long term agreements, the Regulations
under Code Section 467 provide that rent properly allocated to each period must
be accrued in that period and interest is deemed to be paid or earned on any
deferred on prepaid rent. These Regulations are proposed to apply to
disqualified lease-backs and long term agreements entered into after June 3,
1996 and other leases entered into after the date final regulations are issued.
The Company and the Participating Partnerships engage in long-term
sale lease-back transactions; however, based on current law and interpretations
thereof, neither the Company nor the Participating Partnerships believe that
their typical transactions would be found to have a tax avoidance purpose. Also,
neither the Company nor the Participating Partnerships anticipate having any
significant deferred or prepaid rent. However, because these Regulations are new
and not entirely clear, neither the Company nor the Participating Partnerships
can determine with any assurance how these Regulations, if adopted, might apply
to it.
ACQUISITION OF STOCK, OPTIONS AND WARRANTS
The Company currently owns (directly or through the Participating
Partnerships) and may invest in the stock of, or other interests in, or warrants
or other rights to purchase the stock of or other interests (an "Equity
Interest") in any tenant or the parent or controlling person of any tenant of
the Company. If the acquisition of such Equity Interest occurs contemporaneously
with the purchase of property in a sale-leaseback transaction or the execution
of a lease and no separate consideration is provided for such acquisition, the
purchaser will be required to allocate the price paid between the property and
the Equity Interest based upon the relative fair market values of each, or in
the case of a lease, the lessor may be required to recognize rental income equal
to the value of the Equity Interest. Upon the sale or exchange of such Equity
Interest, the gain or loss will generally be capital gain or loss and will be
short-term or long-term depending on the property's holding period. Upon the
exercise of an option or warrant, the price paid for the option or warrant will
be added to the exercise price to determine the Participating Partnership's or
the Company's basis in the stock or other interest acquired. The holding period
for the stock or other interest acquired through such an exercise will commence
on the day after the date of exercise of the option or warrant. Should an option
or warrant owned by the Participating Partnerships or the Company expire or
lapse unexercised, the Participating Partnerships or the Company, respectively
will sustain a loss equal to the amount paid for the option or warrant. Such
loss will generally be a capital loss and will be short-term or long-term
depending on the Participating Partnership's or the Company's holding period.
TAX ELECTIONS
The Company and the Participating Partnerships may make various
elections for federal income tax reporting purposes which could result in
various items of income, gain, loss, deduction and credit being treated
differently for tax purposes than for accounting purposes.
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The Code provides for optional adjustments to the basis of
partnership property for measuring both depreciation and gain upon distributions
of partnership property (Code Section 734) and transfers of Shares (Code Section
743) provided that a partnership election has been made pursuant to Code Section
754. The Operating Agreement and the Participating Partnership Agreements each
require that a Section 754 election be made. Any such election, once made, is
irrevocable without the consent of the IRS.
The IRS has ruled that under the Code and applicable Regulations, the
Section 754 election will generally allow a Shareholder who purchases Shares
from another Shareholder in the open market to increase his share of the tax
basis in the Participating Partnership's properties to reflect the purchaser's
purchase price for such Shares, as if such purchaser had acquired a direct
interest in the Company's assets and of its proportionate share of the Company's
assets. If a Shareholder's adjusted basis in his Shares is less than his
proportionate share of the adjusted basis of the Company's property at the time
of acquisition of such Shares, such Shareholder's basis in his share of the
Company's property must be reduced by such an amount resulting in adverse
consequences to such Shareholder.
The Company will calculate the basis adjustment for subsequent
purchasers who furnish certain information to the Company. For purchasers who do
not furnish this information, the Company intends to provide information to
enable them to calculate the basis adjustment for themselves.
The calculations and adjustments in connection with any Section 754
election would depend, among other things, on the day on which a transfer occurs
and the price at which the transfer occurs. In order to help reduce the
complexity of these calculations and the resulting administrative cost to the
Company, the Operating Agreement provides that the Company will apply the
following methods in making the necessary adjustments: (i) the price paid by a
transferee for his Shares will be deemed to be the lowest quoted trading price
of the Shares during the month in which the transfer was deemed to occur,
irrespective of the actual price paid; and (ii) the transfer will be deemed to
occur at the close of business on the last day of the calendar month in which
the transfer occurs, irrespective of when the transfer actually occurs. The
application of these conventions would yield a less favorable tax result, as
compared to adjustments based on actual price, to a transferee who paid more
than the lowest quoted trading price for his Shares.
The calculations under Code Section 754 are highly complex, and there
is little legal authority dealing with the mechanics of the calculations,
particularly in the context of large, publicly-held partnerships. It is possible
the IRS might take the position that the adjustments made by the Company do not
meet the requirements of the Code or the Regulations, particularly given the
special assumptions to be applied by the Company for administrative convenience.
If the IRS were to sustain such a position, any increased depreciation
deductions allowable to a transferee of Shares as the result of the Section 754
election might be reduced, and any gain allocable to a transferee on the sale of
the Company's and the Participating Partnerships' properties might be increased.
The Manager is authorized by the Operating Agreement and by the
Participating Partnership Agreements to cause the Participating Partnerships and
the Company to make or revoke any election required or allowed to be made by
partnerships under the Code. Such election(s) may increase or decrease taxable
income or loss. See "New Tax Law Provisions" above for a discussion of electing
large partnerships.
DEPRECIATION
Current tax law provides for an accelerated cost recovery system
("ACRS") of depreciation. Under this system, the cost of eligible nonresidential
real property, whether new or used, generally must be depreciated over a 39-year
period using the straight-line method.
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Furthermore, under ACRS, eligible personal property is divided into
six classes (i.e., 3-year, 5-year, 7-year, 10-year, 15-year, and 20-year
property). This property, whether new or used, generally must be depreciated
over specified periods using a statutorily prescribed accelerated method of
depreciation or, if the taxpayer so elects, using the straight-line method over
various periods.
The depreciation periods are lengthened in certain circumstances
where real property is leased to a tax-exempt entity or owned by a partnership
having tax-exempt entities as partners. For this purpose, "tax-exempt entities"
do not include those entities which would be taxable on their allocable share of
Partnership income as "unrelated business taxable income."
Generally, any real property acquired by the Company will be subject
to a 39-year recovery period, and will be depreciated using the straight-line
method. Any personal property acquired by the Company generally will be
depreciated over a seven-year recovery period using the double declining balance
method (switching to straight-line at a time to maximize the depreciation
deductions). If the Participating Partnerships terminate as a result of the
consolidation, the then basis for all nonresidential real property owned by the
Participating Partnerships at such time will be depreciated over a 39-year
recovery period. If the Company and Participating Partnerships elect to be
treated as electing large partnerships, it is possible, but not certain, that
the Participating Partnerships will not terminate and their depreciation
deductions will not change. See "New Tax Law Provisions" above. If, for tax
purposes, a Participating Partnership is not considered the owner of a Property
held at the time of the Consolidation (for example, where a lease is treated as
a financing arrangement rather than a "true lease"), the Shareholders would not
be entitled to depreciation deductions with respect to that Property. It is
anticipated that the Participating Partnerships will be treated as the owners
for tax purposes of all of the Properties held at the time of the Consolidation.
In addition, if any tax-exempt entities hold Shares and the Company's
allocations are not considered to be "qualified allocations," then a portion of
the Company's depreciation deductions, corresponding to the tax-exempt entities'
percentage interest in the Company, may be required to be depreciated over
somewhat longer recovery periods than those otherwise applicable. See
"Allocations of Profits and Losses" and "Tax Elections" above and "Investment by
Qualified Pension and Profit-Sharing Plans (Including Keoghs), Stock Bonus
Plans, and Individual Retirement Accounts" below.
DEPRECIATION RECAPTURE
The Code provides that excess depreciation (the excess of accelerated
depreciation over straight-line depreciation) on depreciable real property,
other than low-income housing, and all depreciation on depreciable real property
eligible for ACRS where other than straight-line depreciation is used, is
subject to recapture as ordinary income (to the extent of gain) when the
property is sold, regardless of how long it is held before such sale. Since the
Participating Partnerships and the Company will only claim straight-line
depreciation, it is unlikely that non-corporate Shareholders of the Company will
be subject to depreciation recapture with respect to the Company's depreciable
real property whether or not eligible for depreciation under ACRS. However, if
depreciable real property is sold or otherwise disposed of within 12 months of
its acquisition, then all depreciation, including straight-line, will be subject
to recapture as ordinary income upon such disposition. See "New Tax Law
Provisions" above for a discussion of the special rate applicable to gain
allocable to depreciation on real property.
Additionally, under the Code, a corporate Shareholder is required to
recognize as ordinary income 20 percent of its distributive share of the
Company's gain from the disposition of depreciable real property, to the extent
of the depreciation deductions claimed thereon, regardless of whether
straight-line depreciation was used.
The Code also provides that all depreciation on tangible personal
property and certain items of real property, such as elevators and escalators,
is, to the extent of any gain recognized, subject to recapture as ordinary
income when such property is sold, regardless of how long it is held before
sale.
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The Company and/or the Participating Partnerships will own items of such
property, and, accordingly, the Company and the Shareholders may be subject to
depreciation recapture with respect thereto.
ALTERNATIVE MINIMUM TAX
Individual and corporate taxpayers have potential liability for
alternative minimum tax. Certain items from the Company could affect a
Shareholder's alternative minimum tax liability. Since such liability is
dependent upon each Shareholder's own circumstance, Shareholders should consult
their own tax advisors concerning the alternative minimum tax consequences of
being a Shareholder.
INSTALLMENT SALES-IMPUTED INTEREST
If a sale or exchange of the Company's or a Participating
Partnership's real or personal property requires a payment or payments to be
made in more than one tax year, the Code allows any gain recognized to be
reported on the installment method." The Code provides that interest is payable
on the applicable percentage of tax deferred in connection with installment
sales of all non-dealer property the sale price of which exceeds $150,000. Such
interest is payable when the aggregate face amounts of installment obligations
held by a taxpayer which are issued during the taxable year exceed $5,000,000
and until any such installment obligation is satisfied. A Shareholder will be
treated as owning a proportionate share of any Company or Participating
Partnership installment obligation, and the $5,000,000 threshold is measured at
the Shareholder level. Interest must be paid on the deferred tax at the rate
applicable to underpayments of tax in effect for the month with which the
taxpayer's taxable year ends. The same rules apply with respect to any
Subsidiary Partnership Unitholder's interest in a Participating Partnership that
holds an installment obligation.
The Code provides that a "dealer" may not report dealer gains on the
installment method. A "dealer" is a taxpayer who holds real property for sale to
customers in the ordinary course of the taxpayer's trade or business. The
Company does not anticipate that it or any Participating Partnership will be a
dealer in real property. Therefore, a Shareholder who is not a dealer in real
property should be eligible to report any gain from an installment sale by the
Company or any Participating Partnership of property on the installment method.
Additionally, the Code provides that if an installment obligation arising from
the disposition of non-dealer property is pledged as security for any
indebtedness, the net proceeds of such secured indebtedness shall be treated as
a payment with respect to the installment obligation.
If, upon an installment sale of property, the Participating
Partnerships or the Company were to receive a rate of interest on any
installment obligation from the buyer which is below the rate provided by law,
the sales terms would be recharacterized in a manner which would increase
ordinary income to the Participating Partnerships or the Company, while
decreasing in a corresponding manner, first, any long-term capital gains and,
second, any depreciation recapture. Such interest income would be recognized by
the Participating Partnerships and/or the Company according to the original
issue discount rules. See "Accrual of Original Issue Discount" below. Because
the terms of sale of properties will be determined in part by then-current
market conditions and negotiations with potential buyers, no assurance can be
given that interest income will not be imputed on installment sales.
ACCRUAL OF ORIGINAL ISSUE DISCOUNT
The Code contains extensive rules relating to the tax accounting for
original issue discount ("OID"). The Participating Partnerships and the Company
will be subject to the OID rules with respect to its installment sales. OID can
arise with respect to an installment sale if (i) the interest rate varies
according to fixed (non-floating) terms, (ii) the debtor is permitted to defer
interest payments to years after such interest accrues, (iii) the amount of the
creditor's share of income or appreciation from the mortgaged property under a
right of participation is determined in a year before payment of such amount is
due or (iv) interest is imputed on an installment sale. See "Installment
Sales--Imputed
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Interest" above. The Participating Partnerships or the Company may sell
properties on an installment basis with any or all of the preceding terms and,
therefore, may be subject to the OID rules.
Recognition of OID as an item of income in any year will have the
effect of either reducing losses, if any, allocable to Shareholders or
increasing the amount of income which Shareholders must report from the Company
without the receipt of cash distributions with which to pay any tax resulting
from the reporting of such income. However, the Company expects the amount of
OID, if any, which the Company might recognize in any year would be minor in
comparison with cash distributions allocable to Shareholders in such year.
INVESTMENT INTEREST AND OTHER LIMITATIONS ON THE DEDUCTION OF INTEREST
A Shareholder's (that is not a corporation) investment interest
expense may be deducted only up to the Shareholder's net investment income
(i.e., the income from interest, dividends, rents, royalties and net short-term
capital gains from investment property to the extent it exceeds the expenses,
including straight line depreciation, incurred in earning such income). Interest
subject to the investment interest limitation includes all interest on debt
incurred in connection with property held for investment (including property
subject to a net lease) but not incurred in connection with the taxpayer's trade
or business, other than consumer interest and qualified residence interest.
To the extent that the Participating Partnerships' or the Company's
Properties are considered to be "investment assets," the amount of mortgage
interest allocated to each Shareholder, other than a corporation, may be
deductible by him only to the extent it does not exceed his net investment
income plus the amount by which certain deductions attributable to property
subject to a net lease exceeds the net income of such property. The amount of
interest not deductible due to such limitation, if any, may be carried over to
subsequent years within certain limits. The Participating Partnerships and the
Company anticipate that substantially all of their Properties will be treated as
investment assets and that substantially all of their mortgage interest
deductions allocated to the Shareholders will be subject to the above rules on
disallowance and carryover. However, unless the Participating Partnerships or
the Company realize a loss for tax purposes in any taxable year, the Company
anticipates that a Shareholder will not have any "excess investment interest"
subject to disallowance attributable to his interest in the Company. Should the
Company or a Subsidiary Partnership suffer a loss for any reason, the
Shareholders may realize "excess investment interest" because of their
investment in the Company.
In addition to the "investment interest" limitation described above,
Section 265(a)(2) of the Code disallows certain deductions for interest paid by
a taxpayer or a related person on indebtedness incurred or continued to purchase
or carry tax-exempt obligations. A Shareholder for whom tax-exempt obligations
constitute a significant portion of his net worth should consider the impact of
Section 265(a)(2) of the Code on his ability to deduct his allocable share of
the Company's interest expense.
Neither the Participating Partnerships nor the Company anticipate
that they will prepay any interest, but either or both may be required by
prospective lenders to pay certain amounts commonly referred to as "points"
which may be considered prepayments of interest for federal income tax purposes.
The Code requires that interest prepayments (including "points") be capitalized
and amortized over the life of the loan with respect to which they were paid.
CONSTRUCTION EXPENSES
The Participating Partnerships or the Company may incur expenditures
in connection with the construction of improvements on real property, some of
which must be capitalized for federal income tax purposes. The Code provides
that interest and real estate taxes incurred during the construction period of
improved real property which would otherwise be deductible must be added the
basis of the property and recovered through depreciation deductions. See
"Depreciation" above.
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INVESTMENT BY QUALIFIED PENSION AND PROFIT-SHARING PLANS (INCLUDING KEOGHS),
STOCK BONUS PLANS AND INDIVIDUAL RETIREMENT ACCOUNTS
Qualified pension and profit-sharing plans (including Keoghs), stock
bonus plans and IRAs (each a "Qualified Plan") are generally exempt from
taxation except to the extent that their "unrelated business taxable income" (as
defined in Section 512 of the Code) exceeds $1,000 during any fiscal year. The
IRS has ruled that an exempt employee's trust which becomes a limited partner in
a partnership carrying on a trade or business will realize such unrelated
business taxable income. There can be no assurance that the activities of the
Company or of any Participating Partnership would not be characterized as the
conduct of a trade or business by the IRS. Even to the extent that the
activities of the Company or any Participating Partnership were not so
characterized, since the Company's and each Participating Partnership's income
will be primarily rental income from "debt-financed property," a portion of each
Qualified Plan's distributive share of the Company's (or, if a Subsidiary
Partnership Unitholder, the Subsidiary Partnership) taxable income (including
capital gain) will constitute unrelated business taxable income. This portion is
determined in accordance with the provisions of Section 514(a) of the Code and
is that portion of the Qualified Plan's distributive share of its partnership's
income which is approximately equivalent to the ratio of that partnership's
share of debt to the basis of the partnership's share of the partnership's
property. Therefore, a Qualified Plan that purchases Shares in the Company may
be required to report all or a portion of its pro rata share of the Company's
taxable income as unrelated business taxable income. If, and to the extent that,
the Qualified Plan's unrelated business taxable income from all sources exceeds
$1,000 in any year, the Qualified Plan could incur a tax liability with respect
to such excess at such tax rates as would be applicable to such organizations if
such organizations were not otherwise exempt from taxation.
Section 514(c)(9) of the Code excludes from treatment as
"debt-financed property" certain investments in real property and improvements
by, among others, a pension, profit sharing or stock bonus trust which qualifies
under Section 401 of the Code (a "Qualified Trust"). A Qualified Trust does not
include an IRA which is not a sponsored IRA for which a determination letter has
been issued under Section 401(a) of the Code. It is not clear that the
acquisition or improvement of any real property by the Participating
Partnerships or the Company will be an acquisition or improvement contemplated
by Section 514(c)(9) of the Code with respect to a Qualified Trust. Furthermore,
even if so contemplated, there can be no assurance that any acquisition or
improvement of real property by the Participating Partnership or the Company
which is otherwise "debt-financed" will qualify for the exclusion under Section
514(c)(9) of the Code with respect to any Qualified Trust, especially since many
of the Participating Partnership's or the Company's Properties are expected to
be leased to the sellers thereof.
In considering an investment in the Company of a portion of the
assets of a Qualified Plan, a fiduciary should also consider among other things
(i) the definition of plan assets under ERISA and the status of labor
regulations regarding the definition of plan assets and (ii) whether the
investment satisfies the diversification requirements of Section 404(a)(l)(C) of
ERISA.
CERTAIN FEDERAL ESTATE TAX MATTERS
For federal estate tax purposes, an asset owned by a decedent is
taxed at its fair market value on the date of death of the decedent or, in some
cases, an alternate date prescribed by the Code. The basis for a Share received
from a decedent will be determined by adding the decedent's share of the
Company's liabilities to the estate tax value of the Share. As a result, the
taxable gain which a successor Shareholder may realize upon the sale of a Share
may be lower or higher than the taxable gain which would have been realized by
the decedent if the decedent had transferred the Company interest during his
lifetime.
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Upon the death of an individual Shareholder, suspended passive
activity losses are deductible by the deceased shareholder only to the extent
that the suspended passive activity losses exceed the difference between the new
Shareholder's (who received his interest from the decedent) basis for the Share
and the adjusted basis for the Share the deceased Shareholder had immediately
before his death. See "Passive Activity Loss Limitations," and "Tax and
"At-Risk' Basis of Shares" above. Any passive activity losses disallowed
pursuant to this rule are lost permanently.
TAX PENALTIES AND INTEREST
The time period during which the IRS must claim any deficiencies with
respect to partnership items in tax returns of Shareholders is generally three
years from the time that the Company files its partnership return, but not
commencing earlier than the due date for such return. The statute of limitations
may be extended automatically for certain Shareholders for which certain
information is not provided. The period may be extended with respect to any
Shareholder by agreement between the IRS and such Shareholder. In addition, the
period may be extended for all Shareholders by an agreement entered into by the
TMP with the IRS. For settlements entered into after the date of enactment of
the 1997 Tax Act, the one-year partner-level statute of limitations on
assessments for underpayments resulting from partnership level adjustments does
not begin to run until all partnership level items are settled. See, "New Tax
Law Provisions," above.
The Code imposes penalties of up to 20 percent on any underpayment of
tax attributable to a substantial understatement, valuation misstatement,
negligence or disregard of rules and regulations. The penalty is increased to 40
percent for any underpayment attributable to a gross valuation misstatement.
A substantial understatement subject to the penalty does not include
any amount attributable to (i) the tax treatment of any item if there was
substantial authority for the treatment or (ii) the tax treatment of any item
with respect to which the relevant facts are adequately disclosed in the return
if there was a reasonable basis for the position. If, however, any item of
understatement is attributable to a "tax shelter," the amount of understatement
is reduced only by the portion of the understatement that is attributable to tax
treatment for which there was "substantial authority" and with respect to which
the taxpayer "reasonably believed" that the tax treatment adopted was "more
likely than not the proper treatment." A "tax shelter" is defined to include a
partnership if the "principal purpose" of the partnership is the "avoidance or
evasion of federal income tax." It is possible that the IRS would take
the position that the Company or any Participating Partnership is a tax shelter
for this purpose and require the higher degree of proof applicable to tax
shelters.
TERMINATION OF THE COMPANY FOR TAX PURPOSES
Under Section 708(b) of the Code, if (i) at any time no part of the
business of the Company continues to be carried on by any of the Partners in the
Company or (ii) within a 12-month period 50 percent or more of the total
interests in partnership capital and profits are sold or exchanged, a
termination of the Company would occur for federal income tax purposes, and the
taxable year of the Company would close. It is possible that Shares representing
50 percent or more of the capital and profits interests in the Company might be
sold or exchanged within a single 12-month period. For this purpose, a Share
that changes hands several times during a 12-month period will only be deemed
sold or exchanged once.
Generally, if the Company is deemed to terminate, a Shareholder would
not recognize any taxable gain or loss as a result of the deemed termination of
the Company. A Shareholder, however, would recognize gain to the extent, if any,
that the Shareholder's pro rata share of the Company's cash (and the reduction,
if any, in the Shareholder's pro rata share of the Company's indebtedness) at
the date of a termination exceeded the adjusted tax basis of his Shares. Also,
the Company's taxable year would terminate. If the Shareholder's taxable year
were other than the calendar year, the inclusion of
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more than one year of Company income in a single taxable year of the Shareholder
could result. Finally, a termination of the Company could cause the Subsidiary
Partnerships, the Company, the Subsidiary Partnerships' Property or the
Company's Property to become subject to unfavorable statutory or regulatory
changes enacted after the date of the Consolidation and prior to the
termination, but which were not previously applicable to the Subsidiary
Partnerships or the Company or their assets. A deemed termination of the Company
will likely cause a deemed termination of the Subsidiary Partnerships. As a
result, if the Company is terminated, the Subsidiary Partnership Unitholders and
the Subsidiary Partnerships would experience the tax consequences described
above. See "New Tax Law Provisions" for a discussion of electing large
partnerships.
STATE AND LOCAL TAX CONSEQUENCES
In addition to the federal income tax aspects described above,
prospective Shareholders should consider potential state tax consequences of an
investment in the Company. Each Shareholder is advised to consult his own tax
advisor to determine whether the state in which he is a resident imposes an
income tax upon his share of the taxable income of the Company, or an estate or
inheritance tax, and whether an income tax or other return also must be filed in
those states where the Company acquires real property.
The Company will inform each Shareholder of his share of income or
losses to be reported to each of the states in which the Subsidiary Partnerships
or the Company own property. Personal exemptions, computed in various ways, are
allowed by some states and may reduce the amount of tax owed, if any, to a
particular state. The Subsidiary Partnerships or the Company may be required to
withhold state taxes from distributions to the Company or Shareholders or pay
state or local taxes. Any such withholding or payment would reduce distributions
by the Company to the Shareholders.
To the extent that a nonresident Shareholder pays tax to a state by
virtue of the Company's or a Subsidiary Partnership's operations within that
state, he may be entitled to a deduction or credit against tax owed to his state
of residence with respect to the same income and should consult his tax adviser
in that regard. In addition, payment of such state taxes presently constitutes a
deduction for federal income tax purposes if the taxpayer itemizes deductions.
NECESSITY OF PROSPECTIVE SHAREHOLDERS OBTAINING PROFESSIONAL ADVICE
The foregoing analysis is not intended as a substitute for careful
tax planning. The tax matters relating to the Company, the Subsidiary
Partnerships and the transactions described herein are complex and are subject
to varying interpretations. Moreover, the effect of existing income tax laws,
the meaning and impact of which is not yet clear and of proposed changes in
income tax laws will vary with the particular circumstances of each prospective
investor and, in reviewing this Prospectus, these matters should be considered.
In no event should the Participating Partnerships, Company, General Partners,
Manager or any of their Affiliates, counsel or any other professional advisors
or counsel engaged by any of them, be considered as guarantors of the tax
consequences of an investment in the Company. Unitholders should look to, and
rely on, their professional tax advisors with respect to the tax consequences of
this investment.
EXPERTS
The combined balance sheets of the CPA(R) Partnerships (the "Group")
as of December 31, 1995 and 1996, and the combined statements of income,
partners' capital and cash flows for each of the three years ended December 31,
1994, 1995 and 1996 and the balance sheet of Carey Diversified LLC as of
September 30, 1997, included in this Prospectus, have been included herein, in
reliance on the reports of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
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<PAGE> 82
GLOSSARY OF TERMS
"Acquisition Expenses" means the expenses of the Company related to
the selection and acquisition of properties by the Company, whether or not such
properties are acquired, including but not limited to legal fees and expenses,
travel and communications expenses, costs of appraisals and fairness letters,
non-refundable option payments on property not acquired, accounting fees and
expenses, costs of title reports and title insurance, transfer and recording
taxes and miscellaneous expenses.
"Adjusted Cash from Operations" means cash receipts from the ordinary
day-to-day operations of the Partnership (including all interest on Partnership
investments and mortgages held by the Partnership) without deduction for any
management fee or for depreciation and amortization of intangibles such as
organization, underwriting and debt placement costs but after deducting all
other expenses, debt amortization and provisions for reserves established by the
Manager which it deems to be reasonably required for the proper operation of the
business of a Subsidiary Partnership.
"Affiliate" means, with respect to any Person, (i) any Person
directly or indirectly controlling, controlled by or under common control with
such Person, (ii) any Person owning or controlling 10 percent or more of the
outstanding voting securities of such Person, (iii) any officer, director or
partner of such Person or of any Person specified in (i) or (ii) above and (iv)
any company in which any officer, director or partner of any Person specified in
(iii) above is an officer, director or partner.
"Appraised Value" means the value according to an appraisal made by
an independent qualified appraiser. Such qualification may be demonstrated by
membership in a nationally recognized appraisal society such as American
Institute of Real Estate Appraisers ("M.A.I."), Society of Real Estate
Appraisers ("S.R.E.A.") or their equivalent, but is not limited thereto.
"Audit Committee" means the committee of the Board of Directors
consisting of two or more Independent Directors established to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the plans and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls.
"Average Market Capitalization" means, for the relevant period, the
closing price of the Listed Shares on each trading day of the period multiplied
by the total number of Listed Shares outstanding on each trading day (including
"Listed Shares Equivalent Units"), adding the product for each day and dividing
the sum by the number of trading days in the periods provided, however, that
this definition may be adjusted to account for changes to the capital structure
of the Company. For purposes of this calculation, the number of "Listed Share
Equivalent Units" is equal to the sum of the product of (i) the total number of
Subsidiary Partnership Units outstanding for each Subsidiary Partnership and
(ii) the Subsidiary Partnership Exchange Ratio for each Subsidiary Partnership.
"Board" or "Board of Directors" means the board of directors of the
Company.
"Bylaws" means the bylaws of the Company.
"Business Combination" means one of the following transactions: (i)
unless the Merger, Consolidation or exchange of interests does not alter the
contract rights of the Shares as expressly set forth in the Company
Organizational Documents or change or convert in whole or in part the
outstanding Shares, any Merger, Consolidation or exchange of interests of the
Company or any subsidiary with (a) any Interested Party or (b) any other entity
(whether or not itself an Interested Party)
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which is, or after the Merger, Consolidation or exchange of interest will be, an
Affiliate of an Interested Party that was an Interested Party prior to the
transaction; (ii) any sale, lease, transfer or other disposition, other than in
the ordinary course of business, in one transaction or a series of transactions
in any 12-month period to any Interested Party or any Affiliate of any
Interested Party (other than the Company or any of its subsidiaries) of any
assets of the Company or any subsidiary having, measured as of the time the
transaction or transactions are approved by the Board of Directors of the
Company, an aggregate book value as of the end of the Company's most recently
ended fiscal quarter of 10 percent or more of the total market value of the
outstanding Shares or of its net worth as of the end of its most recently ended
fiscal quarter; (iii) the issuance or transfer by the Company or any subsidiary,
in one transaction or a series of transactions, of any of the Shares or any
equity securities of a subsidiary which have an aggregate market value of five
percent or more of the total market value of the outstanding Shares to any
Interested Party or any Affiliate of any Interested Party (other than the
Company or any of its subsidiaries) except pursuant to the exercise of warrants
or rights to purchase securities offered pro rata to all Shareholders or any
other method affording substantially proportionate treatment to the
Shareholders; (iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Company in which anything other than cash will be received by
an Interested Party or any Affiliate of any Interested Party; (v) any
reclassification of securities or recapitalization of the Company, or any
merger, consolidation or exchange of Shares with any of its subsidiaries which
has the effect, directly or indirectly, in one transaction or a series of
transactions, of increasing by five percent or more of the total number of
outstanding Shares, the proportionate amount of the outstanding Shares or the
outstanding number of any class of equity securities of any subsidiary which is
directly or indirectly owned by any Interested Party; or (vi) the receipt by any
Interested Party or any Affiliate of any Interested Party (other than the
Company or any of its subsidiaries) of the benefit, directly or indirectly
(except proportionately as a Shareholder), of any loan, advance, guarantee,
pledge or other financial assistance or any tax credit or other tax advantage
provided by the Company or any of its subsidiaries.
"Cash from Financings" means the net cash proceeds realized by a
CPA(R) Partnership from the financing of a CPA(R) Partnership property or the
refinancing of any CPA(R) Partnership indebtedness.
"Cash from Sales" means the net cash proceeds realized by a CPA(R)
Partnership from the sale, exchange or other disposition of any of its assets.
Cash From Sales shall not include net cash proceeds realized from the financing
of CPA(R) Partnership property or the refinancing of any CPA(R) Partnership
indebtedness.
"CCP" means Carey Corporate Property, Inc., managing General Partner
of CPA(R):4, CPA(R):5 and CPA(R):6.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any similar law or provision enacted in lieu thereof, unless the
context indicates otherwise.
"Commission" means the United States Securities and Exchange
Commission.
"Company" or "CD" means Carey Diversified LLC.
"Consolidation" means the merger of up to nine Subsidiary
Partnerships with and into the CPA(R) Partnerships.
"Control Shares" means Shares that, but for the operation of the
Control Share Acquisition Provisions, bring their holder's voting power within
any of the following ranges: (i) one-fifth to one-third; (ii) one-third to a
majority or (iii) a majority or more.
"Control Share Acquisition" means the acquisition of Shares, with
certain exceptions listed under "DESCRIPTION OF LISTED SHARES--Control Share
Acquisition Provisions," that will entitle
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<PAGE> 84
the acquiring person immediately after the acquisition to exercise or direct the
exercise of the voting power of Shares within one of the ranges designating
Control Shares.
"Control Share Acquisition Provisions" means Control Share
acquisition provisions contained in the Organizational Documents.
"CPA(R):1" means Corporate Property Associates.
"CPA(R):2" means Corporate Property Associates 2.
"CPA(R):3" means Corporate Property Associates 3.
"CPA(R):4" means Corporate Property Associates 4, a California
limited partnership.
"CPA(R):5" means Corporate Property Associates 5.
"CPA(R):6" means Corporate Property Associates 6--a California
limited partnership.
"CPA(R):7" means Corporate Property Associates 7--a California
limited partnership.
"CPA(R):8" means Corporate Property Associates 8, L.P., a Delaware
limited partnership.
"CPA(R):9" means Corporate Property Associates 9, L.P., a Delaware
limited partnership.
"CPA(R) Partnerships" or "Partnerships" means CPA(R):1, CPA(R):2,
CPA(R):3, CPA(R):4, CPA(R):5, CPA(R):6, CPA(R):7, CPA(R):8 and CPA(R):9.
"CPA(R) Programs" means, collectively, the CPA(R) Partnerships and
the CPA(R) REITs.
"CPA(R) REITs" means Corporate Property Associates 10 Incorporated,
Carey Institutional Properties, Inc. and Corporate Property Associates 12
Incorporated, all Maryland corporations.
"Determination Date" means the date on which a person became an
Interested Party.
"Directors" means persons authorized to manage and direct the affairs
of the Company and who are members of the Board of Directors of the Company.
"Distribution" means any transfer of money or property by a
Partnership to a Partner without consideration.
"Eighth Carey" means Eighth Carey Corporate Property, Inc., managing
General Partner of CPA(R):8.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934.
"Fiscal Quarter" means the three-month period ending on the last day
of the third, sixth, ninth and twelfth calendar months of each Fiscal Year of
the Partnership.
"Fiscal Year" means the twelve-month period ending on December 31.
"Funds from Operations" means net income (loss) before depreciation,
amortization, other noncash items, extraordinary items and gains or losses on
sales of assets.
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"GAAP" means Generally Accepted Accounting Principles.
"General Partners" means the general partners of each of the CPA(R)
Partnerships which include William Polk Carey, W.P. Carey & Co., CCP, Seventh
Carey, Eighth Carey and Ninth Carey.
"General Partners' Preferred Return" means the three percent of the
Cash from Sales owed to the General Partners in connection with the sale of
properties by the CPA(R) Partnerships prior to the Consolidation.
"Good Reason" means (i) any failure to obtain a satisfactory
agreement from any successor to the Company to assume and agree to perform the
Company's obligations under the Management Agreement, (ii) any breach of the
Management Agreement of any nature by the Company or (iii) a change in control
of the Company.
"Independent Director" means a Director of the Company who (i) is not
an officer of the Company and (ii) is, in the view of the Company's Board of
Directors, free of any relationship that would interfere with the exercise of
independent judgment.
"Interested Party" means any person (other than (a) the Company, (b)
any subsidiary of the Company, (c) the General Partners and the Original
Shareholders, and (d) any Affiliate or associate of any person in (c) above)
that: (i) is the beneficial owner, directly or indirectly, of 10 percent or more
of the outstanding Shares, (ii) is an Affiliate or associate of the Company and
at any time within the two year period immediately prior to the date in question
was the beneficial owner, directly or indirectly, of 10 percent or more of the
then outstanding Shares, or (iii) is an Affiliate or associate of any person
described in clauses (i) or (ii) above.
"Investment Committee" means the committee of the Board of Directors
of the Manager primarily responsible for the approval of investments to be made
by the Company.
"IRS" means the Internal Revenue Service.
"LLCA" means the Delaware Limited Liability Company Act (6 Del.C.
Sections 18-101 et seq.)
"Listed Shareholder" means a Shareholder of the Company who owns
Listed Shares.
"Listed Shares" means a limited liability company interest in the
Company representing a share of all of the income, loss and capital of the
Company.
"Management Agreement" means the agreement between the Company and
the Manager relating to the management of the Company by the Manager.
"Manager" means Carey Management LLC.
"Merger" means the merger of a Subsidiary Partnership into a CPA(R)
Partnership.
"NASD" means the National Association of Securities Dealers, Inc.
"Nasdaq" means the National Association of Securities Dealers
Automated Quotations System.
"Net Lease or Triple Net Lease" means a lease in which the tenant
undertakes to pay all or substantially all the cash expenses, excluding debt
service, related to the leased property.
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"Net Other Assets and Liabilities" means with respect to any CPA(R)
Partnership (A) the sum of (i) cash, (ii) accounts receivable, (iii) security
deposits, (iv) cash held in escrow, (v) the value of all securities and (vi) the
value of any claims in bankruptcy and (vii) any post March 31, 1997 adjustment
to the value of any Properties, less (B) the sum of (i) accounts payable, (ii)
accrued interest, (iii) accrued rent, (iv) rent deposits, (v) escrowed
liabilities, (vi) prepaid rent and (vii) transfer taxes payable upon
consummation of the Consolidation.
"1997 Tax Act" means the Taxpayer Relief Act of 1997.
"Ninth Carey" means Ninth Carey Corporate Property, Inc., managing
General Partner of CPA(R):9.
"NYSE" means the New York Stock Exchange.
"Operating Agreement" means the limited liability company agreement
of the Company.
"Original Shareholder" means Carey Management LLC.
"Organizational Documents" means the Certificate of Formation, the
Operating Agreement and the Bylaws of the Company, as amended.
"Participating Partnership" means a CPA(R) Partnership which
participates in the Consolidation.
"Participating Partnership Agreement" means the partnership agreement
of a CPA(R) Partnership which participates in the Consolidation.
"Partner" means the General Partner and any Limited Partner where no
distinction is required by the context in which the term is used.
"Partnership" means a CPA(R) Partnership.
"Partnership Agreements" the partnership agreements of the CPA(R)
Partnership.
"Partnership Agreement Amendments" means the amendments of the
Partnership Agreements expressly authorizing the Consolidation.
"Person" means any natural person, partnership, corporation, limited
liability company, association or other legal entity.
"Property" or "Properties" means the partial or entire interests in
real property, including leasehold interests and personal and mixed property
connected therewith held by the CPA(R) Partnerships or the Company.
"Prospectus" shall mean the Prospectus which is included in the
registration statement filed with the Commission in connection with the issuance
of the Shares in this offering.
"Registration Statement" means the Company's Registration Statement
on Form S-1 filed with the Commission in the form in which it becomes effective,
as the same may at any time and from time to time thereafter be amended or
supplemented.
"Regulations" means the Treasury Regulations issued in accordance
with the Code.
"REIT" means a real estate investment trust.
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"Right" means a right to buy a Share at a specified exercise price,
which will be subject to adjustment.
"Rights Certificate" means a certificate evidencing a Right.
"Rights Distribution Date" means the earlier of (i) the date an
Acquiring Person, alone or together with affiliates and associates, has become
the beneficial owner of five percent or more of the outstanding Shares or (ii)
the date of the commencement of, or announcement of, an intention to make a
tender offer or exchange offer the consummation of which will result in the
beneficial ownership by a person or group (other than the Company, any
subsidiary of the Company, any employee benefit plan of the Company or any
subsidiary of the Company or the General Partners or their Affiliates) of 10
percent or more of the outstanding Shares.
"Rights Record Date" means a record date established by the Board of
Directors for determining the Company's Shareholders of record who will be
entitled to a Right for each outstanding Share held by such person.
"Securities Act" means the Securities Act of 1933, as amended.
"Seventh Carey" means Seventh Carey Corporate Property, Inc.,
managing General Partner of CPA(R):7.
"Shareholder" means a member of the Company and holder of Shares.
"Shareholder Rights Plan" means the Shareholder rights plan adopted
by the Company.
"Shareholders" means the holders of the Shares collectively.
"Shares" means the Listed Shares of the Company and includes any
other limited liability company interests that the Company may issue in the
future.
"Subsidiary Partnership" means a limited partnership formed by the
Company which will merge with and into a CPA(R) Partnership in connection with
the Consolidation but, for purposes of this Prospectus only, in certain
sections, is used to refer to the surviving CPA(R) Partnership.
"Subsidiary Partnership Unit" means a limited partnership unit in a
Subsidiary Partnership.
"Termination Fee" means an amount equal to the sum of (A) any fees
that would be earned by the Manager upon the disposition of the assets of the
Company and the Subsidiary Partnerships at their appraisal value measured as of
the date the Management Agreement is terminated, (the "Termination Date") and
(B)(1) if the agreement is terminated by the Company after a change in control,
$50 million if the change in control occurs on or before December 31, 1998 and
thereafter, five times the total fees paid to the Manager by the Company and the
Subsidiary Partnership in the 12 months preceding the change in control and (2)
if the agreement is terminated without cause or good reason, $50 million if the
agreement is terminated before December 31, 1999; $40 million if the agreement
is terminated before December 31, 2000; $30 million if the agreement is
terminated before December 31, 2001; $20 million if the agreement is terminated
before December 31, 2002; and $10 million if the agreement is terminated before
December 31, 2003.
"Triple Net Lease" means a lease in which the tenant is responsible
for real estate taxes and assessments, repairs and maintenance, insurance, other
expenses relating to the property and the duty to restore in case of casualty.
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"Unit" means an interest of a Limited Partner in a CPA(R) Partnership
representing a specific initial capital contribution of $500 per unit for
CPA(R):1 through CPA(R):5 and $1,000 per Unit for CPA(R):6 through CPA(R):9.
"W.P. Carey & Co." means W.P. Carey & Co., Inc., a New York
corporation.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
CAREY DIVERSIFIED LLC
Pro Forma (unaudited):
Condensed Consolidated Balance Sheet as of September 30, 1997....................... F-2
Notes to Condensed Consolidated Balance Sheet....................................... F-4
Condensed Consolidated Statements of Income for the year ended
December 31, 1996 and nine months ended September 30, 1997..................... F-7
Notes to Condensed Consolidated Statements of Income................................ F-9
Historical:
Report of Independent Accountants................................................... F-12
Balance Sheet as of September 30, 1997.............................................. F-13
Notes to Balance Sheet.............................................................. F-14
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
Combined Financial Statements:
Report of Independent Accountants................................................... F-19
Combined Balance Sheets as of December 31, 1995 and December 31,
1996 and (unaudited) as of September 30, 1997.................................. F-20
Combined Statements of Income for the years ended December 31, 1994, 1995
and 1996 and (unaudited) for the nine months ended September 30,
1996 and 1997.................................................................. F-21
Combined Statements of Partners' Capital for the years ended December 31,
1994, 1995 and 1996 and (unaudited) for the nine months ended
September 30, 1997............................................................. F-22
Combined Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and (unaudited) for the nine months ended
September 30, 1997............................................................. F-23
Notes to Combined Financial Statements.............................................. F-26
Supplemental Schedule:
Schedule III - Real Estate and Accumulated Depreciation............................. F-44
</TABLE>
F-1
<PAGE> 90
CAREY DIVERSIFIED LLC
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
The following unaudited pro forma Condensed Consolidated Balance
Sheet has been presented as if the Consolidation transaction and the related
issuance of Listed Shares had occurred on September 30, 1997. This unaudited pro
forma Condensed Consolidated Balance Sheet should be read in conjunction with
the balance sheet of Carey Diversified LLC as of September 30, 1997 and the
combined financial statements of the Group, and notes thereto included elsewhere
herein. In management's opinion, all adjustments necessary to reflect the
Consolidation transaction and the related issuance of Listed and Subsidiary
Partnership Units have been made. For purposes of the pro forma balance sheet
presentation, it is assumed that holders of approximately 2% of Limited
Partnership interests elect to receive Subsidiary Partnership Units.
The exchange of Limited Partner (non-controlling) interests for
Listed Shares will be accounted for as a purchase and recorded at the fair value
of the Listed Shares exchanged. The exchange of the General Partner's interest
for Listed Shares will be accounted for on the historical basis of accounting.
F-2
<PAGE> 91
This unaudited pro forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been at
September 30, 1997, nor does it purport to represent the future financial
position of the Company.
<TABLE>
<CAPTION>
CPA(R)
Partnerships Pro Forma Pro Forma
Historical (1) Adjustments Consolidated
------------- ------------- -------------
<S> <C> <C> <C>
(amounts in thousands, except share data)
ASSETS
Real estate leased to others:
Accounted for under the operating method, net..................... $ 218,923 $ 130,895 (2) $ 349,818
Net investment in direct financing leases......................... 216,577 51,793 (2) 268,370
Operating real estate, net.............................................. 23,503 (691) (2) 22,812
Real estate held for sale............................................... 18,471 7,565 26,036
Equity investments...................................................... 13,467 31,065 (2) 44,532
Cash and cash equivalents............................................... 29,346 (6,201) (3) 23,145
Other assets, net....................................................... 19,718 -- 19,718
------------- ------------- -------------
Total assets................................................. $ 540,005 $ 214,426 $ 754,431
============= ============= =============
LIABILITIES AND PARTNERS' CAPITAL/MEMBERS' EQUITY
Mortgage notes payable.................................................. $ 192,042 $ -- $ 192,042
Notes payable........................................................... 24,709 -- 24,709
Accounts payable to affiliates.......................................... 7,815 (1,375) (4) 6,440
Other liabilities....................................................... 11,654 -- 11,654
------------- ------------- -------------
Total liabilities............................................ 236,220 (1,375) 234,845
------------- ------------- -------------
Minority interest....................................................... (5,680) (458) (5) (6,138)
------------- ------------- -------------
Redeemable minority interest............................................ -- 8,611 (6) 8,611
------------- ------------- -------------
PARTNERS' CAPITAL/MEMBERS' EQUITY
Partners' capital....................................................... $ 309,465 $ (309,465) (7) $ --
Listed Shares, no par value; 23,953,165 shares
issued and outstanding............................................ 517,113 (7) 517,113
------------- ------------- -------------
309,465 207,648 517,113
------------- ------------- -------------
Total liabilities and partners' capital/members'
equity.................................................. $ 540,005 $ 214,426 $ 754,431
============= ============= =============
</TABLE>
See accompanying notes to pro forma condensed consolidated balance sheet.
F-3
<PAGE> 92
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
(1) Reflects the CPA(R) Partnerships unaudited historical combined
balance sheet as of September 30, 1997.
(2) Reflects adjustments to record the Limited Partners' interest in the
assets of the Company at their fair value, as follows:
<TABLE>
<CAPTION>
Appraised Real Estate
Value of Cost of Assets at General
Real Estate Acquisition Historical Partners' Net
Assets of Assets Cost Interest Adjustment
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Real estate accounted for under
the operating method, net........ $ 349,212 $ 5,549 $ (218,923) $ (943) $ 130,895
Net investment in direct financing
leases........................... 266,098 4,228 (216,577) (1,956) 51,793
Operating real estate, net............. 22,430 356 (23,503) 26 (691)
Equity Investments..................... 44,990 715 (13,467) (1,173) 31,065
Real estate held for sale.............. 25,910 412 (18,471) (286) 7,565
</TABLE>
The real estate assets of the Company have been appraised by an independent
appraiser. The carrying value of the non-real estate assets and the liabilities
of the Company are deemed to approximate their fair values.
The General Partners' effective interest in the assets and liabilities of the
Company is approximately 3.64%, consisting of a 1% interest in the liquidating
proceeds of the Participating Partnerships and an approximate 3.01% interest in
the Listed Shares of the Company.
(3) Decrease in cash reflects the following:
<TABLE>
<S> <C>
Payment of transaction costs...................................... $ 3,632
Payment of transfer taxes on properties........................... 1,059
Payment of deferred leasing fees.................................. 1,510
---------
$ 6,201
=========
</TABLE>
After the Consolidation, certain deferred leasing fees will be paid for leasing
services rendered by the Corporate General Partners of certain CPA(R)
Partnerships prior to the Consolidation. Such leasing fees were previously
accrued by the CPA(R) Partnerships.
(4) Net decrease reflects the following:
<TABLE>
<S> <C>
Payment of deferred leasing fees to Corporate General Partners .. $ (1,510)
Distribution to Subsidiary Partnership Unitholders .............. 87
Distribution payable in respect of minority interest ............ 8
------------
$ (1,375)
============
</TABLE>
F-4
<PAGE> 93
CARE DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET - (CONTINUED)
Upon completion of the Consolidation, the Participating Partnerships will
distribute excess cash to the holders of Subsidiary Partnership Units, including
the Company, sufficient to allow the Company to fund the payment of transaction
costs and transfer taxes on properties. Subsidiary Partnership Unitholders will
be entitled to a pro-rata portion of such distributions in accordance with their
interests in the underlying assets of the Participating Partnerships. A newly
organized manager of the Company (the "Manager") and the Individual General
Partner will also be entitled to a portion of such distributions in accordance
with their 1% limited partnership interest in the liquidating distributions of
the Participating Partnerships.
(5) Decrease reflects the following:
<TABLE>
<S> <C>
Distribution to Manager .......................................... $ 8
General Partners' share of transaction costs and transfer taxes .. 410
--------
$ 458
========
</TABLE>
The capital interest of the Corporate and Individual General Partners is
classified under minority interest. The General Partnership interests include an
interest in the income, losses and distributions of the operating cash flows of
the CPA(R) Partnerships which range from 1% to 10% of such amounts. The General
Partners are also entitled to a share of the liquidation proceeds from the
disposition of CPA(R) Partnership assets and payment of a preferred return
subject to the satisfaction of certain subordination provisions. The General
Partners' share of liquidation proceeds may range from 1% to 15% of the
liquidating proceeds of each CPA(R) Partnership. Pursuant to the Consolidation,
the Corporate General Partners of the CPA(R) Partnerships will contribute their
General Partnership interest to the Manager in exchange for an interest in the
Manager. The Manager will retain the Corporate General Partners' interests in
the income, losses and operating cash flows of the CPA(R) Partnerships. The
Manager and the Individual General Partner will retain an interest in the
liquidating proceeds of each CPA(R) Partnership equal to 1% of such proceeds.
The Individual General Partner will retain his interest in each Participating
Partnership and such interest will be held in a limited partnership capacity.
The General Partners' share of liquidation proceeds in excess of 1%, assuming a
sale of CPA(R) Partnership assets at their appraised values, will be exchanged
by the Manager and the Individual General Partner for 752,200 Listed Shares of
the Company upon consummation of the Consolidation.
(6) Increase represents the following:
<TABLE>
<S> <C>
Issuance of Subsidiary Partnership Units at redemption value ....... $ 8,698
Distributions payable to holders of Subsidiary Partnership Units ... (87)
----------
$ 8,611
==========
</TABLE>
F-5
<PAGE> 94
For purposes of this presentation it is assumed that holders of approximately
2% of Limited Partnership Units elect to receive Subsidiary Partnership Units,
representing an interest in the capital, income and distributions of an
individual Subsidiary Partnership Units are expected to be redeemed based on
scheduled appraisal dates for each CPA(R) Partnership's properties commencing
December 31, 1998 through December 31, 2002. The redeemable minority interest is
recorded at its redemption value.
(7) Increase in partners' capital reflects the following:
<TABLE>
<S> <C>
Exchange of limited partner and certain general partnership
interests for Listed Shares and Subsidiary Partnership
Units at historical costs ................................ $ 309,465
Adjustment of Limited Partners' interest based upon the fair
value of Listed Shares exchanged ......................... 209,778
Issuance of Subsidiary Partnership Units for approximately
2% of Limited Partnership interests ...................... (8,698)
Issuance of Warrants .......................................... 6,568
------------
$ 517,113
============
</TABLE>
Upon completion of the Consolidation, W.P. Carey & Co. will receive compensation
for investment banking services in the form of warrants to purchase Listed
Shares. W.P. Carey & Co. will receive warrants to purchase 2,284,000 Listed
Shares at $21 per share and 725,930 Listed Shares at $23 per share. The warrants
generally will be exercisable over 10 years beginning one year after the date
the Consolidation is completed. The increase in capital of $6,568 reflecting the
issuance of warrants is equal to the estimated fair value of the warrants.
(8) Pro forma book value per share as of September 30, 1997 is $21.59,
which is computed as total equity divided by Listed Shares
outstanding.
F-6
<PAGE> 95
CAREY DIVERSIFIED LLC
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, 1997
ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
The following unaudited pro forma Condensed Consolidated Statements
of Income are presented as if the Consolidation transaction and the related
issuance of Listed Shares had occurred as of January 1, 1996. The unaudited pro
forma Condensed Consolidated Statements of Income should be read in conjunction
with the balance sheet of Carey Diversified LLC as of September 30, 1997 and the
combined financial statements of the CPA(R) Partnerships and notes thereto
included elsewhere herein. In management's opinion, all adjustments necessary to
reflect the Consolidation transaction have been made. For purposes of the pro
forma financial statement presentation, it is assumed that holders of
approximately 2% of Limited Partnership Units elect to receive Subsidiary
Partnership Units.
The exchange of Limited Partner (non-controlling) interests for
Listed Shares will be accounted for in accordance with purchase accounting
principles. The carrying value of the Limited Partners' interests in the assets
and liabilities of the Company will be adjusted to their estimated fair value.
The exchange of the General Partners' interest for Listed Shares will be
accounted for on the historical basis of accounting. Such exchange will be
treated as a reorganization of interests under common control.
F-7
<PAGE> 96
The unaudited pro forma Condensed Consolidated Statements of Income
are not necessarily indicative of what actual results of operations of the
Company would have been, nor do they purport to represent the results of
operations for future periods.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1996 September 30, 1997
------------------------------------------- ---------------------------------------------
CPA(R)
Partnerships Pro Forma Pro Forma Group Pro Forma Pro Forma
Historical(1) Adjustments Consolidated Historical(1) Adjustments Consolidated
------------- ----------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
(amounts in thousands except share and per share data)
Revenues:
Rental income ................. $ 44,576 $ 44,576 $ 35,725 $ 35,725
Interest income from direct
financing leases ......... 32,644 32,644 22,979 22,979
Other interest income ......... 1,681 1,681 911 911
Other income .................. 1,901 1,901 4,019 4,019
Revenues of hotel operations .. 21,929 21,929 10,943 10,943
--------- ---------- --------- ----------
102,731 102,731 74,577 74,577
--------- ---------- --------- ----------
Expenses:
Interest ...................... 23,200 23,200 15,005 15,005 15,005
Depreciation and amortization . 11,274 $ (1,257)(2) 10,017 8,045 $ (626)(2) 7,419
General and administrative .... 3,747 825 (3) 4,572 3,584 625 (3) 4,209
Property expenses ............. 4,008 1,184 (4) 5,192 3,822 1,182 (4) 5,004
Writedown to net realizable
value .................... 1,300 1,300 3,806 3,806
Operating expense of hotel
operations ............... 15,947 15,947 7,986 7,986
--------- --------- ---------- --------- --------- ----------
59,476 752 60,228 42,248 1,181 43,429
--------- --------- ---------- --------- --------- ----------
Income before net gains,
minority interest and
extraordinary items ...... 43,255 (752) 42,503 32,329 (1,181) 31,148
Gains on sale of real estate
and securities, net(5) ... 5,474 (487)(6) 4,987 608 (33)(6) 575
--------- --------- ---------- --------- --------- ----------
Income before minority interest
and extraordinary items .. 48,729 (1,239) 47,490 32,937 (1,214) 31,723
Minority interest income ...... (3,182) (800)(7) (3,982) (1,958) (412)(7) (2,450)
--------- --------- ---------- --------- --------- ----------
Income before extraordinary
items attributable to
Listed Shares ............ $ 45,547 $ (2,039) $ 43,508 $ 30,979 $ 1,706 $ 29,273
========= ========= ========== ========= ========= ==========
Pro forma income before
extraordinary items per
Listed Share............... $ 1.81 $ 1.21
========== ===========
Pro forma weighted average
number of Listed Shares
outstanding................ 24,053,403 24,223,289
========== ===========
Ratio of earnings to fixed
charges(8)................. 3.00 3.07
========== ===========
</TABLE>
See accompanying notes to pro forma condensed consolidated
statements of income.
F-8
<PAGE> 97
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
ASSUMING 100% PARTICIPATION WITH THE ISSUANCE OF SUBSIDIARY PARTNERSHIP UNITS:
(1) Reflects the CPA(R) Partnerships historical combined income
statements for the year ended December 31, 1996 and unaudited for the
nine months ended September 30, 1997.
(2) Reflects changes in connection with adjustment of Limited Partners'
interest in real estate assets to fair value and adoption of new
depreciable lives for such assets as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months
Assets At Revised December 31, Ended
Fair Value Life 1996 September 30, 1997
---------- ------- ------------ ------------------
<S> <C> <C> <C> <C>
Buildings and improvements ............... $ 280,942 40 $ 7,024 $ 5,268
Personal Property ........................ 16,373 7 2,339 1,754
--------- ---------
9,363 7,022
Less: historical depreciation expense ... (10,668) (7,672)
--------- ---------
Difference ............................... (1,305) (650)
Elimination of General Partners'
(3.64%) interest ................... 48 24
--------- ---------
Net decrease in expense .................. $ (1,257) $ (626)
========= =========
</TABLE>
(3) Increase in general and administrative expenses as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1996 1997
------------ -------------
<S> <C> <C>
Directors' compensation...................................... $ 100 $ 75
Employee compensation........................................ 425 325
Other expenses of a public company........................... 300 225
------------- -----------
$ 825 $ 625
============= ===========
</TABLE>
(4) The Company will pay a management fee and a performance fee each at
an annual rate of .5% of the Total Capitalization of the Company. The
performance fee will be paid in the form of restricted Listed Shares
issued by the Company. Restricted Listed Shares will vest over a five
year period at 20% per year. Total Capitalization will be determined
by adding the average total principal amount of debt owed by the
Company and the Average
F-9
<PAGE> 98
Market Capitalization of the Company. The fees will be reduced by any
payments made to the Manager and Individual General Partner by the
CPA(R) Partnerships for distributions of operating cash flows and
CPA(R) Partnership leasing fees. Such reduction may not exceed the
total management and performance fees incurred by the Company in any
fiscal year. Pro forma management and performance fees payable by the
Company are as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1996 1997
------------ ------------
<S> <C> <C>
Average market capitalization ................ $ 487,761 $ 487,761
Average Debt ................................. 251,143 222,150
------------ ------------
738,904 709,911
Partial year pro-ration ...................... N/A x .75
------------ ------------
Total market capitalization for the period ... 738,904 532,433
------------ ------------
Management and Performance fees @ .5% ........ 4,434 3,749
Reductions:
Partnership distribution to minority interests (2,334) (1,743)
Partnership leasing fees ..................... (916) (824)
------------ ------------
Net fee ...................................... $ 1,184 $ 1,182
============ ============
</TABLE>
Pursuant to the management agreement Average Market Capitalization is
to be calculated on a daily basis based on the market price of the
Listed Shares. As such information is not available on a historical
basis, Average Market Capitalization is equal to the Total Exchange
Value and average debt is equal to the average combined debt as of
the beginning and end of the period.
(5) The Manager will be paid an incentive fee equal to 15% of the amount
of the proceeds received from the sale of any property acquired in
connection with the Consolidation in excess of the appraised value of
the property used in the Consolidation, less an adjustment for the
shares of such net proceeds in excess of the appraised value of the
equity interest attributable to the Manger's interest in the
Company's Listed Shares. No adjustment has been reflected in the pro
forma statements of income for incentive fees that would have been
paid in connection with any such sales during the year ended December
31, 1996 and the nine months ended September 30, 1997.
(6) Represents an adjustment for disposition fees payable to the Manager
on sales of properties. Subject to approval by the Board of Directors
of the Company, the Manager may be entitled to receive a disposition
fee on the sale of properties. The amount of such fee will be
determined by agreement with the Board of Directors. For purposes of
this
F-10
<PAGE> 99
presentation it is assumed that disposition fees average customary
levels, namely 3% of the sales price of properties.
CAREY DIVERSIFIED LLC
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME - (CONTINUED)
(7) Reflects the following:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1996 1997
------------ ------------
<S> <C> <C>
Minority interest income .............. 43 57
Redeemable minority interest income ... (843) (549)
------------ ------------
(800) (492)
============ ============
</TABLE>
The Manger will retain the interest of the General Partners in the
income and losses of the Subsidiary Partnerships. Such interests
range from 1% to 10% of the income and losses of each CPA(R)
Partnership. Minority investment income represents the General
Partners share of pro forma adjustments based on such interests.
Redeemable minority interest income represents the interest of the
Subsidiary Partnership Unitholders in the income of the Participating
Partnerships. For purposes of this presentation it is assumed that
holders of approximately 2% of Limited Partnerships Units elect to
receive Subsidiary Partnership Units, representing an interest in the
capital, income and distributions of an individual Subsidiary
Partnership.
(8) The ratio of earnings to fixed charges in computed is income from
operations before minority interest plus fixed charges (primarily
interest) divided by fixed charges.
F-11
<PAGE> 100
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Carey Diversified LLC:
We have audited the accompanying balance sheet of Carey Diversified
LLC as of September 30, 1997. The balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on the balance
sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly,
in all material respects, the financial position of Carey Diversified LLC as of
September 30, 1997, in conformity with generally accepted accounting principles.
New York, New York
February 11, 1998
F-12
<PAGE> 101
CAREY DIVERSIFIED LLC
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
<TABLE>
<S> <C>
Cash.................................................................. $ 500
==========
MEMBERS' EQUITY
Listed shares, no par value, 25 shares issued and outstanding (Note 4) $ 500
==========
</TABLE>
See accompanying notes to balance sheet.
F-13
<PAGE> 102
CAREY DIVERSIFIED LLC
NOTES TO BALANCE SHEET
(1) FORMATION OF THE COMPANY
Carey Diversified LLC, a limited liability company, was formed under
the laws of the state of Delaware on October 15, 1996 for the
purposes of acquiring up to nine public limited partnerships in the
Corporate Property Associates series of limited partnerships (The
"CPA(R) Partnerships"). The acquisition will be accomplished by a
consolidation by merger (the Consolidation") of the CPA(R)
Partnerships into nine subsidiary partnerships(the "subsidiary
Partnerships") of the Company which will be formed for this purpose.
In exchange for acquiring all of the limited partners' and a portion
of the general partners' interests in the Partnerships, the Company
will issue 24,388,032 Listed Shares. The Manager will retain the
Corporate General Partners interest in the income, losses and
operating cash flow of the Subsidiary Partnerships which range from
1% to 9%.
The Company will acquire and own industrial and commercial property
net leased to creditworthy corporations and other creditworthy
entities and will continue the net lease business operations of the
CPA(R) Partnerships. Upon completion of the Consolidation the Company
will own a portfolio of 198 properties with a carrying value of
$641,000,000, that are net leased to 76 tenants. The real estate
assets of the CPA(R) Partnerships are subject to limited recourse
mortgage debt of approximately $192,000,000.
The Company expects to be taxed as a partnership for Federal and most
state and local income tax purposes.
(2) MANAGEMENT AGREEMENT
The Company has entered into a Management Agreement with Carey
Management LLC (the "Manager") pursuant to which the Manager will
provide personnel and such administrative support as may be required
to carry on the operations of the Company. The Company will pay the
Manager a cash management fee of .5% per annum of the Total
Capitalization of the Company, as defined. The Manager will also be
paid a performance fee in like amount, which will be paid in the form
of restricted Listed Shares issued by the Company which will vest
ratably over five years. Before such Listed Shares are vested, they
will not be transferable and will be subject to forfeiture in the
event the Manager is terminated for cause or resigns. The Listed
Shares will vest immediately in the event of a change in control or
certain other circumstances.
F-14
<PAGE> 103
Management and performance fees due to the Manager will be reduced by
the sum of distributions of operating cash flow, management fees and
leasing fees paid by the Subsidiary Partnerships to the Manager and
the Individual General Partner.
Subject to approval by the Board of Directors of the Company, the
Manager may be entitled to receive disposition fee on the sale of
properties. Such fee will be determined by agreement with the Board
of Directors. The Manager shall be paid an incentive fee equal to 15%
of the amount of the proceeds received from the sale of any property
acquired in connection with the Consolidation in excess of the
appraised value of the property used in the Consolidation , less an
adjustment for the share of such net proceeds in excess of the
appraisal value of the equity interest attributable to the Manager's
interest in the Listed Shares.
(3) REDEEMABLE MINORITY INTEREST
Each Subsidiary Partnership is authorized to issue Subsidiary
Partnership Units to Unitholders of the CPA(R) Partnership who choose
not to receive Listed Shares and wish to retain a security that is
substantially similar to the CPA(R) Partnerships Units. The terms and
conditions of the Subsidiary Partnership Units are substantially the
same as the terms of the CPA(R) Partnerships Units. The performance
of, and distributions with respect to the Subsidiary Partnership
Units will be based solely upon the performance of the assets owned
by the Subsidiary Partnership corresponding to such units. Subsidiary
Partnership Units will be redeemed by the Company as soon as
practicable after appraisals are performed on the properties. Such
appraisals will commence as of December 31, 1998 and the final
appraisal will be made no later than December 31, 2002. The
Subsidiary Partnership Units will not be listed on any national
securities exchange or the Nasdaq National Market System.
(4) LISTED SHARES
The Company is authorized to issue Listed Shares, representing
interests in the income, loss and capital of the Company. Listed
Shares will be issued to holders of units of all nine CPA(R)
Partnerships who choose to receive such shares upon consummation of
the consolidation. Holders of Listed Shares will bear a pro rata
portion of the cash costs of the formation of the Company and the
Consolidation. Such costs will approximate $3,632,000. The
performance of and the distributions with respect to the Listed
Shares will be based upon the performance of the entire portfolio of
the Company's assets. Listed Shares are not redeemable, except
pursuant to certain anti-takeover provisions adopted by the Company.
The Company will pay distributions to holders of Listed Shares when
declared by its Board of Directors out of available funds.
Approval of any matter submitted to the holders of Listed Shares
generally requires the affirmative vote of holders of a majority of
the listed Shares that are present at a meeting at which a quorum is
present. There are no cumulative voting rights with respect to: (i)
the election and removal of directors; (ii) the sale or disposition
of al or substantially all
F-15
<PAGE> 104
of the assets of the Company at any one time; (iii) the merger or
consolidation of the Company (where the Company is not the surviving
entity); (iv) the dissolution of the Company; and (v) certain
anti-takeover provisions. The holders of the Listed Shares will be
entitled to one vote for each Listed Share owned.
If the Consolidation is completed, W.P. Carey & Co., Inc. will
receive compensation for investment banking services in the form of
warrants to purchase Listed Shares. If all the CPA(R) Partnerships
participate in the Consolidation, W.P. Carey & Co., Inc. will receive
warrants to purchase 2,284,000 Listed Shares at $21 per share and
725,930 Listed Shares at $23 per share. The warrants generally will
be exercisable over 10 years beginning one year after the date of the
Consolidation is completed. The compensation of $6,568,000 is based
on the estimated fair value of the warrants.
(5) ADDITIONAL CLASSES AND SERIES OF SHARES
The Organizational Documents of the Company authorize the Board of
Directors (subject to certain restrictions) to provide for the
issuance of Shares in other classes or series to establish the number
of Shares in each class or series and to fix the preference,
conversion and other rights, voting powers, restrictions, limitations
as to distributions, qualifications or terms or conditions of
redemption of such class or series. The Company believes that the
ability of the Board of Directors to issue one or more classes or
series will provide the Company with increased flexibility in
structuring possible future financing and acquisitions, and in
meeting other needs which might arise. The additional classes or
series as well as the Listed Shares, will be available for issuance
without further action by the Company's Shareholders, 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.
(6) NON-EMPLOYEE DIRECTORS' SHARE PLAN
Non-employee directors will be granted options for Listed Shares, and
may elect to receive Listed Shares in lieu of fees, under the 1997
Non-Employee Directors' Share Plan. The Plan provides that each
non-employee director will be automatically granted an option to
purchase 4,000 Listed Shares (i) at the effective time of the
Consolidation or upon his initial election or appointment thereafter,
and (ii) on a quarterly basis beginning in 1999, options or
restricted shares with a total value of $6,250. Such options will
have an exercise price equal to the fair market value of Listed
Shares on the date of grant, and will expire at the earlier of 10
years after the date of grant or one year after the optionee ceases
serving as director. Such options generally will become exercisable
one year after grant, subject to earlier exercisability in the event
of death, disability, or a change in control (as defined), and will
be forfeited in the event of cessation of service as a director
within 10 months after the date of grant. The plan also will permit a
non-employee director to elect to be paid any directors' fees in the
form of Listed Shares. A director who makes such election will
receive Listed Shares having a fair market value equal to the amount
of fees he has elected to forego, with such Shares usable at the time
the fees
F-16
<PAGE> 105
otherwise would have been paid or on a deferred basis. A total of
300,000 Listed Shares are reserved for grant under the plan. The
number and kind of shares reserved and automatically granted under
the plan are subject to adjustment in the vent of stock splits, stock
dividends, and other extraordinary events.
F-17
<PAGE> 106
(7) LISTED SHARES INCENTIVE PLAN
The 1997 Listed Share incentive plan authorized the issuance of up to
700,000 Listed Shares to eligible officers and employees of the
Company and its affiliates. The Plan provides for the grant of (i)
share options which may or may not qualify as incentive stock options
under Section 422 of the Internal Revenue Code, (ii) performance
shares, (iii) dividend equivalent rights issued alone or in tandem
with option and (iv) restricted shares, which are contingent upon the
attainment of goals or subject to vesting requirements. On the
effective date of the Offering, options to purchase 113,500 Listed
Shares and 7,500 Restricted Shares will be granted to the sole
employee of the Company. The options will have an exercise price of
$20 per Listed Share.
(8) SUBSEQUENT EVENT
On October 15, 1997, the Company filed a Consent Solicitation
Statement/Prospectus ("consent solicitation") with the United States
Securities and Exchange Commission. The General Partners proposed
that the Limited Partners of each of the CPA(R) limited partnerships
of the Group approve a transaction in which each CPA(R) limited
partnership would be merged with a subsidiary partnership of Carey
Diversified, of which Carey Diversified is the general partner. Each
limited partner was provided the option of either exchanging his or
her limited partnership units for Listed Shares of Carey Diversified
or to retain a limited partnership interest in the subsidiary
partnership. In December 1997, a majority of the limited partnership
units in each of the CPA(R) limited partnerships consented to the
transaction. The consummation of the transaction occurred on January
1, 1998, at which time the General Partners exchanged a portion of
their general partnership interests for Listed Shares.
The Listed Shares will be listed and publicly traded on the New York
Stock Exchange. Subsidiary Partnership Units will provide
substantially the same economic interest and legal rights as those
of a limited partnership unit in a CPA(R) limited partnership, but
will not be listed on a securities exchange.
F-18
<PAGE> 107
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Corporate Property Associates Partnerships:
We have audited the combined balance sheets of Corporate Property
Associates Partnerships, as described in Note 1, as of December 31, 1995 and
1996, and the related combined statements of income, partners' capital and cash
flows for each of the three years in the period ended December 31, 1996. We have
also audited the financial statement schedule included in this Prospectus. These
financial statements and financial statement schedule are the responsibility of
the General Partners. Our responsibility is to express and opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the General Partners, as well as evaluate the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of Corporate
Property Associates Partnerships as of December 31, 1995 and 1996, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the Schedule of
Real Estate and Accumulated Depreciation as of December 31, 1996, when
considered in relation to the basic financial statements taken as a whole,
presents, fairly, in all material respects, the financial information required
to be included therein.
New York, New York
March 22, 1997
F-19
<PAGE> 108
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
--------------------------- September 30,
1995 1996 1997
--------- --------- -------------
<S> <C> <C> <C>
(unaudited)
ASSETS:
Real estate leased to others:
Accounted for under the
operating method, net $ 260,617 $ 247,580 $ 218,923
Net investment in direct financing leases 218,922 215,310 216,577
--------- --------- ---------
Real estate leased to others 479,539 462,890 435,500
Operating real estate, net 40,888 24,080 23,503
Real estate held for sale 12,785 434 18,471
Cash and cash equivalents 27,711 28,553 29,346
Equity investments 4,260 13,660 13,467
Other assets, net of accumulated amortization of
$1,914 and $2,023 at December 31, 1995 and 1996
and $1,975 at September 30, 1997 17,141 15,111 19,718
--------- --------- ---------
Total assets $ 582,324 $ 544,728 $ 540,005
========= ========= =========
LIABILITIES:
Mortgage notes payable $ 247,478 $ 202,339 $ 192,042
Notes payable to affiliate 2,550 500
Notes payable 24,709 24,709 24,709
Accounts payable to affiliates 2,283 2,543 7,815
Other liabilities 14,005 11,342 11,654
--------- --------- ---------
Total liabilities 291,025 241,433 236,220
--------- --------- ---------
Minority interest (1,597) (750) (5,680)
--------- --------- ---------
Commitments and contingencies
PARTNERS' CAPITAL:
Partners' capital 292,896 304,045 309,465
--------- --------- ---------
Total liabilities and
partners' capital $ 582,324 $ 544,728 $ 540,005
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
F-20
<PAGE> 109
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS of INCOME
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended For the Nine Months
December 31, Ended September 30,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(unaudited) (unaudited)
Revenues:
Rental income $ 41,645 $ 42,255 $ 44,576 $ 36,008 $ 35,725
Interest income from direct
financing leases 40,213 36,391 32,644 21,549 22,979
Other interest income 1,294 1,700 1,681 1,407 911
Other income 3,453 2,523 1,901 1,177 4,019
Revenues of hotel operations 22,532 25,077 21,929 18,407 10,943
--------- --------- --------- --------- ---------
109,137 107,946 102,731 78,548 74,577
--------- --------- --------- --------- ---------
Expenses:
Interest 33,120 28,842 23,200 17,689 15,005
Depreciation and amortization 13,321 12,810 11,274 8,503 8,045
General and administrative 3,663 4,509 3,747 2,938 3,584
Property expenses 8,151 4,086 4,008 2,594 3,822
Writedowns to net realizable value 2,889 3,619 1,300 1,300 3,806
Operating expenses of hotel
operations 16,177 18,037 15,947 13,026 7,986
--------- --------- --------- --------- ---------
77,321 71,903 59,476 46,050 42,248
--------- --------- --------- --------- ---------
Income before net gains, minority
interest in income and extra-
ordinary items 31,816 36,043 43,255 32,498 32,329
Gain on sales of real estate and securities, net 9,646 4,964 5,474 4,711 608
Gain on settlement 11,499
--------- --------- --------- --------- ---------
Income before minority interest in
income and extraordinary items 41,462 52,506 48,729 37,209 32,937
Minority interest in income (3,006) (3,143) (3,182) (2,511) (1,958)
--------- --------- --------- --------- ---------
Income before extraordinary
items 38,456 49,363 45,547 34,698 30,979
Extraordinary gain (loss) on extinguishments
of debt, net of minority interest of $98,
$(205) and $3 in 1994, 1995 and 1996 (1,014) 3,207 (252) (252)
---------- --------- --------- --------- ---------
Net income $ 37,442 $ 52,570 $ 45,295 $ 34,446 $ 30,979
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
F-21
<PAGE> 110
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS of PARTNERS' CAPITAL
For the years ended December 31, 1994,
1995 and 1996 and (unaudited) for the
nine-month period ended September 30, 1997
(In thousands)
<TABLE>
<S> <C>
Balance, December 31, 1993 $ 295,959
Distributions to partners (35,589)
Net income, 1994 37,442
---------
Balance, December 31, 1994 97,812
Distributions to partners (57,216)
Purchase of Limited Partnership Units (270)
Net income, 1995 52,570
---------
Balance, December 31, 1995 292,896
Distributions to partners (34,173)
Purchase of Limited Partnership Units (17)
Change in unrealized appreciation,
marketable securities 44
Net income, 1996 45,295
---------
Balance, December 31, 1996 304,045
Distributions to partners (25,610)
Change in unrealized appreciation,
marketable securities 51
Net income, nine months ended September 30, 1997 30,979
---------
Balance, September 30, 1997 (unaudited) $ 309,465
=========
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
F-22
<PAGE> 111
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS of CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended For the Nine months
December 31, Ended September 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(unaudited)(unaudited)
Cash flows from operating activities:
Net income $ 37,442 $ 52,570 $ 45,295 $ 34,446 $ 30,979
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of deferred
financing costs, net of amortization of
deferred gains and deferred rental income 13,108 12,670 10,905 8,222 7,784
Extraordinary (gain) loss 1,014 (3,207) 252 252
Net gain on sales (9,646) (4,964) (5,474) (4,711) (608)
Gain on settlement (11,499)
Securities received in lieu of cash (1,619)
Minority interest in income 3,006 3,143 3,182 2,511 1,958
Distributions to minority interest (2,435) (2,670) (2,334) (1,750) (1,743)
Scheduled rents on operating and
direct financing leases (less) greater
than income recognized 31 364 (1,343) (855) (1,704)
Writedowns to net realizable value 2,889 3,619 1,300 1,300 3,806
Restructuring consideration received 1,950 15,188
Net changes in operating assets
and liabilities and other (2,228) (1,938) (800) (999) (1,232)
-------- -------- -------- -------- --------
Net cash provided by operating
activities 45,131 63,276 50,983 38,416 37,621
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of real estate and capital
expenditures (2,492) (2,095) (3,420) (2,816) (1,455)
Installment and settlement proceeds 2,286 5,436
Proceeds from sales of real estate
and securities 37,608 22,736 23,394 18,824 1,042
Other (266) (1,750) (429) (429)
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities 37,136 24,327 19,545 15,579 (413)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Distributions to partners (35,589) (57,216) (34,173) (25,910) (25,610)
Payments of mortgage principal (60,281) (60,349) (63,171) (44,701) (22,997)
Release of escrow funds in connection
with mortgage prepayments 2,395
Proceeds from mortgage financings and
notes payable 27,400 10,000 28,189 26,900 12,700
Proceeds from notes payable to affiliate 2,550 1,000 1,000
</TABLE>
F-23
<PAGE> 112
<TABLE>
<S> <C> <C> <C> <C> <C>
Payments of notes payable to affiliate (3,050) (3,050) (500)
Deferred financing costs (505) (293) (603) (601)
Other (1,070) (270) (273) (277) (8)
-------- -------- -------- -------- --------
Net cash used in financing
activities (70,045) (105,578) (69,686) (46,639) (36,415)
-------- -------- -------- -------- --------
</TABLE>
(Continued)
F-24
<PAGE> 113
CAREY DIVERSIFIED LLC and
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
COMBINED STATEMENTS of CASH FLOWS, Continued
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended For the Nine Months
December 31, Ended September 30,
----------------------------------------- ------------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(unaudited) (unaudited)
Net increase (decrease) in cash
and cash equivalents 12,222 (17,975) 842 7,356 793
Cash and cash equivalents, beginning
of period 33,464 45,686 27,711 27,711 28,553
-------- -------- -------- -------- --------
Cash and cash equivalents,
end of period $ 45,686 $ 27,711 $ 28,553 $ 35,067 $ 29,346
======== ======== ======== ======== ========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
In July 1996, the Group exchanged its interest in a hotel property and related
assets and liabilities for units in the operating partnership of American
General Hospitality Corporation, a publicly-traded real estate investment trust
(see Note 15). The assets and liabilities transferred were as follows:
<TABLE>
<S> <C>
Operating real estate, net of accumulated
depreciation $ 16,098
Mortgage note payable (7,304)
Other assets and liabilities transferred, net 69
--------
Equity investment $ 8,863
========
</TABLE>
The accompanying notes are an integral part of the combined
financial statements.
F-25
<PAGE> 114
CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED SEPTEMBER 30,
1996 AND 1997 IS UNAUDITED)
(All dollar amounts in thousands)
1. ORGANIZATION AND BASIS OF COMBINATION:
The combined financial statements consist of interests in nine
Corporate Property Associates ("CPA(R)") real estate limited
partnerships (individually, the "Partnership"), their wholly-owned
subsidiaries and Carey Diversified LLC ("Carey Diversified")
(collectively, the "Group") which have been presented on a combined
basis at historical cost because of the affiliated general partners,
common management and common control and because the majority
ownership interests in the CPA(R) partnerships was transferred to
Carey Diversified, effective January 1, 1998, pursuant to a
transaction described in Note 19. All material inter-entity
transactions have been eliminated. The General Partners' interest in
the Group is classified under minority interest as such interest will
be maintained subsequent to January 1, 1998. Effective January 1,
1998, the exchange of CPA(R) Partnership Limited Partner interests
for interests in Carey Diversified ("Listed Shares") will be
accounted for as a purchase and recorded at fair value of the Listed
Shares exchanged. The exchange of the General Partner's interests for
Listed Shares will be accounted for on the historical basis of
accounting.
The Group is engaged in the net leasing of industrial and commercial
real estate. In accordance with the Amended Agreements of Limited
Partnership of each Partnership (the "Agreements"), the Subsidiaries
will terminate between 2004 and 2050. The primary entities referred
to above are as follows:
Corporate Property Associates
Corporate Property Associates 2
Corporate Property Associates 3
Corporate Property Associates 4, a California limited
partnership
Corporate Property Associates 5
Corporate Property Associates 6 - a California limited
partnership
Corporate Property Associates 7 - a California limited
partnership
Corporate Property Associates 8, L.P., a Delaware limited
partnership
Corporate Property Associates 9, L.P., a Delaware limited
partnership
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Unaudited Financial Information:
The combined financial statements as of September 30, 1997 and for
the nine months ended September 30, 1996 and 1997 are unaudited;
however, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of
the combined financial statements for the interim periods have been
made. The results of interim periods are not necessarily indicative
of results to be obtained for a full year.
F-26
<PAGE> 115
CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby the
tenant is generally responsible for all operating expenses relating
to the property, including property taxes, insurance, maintenance,
repairs, renewals and improvements.
The Group diversifies its real estate investments among various
corporate tenants engaged in different industries and by property
type throughout the United States. No lessee currently represents 10%
or more of total leasing revenues (see Note 10).
The leases are accounted for under either the direct financing or
operating methods. Such methods are described below:
Direct financing method - Leases accounted for under the
direct financing method are recorded at their net
investment (Note 5). Unearned income is deferred and
amortized to income over the lease terms so as to produce a
constant periodic rate of return on the Group's net
investment in the lease.
Operating method - Real estate is recorded at cost, revenue
is recognized as rentals are earned and expenses (including
depreciation) are charged to operations as incurred. When
scheduled rentals vary during the lease term, income is
recognized on a straight-line basis so as to produce a
constant periodic rent.
Substantially all of the Group's leases provide for either scheduled
rent increases, periodic rent increases based on formulas indexed to
increases in the Consumer Price Index or sales overrides.
Operating Real Estate:
Land and buildings and personal property are carried at cost. Major
renewals and improvements are capitalized while replacements,
maintenance and repairs which do not improve or extend the lives of
the respective assets are expensed currently.
Real Estate Held for Sale:
Real estate held for sale is accounted for at the lower of cost or
fair value, less costs to sell.
Long-Lived Assets:
Effective January 1, 1995, the Group adopted the provisions of
Statement of Financial Accounting Standards No. 121 - Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of ("SFAS 121"). Pursuant to SFAS 121, the Group assesses
the recoverability of its long-lived assets, including residual
interests of
F-27
<PAGE> 116
CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
real estate assets, based on projections of cash flows over the life
of such assets. In the event that such cash flows are insufficient,
the assets are adjusted to their estimated fair value. Prior to the
adoption of SFAS 121, the Company assessed the recoverability of its
long-lived assets, including residual interests, based on either
projections of cash flows over the life of such assets or, for vacant
properties, the estimated fair value. The adoption of SFAS 121 did
not have a material effect on the Group's combined financial
condition or results of operations.
Depreciation:
Depreciation is computed using the straight-line method over the
estimated useful lives of the properties which range from 5 to 50
years.
Cash Equivalents:
The Group considers all short-term, highly liquid investments that
are both readily convertible to cash and have a maturity of generally
three months or less at the time of purchase to be cash equivalents.
Items classified as cash equivalents include commercial paper and
money market funds. Substantially all of the Group's cash and cash
equivalents at December 31, 1995 and 1996 and at September 30, 1997
were held in the custody of three financial institutions.
Other Assets and Liabilities:
Included in other assets are accrued rents and interest receivable,
escrow funds and deferred charges. Included in other liabilities are
accrued interest payable, accounts payable and accrued expenses,
deferred rental income and deferred gains.
Escrow funds are funds which are restricted, primarily as additional
collateral on the mortgage financing for certain of the Group's hotel
properties. Such restricted amounts totaled $2,929 and $754 at
December 31, 1995 and 1996, respectively, and $634 at September 30,
1997. Escrow funds of $2,395 were used in 1996 to fund mortgage
prepayments.
Deferred charges are costs incurred in connection with mortgage
financing and refinancing and are amortized over the terms of the
mortgages.
Deferred rental income is the aggregate difference for operating
method leases between scheduled rents which vary during the lease
term and rent recognized on a straight-line basis. Also included in
deferred rental income are lease restructuring fees received which
are recognized over the remainder of the initial lease terms.
Deferred gains consist of assets acquired in excess of liabilities
assumed in connection with acquiring certain hotel operations and
certain funds received in connection with two loan refinancings which
are being amortized into income over 20 and 24 years, respectively.
The deferred gain on the acquisition of hotel operations was realized
in 1996 in connection with the sale of such hotel.
Equity Investments:
The Group's limited partner interests in two real estate limited
partnerships in which such ownership is less than 50% are accounted
for under the equity method, i.e., at cost,
F-28
<PAGE> 117
CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
increased or decreased by the Group's pro rata share of earnings or
losses, less distributions. Equity income in the limited partnerships
has been included in other income in the accompanying combined
financial statements. The Group's income from these equity
investments was $600, $565 and $583 in 1994, 1995 and 1996,
respectively, and $436 and $451 for the nine months ended September
30, 1996 and 1997, respectively. Distributions received from such
investments were $902, $850 and $795 in 1994, 1995 and 1996,
respectively, and $594 and $601 for the nine months ended September
30, 1996 and 1997, respectively. The Group is the sole limited
partner in the two partnerships with the general partner interests
owned by Corporate Property Associates 10 Incorporated ("CPA(R):10"),
an affiliate. An ownership interest in a third limited partnership in
which CPA(R):10 owned the general partner interest was written off in
1995.
An interest in the operating partnership of a publicly-traded real
estate investment trust which interest was acquired in July 1996 is
also accounted for under the equity method. The share of income from
this investment was $274 in 1996 and $1,155 for the nine months ended
September 30, 1997 (see Note 15). Distributions received were $253 in
1996 and $1,142 for the nine months ended September 30, 1997.
Federal Income Taxes:
Each Partnership is not liable for Federal income tax purposes as
each partner recognizes his or her proportionate share of income or
loss in his tax return. Accordingly, no provision for income taxes is
recognized for financial statement purposes.\
Distributions and Profits and Losses:
Partners' distributions and profits and losses are allocated in
accordance with the terms of the Agreements of individual
Partnerships.
3. TRANSACTIONS WITH RELATED PARTIES:
The Agreements of each of the Group's Partnerships provide that the
General Partners (consisting of W. P. Carey & Co., Inc. ("W.P.
Carey") or affiliated companies as Corporate General Partners and
William P. Carey as Individual General Partner) are allocated between
1% and 10%, for the applicable Partnership, of the profits and losses
as well as Distributable Cash From Operations, as defined, and the
Limited Partners are allocated between 90% and 99%, for the
applicable Partnership, of the profits and losses as well as
Distributable Cash From Operations. The partners are also entitled to
receive an allocation of gains and losses from the sale of properties
and to receive net proceeds from such sales with such allocation and
distribution as defined in the Agreements. The General Partners may
be entitled to receive a subordinated preferred return, measured
based upon the cumulative proceeds arising from the sale of the
Group's assets. Pursuant to the provisions of the Agreements, the
preferred return may be paid only after the limited partners of a
Partnership receive 100% of their initial investment from the
proceeds of asset sales and a cumulative annual return ranging from
6% to 9% since the inception of the affected Partnership. The General
Partners interest in such preferred return amounts to $5,145 based
upon the cumulative proceeds from the sale of assets since the
inception of the Partnerships through September 30, 1997. As a result
of the approval of a majority of limited partners of each CPA(R)
partnership to the transaction with Carey Diversified described in
Note 19, the Group's ability to satisfy the subordination provisions
of the Agreement is probable, as defined pursuant to Statement
F-29
<PAGE> 118
CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
of Financial Accounting Standards No. 5. The preferred return amount
of $5,415 has been accrued in the accompanying combined financial
statements, in accounts payable to affiliates as of September 30,
1997.
Under the Agreements, certain affiliates are entitled to receive
property management or leasing fees and reimbursement of certain
expenses incurred in connection with the Group's operations. General
and administrative reimbursements consist primarily of the actual
cost of personnel needed in providing administrative services
necessary to the operation of the Group. Property management and
leasing fees in 1994, 1995 and 1996
were $1,299, $1,886 and $916, respectively, and $705 and $824 for the
nine months ended September 30, 1996 and 1997, respectively. General
and administrative reimbursements in 1994, 1995 and 1996 were $991,
$852 and $911, respectively, and $618 and $1,085 for the nine months
ended September 30, 1996 and 1997, respectively.
For the years ended December 31, 1994, 1995 and 1996, fees
aggregating $922, $652 and $902, respectively, and $558 and $479 for
the nine months ended September 30, 1996 and 1997, respectively, were
incurred for legal services in connection with the Group's operations
and were provided by a law firm in which the Secretary of the
Corporate General Partners of the Partnerships (through July 1997) is
a partner.
The Group is a participant in an agreement with W.P. Carey and
certain affiliates for the purpose of leasing office space used for
the administration of the Group, other affiliated real estate
entities and W.P. Carey and for sharing the associated costs.
Pursuant to the terms of the agreement, the Group's share of rental,
occupancy and leasehold improvement costs is based on adjusted gross
revenues, as defined. Net expenses incurred in 1994, 1995 and 1996
were $523, $964 and $720, respectively, and $579 and $450 for the
nine months ended September 30, 1996 and 1997, respectively. The
increase for 1995 was due, in part, to certain nonrecurring costs
related to the relocation of the Group's offices.
4. REAL ESTATE LEASED TO OTHERS ACCOUNTED FOR UNDER THE OPERATING
METHOD:
Real estate leased to others, at cost, and accounted for under the
operating method is summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------ -------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Land $ 74,533 $ 73,310 $ 69,154
Buildings 273,688 266,193 241,276
-------- -------- --------
348,221 339,503 310,430
Less: Accumulated depreciation 87,604 91,923 91,507
-------- -------- --------
$260,617 $247,580 $218,923
======== ======== ========
</TABLE>
The scheduled future minimum rents, exclusive of renewals, under
noncancellable operating leases amount to $40,683 in 1997, $37,900 in
1998, $31,516 in 1999, $29,998 in 2000, $28,205 in 2001 and aggregate
$326,933 through 2016.
Contingent rentals were $998, $1,583 and $1,697 in 1994, 1995 and
1996, respectively.
F-30
<PAGE> 119
CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
5. NET INVESTMENT IN DIRECT FINANCING LEASES:
Net investment in direct financing leases is summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------ -------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Minimum leas payments $462,037 $426,491 $424,252
receivable
Unguaranteed residual value 214,431 210,146 210,886
-------- -------- --------
676,468 636,637 635,138
Less: Unearned income 457,546 421,327 418,561
-------- -------- --------
$218,922 $215,310 $216,577
======== ======== ========
</TABLE>
The scheduled future minimum rents, exclusive of renewals, under
noncancellable direct financing leases amount to $28,228 in 1997,
$28,183 in 1998, $28,198 in 1999, $28,322 in 2000, $29,017 in 2001
and aggregate $426,491 through 2016.
Contingent rentals were approximately $5,394, $4,889 and $3,444 in
1994, 1995 and 1996, respectively.
6. OPERATING REAL ESTATE:
Operating real estate relating to the Group's hotel operations is
summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
---------------------- -------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Land $ 6,435 $ 3,867 $ 3,867
Buildings 41,740 27,979 27,998
Personal property 7,194 5,581 5,920
------- ------- -------
55,369 37,427 37,785
Less: Accumulated Depreciation 14,481 13,347 14,282
------- ------- -------
$40,888 $24,080 $23,503
======= ======= =======
</TABLE>
7. MORTGAGE NOTES PAYABLE AND NOTES PAYABLE:
A. Mortgage Notes Payable:
Mortgage notes payable, substantially all of which are limited
recourse obligations, are collateralized by the assignment of various
leases and by real property with a carrying amount of approximately
$398,639, before accumulated depreciation. As of December 31, 1996,
mortgage notes payable have interest rates varying from 6.35%
to 11.85% per annum and mature from 1997 to 2020.
F-31
<PAGE> 120
CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
Scheduled principal payments during each of the next five years
following December 31, 1996 and thereafter are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1997 $ 40,771
1998 28,012
1999 37,832
2000 4,836
2001 22,440
Thereafter 68,448
---------
$ 202,339
=========
</TABLE>
B. Notes Payable:
The Group's notes payable which aggregate $24,709 at December 31,
1995 and 1996 and September 30, 1997 provide for quarterly payments
of interest at a variable rate of the London Inter-Bank Offered Rate
plus 4.25% per annum with such notes maturing between July 1999 and
December 1999 at which time balloon payments for the entire
outstanding principal balance will be due. Each note obligation is
recourse to the assets of a specific Partnership.
Covenants under the notes limit the amount of limited recourse
indebtedness the applicable Partnership may incur. Additionally, each
Partnership must maintain certain debt coverage ratios, minimum net
worth and aggregate appraised property values. The debt coverage
ratios requires each Partnership to maintain ratios of free operating
cash flow, as defined, to the debt service on the applicable note
ranging from 3:1 to 3.4:1 over the terms of the note. The net worth
and aggregate property values minimums range from $15,000 to $25,000.
Under the covenants, certain of the Partnerships have limitations on
the amount of total indebtedness which such Partnership may incur.
The Company is in compliance with the covenants of the note payable
agreements.
The note payable agreements require that the lender be offered the
proceeds from property sales as a principal payment. To date, the
lender has declined to accept all mandatory offers of proceeds.
Except for the application of proceeds from property sales and other
limited circumstances, no loan prepayments may be made until 1999.
Interest paid by the Group on mortgages and notes payable aggregated
approximately $31,016, $28,197 and $23,805 in 1994, 1995 and 1996,
respectively, and $18,194 and $11,099 for the nine months ended
September 30, 1996 and 1997, respectively.
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CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
8. DISTRIBUTIONS TO PARTNERS:
Distributions declared and paid to partners are summarized as
follows:
<TABLE>
<S> <C>
1994:
Quarterly $ 35,589
=========
1995:
Quarterly $ 35,962
Special 21,254
---------
$ 57,216
=========
1996:
Quarterly $ 33,350
Special 823
---------
$ 34,173
=========
</TABLE>
Distributions declared and paid for the nine month period ended
September 30, 1997 were comprised of quarterly distributions of
$24,818 and a special distribution of $792.
9. INCOME FOR FEDERAL TAX PURPOSES:
Income for financial statement purposes differs from income for
Federal income tax purposes because of the difference in the
treatment of certain items for income tax purposes and financial
statement purposes. A reconciliation of accounting differences is as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Net income per Statements of Income $ 37,442 $ 52,570 $ 45,295
Excess tax depreciation (11,383) (10,489) (8,440)
Difference in recognition of gain from sales 11,439 7,272 3,532
Difference in the recognition of
restructuring fees 14,491
Difference in timing of recognition of
purchase installments as income 2,286 (5,881)
Writedowns to net realizable value 2,889 11,019 1,300
Minority interest 3,006 3,143 3,182
Other (3,184) (448) (3,244)
-------- -------- --------
Income reported for Federal
income tax purposes $ 42,495 $ 71,677 $ 41,625
======== ======== ========
</TABLE>
10. INDUSTRY SEGMENT INFORMATION:
The Group's operations consist of two business segments (i) the
investment in and the leasing of industrial and commercial real
estate and (ii) owning and operating hotels.
For the years ended December 31, 1994, 1995 and 1996 and for the nine
months ended September 30, 1996 and 1997, the Group earned its net
leasing revenues (i.e., rental income and interest income from direct
financing leases) from over 75 lessees. A summary of net leasing
revenues including all current lease obligors with more than $1,000
in annual revenues is as follows:
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NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<CAPTION>
Nine months ended
Years Ended December 31, September 30, 1997
--------------------------------------------------------- -------------------------------------
1994 % 1995 % 1996 % 1996 % 1997 %
------- - ------- - ------- - ------- - ------- -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hughes Markets, Inc. $ 1,717 2% $ 1,734 2% $ 4,463 5% $ 3,017 5% $ 4,338 7%
Dr Pepper Bottling Company
of Texas 3,998 5 3,998 5 3,998 5 2,999 5 2,999 5
Detroit Diesel Corporation 3,502 4 3,496 5 3,645 5 2,734 5 2,734 5
Gibson Greetings, Inc. 7,810 10 7,234 9 3,384 4 2,535 4 2,590 4
Sybron Acquisition Company 3,311 4 3,311 4 3,311 4 2,483 4 2,483 4
Advanced System
Applications, Inc. 3,404 4 4,693 6 4,586 6 3,453 6 2,267 4
Stoody Deloro Stellite, Inc. 2,091 3 2,551 3 2,624 3 1,976 3 2,042 4
Amerisig, Inc. 2,313 3 2,569 3 2,533 3 1,902 3 1,965 3
Pre Finish Metals Incorporated 2,237 3 2,436 3 2,408 3 1,798 3 1,816 3
Furon Company 2,539 3 2,539 3 2,528 3 1,925 3 1,812 3
AutoZone, Inc. 2,354 3 2,444 3 2,304 3 1,721 3 1,775 3
Orbital Sciences Corporation 2,008 2 2,154 3 2,154 3 1,615 3 1,615 3
The Gap, Inc. 2,154 3 2,154 3 2,154 3 1,615 3 1,615 3
Simplicity Manufacturing, Inc. 1,997 2 1,997 3 1,997 3 1,498 3 1,498 3
Cleo, Inc. 1,793 2 1,331 3 1,378 2
AP Parts Manufacturing, Inc. 1,526 2 1,526 2 1,729 2 1,293 2 1,377 2
NVRyan, L.P. 1,846 2 1,803 3 1,814 2 1,415 2 1,363 2
Peerless Chain Company 1,269 1 1,280 2 1,611 2 1,184 2 1,281 2
Unisource Worldwide, Inc. 1,646 2 1,656 2 1,646 2 1,235 2 1,240 2
Red Bank Distribution, Inc. 1,313 2 1,350 2 1,401 2 1,050 2 1,050 2
Brodart, Co. 1,323 2 1,319 2 1,314 2 986 2 982 2
Gould, Inc. 1,125 1 1,133 1 1,215 2 911 2 911 2
High Voltage Engineering
Corporation 1,140 1 1,168 1 1,179 1 887 2 881 2
Spreckels Industries, Inc. 880 1 1,021 1 1,021 1 766 1 766 1
Anthony's Manufacturing
Company, Inc. 1,348 2 1,073 1 876 1 657 1 657 1
Western Union Financial
Services, Inc. 1,046 1 605 1 604 1 453 1 452 1
GATX Logistics, Inc. 1,834 2 1,399 2 381 1 381 1
Other 24,127 30 20,003 25 18,547 26 13,737 24 14,817 25
------- --- ------- --- ------- --- ------- --- ------- ---
$81,858 100% $78,646 100% $77,220 100% $57,557 100% $58,704 100%
======= === ======= === ======= === ======= === ======= ===
</TABLE>
Results for the hotel properties are summarized as follows:
<TABLE>
<CAPTION>
Nine months ended
Years Ended December 31, September 30, 1997
------------------------------------------ -------------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 22,532 $ 25,077 $ 21,929 $ 18,407 $ 10,943
Management fees paid to
</TABLE>
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CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
<TABLE>
<S> <C> <C> <C> <C> <C>
unaffiliated hotel managers (583) (594) (547) (497) (296)
Other operating expenses (15,594) (17,443) (15,400) (12,529) (7,690)
-------- -------- -------- -------- --------
$ 6,355 $ 7,040 $ 5,982 $ 5,381 $ 2,957
======== ======== ======== ======== ========
</TABLE>
11. GAIN ON SETTLEMENT:
In August 1995, the Group reached a settlement with The Leslie Fay
Company ("Leslie Fay") and its surety company regarding Leslie Fay's
lease with the Group. In connection with the settlement, the Group
recognized a gain of $11,499, which consisted of aggregate net cash
received from Leslie Fay and the surety company of $18,840 and the
waiving of the $383 interest obligation that had been accrued on the
Leslie Fay monthly payments, offset by the writedown of $7,400 and
aggregate management fees, payable to an affiliate, of $324 on the
monthly payments received from Leslie Fay since the beginning of the
dispute in 1992. Of the rent received, $5,436 was received in 1995.
Under the settlement agreement, Leslie Fay was required to dismiss
with prejudice all of its suits filed against the Group, and the
Group's bankruptcy claim against Leslie Fay, as an unsecured
creditor, was reduced to $2,650. On June 30, 1997, the Group received
securities with a market value of $1,619 as a distribution on its
claim. Such distribution represents 79% of the total settlement
amount. In October 1997, the Group received securities with a market
value of $71 as a second distribution on its claim.
As the fair value of the property was no longer impacted by the
Leslie Fay lease, the Group wrote down the estimated fair value of
the property, net of anticipated selling costs, to $2,000 and
recognized a noncash charge of $7,400, which is netted against the
gain of settlement.
In January 1996, the Group sold the vacant property to a third party,
net of transaction costs, for $1,854. The Group recognized an
additional writedown on the property to an amount equal to the net
sales proceeds, resulting in a charge to income in 1995 of $146.
Accordingly, no gain or loss was recognized in 1996 in connection
with the sale.
12. GAINS AND LOSSES ON SALE:
Significant sales of properties and securities are summarized as
follows:
1997
In September 1996, the Group entered into a purchase and sale
agreement for the sale of the Group's property in Louisville,
Kentucky, leased to Winn-Dixie Stores, Inc. ("Winn-Dixie") for
$1,100 less selling costs. The Winn-Dixie property was sold in August
1997 at which time, the Group received $1,042 and recognized a gain
on sale of $608. Such property was classified as real estate held for
sale as of December 31, 1997.
1996
In January 1996, the Group sold a multi-tenant property in Helena,
Montana whose primary tenant was IBM Corporation ("IBM") for $4,800.
Net of closing costs, the Group received cash proceeds of $1,741 and
assigned a mortgage loan obligation of $2,854 and accrued interest of
$12 thereon to the purchaser. A gain of $90 was
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NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
recognized on the sale. All of the Group's leases at the Helena
property, including the IBM lease, were assigned to the purchaser.
In April 1996, the Group sold its warehouse property in Hodgkins,
Illinois leased to GATX Logistics, Inc. ("GATX") for $13,200 and
assigned the GATX lease to the purchaser. Net of the costs of sale
and amounts necessary to satisfy the $3,209 balance on the mortgage
loan collateralized by the Hodgkins property, the Group received cash
proceeds of $9,661 and recognized a gain of $4,408. The Group used
$7,477 of the cash proceeds from the Hodgkins sale to satisfy two
mortgage loan obligations which were scheduled to mature in 1996.
In 1985, the Group purchased a hotel in Rapid City, South Dakota,
which it operated as a Holiday Inn, with $6,800 of tax-exempt bonds
which were supported by a letter of credit issued by a third party.
In September 1994, the Group was advised by Holiday Inn that it would
need to upgrade the hotel's physical plant by January 1997 in order
to meet the requirements of a modernization plan adopted by Holiday
Inn or surrender its Holiday Inn license. As the cost of such
upgrade was estimated to be $1,925 Management concluded that such
additional investment would not justify compliance with the
modernization plan. Although Management was considering an
affiliation with another national hotel chain, earnings were
expected to decline after any change in affiliation.
In 1995, under an agreement with the issuer of the letter of credit
supporting the $6,800 tax-exempt mortgage bond on the Rapid City
property, the Group agreed to use its best efforts to sell the hotel
property in exchange for an extension of the letter of credit from
October 1995 to October 1997. Annual cash flow from the hotel (hotel
earnings, adjusted for depreciation and amortization, less debt
service on the tax-exempt bonds) for 1995, the last full year of
operations, was $305. In 1995, the Group reevaluated the net
realizable value of the property and recognized a noncash charge of
$1,000. In 1996, the Group recognized an additional charge of $1,300
as a writedown to net realizable value to an amount Management
believed would approximate the proceeds from a sale.
In October 1996, the Group sold the property and the operating assets
and liabilities of the hotel for $4,105. The Group recognized a gain
of $785 on the sale. The bond was paid off by utilizing the net
proceeds from the sale, $302 of cash and various escrow accounts
which had been held by the bond trustee or issuer of the letter of
credit. The gain includes the recognition of the release of
unamortized deferred gains relating to the acquisition of the hotel
operation in 1991 from the former lessee.
1995
In December 1995, the Group sold the food service facility in
Jupiter, Florida, at which it operated a restaurant, for $4,140,
recognizing a gain on the sale of $1,019.
In June 1995, the Group sold its property in Allentown, Pennsylvania,
which it purchased in June 1983 for $11,702, to its lessee, Genesco,
Inc. ("Genesco") for $15,200 and recognized a gain on the sale of
$3,330, net of certain costs. In connection with the sale, the Group
paid off an existing limited recourse mortgage loan on the Genesco
property for $5,723.
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CAREY DIVERSIFIED LLC AND
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NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
In August 1985, the Group purchased from and net leased to Industrial
General Corporation ("IGC") and certain of its wholly-owned
subsidiaries, seven properties located in Elyria and Bellville, Ohio,
Forrest City and Bald Knob, Arkansas, Carthage, New York, Saginaw,
Michigan and Newburyport, Massachusetts for $9,100. Subsequent to the
purchase, the Group agreed to exchange the Saginaw property for an
expansion of the Newburyport facility, severed the Carthage property
from the lease and entered into a lease with FMP/Rauma Group ("FMP")
and sold the Forrest City property. On July 28, 1995, IGC filed a
voluntary petition of bankruptcy under Chapter 11 of the United
States Bankruptcy Code. In connection with IGC's sale of its plastics
division, on September 14, 1995, the Group entered into a series of
transactions which resulted in the termination of the IGC lease, the
sale of the Bald Knob, Bellville and Newburyport properties and the
full satisfaction of the mortgage loan obligation collateralized by
all of the IGC properties and the FMP property which had been
scheduled to mature on September 1, 1995. In connection with the sale
of the Bald Knob property to IGC, the Group received cash of $987 and
IGC, with the consent of the mortgage lender, assumed the Group's
mortgage obligation of $720 and accrued interest of $6. Additionally,
the Group is scheduled to receive an additional $200 from IGC over an
eight-month period commencing in 1996. The Bellville and Newburyport
properties were sold for $2,400 in cash to the third party which
acquired the assets of the IGC plastics division. The Group used
$2,200 of the proceeds to pay off the remaining balance on the
matured mortgage loan obligation on the IGC and FMP properties. In
connection with the sale of the three properties, the Group realized
a loss of $1,720 in 1995. In December 1994, the Group also sold the
Forrest City property for $650 and realized a loss of $887 on such
sale in 1994.
In January 1984, the Group purchased properties in Gordonsville,
Virginia and in North Bergen, New Jersey for $7,000 and entered into
a net lease with Liberty Fabrics of New York ("Liberty"). In December
1993, Liberty notified the Group of its intention to exercise its
purchase option on the properties. Pursuant to the lease, the
purchase price would be the greater of $7,000 or fair market value as
encumbered by the lease. On October 18, 1994, Liberty filed suit to
compel the Group to transfer title of the properties to Liberty for
$9,359, the fair market value which had been determined pursuant to
the purchase option appraisal process. Because the Group believed
fair market value of the properties exceeded $9,359, Management
challenged the Liberty suit to seek a higher purchase price. On
December 29, 1994, the Group and Liberty terminated the lease and
agreed that the properties would be transferred to Liberty for
$9,359, subject to a final determination of the fair value of the
property. If the fair market value was determined to be greater than
$9,359, Liberty would have the right within 30 days of the
determination to rescind the transfer, in which case all proceeds
would be returned to Liberty, title of the properties transferred
back to the Group and Liberty would pay all rents in arrears for the
period from the initial transfer of title to Liberty. In January
1996, the Court ruled in favor of Liberty. As a result of this
ruling, Liberty no longer had the right to rescind the transaction.
Accordingly, the Group recognized a gain in 1995 on the sale of the
properties of $2,334.
1994
In November 1994, Pace Membership Warehouse, Inc. ("Pace"), a former
subsidiary of Kmart corporation ("Kmart"), purchased a property in
Tampa, Florida owned by the Group and a property owned by CPA(R) 10
in Des Moines, Iowa for an aggregate purchase price of $14,150. In
connection with Kmart's sale of Pace's business operations in 1994,
the acquirer did not assume the operations at the Pace properties.
Based on the provisions in the Pace leases, the Group and CPA(R):10
were able to negotiate the sale of
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CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
the properties. Pursuant to a fairness opinion performed by an
independent investment banking firm, $7,000 of the purchase price was
allocated to the Group. A portion of the Group's proceeds from the
sale were used to satisfy the remaining $3,290 mortgage balance on
the Tampa property. In connection with the sale, the Group recognized
a gain of $2,028, net of certain costs.
In October 1994, the Group sold its properties leased to
Mid-Continent Bottlers, Inc.'s ("Mid-Continent") to the lessee for
$17,800 and sold the Group's 3.29% limited partnership interest in
Midcon Bottlers, L.P., an affiliate of Mid-Continent, for $700. In
connection with the sales, the Group recognized gains of $7,814 and
$683, respectively. The Group used $3,895 of the sales proceeds to
satisfy the Mid-Continent mortgage loan. In addition, the Group used
a portion of the proceeds to prepay certain mortgage loans on
properties which remain subject to leases.
Proceeds from the Genesco, Pace and Mid-Continent sales were used to
fund special distributions to partners of $13,334 in 1995.
13. EXTRAORDINARY GAINS AND LOSSES ON EXTINGUISHMENT OF DEBT:
1996
In 1996, the Group obtained $6,400 of new limited recourse mortgage
financing on one of its properties leased to The Gap, Inc. (the
"Gap"). Proceeds from the mortgage financing were used to pay off the
remaining balance of $6,195 on an existing mortgage loan on the Gap
property, certain refinancing costs and prepayment charges of $255.
The prepayment charges have been reflected as an extraordinary charge
on the extinguishment of debt in the accompanying combined financial
statements. The new mortgage loan is a limited recourse obligation
and is collateralized by a deed of trust and a lease assignment. The
loan bears interest at 7.25% per annum and provides for monthly
payments of principal and interest of $58 based on a 15-year
amortization schedule. The retired mortgage loan provided for
quarterly payments of $211 at an annual interest rate of 10%. The new
mortgage loan has a term of three years and a balloon payment of
$5,608 will be due on the maturity date, May 1, 1999.
1995
In connection with the sale of its property in Jupiter, Florida in
December 1995, the Group satisfied the mortgage notes collateralized
by the Jupiter property. Under a prior agreement, certain principal
and interest payments were deferred through 1995. The prior agreement
provided that the payment of deferred amounts would be forgiven under
certain circumstances including the payment in full of all other
amounts due under the mortgage notes. At the time of sale, the Group
paid all amounts due and met the conditions for forgiveness of the
deferred amounts. Accordingly, the Group recognized an extraordinary
gain of $1,324 on the extinguishment of debt on the satisfaction of
the Jupiter property mortgage notes.
The Group recognized a gain on the satisfaction of the mortgage loan
collateralized by the property leased to Anthony's Manufacturing
Company, Inc. ("Anthony's"). In May 1995, the Group paid off and
satisfied the mortgage loan collateralized by the Anthony's
properties. The lender accepted payments aggregating $5,440 to
satisfy an outstanding principal balance of $6,854 and accrued
interest thereon of $705. In connection with the satisfaction of the
debt, the Group recognized an extraordinary gain on the
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CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
extinguishment of debt of $2,088, net of certain related legal costs.
To pay off the mortgage obligation, the Group used the $1,550
received from Anthony's under a settlement agreement.
1994
In December 1994, using, in part, proceeds from the Mid Continent
sale, the Group paid off mortgage loans on three other properties
with a combined outstanding balance of $8,376. In connection with
paying the mortgages, the Group paid prepayment charges of $470 and
wrote off unamortized financing costs of $42 and recognized an
extraordinary loss of $512.
In June 1990, the Group purchased land and buildings in Detroit and
Redford, Michigan for $31,500, of which $24,000 was financed by a
limited recourse mortgage loan, and entered into a net lease with an
initial lease term of twenty years with Detroit Diesel Corporation
("Detroit Diesel"). The mortgage loan provided for quarterly interest
only payments at an annual rate of 11.28% with payments of principal
commencing on December 15, 1995. On May 25, 1994, the Group prepaid
the existing $24,000 mortgage loan and obtained $25,000 of new
mortgage financing. The new mortgage loan bears interest at the rate
of 7.16% per annum and provided for quarterly interest only payments
of $448 through December 15, 1995 at which time quarterly interest
and principal payments of $690 commenced and which are payable
through June 15, 2010 at which time the loan will be fully amortized.
Pursuant to the Detroit Diesel lease, Detroit Diesel was entitled to
a rent reduction equal to 70% of any benefit realized from the
refinancing of the mortgage loan in exchange for its paying 70% of
the costs incurred in connection with any such refinancing other than
prepayment premiums. In lieu of paying any refinancing costs, Detroit
Diesel consented to allowing the Group to refinance the mortgage debt
for $1,000 in excess of the original mortgage financing and for the
Group to keep any proceeds which remained after prepaying the
original mortgage loan and paying prepayment charges and the
financing costs of the new loan. The Detroit Diesel lease was amended
so that rentals under the lease reflect the refinancing benefits.
Although gross rents under the lease decreased, total equity rents
(i.e., rent, net of debt service requirements) over the remaining
initial term are scheduled to increase by approximately $2,804. In
connection with paying off the original mortgage loan, the Group
incurred an extraordinary charge on the extinguishment of debt as a
result of paying a prepayment charge of $600.
14. WRITEDOWNS TO NET REALIZABLE VALUE:
Significant writedowns of properties to net realizable value are
summarized as follows:
As described in Note 16, Simplicity Manufacturing, Inc.
("Simplicity") notified the Group that it was exercising its option
to purchase the property it leases from the Group in Port Washington,
Wisconsin on April 1, 1998. Although the appraisal process has not
yet been completed, the Group has concluded that it is not likely
that the agreed-upon exercise price will be in excess of the minimum
exercise price of $9,684. Accordingly, the Group has recognized a
noncash charge of $2,316 in 1997 on the writedown of the property to
its estimated net realizable value of $9,684.
The Group owns two properties in Sumter and Columbia, South Carolina
leased to Arley Merchandise Corporation ("Arley"). A limited recourse
mortgage loan of $4,765,
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NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
collateralized by the properties and an assignment of the Arley
lease, matured in January 1993. The Group and the lender entered into
a forbearance agreement at that time and attempted to reach an
agreement to restructure the loan. Such agreement was not reached and
the forbearance agreement expired in July 1995.
In May 1997, the lender made a demand for payment of the entire
outstanding principal balance of the loan. Although the Group made
certain offers to the lender, the lender rejected such offers and, in
June 1997, the lender initiated a lawsuit for the purpose of
foreclosing on the Arley properties. The foreclosure proceeding was
completed in November 1997 at which time title to the Alrey
properties was transferred to the lender and the Group was released
from its limited recourse mortgage obligation. As a result of the
lender's decision not to negotiate on a settlement, the Group has
estimated that the fair value of the Arley properties was
approximately $3,940 and recorded a charge of $1,350 on the writedown
of the Arley properties to their estimated net realizable value at
June 30, 1997. The Arley properties have been reclassified as real
estate held for sale as of September 30, 1997 in the accompanying
combined financial statements.
The Group owned a hotel property in Rapid City, South Dakota which it
sold in October 1996. As more fully described in Note 12, the Group
reevaluated the net realizable value of the property in 1995 and
recognized a noncash charge of $1,000 on the writedown. An additional
noncash charge of $1,300 was recorded in 1996.
In connection with the sale of the IGC properties as described in
Note 12, the Group retained ownership of a property in Elyria, Ohio
and has written off its carrying value of $692 in 1995.
In January 1991, the Group and CPA(R):10 formed a limited
partnership, Hope Street Connecticut Limited Company ("Hope Street"),
for the purpose of purchasing land and an office building in
Stamford, Connecticut for $11,000. The Group contributed $1,500 to
Hope Street for a 31.915% limited partnership interest and CPA(R):10
contributed $3,200 for a 68.085% general partnership interest. Hope
Street used this equity and assumed an existing limited recourse
mortgage loan of $6,300 collateralized by the property and also
assumed an existing net lease, as lessor, with Xerox Corporation
("Xerox"), as lessee. The Xerox lease provided for annual rent of
$1,300 with an initial term through August 31, 1995 and two five-year
renewal terms at Xerox's option. The mortgage loan was an interest
only obligation with annual debt service of $639 and was scheduled to
mature on September 1, 1995 with a balloon payment of $6,300 due at
that time.
In August 1995, Xerox vacated the property at the end of the initial
term. Hope Street was unsuccessful in its efforts to remarket the
property and find a new lessee even at a substantially lower annual
rental. Based on its assessment of current conditions for the
Stamford market, the general partner concluded that the net
realizable value of the property was less than the outstanding
balance of the mortgage loan. Given these circumstances, the general
partner considered various alternatives, including negotiating with
the lender to extend the maturity, restructure the loan or satisfy
the balloon payment obligation at a substantial discount. All of
these alternatives were rejected by the lender. Since the Group did
not anticipate receiving any further cash distributions from Hope
Street nor does the Group have any obligation to Hope Street, the
Group wrote off its remaining equity investment in Hope Street and
recognized a charge of $1,173 in 1995. The property was transferred
to the lender in connection with a foreclosure proceeding which was
completed in September 1997 at which time Hope Street was released
from its limited recourse mortgage obligation.
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NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
The Group owns three properties located in Reno, Nevada; Bridgeton,
Missouri and Moorestown, New Jersey. On April 1, 1993, the lessee,
New Valley Corporation ("New Valley"), filed a petition of voluntary
bankruptcy seeking reorganization under Chapter 11 of the United
States Bankruptcy Code. In connection with the bankruptcy filing, the
Bankruptcy Court approved New Valley's termination of its lease with
the Group for the Moorestown, New Jersey property in May 1993. In
1993, the Group wrote down the Moorestown property to its estimated
net realizable value of $2,960 and recognized a charge of $2,144 on
the writedown. In December 1994, the Bankruptcy Court also approved
the termination of New Valley's lease on the Reno property effective
December 31, 1994. In connection with the lease termination, the
Group recognized a charge of $1,143 and wrote down the Reno property
in 1994 to its estimated net realizable value of $3,295.
In 1994, the Group entered into contracts to sell two properties
formerly leased to NVRyan L.P. ("NVRyan") in Jefferson, Georgia and
Fredricksburg, Virginia, respectively. As the proposed purchase
prices were in excess of the carrying value of such properties, the
Group recognized charges of $1,746 and wrote down the Jefferson and
Fredricksburg properties to an amount equal to the anticipated sales
proceeds. In addition the Group recognized a charge of $1,089 in 1993
on the writedown of a property in Plant City, Florida formerly leased
to NVRyan to the anticipated sales proceeds when the lessee of the
property informed the Group of its intention to exercise its purchase
option. The Jefferson and Plant City properties were sold in 1994
with no gain or loss recognized at the time of sale. The sale of the
Fredricksburg property was not completed. In addition, the Group has
written down properties held for sale to an amount equal to the
estimated sales proceeds when such amount is less than the carrying
value of such property.
15. EXCHANGE TRANSACTION:
The Group purchased a hotel property in Kenner, Louisiana, in June
1988. The Group assumed operating control of the hotel in 1992 after
evicting the lessee due to its financial difficulties. On July 30,
1996, the Group completed a transaction with American General
Hospitality Operating Partnership L.P. (the "Operating Partnership"),
the operating partnership of a newly-formed real estate investment
trust, American General Hospitality Corporation, ("AGH"), in which
the Group received 920,672 limited partnership units in exchange for
the hotel property and its operations. In connection with the
exchange the Group and the Operating Partnership assumed the mortgage
loan obligation collateralized by the hotel property of $7,304. AGH
owns an 81.3% equity interest in the Operating Partnership.
The exchange of the hotel property for limited partnership units was
treated as a nonmonetary exchange for tax and financial reporting
purpose. The Group's interest in the Operating Partnership is being
accounted for under the equity method. The Group has the right to
convert its equity interest in the Operating Partnership to shares of
common stock in AGH on a one-for-one basis. AGH completed an initial
public offering during 1996. The Partnership's carrying value for the
limited partnership units at the time of the exchange of $9,292 was
based on the historical basis of assets transferred, net of
liabilities assumed by the Operating Partnership; cash contributed
and costs incurred to complete the exchange.
F-41
<PAGE> 130
CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
As of December 31, 1996, the audited consolidated financial
statements of AGH reported total assets of $243,115 and shareholders'
equity of $127,461 and for the period from July 31, 1996 to December
31, 1996 revenues of $13,496 and net income of $5,129. As of
September 30, 1997, AGH's quoted per share market value was $2715/16
resulting in an aggregate value of approximately $25,721. The
carrying value of the equity interest in the Operating Partnership as
of December 31, 1996 was $9,612. For the period from July 31, 1996 to
December 31, 1996, and for the nine months ended September 30, 1997,
the Group's share of the Operating Partnership's earnings were $274
and $1,155, respectively.
Between January 1995 and July 1996, the Group had engaged an
affiliate of AGH to manage the operations of Kenner on their behalf.
Such affiliate is currently engaged to manage the operations of the
Group's three hotel properties.
16. REAL ESTATE HELD FOR SALE:
In March 1997, Simplicity notified the Group that it was exercising
its option to purchase the property it leases from the Group in Port
Washington, Wisconsin on April 1, 1998. The option price will be the
greater of $9,684 or fair market value, capped at $12,000. An
appraisal process to determine fair market value has commenced. After
paying the limited recourse mortgage loan, the Group will realize
cash proceeds of up to $7,678 and no less than $5,362, before any
selling costs. Annual cash flow from the property (rent less mortgage
debt service on the property) is $934. The carrying value of the
Simplicity property at September 30, 1997 was $9,684 (also see Note
14).
In December 1996, KSG, Inc. ("KSG") notified the Group that it was
exercising its option to purchase the property it leases in
Hazelwood, Missouri. The exercise price will be the greater of $4,698
(the Group's purchase price for the property in March 1987) or fair
market value as encumbered by the lease. The option provides that the
sale of the property occur no later than March 8, 1998. An appraisal
process to determine fair market value has commenced. Annual cash
flow from the KSG property is approximately $820. The carrying value
of the KSG property at September 30, 1997 was $4,698.
As described in Note 14, the $3,889 carrying value of the Arley
properties was classified as real estate held for sale at September
30, 1997.
17. ENVIRONMENTAL MATTERS:
Substantially all of the Group's properties, other than the hotel
properties, are currently leased to corporate tenants, all of which
are subject to environmental statutes and regulations regarding the
discharge of hazardous materials and related remediation obligations.
The Group generally structures a lease to require the tenant to
comply with all laws. In addition, substantially all of the Group's
net leases include provisions which require tenants to indemnify the
Group from all liabilities and losses related to their operations at
the leased properties. The costs for remediation, which are expected
to be performed and paid by the affected tenant, are not expected to
be material. In the event that the Group absorbs a portion of any
costs because of a tenant's failure to fulfill its obligations,
Management believes such expenditures will not have a material
adverse effect on the Group's financial condition, liquidity or
results of operations.
F-42
<PAGE> 131
CAREY DIVERSIFIED LLC AND
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
In 1994, based on the results of Phase I environmental reviews
performed in 1993, the Group voluntarily conducted Phase II
environmental reviews on certain of its properties. The Group
believes, based on the results of Phase I and Phase II reviews, that
its leased properties are in substantial compliance with Federal and
state environmental statutes and regulations. Portions of certain
properties, which do not include any of the hotel properties, have
been documented as having a limited degree of contamination,
principally in connection with surface spills from facility
activities and leakage from underground storage tanks. For those
conditions which were identified, the Group has advised the affected
tenants of the Phase II findings and of their obligations to perform
required remediation.
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash, accounts receivable, accounts payable
and accrued expenses approximate fair value because of the short
maturity of these items.
The Group estimates that the fair value of mortgage notes payable and
other notes payable approximates the carrying amounts for such loans
at December 31, 1996. The fair value of debt instruments was
evaluated using a discounted cash flow model with discount rates
which take into account the credit of the tenants and interest rate
risk.
19. CONSENT SOLICITATION:
On October 15, 1997, Carey Diversified filed a Consent Solicitation
Statement/Prospectus ("consent solicitation") with the United States
Securities and Exchange Commission. The General Partners proposed
that the Limited Partners of each of the CPA(R) limited partnerships
of the Group approve a transaction in which each CPA(R) limited
partnership would be merged with a subsidiary partnership of Carey
Diversified, of which Carey Diversified is the general partner. Each
limited partner was provided the option of either exchanging his or
her limited partnership units for Listed Shares of Carey Diversified
or to retain a limited partnership interest in the subsidiary
partnership ("Subsidiary Partnership Units"). In December 1997, a
majority of the limited partnership units in each of the CPA(R)
limited partnerships consented to the transaction. The consummation
of the transaction occurred on January 1, 1998, at which time the
General Partner exchanged a portion of their general partnership
interests for Listed Shares.
The Listed Shares will be listed and publicly traded on the New York
Stock Exchange. Subsidiary Partnership Units will provide
substantially the same economic interest and legal rights as those of
a limited partnership unit in a CPA(R) limited partnership, but will
not be listed on a securities exchange.
F-43
<PAGE> 132
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
--------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ------------ ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method:
Office, warehouse and
manufacturing buildings
leased to Broomfield
Tech Center Corporation $ 2,250,640 $ 354,970 $ 3,073,575 $ 559,647
Office and manufacturing
buildings leased to IMO
Industries Inc. 2,485,302 685,026 2,006,559 2,617,652
Office and manufacturing
buildings formerly leased to
IMO Industries, Inc. 221,474 448,641 4,384 $(38,155)
Distribution facilities
and warehouses
leased to
The Gap, Inc. 6,259,172 1,363,909 19,065,813 225,569
Supermarkets
leased to Winn-Dixie
Stores, Inc. 191,942 904,589 6,749,989 111,880
Land leased to
Kobacker Stores, Inc. 395,944 1,236,735 (176,112)
Warehouse and manufac-
turing plant
leased to Pre Finish
Metals Incorporated 2,347,677 636,000 16,470,208 33,652
Retail store in
Greensboro, North Carolina 40,946 186,926 14,508
Retail store in
New Orleans, Louisiana 129,065 188,599 15,776
Retail stores on adjacent sites
leased to Kinko's of Ohio, Inc.
and Color Tile, Inc. 47,350 581,034 10,795
</TABLE>
<TABLE>
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
---------------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method:
Office, warehouse and
manufacturing buildings
leased to Broomfield
Tech Center Corporation $ 354,970 $ 3,633,222 $ 3,988,192 $ 2,194,402 November 17, 1978 10-30 yrs.
Office and manufacturing
buildings leased to IMO
Industries Inc. 685,026 4,624,211 5,309,237 2,391,393 April 20, 1979 17 yrs.
Office and manufacturing
buildings formerly leased to
IMO Industries, Inc. 183,319 453,025 636,344 453,025 April 20, 1979 17 yrs.
Distribution facilities
and warehouses
leased to July 6, 1979 and
The Gap, Inc. 1,363,909 19,291,382 20,655,291 10,590,278 February 16, 1988 5-50 yrs.
Supermarkets March 12, 1984,
leased to Winn-Dixie June 17, 1987,
Stores, Inc. 904,589 6,861,869 7,766,458 2,069,929 March 17 & 21, 1988, 5-40 yrs.
and October 26, 1990
Land leased to
Kobacker Stores, Inc. 1,060,623 1,060,623 January 17, 1979
Warehouse and manufac-
turing plant
leased to Pre Finish December 11, 1980 5-30 yrs.
Metals Incorporated 636,000 16,503,860 17,139,860 8,382,550 and June 30, 1986
Retail store in
Greensboro, North Carolina 40,946 201,434 242,380 139,023 September 2, 1980 15-35 yrs.
Retail store in
New Orleans, Louisiana 129,065 204,375 333,440 144,842 January 5, 1981 15-35 yrs.
Retail stores on adjacent sites
leased to Kinko's of Ohio, Inc.
and Color Tile, Inc. 47,350 591,829 639,179 415,828 October 1, 1980 15-35 YRS.
</TABLE>
F-44
<PAGE> 133
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
--------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ------------ ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Warehouse and distribution
center leased to,
Maybelline, Inc., and B&G
Contract Packaging, Inc. 216,000 3,048,862 25,103
Land leased to Unisource
Worldwide, Inc. 2,278,415 3,575,000
Centralized telephone
bureau leased to Excel
Telecommunications, Inc. 1,139,600 3,379,679 505,662 (1,230,690)
Building leased to
Sports & Recreation, Inc. 677,600 4,908,238 (2,625,838)
Dairy processing
facility leased to
Hughes Markets, Inc. 2,029,682 9,699,041 26,000
Office building in
Beaumont, Texas
leased to Petrocon
Engineering, Inc. 510,000 4,490,000 612,462 $(4,346,960)
Office, manufacturing
and warehouse
buildings leased to
Continental Casualty
Company 1,311,193 1,800,000 6,710,638 105,000
Warehouse and
distribution center
leased to Family
Dollar Stores, Inc. 946,865 291,540 5,708,460 153,179
Manufacturing facilities
leased to Arley
Merchandise Corporation 4,754,940 256,000 7,544,000 8,555
</TABLE>
<TABLE>
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
---------------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Warehouse and distribution
center leased to,
Maybelline, Inc., and B&G
Contract Packaging, Inc. 216,000 3,073,965 3,289,965 1,608,633 April 9, 1981 30 YRS.
Land leased to Unisource
Worldwide, Inc. 3,575,000 3,575,000 April 29, 1980
Centralized telephone
bureau leased to Excel
Telecommunications, Inc. 1,139,600 2,654,651 3,794,251 143,692 November 24, 1981 30 YRS.
Building leased to
Sports & Recreation, Inc. 359,068 2,600,932 2,960,000 325,117 November 24, 1981 30 YRS.
Dairy processing
facility leased to
Hughes Markets, Inc. 2,055,682 9,699,041 11,754,723 6,440,728 June 1, 1983 5-36 yrs.
Office building in
Beaumont, Texas
leased to Petrocon
Engineering, Inc. 278,801 986,701 1,265,502 498,078 August 11, 1983 30 YRS.
Office, manufacturing
and warehouse
buildings leased to
Continental Casualty
Company 1,800,000 6,815,638 8,615,638 5,115,164 October 20, 1983 10-40 YRS.
Warehouse and
distribution center
leased to Family
Dollar Stores, Inc. 291,540 5,861,639 6,153,179 2,069,770 December 16, 1983 30 YRS.
Manufacturing facilities
leased to Arley
Merchandise Corporation 256,000 7,552,555 7,808,555 2,391,593 July 13, 1984 30 YRS.
</TABLE>
F-45
<PAGE> 134
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
--------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ------------ ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing and office
buildings leased to Penn
Virginia Corporation 453,192 3,246,808 3,112
Land leased to
Exide Electronics
Corporation 1,170,000
Motion picture theaters leased
to Harcourt General
Corporation 2,039,908 1,387,000 5,113,000 36,459
Office and research facility
leased to Gould, Inc. 1,422,000 8,418,500 34,587
Office/Manufacturing
facility in leased to
Inno Tech Industries, Inc. 122,884 568,756 (691,640)
Office facility leased
to Motorola, Inc. 2,187,829 387,000 3,981,000 11,455
Warehouse and manufacturing
facility leased to
Martin Marietta
Corporation 398,475 2,590,092 26,491
Warehouse and office
facility leased to
Kinney Shoe Corporation/
Armel, Inc. 261,060 1,360,935 3,899,415 8,000
Manufacturing and office
facility leased to
Yale Security, Inc. 1,884,503 300,000 3,400,000
</TABLE>
<TABLE>
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
---------------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing and office
buildings leased to Penn
Virginia Corporation 453,192 3,249,920 3,703,112 2,391,080 August 7, 1984 5-30 YRS.
Land leased to
Exide Electronics
Corporation 1,170,000 1,170,000 N/A June 20, 1985
Motion picture theaters leased
to Harcourt General July 17, 1985 and
Corporation 1,387,000 5,149,459 6,536,459 1,855,848 July 31, 1986 30 YRS.
Office and research facility
leased to Gould, Inc. 1,423,875 8,451,212 9,875,087 3,125,698 November 25, 1985 30 YRS.
Office/Manufacturing
facility in leased to
Inno Tech Industries, Inc. August 30, 1985 N/A
Office facility leased
to Motorola, Inc. 387,000 3,992,455 4,379,455 1,469,228 December 23, 1985 30 YRS.
Warehouse and manufacturing
facility leased to
Martin Marietta
Corporation 401,541 2,613,517 3,015,058 925,009 May 15, 1986 30 YRS.
Warehouse and office
facility leased to
Kinney Shoe Corporation/
Armel, Inc. 1,360,935 3,907,415 5,268,350 1,340,471 September 17, 1986 30 YRS.
Manufacturing and office
facility leased to
Yale Security, Inc. 300,000 3,400,000 3,700,000 85,000 August 13, 1985 30 YRS.
</TABLE>
F-46
<PAGE> 135
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
--------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ------------ ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing facilities
leased to AP Parts
Manufacturing Company, Inc. 5,736,608 443,500 11,256,500 1,733,087
Manufacturing facilities
leased to Anthony's
Manufacturing Company, Inc. 3,200,000 8,300,000
Manufacturing facilities
leased to Swiss
M-Tex, L.P. 1,714,176 420,440 4,379,560 1,300 (127,721)
Land leased to
AutoZone, Inc. 3,234,924 7,199,219 60,795 (206,920)
Retail stores formerly
leased to Yellow
Front Stores, Inc. 4,934,160 3,897,549 329,838 (2,238,493)
Office facility leased to
NYNEX 275,363 1,955,820 24,093
Land leased to Sybron
Acquisition Company 424,604 742,246 4,230
Office facility leased
to Advanced System
Applications, Inc., and
UnitedStates Postal Service 298,417 1,484,340 14,835,661 57,244 610,000
Manufacturing and office
facility leased to
Allied Plywood, Inc. 661,196 1,932,997 13,383
</TABLE>
<TABLE>
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
---------------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing facilities
leased to AP Parts
Manufacturing Company, Inc. 443,500 12,989,587 13,433,087 3,815,719 December 23, 1986 30 YRS.
Manufacturing facilities
leased to Anthony's
Manufacturing Company, Inc. 3,200,000 8,300,000 11,500,000 2,725,001 February 24, 1987 30 YRS.
Manufacturing facilities
leased to Swiss
M-Tex, L.P. 292,719 4,380,860 4,673,579 1,362,919 August 24,1987 30 YRS.
January 17 &
May 2, 1986,
Land leased to August 24, 1987 &
AutoZone, Inc. 7,053,094 7,053,094 August 24, 1988 N/A
Retail stores formerly
leased to Yellow
Front Stores, Inc. 3,332,294 3,590,760 6,923,054 801,945 January 29,1988 30 YRS.
Office facility leased to
NYNEX 275,363 1,979,913 2,255,276 588,475 January 29,1988 30 YRS.
Land leased to Sybron
Acquisition Company 746,476 746,476 December 22, 1988 N/A
Office facility leased
to Advanced System
Applications, Inc., and
UnitedStates Postal Service 1,485,075 15,502,170 16,987,245 4,107,715 September 29, 1988 30 YRS.
Manufacturing and office
facility leased to
Allied Plywood, Inc. 661,627 1,945,949 2,607,576 210,811 March 31, 1989 30 YRS.
</TABLE>
F-47
<PAGE> 136
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
------------------------ Subsequent to in Net
Description Encumbrances Land Buildings Acquisition(a) Investment(b)
----------- ------------ ---- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing and office
in Fredericksburg. Virginia 87,936 1,110,847 3,458 (456,203)
Manufacturing facilities
leased to
Amerisig, Inc. 10,248,140 3,957,645 15,961,355 13,782
Land leased to High
Voltage Engineering
Corporation 805,487 1,720,000 1,601
Manufacturing facility
leased to
Mayfair Molded
Products Corporation 793,325 2,456,675 4,356
Distribution and office
facilities leased to
Federal Express
Corporation 394,544 2,102,456 49,041
Land leased to Dr Pepper
Bottling Company
of Texas 4,586,706 7,351,740 34,370
Manufacturing facilities
leased to
Furon Company 12,542,043 4,187,766 19,104,786 127,177 (1,551,221)
Manufacturing facility
leased to Detroit Diesel
Corporation 23,745,378 4,986,450 26,513,550 8,130
</TABLE>
<TABLE>
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
---------------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Manufacturing and office March 31 and
in Fredericksburg. Virginia 54,566 691,472 746,038 75,161 December 29, 1989 30 YRS.
Manufacturing facilities
leased to
Amerisig, Inc. 3,961,025 15,971,757 19,932,782 4,072,514 June 24, 1988 30 YRS.
Land leased to High
Voltage Engineering
Corporation 1,721,601 1,721,601 N/A November 10, 1988 N/A
Manufacturing facility
leased to
Mayfair Molded
Products Corporation 794,388 2,459,968 3,254,356 661,365 December 8, 1988 30 YRS.
Distribution and office
facilities leased to
Federal Express March 24 and
Corporation 401,526 2,144,515 2,546,041 541,376 June 30, 1989 30 YRS.
Land leased to Dr Pepper
Bottling Company
of Texas 7,386,110 7,386,110 N/A June 30, 1989 N/A
Manufacturing facilities
leased to 30 YRS.
Furon Company 3,863,089 18,005,379 21,868,468 4,154,768 January 29, 1990
Manufacturing facility
leased to Detroit Diesel
Corporation 4,987,737 26,520,393 31,508,130 5,782,813 June 15, 1990 30 YRS.
</TABLE>
F-48
<PAGE> 137
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
--------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ------------ ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Method (continued):
Engineering and
Fabrication Facility
leased to Orbital
Sciences Corporation 8,587,426 3,675,966 7,757,081 5,976,705
Land leased to
NVRyan L.P. 2,377,669 3,342,854 23,850
Distribution
facility leased to
PepsiCo 156,327 829,488 15,075
Land leased to Childtime
Childcare, Inc. 528,164 1,170,448
Land and building leased to
General Electric Company 3,386,923 1,253,772 6,519,634
Hotel complex leased to
Hotel Corporation of America 8,569,627 762,839 8,241,162
------------ ----------- ------------ ----------- ------------
$116,381,679 $76,319,049 $262,632,953 $13,631,443 $(13,079,993)
============ =========== ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
Life on which
Depreciation
Gross Amount at which Carried in Latest
at Close of Period (c)(d) Statement of
---------------------------------------- Accumulated Income
Description Land Buildings Total Depreciation Date Acquired is Computed
----------- ---- --------- ----- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating Method (continued):
Engineering and
Fabrication Facility
leased to Orbital
Sciences Corporation 3,676,492 13,733,260 17,409,752 2,850,054 September 29, 1989 30 Yrs.
Land leased to
NVRyan L.P. 3,366,704 3,366,704 May 16, 1989 N/A
Distribution
facility leased to
PepsiCo 158,717 842,173 1,000,890 200,045 November 16, 1989 30 Yrs.
Land leased to Childtime
Childcare, Inc. 1,170,448 1,170,448 January 4, 1991 N/A
Land and building leased to
General Electric Company 1,253,772 6,519,634 7,773,406 1,745,123 December 21, 1988 30 Yrs.
Hotel complex leased to
Hotel Corporation of America 762,839 8,241,162 9,004,001 1,661,000 30 Yrs.
----------- ------------ ------------ -----------
$73,310,194 $266,193,258 $339,503,452 $91,923,253
=========== ============ ============ ===========
</TABLE>
F-49
<PAGE> 138
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
--------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ------------ ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Direct financing method:
Office buildings and
warehouses leased to
Unisource Worldwide, Inc. $4,569,578 $ 298,655 $ 9,956,345 $9,528 $655,180
Retail stores leased
to Kobacker Stores,
Inc. 629,817 2,008,850 105,207 (376,015)
Centralized Telephone
Bureau leased to
New Valley
Corporation 893,200 5,050,489 (52,236)
Computer Center
leased to
AT&T Corporation 369,600 6,985,844 3,189 60,569
Warehouse and
manufacturing
buildings
leased to Gibson
Greetings, Inc. 1,904,186 $17,239,235 (5,845,212)
Warehouse and
manufacturing
buildings
leased to Cleo, Inc. 1,133,761 15,142,206 (4,933,279)
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at which Carried
at Close of Period (c)(d)
-----------------------------
Description Total Date Acquired
----------- ----- -------------
<S> <C> <C>
Direct financing method:
Office buildings and
warehouses leased to December 28, 1979 and
Unisource Worldwide, Inc. $10,919,708 April 29, 1980
Retail stores leased
to Kobacker Stores,
Inc. 1,738,042 January 17, 1979
Centralized Telephone
Bureau leased to
New Valley
Corporation 5,891,453 November 24, 1981
Computer Center
leased to
AT&T Corporation 7,419,202 November 24, 1981
Warehouse and
manufacturing
buildings
leased to Gibson
Greetings, Inc. 13,298,209 January 26, 1982
Warehouse and
manufacturing
buildings
leased to Cleo, Inc. 11,342,688 January 26, 1982
</TABLE>
F-50
<PAGE> 139
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
--------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition (a) Investment (b)
----------- ------------ ---- --------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Direct Financing Method
(continued):
Manufacturing and
product testing
buildings leased
to Simplicity
Manufacturing, Inc. 5,031,101 472,700 11,527,300
Manufacturing,
distribution and
office buildings
leased to
Brodart Co. 3,218,689 241,550 6,141,429 (189,424)
Manufacturing facility
to Spreckels
Industries, Inc. 444,730 5,055,270
Manufacturing facilities
leased to Rochester
Button Company, Inc. 86,663 2,815,596 4,429 (1,003,639)
Office and research
facility leased to
Exide Electronics
Corporation 2,030,000 1,500
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at which Carried
at Close of Period (c)(d)
-----------------------------
Description Total Date Acquired
----------- ----- -------------
<S> <C> <C>
Direct Financing Method
(continued):
Manufacturing and
product testing
buildings leased
to Simplicity
Manufacturing, Inc. 12,000,000 March 3, 1983
Manufacturing,
distribution and
office buildings
leased to
Brodart Co. 6,193,555 June 15, 1988
Manufacturing facility
to Spreckels
Industries, Inc. 5,500,000 December 30, 1983
Manufacturing facilities
leased to Rochester
Button Company, Inc. 1,903,049 April 11, 1984
Office and research
facility leased to
Exide Electronics
Corporation 2,031,500 June 20, 1985
</TABLE>
F-51
<PAGE> 140
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
--------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition(a) Investment(b)
- ----------- ------------ ---- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Direct Financing Method
(continued):
Manufacturing
facilities leased to
DeVlieg Bullard, Inc. 310,032 4,782,667
Manufacturing
facility leased to
Penberthy Products, Inc. 48,968 1,028,333
Manufacturing facility
and warehouse leased
to Stoody Deloro Stellite,
Inc. 2,815,000 11,885,000
Manufacturing
facilities leased
Sunds Defibrator
Woodhandling, Inc. 24,750 669,427
Retail stores leased to
AutoZone, Inc. 5,508,115 12,649,956 98,930 (321,900)
Manufacturing facility
leased to Peerless
Chain Company 829,000 6,991,000
Retail facility leased to
Wal-Mart Stores, Inc., 3,464,336 1,467,000 5,208,000 10,250
Manufacturing and warehouse
facility leased to KSG, Inc. 1,099,700 3,598,220 104
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at which Carried
at Close of Period (c)
----------------------------
Description Total Date Acquired
- ----------- ----- -------------
<S> <C> <C>
Direct Financing Method
(continued):
Manufacturing
facilities leased to
DeVlieg Bullard, Inc. 5,092,699 April 3, 1986
Manufacturing
facility leased to
Penberthy Products, Inc. 1,077,301 April 3, 1986
Manufacturing facility
and warehouse leased
to Stoody Deloro Stellite, February 14, 1985 and
Inc. 14,700,000 December 22, 1986
Manufacturing
facilities leased
Sunds Defibrator
Woodhandling, Inc. 694,177 August 30, 1985
Retail stores leased to January 17, 1986
AutoZone, Inc. 12,426,986 May 2, 1986; August 28, 1987
and March 31, 1989
Manufacturing facility
leased to Peerless
Chain Company 7,820,000 June 18, 1986
Retail facility leased to
Wal-Mart Stores, Inc., 6,685,250 August 7, 1986
Manufacturing and warehouse
facility leased to KSG, Inc. 4,698,024 March 12, 1987
</TABLE>
F-52
<PAGE> 141
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Cost Increase
Company Capitalized (Decrease)
--------------------- Subsequent to in Net
Description Encumbrances Land Buildings Acquisition(a) Investment(b)
----------- ------------ ---- --------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Direct Financing Method
(continued):
Manufacturing and office
facilities leased to Sybron
Acquisition Company 13,886,818 1,984,406 22,383,348 138,318
Manufacturing and office
facilities leased to
NVRyan L.P. 4,322,331 570,729 12,904,948 321,200 457,579
Manufacturing and
generating facilities
leased to High
Voltage Engineering
Corporation 3,493,716 688,000 7,242,000 7,394
Office/warehouse
facilities leased to
Stationers Distributing
Company 2,348,134 1,120,000 3,510,000 293 (732,255)
Bottling and Distribution
facilities lease to
Dr Pepper Bottling
Company of Texas 11,055,361 20,848,260 97,467
Office/warehouse
facility leased
to Red Bank
Distribution, Inc. 5,440,902 1,572,296 9,065,704 11,302
Day care facilities
leased to Childtime
Childcare, Inc. 761,176 1,686,816
----------- ----------- ------------ -------- ------------
$63,730,083 $18,374,926 $208,406,243 $809,111 $(12,280,632)
=========== =========== ============ ======== ============
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at which Carried
at Close of Period (c)
-----------------------------
Description Total Date Acquired
----------- ----- -------------
<S> <C> <C>
Direct Financing Method
(continued):
Manufacturing and office
facilities leased to Sybron
Acquisition Company 24,506,072 December 22, 1988
Manufacturing and office
facilities leased to March 31, 1989 and
NVRyan L.P. 14,254,456 May 16, 1989
Manufacturing and
generating facilities
leased to High
Voltage Engineering
Corporation 7,937,394 November 10, 1988
Office/warehouse
facilities leased to
Stationers Distributing
Company 3,898,038 December 29, 1988
Bottling and Distribution
facilities lease to
Dr Pepper Bottling
Company of Texas 20,945,727 June 30, 1989
Office/warehouse
facility leased
to Red Bank
Distribution, Inc. 10,649,302 July 20, 1990
Day care facilities
leased to Childtime
Childcare, Inc. 1,686,816 January 4, 1991
------------
$215,309,648
============
</TABLE>
F-53
<PAGE> 142
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
SCHEDULE of REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 1996
<TABLE>
<CAPTION>
Initial Cost to Costs
Company Capitalized
------------------------ Personal Subsequent to Decrease in
Description Encumbrances Land Buildings Property Acquisition(a) Net Investment(b)
----------- ------------ ---- --------- -------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Operating real estate(e):
Hotels located in:
Alpena, Michigan $ 7,330,000 $ 210,000 $ 7,551,000 $ 742,500 $ 925,869
Petoskey, Michigan 7,330,000 527,000 7,211,000 765,500 629,241
Livonia, Michigan 7,566,921 3,130,000 12,410,000 2,260,000 1,064,874
----------- ---------- ----------- ---------- ----------
$22,226,921 $3,867,000 $27,172,000 $3,768,000 $2,619,884
=========== ========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Life on which
Gross Amount at Which Carried Depreciation
at Close of Period (c)(d)(e) in Latest
---------------------------------------------------- Statement of
Personal Accumulated Income
Description Land Property Building Total Depreciation Date Acquired Is Computed
----------- ---- -------- -------- ----- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating real estate (e):
Hotels located in:
Alpena, Michigan $ 210,000 $1,661,869 $ 7,557,500 $ 9,429,369 3,585,930 MARCH 6, 1987 7-30 YRS
Petoskey, Michigan 527,000 1,388,241 7,217,500 9,132,741 3,526,080 JUNE 30, 1987 7-30 YRS
Livonia, Michigan 3,130,000 2,530,713 13,204,161 18,864,874 6,234,972 November 20, 1987
---------- ----------- ----------- ----------- -----------
$3,867,000 $5,580,823 $27,979,161 $37,426,984 $13,346,982 JUNE 15, 1988 5-30 YRS
========== ========== =========== =========== ===========
</TABLE>
F-54
<PAGE> 143
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to SCHEDULE of REAL ESTATE
and ACCUMULATED DEPRECIATION
(a) Consists of the cost of improvements and acquisition costs subsequent
to acquisition, including legal fees, appraisal fees, title costs,
other related professional fees and purchases of furniture, fixtures,
equipment and improvements at the hotel properties.
(b) The decrease in net investment is primarily due to the amortization
of unearned income producing constant periodic rate on the net
investment in direct financing leases, which differ from scheduled
minimum lease rentals, sales of properties, and writedowns of
properties to net realizable value.
(c) At December 31, 1996, the aggregate cost of real estate owned by the
Company and its subsidiaries for Federal income tax purposes is
$601,230,573.
(d)
Reconciliation of Real Estate Accounted
for Under the Operating Method
<TABLE>
<CAPTION>
December 31, December 31,
1995 1996
------------- -------------
<S> <C> <C>
Balance at beginning
of year $ 360,009,561 $ 348,220,453
Additions 514,977 2,842,338
Sales (14,157,435)
Writedowns to net realizable value (319,685)
Reclassification from (to) investment in
direct financing lease (4,630,293) 3,700,000
Reclassification to real estate
held for sale (7,354,107) (1,101,904)
------------- -------------
Balance at end of
year $ 348,220,453 $ 339,503,452
============= =============
</TABLE>
F-55
<PAGE> 144
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to SCHEDULE of REAL ESTATE
and ACCUMULATED DEPRECIATION
Reconciliation of Accumulated Depreciation
<TABLE>
<CAPTION>
December 31, December 31,
1995 1996
------------ ------------
<S> <C> <C>
Balance at beginning
of year $ 80,610,386 $ 87,603,614
Depreciation expense 9,975,404 9,334,741
Reclassification to real estate
held for sale (2,249,921)
Reclassification to direct financing
lease (732,255) (667,565)
Writeoff resulting from sales
of property (4,347,537)
------------ ------------
Balance at end of
year $ 87,603,614 $ 91,923,253
============ ============
</TABLE>
(e)
Reconciliation for Operating Real Estate
<TABLE>
<CAPTION>
December 31, December 31,
1995 1996
------------ ------------
<S> <C> <C>
Balance at beginning
of year $ 69,187,881 $ 55,369,375
Additions 1,580,013 578,005
Reclassification to real estate
held for sale (9,442,947)
Writedown to net realizable
value (1,000,000)
Sales and exchange of property (4,955,572) (18,520,396)
------------ ------------
Balance at close of
year $ 55,369,375 $ 37,426,984
============ ============
</TABLE>
F-56
<PAGE> 145
CORPORATE PROPERTY ASSOCIATES PARTNERSHIPS
NOTES to SCHEDULE of REAL ESTATE
and ACCUMULATED DEPRECIATION
Reconciliation of Accumulated Depreciation
Operating Real Estate
<TABLE>
<CAPTION>
December 31, December 31,
1995 1996
------------ ------------
<S> <C> <C>
Balance at beginning
of year $ 17,915,786 $ 14,481,112
Depreciation expense 2,267,157 1,215,149
Reclassification to real estate
held for sale (3,834,823)
Writeoff resulting from
sales and exchange (1,867,008) (2,349,279)
------------ ------------
Balance at end of year $ 14,481,112 $ 13,346,982
============ ============
</TABLE>
F-57
<PAGE> 146
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC Registration .............. $28,303
Legal Fees and Expenses ....... $25,000
Accounting Fees and Expenses .. $ 5,000
Printing and Engraving Expenses $10,000
Miscellaneous ................. $15,000
-------
Total ......................... $83,303
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification is provided for in the Organizational Documents of
the Registrant and such provisions are incorporated herein by reference.
Reference is hereby made to the captions "FIDUCIARY RESPONSIBILITY
AND INDEMNIFICATION--Indemnification of Directors and Officers of the Company"
and "FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION--Directors and Officers
Insurance" in the Prospectus, which is part of this Registration Statement, for
a more detailed description of indemnification and insurance arrangements
between the Company and its officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
NONE
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits
Exhibit No. Exhibit
- ----------- -------
1(1) Listed Share Purchase Warrant Agreement
2.1(1) Form of Certificate of Merger of CPA(R):1
2.2(1) Form of Certificate of Merger of CPA(R):2
2.3(1) Form of Certificate of Merger of CPA(R):3
2.4(1) Form of Certificate of Merger of CPA(R):4
2.5(1) Form of Certificate of Merger of CPA(R):5
<PAGE> 147
2.6(1) Form of Certificate of Merger of CPA(R):6
2.7(1) Form of Certificate of Merger of CPA(R):7
2.8(1) Form of Certificate of Merger of CPA(R):8
2.9(1) Form of Certificate of Merger of CPA(R):9
2.10(1) Form of Agreement of Merger of CPA(R):1
2.11(1) Form of Agreement of Merger of CPA(R):2
2.12(1) Form of Agreement of Merger of CPA(R):3
2.13(1) Form of Agreement of Merger of CPA(R):4
2.14(1) Form of Agreement of Merger of CPA(R):5
2.15(1) Form of Agreement of Merger of CPA(R):6
2.16(1) Form of Agreement of Merger of CPA(R):7
2.17(1) Form of Agreement of Merger of CPA(R):8
2.18(1) Form of Agreement of Merger of CPA(R):9
3.1(1) Amended and Restated Limited Liability Company
Agreement of Carey Diversified LLC
3.2(1) By Laws of Carey Diversified LLC
4(1) Form of Listed Share Stock Certificate
5 Opinion of Reed Smith Shaw & McClay as to Legality
of Securities Issued
8.1 Opinion of Reed Smith Shaw & McClay as to Certain
Tax Matters
8.2(1) Opinion of Reed Smith Shaw &
McClay as to Certain ERISA Matters
8.3(1) Opinion of Delaware Counsel,
Richards, Layton & Finger
10.1(1) Management Agreement Between Carey
Management LLC and the Company
10.2(1) Non-Employee Stock Option Plan
<PAGE> 148
10.3(1) 1998 Listed Share Incentive Plan
10.4(1) Investment Banking Engagement Letter
21(1) List of Registrant Subsidiaries
24 Consent of Coopers & Lybrand
99.1(1) Fairness Opinion of Robert A.
Stanger & Co., Inc.
99.2(1) Independent Appraisal of Fair
Market Value of the CPA(R) Partnerships'
Real Estate Portfolios
99.3(1) Consolidation Consent Card
99.4(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):1
99.5(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):2
99.6(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):3
99.7(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):4
99.8(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):5
99.9(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):6
99.10(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):7
99.11(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):8
99.12(1) Amendment to the Amended Agreement of
Limited Partnership of CPA(R):9
99.13(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):1
99.14(1) Amended and Restated Agreement of Limited
<PAGE> 149
Partnership of CPA(R):2
99.15(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):3
99.16(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):4
99.17(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):5
99.18(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):6
99.19(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):7
99.20(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):8
99.21(1) Amended and Restated Agreement of Limited
Partnership of CPA(R):9
- ----------
1 Filed with the Company's Registration Statement on Form S-4
(333-37901), dated October 15, 1997 and incorporated herein by reference.
(b) 1. Consolidated Financial Statements
The following combined financial statements are filed as
part of this Report:
Pro Forma Condensed Consolidated Balance Sheet of Carey Diversified LLC as of
September 30, 1997.
Pro Forma Notes to Condensed Consolidated Balance Sheet.
Pro Forma Condensed Consolidated Statements of Income of Carey Diversified LLC
for the year ended December 31, 1996 and nine months ended September
30, 1997.
Pro Forma Notes to Condensed Consolidated Statements of Income.
Report of Independent Accountants.
<PAGE> 150
Historical Balance Sheet of Carey Diversified LLC as of September 30, 1997.
Notes to Balance Sheet.
Report of Independent Accountants.
Combined Balance Sheets of the Corporate Property Associates Partnerships as of
December 31, 1995 and 1996 and (unaudited) as of September 30, 1997.
Combined Statements of Income of the Corporate Property Associates Partnerships
for the years ended December 31, 1994, 1995 and 1996 and (unaudited)
for the nine months ended September 30, 1996 and 1997.
Combined Statements of Partners' Capital of the Corporate Property Associates
Partnerships for the years ended December 31, 1994, 1995 and 1996 and
(unaudited) for the nine months ended September 30, 1997.
Combined Statements of Cash Flows of the Corporate Property Associates
Partnerships for the years ended December 31, 1994, 1995 and 1996 and
(unaudited) for the nine months ended June 30, 1997.
Notes to Combined Financial Statements.
Schedule III - Real Estate and Accumulated Depreciation
(b) Financial Statement Schedules
NONE
ITEM 17. UNDERTAKINGS.
The undersigned registrant undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933; (ii) To reflect in the
prospectus any facts or events arising after the effective
date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement; (iii)
To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement. or any material change to such
information in the registration statement.
<PAGE> 151
(2) That, for the purpose of determining liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
<PAGE> 152
POWERS OF ATTORNEY AND 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-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York on the 11th day of
February, 1998.
CAREY DIVERSIFIED LLC
By: /s/Francis J. Carey
-------------------------------------
Francis J. Carey, Chairman and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints each of Francis J. Carey, Gordon
F. DuGan, John J. Park and Steven M. Berzin his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this Registration Statement, and to file the same, with all
exhibit thereto, and any other documents in connection therewith, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/Francis J. Carey Chairman of the Board and Chief Executive February 11, 1998
- ------------------------------------ Officer (Principal Executive Officer) of
Francis J. Carey the Registrant
/s/William P. Carey Director of the Registrant February 11, 1998
- ------------------------------------
William P. Carey
/s/Gordon F. DuGan President and Director of the Registrant February 11, 1998
- ------------------------------------
Gordon F. DuGan
/s/Steven M. Berzin Vice Chairman and Director of the February 11, 1998
- ------------------------------------
Steven M. Berzin Registrant
/s/Claude Fernandez Executive Vice President of the Registrant February 11, 1998
- ------------------------------------
Claude Fernandez
/s/John J. Park Executive Vice President and Chief February 11, 1998
- ------------------------------------ Financial Officer of the Registrant
John J. Park (Principal Financial Officer)
</TABLE>
<PAGE> 153
<TABLE>
<S> <C> <C>
/s/Barclay G. Jones III Director February 11, 1998
- ------------------------------------
Barclay G. Jones III
/s/Dona;d E. Nickelson Director February 11, 1998
- ------------------------------------
Donald E. Nickelson
/s/Charles C. Townsend, Jr. Director February 11, 1998
- ------------------------------------
Charles C. Townsend, Jr.
/s/Eberhard Faber, IV Director February 11, 1998
- ------------------------------------
Eberhard Faber, IV
/s/Lawrence R. Klein Director February 11, 1998
- ------------------------------------
Lawrence R. Klein
/s/Reginald Winssinger Director February 11, 1998
- ------------------------------------
Reginald Winssinger
</TABLE>
<PAGE> 1
EXHIBIT 5
[REED SMITH SHAW & MCCLAY LLP LETTERHEAD]
February 4, 1998
Carey Diversified LLC
50 Rockefeller Plaza
New York, NY 10020
Re: Shelf Registration Statement; 4,800,000 Shares
Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel for Carey Diversified LLC, a Delaware
limited liability company (the "Company"), in connection with the matters set
forth herein. At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of executed or
conformed counterparts, or copies otherwise proved to our satisfaction, of the
following:
(a) The Certificate of Formation of the Company, dated October
14, 1996 as filed in the office of the Secretary of State of the State of
Delaware (the "Secretary of State") on October 15, 1996;
(b) The Limited Liability Company Agreement of the Company,
dated as of October 15, 1996;
(c) The Certificate of Amendment to Certificate of Formation
of the Company, dated July 15, 1997, as filed in the office of the Secretary of
State on July 15, 1997.
(d) The First Amendment to the Limited Liability Company
Agreement of the Company, dated as of July 15, 1997;
(e) The Amended and Restated Limited Liability Company
Agreement of the Company, dated as of October 13, 1997 (the "Agreement");
<PAGE> 2
Carey Diversified LLC
February 4, 1998
Page 2
(f) The Bylaws of the Company, adopted on October 13, 1997
(the "Bylaws") (the Agreement, together with the Bylaws, is hereinafter referred
to as the "LLC Agreement"); and
(g) Excerpts from the minutes of the meeting of the Board of
Directors of the Company held on February 11, 1998.
Initially capitalized terms used herein and not otherwise defined are
used as defined in the LLC Agreement.
For purposes of this opinion, we have not reviewed any documents
other than the documents listed in paragraphs (a) through (g) above. We have
assumed that there exists no provision in any document that we have not reviewed
that is inconsistent with the opinions stated herein. We have conducted no
independent factual investigation of our own but rather have relied solely upon
the foregoing documents, the statements and information set forth therein and
the additional matters recited or assumed herein, all of which we have assumed
to be true, complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed that
(i) all signatures on documents examined by us are genuine, (ii) all documents
submitted to us as originals are authentic, and (iii) all documents submitted to
us as copies conform with the original copies of those documents.
For purposes of this opinion, we have assumed (i) that the LLC
Agreement constitutes the entire agreement among the parties thereto with
respect to the subject matter thereof, including with respect to the admission
of members to, and the creation, operation, management and termination of, the
Company, and that the LLC Agreement has not been amended, (ii) except to the
extent provided in paragraph 1 below, the due organization or due formation, as
the case may be, and valid existence in good standing of each party to the
documents examined by us under the laws of the jurisdiction governing its
organization or formation, (iii) the legal capacity of natural persons who are
signatories to the documents examined by us, (iv) that each of the parties
(other than the Company and its officers and directors) to the documents
examined by us has the power and authority to execute and deliver, and to
perform its obligations under, such documents, (v) the due authorization,
execution and delivery by all parties thereto (other than the Company and its
officers and directors) of all documents examined by us, including the LLC
Agreement by the Managing Member and Carey Property Advisors L.P., a Delaware
limited partnership, (vi) that the Shares are issued and sold to
<PAGE> 3
Carey Diversified LLC
February 4, 1998
Page 3
the Shareholders in accordance with the LLC Agreement and the Registration
Statement, and (vii) that the Shareholders will not engage in tortious or
wrongful conduct and will fulfill all of their obligations as set forth in the
LLC Agreement.
This opinion is limited to the laws of the State of Delaware and we
have not considered and express no opinion on the laws of any other
jurisdiction, including federal laws and rules and regulations relating thereto.
Our opinions are rendered only with respect to Delaware laws and rules,
regulations and orders thereunder which are currently in effect.
Based upon the foregoing, and upon our examination of such questions
of law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
(1) Upon the issuance and delivery of the Shares in accordance
with the terms set forth in the Registration Statement, the Shares will be
validly issued and, subject to the qualifications set forth in paragraph 2
below, fully paid and non-assessable limited liability company interests in the
Company.
(2) The Shareholders will not be obligated personally for any
of the debts, obligations or liabilities of the Company, whether arising in
contract, tort or otherwise, solely by reason of being a member of the Company,
except that a Shareholder may be obligated to repay any funds wrongfully
distributed to it.
Very truly yours,
/s/ REED SMITH SHAW & McCLAY LLP
REED SMITH SHAW & McCLAY LLP
<PAGE> 1
EXHIBIT 8.1
[REED SMITH SHAW & MCCLAY LLP LETTERHEAD]
February 12, 1998
Carey Diversified LLC
50 Rockefeller Plaza
New York, New York 10020
Gentlemen:
You have requested our opinions with respect to certain Federal
income tax matters in connection with Carey Diversified LLC's shelf registration
statement on Form S-1 (the "Shelf Registration"). The consolidation by merger
(the "Consolidation") of nine public limited partnerships in the Corporate
Property Associates series of limited partnerships is more fully described in
the Registration Statement on Form S-4, Registration No. 333-37901 dated October
16, 1997(the "Registration Statement"), and the Prospectus included therein
filed by Carey Diversified LLC (the "Company" or "LLC") with the Securities and
Exchange Commission. All terms used herein have the respective meanings set
forth in the Prospectus or Shelf Registration.
In connection with the Registration Statement, we have acted as your
counsel and have assisted in the preparation of the tax summary for such
Registration Statement. In rendering or confirming the opinions stated below and
referred to in the Shelf Registration and Registration Statement, we have
examined and relied upon the following:
1. Amended and Restated Agreements of Limited Partnership for
the Partnerships;
2. Amended and Restated Limited Liability Company Agreement
of Carey Diversified LLC (hereinafter the "Operating Agreement");
3. Bylaws of Carey Diversified LLC;
4. The Prospectus, Registration Statement and Shelf
Registration; and
5. Such other documents, records and instruments as we have
deemed necessary in order to permit us to render and confirm the opinions
referred to herein.
<PAGE> 2
Carey Diversified LLC
February 12, 1998
Page 2
In our examination, in those cases in which we have not been involved
directly in the preparation, execution or the filing of a document, we have
assumed that (i) the document reviewed by us is an original document, or a true
and accurate copy of the original document, and has not been subsequently
amended, (ii) the signatures on each original document are genuine, and (iii)
each party who executed the document had proper authority and capacity.
For purposes of rendering and confirming the opinions stated below
and referred to in the Shelf Registration and Prospectus, we have assumed and
have relied on the following:
(a) The truth and accuracy of the statements contained in the
Shelf Registration and Prospectus;
(b) The representations, views and beliefs of the Manager
referred to in the "Income Tax Consequences" sections of the Shelf Registration
and Prospectus and elsewhere in the Shelf Registration and Prospectus are true,
correct and accurate.
With respect to opinions (1) and (2) rendered below, we have
additionally assumed and have relied on the following:
(a) That the Partnerships have been organized and have been
and will be operated at all times during their existence in accordance with the
provisions of the Partnership Agreements, the description of their organization
and operation contained in the Prospectus, and all applicable state statutes
pertaining to limited partnerships, and the Partnership Agreements will not be
amended or modified in any manner which would adversely affect the
classification of the Partnerships as a partnership for Federal income tax
purposes;
(b) That the Company will be organized and operated at all
times during its existence in accordance with the provisions of the Operating
Agreement, the description of its organization and operation contained in the
Prospectus, and all applicable state statutes pertaining to Limited Liability
Companies, and the Operating Agreement will not be amended or modified in any
manner which would adversely affect the classification of the Company as a
partnership for Federal income tax purposes;
(c) That the Company will satisfy the gross income
requirements of Code Section 7704; and
<PAGE> 3
Carey Diversified LLC
February 12, 1998
Page 3
(d) That each Partnership will satisfy the gross income
requirements of Section 7704 of the Code and/or will not be a "publicly traded
partnership" as that term is defined in Section 7704 of the Code.
Our opinions stated below and confirming those referred to in the
Shelf Registration are based upon the California Revised Limited Partnership
Act, the Delaware Limited Liability Company Act, the Delaware Revised Uniform
Limited Partnership Act, the Code, final and proposed Treasury Regulations,
legislative history, published administrative positions of the IRS and court
decisions, all as of the date of this letter. We can furnish no assurance that
changes in the relevant statutes, regulations, administrative positions or court
decisions will not be made in the future which would modify or supersede our
opinions.
Additionally, our opinions are not binding on the IRS or the courts
and there can be no assurance that the IRS will not assert positions contrary to
our opinions or that a court considering the issues would not agree with the
IRS. Our opinions represent our conclusions based upon the documents, facts and
assumptions referred to above, any modifications to or changes of which might
affect our opinions. Although we have made such inquiries and performed such
investigation as we have deemed necessary to fulfill our professional
responsibilities as counsel, we have not attempted to verify independently each
of the facts and assumptions referred to above. On the other hand, nothing has
come to our attention which would cause us to question such facts and
assumptions.
In rendering our opinions stated below and confirming those referred
to in the Shelf Registration and Prospectus, we have considered the relevant
professional standards, including those expressed in American Bar Association
Formal Opinion 346 (Revised), January 29, 1982, and have considered all material
tax issues which have a reasonable probability of being challenged by the IRS.
Furthermore, although we believe that the Shelf Registration and Prospectus
contains full and fair disclosure of such material tax issues, we can provide no
assurance that the IRS will not challenge the Federal income tax positions taken
by the Company, the Partnership or the Partners on grounds not disclosed in the
Shelf Registration and Prospectus.
Finally, we express no opinion on any Federal income tax matter or
other matter except those set forth or confirmed below. Specifically, for the
reasons set forth in the Prospectus, it is
<PAGE> 4
Carey Diversified LLC
February 12, 1998
Page 4
not possible for us to reach a conclusion as to the likely outcome (either
favorable or unfavorable) of certain Federal income tax matters, including but
not limited to: (1) whether the sale or disposition of any asset of the Company
or a Subsidiary Partnership might, at that time, be treated as being to a
customer of the Company or Subsidiary Partnership and in the ordinary course of
such entity's trade or business, thereby resulting in the entire gain recognized
upon such sale or disposition being treated as ordinary income rather than
capital gain; (2) whether the Company's or a Subsidiary Partnership's allocation
of basis between land and depreciable improvements will be respected for
purposes of computing depreciation or cost recovery (ACRS) deductions and
whether the Company's or any Subsidiary Partnership's allocation between real
estate assets and stock or warrants will be respected; (3) whether expenses
incurred by the Company prior to the time it was or is engaged in an active
trade or business will be deductible or required to be capitalized, and if the
latter, whether amortizable; and (4) whether the Company's or the Subsidiary
Partnerships' allocations of tax items have substantial economic effect.
Based upon and subject to the foregoing:
1. We are of the opinion that the Company and the
Partnerships will be classified as partnerships and not as associations taxable
as corporations for Federal income tax purposes.
2. Although the discussions set forth under the caption
"Income Tax Consequences" in the Shelf Registration and "Income Tax
Consequences" in the Prospectus do not purport to discuss all possible Federal
income tax consequences of the acquisition and ownership of the Company's shares
issued under the Shelf Registration, such discussion constitutes, in all
material respects, an accurate summary of the Federal income tax considerations
that are likely to be material to those receiving shares pursuant to the Shelf
Registration.
3. We hereby confirm that each of the statements in the
Prospectus and Shelf Registration in which it is stated that counsel has advised
the Company or Partnerships of an opinion as to the probable outcome of an issue
if the issue were fully litigated in court accurately reflects our current
opinion as to such issue.
<PAGE> 5
Carey Diversified LLC
February 12, 1998
Page 5
Other than as expressly stated above, we express no opinion on any
issue relating to the Company or to any investment therein or under any law
other than the Federal income tax laws.
We hereby consent to the use of this letter as an exhibit to the
Shelf Registration and to the reference of this firm in the Prospectus in "Legal
Matters".
Very truly yours,
/s/ REED SMITH SHAW & MCCLAY LLP
REED SMITH SHAW & McCLAY LLP
<PAGE> 1
EXHIBIT 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 (File
No. 333- ) of our report dated March 22, 1997, on our audits of the combined
financial statements and financial statement schedule of Corporate Property
Associates Partnerships and our report dated February 11, 1998, on our audit of
the balance sheet of Carey Diversified LLC. We also consent to the references
to our firm under the captions "Experts", "Summary Selected Combined Financial
Information" and "Selected Financial Data."
/s/Coopers & Lybrand LLP
-------------------------
Coopers & Lybrand LLP
New York, New York
February 12, 1998
